FTAI Aviation - Q1 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the FTAI Aviation First Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andreini, Investor Relations. Please go ahead.

Alan Andreini (Head of Investor Relations)

Thank you, Shannon. I would like to welcome you all to the FTAI Aviation First Quarter 2024 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 a 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.

Joe Adams (CEO)

Thank you, Alan. To start today, I'm pleased to announce our 36th dividend as a public company and our 51st consecutive dividend since inception. The dividend of $0.30 per share will be paid on May 21, based on a shareholder record date of May 10. Now let's turn to the numbers. The key metric for us is Adjusted EBITDA. We began the year strongly with Adjusted EBITDA of $164.1 million in Q1 2024, which is up 1% compared to $162.3 million in Q4 2023 and up 29% compared to $127.7 million in Q1 of 2023. During the first quarter, the $164.1 million EBITDA number was comprised of $104.8 million from our leasing segment, $70.3 million from our aerospace product segment, and -$11 million from corporate and other. Turning now to leasing, leasing had another good quarter, posting approximately $105 million of EBITDA.

The pure leasing component of the $105 million came in at $98 million for Q1 versus $99 million of Q4 of last year. With exceptionally strong demand for assets and the commencement of the Northern Hemisphere summer season, we expect meaningful growth in Q2. We remain very confident in leasing EBITDA of $425 million for the year, excluding gains on asset sales. Part of the $105 million in EBITDA for leasing came from gains on asset sales. We sold $31.9 million book value of assets for a gain of $6.7 million, slightly below our expectations, but we have more asset sales coming in Q2 and the rest of the year, and are comfortable assuming gains on asset sales of approximately $12.5 million per quarter or $50 million for all of 2024. Aerospace products had yet another excellent quarter with $70.3 million of EBITDA and an overall EBITDA margin of 37%.

We sold 72 CFM56 modules in Q1 to 16 unique customers. Additionally, we sold 6 V2500 engines in Q1 to three customers through our recently launched V2500 engine program. We continue to see the tremendous potential in aerospace products and are comfortable that we will generate approximately $250 million in EBITDA in 2024, the high end of our previous range.

Our maintain, repair, and exchange, or MRE, model for the two most widely used engines in commercial aviation produces cost savings and operational flexibility for airlines and aircraft lessors by allowing them to avoid shop visits through engine or module exchanges. Our recently executed perpetual power agreement with LATAM, covering over 60 V2500 and CFM56 engines, illustrates the growing acceptance of airlines and lessors to outsource this activity to FTAI Aviation. Overall, looking ahead, we continue to expect our annual aviation EBITDA for 2024 to be approximately $725 million, not including corporate and other. With that, I'll turn the call back to Alan.

Alan Andreini (Head of Investor Relations)

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

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one or your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open.

Kristine Liwag (Executive Director and Head of Aerospace and Defense Equity Research)

Hey, good morning, guys.

Joe Adams (CEO)

Good morning.

Kristine Liwag (Executive Director and Head of Aerospace and Defense Equity Research)

You know, yesterday you announced a successful execution of a perpetual power agreement with LATAM Airlines. Can you provide more color on what this agreement entails? How meaningful is this contract?

David Moreno (COO)

Hey, Kristine. This is David. So to provide additional color on LATAM, the deal itself is predominantly a V2500 maintenance, repair, and exchange contract. It does have a smaller component, related to the sale lease back. But what we're doing is we're building engines ahead of shop visits, and we're providing engine exchanges, that are avoiding shop visits for LATAM and offering flexibility. As far as EBITDA and how that's gonna show up, we're going to be recognizing V2500 MRE contribution as soon as engines are exchanged. There's gonna be a ramp-up period, so as we exchange more engines, there's gonna be a ramp-up on aerospace EBITDA. We're expecting ramp-up to take about two to three years, as well as there's a smaller contribution on the leasing side, that's going to commence as soon as we close those airplanes.

Kristine Liwag (Executive Director and Head of Aerospace and Defense Equity Research)

I see. Thanks, David. And then when you said the ramp-up over two to three years, you said, you know, over 30 aircraft would be part of this agreement. Can you parse out the timing of when that could occur? And also, regarding the EBITDA contribution of this deal, what are the economics?

