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Edited Transcript of AYR earnings conference call or presentation 13-May-20 12:30pm GMT

·15 min read

Q1 2020 Aircastle Ltd Earnings Call Stamford May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Aircastle Ltd earnings conference call or presentation Wednesday, May 13, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Aaron A. Dahlke Aircastle Limited - CFO * Douglas C. Winter Aircastle Limited - Chief Commercial Officer * Frank C. Constantinople Aircastle Limited - SVP, IR * Michael J. Inglese Aircastle Limited - CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Douglas William Runte Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research * Mark Stephen Streeter JP Morgan Chase & Co, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Aircastle 1Q '20 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Frank Constantinople. Please go ahead. -------------------------------------------------------------------------------- Frank C. Constantinople, Aircastle Limited - SVP, IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, everyone, and welcome to Aircastle Limited's First Quarter 2020 Conference Call. Our call today is being conducted from several locations. On the line are Mike Inglese, Chief Executive Officer; Aaron Dahlke, Chief Financial Officer; and Doug Winter, Chief Commercial Officer. We'll begin the presentation shortly, but I'd like to remind everyone that this call is being recorded, and a replay will be available through our website at www.aircastle.com, along with our first quarter press release and PowerPoint presentation. I would like to point out that statements today, which are not historical facts, may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain facts that could cause actual results to differ materially from Aircastle Limited's expectations are detailed in our SEC filings, which can also be found on our website. I'll direct you to Aircastle Limited's press release for the full forward-looking statement legend. I'll now turn the call over to Mike. -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Frank, and good morning, everyone. Let me begin by conveying our best wishes to the individuals, first responders and health care professionals and others impacted by the coronavirus. This morning, I'll provide a brief update on our response to the crisis, along with our mitigation plan. Aaron will then briefly cover our first quarter results. As we work through this challenging period, we will be focused on what we can do to keep our franchise strong and well positioned in the marketplace. Since the onset of the crisis, we've moved quickly to protect the well-being of our employees, customers and other key stakeholders and operated in good faith to protect the interest of our capital providers and owners. Our employees have been safely and successfully working from home since mid-March. On March 27, we closed the acquisition of Aircastle by Marubeni Corporation and Mizuho Leasing. We're a stronger company as a result of our new private ownership structure with 2 stable and long-term focused investors. Our new owners are positively recognized by the rating agencies and our bond investors as a stabilizing factor, and our private ownership structure will help us work through this unique environment, which lacks visibility on many fronts. Following the closing of the acquisition, Fitch upgraded Aircastle to BBB flat from BBB minus, and Moody's confirmed Aircastle's rating at Baa3. Standard and Poor's similarly affirmed our issuer credit rating at BBB minus. The COVID-19 pandemic and its effects are unprecedented for the world and for our industry. It is difficult to see how long the current dislocation will last. Aircastle's approach has always been fundamentally different to many other leasing companies. We view our strategy as lower risk compared with other lessors and see our financial leverage as significantly lower because we do not have significant forward CapEx commitments. Along with our conservative leverage, we have significant liquidity and a laddered liability structure. Aircastle entered this crisis in a strong position, and we believe the majority of our customers will survive and that business and leisure travel will revert as it always has to historic longer-term growth trends. While established lessor balance sheets are generally strong, the industry will definitely see short-term pressure until travel resumes and conditions stabilize for our airline customer. We feel comfortable that the demand for air travel will eventually return to historic growth levels, the real question is when. In time, this crisis will create opportunities for those who are conservatively capitalized and managed and maintaining disciplined long-term growth strategy with a well-diversified asset and customer base. With that in mind, we are focusing on key priorities: number one, keeping our employees safe. Our long-standing disaster recovery plans were devised to allow our company to keep operating during the crisis. So when this crisis came, we were prepared with our systems and processes. We can continue effectively managing our business and keep our employees safe, however, long this lasts. Number two, managing liquidity. We are proactively managing through the crisis, working through liquidity issues with our customers and helping them where appropriate with issues they currently face. We have agreed to defer near-term lease payments totaling approximately $70 million with 35 airlines, most of which are set to be repaid by year-end with interest. We expect that we will probably have other deferrals to additional customers or extend some of the deferrals we have already made. Number three, we'll preserve, optimize and bolster our already strong liquidity position, which Aaron will cover in his remarks shortly; and fourth, we'll be prepared to take advantage of opportunities. We will seek opportunistically to deploy capital and take advantage of dislocations in the market as airlines seek to raise liquidity. As in the past, we will be prudent and patient and not risk our balance sheet, and we will continue to pursue a conservative approach to leverage future commitments. In closing, we entered the crisis with a strong balance sheet and are well prepared for an unsettled environment that has unfolded. We have a strong liquidity profile, and our platform is well positioned to deal with the asset management task at hand with the strong sponsorship of our new owners, our expert team of professionals, modest forward commitment and a solid liquidity position. Aircastle will emerge from the COVID-19 crisis in a stronger market position. I'll now hand the call over to Aaron to briefly discuss our first quarter results. -------------------------------------------------------------------------------- Aaron A. Dahlke, Aircastle Limited - CFO [4] -------------------------------------------------------------------------------- Thanks, Mike. Our first quarter results were strong after adjusting for nonrecurring merger-related costs of $79 million. We incurred a net loss in the first quarter of $34 million versus net income of $34 million in the prior year. Lease rental and finance lease revenues were $206 million, up 8.4% versus Q1 '19. During the first quarter, we recorded gain on sales of $27 million, an increase of $15 million. We've opportunistically sold 8 narrow-body aircraft during the first quarter. The average age of the aircraft sold was 14.4 years and the net proceeds were $150 million. This resulted in a margin and proceeds of approximately 18%. Total revenues were $283 million, up 32% versus Q1 '19, mostly due to lease rental, maintenance revenues and higher gains on sale of flight equipment. Total expenses increased by $139 million or 77% versus Q1 '19. This was primarily due to the $79 million of non-reoccurring merger-related costs and $63 million of noncash aircraft impairment charges associated with early returned 4 South African A330s. The noncash impairments were partially offset by $53 million of combined maintenance, lease rental payments that we received an advance in security deposits. Adjusted EBITDA was $263 million, an increase of $64 million or 32%. The increase was driven primarily by combined lease rental, maintenance and other revenues and gains on sale. Our utilization was 98.9% versus 93.7% in the prior year and for the first quarter of 2020, our portfolio lease rental yield was 11.2% compared with the first quarter 2019 yield of 10.5%. Turning to our liquidity and capital structure. As of April 30, our estimated 12-month cash coverage ratio is in excess of 1.7x. Our sources of liquidity exceeds $1.4 billion, which includes $348 million of unrestricted cash, $450 million of unused revolving credit capacity and $540 million of net operating cash flows for the next 12 months. These combined resources are significant and line up well with our $814 million of contractual commitments through April 30, 2021. We also had unencumbered flight equipment with a net book value of $5.8 billion. We agreed to $70 million of lease rental deferrals for an average 3 months, which represents 8.6% of our 2019 operating- and finance-based revenues. We agreed to defer 2020 due delivery into late 2021 and rescheduled our PPP payments. Our net debt-to-equity ratio was 2.4x. Total borrowings were $5.5 billion at quarter end, and 82% of our debt was unsecured at quarter end. Our weighted average debt was 3.1 years and weighted average coupon on our debt declined to 4.27%. In closing, Aircastle continues to work through COVID-19 crisis and is well positioned to manage through the current situation. We have a strong professional and experienced team with deep asset management skills and bench depth. We have a solid balance sheet with minimal CapEx commitments. With our new partners, Marubeni Corporation and Mizuho Leasing, we remain committed to executing our long-term strategy as a disciplined investor in mid-life aircraft. We are optimistic about our future prospects. With that, operator, we can now open up the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll go first to Mark Streeter at JPMorgan. -------------------------------------------------------------------------------- Mark Stephen Streeter, JP Morgan Chase & Co, Research Division - MD [2] -------------------------------------------------------------------------------- Wondering, can you comment on what your cash collection rate was for the first quarter? -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [3] -------------------------------------------------------------------------------- The first quarter covers about 89%, Mark. -------------------------------------------------------------------------------- Mark Stephen Streeter, JP Morgan Chase & Co, Research Division - MD [4] -------------------------------------------------------------------------------- And Mike, how do you think that plays out for the rest of the year? -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [5] -------------------------------------------------------------------------------- Look, that's the $64,000 question for those of us old enough to remember that quiz show. As we said, we've granted $70 million of deferrals today with an expectation that those will get repaid over the balance of the year. We're still in discussions with many lessees for similar requests and that number isn't the final number, as I've mentioned in my opening remarks. And I can't give you a -- this is the percentage of what I would have expected. I can say we have factored in our guess on what we think that is in our expected operating cash flows over the next 12 months, but that's the -- not sure where it's going and not sure how it shakes out. But there will clearly be some pain, but I think we feel pretty good about where we are and with the discussions we've concluded and with the discussions we'll have. But this, to me, is still the first wave of what we're going to see. And although we're seeing some traffic patterns reemerge in domestic China, and other markets, it's still early days, and it's hard to pencil out exactly what that number could be. -------------------------------------------------------------------------------- Mark Stephen Streeter, JP Morgan Chase & Co, Research Division - MD [6] -------------------------------------------------------------------------------- Okay. Great. And then so Marubeni, obviously -- and Mizuho, your partners, closed the deal on March 27. Marubeni announced the write-down of the goodwill. If I do the yen to dollar conversion correctly, maybe $360-ish million, something like that of the write-down, which I think is about maybe 15% of sort of what they pay. I'm just trying to equate that to what does that tell us about aircraft values? Is it -- is that a one-to-one relationship, if you will, between that write-down and sort of their opinion on just aircraft values in general? Should we use that as a guide? Just wondering if you can comment on that. -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [7] -------------------------------------------------------------------------------- No. Yes. Look, I wish life was that simple, but it's not. Number one, Marubeni has been an investor here for 7 years. Their basis in our assets is very different because they use a different accounting standard. So trying to extrapolate from something they record in their Japanese financials to what it implies to Aircastle's asset values is just not that simple. -------------------------------------------------------------------------------- Mark Stephen Streeter, JP Morgan Chase & Co, Research Division - MD [8] -------------------------------------------------------------------------------- Okay. And then just shifting gears, and then I'll