FTAI Aviation - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2024 FTAI Aviation's earnings conference call. At this time, all participants are in 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 would need to press * 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press * 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Alan Andreini, Investor Relations. Please go ahead.

Alan Andreini (Head of Investor Relations)

Thank you, Michelle. I would like to welcome you all to the FTAI Aviation second 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 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.

Joseph Adams (CEO)

Thank you, Alan. To start today, I'm pleased to announce our 37th dividend as a public company and our 52nd consecutive dividend since inception. The dividend of $0.30 per share will be paid on August 20th based on a shareholder record date of August 12th. Now, let's turn to the numbers. The key metric for us is adjusted EBITDA. We continued the year strongly with adjusted EBITDA of $213.9 million in Q2 2024, which is up 30% compared to $164.1 million in Q1 of this year and up 40% compared to $153.1 million in Q2 of 2023. During the second quarter, the $213.9 million EBITDA number was comprised of $125 million from our leasing segment, $91.2 million from our aerospace product segment, and negative $2.3 million from corporate and other. Turning now to leasing, leasing had a great quarter posting approximately $125 million of EBITDA.

The pure leasing component of the $125 million came in at $112 million for Q2 versus $98 million in Q1 of 2024. Additionally, we sold $59 million book value of assets for a gain of $13.5 million. With exceptionally strong demand for assets and the continuation of a robust northern hemisphere summer travel season, we now expect to generate $500 million in EBITDA in 2024, which includes $50 million in gains on asset sales versus our prior estimate of $475 million. Aerospace products had yet another excellent quarter with $91.2 million of EBITDA and an overall EBITDA margin of 37%. We're seeing tremendous growth in the aerospace products business in general and feel good about raising our estimates for 2024 EBITDA in aerospace products from our prior estimate of $250 million up to $325 million-$350 million.

We also are experiencing expansion in aerospace products margins as demand for refurbished modules and engines remains very high, while increasing efficiencies at our two CFM56 maintenance facilities in Montreal and Miami is controlling or, in some cases, lowering our costs. Overall, looking ahead, we now expect annual aviation EBITDA for 2024 to be between $825 million-$850 million, not counting corporate and other, versus our original estimate of $675 million-$725 million. Finally, about two years ago, we first outlined our corporate financial goal of generating in 2026 $1 billion of EBITDA comprised of $500 million from leasing and $500 million from aerospace products. Now that we're halfway through this time period and ahead of plan, we're resetting the target. Our new goal is $1.25 billion of EBITDA in 2026 comprised of $550 million of leasing EBITDA and $700 million of aerospace products EBITDA.

With that, I'll turn the call back to Alan.

Alan Andreini (Head of Investor Relations)

Thank you, Joe. Michelle, you may now open the call to Q&A. Hello?

Operator (participant)

The first question comes from Jason Holcomb with Morgan Stanley. Your line is now open.

Jason Holcomb (Equity Research Associate)

Good morning, Joe, Angela, and David.

Alan Andreini (Head of Investor Relations)

Good morning.

Jason Holcomb (Equity Research Associate)

Within aerospace products, you've historically mentioned that you target EBITDA margin of around 35%. The last couple of quarters, we've seen you surpass that target. It would be great if you could talk about where you see margins going from here as you continue to grow and develop the business. Also, it would be great if you could speak to how that margin path may differ between both the CFM56 and the V2500 engines. Thank you.

Joseph Adams (CEO)

Great. Thanks for the question. Yes, we are, as I mentioned in the remarks, we are seeing margins trending up, and it's fairly basic. Our revenues are going up, and our expenses are either flat or down. And so the revenue side is really demand-based where, as you can realize, equipment is in short supply. Turn times at maintenance shops are getting longer. So that means it puts a premium on having a pre-built engine or module available so we can actually get slightly higher prices and still generate significant savings for the customers. At the same time, by controlling costs through our own facilities, we do that with controlling the labor cost in that we have more specialization in the facilities. We're basically running one engine, and we're teaching people to do it in a high-volume manner. So it's a learning curve process.