David Moreno (COO)

Well, we're not giving a specific number on that yet. I think it's a bit of a function of how many engine exchanges occur and how quickly they occur, and we don't have certainty on that yet. But we do expect it will ramp up, such that, you know, we'll have, it'll be a needle mover in years two, three, four, five, for our aerospace products business. So, that's really all we're saying at the moment, at this point. It's gonna take a little bit of time for that to kick in, but then once it does, it's a needle mover, and it's very stable.

Kristine Liwag (Executive Director and Head of Aerospace and Defense Equity Research)

Thanks. If I could do one more follow-up on this, you know, with the V2500 MRE that you've announced earlier this year, how should we think about the Latam contract as a proxy for economics for additional V2500 MRE? Should this be what we look at for additional sub-V2500 contracts? Is this a good starting point? Is this better? Any sort of context would be helpful.

David Moreno (COO)

It's a great starting point, and we would love to do more of these, and we hope we will. We have several projects that are, you know, of a similar nature. Each airline obviously has a you know, their own requirements and their own specs, so they're, they'll all be a little bit different, but we hope the you know, the this model is used by other airlines. And we in discussions with the big operators of V2500s, we've gotten very positive feedback on this, so we expect to do more, and we hope to do more.

Kristine Liwag (Executive Director and Head of Aerospace and Defense Equity Research)

Great. Thank you. I'll stop there.

David Moreno (COO)

Yep.

Operator (participant)

Thank you. Our next question comes from the line of Louis Raffetto with Wolfe Research. Your line is now open.

Louis Raffetto (SVP of Equity Research)

Thank you. Good morning.

Alan Andreini (Head of Investor Relations)

Good morning.

Louis Raffetto (SVP of Equity Research)

Joe, on the last year or maybe October earnings call, you said you thought maybe 200 module swaps, not a precise, you know, number but ballpark for 2024, but, you know, doing 72 in the first quarter. Any thoughts on that now? And then sort of rolling into that, obviously, you've got module swaps. You've got the MRE on the V2500 where you just said you, you know, you're kinda doing these shop visits ahead of time. How should we think about capacity limitations at this point?

Joe Adams (CEO)

So on the first point, I think, my recollection is we indicated between 250 and 300 module swaps or exchange sales for this year, for 2024. And so we're obviously on a great path, you know, given the first quarter of that, and we have pretty strong backlog, so I feel very good about that number. We have built our plan around being able to deliver that, so we have ample capacity at our two maintenance facilities that we use, the Montreal facility and the Miami facility. So we've got adequate capacity to do that. Obviously, we're working to increase capacity and ramp up, because we wanna stay ahead of this, and we do see, you know, substantial upside, you know, in the years ahead. So we're building additional capacity, but we have in place what we need to deliver this year.

Louis Raffetto (SVP of Equity Research)

Okay. Great. Thank you. And then, oops, sorry. Go for it, Joe.

Joe Adams (CEO)

What was the second question, or did I?

Louis Raffetto (SVP of Equity Research)

No, you covered both of them, so I was just gonna ask a quick one. Angela, just any commentary around how to think about cash flow in the quarter and rest of the year?

Angela Nam (CFO)

Sure. So our cash flows for this quarter, as you can see, our operating cash flows were about neutral, but that's because part of our proceeds from sales is sitting in investing. We believe for the rest of the year, our cash flow and operations will improve significantly.

Louis Raffetto (SVP of Equity Research)

Okay. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Josh Sullivan with The Benchmark Company. Your line is now open.

Josh Sullivan (Senior Analyst)

Hey, good morning.

Alan Andreini (Head of Investor Relations)

Good morning.

Josh Sullivan (Senior Analyst)

Just, with the addition of the V2500 here, can you just help us understand, you know, some of the relative savings, maybe versus the CFM56 for an airline? You know, I wanna say in the past, you've talked about a, you know, $3.5 million differential in the CFM56, but is there a way to think about that for the V2500?

