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Executives

Matt Dallas – IR

Colm Barrington – CEO

Gary Dales – CFO

Steve Zissis – President and CEO of BBAM

Analysts

Helane Becker – Dahlman Rose

Ray Neidl – Maxim Group

Joe Gill – Bloxham

John Evans – Edmunds White

Richard Haydon – Yield Capital

Richard Diamond – Green Drake Partners

Fly Leasing Limited (FLY) Q1 2011 Earnings Call May 4, 2011 9:00 AM ET

Operator

Good morning. My name is Kearie and I will be your conference operator today. At this time, I would like to welcome everyone to the Fly Leasing Limited first quarter 2011 earnings 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)

Thank you. I would now like to turn the call over to Mr. Matt Dallas. Mr. Dallas you may begin.

Matt Dallas

Thank you and good morning everyone. I am Matt Dallas, the Investor Relations Manager of Fly Leasing and I'd like to welcome everyone to our first quarter earnings conference call. Fly Leasing, which we will refer to as FLY or the Company throughout this call, issued its first quarter earnings results press release earlier today, which is posted on the Company's website at www.flyleasing.com.

Representing the company on this call today will be Colm Barrington, our Chief Executive Officer, Gary Dales, our Chief Financial Officer and Steve Zissis, the President and CEO of BBAM the company that manages and services FLY’s fleet.

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 expectations and assumptions of FLY'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. FLY 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 FLY and cannot be distributed or broadcast in any form without the expressed 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 Web site.

I will now hand the call over to Steve Zissis, the President and CEO of BBAM to give you his view on industry conditions. Steve?

Steve Zissis

Thank you, Matt, and thank you for joining us today. The Commercial Aviation sector continues to perform strongly. We are seeing strong demand for virtually all aircraft types, while demand in the earlier stages of the recovery was focused almost exclusively on the Boeing 737-800 product; we now experience a similar uptick in demand, not only for Airbus narrow body aircrafts, but also for more common light body aircrafts like the Boeing 777 and the Airbus A-330s.

In terms of geographical demand, interest is well balanced and we are fielding many inquiries for additional aircrafts from our airline clients in Asia, Eastern and Western Europe, Latin America and North America. Lease rate on in-production aircraft types have rebounded sharply off their lows from the period of time immediately following the global credit crisis.

Even after adjusting for interest rate environment today, compared to 2006 and 2007 period when the industry was last firing on all cylinders, net margins from capitalized source are comparable in a certain cases even higher for the most in-demand aircraft types.

Notwithstanding these positive dynamics in the industry, our positive outlook is tempered somewhat by rising fuel prices in social unrest, in the Middle East, in North Africa. Our rising fuel prices do put financial pressures on airlines, it’s more of a concern for the industry given the impact, high fuel prices can have on consumer demand more broadly in the economy.

It is also worth noting that operating leases in the business are written so that lessors do not take direct risk on airline operating expenses like higher fuel prices. As I mentioned on our recent earnings calls there is a large amount of capital flowing into the aircraft lessee sector.

Much of the capital is coming from private equity community, with the larger existing lessors are also allocating capital to grow their businesses. All of this capital is creating a demand for aircrafts subject to operating leases and aircraft prices continue to move upward.

We have taken advantage of this liquidity in the past to rebalance the portfolio through selective sales of aircrafts. In the each case, at premiums to book values. We will continue to evaluate future sell opportunities. We continue to see attractive value to FLY share given current operating prices that are below our book value. We’ve proven that our – in the market at premiums to book value, 100% of our aircrafts are on lease. We are generating positive cash flow in current periods. We’re paying substantial dividend and we have built up a very large cash position that will allow us to grow the business in the near future.

We’re very focused on growth at this time, and we hope to announce significant progress on this front in the near future. I will now turn the call over to Colm.

Colm Barrington

Thank you, Steve and thank you everyone for joining us on our first quarter 2011 earnings call. In the March quarter, FLY is reporting net income of $2.8 million and earnings per share of $0.10. Our net income is lower than the $16.7 million as of net income in the first quarter of 2010.

However the 2010 results were significantly enhanced by a $12.5 million pretax gain from the sale of an option to purchase $50 million face amount of our notes payable and also as a result of a $3.6 million end of lease income.

In addition, our lease revenues were also negatively impacted in the March quarter by the fact that five of our aircrafts were in transition to new lessees during the quarter and so experienced some downtime. All of these aircrafts are now on lease and generating revenues. We had five scheduled lease returns in 2011. Of these, four leases have been extended and one aircraft has been released with no downtime and minimal transition cost expected.

As a result, we have no further scheduled remarketing events in 2011. During the quarter, we took delivery of one new Boeing 737-800 aircraft, which will have a positive impact on our revenues and earnings in future quarters. At quarter end, our annualized lease rentals were $210 million, as compared to $209 million a year earlier. We’ve also completed a transaction in which FLY have invested $5.9 million for 57% interest in a joint venture company that has acquired four Boeing 767 aircrafts on lease to two airlines in North America.

The joint venture company has been leveraged with debt that is non-recourse to its shareholders. Our investment in BBAM, which was completed a year ago, has continued to perform very well and contributed approximately $1.1 million of equity earnings in the quarter. We continue to be very pleased with BBAM’s performance and without efficient to invest in BBAM.

During the quarter, we also continued our program of shareholder value enhancements; we repurchased 1.1 million FLY shares at an average price of $11.94 per share. Since we launched our share repurchase program in June 2008, FLY has repurchased a total of 8 million of its shares at average price of $7.89 per share and representing 24% of the shares issued in our IPO in 2007. Our Board of Directors has approved new share repurchase program that will extend through May 2012. FLY now has a total of 25.6 million shares outstanding and based on our March 31 balance sheet, the total shareholders' equity is just over $18 per share.

FLY declared its fourteenth consecutive quarterly dividend in April, this quarterly dividend of $0.20 per share representing 19% of available cash flow in the March quarter, will be paid on May 20 to shareholders of record on April 29. We have not paid a dividend to shareholders in every quarter since we listed FLY in 2007.

We are very pleased to continue with this attractive dividend and our shareholder value enhancing initiatives. Our fleet have mounted widely with fuel efficient aircrafts had a total utilization of 95% in the quarter and at quarter end all of our 60 aircrafts were on lease.

At quarter end, our 60 aircrafts at an average remaining lease term of 4.5 years weighted by net book value of each aircraft. As Zessis said, the first month of 2011 have been positive for the aircraft leasing industry generally, the advent of a high profile newly listed aircraft leasing companies that likely to be positive for the existing participants as it will lead to greater interest in the sector and in the business generally and particularly from the analyst community.

At quarter end, FLY had total cash of $306 million, of which $140 million is unrestricted. We are actively pursuing growth opportunities and these cash resources allow FLY to pursue additional and significant investments in aircraft. I can assure shareholders of BBAM and FLY are strongly focused on putting our resources to work to ensure that FLY’s shareholder returns and shareholder values are further enhanced. I will now hand over to Gary Dales our CFO to give you a deeper look at the financials.

Gary Dales

Thank you, Colm. We are reporting net income for the first quarter of 2011 of $2.8 million or $0.10 per share. This compares to net income of $16.7 million or $0.55 per share for the first quarter of 2010. As Colm mentioned, the first quarter of 2010 results include a pretax gain of $12.5 million or $0.31 per share from the sale of an option to purchase $50 million of our notes payable.

Our total revenues for the first quarter of 2011 were $49.7 million and include $47.6 million in operating lease revenue and $1.2 million in equity earnings from our investments in BBAM and the joint venture that holds before Boeing 767 aircraft.

Total revenues for the first quarter of 2010 were $67.7 million and include the $12.5 million pretax gain from the sale of an option to purchase our notes payable. Operating lease revenue for the first quarter of 2011 was $47.6 million compared to $54.2 million for the same period in the previous year. The first quarter 2010 results benefited from $3.6 million of end of lease revenues on aircrafts whose lease expired in that period and $2.9 million in operating lease revenues from the four aircrafts that were sold during 2010.

2011 operating lease revenue includes $1.6 million of revenue from the two new Boeing 737-800 aircrafts. Total expenses for the first quarter of 2011 were $46.2 million and consists of depreciation expense of $20.6 million, interest expense of $18.6 million, selling general and administrative expenses of $5.7 million, and maintenance and other cost of $1.3 million.

Total expenses decreased $900,000 or 2% from the same period in the previous year. Depreciation expense for the first quarter of 2011 was $20.6 million, compared to $21.3 million for the same period in the previous year, a decrease of approximately $700,000 or 3%. The decrease is primarily due to the four aircrafts that were sold in 2010, partially offset by depreciation on the two new Boeing aircrafts.

Interest expense in the first quarter of 2011 was $18.6 million, compared to $19.1 million for the same period of the previous year, a decrease of 3%. The decrease is mainly due to a reduction in the amount of notes payable and acquisition facility debt outstanding and a reduction in the notional amount of interest rate hedges. All partially offset by interest on debt used to finance the purchase of the two new aircrafts.

Selling general and administrative expenses were $5.7 million in the first quarter of 2011, compared to $5 million in the same period of the previous year, an increase of $700,000. Included in the first quarter 2011, SG&A expense is $1 million of non-cash share-based compensation. Excluding share-based compensation, SG&A expense was 9.5% of total revenues for the first quarter of 2011.

Maintenance and other costs were $1.3 million during the first quarter of 2011, compared to $800,000 for the same period in the previous year. The increase reflects the cost associated with the aircraft that are transitioning to new lessees. Our provision for income taxes for the first quarter of 2011 was $700,000, representing an effective rate of 20.2%. The effective tax rate for the same period in the previous year was 19.3%.

Our balance sheet remains strong. At March 31 2011, we have total assets of $2 billion, of which $1.6 billion is invested in flight equipment held for operating lease. Our total cash is $306 million, of which $140 million is unrestricted. These amounts compare to $329 million and $164 million at the end of 2010. During the first quarter of 2011, unrestricted cash was used to repurchase shares, purchase an aircraft and invest in the joint venture holding the four Boeing 767 aircrafts.

Our available cash flow or ACF was $28.3 million in the first quarter of 2011, compared to $45 million for the same period in the previous year. The decrease is primarily due to the decline in net income caused by the 2010 gain associated with the sale of the debt purchase option. ACF per share was $1.07 for the first quarter of 2011, compared to $1.49 in the same period of 2010.

We define ACF as net income plus depreciation, amortization of lease incentives and debt issue cost and deferred income taxes, all non-cash charges. Non-cash gains resulting from the purchase of notes payable and other one-time cash items are excluded from ACF.

We believe that ACF provides the meaningful measure of FLY’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 proceeds and expenses that are not reflected in net income.

You will find the reconciliation of ACF to net income, to 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

Thanks you, Gary. In summary, we remain encouraged by the strengthening industry conditions and the number of increasing opportunities to grow our fleet of modern and popular aircrafts. We are strongly focused on growth and with the strong cash balance, we have – to take advantage of these opportunities and look forward to reporting our progress on this front.

With that, we are now ready to take your questions. Operator, can you please open up the lines?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Helane Becker of Dahlman Rose.

Helane Becker – Dahlman Rose

Two quick questions. One, how much downtime did the five aircrafts wind up impacting revenue? And going forward, should we think about lease revenues being back about $50 million?

Colm Barrington

Is that it?

Helane Becker – Dahlman Rose

No, my second question is what’s the tax rate going forward? I was going to give you a chance to answer the first question, but that’s okay.

Colm Barrington

Let me deal with your second question first, because it’s probably the easiest. The orange corporate tax raise on operating earnings is 12.5%, so the actual tax raise we will be charged which will depend on our mix of earnings and the reason it’s higher than 12.5% in this case it’s, that some of our earnings came from equity earnings in BBAM and in the 767 joint venture.

As regards to five aircraft, Gary, I think we estimate that we lost revenues about $1.5 million from those five aircraft in the quarter. And the second part of your question Helane, is that our annualized earnings are currently $210 million, on a quarterly basis then we are talking – give or take $52.5 million.

Operator

Your next question comes from the line of Ray Neidl of Maxim Group.

Ray Neidl – Maxim Group

I was just looking at your strong cash flow and going forward it seems like you are optimistic on the outlook for the leasing industry and there is going to be a lot of opportunities. I was just wondering is it wise to do a share buyback, big dividend payments and look at this potential growth, even though you have strong cash flow, will it be enough to - can grow all three areas?

Gary Dales

Certainly, to-date we have – we fund with our shares at the price they were with better value resource to repurchase shares as well as do other things with our cash. So we have been diverting our cash to share buyback significantly and as we’ve said I think we did not bought back a total of 24% of our original issued shares at a price of less than $8 a share. So in relation to the net book value per share, we think that’s been a very good transaction for our shareholders, series of transactions for our shareholders.

Going forward, we are planning to grow the asset base of the company and we will be deploying our cash significantly towards that growth opportunities over the rest of 2011.

Operator

Your next question comes from the line of Joe Gill of Bloxham.

Joe Gill – Bloxham

I wonder, could you comment a little bit on the market conditions for new as against five year old plus and commercial narrow bodies in the context of high oil prices over the past number of quarters. Was if any dynamic having on the value of actual older aircraft in the lease rights on those aircrafts? And then the second question is a relation to the 767 joint venture. Could you just give us a bit of flavor in terms of what types of returns you hope to get over that equity, what age these aircrafts are? And how it will evolve over time in the particular JV?

Colm Barrington

On the 767, the aircrafts are in their mid-teens in age Joe. We expect to get reasonably significant returns out of the joint ventures – tend to exactly what are we getting from that there but you will receive the earnings reported over the coming quarters. But it is a very good deal. We’re very happy with the deal and we expect to get pretty significant returns from it over time.

Joe Gill – Bloxham

Do you envisage that those 767s are just being run out to their natural end of lives and then prior to that how old that actually won’t work?

Colm Barrington

I suppose it depends on the market for the aircraft at the time of the leases end. The leases have embedded five years on average throughout I think between on average. And the aircraft will be then give or take 20 years old that will depend on the market values both the aircraft at the time. We actually envisage those aircrafts can probably be re-leased at the end of their present leases. But we’ll obviously look at opportunities in five years time. And we are very happy with the credits that we expect those leases to on their full terms.

Joe Gill – Bloxham

In terms of the fuel prices, Steve would you like to comment on that?

Steve Zissis

Sure, before even taking into consideration Joe, increases in fuel prices, the demand for in-production narrow bodies has been very strong. And basically we’ve been seeing lease rates creep up for the last 18 months on in-production narrow bodies both for Airbus and Boeing. As fuel prices increase, obviously airlines are looking for the most efficient aircrafts to operate. So that even puts further pressure on demand for these aircrafts and as you’ve probably have heard in the industry, the production line for both Airbus and Boeing are pretty much sold out till the beginning of 2015. So, if this recovery stays intact, the way that we see it going you could expect probably higher prices and or higher values and higher lease rates on in-production narrow bodies as we go forward.

Joe Gill – Bloxham

Are you seeing that then having a positive effect on the say five year old plus aircraft, because they pass H2, 2010, there was some evidence of weakness in old Airbus A-320 type aircraft.

Steve Zissis

That’s certainly true. It’s the mid-life stuff is definitely lagging, both in value and in some respect lease rates, we are starting to see a bit of recovery and the older stuff just because of the airlines can’t find the newer stuff. And they have tendency to newer stuff to kind of pull up the older stuff as it recovers.

But definitely there is a relative price differential between say five year, seven year old narrow bodies and the new stuff and we think in some respect that represents some good value in the marketplace, because you’ve probably heard that, the new stuff is really being build up pretty aggressively now by this capital that’s coming. So, we think there is some good opportunities in the mid-life stuff right now.

Operator

Your next question comes from the line of John Evans of Edmunds White.

John Evans – Edmunds White

Yes, I was just curious, first of all could you just talk book value maybe I missed it in your release, but what book value is now and then you’ve done several initiatives to try to increase shareholder value, but your stock still trades at a significant discount for book. Help me understand other things potentially you guys can do to get the markets to realize the value in the company?

Gary Dales

Yes, at March 31, our book value is $18.31. I don’t know what we can say about the prices the way it is precisely where it is Colm?

Colm Barrington

We are obviously disappointed John in the share price relative to book value and we do see potential increases in that share prices and that’s why we’ve been buying back shares, because we thought it was a very good use of the company’s funds to buy back the shares when they were trading at such a significant discount. Unfortunately, I can’t predict markets and I can’t predict how you can encourage shareholders to increase your prices, but I think with the new exposure of the industry, resulting from the new entrants, I think we hopefully will see some more analyst reports which will be highlighting the fact that these shares are good value relative to book.

John Evans – Edmunds White

Can you talk about, should we expect you to continue then to buy back stock until the stock gets closer to book value because it’s creating a substantial discount if you think its $13.50 today compared to $18 and some change on book?

Colm Barrington

We are certainly disappointed that when we bought back $1.1 million shares recently, it didn’t have an increase in the share price which logically you think it should have. And so markets are tickle and they are hard to predict. But certainly we see our shares as being very good value currently and we still have a share purchase program of $30 million in place and we continue to buy shares as we come across them in the markets.

