AerCap Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: AerCap Holdings N.V. (AER)
by: SA Transcripts

Operator

Welcome to the AerCap Holdings’ 2013 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. The call is being webcast and an audio version of the call will be available on the company’s website. This call is also being recorded for replay purposes.

I now hand over the call to Peter Wortel, Head of Investor Relations. Please go ahead.

Peter Wortel

Thank you very much. Good day everyone and welcome to the 2013 third quarter results conference call. With me today in New York are Aengus Kelly, AerCap’s CEO and Keith Helming, AerCap’s CFO.

But before we begin today’s call, I would like to mention that AerCap will also be hosting an Investor and Analyst Day today at the New York Palace, to review it as in ‘14 and beyond. You can find information on this on the website. The presentation will commence at 11:30 a.m. And the doors are open from 11:00 a.m. onwards.

I also want to remind you that some statements made during this conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.

In addition, this conference call contains time-sensitive information that reflects management’s best judgment only as of the date of the last call. AerCap does not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call.

Further information concerning issues that could materially affect performance related to forward-looking statements can be found in AerCap’s earnings release dated November 4, 2013. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay.

I’ll now turn the call over to Aengus Kelly.

Aengus Kelly

Thank you, Peter. Good morning to everyone in the U.S. and good afternoon to those of you in the Middle East and Europe. Thank you for joining us today for our third quarter earnings call.

I’m very pleased to report that the third quarter of 2013 was another record quarter with earnings per share of $0.79 and $1.98 for the first nine months.

Very importantly these record earnings are being generated with a relatively low risk portfolio that is one of the youngest in the industry and is also 90% concentrated in the most liquid aircraft types in the world.

This demonstrates that a disciplined asset manager in this industry can consistently generate industry leading returns, if it rigorously applies to core strategies of AerCap, which are: firstly, a very active receivable management policy. Our receivables are running at an all-time low of $6 million that’s less than 48 hours.

Two, active portfolio management, AerCap has sold almost 270 aircrafts with an average age of 13 years at a $320 million gain in the last six years. And over the course of the last 24 months alone, we have contracted $5 billion of growth through the American LatAm and Singapore transaction.

Three, you must have a long-term liability structure. Most of AerCap’s debt matures close to the end of this decade. And finally, a hedged book which of course AerCap has. These strategies have led to the industry leading ROE of 15% for the third quarter.

Our utilization rate is running at 99%, and we have placed nearly all of the 2014 aircrafts. Only 8 are left to place, which for a platform like AerCap, that buy sells or leases an aircraft every three days is a very manageable task.

The capabilities of the AerCap platform as well as the long-term nature of our current leases and contracted purchases will continue to drive stable future profits and cash flows.

Now turning to the market opportunities, we continue to see plenty of growth opportunities. The key however is to be disciplined and ensure that we only deploy our shareholder’s money, when the risk/reward ratio was in balance. However, as we are one of the most active portfolio managers in the world, if not the most active having sold almost 270 aircraft at a $320 million gain, we know the value of what we are buying. So when we see the right opportunity we will be aggressive.

The fact that we have sold so many aircraft at a gain should give our shareholders confidence that firstly AerCap’s book values are conservative. As it is not possible to cherry-pick 270 aircraft, and secondly when we buy we pay the right price.

If we feel the risk/reward ratio investing in new aircraft is not in balance, we will return capital to our shareholders. Since we went public, we have returned 30% of our net income to our shareholders.

Now, I’m as concerned as any shareholder with the potential for capital misallocation between investing in aircraft and returning capital to our shareholders. I think with the gains I just referenced are evidence of our disciplined approach to investing in aircraft.

I am confident that if we continue to adhere to our core strategy, we can continue to generate industry leading profitability and return substantial amounts of capital to our shareholders while investing in modern fuel-efficient aircraft.

Turning to the leasing market, we have noticed over the course of the last 12 months, an up-tick in the level of placement activity in Europe, the world’s largest leasing market.

