Prepared remarks
Good day, and thank you for standing by. Welcome to the Quarter 2 2025 FTAI Aviation Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alan Andreini, Head of Investor Relations. Please go ahead.
Thank you, Brianna. I would like to welcome you all to the FTAI Aviation Second Quarter 2025 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 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. I'm pleased today to announce our 41st dividend as a public company and our 56th consecutive dividend since inception. The dividend of $0.30 per share will be paid on August 19 based on a shareholder record date of August 12. Angela will provide a detailed overview of the numbers. But first, I'd like to highlight a few key updates. Aerospace Products delivered another excellent quarter, reporting $165 million in adjusted EBITDA at a margin of 34%. We now estimate we are at 9% market share, approximately double where we were this time last year, with a strong focus on reaching our long-term goal of 25% market share. We feel confident in this goal due to our large expanding backlog of purchase orders for 2025 and beyond, supplemented by our Maintenance, Repair and Exchange agreement, or MRE, with the Strategic Capital Initiative, or SCI, to support the portfolio's engine maintenance events over the life of the partnership.
Our scale, asset ownership and unique maintenance capabilities position FTAI as the long-term sustainable leader in engine aftermarket maintenance. Overall, market adoption of our unique MRE solution to engine maintenance continues to accelerate. There is continued and growing global demand for prebuilt engines and modules for owners and operators of all sizes as a flexible, cost-effective alternative to complicated, time-consuming and expensive shop visits. In Q2, we executed a sizable engine exchange program with a major U.S. airline, albeit at margins below our typical levels. We believe that offering attractive terms to showcase our capabilities with this customer will drive repeat business and higher volumes, ultimately leading to stronger margins. We're implementing several new procurement programs, which we expect to contribute to margin expansion by the end of 2025. With these strategies and with the approval of PMA Part #3, we continue to expect Aerospace Products margins to expand to the 40% plus range in 2026.
Turning to production. We refurbished 184 CFM56 modules this quarter across our facilities in Montreal, Miami and Rome, an increase of 33% compared to last quarter. In Montreal, our largest facility, we have been expanding operations by focusing on developing talent through our newly established training academy as well as the use of specialization and technology to improve efficiency and throughput. We anticipate these measures will drive significant production growth over the next several quarters. We're also delighted to close on our 50% joint venture in Rome, now operating as QuickTurn Europe. We've been impressed by how quickly the team has scaled operations to meet FTAI's production pipeline, and we're excited for the plans we have to grow the facility over the coming months to support our regional base in Europe and the Middle East. Additionally, we're excited about the opportunity it provides to sell directly to the Chinese market due to the CAAC license that QuickTurn Europe holds.
We're pleased to announce the acquisition of Pacific Aerodynamic, a piece part repair facility in California, which focuses on highly specialized precision repairs of CFM56 compressor blades and vanes. Under FTAI ownership, this acquisition delivers cost savings that will lead to further margin expansion. Over the past three years, we've now acquired four facilities across three countries and have a proven track record of integrating each into our MRE ecosystem, creating significant value. We're actively reviewing other M&A opportunities in the global market and expect additional acquisitions in the near term to further differentiate FTAI's offering. Next, let's discuss adjusted free cash flow. In the first half of the year, we generated $370 million in free cash flow, above our targeted $350 million. It was driven by over $1.4 billion in gross cash inflows. Included in this number was the sale of 37 of the 45 seed portfolio aircraft, which are being sold through the strategic capital initiative.
The transition of these aircraft is almost complete with the sale of the remaining eight expected to close during Q3. We also expect adjusted free cash flow to be in the range of $380 million in the second half of the year, which means we are increasing our overall target from $650 million to now $750 million in adjusted free cash flow for the entire 2025 year. With our pivot to an asset-light business model nearly complete, we anticipate substantial growth in free cash flow in the coming years. For capital allocation, our first priority has been to manage debt to achieve a strong BB rating with the rating agencies, a goal we expect to reach by the end of this year, given our exceptional financial performance. Secondly, we will continue to invest in targeted growth opportunities in areas where we can expand our differentiated product offering and further widen our competitive advantage. However, it is very likely there will be a surplus above these two priorities, which means returning capital to shareholders will be part of our financial plan in the near term.
