Good day and welcome to the Willis Lease Finance Corporation Third Quarter 2024 Earnings Call. Today's conference is being recorded. We would like to remind you that during this conference call management will be making forward-looking statements including statements regarding our expectations related to financial guidance, outlook for the company and our expected investment and growth initiatives. Please note these forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. These statements reflect WLFC's views only as of today. They should not be relied upon as representative of views, as of any subsequent date and WLFC undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risk and other important factors that could affect WLFC's financial results, please refer to its filings with the SEC, including without limitation FLC's most recent Quarterly Report on Form 10-Q, the Annual Report on Form 10-K and other periodic reports, which are available on the Investor relations section of WLFC's website, @httpf://www.wlfc.global/investor-relations At this time, I would like to turn the conference over to Austin Willis, Chief Executive Officer. Please go ahead.

Thank you. Here with me today is Scott Flaherty, our CFO and Brian Hole, our President. Firstly, I'd like to thank our employees for delivering another strong quarter and in particular I'd like to recognize our Legal department, Finance department and those others who have been involved in our capital markets transactions over the past two years. From completing our eighth ABS last year to establishing what we understand to be the industry's first ever engine warehouse and closing the first engine Jelco and more recently expanding our revolver to $1 billion and extending and expanding the company's preferred stock with an increased investment from the Development bank of Japan. I would also like to announce our second quarterly dividend of $0.25 per share to be paid on November 21, 2024 to holders as of November 12, 2024. Our core leasing business is performing extremely well and continues to show improvement relative to prior quarters. Our Q3 pre-tax earnings or EBT of approximately $35 million is our second highest on record and represents our highest when you adjust for long-term maintenance reserves, which tend to run lower, when lessees opt to extend leases rather than return engines. Demand for engines remains robust. Little has changed from the second quarter in the supply chain. Issues continue to affect the OEM's ability to produce new assets and parts and the MROs continue to struggle to repair engines in a timely manner. This continues to bode well for our utilization and rates. The Boeing strike is exacerbating this problem and is resulting in more of our customers seeking to extend the lives of their current generation narrowbody aircraft. We have seen specific examples recently where airlines had RFPs in the market to sell their fleets of aircraft over the next 12 months, but…

Thank you, Austin and good morning, all. As you can see from this morning's earnings release, the company produced strong earnings as evidenced by both the $34.5 million of third quarter earnings before tax or EBT and $122.3 million of year-to-date EBT achieved, which exceeds full year performance in any prior year of our company's history. This performance was up $14.1 million or 69% for the comparable quarter of 2023 and up 7$6.1 million or 165% on a comparable year-to-date basis. Walking through the P&L revenues for the quarter were $146.2 million. Significant revenue drivers were core leasing revenues inclusive of lease rent revenues and interest revenues on notes, receivables and sales type leases were $68.3 million, another all-time high, reflecting the increased total portfolio size of nearly $2.7 billion at quarter end as the company purchased equipment totalling $229.8 million in the quarter, only slightly offset by $47.9 million of equipment sales. Maintenance reserve revenues for the quarter were $49.8 million, up $12.1 million or 32% from the comparable quarter in 2023. $1.2 million of these revenues were long term maintenance reserve revenues associated with engines coming off lease and the associated release of any maintenance reserve liabilities. And $48.5 million of these revenues were short term maintenance revenues which are highly correlated to the amount of time our portfolio is flying as we get paid an hourly and cyclic rate on our lease assets. These short-term maintenance revenues were up $14.2 million or 41% when compared to the comparable period in 2023. Spare parts and equipment sales of $10.9 million in the quarter were up $7.5 million or 223.4% from the comparable quarter in 2023 and produced 18.4% gross margins. The increase in spare parts sales reflects the demand for surplus materials that we are seeing as operators…

Thank you. [Operator Instructions].

Yeah, hi, this is Frank Galanti calling from Stifel. I appreciate you guys taking my questions. I wanted to ask about asset values and lease rates, particularly for the narrow body engines, the older ones, the CFM56 and V2500s. Sort of what you're seeing from a recent trends perspective?

Hi Frank, this is Austin Willis. We've seen year over year about 37% increase in lease rates and I believe we published our book values at the end of last year from an appraisal to book value perspective. So, you can see that change there. We're not going to get into details on specific engine types, but we have seen a significant increase. What's interesting though is if you look at lease rates now relative to where they were in 2019, for the most part they're not that dissimilar. So, while there has been a significant increase in rates year over year, I think there's still room to go. Certain types I think have stabilized at a higher level, but others certainly have a lot more Runway. On the newer engine types, the Leaps GTFS GEnx lease rates have been climbing, but I think that's more reflective of asset values than anything else. I mean, when you've got engines that are selling in excess of $20 million, it's going to be reflected in the lease rates.

Great, thanks for that. And then for another question, if I could, I wanted to ask about sort of maintenance overhaul costs, what you've seen from that perspective in terms of trends and sort of maintenance or MRO availability. And then if I Could, could you sort of walk through how you guys think about the decision to repair your engines versus using modules for your own assets?

Sure, yeah, I'd be happy to. In terms of MRO availability, it's fairly tight, but it's tightest with the larger MROs, the Lufthansas, KLMs, MTUs. The smaller MROs. I think there's a little bit more availability currently in terms of overhaul cost. The 5B/7B V2500, I'll sort of paint them with a similar brush. But you're looking at $10 million plus for a full overhaul with LLP. So it's, it's a significant investment. The core modules are going to be in the neighborhood of $7 million and that's, HPT Blades, LLP and the remainder of the engine. So again, it's expensive. And in terms of your last question, how do we think about what we do with our assets when they come off lease or they've become unserviceable? We have a formal process to evaluate engines where we really look at for different outcomes and we run a present value analysis on each. So, first is sort of the repair end and that could be module swaps or overhaul and the preference is module swaps when we have the appropriate modules available. The real difficulty is finding core modules that are serviceable because there isn't a great deal of availability for core modules, much less Core Module LLP's. So, then you look at the overhaul scenario and then you look at the part out scenario where we send it through our parts business wasi and then the final scenario is looking at selling it outright where we take multiple bids from the marketplace and we value each scenario in whichever one results in the highest present value is generally the path that we take.

Hi, good morning, everyone. This is Greg Dahlberg on for Miles Walden at Wolff Research. I guess given chromoly had a part approved last week in the hot section, PMA wise, I guess. Can you just comment philosophically your view on PMA usage?

Sure. So, PMA certainly has the potential of saving money on the, on the bill of an overhaul. I think the question is really twofold. One, is it going to have the same on-wing life as an OEM part and that really is reflected in the cost per cycle. And then two, what are the impacts with remarketability of the asset for us? Historically we found that most of our airline customers or the lion's Share of our airline customers have opted for engines that are free of OEM or I'm sorry, free of DER and PMA parts. So, if we were to introduce those, it would limit the ability to remarket those assets both for lease and sale considerably. So, we're watching what happens in the future.

Got it, thank you. And then just on engine acquisition activity, I saw you acquired 19 engines. Can you comment broadly on the availability of engines? I guess. Are you seeing any signs of a slowdown at all?

Yes, our originations are fairly broad. we've got an order book with the OEM, so we purchase some engines directly from them. Others are through big programmatic deals we do. Like the one we did with Air India, which is a classic constant thrust deal, where we do a sale leaseback and when one of the engines becomes unserviceable, we take that engine back and replace it with one from our portfolio. And then with that unserviceable engine, we run it through the formal process that I mentioned earlier, where we may sell it, we may part it out, we may repair it. So, we do originate a fair amount from programs and then we also originate from just the open market generally where we find that because of the different elements of our business model, having the in-house parts business, having our own MROs, and also just having diversity of assets, we're usually able to originate assets where other people may struggle because we've got better avenues of monetizing them.

This is Will Waller from M3. Just wondering if you could comment on what your average utilization rate for equipment for lease was in the third quarter?

Sure. Yep. Hey, Will, this is Austin Willis. It was a little under 83% for the third quarter.

Okay. One question I have, and it kind of ran that same level in the second quarter. I'm just curious if we go back a couple of years and I know that 83% is actually a pretty high number when it comes to leasing any sort of asset because there's just times when things are down. But you had been in the upper 80s a couple, like, I don't know, it's probably been three or four years ago. Just kind of curious to hear if you think you could ever get back to those levels and if there's something that's keeping the levels down in the low 80s. It just seems like the demand for equipment is so high right now that it would be the highest it's ever been historically. So just wondering if there's something that's going on different in today's world versus, I don't know, four or five years ago?