David Moreno (COO)

Yes. We have the same, you know, set of, same approach to that engine we as we've taken with the CFM56 engine. We've looked at, you know, sourcing used serviceable material, doing hospital repairs, potentially PMA, better being able to get better deals with MROs because of volume commitments, and it's all it's all on the table. The, the shop visit cost for the V is higher than the CFM56. It's, it's typically, you know, full front to back is $9 million-$10 million versus probably $7 million for the, the CFM56.

We think we can get similar dollar savings out of using all those, albeit on a higher, price, so it's a lower percentage, but it's still the same amount of savings. So I think, you know, we feel very good about that. We haven't locked in all of the partners that we're talking to right now on this program, and as the volumes, you know, increase in build, we'll be able to give more specifics around, you know, who we're working with and what, you know, what are the components of that.

Josh Sullivan (Senior Analyst)

Got it. And then, you know, just given the, the move in the stock, all the changes, you know, do you have a sense of the investor base at this point versus last year? Any major changes you're seeing?

Alan Andreini (Head of Investor Relations)

You know, hi, it's Alan. There have been, and I think that, you know, there are people that are initiating on the stock right here. And I think when you see the 13Fs filed, you know, for this quarter, in May 15, you're gonna see some names that you've never seen before.

Josh Sullivan (Senior Analyst)

Great. Thank you for the time.

David Moreno (COO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Giuliano Bologna (Managing Director)

Good morning. You know, congrats on the continued outperformance on the product segment. What I was curious about asking was that, you know, we've, you know, we would obviously love to, you know, have a, you know, an update about PMA. But, you know, with that being said, you know, we've heard a lot of discussion recently about the industry pushing into PMA and increased demand for PMA from airlines. I'm curious if you agree with that and, you know, why do you think that's happening?

David Moreno (COO)

Sure. So on the first part, we've, you know, continued to make very good progress on getting approval on the next set of parts. And we're not giving a specific estimate on the timetable, but very good progress. And the quality and the performance of those parts is gonna be terrific, and we're very excited about that. So, as I said consistently, it's worth the wait. On the acceptance of PMA, I think that a lot of, you know, in the recent last year or so, people have focused a lot on supply chain reliability, and when you have a sole source for critical parts, that's a bad dynamic.

And so I think people are recognizing that PMA not only delivers cost savings in a very high-quality product, but it delivers a second source of product, which can be very important if you have an engine sitting in a shop and shop turntimes are stretching out, you know, beyond six months now. If you're waiting for a single part and you have a single supplier, and they tell you they can't get you that part for a year, then you're in a bad position. So that's, I think, why it's becoming, you know, more talked about or maybe more people are recognizing it's not just a, you know, a cost-saving opportunity.

Giuliano Bologna (Managing Director)

That's very, very helpful, and I will jump back on the queue. Thank you.

David Moreno (COO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Hillary Cacanando with Deutsche Bank. Your line is now open.

Hillary Cacanando (Director of Equity Research)

Hi. Thank you for taking my question. So this one's for Angela. So Angela, you have, you know, two preferreds that go from fixed to floating this year, you know, one in September and one in December. You know, obviously, you've had some great returns on those preferred those securities. Could you talk about what your plans are for them and, you know, how your discussions are going with the rating agencies?

Angela Nam (CFO)

Sure. Hey, Hillary. So yes, you're correct in our Series A's and B's are converting to floating later this year. And we're currently planning on refinancing those preferreds before those reset dates, so we'll continue to reassess that. In regards to the rating agencies, our current analysts are those that typically cover aircraft plus stores, but each rating agency is recognizing the great contribution that we're getting from the aerospace products business and the different metrics that will be involved in those sectors. So we are bringing in aerospace products business coverage analysts to each of our discussions with the rating agencies this year, which we think will be beneficial to our ratings.

Hillary Cacanando (Director of Equity Research)

Great. Thank you. And then my second question is just on the leasing side. You know, you mentioned that the demand for these assets remains strong. You know, I know the gains could be lumpy, so how should we think about the segment for the rest of the year? And, you know, could you just talk about the pipeline for that segment? You sounded pretty excited about it, in terms of what the pipeline looks like for the second quarter.