Regarding our current estimates for EBITDA for all of 2025, we are raising our outlook for Aviation Leasing from $500 million to $600 million, which includes $54 million in insurance settlements received in the first half of the year. Based on the strength of our current pipeline, we are also increasing our estimated 2025 Aerospace Products EBITDA from the prior range of $600 million to $650 million to a new range of $650 million to $700 million. Overall, we are updating total estimated 2025 business segment EBITDA from $1.1 billion to $1.15 billion to the new numbers of $1.25 billion to $1.3 billion. For 2026, we're also seeing meaningful upside to our previous estimate of $1.4 billion and plan to provide an update later this year. For the SCI, we made great progress this quarter. We closed on additional equity partners and expect to have final closings completed by October this year. Our target is to invest $4 billion through the 2025 partnership, which will encompass approximately 250 leased aircraft.
Halfway through the year, we have now secured 145 aircraft either closed or under LOI commitment and have good visibility from the SCI investments team on sourcing the remaining aircraft through a combination of lessor counterparties and direct sale-leaseback transactions with airlines. A key component to SCI's investment strategy is the MRE agreement with FTAI. During the second quarter, we generated $70 million in Aerospace Products revenue by fulfilling orders to SCI, representing approximately 14% of our total sales in Aerospace Products or 20% for the entire first half of 2025. Fixed-price engine exchanges are a great source of enhanced returns to our equity partners, providing greater predictable cash flows and lower residual risks compared to peer lessors, while also delivering significant value to airline customers who avoid the costs and risks of managing shop visits themselves.
We continue to believe SCI will be a major driver of growth in aerospace products and will also provide a significant contribution to Aviation Leasing through management servicing fees, incentive fees, and our 20% minority ownership. Overall, we see a very long horizon ahead for the life cycle of current technology aircraft and engines. Many airlines today recognize that the economic useful life of 737NGs and A320ceo aircraft has been extended to 30 years compared to the previous assumption of 25 years. While industry issues such as multiyear delays in new aircraft deliveries and the durability of new technology engines are well known, advancements in CFM56 and V2500 engine maintenance, such as the availability of module swaps and the development of new PMA parts, allow airlines to economically reinvest in their existing fleets for longer than they originally planned. Programs like FTAI's MRE engine exchanges provide predictable costs and offer airlines a simple, easy way to keep their current aircraft flying profitably.
An average useful life extension of 5 years means 20% more engine shop visits, which equates to greater maintenance spending and a larger opportunity for FTAI to expand our market share and sustainably support airlines in their long-term maintenance needs. With that, I'll turn it over to Angela.
Thanks, Joe. The key metric for us is adjusted EBITDA. We continued the year positively with adjusted EBITDA of $347.8 million in Q2 of 2025, which is up 30% compared to $268.6 million in Q1 2025 and up 63% compared to $213.9 million in Q2 of 2024. In the first quarter, the $347.8 million EBITDA number consisted of $199.3 million from our Leasing segment, $164.9 million from our Aerospace Products segment, and negative $16.4 million from Corporate & Other, including intersegment eliminations. Turning now to Leasing, we continued to deliver strong results, posting approximately $199 million of EBITDA. The pure leasing component of the $199 million came in at $169 million for Q2 versus $152 million in Q1 2025. Included in the $169 million was a $24 million settlement related to assets in Russia written off in 2022, which is an additional settlement to the $30 million we announced we received last quarter and $11 million we received in Q4 2024.
For gains on sales, we continue the year with a $356.2 million book value of assets sold or an 8% margin gain of $30.7 million as we closed on 33 additional aircraft of the seed portfolio to the SCI with eight remaining, which we expect to close in Q3. Looking ahead, we're assuming Leasing EBITDA will be $600 million in 2025, including insurance settlements of $54 million as we pivot our focus towards an asset-light business model. Aerospace Products had yet another good quarter with $164.9 million of EBITDA at an overall EBITDA margin of 34%, which is up 26% compared to $130.9 million in Q1 of 2025 and up 81% compared to $91.2 million in Q2 of 2024. We continue to see accelerated growth in adoption and usage of our Aerospace Products and remain focused on ramping up production in each of our facilities in Montreal, Miami, and Rome, as well as expanding component repair operations at our new acquisition in California.
