Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Babcock & Brown Air Ltd. (NYSE:FLY)

Q2 2009 Earnings Call

August 6, 2009 8:30 am ET

Executives

Matthew Dallas - Investor Relations Manager

Steve Zissis – Chairman

Colm Barrington - Chief Executive Officer

Gary Dales - Chief Financial Officer

Analysts

Michael Linenberg – Bank of America

Analyst for Jamie Baker - J.P.Morgan

Richard Shane - Jefferies & Co.

Daniel McKenzie – Next Generation

Andrew Light - Citi

Operator

Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to the Babcock & Brown Air second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions)

Mr. Dallas, you may begin your conference.

Matthew Dallas

Thank you. Good morning everyone. I’m Matt Dallas, the Investor Relations manager of Babcock & Brown Limited and I’d like to welcome everyone to our 2009 second quarter earnings conference call. Babcock & Brown Air, which we will refer to as “B&B Air” or “the company” throughout this call issued its second quarter 2009 results press release earlier today which is posted on the company’s website at www.babcockbrownair.com. Representing the company today on this call will be Steve Zissis, our Chairman, Colm Barrington, our Chief Executive Officer, and Gary Dales, our Chief Financial Officer.

I’d like to begin the call by reading the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements regarding the outlook for the company’s future business and financial performance. Forward-looking statements are based on current expectation and assumption of B&B Air’s management which are subject to uncertainties, risks, and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and are described more fully in the company’s filings with the SEC. Please refer to these sources for additional information. B&B Air expressly disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations, or otherwise.

This call is the property of B&B Air and cannot be distributed or broadcast in any form without the express written consent of the company. A replay of this call is available for two weeks from today. An archived webcast of this call will be available for one year on the company’s website.

I will now hand the call over to Steve Zissis, our Chairman and CEO of BBAM to give you his view on the industry’s conditions.

Steve Zissis

Thank you Matt and thank you everyone for joining us on our second quarter 2009 earnings call. While global financial markets have stabilized and in many cases have rallied significantly off their respective lows, we remain concerned about the lack of meaningful recovery reported by the airlines.

Passenger and freight revenues have fallen sharply over the last year and there are continuing concerns about renewed fuel price volatility. While the rate of decline appears to have slowed, in many cases it has plateaued. Airlines have been unable to fortify their balance sheets through the busier summer season and we remain concerned about the lack of meaningful recovery across the commercial aviation business going into the winter.

We were disappointed with the preliminary third quarter global passenger demand statistics and it seems likely that the final third quarter 2009 statistics will show ongoing weakness. It has been management’s view that the strong summer season was necessary if airlines were to bolster their financial position before the slower winter season since many airlines were weakened initially by record high oil prices in 2008 followed by steep declines in passenger traffic and yields in 2008 and into 2009.

To reiterate our comments on previous calls, our experience in other periods of significant global economic expansion and contraction suggest that aircraft values and lease rates tend to lag the underlying economy on both the downside and the upside. We are now expecting the recovery in the commercial aviation business to be delayed until sometime in 2010.

While our airline lease customers have thus far performed relatively well given the underlying distress in the industry, the company has not been completely immune to the effects of the weak market dynamics. The company’s delinquencies have increased somewhat and over the last several months we have restructured leases with seven lessees. Most restructuring activity has provided for short term relief to impacted airlines while at the same preserving on a present value basis the underlying economic contract previously in place with the airline.

We have also been successful in achieving lease extensions in most cases. We’ve had no repossessions since third quarter of 2008 and all but one of our aircraft are subject to leases. The remaining off lease aircraft has been expected to be delivered to a lessee in the third quarter of 2009 under the terms of an executed agreement but the airline was not in a position to take delivery of the aircraft and we have re-initiated the marketing process.

As we look into 2010, we expect lease rates on our five scheduled remarketings to be down approximately 10% to 15% from our current lease rates. It is taking longer to remarket aircraft and this will result in longer downtimes between leases when aircraft won’t be generating revenue. Actual results will vary depending on the aircraft age, maintenance condition, pedigree, and type.

It is also to be noted that several of our peers in the aircraft leasing business are in a state of flux. In many cases this uncertainty is not directly related to their activities in their core operating business but instead tied to the financial difficulties of their respective current companies. It would appear that several large leasing companies will be sold or otherwise wound up over the coming year. This divestment activity will on one hand introduce more uncertainty into the sector but on the other hand create aircraft investment opportunities.