As I mentioned on prior calls, we continue to see a hardening of the Airbus A320 market and we could certainly place more of these if we had them available. The 737-800 and the A321 continue to be in high demand and the 319 is stable.

Receivables are at all-time low as I mentioned, less than 48 hours. We did have one, repossession in early September and the aircraft was repossessed within 72 hours with no credit loss. And it has already been put through the maintenance shop and delivered to the next lessee. This is another example of the efficiency of the AerCap platform.

Looking ahead to what remains of 2013 and into 2014. We expect to see further opportunities for fleet expansion and again to stress, we are extremely focused in capital allocation. And will only invest if the acquisition is accreted to our shareholders.

On that note, I will hand the call over to Keith, who will go through the financials before we open up for the question-and-answer session. Thank you.

Keith Helming

Thanks, Gus. Good morning everyone. I’ll start on page 4 of the presentation. Our reported net income for the third quarter 2013 was $83.6 million and adjusted net income, which excludes the various items listed, was $89.4 million, a 44% increase over the third quarter of 2012. For the first nine months of 2013, reported net income was $226.8 million and adjusted net income was $224.5 million.

Page 5, reported earnings per share were $0.74 in third quarter 2013. Adjusted earnings per share were $0.79 during the same period, an increase of 63% over the third quarter of 2012. For the first nine months of 2013, reported earnings per share were $2 and adjusted earnings per share were $1.98.

The average shares outstanding in the third quarter was 113.4 million which is about 15 million shares lower than the same period in 2012 as a result of the shares we repurchased in 2012.

Page 6, total revenues in third quarter 2013 was $279 million, up 4% over 2012. The increase was driven primarily by higher gain on the sale of the aircraft and other revenues which related primarily to cash recoveries on bankruptcy claims from previous lessee defaults. This small decrease in basic rent from prior year was driven primarily by the sale of our oldest aircraft portfolio ALS, which is partially offset by new aircraft purchases.

Page 7, net interest margin or net spread was $175 million in the third quarter. The annualized margin as a percent to average lease assets was 8.75%. The small decrease in net spread was also driven primarily by the sale of ALS portfolio, partially offset by purchases of new aircraft.

Page 8, the impact from sales in the third quarter of 2013 was a pretax gain of $10.7 million and was $32.2 million in the first nine months of 2013. In the first nine months of the year we sold two A330s, nine 737-800s, one 737-400 and one MD11 aircraft. The average age of our aircraft portfolio is 5.4 years.

Page 9, leasing expenses were $5.5 million for the third quarter as compared to $23.3 million in the same period of 2012. The decrease in leasing expenses was driven primarily from a lower impact from defaults and restructurings.

SG&A for third quarter 2013 was $23.4 million. Our tax rate for third quarter 2013 was 8.5% and is expected to be the same for the full year.

Page 10, AerCap’s unrestricted cash balance at the end of the third quarter was $318 million and our total cash balance, including restricted cash was $593 million. Operating cash flows were $198 million for the third quarter. Operating cash flows for the first nine months of 2013 was $494 million.

Page 11, at the end of third quarter 2013 AerCap’s debt balance was $6.2 billion and our debt to equity ratio was 2.6 to 1. Our book equity is nearly $2.4 billion and the average cost of our debt for the third quarter of 2013 was 3.9%.

Now page 12, with regard to the 2013 financial outlook, currently expected aircraft purchases are $1.7 billion. Basic lease rents for the full year 2013, is expected to decrease approximately 3% as a result of the ALS portfolio sale.

The maintenance contribution to income is expected to be minimal and the pre-tax gain from committed aircraft sales in 2013 is now expected to be approximately $40 million. And the average cost of debt in 2013 will be around 4% and the tax rate as I mentioned 8.5%.

With regard to 2014, page 13, as of now the committed aircraft purchases are $600 million but expected to grow. Basic lease rents for the full year 2014 are expected to increase approximately 7%. The maintenance contribution again will be minimal in 2014. Pretax gains from committed aircraft sales, is currently at $10 million. Average cost of debt will be again around 4% and the tax rate around 8%.

Those are the financial highlights for the third quarter. So, I’ll turn it back over to Gus.

Aengus Kelly

Okay. Operator, if you could open up the Q&A session please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Today’s first question comes from John Godyn from Morgan Stanley. Please go ahead.

John Godyn – Morgan Stanley

Hey guys, thanks for taking my question. First, Gus, I was hoping that you could just elaborate on credit risk by geography. What you’re seeing out there in the customer base?

Aengus Kelly

Well, I think if you look at our results you will see that the credit position of the AerCap portfolio is extremely strong right now. We see the North American market being extremely robust. The European market is getting materially better. There is, always pockets of weakness in various places of course and we still have some issues but we have no aircraft left there apart from two with Air India which is the stage at the end of the day.

So, overall things are reasonably benign. I mean, we are very active when it comes to receivables management with only $6 million of receivables and less than 1% of lease revenue.

But I think more generally the point is that AerCap’s receivables history has been that our total credit cost going through the last six years, going through $148 fuel, going through the financial crisis, have been less than 100 basis points of lease revenue on an annualized basis. So the credit cost and the receivables management policy here at AerCap is very, very active.

John Godyn – Morgan Stanley

Okay, that’s very helpful. And we’ve recently seen some announcements out of the OEs that confirm rate increases that I think the market was sort of looking for. But now we finally have confirmation of it. We’ve also got some new technology around the corner and that’s the topic that you’ve spoken to in the past.

But with sort of now, some of these events being not only confirmed by closer to us in the timeline, I was hoping that you could just update your thoughts big picture on how you see the situation with OEs playing out particularly with new technology and whether the market you think consisting these rate higher increases as we look out a few years? Thanks.

Aengus Kelly

But when it comes to the OEMs, I wouldn’t really pay much attention to their announcements, I’d pay a lot more attention to what they actually deliver. There is a precedent of announcing one thing and delivering another. So that’s the key.

And you have to look back, step away and look at the bigger picture of the industry. Ultimately you have two suppliers in this industry. You have about eight leasing companies that matter and then you have 600 plus airlines.

On the supply side, therefore you have a duopoly that ultimately act rationally. If they feel that their customer base cannot absorb the level of aircrafts that have been ordered, the historic precedent has always shown that they will work with their customers and defer or cancel orders.

What they would have never done in the past is cannibalize their own customers’ base by putting enough aircraft into the market to put them into bankruptcy that has never happened. So this is not like shipping where you have 60 shipyards just trying to cover variable costs and cranking out ships despite no matter what the market demand is.

So, on the OEMs, I think they will ultimately act rationally. The much bigger issue is did you buy right. I mean, look, if you overpay for the airplane, you’re going to be in trouble. What I would say about AerCap, I can’t comment on any others is look at our track record of our ability to monetize gains on airplanes we have worked consistently.

And all the big transactions we’ve done recently, we have printed substantial gains in the sale of some of the airplanes in those deals. And as I referenced, we have sold 270 airplanes at a gain of over $300 million that’s really the only evidence that a shareholder should look at as to say, can they consist – if you’re worried about book values, can the company consistently sell at or above book value. That’s the key message.

And that really demonstrates how the company operates and its approach to investing. If you overpay you’re going to get into trouble sooner or later, doesn’t matter what the OEMs are doing.

John Godyn – Morgan Stanley

Great. Thanks a lot.

Operator

Our next question comes from Michael Linenberg from Deutsche Bank. Please go ahead.

Michael Linenberg – Deutsche Bank

Yes, I want to go back to the comment, Keith, you talked about 2014 committed purchases. You said look at that $600 million but it’s expected to be more than that. When we think about the appetite and the capacity of the company, is 2013 the $1.7 billion, is that a pretty good guide or does that represent just a year where you’re little bit higher than normal. How can we think about that and the upside?

Keith Helming

Sure. I mean, when we went into 2013, I don’t recall exactly what the level was but committed purchases were well below $1.7 billion. So, we obviously committed to a lot during the year. So I think 2013 is a good representation of what 2014 could be I guess.