You get better and better at it as you do it more and more frequently. So that's part of it. And we're also getting smarter about used serviceable material, forecasting the demand. Where is it going to be needed? When are we going to need it? Getting our repairs done in advance. So we're smarter and more efficient about using used material. So it's really on both sides of the equation: revenues up, expenses down, that we see growing margins. We will also see increased savings when we close on Lockheed Martin. And so we do see the margins trending towards 40%, and we think that that will continue to grow as we get better and more experienced with that facility as well, and we generate more volume. So pretty positive outlook for today and also for the near future for the coming years.

I would say on your other question on Pratt versus CFM, we have said that the Pratt & Whitney V2500 deal will not be dilutive to margins, and I would continue to say that. We're seeing very good demand for those engines, extremely high, and we're also seeing good turnaround times on getting engines through the shop. So we continue to expect that that will be the same or as good as or better than the CFM side.

Jason Holcomb (Equity Research Associate)

All right. Thank you for that, Joe. I'll leave it at one.

Alan Andreini (Head of Investor Relations)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Kyle Wenclawiak (Equity Research Senior Associate)

Hi, team. This is Kyle Wenclawiak for Sheila.

Angela Nam (CFO)

Hello.

Kyle Wenclawiak (Equity Research Senior Associate)

Hey, guys. Very nice quarter here and first half, really, in aero products. It's not just the EBITDA growth, but the margins, like you just said, kind of trending towards 40% is now kind of the watermark. So maybe just drilling in on your comments, Joe, about the Lockheed facility. How are you thinking about the margin opportunity within that facility as that deal is going to close in the second half and kind of what it means for the productivity, the throughput, and the piece part opportunity there for the modules?

Joseph Adams (CEO)

Yeah. So good question. I think that we've indicated we expect about $30 million of savings per annum once we close initially on just on the CFM56 overhaul operations. So that should add 3-4 percentage points to the margins just from that closing. Then I think the efficiency, we haven't really baked that in yet, but we did see quite an improvement when we took control of the Miami facility. We've seen a pretty significant increase in throughput per person. So we expect a similar trend in that facility, although we don't yet have our hands on it. So it's something we think we'll be able to accomplish, and we don't see any reason because we've done it before. And then lastly, incremental to that is the piece part repair business, which we've talked about for quite some time.

There's a lot of capability in the Lockheed Martin facility that was not really fully developed. We're going to accelerate the development of the piece part repair business. We're going to do more repairs for our own engines, repairs for third parties, and then we'll develop new repairs. And so that, I've indicated, we expect to generate probably an incremental $10 million-$15 million of EBITDA from that, but not really starting until probably 2025, and then potentially growing from there. We'll update you on that. We see every time we look at the engine and we look at something new, we find millions of dollars lying on the floor. There's so many opportunities that we can pursue that are big dollars.

We're very optimistic that we're going to keep this as continuous improvement, is what we've always said over the last 5, 6 years, and we're nowhere near the end of our list of opportunities.

Kyle Wenclawiak (Equity Research Senior Associate)

Great. Super helpful. I'll leave it at one. Thanks, guys.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Josh Sullivan with The Benchmark Company. Your line is open.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Hey, good morning. Congratulations on the quarter here. What is the relative turnaround time for an airline or lessor using the Module Factory versus the open market at this point?

David Moreno (COO)

Yeah, I can take that. This is David. So the typical industry turn time we're seeing is anything from 120-180 days. Our turn time on modules is about 30-60 days to actually build a module, right? And then to actually execute said module depends on the module is anywhere from 5-25 days. So for a customer's perspective, they're doing the module swap in 5-25 days versus 120-180 days. And again, we're seeing industry turn times that are long and getting longer. And I think we're in a much better position predominantly for four reasons, right? Number one is we have capacity up in Montreal and in Miami. So we have the capacity and the workforce. Number two is we have access to used serviceable material via our AAR program.

