Aircastle Limited (NYSE:AYR)
Q1 2009 Earnings Call
May 7, 2009 2:00 pm ET
Julia Hallisey – IR
Ron Wainshal – CEO
Mike Inglese – CFO
Mark Streeter - J.P. Morgan
Scott Tan - J.P. Morgan
Scott Valentin - Friedman, Billings, Ramsey & Co.
Good afternoon. My name is [Ashley] and I will be your conference operator today. At this time I would like to welcome everyone to the Aircastle first quarter 2009 earnings call. (Operator Instructions)
I would now like to turn the call over to Julia Hallisey, Investor Relations. Ms. Hallisey, you may begin your conference.
Thank you, Ashley, and good afternoon, everyone. I'd like to welcome all of you to the first quarter 2009 earnings call for Aircastle Ltd.
Joining us today are Ron Wainshal, our Chief Executive Officer, and Mike Inglese, our Chief Financial Officer.
Before I turn the call over to Ron, I would like to mention that this call is being recorded and the replay number is 800-642-1687 from within the U.S. or 706-645-9291 from outside of the U.S., with a replay passcode of 96342931. This call will also be available via webcast on our website, www.Aircastle.com, in addition to the earnings release and an accompanying PowerPoint presentation.
I would also like to point out that statements today which are not historical fact may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements and certain factors that could cause actual results to differ materially from Aircastle Ltd.'s expectations are detailed in our SEC reports. I direct to Aircastle Ltd.'s earnings release for the full forward-looking statement legend.
Now I'd like to turn the call over to Ron.
Thanks, Julia, and thanks to those joining our call.
Let me start with a brief top line assessment of Aircastle. Overall, I'm pleased to say, the company's in relatively as we manage through these difficult economic times. Firstly, our portfolio continues to perform well, with 96% utilization during the first quarter, good collections levels and a long remaining average lease term. Secondly, cash flow remains strong and unrestricted cash is higher, coming in at $102 million on March 31st. Finally, although industry conditions are tough and we believe are unlikely to improve this year, we do see some positive developments which may set a foundation for a recovery in the aircraft leasing business.
During the call I'll go into greater detail and address Aircastle's performance during the quarter, discuss what we're currently doing on a day-to-day basis to manage the business, and then cover the months ahead. Mike Inglese will then speak to our financial highlights before we get into Q&A.
Looking at our results, we had another good quarter, even against the prevailing economic headwinds. During the first quarter adjusted net income plus depreciation and amortization, a good measure of our operating cash flow, was $73.8 million or $0.93 per diluted share. This compares to $80.5 million in the year earlier period. The decrease was driven primarily by $5 million in lower lease rental revenues and $5.1 million from higher lease transition expenses.
We anticipated these revenue and expense transition expense effects and discussed them during our last earnings call. In both cases most of the variance is attribute to 7x Sterling that came off lease in late October last year. In this regard we beat the downtime and transition cost estimates we'd shared with you.
We also have very good news on the placement front. We've now secured lease commitments for all seven of the x Sterling Boeing 737-700 aircraft. Three aircraft were placed in service during the first quarter and we expect the other four aircraft to go into revenue service by the end of this month.
Even with the recent increase in our stock price, along with that of the general market over the past few months, our closing stock price yesterday of $7.20 a share still represents less than two times the last 12 months adjusted net income plus depreciation and amortization figure of $4.35 per share. Our total enterprise value as a multiple of the last 12 months' EBITDA, debt at face value, is less than 6 times. In other words, we believe the company's shares still represent excellent value.
As I mentioned during the beginning of our call, our diversified aircraft portfolio is performing very well. Utilization came in at 86% during the first quarter and we expect [inaudible] back on the rise again in the second quarter. Assuming no further defaults and aircraft deliveries coming in on schedule, we believe utilization will be closer to 98% next quarter.
The average remaining lease term at the end of March was 5.1 years. The accounts receivable balance at the end of the first quarter was around $3 million, which is comparable to our year end number.
Turning to portfolio management, in certain restructuring situations it's in our economic interest to minimize losses and move quickly and decisively to redeploy our assets and we're doing so when it's appropriate. For example, during the first quarter we early terminated leases and completed the transition to new customers of two aircraft, an Airbus A320 and a Boeing 737 Classic. We also secured a lease commitment for a third aircraft, another A320, which is in the process of being redelivered from the current lessee.
As for our current activities, we're focusing on keeping our assets deployed and tapping into the extensive worldwide contacts, in-house expertise, and deal experience of our team. Our professionals are covering every corner of the earth to find the best deals for our aircraft that come off lease. So as we drill down on our scheduled fleet roll off, we've got three aircraft left for 2009 out of the original 20 and we're working very hard on these.
Looking ahead, we have 19 aircraft with scheduled lease expirations next year. Six of these aircraft are already spoken for, with two 757s subject to signed forward sales agreements and four others where we signed lease extensions. We're in active discussions regarding most of the other aircraft, particularly those with expirations during the first half of next year.
As a reference point, the 2010 aircraft still to be placed represent less than 9% of our portfolio's net book value as of the end of the quarter.
Regarding our A320s, I have some very promising developments to discuss. For the past several weeks our team has been working to conclude a transaction that would result in the advancement of one of our A320 new commitments. We anticipate the transaction will be financed with ECAguaranteed debt, that is, in this case, debt guaranteed by an arm of the French government similar to the U.S. Ex-Im Bank, and the aircraft will be placed on long-term lease with an airline customer. When completed this transaction will put an attractive earning asset on the books in the near term while reducing both our placement and term financing requirements. Closing for this deal is looking good within the next month or so, but it's not done yet.
Now let me turn to how we see things unfolding in the future. As I mentioned, we don't see a material improvement in the aircraft lease market this year; however, it's worth pointing out certain market forces that are contributing towards a recovery. Firstly, while the passenger market is still soft, particularly for premium travel, air cargo appears to have stabilized, albeit at a low level. So far this year air cargo traffic volumes are down roughly 20% to 25% year-over-year.
However, the world cargo fleet is more than 20 years old on average and we're seeing quite a lot of operators flying aircraft only until the next major shop visit - that's what we call a [decheck] - and then they're grounding them. Looking at the medium to large aircraft freighter category, we estimate that by the end of 2011 this could lead to as much as a third of the existing world fleet being removed. That's before taking into account new deliveries, which themselves are experiencing significant deferrals.
With dechecks for 747 Classic freighters running at $5 or $6 million apiece, there's a very good chance many of these aircraft won't be flying much longer as they'll be grounded rather than sent to the shop. This sets the stage for a spring back in the cargo market once demand recovers. We've seen that cargo demand is more closely and immediately correlated to economic activity than passenger traffic and we believe this market could be poised for a more rapid return to health.
While we don't have any freight aircraft coming off lease before 2013, this is good for our cargo airline customers; it's a positive for residual values, too. Additionally, it presents an opportunity for us to apply our specialized knowledge and skills in this market sector, both in terms of matching our current portfolio and in pursuing new business.
Secondly, on the financing side the U.S. Ex-Im Bank and the European Export Credit Agency counterparts have been playing a very supportive role for new aircraft financing, and that's both for airlines and lessors. Indeed, we understand they have completed or are in the process of executing significant transactions for several major aircraft leasing companies and we're working on our deal with them as well. We believe the European ECAs could well play an important role in supporting the financing of our A330 orders.
Thirdly, while there's still plenty of bad news, we're seeing some encouraging signs in certain key markets. Most notably, after weathering a very tough 2008 the Chinese domestic air travel market has rebounded in response to government stimulus measures. Domestic revenue passenger kilometers, which is a good measure of demand, grew 17% year-over-year during the first quarter. Additionally, the Turkish market's been resilient and we're encouraged by that as well.
So let me just conclude from where I began. Our portfolio continues to perform very well, with good utilization levels; cash flow remains strong, unrestricted cash is higher, and we see some positive developments which can set the foundation for recovery.
I'll now turn it over to Mike.
Thanks, Ron. I'll just spend a few minutes reviewing our business results for the quarter and our capital structure and financing activities.
First quarter total revenues were $132.1 million, down $2.8 million from the first quarter of 2008. Lease rental revenue was $5 million lower than Q1 '08 resulting from the combined effects of revenue downtime from transitions and freighter conversions of $7.7 million and changes from floating rate lease rentals of $1.6 million which were partially offset by the impact of 2008 aircraft acquisitions net of dispositions of $3.4 million and other lease changes of approximately $1 million.
First quarter 2009 revenue included $6.6 million end of lease maintenance revenue versus Q1 '08, which was partially offset by $3.8 million of reduction in revenue due to higher amortization of lease incentives compared to the first quarter of 2008 and a $700,000 reduction quarter-over-quarter in interest revenue due to the sale of debt investments during the first quarter of 2008.
EBITDA for Q1 '09 was $116.5 million, down $3.4 million from the first quarter of '08 due primarily to lower lease rental revenues of $5 million, higher transition costs in the quarter of $5.1 million offset by higher end-of-lease maintenance of $6.6 million.
Adjusted net income which excludes gains and losses from asset sales and charges related to our interest rate hedges was $21.1 million or $0.27 per diluted share on the $132.1 million of revenue compared to $34.9 million or $0.44 per diluted share on revenues of $134.9 million in the first quarter of '08. The decrease in adjusted net income reflects lower total revenues of $2.8 million, higher depreciation expense of $3.3 million, lower capitalized interest of $3.3 million, higher transition costs of $5.1 million, all of which were partially offset by lower interest and SG&A expenses of about $1.1 million over the prior period.
Adjusted net income plus depreciation and amortization for the first quarter of '09 was $73.8 million or $0.93 per diluted share. This figure was down $6.7 million from the first quarter of '08 driven by lower lease rental revenues of $5 million, the higher transition costs of $5.1 million, lower capitalized interest of $3.3 million offset by higher end-of-lease maintenance revenue of $6.6 million in the quarter.
As we discussed, the primary factor driving the reduced lease rental revenues in the quarter and the increased transition costs was related to the Sterling repossessions in the fourth quarter of 2008.
First quarter '09 SG&A expense was $11.1 million, down from $11.5 million in the first quarter of '08, and includes non-cash share-based compensation expenses of $1.7 million in the first quarter of '09 and $1.6 million in the first quarter of '08. The year-over-year reduction in quarterly cash SG&A of $0.5 million was driven by reduced personnel costs and professional fees.
Reported interest net, which includes hedges related to charges, was $43.4 million for the first quarter and is net of $400,000 of interest income earned on cash balances and $300,000 of capitalized interest during the quarter.
Gross interest expense on our financings for the quarter, excluding the one-time hedge items noted, was $41.4 million on weighted average debt outstanding of approximately $2.46 billion, for a weighted average cost of funds of about 6.82%. At the end of the quarter we had $2.34 billion of net debt outstanding, which is about 62% of the net book value of our flight equipment.
Depreciation expense for the first quarter '09 was $51.6 million, up $3.3 million compared to the first quarter of '08, reflecting the change in our aircraft portfolio and improvements made to that over the year. At quarter end 3/31/09 our run rate depreciation on a monthly basis is approximately $17.3 million.
For the first quarter our tax provision was $1.9 million for an effective tax rate of approximately 9.4%. $1.5 million of that amount reflects deferred taxes. For the full year, consistent with prior years, we would expect the effective tax rate to be in the 5% to 10% range, with about half of that amount estimated to be current cash taxes.
Our fleet revenue utilization during the quarter was about 96%. Given our expectations and the timing impact of transitioning aircraft back into revenue service during Q1 and Q2 and the aircraft undergoing the freighter conversion process, we expect revenue utilization to improve a couple percent compared to the first quarter and lease rental revenues to be up $1 to $2 million in the second quarter '09.
We entered the first quarter with $102 million of unrestricted operating cash and $178 million of restricted cash and the portfolio continues to generate strong cash flows.
At the end of the first quarter we had $2.45 billion of securitization and term debt outsourcing comprised of four separate long-term facilities, with the earliest maturity being in September of 2013. In March of this we delivered the annual appraisal for Term Financing No. 1 and the first semiannual appraisal for Term Financing No. 2. We are now in compliance with all applicable covenants on each of our long-term financings. The next required appraisal for Term Financing No. 2 is September 2009 and that facility had outstanding debt of $141 million at the end of the quarter.
As we've mentioned before, given current capital markets conditions we're not expecting to have a PDP facility in place for the Airbus program until later in 2009 or early 2010. Our PDP payments required for the last three quarters of 2009 total approximately $100 million, with over half that amount due during the fourth quarter of this year. Based on our unrestricted cash balance and our expected operating cash flows from our existing aircraft portfolio we believe we have more than enough liquidity to meet our liquidity to meet our PDP funding requirements and maintain our current dividend level for the balance of the year, even without any PDP financing.
And with that, Operator, we're ready to proceed to the Q&A portion of the call.
(Operator Instructions) Your first question comes from Mark Streeter - J.P. Morgan.
Mark Streeter - J.P. Morgan
I'm wondering, Ron, if you can talk about the marked-to-market disclosure on the upcoming expiries. You mentioned plus 6% on a same-store basis for the 2009 rollover. That obviously is far more positive than your experience with the Sterling aircraft, which I understand were sort of more of a stress situation where you had to get those placed quickly. But I'm just wondering if you can talk a little bit about that dynamic because you clearly had that negative hit with the Sterling aircraft.
Yes, well context accounts for everything here. For 2009 our best estimate for the same-store comparison is up 7%, okay? That's looking at the - I'm sorry, 6% - but that's looking at a comparable basis - let's say an average was established in 2004 during the last downturn, so the strength of the market that we place this into, most of these deals were done last year, allowed us to do pretty well.
Normally you would expect aircraft to command less in rents as they get older, so what we achieved was really good and it's a testament to the team, but it also reflects the comparable base in regards to the aircraft in that layer of our portfolio.
We're seeing a lot of different things happening as far as lease rentals and I'll give you a few examples. For new order placements we're definitely seeing a trend where airlines are, for obvious reasons, trying to conserve cash and pushing out their own orders in favor of leasing companies' deliveries. That's a helpful thing to us as we look at our A330 order.
Another thing that we're seeing is that - the Sterling example is a great situation - when you get aircraft back at the wrong time of the year with no time to prepare you're going to do worse. That always happens, in good times and bad. And I'm actually very pleased with the execution of the Sterling aircraft. We kind of hit all our internal bogeys on that.
In between there's a lot of other things, too. In regards to our 2010 roll off, as an example, everybody's kind of written off the 737 Classic market; we just signed a one-year extension with an existing operator at the same rent. This helps them tide over the aircraft into their A320 orders.
And so a lot of it is just what is the situation, how does it fit in together? But there's no doubt that the market is softer and I'd say depending on the context it could be down 10% - 20%, but there are situations where you could generate wins like we did with the 737 Classic or, as we're hopeful, on some of the new aircraft.
Mark Streeter - J.P. Morgan
Wondering on the dividend policy, you know, some of your peers have been aggressive in buying back debt in the open market and I'm wondering have you thought about whether or not you should be cutting the dividend further or if you can somehow squeeze out some PDP financings or maybe use some of the cash on hand to go out and address some of those debt maturities? I know they're not near term, but you do have an opportunity to buy back debt at a significant discount to the par carrying value and I'm wondering if you can talk about that.
As we said during the last call, we think the debt investments are very good value. When we look at our kind of commitment base and our cash flows is an order stream with Airbus, a contract for aircraft we are very excited about and I think the opportunities there are still very good, but we have to make pre-delivery payments on that. We're working very hard to get the financing for that in place.
The challenge for us is that the aircraft deliveries are still quite far out and as you might appreciate, banks today are much less excited about making drawdown commitments far out into the future. I think the possibilities are a lot more interesting when you get closer to delivery dates because the window for the banks to get drawn down on is that much less.
It's a balance at the end of the day. We've looked at our debt. Our debt and that of our competitors I think is probably the best risk-reward trade-off out there for somebody who's not in the business; it's very attractively priced. And I can't say we will buy that, but it's certainly interesting.
Mark Streeter - J.P. Morgan
At this point in the cycle is your team fully built out, Ron? Are you hiring anyone or do you think you're fully staffed at this point for the cycle?
There's always some folks we add in here and there around the edges, but there's two aspects of that. I think we have a top-notch team, world class, and when you look at the in-house expertise we have on the marketing side and the technical side and the leasing side, basically the front end elements, it's all here. And if you look at any measure of team versus work to be done, like aircraft coming off lease, nobody even comes close to the coverage we have. And I think we do as good a job if not better than anybody else out there in that regard.
Now in terms of SG&A, I'll let Mike address that, but I don't think we're going to see much change in that regard.
No, we are running a lean shop and we have, we think, the sort of best SG&A ratio in the business and we intend to keep it that way.
Your next question comes from Scott Tan - J.P. Morgan.
Scott Tan - J.P. Morgan
Ron, as I looked at some of your previous filings here I noticed that as far as your debt payments, it's about $200 million in debt obligations and payments for 2009. I know that includes some interest component to it and for the first quarter you paid out about $30 million in securitization and term debt. Is it safe to say that there's about, call it, $150 to $170 million remaining for 2009? Is that the right way to look at it?
Yes, I think as we think about the debt amortization for the full year it was in the neighborhood of $130 million overall, Scott, and then the balance of that would be expected interest.
Scott Tan - J.P. Morgan
And just to build on Mark's question, where he spoke about your dividend policy now, is it safe to say that given where your debt is trading if you had a choice to consider between buying debt and dividends or purchasing aircraft, would you move more towards buying your debt back?
I think it's a balance and, you know, on the dividend side we have a discussion every quarter with our Board and everything I say now is subject to that, but when we set up the company we were set up as a dividend-paying company. I think the Board's inclination is to be a dividend-paying company at some level.