As we make decisions about allocations about B&B Air’s capital, we are continually evaluating the relative returns available in the market between aircraft acquisitions, share repurchases, and debt repurchases. Although bond prices in the securitization market have rallied in recent weeks, we still find return opportunities on the company’s debt to be attractive relative to other potential uses of our cash.

However, these market dynamics do change from time to time and we’ve been spending more time evaluating aircraft acquisition opportunities in recent weeks. The return opportunities presented by new aircraft acquisition opportunities has continued to improve as airlines face liquidity constraints and many other aircraft leasing companies have stopped originating new aircraft.

Finally, I’d like to turn my comments to B&B Air’s financial performance and the transparent nature of its business model before handing the call over to Colm. We all know that it’s a difficult market but despite my prior comments about the distress among our airline clients, B&B Air’s financial performance has been strong.

In the second quarter we produced $1.06 of available cash flow, well in excess of $4.00 per share on an annualized basis. When combined with the company’s existing cash balances, there is significant value embedded in the company even excluding the long term value of our aircraft portfolio.

The ongoing cash flow being generated by the business is sufficient to allow us to cover the current dividend while at the same time buying back a significant amount of the company’s debt and equity securities.

I will now turn the call over to Colm Barrington.

Colm Barrington

Thank you Steve. As Steve has already mentioned, B&B Air had a strong second quarter with net income of $40 million and EPS of $0.46. These figures compare to $11.1 million and $0.33 in the same period of 2008.

For the six months ended June 30, 2009, our net income was $60.9 million or $1.04 per share as compared to $22.7 million or $0.68 per share in the same period of 2008. We have declared a dividend of $0.20 per share in the second quarter, bringing our dividend for the first six months of 2009 to $0.40 per share. The dividend represents 19% of our available cash flow for the six month period.

As you know and as Steve has summarized, 2009 continues to be a very difficult year for the global airline industry. Recent reports from airlines suggest that market conditions are considerably worse than in 2008 and the main problem was the price of fuel. Now airlines are being faced with significantly reduced demand conditions by more than 20% in some markets and are offering lower and lower fares to fill empty seats as they struggle to reduce capacity and costs.

In June alone the Air Transport Association reports that US airline passenger revenue was down 26% year-over-year, reflecting decline in passenger numbers of 6.5% and a 20.7% drop in yields. This is the largest monthly year-over-year drop in yields this decade.

The result has been very negative impact on revenues and bottom lines even with some of the major global carriers. As a result of these realities, IOTA has recently increased its prediction of world airline losses in 2009 to $9 billion, driven mainly by an $80 billion decline in revenues. Despite the market conditions, all but one of our 62 aircraft were on lease throughout the quarter, representing a 98% utilization factor.

As we mentioned on our last call, one of our lessees that leases two aircraft was placed on a non-accrual basis. We have since restructured these leases which included an immediate reduction of the lease rate and a three year extension. In addition, the lessee has made a significant payment against past due amounts. However, as Steve mentioned earlier, we remain concerned that airlines generally are not building up the liquidity over the historically strong summer period.

At the end of June, our rents receivable balance was $6.9 million as compared to $4.1 million at the end of December 2008. Since the quarter end we have received approximately $2.6 million of the $6.9 million amount.

As you know, our fleet of 62 aircraft is comprised mainly of modern widely used fuel efficient narrow body types with all but four being narrow bodies and 46 of the total being Airbus A320 family and Boeing 737 new generation aircraft. We believe that [inaudible] aircraft would provide B&B Air with resilience against difficult market conditions. At the end of June our average fleet age was 6.8 years.

Our June and the six month ending June 30 results were positively impacted by two repurchases of our notes totaling $190 million face value and providing a [cheap] pre-tax gain of $57.6 million which is equivalent to $1.90 per share. These debt repurchases are a continuation of the shareholder value enhancement initiatives that we promised our shareholders when we reduced the quarterly dividends last year. As a further enhancement to shareholder value, we have also purchased options to repurchase another $100 million of note payable by March 17, 2010 at a price of 48% of face value.

In June 2008 our Board of Directors authorized a $30 million share repurchase program through June 2009 and subsequently extended it to June 2010. In the June 2009 quarter, we repurchased 2.2 million shares at a price of $4.08 per share. To date the company has repurchased $3.3 million shares for an aggregate amount of 15.6 million, representing approximately 10% of our shares and repurchased at an average price of $4.68 per share. We expect to continue the program although the timing of the share repurchases will depend on a variety of factors including market conditions and maybe suspend it or stop it at anytime.