Number three is what Joe mentioned is we have access to repairs at Lockheed where we can repair parts. Number four, we have the flexibility since it's our fleet of mixing and matching modules as well as planning. As we see turn times go down industry-wide, I think it is accelerating more and more demand for modules because one of the key attributes of modules is it's a faster product than a traditional MRO.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Got it. And then just as a follow-up on the piece part repair business expansion, is that an organic effort, or do you see opportunities to bolt on inorganically at Montreal?

Joseph Adams (CEO)

Both. I think that our base case is organic, but we have a lot of conversations that we've been engaging with different parties in that business for the last two years looking at different alternatives. And there might be some combination of the two, which is organic plus working with another player in the industry. So we are always open-minded and flexible, and whatever the math and the operations would support, we'll take a look at it. There's not enough capacity in the piece part repair business globally. And we realized that last year, I think we spent $50 million with third parties where we were a pretty big buyer of repair services, and no one had ever called on us and marketed a product to us. It's amazing. The industry is all order takers.

There's a lot of things that we think we can do to grow and increase that business that we're just at the very, very beginning of that.

Josh Sullivan (Managing Director and Senior Equity Research Analyst)

Great. Thank you for the time.

Joseph Adams (CEO)

Yep.

Operator (participant)

One moment for the next question. The next question comes from Hillary Cacanando with Deutsche Bank. Your line is open.

Hillary Cacanando (Research Analyst)

Thank you. Good morning. You had previously mentioned that savings this year from internalization would be about $30 million. So given that you're raising guidance, does that number change? And so do you now expect more savings from internalization for 2024? And how should we think about that number for 2025 and beyond?

Joseph Adams (CEO)

Yes, it will go up as we've increased our expectations for this year and for the out year 2026. So we had indicated at the time of the internalization that we would save $30 million annually, which we think we'll do at least that this year, and that number will grow to $40 or $50 million in the next couple of years and then potentially higher than that. So I mean, we're very confident that the numbers that we'll save are better than what we had thought, what we expected a couple of months ago.

Hillary Cacanando (Research Analyst)

Okay. So then we could probably assume for modeling purposes, we would probably assume like $30 million this year and then maybe like $40-$50 next year and then maybe even higher in 2026? Kind of upward trending in terms of savings?

Joseph Adams (CEO)

Yes.

Hillary Cacanando (Research Analyst)

Okay. Perfect. Then in slide number 8 in the leasing segment, it says that you performed 10 engine exchanges for aircraft leases year to date. I think this is the first time you've discussed engine exchanges with your lessees. Could you just go over exactly what that is and if those 10 engine exchanges are included in the 82 modules sold number and are these engine exchanges with your lessees one-offs, or do you have contracts with them to do more?

Joseph Adams (CEO)

Yeah. I'll let David walk through that.

David Moreno (COO)

Hey, Hillary. So the answer is in addition to the 82. So on our entire aircraft portfolio, we manage the shop visits via exchanges. So we're manufacturing engines ahead of removals and providing exchanges instead of lessees doing shop visits, which is typically how these contracts are written. So it's a value add. The reason why we like it is because we're able to charge OEM rates per the contract for every hour and cycle flown, and then we're able to manufacture those engines for a lot less. So that margin is going to show up through the maintenance revenue on our financial statements. The reason why airlines like it is because they're able to avoid the major shop visits. So they have zero turn time.

Typically, they'd have to lease an engine during that interim period, which can be very expensive, as well as they are responsible for the most part on all negative surprises. So if the shop visit overruns, typically the airline would be in charge of that over and above. So they really like that service, and it's a value add as part of our aircraft leasing business.

Hillary Cacanando (Research Analyst)

Okay. Well, thank you so much, David. Thank you. Thank you, Joe.

Joseph Adams (CEO)

Yeah. It goes to the when we talk about our business model is basically we are in the engine maintenance business. Most lessors are in the maintenance avoidance business, and they force it onto the airline. And we're the opposite. So we want to do the maintenance, and we want the airlines to get out of the maintenance business because we're better at it. So it's really that we're providing an outsourced opportunity for airlines to not have to manage shop visits, which for the most part, most airlines are not particularly good at.

Hillary Cacanando (Research Analyst)

I'm sure when you're talking to potential lessees, this is something that you pitch as well, right? Like, "If we could do exchanges as well." That's probably a selling point, I'm assuming.