David Moreno (COO)

Sure. So, you know, two things in the first quarter that depressed leasing, you know, EBITDA, pure leasing EBITDA. One is, as you may recall, we had four airplanes we took back, terminated the lease with a Vietnamese airline in the fourth quarter last year, and those are off-lease. They go on lease in the second quarter, and that had about a $5 million negative impact to EBITDA. And then secondly, the first quarter is typically seasonally the slowest period for flying hours, and a lot of airlines don't fly the same schedules, and some of our EBITDA is driven off of, you know, hours flown. So all of that, you know, changes in Q2 and Q3, and we expect, as I said, a meaningful uptick starting next quarter, and we're reaffirming our $425 million of leasing EBITDA for the year without gains on asset sales.

Hillary Cacanando (Director of Equity Research)

Okay. Great. Thank you so much.

Operator (participant)

Thank you. Our next question comes from the line of Brian McKenna with Citizens JMP. Your line is now open.

Brian McKenna (Director of Equity Research)

Okay. Great. Thanks. Good morning, everyone. Joe, I appreciate the comments on the $250 million of EBITDA expected from aerospace products for this year, but if I annualize first quarter results, you know, you're already run rating at $280 million. You know, and it, it sounds like and it seems like there's, you know, quite a bit of momentum hitting you know, heading into Q2 and beyond. So, you know, I would so I would think it's, it's reasonable to assume continued growth from the first quarter level, so why not move the upper end of the range for 2024 for the segment?

Joe Adams (CEO)

Well, it's just one quarter. I mean, it's a good quarter, and we see good things ahead, but it's, you know, 25% of the year, and so we're just not ready to do that. We'll reassess, you know, on the second quarter, but at this point, we're sticking with the $250.

Brian McKenna (Director of Equity Research)

Got it. Okay. Makes sense. And then, you know, just to follow up, it's, you know, it's great to see the V2500 program ramping, but, you know, how should we think about the incremental margin from this business? You know, it would seem like there are some synergies with your existing platform, and ways to leverage the infrastructure already in place. So, could this business actually be margin accretive to the segment over time?

Joe Adams (CEO)

It could. I think the, I mean, the LATAM deals are a good example where it's both V2500 and CFM56 engines, and we offer engine solutions to every airline in the world that operates either a 737 NG or an A320ceo family aircraft, which is basically every airline. So it's pretty powerful that, you know, we can combine and, you know, sell them as, you know, essentially in a single transaction, those services. There are some unique aspects right now because the V2500, the demand is so high given that there's reportedly over 600 GTF-powered aircraft that are grounded right now, which is times two. That's 1,200 engines that are out of service.

And so the demand for the V2500 is extremely high and will likely stay that way for the next three years, and it's a smaller market, so airlines, I think, are a little more fearful that they may not be able to get a V2500 at all. So we see airlines willing to talk about longer-term leases on that product, which inevitably leads to more value creation, right? If we can do the MRE, put it on a long-term lease, then you can sell it as a cash-flowing asset and create value two different ways. So I think that possibility is something that we're seeing now, likely to play out, so I do think it has some added upside.

Brian McKenna (Director of Equity Research)

All right. Great. I'll leave it there and congrats on another great quarter.

Joe Adams (CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of David Zazula with Barclays. Your line is now open.

David Zazula (Senior eVTOL Equity Research Analyst)

Hey. Thanks for taking my question. For David, I guess, you know, my understanding is, with the V2500, you have a little bit less flexibility in, you know, how you execute the maintenance and operations of that type of engine, and just with, you know, high demand overall. Can you just talk about some of the challenges you have in balancing the V2500 versus CFM56 and, you know, how you're managing that?

David Moreno (COO)

Sure. So on the V2500, you have a lot of the same components that you do on any engine, right, which is you have access to used serviceable material, you have access to independent MROs, and then you have access to new parts via either OEM or PMA. The V2500, as we discussed, is a more expensive shop visit. It is a little more complicated from an engineering, which therefore creates more demand for ways to avoid that shop visit. So we're seeing a lot of folks come to us not wanting to shop those engines and wanting us to come with solutions. We're able to integrate those solutions and provide a better product. So we are working through all that. There's a lot of innovations around the hot section side of that engine that are coming out, just 'cause there's not enough V2500s today in the market.