To further assist the company in these value enhancing initiatives, in May we entered into a $32.3 million non-recourse working capital credit facility. This facility along with the cash generated from our portfolio provided us with a total cash balance at June 30 of $192.3 million of which $64.1 million was unrestricted. This strong cash position gives us a significant protection from any lessee credit issues that we may face in the coming months and also provides us with the resources to continue to add to shareholder value despite the negative trends being experienced in the airline and aviation industries generally.

I will now hand you over to our CFO, Gary Dales, to take you through the second quarter and six months financial results.

Gary Dales

Thank you, Colm and Steve. We are reporting net income of $14.mn or $0.46 per share which I’ll now discuss in more detail. Our total revenues for the quarter were $65.4 million and include operating lease revenue of $53.8 million, a gain on purchase of notes payable of $8.6 million, proceeds from a lease termination settlement of $600,000, and interest and other income of $1.5 million.

Operating lease revenue for the second quarter of 2009 was $53.8 million, a decrease of $2.5 million over revenue reported in the same period of the previous year. The decrease is due to the recognition in 2008 of approximately $4 million of end of lease revenue with no comparable amount in the current period. The [assets] of revenue associated with aircraft sold in the third and fourth quarter of 2008 and the impact of one lessee we have placed on non-accrual basis.

As Colm highlighted, we recognized a pre-tax gain of $8.6 million on the purchase of approximately $19 million of securitized debt. Included in interest and other income is $1.2 million associated with a forfeited deposit from a potential lessee.

Total expenses for the second quarter of 2009 were $47 million compared to $44,.9 million for the same period in the previous year and consist of depreciation expense of $20.8 million, interest expense of $19.9 million, selling, general, and administrative expenses of $5 million, amortization of $1.1 million associated with an option to purchase our notes payable, and maintenance and other costs of $307,000.

Depreciation expense for the second quarter of 2009 was $20.8 million compared to $18.9 million for the same period in the previous year. The current period depreciation expense reflects a full quarter depreciation on the three aircraft acquired in the second quarter of 2008 and the two aircraft acquired during the third quarter of 2008, partially offset by the absence of depreciation on the two aircraft sold in the third and fourth quarters of 2008.

Interest expense for the second quarter of 2009 of $19.9 million compared to $19.7 million for the same period in the previous year. The increase is mainly due to the increased borrowing associated with the growth of the portfolio, partially offset by debt repayments during 2009 and a decrease in the LIBOR which reduced the interest cost on debt amounts associated with aircraft subject to variable lease rentals.

Selling, general, and administrative expenses were $5 million in the first quarter of 2009 compared to $5.3 million for the same period in the previous year. The decrease is primarily due to costs associated with repossession of the four aircraft on direct finance leases in April of 2008. There were no similar costs in the second quarter of 2009.

As Colm mentioned we have paid $7 million for two options to purchase up to $100 million of our securitization notes payable at a price of 48% of par value. The cost of the options is being amortized over their terms of approximately 6 months and 10 months respectively. Our provision for income taxes for the second quarter of 2009 is $3.5 million, representing an effective rate of 20%. The effective rate for the same period in the previous year was 10.3%. The increase in the effective rate reflects the recognition of preferred taxes at a 25% rate on the gain associated with the purchase of the securitization notes.

Moving to the balance sheet, we have total assets of approximately $2 billion of which $1.8 billion is invested in flight equipment and held for operating lease. Our total cash and cash equivalent is $192.3 million of which $64.1 million is unrestricted. These balances include the proceeds from our new non-recourse credit facility.

The book value of our company has increased to $465.6 million or $15.38 per share, an increase of $76 million from December 31, 2008 reflecting 2009 net income and the reduction of the fair value obligation associated with our interest rate swap caused by the slight increase in market interest rates.

Our available cash flow or ACF was $32.2 million for the second quarter of 2009 compared to $33.2 million for the same period in the previous year. On a per share basis, ACF was $1.06 in second quarter of 2009 compared to $0.99 in the second quarter of 2008, an increase of 7%. Second quarter 2008 ACF includes approximately $4 million associated with end of lease income not present in 2009.

We define ACF as net income plus depreciation, amortization of lease incentives, and debt issue costs, and deferred income taxes, all non-cash charges. The gain on the purchase of the securitization notes is excluded from ACF. We believe that ACF provides a meaningful measure of B&B Air’s capacity to reinvest in our business and to execute other initiatives designed to create shareholder value.