Michael Linenberg – Deutsche Bank

Okay, very good. And then my second question, I want to go back to some of the more difficult jurisdictions out there. Gus, you mentioned India, you have two airplanes with Air India, it’s essentially a sovereign credit. That said, I know Air India out there, I believe they have an RFP for a sizable number of 737s. And some of the things that we’re hearing is that there is not a lot of takers.

And so the question is, one, we haven’t seen the dust settle on this. But two, does this send a message out to other jurisdictions or call it rogue nations who don’t protect the investors that it would be that much more difficult to finance their assets going forward. I mean, what’s the potential message out of this? And do these airplanes ultimately get picked up?

Aengus Kelly

Well, let me start with Air India. They had an extraordinarily competitive 787 campaign to start this year, where there was a tremendous amount of activity. And Air India, ultimately is an Airline that will get financed. Because as you rightly point out is the sovereign credit, we have never had a single overdue balance from Air India in doing business with them for 20 plus years.

So, Air India is separate. Then of course you have other airlines in India, now Kingfisher is one where we were involved. We took our airplanes, we had six in there. We had them all out within a matter of weeks in late 2011, we had them all out over two years ago. Now we had them out in a couple of weeks.

So the same is true in Mexico, we had our six airplanes out in 24 hours and others had to wait an extended period of time to get them out of both of those airlines. We are very active, I can only speak to AerCap’s experience there has never been an airplane we couldn’t get out within 60 days.

The most difficult jurisdiction we’ve ever faced is the United States. That is the hardest jurisdiction to operate in, in a bankruptcy. If you have some of the challenged airplanes in the U.S. Major, that’s where the biggest losses always incurred.

The situation in Kingfisher was of course disappointing I understand that. But we have demonstrated our ability to cope in these jurisdictions. The airplane that I referenced we pulled out earlier this quarter was out of former Soviet Republic. People might look at that and say that must be a challenge but it was done as I said within 72 hours and then the airplane was back and it was gone through the maintenance shop and released straight away.

So, I think your message about India in general, we would certainly do business in India but it’s got to be on terms where you know that you can move quickly if things go wrong.

When it comes to managing receivables, it’s the loss given default that you look at and say right. Based on my experience my collateral package de-asset, what do I think I could lose in a default and do I have enough collateral against that.

That’s how we certainly looked at our Kingfisher exposure rather than the probability of default – look at the last given default and make sure then that you’re disciplined with yourself in managing that last given default that if you ever get near that that you’re repossessing the airplanes quickly. So, we would be careful of course in how we structure our transaction. But we would certainly go back into India, no problem.

Michael Linenberg – Deutsche Bank

Okay, very good. Thank you for that.

Operator

Our next question comes from Jason Arnold from RBC Capital Markets. Please go ahead.

Jason Arnold – RBC Capital Markets

Hi, good morning guys. I was just wondering if you could speak in a bit more detail about the opportunities you’re seeing in the North American markets.

Aengus Kelly

I mean the North American market is somewhere where we were very focused on a few years ago. And we felt that the consolidation was going to lead to a much more robust market. And hence we moved a lot of material into North America, not just a big American deal but we did a lot more there.

And now of course, look, the North American Airline, particularly the Majors are generating extremely healthy levels of profitability and cash flow. I think it’s evidenced by Delta’s entry into the SMP 500, first time an airline that’s done that in a very long time.

So, the North American market now if you were to try and go in it’s a much tougher proposition, with the time to try and get in there was probably a couple of years ago when we went there.

And it’s – you’ve got to wonder if you can make the AM, the return on equity that your shareholders deserve if you’re going to go into the North American market now because it’s so robust. We love to do a lot more here obviously but with the state of the AATC market and the level of profitability these majors are generating it is much tougher.

Jason Arnold – RBC Capital Markets

Great. Thanks for the color. I appreciate it.

Aengus Kelly

You’re welcome.