Joseph Adams (CEO)

Yes. We're saving them time and money and eliminating a major possible negative surprise in a lease.

Hillary Cacanando (Research Analyst)

Great. Thank you very much.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna (Managing Director)

Good morning and congratulations on another incredible quarter, especially on the product side of the business. As a first question, I'd be curious, looking at the leasing side of the business, you outperformed pretty strongly, especially even on core leasing. I'm curious what drove the leasing outperformance, and if that's a trend that we should expect to continue going forward.

Joseph Adams (CEO)

Yeah. The two big drivers are rent and hours flown. And so both of those are up. It's very tight, the rent market, as you're probably obviously aware, with the demand for equipment, particularly older equipment that we own, is quite high. Airlines around the world are extending leases and not giving those back, given that they can't fly a lot of GTF-powered engine aircraft, and they can't get deliveries from Boeing on time. So the demand for older equipment and engines related to those is very high. And then typically the second quarter and really the third quarter are very high utilization quarters for airlines because the demand is there for flying. So we see it in the maintenance revenues as well. So both rent and maintenance reserves are up.

Giuliano Bologna (Managing Director)

That's very helpful. And then thinking about the shortage of engines globally and a lot of the supply chain issues that are out there, there are a few industry leaders that suggested that the industry will take a normalize or won't normalize until somewhere between late 2026 and 2030. I'm curious how you think about what that means for the opportunity for FTAI and also what normalization would mean or look like on the other side of that. And I realize it's pretty far out, so it's a pretty good runway here.

Joseph Adams (CEO)

Yeah. So we've always thought or run our business assuming normalization. This was just an unexpected gift that we got. So we think we have a great business even in an environment where everything is smooth and running and functioning well. Having said that, it is difficult to project, but I also would point out that it's not going to be a cliff. You're not going to wake up in 2027 and all of a sudden everything is good. So it'll be a gradual return to normalization over some extended period of time because, as you see, fixing supply chains, hiring people back is a very lengthy process, and it only takes one part of that supply chain to negatively affect the entire supply chain. So I think it'll be probably what everybody generally, the extremes are not right. It's somewhere in the middle. Somebody says 2030.

Somebody says 2026 is probably in the middle, but it's a gradual return to normal, not all of a sudden a bright line event.

Giuliano Bologna (Managing Director)

That's very helpful. And then one last one. Thinking about the product segment and kind of the demand for CFM56s and V2500s, I'm curious what the pipeline or the order backlog looks like in the third quarter and fourth quarter relative to the second quarter and how we should think about what that pipeline's already indicating or telling us.

Joseph Adams (CEO)

So we're getting I mean, we have some long-term contracts. Like if you talk about WestJet and LATAM or Avianca, where we have 7-, 6- to 8-year deals locked in. So we have very good visibility on that type of business. The other more transactional is probably we have 3- to 6-month visibility. We're getting people to give us forecasts of when they're going to need equipment earlier so that we can, as David said, we can order material, we can plan better, we can have the modules ready. So I would say our visibility is getting longer than it was even a year ago.

We're encouraging airlines to really be once they've tasted and experienced the product and they like it, they say, "Well, okay, now give us all your business and give us your program and give us your profile when you're going to need it." So I think we're going to continue to push for more programs, more visibility, longer time to get ready, and everybody benefits from that.

Giuliano Bologna (Managing Director)

That is very helpful. I appreciate it. Congrats on the quarter, and I will jump back in with you.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Ken Herbert with RBC. Your line is open.

Ken Herbert (Aerospace and Defense Analyst and Managing Director)

Yeah. Hey, Joe. Good morning.

Good morning.

Hey, I just wanted to ask you, you did 82 modular swaps this quarter. What percentage of the global sort of CFM56 operator universe are you currently working with? And how quickly is that expanding? And what sort of a timeframe as you think about an airline today with everything going on that may not have been a customer that comes to you and ultimately becomes a customer? Sort of how is that sales cycle compressing?