Sure. Yes. No, it's a few different things. One of them is it's a little bit deceptive because when we originate new transactions, oftentimes those assets are off lease and it takes sometimes a little bit of time to put them on lease. Some of it is holding a selection of assets for our big programmatic deals and then it is just putting assets through maintenance and just the normal churn of assets coming on and off lease.

Great. That makes perfect sense. And then one last question. On your order book that you have, what does the order book look like for engines that you've got orders placed on but haven't yet taken delivery on?

Sure. It's about 400 million more. And when were most of those orders placed? Those orders are through 2027. They'll be purchased through 2027.And you'll see that, you'll see that in more detail will later today when we post our queue.

Eric Gregg from Four Tree Island Advisory. Great quarter. A few questions here. One is what is the average lease life on the engine portfolio at this point?

So, our average lease term remaining is in the neighborhood of two years.

And AerCap came out last week and announced that they were taking a provision for last quarter for Azul, which I saw Based on your October 14 update is a meaningful customer for Willis. What do you anticipate if anything is going to happen there with a potential provision or steps that need to be taken with regards to that situation?

Sure. So I won't get into too much detail with regard to specific discussions with Azul other than to say we have a zero AR balance with them right now. So we don't have any issues and we don't have any immediate expectations for provisions.

And then in terms of capital allocation, I know you have a lot of, obviously, commitments to buy more engines here. But as per that update you provided back in the middle of October, there's very significant daylight between your valuation and that of FTAI, which a lot of people look at as your closest comparable. How are you thinking about capital allocation with regards to stock buybacks and shareholder payouts?

So I'm not going to speak specifically on capital markets transactions other than to say the appreciation in our share price over, I don't know, the last 9 months has been welcomed, I think, by all investors and it certainly gives us optionality.

And then finally, we saw this year-over-year some negative operating leverage, specifically in G&A. We also saw kind of negative operating leverage quarter-over-quarter from Q2 to Q3 with revenues down a little bit, but costs up in the kind of double digits. When do we start -- or when do you forecast, we're going to start seeing actually positive operating leverage here with the great growth in the top line leading to margins improving again on a quarter-over-quarter basis?

Sure. I think one thing that we did mention in the -- in our script earlier in the call was a lot of what you saw on the G&A side was related to stock-based comp and specifically the movement in the stock price. What we are seeing, as you know, Eric, is we are getting better or improvement. I think if you look on a year-to-date basis, you're seeing improvement in G&A margins. So, I think you're going to continue to see that improvement in the G&A margin, so leverage through the P&L with growth as we move forward. But I think that there was a large component that we did experience in Q3 due to the stock-based comp phenomena.

And then maybe finally, in terms of the maintenance reserve revenues, that seems pretty -- it was pretty lumpy or a big difference between -- I mean, it was great basic lease rent improvement, but the maintenance reserve revenues were down a bit in Q3 over Q2. Is there a way for us to think about that going forward? And I appreciate those comments you made earlier about how a lot has to do with that being lower when leases are extended with customers. But any more color you can provide there would be helpful.

Yes. That's the majority of it. I mean, it is lumpy exactly as you described. And when lessees opt to extend rather than return engines, we do tend to see lower long-term reserves. And the increased short-term reserves, the significant increased short-term reserves year-over-year are really the results of both portfolio growth as well as increased utilization. Scott, is there anything else you'd like to touch on there?

Yes. No, I think that's right. I think if you look at the short-term maintenance component, which we disaggregate in our discussion and in our Q, you can see that that is the recurring piece, which we see strong growth in. And clearly, you can see from quarter-to-quarter the lumpiness in the long term, but we think it's simply that.

This is Justin Hughes at Phase 2. Just two questions. One on leverage. If I look year-over-year, as you highlight in your comments, your financial leverage came down. That's despite a lot of really good growth prospects, initiating a dividend, paying a special dividend, et cetera. Going forward, would you expect to continue to deleverage? Or do you think that there's enough demand for the leasing side that the portfolio growth will pick up enough to kind of offset the capital generation that you're doing right now?