Operator

Our next question comes from Gary Leibowitz from Wells Fargo Securities. Please go ahead.

Gary Leibowitz – Wells Fargo Securities

Thank you, good morning guys. Gus, with the first of the new LatAm aircrafts starting to deliver next year, can you give us an update on the financing strategy for those planes, what’s being considered right now?

Aengus Kelly

For the 787 on LatAm, there is -- an awful lot of inbound calls Gary to do those deals. I think our strategy, our preferred strategy internally would be to use it as part of our portfolio financing, where you have in this instance the most in-demand airplane in production next year with one of the top credits in the world. I think we will look to get some synergistic benefit out of that and finance it as a portfolio either in the capital markets or in the bank market. Keith?

Keith Helming

No, I agree with that. That is exactly right.

Gary Leibowitz – Wells Fargo Securities

Okay. Also, can you comment on this quarter’s leasing expenses or net maintenance expenses overall. It seemed like leasing expenses were as low as they’ve been in a very long time. Yet next year your guidance assumes knowing that contribution from maintenance. Does this $5 million figure go back to the usual quarterly $10 million to $15 going forward?

Keith Helming

Yes, if this quarter Gary was unusually low. I mean, first of all just the year-over-year comparison there were effectively very limited amounts of costs relating to also restructuring versus last year. The biggest decrease was associated with that. But the $5.5 million did not include or lesser contributions it didn’t include a lot of the normal transition costs.

Again, these are costs that are not evenly distributed quarter-to-quarter-to-quarter. So, $5.5 million is low. You’ll see in our guidance the outlook that we’ll go through today in the Investor Day discussion, it will be around – the annual rate would be around the $60 million to $65 million level going forward.

Gary Leibowitz – Wells Fargo Securities

Okay. And just one last clarification, I hate to go back to this. But on the guidance for 7% basic lease rent growth, does that assume only the $600 million that’s committed because you’ve talked about maybe doing two or three times that much. So does that 7% reflect the $600 million only?

Keith Helming

It only includes the $600 million that we’ve committed so far, yes.

Gary Leibowitz – Wells Fargo Securities

Okay. Thank you very much.

Operator

Our next question comes from Ryan Zacharia from Jacobs Asset Management. Please go ahead.

Ryan Zacharia – Jacobs Asset Management

Thanks for taking the question. Just on the personal expense this quarter, there was a big kind of sequential and year-over-year rise. I was just trying to understand what growth that is?

Keith Helming

Again, we had some additional cost relating to some specific bonus programs that was a catch-up for the full year. The annual rate that you should see again for SG&A should be around the $21 million to $22 million level on a quarterly basis.

Ryan Zacharia – Jacobs Asset Management

Okay. Thanks. That’s the only question I had.

Operator

(Operator Instructions). Our next question today comes from Helane Becker from Cowen & Co. Please go ahead.

Helane Becker – Cowen & Co

Thanks very much, operator. Hi, guys, thanks for the time. Just one question, on the 747 freighter, did you say whether you disposed of it or parted it out or what was the disposition of that?

Aengus Kelly

They’ve both been released to LatAm.

Helane Becker – Cowen & Co

Okay. Fine, are you happy with that freighter market these days?

Aengus Kelly

You know the freight market is a tough spot. We sold a freighter last year we’ve never been big in the freight business. We acquired these as part of our bigger portfolio when we bought the Genesis Company few years back. But it’s such a tiny percentage of our overall net assets is less than 1%. It’s not really a material amount. But the freight market is in a tough spot. There is no getting away from it.

Helane Becker – Cowen & Co

Okay. Thank you. See you later.

Aengus Kelly

All right. No problem.

Operator

As there are no further questions, I’d like to hand the conference back over to Peter Wortel.

Peter Wortel

Thank you very much. We hope to see you today here at New York that is if you’re able to come. If you have more questions, please shoot me an e-mail or give me a call. You can find my details on the website. Thanks very much.

Aengus Kelly

Thank you, all.

Keith Helming

Thank you.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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