Joseph Adams (CEO)

Lots of aspects of that question, but just if you start off and you say we indicated that we have now 50 customers in our Module Factory. And if you think back in 2022 when we sort of rolled out our math for getting to $1 billion, we were forecasting 50 by 2026. So we're now at 50 in 2024. So things are moving quickly. And part of what happens in a crisis is when people need something, then they're more receptive to changing their business model. And so we see that the current environment is accelerating people's transitioning to outsourcing maintenance, engine maintenance, which is what we're offering the customer. Those 50 represent what we say 300 total potential. So maybe we're 1/6 of the operator base, and we're not getting with a couple of exceptions, we're not getting 100% of people's business yet.

But we're aspiring to because we don't see any reason why we shouldn't once people realize they save money, they save time, and they eliminate negative surprises. It's like, "How hard? What else do you need me to tell you?" So I think it's still growing. It's a huge market. The total universe, if you think about 3,000 shop visits a year, and you can argue whether it's 4,000 or 2,500 or something, but roughly 3,000, that's 9,000 modules moving through a maintenance facility somewhere in the world per year. And we're talking about doing 400-500. It's still less than 10%. It's half of 10%. So we're not anywhere near where we think the penetration could get to. And we have our own maintenance capacity. We can do 300 shop visits in Montreal a year, which is 900 modules, and 150 in Miami, which is 450 modules.

We have 1,350 module rebuild capacity that we own now. If you think about 4,500 is what we're shooting for, that's 5% market penetration. We can handle 15% today based on what we own. We're in a pretty good position to keep growing that. We haven't had anybody that used the product that didn't want to do it again. That, to me, is one of the main litmus tests is that do people like it and they have a good experience? That's what we're trying to foster so that the word of mouth spreads. People put testimonials up on their Instagram accounts, and they talk about how great this is.

We have photos of people in maintenance facilities looking to say, "I just did an LPT swap in 2 weeks, and that engine would have been in the shop for 6 months if I hadn't done that." So those are the kind of things where the viral marketing that we're using to accelerate even more. So I might have missed. There are a lot of elements to your question, but I don't know if I got all of them, but.

Ken Herbert (Aerospace and Defense Analyst and Managing Director)

No, that's great. If I could, just one follow-up. I mean, obviously, you're benefiting from the supply chain disruptions and turnaround times and lead times on material, but you obviously also buy a lot of material to fulfill demand while we're waiting for PMA parts and other stuff. Are you seeing an extension in the material you're looking to buy, the new OEM material or even on the USM side? And has that been maybe a headwind to some of the throughput?

Joseph Adams (CEO)

I mean, there's two parts. There's the CFM part and the Pratt part. You talk about the CFM, I'll talk about Pratt.

David Moreno (COO)

Sure. So on the CFM side, yes, we are seeing a delay for, let's say, repairing parts. I think we're well-positioned because we have the inventory ahead of time, right? So we are tearing down 40-50 engines per year with AAR. We're able to recall those parts and use them ahead of time. So really, it's having the USM available. And then number two is planning, right? So before a module comes into the shop, we understand and we have a kitting process ahead of time. So we produce the kit on what exactly is needed in that module. So we're able to be one step ahead in that process, right? Typically, what would happen is if you're engaging in third-party work, an engine would show up and you'd have a very limited amount of time to react and order parts, right?

So that's all happening ahead of time. So we feel like we're well-positioned, and that's why our turn times have not been impacted.

Joseph Adams (CEO)

On the V2500, I mean, we spent time with Pratt last week, and we're talking about material availability and turn times. They're very confident. I mean, earlier this year, they had some sort of delays in producing some of the V2500 parts and material, but they're on top of it now. They're very confident. We are, I would say, a high-priority customer. So with an order of 100 shop visits, we get they're going to put us at the top of the list. So they're very confident that what they've indicated to us, the 90-day turn times, that they're going to deliver on that. It's also helpful from our point of view that we're very flexible and they can put those engines into whatever shop in their network they want to.

That, they indicated, was very helpful because they can use our orders to fill in shops that don't have enough stuff.

Ken Herbert (Aerospace and Defense Analyst and Managing Director)

Great. Thank you very much.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Brandon Oglenski with Barclays. Your line is open.

Brandon Oglenski (Director and Senior Equity Analyst)

Hey, good morning, everyone. Thanks for taking my question. Joe, I appreciate the updated guidance for this year and longer-term outlook on the business. I guess, though, with how tight the market is, I mean, I know you're generating better margins now, but when we think of acquisition costs, especially for new engines, does this get more challenging looking ahead? Or is it the swap aspect that makes this so viable?

Joseph Adams (CEO)

Yeah, that's a great question. We've been pretty good at sourcing engines, and I think the main reason is we tend to excel when an engine is in need of a shop visit in the immediate or near future. So if you think about most buyers, when a portfolio or an aircraft comes up and they do their model and they have to do a shop visit in the next 18, 6 to 24 months, it's a huge negative to them. So we're one of the few buyers that actually, when we see a shop visit in the near future, we're like, "This is great. We love this because we know we're going to, A, we can do the shop visit generally for less than other people can, and B, we can also optimize by doing module swaps. We can sometimes do hospital shop repairs. We can generate more.

We can burn off some of the green time that other people can't value." So we have so many ways to make that into a better deal than virtually anybody else that we win a disproportionate amount of that business. And there's a lot of engines out there that during COVID, people didn't do any maintenance on. So we're seeing a lot of a very good pipeline of acquisition opportunities. And that is one of our core strengths is sourcing run-out engines. That's the first part of our business model, which is to buy run-out engines, then we fix them up, and then we lease them, sell them, or exchange them. And we love the exchange option too because then you're getting another engine back that's run out, generally at a very good price because you're solving somebody's problem, and you also then get to do it all over again.

It's a virtuous circle for us in sourcing.

Brandon Oglenski (Director and Senior Equity Analyst)

Okay. I appreciate that, Joe. And then I guess as you transition more earnings in the business space to aviation products, how should investors think about free cash flow in the business? And maybe longer term, where do you want to see leverage on the balance sheet too? Thank you, Joe.

Joseph Adams (CEO)

Yeah. So the second question, we just did an $800 million high-yield deal, and we indicated that our goal is to be strong BB by all agencies and have debt to total EBITDA in the 3-3.5 times range. This quarter, we're at 3.4 times. The bonds have traded up. I think we're trading pretty much like a strong BB at the moment. That's something we think is achievable this year and in the near future. So we're going to maintain that leverage and that rating. In terms of free cash flow, what we do is we take the EBITDA, subtract corporate and interest, and then we use a number for Maintenance CapEx, what we would use, what we need to invest each year to maintain the engines so that they can fly forever at infinitum.

That number tends to be between $60 million and $80 million a year of Maintenance CapEx. So when you run the math, we'll generate hundreds of millions of free cash flow in the near future. That's been our goal since, as you remember back from 2022 when we set those targets, is not to be in a perpetual cycle of always buying more equipment, but just turning it faster and generating a lot of cash.

Brandon Oglenski (Director and Senior Equity Analyst)

Thank you for that. Appreciate it.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Stephen Trent with Citi. Your line is now open.

Stephen Trent (Managing Director)

Good morning, everybody. Thanks very much for taking my question. The first, I recall you commented about your global footprint and opportunities you saw to expand, for example. I believe you previously called out Southeast Asia geographically. I was wondering since that time, what sort of elements you've seen in the market that might be reinforcing your view on that being an attractive footprint. Thank you.

Joseph Adams (CEO)

Thanks.

David Moreno (COO)

Hi, Stephen. I can take that question. This is David. Southeast Asia is a very important region for us. It has a high concentration of 737 NGs and A320s. Typically, that fleet has been newer. Now with time, it's maturing, and the engines are due shop visits. It's an area that we're keenly focused on. Recently, we started working with an airline by doing all module swaps at their hangar facility. They have a hangar where they do airframe work and light engine work as well. We started doing module swaps on LPTs. We have a large program with that airline. We've also recently started offering that as a third-party business. Now we have airlines coming in with aircraft that have engines that need module swaps.