David Zazula (Senior eVTOL Equity Research Analyst)

We're gonna continue to develop our capabilities and continue to, you know, find innovative ways to maintain those engines.

David Moreno (COO)

It's continuous improvement. We did the same thing on the CFM56. When we started that program, we knew about 10% of what we know now, so I would expect in a year or two, we're gonna have a lot more tools to work with on the V2500 that we didn't have today. But even without the tools, it's still a great market, so.

David Zazula (Senior eVTOL Equity Research Analyst)

Great. That's very helpful. And the effort for Joe and Angela, you know, impressive work on the tender for the October 2025 notes. Just curious as to what, you know, the plan is for that funding. And, you know, if, you know, your balance sheet, you're not looking at expanding the leasing balance sheet significantly, you know, would you consider, you know, potentially funding from the aerospace product side, you know, a refi of those notes, or, you know, what the plan would be?

David Moreno (COO)

Well, I think the refi is done. The next opportunity is the 9.75 that are callable. The call price drops in August, so that's the next opportunity for, you know, refi to lower our interest costs. In terms of cash flow generation, we will look at using cash flow to repay debt. And, you know, our priority on cash flow is to one, make investments, and two, then obtain a strong double B rating from all three agencies, which we're on track to do. And then three, we would look at increased dividends or stock buyback.

On the investment side, we are expecting to increase the balance sheet slightly for the V2500 investments that we're making this year.We expect to end the year at 150-200 engines of the V2500, which is up from 70 now, so we will be increasing slightly that. But I think the opportunity will come at some point later this year, probably to look at repaying debt and paying some of that, the more expensive debt off.

David Zazula (Senior eVTOL Equity Research Analyst)

Great. Thanks. And if I could just squeeze one more in, any update on insurance or where you stand there?

David Moreno (COO)

Yes. We have four separate work streams going. Three of them are negotiations with counterparties that are not insurance companies, and they're very advanced, and we expect, hopefully, to get those done around the middle of this year, which represents about $75 million out of the expected $150 million that we expect to recover in total. The balance of that will be with insurance companies, which we think will take somewhat longer, which we're expecting to be the middle of next year. But we think we'll get $150 million. We think half of that in the middle of this year and the other half in the middle of next year.

David Zazula (Senior eVTOL Equity Research Analyst)

Awesome. Thanks so much. Appreciate it.

David Moreno (COO)

Yeah.

Operator (participant)

Thank you. Our next question comes from the line of Sherif El-Sabbahy with Bank of America Securities. Your line is now open.

Sherif El-Sabbahy (Analyst)

Hey. Good morning. Thanks for taking my questions. So, a couple on the LATAM deal. What's the lead time on the V2500 exchanges? You touched on your capacity, but I'm curious on the timing side. You said you'd be sort of prepping the engines for exchange ahead of time, and I'm wondering how long it takes before FTAI can recognize revenue.

Joe Adams (CEO)

Yep. So we have engines in shop right now, and we're starting to deliver those engines as soon as we will close the transaction. So the engine exchanges will start, you know, relatively soon. The ramp-up will take time, so we are, you know, we have a schedule right now for this year of shop visits and expected dates, but we're, you know, still working on the next outer years, so we're gonna be receiving that soon and working through that and producing those engines ahead of time. But those engines have been produced, and some of them are finalizing shop visit at the moment.

David Moreno (COO)

Yeah. We started. I mean, we have 15 engines in shop right now, the V2500. We started that earlier this year, so some of them are already coming out, and we've got a schedule, where we expect to be able to meet the requirements for LATAM, when they need them, and we'll have those engines ready. They spent a lot of time.

Sherif El-Sabbahy (Analyst)

Thank you.

David Moreno (COO)

They spent a lot of time asking us that question, so we went through the wringer on that. That was one of their key, you know, criteria given the shortages in the industry.

Sherif El-Sabbahy (Analyst)

Yeah. That makes sense. And then, on the sale lease-back side of the deal, obviously, that generates some liquidity for LATAM, right? So, does a deal like that potentially for a future customer, not just this airline, open up opportunities for asset sales under the leasing business? Is that sort of multi-phase deal something you're thinking about?

