Great. Good morning, everyone. Welcome to our session of FTAI Aviation. I'm Kristine Liwag, Morgan Stanley's Aerospace and Defense Analyst. This morning, I have the pleasure of having Joe Adams, CEO of FTAI, with me on stage. Welcome, Joe. Thank you, Kristine. Great to be here. Great. We're very happy for you to be here. You know, Joe, I feel like you know we've gone through a journey together in these past few years, really understanding the FTAI story. Just because in aviation, usually you're dealing with behemoths, right? The market share, this piece, and then the market share is really set on ship set content. You're building something different with FTAI. Even with my conversations with investors today, there still seems to be a misunderstanding of exactly who you are and what you do. I was hoping before we get through some of the questions, if we can go through that. One, you know, you started out as an aircraft and engine leasing business. Now you've got an MRO shop. Now you've got this engine Module Factory. You've got exchanges. You've now got a Strategic Capital Initiative with outside capital. You've got PMA with your joint venture with Chromalloy. I mean, that's quite a lot of different pots. Before we get started on diving deeper on each one of these, can you give us your origin story? How did this come about? What came first? What's the rationale in entering these specific markets? Finally, like what is it today? Yes. Good question. I appreciate the opportunity to be here again this year. It's been many years coming to this conference. We value the relationship with Morgan Stanley. You've done a great job explaining the story, what has sometimes seemed a bit complicated. I remember when we first met and we said we wanted to generate $500 million in aerospace products, and you sort of almost fell out of your chair. Did you say that right? I think that there are a lot of steps along the way. The overall vision has really remained pretty constant, which is for us to be the leader in providing aftermarket engine power to the industry, the commercial aviation industry. We focused on the two biggest engines by number, which is the CFM56 and the V2500, which are maintained in the aftermarket. Our vision has been to be the best in the world at managing those assets, and in particular, the maintenance of those assets, which is the biggest driver for the economics in the industry, the maintenance of those engines. It's somewhat unique in asset classes in that you can spend more after owning an asset for five years than you spend buying it in the first place. That's our goal. Effectively, what we do is we go to the industry and say, look, we spend our entire life trying to be the most efficient, best at doing the maintenance on that engine. Why don't we do it instead of you doing it? The end customer, what we deliver to them is a benefit of saving them time and money and providing them a lot of flexibility. That's the proposition, we can do it better. In return, you, the owner, are going to get tangible benefits in time, money, and flexibility. People get it because most airlines and most people who try to manage the engine maintenance find that it's very complicated. It's more expensive. It has a lot of pitfalls. Very few customers I ever talk to say, I love engine maintenance, and I think I'm really good at it. It's not what you hear. What we do, if you roll back the clock, what we started looking at, owning engines. We got into the business 12 years ago and realized that as an owner of an engine, you provide that as a leased product to the airline, that really the key where all the problems are, where all the challenges are, are in the maintenance activity. That's when we decided to sort of not pivot, but it's like, let's focus on engine maintenance. Early on in that process, we discovered PMA with Chromalloy on CFM56 engines, which is the engine that flies the 747 and the 767. We found that product to be a great product that performed extremely well and was misunderstood. We then looked around the industry and said, where could we apply that knowledge and that experience and make the most impact? The answer was the CFM56 engine. It was probably around 2017 where we said, let's do what no leasing company ever thinks of doing. Let's focus instead of diversify. It was a big decision because we had, you know, six or eight engine types. We're like, there's nothing in life we could do that would be better than the CFM56 engine. Why do anything else? That was a big decision. As we made that decision, we said the key to controlling the expense and the experience is owning vertical integration. I think I mentioned that to you early on. It's like own the engine shop, own the parts, own the entire chain, and figure out where the money is spent, and then do that yourself so you can be the best and be the most efficient. Everything that after that sort of follows logically from wanting to be the leader of engine aftermarket maintenance, vertically integrating, and focus are all sort of what drove us to where we are today. Wow. I mean, it's been quite a phenomenon. Actually, Joe, kudos to you. I remembered when you first started in that