We are performing those module swaps for that airline, and the aircraft is going back in the air in 15-20 days. So it's operating like a pit stop. So we've started with a few third-party customers, and we're very excited to grow that presence in Southeast Asia.

Stephen Trent (Managing Director)

I appreciate that, David. Very helpful. And just as a follow-up, on the M&A side, you guys seem to be really putting together a potent story on MRE. And I know you've done your own acquisitions like QuickTurn and what have you. Long term, would you ever consider a larger competitor acquiring you?

Joseph Adams (CEO)

Well, I mean, it's up to the shareholders. We're always very shareholder-oriented. So we all own a lot of stock. And if the right offer came in and somebody was interested, we would certainly entertain it. But that's a board-level call, not just an individual, so.

Stephen Trent (Managing Director)

Fair enough. And I appreciate that, Joseph. Thank you for the time.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Brian McKenna with Citizens JMP. Your line is open.

Brian McKenna (Equity Research Director)

All right. Great. Thanks. Good morning, everyone. Most questions have been asked, but it would be great just to get an update on capital management. I'm assuming returns on new investments today are quite high. So I suspect your top priority for capital is investing back into the business for longer-term growth. But can you just walk through your capital priorities today as it relates to new investments, further deleveraging, strategic M&A, and then dividends and buybacks?

Joseph Adams (CEO)

Yes. So first priority is to achieve and maintain the strong BB rating, which I mentioned, and maintain debt at 3-3.5 times debt to total EBITDA. So that we're on course. We're in that zone in Q2, and we expect by the end of the year to be solidly in that. So that's priority number one. Priority number two, as you mentioned, is investments. We do have a good pipeline of acquisitions. We also are turning that by selling modules and engines quicker. So our goal is not to have a huge increase in net assets owned this year. Having said that, at the beginning of the year, we did indicate with the V2500 program, we expected to increase our engine count from roughly 60 V2500s at the beginning of this year to about 150-200 by the end of this year.

We're well on our way. We're at 130 now. And so we expect to achieve that. And if you think of an average engine being $5 million or so, adding 100 engines adds about $500 million in capital. So that's been a focus this year is to have the V2500. But once we achieve having 400-500 CFM56 engines and 150-200 V2500s, we don't need to grow that number significantly. So after that, it then becomes a question for shareholder returns and dividends and stock buybacks would be the third priority.

Brian McKenna (Equity Research Director)

Okay. Great. Helpful. And then just one more follow-up for you, Joe. Just given how much the business has grown over the past couple of years, how are you splitting your time between managing the two segments? And then somewhat related, is there an opportunity to lean in on hiring here, just given the broader macro environment, to further accelerate growth in some of the emerging opportunities within the aerospace products?

Joseph Adams (CEO)

Well, I spend 100% of my time on FTAI, whatever is needed. So I don't think of it as splitting. I've said to people, my dream is that one day people will not do a sum of the parts calculation and think of this as we do as an integrated product. And we go to the airlines and we say, "Look, we can provide you your engine maintenance without you having to do it. You outsource it to us, and we'll always have an engine for you. And we'll save you time and money and provide you a lot of flexibility." And that's our pitch. And so what we do is we go buy run-out engines, we rebuild them, and then we can offer either a lease, a sale, or an exchange to an airline. And so the leasing is just one spoke, one arm of what we offer.

But it's an important one because having that ability gives the airline the flexibility to say, "Well, you know what? I only want three years, I think, is what I'm going to need. And somebody else says I want six years." And so you have the ability to customize and say, "Whatever you want, we'll deliver that for you." And that integrated product is extremely powerful. So we don't think of it as two different businesses. We report it that way. But someday, hopefully, people will stop doing some of the parts, and they'll say, "This is just a great product. This is an outsourced engine maintenance business for aftermarket for the most popular engines in the world.

Brian McKenna (Equity Research Director)

Yep. Got it. Makes sense. I'll leave it there and congrats on another great quarter.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Myles Walton with Wolfe Research. Your line is open.