In 2025, we expect to generate Aerospace Products EBITDA of $650 million to $700 million, which is up from $381 million in 2024 and $160 million generated in 2023. With that, let me turn the call back over to Alan.
Thank you, Angela. Brianna, you may now open the call to Q&A.
Questions and answers
Our first question comes from Sheila Kahyaoglu of Jefferies.
Joe or Angela, maybe first question for you guys on EBITDA for Aerospace Products. Just looking at the first half versus the second half, the second half module increase is about 85 units, in line with the EBITDA increase of $85 million at the midpoint. So it seems the business normalizes to $1 million of EBITDA per module. How do we think about the margin improvements into '26, both including and excluding PMA to get to that 40% and as Montreal and Rome ramp?
I'll take it initially. I think the margin improvement opportunity is multifaceted. We have repairs that we've been developing in Montreal, and the acquisition of Pacific Aerodynamic potentially adds 1 to 2 percentage points. We have new serviceable material that we've been acquiring over the last few months that will flow through in the P&L with core restorations. Ultimately, we're also looking at PMA kicking in. So we see 5 to 10 percentage points of improvement happening in 2026 as a result of those activities. PMA is clearly the biggest factor, but all will contribute positively to the improvement next year.
Okay. And maybe if I could ask more on that point, Joe, with Pacific Aerodynamic, that deal, $12 million purchase price for $50,000 of savings per shop visit suggests a return within half a year. Can you talk a little bit more about the business, how it further differentiates FTAI and how you're thinking about future inorganic opportunities?
Yes. We've been looking at the repair space and have developed a number of repairs internally in Montreal. The compressor blades are a fairly specialized repair, and there are only a handful of companies that really have that capability. Pacific had great technology and products but probably a limited marketing customer base. We saw that as an opportunity to combine our volume with their expertise. If you think about the acquisition price being roughly about $15 million, if we can ramp that operation up to handle about 300 shop visits, saving $50,000 per shop visit equates to about $15 million a year in savings, leading to a 1-year payback. Our ability to deliver volume enhances the economics, making this vertical integration both extremely accretive and attractive to us. There are others out there of a similar nature that we are also actively reviewing. We are looking at every item of cost in a shop visit to determine if we can build that capability ourselves or acquire it.
Our next question comes from Kristine Liwag of Morgan Stanley.
Joe, you had 184 CFM56 modules in the quarter, so up 33% sequentially. You've talked about 750 for the full year, implying that the second half would see another 33% growth versus the first half. Can you discuss the airline customer reception of the modules? What's their opinion of your service? Are you seeing more repeat customers? Can you expand more on the offering that you made for a major U.S. airline? What does that mean? And if they're satisfied with your service, what could that imply for future growth?
Sure. I'll let David start on the production, and then we can address the other parts of the question. So yes.
Kristine, this is David. To start off with production, the majority of the increase in production was based on two factors. First was the growth in Montreal. As we announced in previous quarters, we've focused that facility on specialization, enabling us to increase production from 77 in Q1 to 91 in Q2. This improvement also reduced turnaround times from 83 days in Q1 to 66 days in Q2. We expect that to continue to improve, aiming for around 60 days turnaround time per module. The second catalyst was the introduction of our Rome facility. Although we closed that transaction in early June, our transformation efforts began earlier this year. We prioritized CFM56 volume over the previous CF6-80 work, and we plan to replicate the specialization seen in Montreal at this facility in the back half of this year. We expect to have 100 modules for the entire year.
Regarding customer reception, it is quite positive. We present to airlines an alternative to managing their own engine maintenance, showing them that we can save them both time and money, providing significant flexibility. Airlines understand that managing engine maintenance comes with high costs and potential overruns. We have successfully introduced this concept globally, demonstrating that it works even with larger clients. We have yet to receive any complaints from our customers about our products, which have always been delivered at the highest quality. Our goal is to grow with our clients as their platforms age, increasing our share of their engine requirements. Market share is not static and tends to rise as platforms age, so we see opportunities as we become the preferred option for more airlines.