journey, our first conversation, you didn't really have a lot of market share in that CFM56 Module Factory. Now here you are, what, 5%? If you add the V2500, 9%? Yes. Is that included the V2500 too? No, that was just we originally last year were saying we had 5% of the $22 billion to spend. This year, the most recent quarter, we're up to 9% with a goal of 25%. Where were you four years ago? Like 0%. That's a pretty phenomenal share gain. Now, when you look at the next three to five years, how much market share do you want to have of this market? Yeah, so what we've said is our goal is to achieve about 25% of that market share, which if it's a $22 billion a year spend, that's roughly $5.5 billion of revenue from aerospace products in our company. That represents, if you think about it in terms of the number of engine events that we would be managing, if the CFM56 is about a 3,000, you know, number of shop visits per year, that would mean we would need to get 750 of those engine events. We've built our own maintenance capability today that can handle about 600 of those between the three facilities: Rome, Miami, and Montreal. We have the physical, you know, capacity to achieve most of that number. As we grow over the next few years, we think that that's a very achievable goal. You know, a leasing company going through an engine MRO business, you don't often really see that. What was the barrier to entry for FTAI to be relevant in that engine MRO? Also, your engine MRO approach is different. It's not like your standard aero where you bring the engine and quote parts and labor. Your approach is novel. Can you talk more about that? Yeah, so we took a very different approach to it. In the beginning, when we looked at it, we said, if we're going to use PMA in our engines to be able to deliver that to the market, we have to be able to control the whole chain because we can't be dependent upon someone else who might or might not be able to do that for us. It was partly a defensive approach to say we need to be in the business to do the maintenance to make sure we can deliver that product. That led us to buying a facility in Miami and then doing a deal with a long-term contract with Lockheed Martin in Montreal. As we got into that business, we made another critical decision. When I talk about diversification, the other one we made at that point was we don't want to do any third-party engines. We bought facilities and got rid of the customers, in essence, which I remember many times people in the facility would be like, are you crazy? I was like, why would, who does that? I was like, I don't think anybody does it. That's what we're going to do because we own our engines. We have the unique ability to deliver all those engines to wherever we want. If we own the shop, obviously, that's where we're going to deliver those engines. That was a big differentiating factor. As you said, it's a different approach. Other than American and Delta, who do effectively the same thing, they own their engines and they own the shop, no one else in the industry does it that way. That is the way if you think like an owner, and you are an owner, then you're going to use the most efficient and best practices to be the best at managing it. It's a critical combination to have that ownership and maintenance in the same entity. Great. Can you talk about capacity for this engine module? Now that you do own Montreal, you bought that from Lockheed. You bought Miami. You have Rome. How much capacity could you expand to, and how long could that take? Yeah, as I mentioned, we have physical capacity to do 1,800 modules per year, switching over from engines to modules. This year, we expect to produce about 750 modules in the three facilities. We bought Rome, Italy, in May of this year, and we expect to do 100 modules for the year in that facility. Next year, we expect to double that to 200 modules for the year. Our goal for next year is, instead of 750 of production, 1,000 through the system for our three facilities. Rome will be a double, obviously, as I mentioned, 100 going to 200. We'll also increase Montreal meaningfully. We think that there is a 33% growth rate in the production that is very manageable and achievable for next year for us. We're going to keep looking at expanding the existing facilities, adding mechanics, and potentially adding another physical, another fourth location. Great. Now, you think about the cash requirements to fund this business. This is probably our time to dovetail into SEI or Strategic Capital Initiative. Historically, aircraft and engine leasing business, when you're growing, you're a negative cash flow because you're a financing entity. How does the Strategic Capital Initiative thought come about to put these assets effectively off balance sheet and earn an asset management CI, kind of like the multiple streams of income here, Joe? Yes. How did that come about? Ultimately, as you scale up the aerospace products business, what are the capital needs for CapEx and inventory? How much are you freeing up versus the SEI? How does this asset-light business materialize? Right. It's a great question. It really was two drivers that started last year