You have to take the magnitude of everything here into context, too. The level we're at right now, it's not insignificant; it certainly matters personally to me from a dividend receipt perspective. But the first order of business for us is to take care of our existing obligations. I take the dividend very seriously.
And in terms of debt opportunities, we've looked at that but, you know, it's a pretty tricky market. It's not a market that trades actively; it's a trade by appointment type of a thing. And I've noted that our competitors have bought some of their own debt back; I think that's not a bad move on their part. If there's an opportunity that presents itself and we feel comfortable from a cash perspective, we'll definitely pursue it.
Your next question comes from Scott Valentin - Friedman, Billings, Ramsey & Co..
Scott Valentin - Friedman, Billings, Ramsey & Co.
You mentioned the Chinese market is seeing a nice rebound in terms of passenger travel. I was wondering if you could maybe touch on Europe and maybe your expectations for North America?
Okay. Well, I think the big theme throughout the world that you can generalize is there's a very big difference between premium and economy. Economy travel seems to have hung in there, I think for two reasons. One is because more business travelers are being sent to the back of the bus, so to speak, and the other reason is that so far people don't seem to want to give up their vacations. They might put off that new car or the furniture buy, but they still want to travel on their vacations. So that is going to affect what type of carrier results you see.
And Europe is a good example EasyJet and Ryanair are doing much better than many of the more established carriers, and I think that's a trend you can see across the world, including the U.S.
When you look at Europe geographically, there's some very big differences between, say, Eastern Europe, which is having a very rough time given the more severe economic stresses there, versus what's happening in Western Europe. So there's some very important regional differences and, you know, I think the currency effects that come with that are also pretty profound. Some of the non-euro countries are seeing very, very sharp drops in their currency and that's a challenge for airlines that pay rentals in dollars.
When you look at Asia, Asia's a very big place. China, good story; India's not as good of a story. That's a market that's been challenged by over capacity and it's going to have to work itself out.
But, you know, you also have to take a look at this stuff from a big picture perspective. When we look at our portfolio and we make our placement decisions, they're always done one at a time but I remain very, very excited about India from a long-term perspective, but in the short term, you know, I'd be a little bit more concerned about where to step in there to.
I think the North American market internationally is going to be challenged. A lot of that is business travel. But, you know, it's all sentiment driven at the end of the day and so if people feel better about things they'll be more inclined to take that summer vacation or to let their guys travel in the front of the aircraft. There will be a delay in terms of how that affects our market because airlines don't adjust instantaneously, but I think the outlook really depends on your view of the general economic sentiment.
Your next question comes from Mark Streeter - J.P. Morgan.
Mark Streeter - J.P. Morgan
I'm wondering if you can talk a little bit about the situation with Allco - they were obviously just sold or under agreement to be sold - and the situation with ILFC. There's a lot of private equity and capital sources out there chasing after aircraft leasing companies at this point and your peers that are for sale. Have you had conversations with any of these firms about maybe forming a strategic partnership to go out there and buy aircraft or to take stakes in these companies? I'm just sort of wondering how could Aircastle maybe participate more in the dislocation that's out there right now and whether or not you've thought about teaming up with any of these interested parties in the space.
Well, firstly, I have seen some pickup in call it alternative investor interest in the sector and, you know, this comes and goes from time to time. Certainly a big deal like ILFC will attract the big boys, and it's not clear to me [inaudible] play out. I don't know any more than you might reading the newspaper. But it can only be a good thing in terms of kind of sparking interest.
We did explore this last year. We talked about this about a year ago during, I think, our first quarter call in 2008, about setting up a fund type of approach, and we revisit this from time to time. There's pros and continuous trauma to that approach. The pro is that you can tap into money that in turn taps into the expertise and the capabilities of our platform and I think a lot of people are attracted to that. The cons to that is that you have conflict of interest issues to manage through, so if we were set up a fund and we look at an incremental opportunity, you'd have to basically show that to the fund as opposed to doing it yourself. And then you have all the management issues that go with that.
So we have kept things really, really simple. By the way, we've kept our leverage really low to avoid having what happened to Allco happen here, you know, at 62% debt ratio we're the lowest leveraged guys out there and that's a great thing. But from a control perspective, this is a full contact sport and you need to be able to execute without too many impediments. So that's the one thing.
But we will look at those things and we're certainly encouraged by the spark in interest over the last few months.
And there are no further questions at this time. I will now turn today's call over to Julia Hallisey.
Thank you. This concludes the Aircastle first quarter 2009 call. We look forward to speaking with you next quarter.
This concludes today's Aircastle first quarter 2009 earnings call. You may now disconnect.
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