Looking at 2025, how quickly do you expect to reach the 750 module target? Given the capacity that you've talked about of having 1,800 for the CFM56 module, can you share your thoughts on how quickly you could reach that capacity? What are the key bottlenecks such as labor, and how does this relate to your new university program?
We expect to achieve roughly 1,800 modules in the next two years. Our chief constraint is acquiring technicians, particularly young technicians. Although we have a highly experienced workforce, we need to continue hiring newcomers. We have developed a training academy in Montreal, partnering with local schools. Students intern with us and we usually hire the best graduates. We're also establishing a training center to immerse new hires in augmented reality learning, which improves their learning curve significantly compared to traditional methods. We believe this gives us a competitive advantage by enabling better control over hiring.
The Montreal and Rome markets are particularly favorable for hiring talent due to the previous airline engine shops that have gone out of business, which creates opportunities for us as we bring volume into these facilities. This allows us to be an attractive opportunity for mechanics in the region, as we have the business, and many people prefer to work in cities like Rome rather than Northern Europe. It's easier for us to acquire additional maintenance capabilities based on our success.
Considering the return from the acquisition of Pacific Aerodynamic, are you planning to expand more repair capabilities? Could you discuss your M&A strategy and how we should view future potential deals?
Yes, we plan to fill gaps in piece part and component repairs as part of our vertical integration strategy. We started by investing in PMA manufacturing, then acquired maintenance facilities, and then moved to carve-out ventures. We are now focusing on piece part repair as our next strategic move. Given our ability to generate significant volume, our aim is to do 600-700 shop visits yearly, making us the largest user of services for the CFM56 engine globally. We're also evaluating other potential acquisitions.
Our next question comes from Giuliano Bologna of Compass Point.
Congrats on the continued performance of the Aerospace Products side. One thing I wanted to understand is the accelerating growth in the Aerospace Products segment. What do you think specifically is driving that, and how durable do you think those trends are? Are there any industry events that could accelerate this growth?
The underlying dynamic driving adoption is airlines and owners wanting to avoid the hassle and costs associated with managing shop visits. As platforms age and larger airlines sell older technology to smaller airlines, it creates more spread in fleets, reducing parts availability and increasing maintenance costs. This environment favors us in doing the maintenance as the preferable option. It's a scale business, and growing larger leads to more success. The larger we are, the better we become because it reduces competition.
The SCI is an accelerant for market share growth. The SCI contributes approximately 20% of our sales in aerospace, translating to a solid pipeline of airline customers. With 50 customers currently, we have another 100 potential customers through future vehicle sales. This sets us up well for continuous growth in aerospace.
Across our entire business, including Leasing, Aerospace Products, and SCI, we have over 250 customers today, a substantial number for current generation aircraft and engines. This presents significant opportunities for us. Once we establish a relationship with a client in one area, they often begin to view us as a single entity regardless of where funds are coming from, which further solidifies our market position.
Our next question comes from Josh Sullivan of The Benchmark Company.
Congratulations on the quarter. Joe, following up on strategic capital, how should we be thinking about SCI 2? What's your sense on how the SCI model is evolving into a repeatable relationship?
We couldn't be happier with where we are right now. Starting something new always comes with uncertainty, but we're executing well. We currently have 145 aircraft owned or under LOI with about 50 customers. Our returns align with expectations, and we plan to decide on SCI 2 in the third or fourth quarter. Overall, it looks optimistic.
What is your view on when you might consider starting to explore assets around the LEAP or GTF engine?
I still think it will be around 2028 or 2029. Both engines are introducing new parts this year and next, and we’d prefer to wait for that stabilization before acquiring assets. Additionally, the number of engines that cycle off power by hour programs is crucial for us to manage shop visits effectively.
Our next question comes from Brandon Oglenski of Barclays.
Can you provide an update on PMA? It feels like we've been waiting for the third, fourth, and fifth parts to come out for a while. What's the status?
It's worth the wait. Chromalloy has publicly stated that the third part's final application was submitted to the FAA by May 1. They indicated that approval might come by October, as past applications have taken around six months. The third part is critical for our savings, while the fourth and fifth parts will likely arrive in 2026 and are less significant. We're focused on the upcoming approval.