So, our objective is to both grow and delever. In terms of whether or not we'll delever further from where we are, our objective is generally to have a BB-type credit profile. So, Scott, do you want to talk to that anymore?

Yes. I think as we mentioned on the prepared remarks, Justin, we're on a net basis, we're in the low 3s, 3.25 on a net basis. And I think as you start to get in that area, that's probably reflective of where a BB is. So, I think we will delever just as the company produces earnings like we've been producing, but we're probably getting to more of a comfort zone in that low three range.

Okay. And then second question, on the $3 million bonus for Charlie, is that something we should build into forward numbers? Is that a onetime item? How should we think about that going forward?

Sure. That was a onetime item where he was compensated for strategic initiatives and goals that he executed upon through the year.

Okay. Are there similar targets for next year that we could look at so that we can see if they're going to get hit that we can build them into estimates?

Not currently.

This is Josh Strauss from Pekin Hardy Strauss. Guys, great quarter. Very happy about that. I had a couple of questions. I guess one of the things that I was looking at was with regards to revenues per employee based on publicly available data. When you look at FTAI, they're looking at $1.2 million in revenues for every employee, while Willis is far short of that around $420,000. And I just was curious, why is Willis' operations so much more labor-intensive versus FTAI? And is there some sort of opportunity in order for Willis to improve on that metric?

Yes. Thanks for that. So, I won't speak to specifics about FTAI and compare ourselves there, but I'll tell you that there's really two elements. One, when you comp us to the majority of leasing companies, we are much more hands on. Half of our portfolio is short-term leases. So, when you look at us relative to an aircraft lessor when -- where they put an aircraft out on lease for 10 years, they really don't interact with the customer as frequently as we do. It takes a lot more touch. And that's everything from accounting to legal to really technical. And there's a lot more manpower involved there. So that's part of the story. And the other part of the story is the services businesses. If we were strictly a leasing company, you would see the dollar amount per employee be much higher. But the nature of the services business, obviously, is lower revenue per person. And as we've grown that over the past few years, that's influenced that number pretty significantly.

Great. Okay. I mean, is engine parts manufacturing, which FTAI does and is that an area that Willis is looking to get into?

So, you're talking about PMA? Yes, I covered that briefly a moment ago and that's something that we've shied away from in the past for the reasons that I discussed, particularly from a remarketing and marketability standpoint. But we're not proud. We sit back and we evaluate what happens in the marketplace all the time.

Got it. And your utilization rates prior to COVID were in the very high 80%s. And I think I missed what the utilization rate was this quarter, but it just seems like through Q2, you're on 84%. And I was curious given how strong the environment is why those utilization rates aren't just through the roof?

Yes. And again, I touched on that briefly earlier. So, I would point you back to those prior comments.

And our final question is coming from Josh Sullivan with The Benchmark Company.

Just wanted to get your perspective on kind of the life cycle of the CFM and V2500. I think you talked about shop visits peaking in '25, then flattening out '27. But what's your perspective on the life of those Q curves and I guess for the V2500 as well? Does that seem right? Or do you think these engines given the market dynamics might have a little bit longer life cycle?

I think the engines in general have a long time to continue in operation on wing. The 5B, the 7B, V2500, a lot of these, I'd say, slightly less than half haven't even had their first shop visit yet. So I think they've got a lot of longevity. But you've also got the introduction of a lot of newer generation assets as well, the LEAP, the GEnx, the GTF. So that's why we're trying to really make sure we have a well-balanced portfolio that's of the most in-demand asset types for our customers going forward.

And then you talked a bit about originations for leases. You mentioned the Air India deal. How important is it to have a dynamic offering at this point? Is the market strong enough where it's just get out there or the specialization offerings that come with a lot of your lease constructs, is that important or more important than it's been in the past?

Look, I think this is certainly a seller's market if you've got assets. I think if you're a lessor and you have the right in-demand assets, you're going to be doing okay right now. But our model and our programmatic business definitely enables us to fetch a premium return relative to competition. And I think it offers an element of resilience too. If and when things do change, having that long-term built-in programmatic work is important for helping maintain long-term demand for the assets.

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