David Moreno (COO)

Yes. Yes. It, it does. I mean, LATAM on this in this situation wasn't really focused as much as some airlines are on generating a lot of liquidity from this deal, so it's a it's not a huge amount to them. They were more focused on the engine exchange program. But airlines are all every deal ends up being a snowflake, and it's always a different set of priorities. But the demand for unleased aircraft is very high again, so there's a lot of money that's come into the leasing segment again to you know, if you have a six-year lease, you know, with a with a known airline, you can easily monetize that. And we will be doing more of that in the second quarter, so that we'll generate some cash more cash and more gains in, in the from that activity. So yes, we do like that.

Sherif El-Sabbahy (Analyst)

Okay. Thanks for taking my questions, everyone.

Operator (participant)

Thank you. Our next question comes from the line of Stephen Trent with Citi. Your line is now open.

Stephen Trent (Managing Director and Senior Research Analyst)

Good morning, everybody, and thanks for taking my question. You know, a couple of my questions have already been answered, but I'm curious as well. When we think about, you know, the engine module side, you've got, you know, very good exposure in U.S. You acquired that 50% stake in QuickTurn, I believe, a facility in Montreal. When you think about this high level, are there sort of any other geographic spots where you maybe think you can, you know, add your footprint?

David Moreno (COO)

Yes. It would be Southeast Asia, which we've done a relatively very good job early on of covering, you know, North and South America and Europe. We started about, you know, six to nine months ago, really, with a more intense focus on Southeast Asia, and we've had success there, but there's a lot. I mean, it's a huge, huge market opportunity that we're relatively underrepresented, but that will be changing this year, and we see that, you know, as a future, significant growth opportunity. Whether we add maintenance capacity there or not is something, you know, we've started thinking about, so I don't have anything conclusive yet, but we will look at maintenance facilities and potentially either our own or partners in that market in the coming months.

Stephen Trent (Managing Director and Senior Research Analyst)

Okay. Appreciate that as super helpful, and thanks for the time.

David Moreno (COO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Frank Galanti with Stifel. Your line is now open.

Frank Galanti (Equity Research Associate VP)

Great. Thank you. Hi. Thanks for taking my questions, and congrats on the great quarter. I wanted to ask about the aerospace segment. Can you help us understand what the breakdown in the segment was between module swaps, USM sales, and full engine sales or exchanges, given the varying levels of differentiation and margins between those businesses?

David Moreno (COO)

Sure. So, starting with the Module Factory, we generate about $600,000 EBITDA per module sale or exchange this quarter. That's up a little bit from the last quarter, and it's consistent with what we've been seeing since really when we started the Module Factory. Module transactions happen in either one, two, or three. So a customer can choose either one any of those, you know, flavors that you want. Three modules is a whole engine. And in some cases, what airlines realize is that rather than them working to try to keep their fan or their low-pressure turbine, that they could actually save more money by just doing a whole engine exchange and not having to deal with that because then they have zero days of downtime. So, but on average, the average transaction averages out to two modules per transaction.

In terms of the rest, so we call that the Module Factory and the MRE V2500 business is very similar, and the profitability from the V2500 on an equivalent basis is probably a little bit higher than the equivalent on the CFM56 today, but they're pretty comparable, and we expect that to, you know, remain similar. That's assuming that an engine has three modules for the V2500. On USM, it's been, you know, we've indicated in the past that it was roughly previously about 25% of EBITDA from aerospace products, but as we have ramped up the MRE business, that percentage is going down to where it's less than 15% of EBITDA at this point, and will continue as a, you know, percentage to decline because that's not a high-growth business. So hopefully that helps.

Frank Galanti (Equity Research Associate VP)

That does. Thanks. And so sort of digging into the three whole engine CFM sales, sort of based on last quarter's reclassification of the V2500 gain on sale from that leasing segment into the aviation segment, it's sort of my understanding, right, that when you sell a full CFM56 engine, that shows up as three modules, and it results in a gain on sale that shows up in the aerospace segment. So just confirm for me that that's correct. And then so how many of those 72 modules were full engines? And of those full engines sold, how many of those engines did you sell with sort of the same three modules that you had purchased them with?