turn it over. Obviously, your bond spreads like your peers have blown out here. You're trading at some pretty wide unsecured bond yields right now. How are you thinking about funding the business, the commitment to unsecured? Are you just looking to sort of wait this out at this point? Are you -- would you consider issuing secured in order to have access at a lower all-in yield? Just wondering how you can talk about sort of the go-forward plan for Aircastle with your new owners in terms of funding the business? -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [9] -------------------------------------------------------------------------------- So look, I think, practically speaking, we're going to look at all avenues, but I would say as an overarching parameter, our new owners are very committed to maintaining an investment-grade profile for Aircastle over the long term. And so we're going to do whatever we do in the context of that and the implications that, that might have on that. And clearly, the industry's spreads have blown out since the beginning of the year. We'll have to see how that plays out over the next 12 months. I don't have a need to go to the market anytime soon. And if I see interesting things to buy, we'll have to revisit what we think is the most cost-effective way to finance them at that time. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) We'll go next to Doug Runte at Deutsche Bank. -------------------------------------------------------------------------------- Douglas William Runte, Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research [11] -------------------------------------------------------------------------------- And yes, I do remember the $64,000 question. So a couple of questions. You mentioned the South Africa situation. And on Slide 7, it says there 2 A330s are off lease. If I recall, there were 4 A330s at SAA. It is expected that all of them come back? -------------------------------------------------------------------------------- Douglas C. Winter, Aircastle Limited - Chief Commercial Officer [12] -------------------------------------------------------------------------------- Yes. Doug, this is Doug Winter. It is expected that all 4 will come back. And in fact, physically, we're expecting those aircraft to transfer from South Africa to the United States over the next week or 2, all logistics point smoothly. -------------------------------------------------------------------------------- Douglas William Runte, Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research [13] -------------------------------------------------------------------------------- And then maybe a little too granular for a question, but can you say if they were maintenance payers or EOL? -------------------------------------------------------------------------------- Douglas C. Winter, Aircastle Limited - Chief Commercial Officer [14] -------------------------------------------------------------------------------- They were maintenance payers. -------------------------------------------------------------------------------- Douglas William Runte, Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research [15] -------------------------------------------------------------------------------- Great. And then as you look forward, what are your unplaced aircraft for the remainder of the year and into next year? And what is your outlook in terms of potential releasing activity? And where do you expect to see leases when these things need to be remarketed? That's $128,000 question. -------------------------------------------------------------------------------- Douglas C. Winter, Aircastle Limited - Chief Commercial Officer [16] -------------------------------------------------------------------------------- I can only give you this $64,000 answer. But let me start by saying that as it relates to 2020, we have 13 aircraft that needs to be dispositioned. And that I can tell you, 5 of those are earmarked for the end-of-life market and only 8 aircraft, which were either going to need to extend with existing operators or transitioned to existing operators. And then -- can you hear me okay? -------------------------------------------------------------------------------- Douglas William Runte, Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research [17] -------------------------------------------------------------------------------- Yes, I can now. -------------------------------------------------------------------------------- Douglas C. Winter, Aircastle Limited - Chief Commercial Officer [18] -------------------------------------------------------------------------------- Okay. Sorry. So as I said, 13 aircraft, 5 dispositioned to the part-out market, 8 will have to be extended or transitioned to other operators, as it relates to 2020. And then in 2021, we have 15 scheduled lease expiries at this point. All of those narrow-body aircraft, 737-800, A320, 321 types. So that's where we sit with our fleet right now. We are engaged with folks, notwithstanding the situation that we find ourselves in at the moment. There are pockets of interest. There are airline operations that are looking at opportunity arising from the situation we find ourselves in. As an example, ACMI type operators. So we're engaged with a number of customers about either extending some of these aircraft or transitioning some of these aircraft, and we'll continue that dialogue, and we will get these aircraft placed. -------------------------------------------------------------------------------- Douglas William Runte, Deutsche Bank AG, Research Division - MD and Head of Aircraft Debt Research [19] -------------------------------------------------------------------------------- Okay. Is the 8 aircraft reflected of your general fleet mix? Or is it skewed towards narrow or wide? -------------------------------------------------------------------------------- Douglas C. Winter, Aircastle Limited - Chief Commercial Officer [20] -------------------------------------------------------------------------------- It's very reflective of our overall fleet mix. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And at this time, we have no further questions. I'll turn the conference back over to management for any closing remarks. -------------------------------------------------------------------------------- Michael J. Inglese, Aircastle Limited - CEO & Director [22] -------------------------------------------------------------------------------- Thanks for joining us, everyone. If you have any further questions, you can follow-up with Frank Constantinople through IR and happy to catch up with any of those folks who would like to. I appreciate your time and patience, and stay safe and stay healthy. And thank you very much. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- And that does conclude today's conference. Again, thank you for your participation.