Regarding the U.S. airline deal you mentioned, does it have a recurring element, and is there a structure we could replicate globally?
We have several deal structures, and the current deal involves large ticket exchanges, which may be lower margin. We also offer products like module swaps and perpetual power deals. If we normalize the mix, margins are expected to return to levels seen in the past.
Our next question comes from Myles Walton of Wolfe Research.
Given the paydown of the revolver and expectations for further positive free cash flow, can you discuss the role of share repurchase in your plans? Where do your leverage comfort levels lie?
We expect to achieve our goal with the rating agencies this year thanks to our financial performance. We consider anything under a 3x debt to EBITDA acceptable for leverage. We prioritize growth investments and will consider share buybacks thereafter. It depends on how much cash and liquidity we need to retain.
So the second half of the year's free cash flow is essentially unallocated at this point and could be considered for share buybacks?
Yes.
It sounds like you're running a lighter capital portfolio. Is the target of 350 to 400 CFM56 engines more of a long-term estimate or reflective of current ownership that grows into '26?
It appears sustainable. We have the advantage of engines under management in the SCI, which provides good availability. We maintain that the goal is to have sufficient engines available to deliver to customers.
Our next question comes from Brian McKenna of Citizens Bank.
What feedback have you received from alternative asset management regarding SCI and its early success? How does it impact potential long-term demand for SCI?
The feedback has been very positive. Investors have various timelines for approval, but they are generally eager to return as repeat investors given our forecasted returns. Demand for capital is significant, and we have a diversified investor base, which aligns with our expectations.
Regarding your debt capital, is there an opportunity to refinance your notes to reduce the cost of capital? What would that imply for your bond ratings over time?
We aim to achieve a strong BB rating and could argue for an investment-grade rating. We will assess refinancing options as the cost of debt decreases. However, since none of the debt is callable currently, we have to weigh the costs against potential benefits.
Our next question comes from Ken Herbert of RBC CM.
Can you discuss the increased throughput and efficiencies seen in the shops in the second quarter? What are the lead times on spare parts, and how has that affected productivity?
Our inventory strategy is unique, allowing us to procure parts in advance. This enables us to kit modules ahead of time, avoiding idle time waiting for repairs. We've been proactive in buying core modules and expect high demand continuing through the year. Our turnaround times improved from 83 days in Q1 to 66 days in Q2, contributing positively to our efficiency.
Is that turnaround time specific to Montreal or reflective across all facilities?
That's specific to Montreal.
As we consider the value dynamics in the market, especially regarding legacy engines, how do you foresee their value changing over the next couple of years, and how might that impact your business model?
We expect the growth rate to slow and eventually decline, which is normal. Our business operates on a relative value model. We buy used engines, rebuild them, and go to market. A price increase is not necessary to sustain our projected growth. OEMs generally raise prices, driving up replacement costs. Additionally, market share isn't static, meaning it tends to rise as equipment ages, so we anticipate continued growth through cost increases and share gains.
Our next question comes from Andre Madrid of BTIG.
Can you elaborate on the Chinese opportunity through Rome?
We view the Chinese market as a growth opportunity. The current fleet of 737 and A320ceo aircraft represents about 20% of the global fleet, but their order book is only about 4%. This indicates these aircraft will operate much longer, leading to more engine shop visits. We're excited to have the license enabling engine exchanges in China, and we have begun acquiring customers. We see this as significant growth potential.
It's an ideal market for engine and module exchanges, given the anticipated high demand for replacements and the lack of local shop capacity.
Can you quantify the material impact this could have and whether the margins are accretive?
We should be able to evaluate the precise impact after another quarter or two of business. We've recently begun operations there, and prospects look promising. The margins are favorable, and this is not a price-sensitive market.
Lastly, with regards to the margin step down at AP, how do you see margins progressing for AP in the second half of 2025 and into 2026? Are previous targets for improvement still viable?
For the remainder of this year, we expect margins to remain between 34% and 38%. For 2026, we're still anticipating margins to reach the 40% plus range, and we feel positive about that.
I am showing no further questions at this time. I would now like to turn it back to Alan for closing remarks.
Thank you, Brianna, and thank you all for participating in today's conference call. We look forward to updating you after Q3.
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.