Myles Walton (Managing Director)

Thanks. Good morning. Hey, Joe. I was wondering if you could maybe decompose the $700 million of EBITDA in 2026. The $500 million previously, I think, had $50 million of PMA, third-party parts, and $200 million of better drops during the module business. Is the PMA contribution of that $700 million about the same, and the remainder's better business elsewhere plus the V2500?

Joseph Adams (CEO)

Yes. So there are similar PMA, USM, each about 50. And then we've added probably between 100 and 150 for the V2500 program. And then the rest is just higher margins and more volume on CFM modules.

Myles Walton (Managing Director)

Does that higher margin volume on CFM require that PMA? Because that was sort of the selling point to get to that higher margin. Or is the market now so robust that you don't need the PMA for that drop-through?

Joseph Adams (CEO)

We're going to get it. So I don't think of it as the PMA will come, and that will increase the margins. I think we're going to increase margins even without PMA. But definitely, we're planning on PMA and PMA increasing margins.

Myles Walton (Managing Director)

Okay. And there's been a lot of news about airlines, and clearly, yields are working against them, and they're running more into cost questions about containment. Are you finding that this business that you have has more durability in a market where airlines are cost-cutting? Where are your weak points? Where are your strengths if we go into that cash conservation mode that sometimes cyclically happens with airlines?

Joseph Adams (CEO)

Yes. It does help us. And we're providing, as I said, cost savings. So when everybody's told to look at every line item in the P&L, one of the line items that always pops up is engine maintenance as a big one, and one that they seem to never be able to get it to go down. So we can provide a flattening out of that and savings. And so when people do have an intense focus on cost savings, then outsourcing of these types of activities goes up. The demand for that goes up. So we're happy in any environment, but particularly when people are focusing on that. That's what we're providing is expense management reduction.

Myles Walton (Managing Director)

Yeah. Okay. All right. Great. I'll leave it there. Thank you.

Joseph Adams (CEO)

Thanks.

Operator (participant)

One moment for the next question. The next question comes from Sherif Elmaghrabi with BTIG. Your line is open.

Sherif Elmaghrabi (Equity Research Associate)

Hey, good morning. I want to start with an update on PMA. How is industry acceptance going for your first part? Can you talk through what the second PMA part does within the engine and timing for approval there, please?

Joseph Adams (CEO)

Yeah. The timing we've said is shortly. Obviously, we're closer today than we were last quarter. We don't have any; we don't forecast specific timing, but very good progress made on all fronts on that. So we're very confident. The first part we have installed in 15 engines. It's been flying with another airline and no issues. It's a high-quality product, as always, with Chromalloy. And we think the industry acceptance is going to grow. There is a school of thought for many airlines that if they're going to put PMA, they want more than one part. So there are airlines that will wait till there's more parts approved. And once those are available, then we expect industry take up to be quite robust. There's an additional element today in supply chain availability in that it's not just cost savings for PMA.

Its availability, which is also important if you have another alternative if you can't get in a timely manner the OEM parts.

Sherif Elmaghrabi (Equity Research Associate)

That's a good color. Then on the corporate side, both of the well intervention vessels are now on charter. It looks like the rate that they're earning has melted up nicely. How are you progressing on the sale of these vessels? Are there any recent transactions you can point to to give us a sense of how they're valued?

Joseph Adams (CEO)

Yes. So you're right. The market is improving nicely. We have a handshake deal on both vessels today, which we expect to close by the end of the year, subject to a couple of conditions that we think will be met. But the market has strengthened, and we expect for the next few years it's going to be a strong market. So the vessels are both on charter, doing well, generating EBITDA, and the values have gone up. We originally said we thought we would get approximately $150 million, and we're in that zip code. So we're very happy that the end of that chapter is close.

Sherif Elmaghrabi (Equity Research Associate)

Thanks for taking my questions, Joe.

Joseph Adams (CEO)

Thanks.

Operator (participant)

I show no further questions at this time. I would now like to turn the call back over to Alan Andreini for closing remarks.

Alan Andreini (Head of Investor Relations)

Thank you all for participating in today's conference call. We look forward to updating you after Q3.

Operator (participant)

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