However, actual cash available for distribution may differ from our ACF measure because of other cash expenses that are not reflected in net income. You will find the reconciliation of ACF to net income the most directly comparable GAAP measure at the end of our press release issued this morning.

With that, let me turn it back to Colm for his closing remarks.

Colm Barrington

Thank you, Gary. We’re now ready to take your questions. Operator, could you open up the lines for our Q&A session please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Linenberg – Bank of America.

Michael Linenberg – Bank of America

Steve, in your opening comments you talked about some of the financial difficulties at the parent level for some of the leasing companies and how that could create some potential opportunities. Specifically to BBAir and BBAM, can you just update us on where things stand between your business and the parent company and the potential divestiture. What’s the latest on maybe how the relationship could change?

Steve Zissis

I think about six months ago we updated the market on the process that we are going though which is basically that BBAM and all the activities of Babcock & Brown are being sold and that process is being handled over a three year period but as we updated people, we expect that our process to be concluded by year end and we’re pretty much on target. Things are in process. It’s happening real time. As soon as we have more of an update for everyone we’ll let you know. But things are pretty much on track and we expect to have BBAM and the whole team and the management all intact and sold to a new investor shortly.

Michael Linenberg – Bank of America

Given the fact that there is some uncertainty around this divestiture here, have you seen at least in the market a different response outside, call it the variability in the market that we’re seeing in general for this space. Have you had issues where investors or should I say various lenders have either been loath to lend or they’ve extracted higher terms because of the uncertainty. That’s when I sort of mentioned relationship. Any meaningful change there that you’ve seen?

Steve Zissis

I’m not clear on your question. Are you referring to kind of one-off deals that we’re trying to source financing on or are you talking more generally about our existing banks?

Michael Linenberg – Bank of America

I would say overall, just the overall perception of BBAM in the marketplace given that the company is up for sale. Are you getting any sort of pushback?

Steve Zissis

Certainly any of the banks that we’ve done business with for the last 20 years are concerned about the situation and they want some certainty as everybody does in this marketplace, they’ve certainly expressed that. But we’ve really had no meaningful slowdown in our ability to originate new deals or get things done. I think we’re all frustrated that it takes so long to get our deal processed in this environment but I think everybody’s experiencing the same thing.

Colm Barrington

Michael, as our filings will show, there are certain change of control provisions in our financing documents and we are in discussion with our lenders regarding those but finding no pushback at this point in time.

Michael Linenberg – Bank of America

Okay, good, that’s very helpful. In November, the $1.2 billion warehouse revolver, you come up to a date and I think cash flow is then used to repay principal on the loans. Where do things stand or does that get extended or waived, how should we think about that as we get into November on that facility?

Colm Barrington

As you know, we’ve drawn $700 million of the $1.2 billion. If all is going well we may draw a little bit more before November. So in November it turns into a three year term facility. So there’s no change in any of those terms yet.

Michael Linenberg – Bank of America

Should I read into the word yet? Or am I reading too much into what you just said?

Colm Barrington

I’m sorry?

Michael Linenberg – Bank of America

You indicated that there was no change in the terms yet. Should I read --

Colm Barrington

We haven’t extended it or modified those terms at all.

Operator

Your next question comes from Jamie Baker - J.P.Morgan.

Analyst for Jamie Baker - J.P.Morgan

This is Scott [Tannen] on behalf of Jamie. You mentioned earlier about weak market dynamics for airlines going into the winter. Given your current customers, any portion of our leases or lessees that might pose a potential problem?

Steve Zissis

We prefer not to talk about specific lessees of ours, but in general we are concerned about what might transpire this winter and it’s more of a general concern, not a specific concern to our own portfolio. Maybe just to elaborate a little on that, if we have a major bankruptcy or restructuring of one or more airlines that had a significant fleet, we do think that will put downward pressure on lease rates and take longer to remarket aircraft, so there’s a knock on effect even if it isn’t a lessee in our own portfolio, what happens to the overall marketplace. I think that’s what we’re concerned about. More aircraft on the market and depressing and prolonging this recovery.

Analyst for Jamie Baker - J.P.Morgan

Just a question on your new $32 million facility. Are there any covenants to that facility?

Steve Zissis

I’ll let Gary handle that.

Gary Dales

There are not really any significant covenants to that facility.

Operator

Your next question comes from Richard Shane - Jefferies & Co.

Richard Shane - Jefferies & Co.

Over the last year, what have you seen in terms of secondary market pricing for planes? If you can just put this into some context for us so we have some sense of where the fleet value is.