when we've been thinking about how do we become more asset-light and how do we reduce the amount of investment in leased assets for years. Then a year ago, we realized that a lot of our customers in the leasing space were using engine exchanges to solve problems with their leases because at the end of life, return compensation issues, you have minimum commitments on hours and cycles. We became a problem solver for the owner. We looked at that and said, there's a lot of private capital out there trying to invest in the space. We can actually deliver tangible benefits to generate higher returns with lower risk if we access that private capital. We went about, we set that up, and we listed all the things we wanted to get. We were able to achieve that in that we manage the partnership. We make all the investment decisions. We're the interface with the airline. We get management fees, incentive compensation, and very importantly, all of those engine maintenance events are committed to FTAI Aviation. Immediately, you become 100% customer, using our MRO product. It was all positives. We said, we should absolutely do this. Our goal this year was to buy 250 aircraft with 500 engines on them. At July 31, we're at 145. We're on track to be able to achieve that this year, which was a big, it was an ambitious target. We're on track to be able to do that, and the returns are very good. When we look at that, we said, we should be able to do this every year. We would like to do an SEI 2 next year. We should have visibility on what the returns are looking like for the portfolio and what the pipeline of deals are looking like. We feel like we'll be in a position to make that decision by the fourth quarter of this year. It looks very promising at this point in time. Effectively, what that allows us to do is to reduce our leasing fleet. As you said, the cash flow now from the leasing activity doesn't become a negative. It becomes, in this year, it became a positive because we sold some assets. We're also developing tools to be able to take some of the engines that we lease that are on longer-term lease into a similar structure with an off-balance sheet partnership. We're headed towards a more and more asset-light, you know, business model, such that effectively where we would like to end up is all of our activity in the parent company is really the factory. It's really buying an engine, rebuilding it, and then selling it and doing that over and over again for the industry, which becomes, you know, a very different, the transition, you know, would be completely from one business model to the other business model as we achieve that. Thanks, Joe. I mean, that's pretty interesting. A few quick things following up on SEI. One, you said higher returns in industry. Can you expand a little bit more on that? What kind of returns could SEI provide to its stakeholders? How could you achieve better returns than what they were doing before? Where are the optimizations? What's your value add? Yeah, so I'll answer the second question first, which is, if you take an aircraft that's on lease for, say, five years when we acquire it, and let's say that an engine is due for its full performance restoration in the middle of that lease, say, 2.5 years in, the traditional approach to managing that would be to have the airline rebuild that engine and make it a five-year engine. Do a complete performance restoration and put five years of hours and cycles on that engine. You're investing in a full performance restoration. At the end of the lease, at 2.5 years, you now have an engine that has 2.5 years of remaining life on it. What we do instead is we say, OK, instead of doing it that way, why don't we do an exchange with an engine that has 2.5 years of life on it? You're able to, as the owner, invest less because that's a less expensive engine. At the end of the lease, the residual value is all part-out value. When you look at the total economics of that, you end up with a higher return because you've put less cash in and less dependency on residual value, meaning lower risk. That's the box that, as a private credit investor, you're always trying to find is higher return, lower risk. We can't publicly, we're not allowed to, sort of talk about returns for that partnership. Let's just say it's a meaningful difference in returns for being able to do those engine exchanges, which provides a product that we uniquely can do because we have the capability of delivering a 2.5 year customized engine into that structure. Great. Now the dollar amount of this, I think it's also, I think sometimes, you know, people forget. I mean, it was a $4 billion fund, and you've deployed over $2 billion already in about six months. That's a pretty fast pace, Joe. Now you're hinting at a, well, not hinting, you actually said SEI 2. How large could this outside capital be? When you think about getting the market share that you want to get in aerospace product, what's the absolute size of this potential structure? Could it be SEI 3, SEI 4? What's the total aggregate value? I hope so, that, you know, we'd love to be an asset manager and manage $20 billion in assets someday. You have to build it, you know, block by block. If you look at the total size of this market, today there's about 14,000 current-generation narrowbody in existence. About half of those are owned by leasing companies and half are owned by airlines. Of the leasing companies side, if you take 7,000 of those, on average, leasing companies will turn that portfolio as they're getting into the later years 20% per year. That would be, you know, 1,400 aircraft per year, an average price, you know, in the high teens that you have a $25 billion a year investment opportunity. That's just the lessor community. You also then have airlines where we've done sale lease specs, where the airline is looking ahead, saying, I've got 30 shop visits I need to do. I don't want to do those shop visits. I don't want to put my capital into that. Why don't I do a sale lease spec and then FTAI does it? Both of those markets in aggregate are massive markets. Our plan is to invest $4 billion a year, which is still a relatively, you know, low percentage of that market. If you roll that forward and you do 250 airplanes every year, it would make us the largest owner of current-generation narrowbodies in the world, which is, and as I say, you know, that scale keeps making our business even more and more efficient. It's definitely an advantage to have more assets. We will then know exactly when engine shop visits are needed. We can plan in advance for the provisioning of parts for the facilities. We have, we know all the engine specs. As you get bigger, you get better. Great. Wow. That's another leg. Now, last leg, we'll touch on PMA, which is, you know, kind of where it seems like the evolution started as part of your origin story. Where are we now on PMA approval of CFM56 parts? I mean, you're also not, you know, doing little PMAs of little nuts and bolts, Joe. You went straight for the engine. Can you walk us through the timing of that approval, where we are today, and economics? Yes. When we started the partnership with Chromalloy back in 2018, we looked at the hot section of the engine. We picked the five parts where you have the highest costs per shop visit. Obviously, somebody said, how did you do that? I said, we looked at the ones that cost the most. That's what we chose. In total, the savings between our deal with Chromalloy is we get to buy parts for our own engine at cost to manufacture, which is effectively OEM economics, which is a significant discount, 75% discount to OEM list prices. We can save over $2 million per shop visit across all five parts. They're not all equal. The first two parts were sort of in ranking order, number two and three. The third part is number one, where it's almost 60% of the savings of that total number. That's the part that's expected to be approved very soon. Chromalloy indicated back to investors recently that they made the final application, submitted the final application to the FAA in May. The last part they had that was approved was a hot section part for the V2500. It took six months. They're indicating October. Effectively, it could come any time and very soon. That provides a significant amount of savings across the engine, which then allows people, if they want to go the PMA route, to generate enough savings for them to justify the investment in whatever they would have to do differently internally to own or manage and operate a PMA engine. That's a big event for the industry. I mean, very soon, we're, you know, September 12th, Joe. I mean. That's correct. I guess, you know, look at the recent stock price, I guess. I'm not a good forecaster of stock prices. I don't. I guess with that, for PMA, how do you think about adoption? I mean, historically, the OEMs scared the bejesus out of industry. OK, residual value, all right, performance. Can you talk about your approach, especially now that, look, you're going to own your MRO shop? You can't be shut out of that. You're also going to own the assets with SEI. You're in control of the maintenance. How do you think about that PMA distributions when it does come online? Yeah, that's a great question. Our experience really comes from the CFM56 engine, where we did exactly that. The first market that we went into was leasing engines to people. If you put PMA in an engine and then you go to market to lease, on the CFM56 engine, virtually every operator of 747s and 767s was willing to lease an engine with PMA in it. I remember asking our team that over and over again. I was like, are you sure? Because that's not what conventional wisdom is, that people say, oh, someone so and so won't take it. The part had a great track record, great performance, and any airline in the world was willing to lease that engine. That's number one. We have put the first two parts in our engines that are in our leasing portfolio already. The second opportunity, as you mentioned, is SEI because we are the general partner of that partnership. Any approval needed, we can give approval to put PMA in an engine. Those restrictions that typically a lessor would say no PMA or something like that with an airline, we can amend that. That's an easy next step. The third part is selling it to people. What drives adoption is what you would hope, which is performance. If the part performs well, and Chromalloy has had 12 hot section or 13 hot section parts that have flown over 2.5 billion hours with no error with instructives, if that part performs similarly, then people will say that's a very good part. It's a very high-quality part, and it costs less. Why wouldn't I use it? That's sort of the third step. That can come in different time frames. Typically, also, it increases as platforms age. As more and more operators are saying, I'm not going to be in that engine longer, and I'll put PMA in because I want to save money today, it goes up over time. Wow. Capacity for Chromalloy, do you have any visibility into how much they could produce? We do. I think they recently had an investor day, and they talked about how they invested $200 million in Tampa, expanding. They have an EB- PVD, which is a, I don't know if you know coatings, but that was a two-year lead time item to be ordered. It's now operating in Tampa. That was a big move; they moved their coatings business basically solely from Orangeburg, New York, down to Tampa. Now they have the castings, machining, and coatings all in a brand new facility down in Tampa, and they have substantial capacity to focus on these new hot section PMA parts. Wow. I mean, it took us like a half an hour just to go through your business, Joe. That's a pretty complicated one. Maybe a simpler question. We've never really seen an engine lessor or an aircraft leasing company do all the pieces that you're doing with the PMA and the engine module and the SEI. How is it that you've kind of come up with this fairly unique niche business to attack the 737 MAX and 737 NG and A320 CEO with the CFM56 when others haven't done it? Why you? How were you able to have all these different competencies to be the right person to provide a solution to airline customers? It was always there. To me, it always surprised me that no one really sort of woke up and looked and said, oh, my god, the CFM56 is a lifetime opportunity. I remember thinking that like seven or eight years ago. It's like someday I'm going to wake up and it's going to be like the headline on The Wall Street Journal because it is, it's the best engine. It's the best aftermarket. It's the most durable. It's a fantastic product. It's modular. I don't know. I just, when we got into it, we looked at it and said, this is nirvana. There's nothing like this maybe that ever happens again in our lifetime. We became obsessive about, like, just be the best at that and then take wherever that takes you. You know, think about, can you manage that? As I mentioned, the big decisions we made, which were not easy at the time, were don't diversify and buy a maintenance facility. When we did that, and then we bought the maintenance facility, we said, don't do third-party work. No one had done those steps. It's hard because you buy something, and then you're like, I'm going to do it differently. You have to believe what you're doing because a lot of people will say, you know, you're nuts. They did. We're like, no, I think you're wrong because this is how you should, this is how engine maintenance in the aftermarket should be done. It's one thing to go from 0% market share and talk about a dream, then have 5%, then have 9%, and then really go for that 20%, 25%, and then be the largest asset owner. At that point, you know, you're not just a little disruptive guy that's kind of annoying. You're actually a pretty meaningful part of the market. Can you talk about your expectations for competitive responses? How do you think the industry would respond to what you're doing? Where are you seeing either adoption and welcoming of your approach versus, you know, a lot of friction? When you're changing a business model, somebody is going to lose something. It's really the third-party MRO shops that, you know, if their approach is to go convince an airline to put their engines in their shop, and then they'll manage it for them. In many cases, they are motivated to try to find more work to do, right? The business models expand the work scope. That's kind of what we're changing. If you think about it, United and American and Delta don't manage their maintenance shops that way, right? They manage it the way what we did is basically copied that, which because they're an owner and the maintenance provider, your motivations are, you know, be the most efficient, not spend the most. If you think about who competitively, you know, the third-party MRO business is in a good position today in that you've got the LEAP and the GTF. They're requiring more maintenance than as their new engines, you know, there's issues. Those companies today have a very strong backlog and a significant amount of business coming down the pipe for their traditional model. I think if you think about it, they have to re-engineer their business to sort of try to copy what we've done. Maybe that ship already sailed on the CFM56 engine. They look ahead and say, but why do I care? You know, my business is good. I'm set for the next four or five years because I've got, you know, locked in order book. I don't know for sure. I just think that, you know, that we've spent seven years obsessing about this engine. We have the scale. We have the assets in place. There's a lot of things people would have to do to replicate what we did, not to mention the least of which would be to go buy a lot of engines, which isn't as easy as it was when we were doing it. Now we have SEI, which on top of that, you know, how many MRO shops can go manage, you know, $4 billion of assets? I don't know many. There's a lot of things. Every year, we try to add two or three more things to the list, like repair capabilities. We're not stopping. We haven't had a year where we didn't do anything new. We're going to keep making it hard. I can't be sure for, you know, forever. We're always paranoid. Yeah, I mean, it sounds like the pie is getting bigger. Everybody was capacity constrained. It's capacity they probably couldn't have met, and you would have had some idle assets for longer. You just happened to be in the market creating that capacity, taking that share. By the time they wake up, after they finish their work, you would have had that market already. Yeah, maybe. Yeah, hopefully. That's what I'm hoping for. Me too. With that, we will take some questions from the audience. If you want to ask a question, raise your hand. We'll bring a mic to you. Don't be shy. Raise your hands. Go ahead. Thank you. Maybe we get into like a ship of Theseus type thing. As you know, the expected life, or fly life, for CFM56 keeps getting longer and longer. Do you think with PMA and everything you're doing that we're actually underestimating the number of years ahead for the CFM56? I mean, that's clearly been part of our investment thesis. If you look back, my experience with the 757 was it was the gift that just kept on giving. The asset ended up flying a lot longer than people expected. If you think about why do airlines retire aircraft, it's for economic reasons, not technological. If you think today you've got a 737-800 or A320 CEO that costs $14 billion or $15 million, it's predictable in its maintenance costs. It has a mission that every airline in the world has routes that they can make money on. It's a moneymaker for the industry, so people don't retire it. What happens is you get out in the year 2025, and you say, do I want to invest in the next D check? That's typically the point in which people will say, it's $2 million, I'm not sure. Or they look at it and say, it's a no-brainer. That's why we came out recently and said every airline we talk to says that 30 is the new 25. If you thought you were going to fly at 25 years, now you're all looking at 30 years. We can help them actually make the economics better by lowering the engine cost, maintenance costs, by doing module swaps, by doing hospital shop repairs, by doing exchanges. We had several airlines that said when they put all of their estimated costs into their algorithm, we've extended the life of that asset by five years already. We believe that it is an asset that makes a lot of money, and it will continue for a long time. If you think about the alternative, it might be a $60 milion or $65 million MAX or a NEO that is your benchmark for comparison. That's a lot of capital. There are a lot of airlines in the world that really, capital cost matters a lot, and not the least of which is cargo operators. That's always sort of the life extension at the end for the 757 and the 767, the cargo market. That's still out there in a big way. Other questions? Joe, last question from me. It took us a while to get through your business model, right? You've got a lot of very complicated pieces. You know, as an engine, I mean, it all makes sense in terms of what you're building. I feel like it's finally materializing for investors to see this fortress, right, that you're building. Historical reference. Sorry, these puns just kind of come up. Yeah. At this point, where are you spending the most of your time? What are you most thinking about? Allocation of time is usually a reflection of priorities. What are you spending the most of your time on right now? I would say the production of modules is a focus, you know, in getting Rome this year, increasing productivity in ramping up Montreal, looking at, you know, things we can do in Miami to increase production because that is a constraint. The more we can produce today, the more we can sell. That's a priority. The second is making sure that, you know, SEI is off to a really good start, you know, with good deals, capital raising, and capital formation around that is another priority. Thirdly is these M&A opportunities in the repair space. Looking at, we've got a couple more that we're working on. We did the one with Pacific Aerodynamic. We love the repair business because the economics are phenomenal. It also, you know, we talk about forgers. We always talk about widening the moat. We want the more we can lower our costs by internalizing things like that, the better and more efficient we become. Repairs are a tremendous opportunity for saving money. I would say those three. I would say the, you know, production, capital formation, and SEI, and M&A. Thank you very much, Joe. Thank you for joining our session today. This concludes FTAI Aviation. Thank you.