David Moreno (COO)

I have no idea. I don't, you know, when we sell a whole engine, as I said, it's the customer's choice. If they wanted to take their fan off and only buy two modules, they can do that, so we don't really think of it any differently, and we don't break it out that way. It's not relevant to us, as it, you know, from a business operation, so I don't have the numbers on that.

Frank Galanti (Equity Research Associate VP)

Okay. But just, like, if you'd purchased an engine in COVID, and did no work on it, and so sort of no value-added work, when you sell that, is that showing up in aerospace EBITDA?

David Moreno (COO)

Well, if there's no such thing as an engine that sits around for two to three years, so that doesn't happen. When we buy an engine, we put it into the facility, and it's split into three modules. It's either repaired, torn down, or combined, reassembled into an engine, so that doesn't happen.

Frank Galanti (Equity Research Associate VP)

Okay. So then, just to be clear, every CFM56 engine goes through the Module Factory, in some capacity?

David Moreno (COO)

No. I mean, we've bought airplanes, sold the airframe, and leased engines directly. If the engine doesn't require work, it doesn't go into the Module Factory.

Frank Galanti (Equity Research Associate VP)

Okay. That's really helpful. I appreciate you taking my questions. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is now open.

Robert Dodd (Director of Speciality Finance)

Morning, everybody, and congrats on the quarter. And thanks for all the detail about cash flow and potential use of funds, etc., paid on debt. You did mention the dividend. I'm gonna ask about the dividend. I mean, now you're barely yielding more than the S&P 500 given the stock performance. Is there—I mean, you mentioned maybe increasing the dividend later this year with the cash flow you're gonna generate. Is there a rule of thumb you're thinking? I mean, way back in the past, there used to be a, you know, 2x FAD coverage. We'll think about the dividend. Obviously, the whole profile, the metrics are different now, but is there a rule of thumb we should think about as to what would give you the comfort necessary to increase the dividend from where it is right now?

David Moreno (COO)

Yeah. You're right. We really haven't thought about the coverage, calculation recently for the last four years or five years, but you have the history, so you remember that.

Robert Dodd (Director of Speciality Finance)

Yeah.

David Moreno (COO)

Deep down. But now that I don't think that's necessarily the way we're approaching it today, is it? It's more, you know, we have investments. We wanna have a strong double B, and then when we have excess cash, we'll return it to shareholders somehow. That's kind of the, you know, the, the waterfall.

Robert Dodd (Director of Speciality Finance)

Got it. Thank you. And one more if I can. On the capacity question, you were very opportunistic with when you added the Lockheed capacity, for example, during COVID, and the facility was being underutilized, and you were very opportunistic kinda locking that up long term. Aren't those kind of facilities being underutilized now, right? There's backlogs everywhere. Are those kind of opportunities going to be available, or is an expansion in capacity going to be more, is it gonna necessitate an acquisition or be capital-intensive, or are you gonna be able to find capacity on an as-needed basis, do you think?

David Moreno (COO)

Yeah. There's capacity out there. There are some shops that, I mean, the successful shops and the large shops are very busy, and they have, and many of them have now geared turbofan work that they either want to do or have to do, which is sort of squeezing out some other capacity. But there are lots of other facilities out in the world that we look at and see, and we also have partners in different parts of the world.

So the opportunity for the maintenance side, it's more of a, you know, it's available, and we have plenty of capacity right now, but we are always, you know, looking ahead and trying to, you know, stay in front of it. So yes, there's still opportunities. Maybe, maybe not the same as, you know, during COVID, but it's a big industry, and it's global, and there's lots of, you know, smaller and medium-sized players out there.

Robert Dodd (Director of Speciality Finance)

Got it. Thank you.

David Moreno (COO)

Yeah.

Operator (participant)

Thank you. I'm currently showing no further questions at this time. I'd like to hand the call back over to Alan Andreini for closing remarks.

Alan Andreini (Head of Investor Relations)

Thank you, Shannon, and thank you all for participating in today's conference call. We look forward to updating you after Q2.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.