John Evans – Edmunds White

I know you are bullish on buying aircraft et cetera, but do you believe at all since your lease revenues are starting to grow that potentially you guys could raise a dividend or should we just look at the dividend come in at steady state that you have?

Colm Barrington

We look at the dividend, John every quarter and we’ve continued with our dividend now for 14 consecutive quarters. We’re comfortable with the dividend at the level it is, but as the company grows, who knows we might see opportunities for us in the future. But we don’t have any plans at this point in time either way on the dividend.

Operator

(Operator Instructions) Your next question comes from the line of Richard Haydon of Yield Capital.

Richard Haydon – Yield Capital

It’s been clear in the market that the gap between the market price, the book value is now increasing and this package had a negative return to share, does it makes us to go out and buy new equipment that when you book it, it’s on inadequately just had at the marketplace? Number one and number two, is FLY have sufficient size to compete in the leasing market today?

Colm Barrington

The second question Richard, the size of the ownership owning entity is not relevant to our position to compete. Remember that we are serviced by BBAM and which manages nearly 400 aircrafts globally. The BBAM has the full resources for market penetration on behalf of FLY throughout the world. So we don’t suffer from any diseconomies of scale. As the BBAM team is very experienced, have been around for 20 years plus they’ve been together and working with industry for a long, long time. So, we don’t feel that we suffer from any diseconomies of scale.

Our financing which we put together several years ago is very competitive, and we don’t believe that FLY suffers from any scale that is ambiguous. To your point about whether we should buy aircraft at book when our shares are trading at below book, I think that’s relevant if we had to issue new shares to be able to book, but we are not actually planning to issue any new shares at below book at this point in time. We have a lot of free cash, which we can use to buy shares, so we are effectively would be trading cash per aircraft, which we think is important to show the growth story for the company.

Richard Haydon – Yield Capital

My point Colm is, so pay a $1 for an aircraft today then the market then values that at $0.70. Or 30% discount book value.

Colm Barrington

I don’t see it actually being quite after that relationship Richard.

Richard Haydon – Yield Capital

I hope that the best of the market is still.

Colm Barrington

But it is for some companies.

Richard Haydon – Yield Capital

It’s duly deployed I believe.

Colm Barrington

Well, there is no doubt that our shares are trading at below book today. But cash doesn’t mean the value that 100 tenths of a dollar either if it’s a tenth of a dollar either if we look at the all the cash we have on our balance sheet, you think that that cash should have a higher value on the balance sheet in relation to the share price. They just need to be valued fully either. So we got to deploy that cash to try and grow the company, show the fact that the company has growth potential, gross earnings and then I think you’ll get start maybe potentially getting a premium to book and your share price.

Richard Haydon – Yield Capital

I guess, my question is, as you convert the liquidity cash, into the various alternatives, the one that seem to be showed the least rate of return, in fact it’s a negative way of returning this CapEx at least now.

Colm Barrington

Well, I think, I take your point Richard, but I think that’s very important for a company like FLY to show that we are going to grow the company too and that we can grow our earnings and that’s where we are heading right now.

Operator

Your next question comes from the line of Richard Diamond of Green Drake Partners.

Richard Diamond – Green Drake Partners

The stock is particularly weak and the pre-markets are, in the market this morning and I believe it’s due to analyst miscommunication, because the decline in revenues from reading your release are totally predictable. Have you given any thought to how to improve communication with the analyst community if, as in this case you are going to have predictable revenue declines?

Colm Barrington

Well, we are not going to have – we don’t expect to have revenue declines Richard going forward. We do keep a very active dialogue with our shareholders and with the analyst community. So, we’ve informed them as best we can. I haven’t seen any analyst reports regarding this quarter’s earnings as yet.

Richard Diamond – Green Drake Partners

In presentations, excellent you gave at the JP Morgan conference, you may want to evaluate in the future signaling if you are going to have a dip quarter-to-quarter, because I think it masks the excellent value of shareholder creation you and your team have engaged on. And as to the buyback, it’s clear to me that the person who owns the last share of FLY is going to make a great deal of money. Thank you.

Colm Barrington

Thank you.

Operator

You have no further questions at this time. Gentlemen, do you have any closing remarks?

Matt Dallas

We’d like to thank everyone for joining us on the first quarter earnings call for FLY Leasing and we look forward to updating you again next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.

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