Gary Dales

This is going to sound odd, that prices on the way down are always sticky, especially for large assets that trade in the marketplace. Really we haven’t seen the type of opportunities that you would expect. We think that there’s still going to be some more downward pressure on values as we go through this down cycle. But up to now, and this is the main reason that we decided to buy back our equity and debt securities, they were priced much more attractive than we could find aircraft deals. So we haven’t seen prices come off as significantly as you probably have seen in shipping or real estate or other big ticket items.

Richard Shane - Jefferies & Co.

I apologize, this will at least initially sound inflammatory, it’s not meant to, and I think the answer is pretty innocuous. Can you explain what the impairment you have to take on assets are? My understanding is it’s based upon whether or not undiscounted expected cash flows exceed carrying values, is that correct, and I assume then that there’s limited risk?

Gary Dales

You’re correct. From a GAAP standpoint, it’s a test of nominal cash flows to the current book value of the asset and given these are relatively long life assets, we can look out through their economic life and utilize all those cash flows. It’s not necessarily reflective of a current market valuation.

Richard Shane - Jefferies & Co.

Based on sort of 10% to 12% lease rates, I guess the assumption is that as long as you have expected lifetime utilization exceeding 50% or 60% you’re really not in any danger on the impairment side? Is that a good benchmark?

Gary Dales

I think you need to cover 100% of the book costs on the asset but you’re allowed to look out on the full economic life of the asset. So we do look at impairment each quarter and we do not have any impairment in our fleet.

Operator

Your next question comes from Daniel McKenzie – Next Generation.

Daniel McKenzie – Next Generation

Regarding the sale of BBAM, I’m wondering if you can provide some perspective of what this means for the longer term plans for FLY, which of course they would take an ownership position. So for example, would they be open to spinning off FLY as part of an M&A transaction? Would they be committed to or would they want to grow FLY? How should investors think about sort of the longer term end game here for Babcock & Brown Air?

Gary Dales

I think it’s a little too early to talk about those types of things but certainly our intention is as I said to keep the whole team together as people have known us for the last 20 years. All the assets and management contracts of BBAM will be part of the transaction and we will have hopefully a much stronger parent that will elevate us to maybe one or two position in the marketplace. That’s the way we’re currently thinking of it.

Daniel McKenzie – Next Generation

I wonder if you can talk about the potential purchase of assets from other distressed lessors? I know there’s a lot going on right now in the industry, but the names of course that are sort of commonly bandied about are CIT and AIG Lease Finance, who really knows. But I’m wondering if you can provide some perspective on what this means for aircraft lease rates and what kind of opportunity or not this might be for Babcock & Brown. How should investors think about some of these things that are going on in the industry right now?

Gary Dales

I think it’s going to be a real interesting next 12 months and obviously there should be a lot of opportunities to do something in the sector where the big leasing companies either want to shed some assets or want to break up portfolios. But to be quite frank, up to now we haven’t seen really any good opportunities coming from other existing lessors. Most of the stuff that we are looking at is directly with the airlines.

Daniel McKenzie – Next Generation

So if these distressed assets came up for sale, how confident are you that the market would be open to help you get the financing you need to actually buy those assets?

Gary Dales

I think that’s the most challenging aspect of it. There’s plenty of equity capital to do stuff but there’s a limited amount of debt capital out there.

Colm Barrington

In further response to that, I don’t think we’re finding that the availability of these companies has any impact on lease rates. Those are really driven by the airlines out of the market. So we haven’t seen any impact on lease rates from the availability of the likes of AIG and CIT etc.

Operator

Your next question comes from Andrew Light - Citi.

Andrew Light - Citi

Do I take it then that you’ve got this credit facility expiring in November that there’s going to be, you’ve just got a very narrow window in which to explore very few opportunities in terms of what [inaudible]. Do you see any aspect of the market that could be a threat between now and November?

Colm Barrington

We’re certainly looking at, we have a reasonably good deal flow that we’re looking at right now, so hopefully we will add more aircraft to the portfolio between now and November so hopefully we’ll see some growth in the portfolio n the next few months.

Andrew Light - Citi

Would that be things like say the lease back opportunities on newly delivered planes?

Colm Barrington

That’s the most likely source right now, yes.

Operator

Gentlemen, are there any closing remarks?

Matthew Dallas

I’d like to thank everyone for joining us today on Babcock & Brown Air’s second quarter 2009 earnings call. We look forward to updating you all again soon.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Babcock & Brown Air Ltd. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts