Aircastle Limited's (AYR) CEO Mike Inglese on Q3 2020 Results - Earnings Call Transcript

Nov. 12, 2020 2:24 PM ETAircastle Limited (AYR)
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Aircastle Limited (NYSE:AYR) Q3 2020 Earnings Conference Call November 12, 2020 10:00 AM ET

Company Participants

Mike Inglese - CEO

Conference Call Participants

Mark Streeter – JPMorgan

James Barr - Loomis, Sayles & Company LP

Matthew Phan - Bloomberg Intelligence

Operator

[abrupt start]

2020 Call. Today's conference is being recorded and at this time, I would like to turn the conference over to Michael Inglese, Chief Executive Officer. Please go ahead.

Mike Inglese

Thanks operator and welcome everybody to Aircastle's financial update for the three months ended September 30, 2020. With me today on the call are Aaron Dahlke, our CFO; Doug Winter, our Chief Commercial Officer; Roy Chandran, our Chief Strategy Officer; and Chris Beers, our Chief Legal Officer.

Before I begin, I'd like to point out that statements today which are not historical facts may be deemed forward-looking statements. Actual results may differ materially from the estimates or expectations expressed in those statements, and certain facts that could cause actual results to differ materially from Aircastle Limited expectations are detailed in our SEC filings, which can also be found on our website. I'll direct you to Aircastle Limited press release for the full forward-looking statement.

I'd like to start off by covering recent changes to our fiscal year and the going forward cycle for financial reporting. In late September, we announced the change to Aircastle financial reporting periods to better align with the financial reporting cycle of our shareholders Marubeni and Mizuho Leasing.

Our fiscal year end has been changed from December 31st to the last day in February. Accordingly, our fiscal quarters will now end on May 31, August 31, and November 30. Our next audited financial results will be for the five months ending November 30th, which we expect to release in January.

We know the value of regular reporting [technical difficulty] for investors, particularly during these tumultuous times in our industry, and rather than waiting until January, we released unaudited financial information for the three and nine months ended September 30.

We also posted a PowerPoint presentation to our website earlier today and by the end of the week, we'll be filing a transitional 10-Q for a new reporting cycle, which will only be the historical results for the month of January and February of 2020.

Before I get into specifics, I'd like to provide some perspective on how we're managing through the most severe crisis ever to impact our industry. While we've been managing through a painful period, there's probably still more turbulence until the recovery starts in earnest and the market resumes its growth trajectory.

This week's news from Pfizer was positive, but we can't predict the bottom or when we'll revert to pre-COVID levels of traffic. What we can do, however, is remain focused on protecting the health and safety of our employees, the preservation and enhancement of our liquidity and protection and proper maintenance of our assets in conjunction with our lessees.

Industry trends during the third quarter showed signs of improvement. In the U.S., the TSA throughput numbers trended up since the spring trough and holiday demand is looking promising. More regional markets like China, Russia, Brazil, and Mexico also have pointed to improvements.

In addition, meaningful progress has been made in critical areas of vaccine development and testing, so next few quarters, we remain quite optimistic. However, in the near-term, conditions are expected to be challenging with a growing number of reported COVID cases spreading across the U.S. and Europe.

Nevertheless, Aircastle has a strong balance sheet and a solid liquidity position and we expect to successfully navigate through the crisis and be well-positioned to take advantage of opportunities as they become available.

Aviation, without a doubt, is an important part of the global economy and will remain so. According to the World Travel & Tourism Council and Oxford Economics, in 2019, travel and tourism represented over 10% of global GDP, and provided 330 million jobs worldwide.

While the airline industry is currently operating under financial stress, we're certain that improving treatment protocols and therapies along with suitable vaccines will be rolled out in the not too distant future. This along with coordinated international efforts around testing and travel restrictions will assure the eventual return of passengers to the skies.

Because of the significant decline in travel demand since the onset of COVID, the ability of airlines to access government support and raise external liquidity will be critical to determine their survival in the near-term.

To-date, the larger airline bankruptcies have either been generally due to a lack of political support for government aid and airlines that were financially weak pre-pandemic.

In October, IATA reported that approximately $160 billion of government aid along with an additional $20 billion from suppliers has been provided to the industry thus far.

While significant, it appears that additional financial support may be required for airlines around the world. While failures are inevitable, we expect the vast majority of airlines around the globe to survive and when the flying public is eventually convinced that air travel is safe, the demand for aircraft will increase.

In addition, when market conditions improve, it will take many years for debt-burdened airlines to reduce their financial leverage and this will increase the attractiveness and influence of aircraft leasing as a source of capital for the aircraft industry.

Accordingly, the leasing business model will play an increasingly important role in aviation finance and will benefit experienced and conservatively managed players like Aircastle. Our team is deep and experienced, and we enjoy strong shareholder support from Marubeni and Mizuho Leasing.

Let me spend a minute reviewing Aircastle's liquidity. Our 12-month liquidity position increased by $600 million from early August, our forward CapEx commitments remained very low, and have remained focused on preserving and enhancing our liquidity since the crisis began.

In late July, we successfully executed $150 million revolving credit facility with Mizuho Bank and in early August issued $650 million of 5.25% notes due in 2025. At the end of October, we had total liquidity of $2.1 billion which included unrestricted cash of $432 million, $120 million of contracted asset sales, and $1.25 billion of undrawn revolving credit facilities. In addition, we have $5.5 billion of unencumbered aircraft across the fleet.

By comparison, our commitments through October of next year total around $770 million, giving us a liquidity coverage of about 2.8 times. For three months ended September 30, we generated cash flow from ops around $90 million, while cash collections as a percent of reported operating and finance lease revenues over that same period increased to 73% from 60% in the second quarter.

In the current environment, we remain focused on balance sheet management, which will be particularly important over the coming winter.

In summary, we remain focused on maintaining a strong liquidity position in a challenging market and expect to be well-positioned to take advantage of the eventual recovery in aviation.

With respect to deferrals, while they have flattened a bit from mid-year, although we expect there may be some pick-up during the winter months, as airline cash flows remain pressured.

Through the end of October, we had approved deferral agreements with 40 airlines for approximately $101 million, including $80 million that appeared on our 9/30 balance sheet.

Let me spend a few minutes on portfolio positioning. We believe our midlife portfolio will be attractive as airlines start to rebuild their balance sheets, given their lower capital costs and predictable maintenance costs and will continue to invest in newer tech narrow-body aircraft that will become the backbone of the industry as it moves forward in the post recovery growth phase over the balance of this decade.

We continue to optimize our fleet mix towards broadly operated fuel efficient narrow-body aircraft. And looking ahead, we believe mid-age single aisle market will continue to be a critical segment for the global lease fleet for well-managed airlines focused on expense management because of the value proposition offered by current tech aircraft.

Persistently low oil enhances the attractiveness of mid-age current technology narrow-bodies and reduces the return from investing in more costly brand new technology aircraft.

As the industry emerges from the crisis, we believe that airline fleet management will be simplified, and commonality will be sought to improve operating efficiencies. International travel is expected to take longer to recover and smaller fleet variants will be preferred by the airlines in the interim.

As Aircastle began shifting its fleet mix towards narrow-body aircrafts about seven years ago and currently 90% of the aircraft in our fleet are narrow-bodies. We expect regional aircraft to have an advantage in the current environment which will benefit our E-2 investment and to remind everyone of the 25 E-2 aircraft we have on order. 18 has been placed and in 2021, we're scheduled to deliver four of those aircraft to KLM.

Turning to recent highlights and financial results for the three-month period ended September 30, we reported net income of almost $6 million, EBITDA of $161 million, and adjusted EBITDA of $181 million.

During this period, our fleet utilization averaged about 94%, driven by rise in collection activity, cash flow from ops for the three-month period improved to about $90 million in this period.

In September, Aircastle's investment-grade credit rating was affirmed at Baa3 by Moody's, driven by our strategic ownership, management's track record, minimal forward commitment, strong liquidity, and a conservative balance sheet.

You’ll recall that ahead of Moody's affirmation, our investment-grade ratings were previously affirmed at BBB, flat by Fitch, and BBB minus by S&P.

Year-to-date to October, Aircastle executed a total of 37 lease transactions including transitions, extensions, and aircraft sales. Thus far in 2020, we've sold nine aircraft and have agreements to sell an additional 21 narrow-bodies as they come off lease over the coming couple years.

Over the past three months, we've strengthened our balance sheet, have been adapting to shifting market conditions, and are well-positioned to emerge from COVID-19 as a stronger company. We'll be prudent and patient not risk our balance sheet and continue to pursue a conservative approach with respect to leverage and future commitment.

Together with our shareholders, we're preparing for profitable future growth that Aircastle's position in the industry is strengthened. Our near-term plan is pretty straightforward. We remain committed to protecting the health and safety of our employees. Our employees continue to work hard to keep the business running smoothly and seamlessly and we'll continue to do so.

We will continue to focus on liquidity preservation and enhancement of our business and security and maintenance of our assets around the world. The COVID situation is evolving and we've embraced a rapid crisis management approach to maximize decision-making agility will continue to adapt as needed.

In closing, we have a seasoned leadership and professional team who have managed through prior crisis, so we know how to protect our assets and manage through airline bankruptcies and insolvencies.

We've been able to successfully manage the business largely remotely over the last nine months, which is a testament to our people and our investment in technology. We have a strong liquidity profile, strong ownership, and an expert team with modest forward commitments. Over the longer term, our strategy will not change much and with our shareholders, Marubeni and Mizuho Leasing, we're well-positioned to emerge as a stronger company.

And with that, operator, we're happy now to open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from Mark Streeter with JPMorgan.

Mark Streeter

Yes, thank you, Mike. Just want to talk a little bit about ownership and sponsorship, if you will, of the platform. Now that everything's closed and so forth, with Mizuho Leasing, which is 27% I think, 28% owned by Mizuho Financial Group, if I'm looking at the screen correctly here, just sort of understanding the relationship with Mizuho Bank and the credit facility that you put in place. Just sort of wondering, is the rationale for that? Are you trying to sort of show investors how invested Mizuho; the ultimate parent is in the platform? Were there other alternatives to that? Was that sort of the best deal for you or just maybe can you just give us a little bit more color about how we should think about the role of Marubeni, the role of Mizuho Leasing and Mizuho Bank going forward in the platform because it's very unique Aircastle and I think it's worthy of discussing a little bit further.

Mike Inglese

Sure. Thanks Mark. So, first of all, Marubeni and Mizuho Leasing have been involved with Aircastle for a number of years. Marubeni first invested here in July of 2013 and a few years later, we formed a joint venture with Mizuho Leasing.

In connection with their own businesses and their own pursuits in the leasing industry in Japan and elsewhere outside of aviation, Marubeni and Mizuho Leasing got closer together in the form of other relationships in Japan. Soon before as a group together, they decided to acquire the remaining amount of Aircastle that wasn't owned by Marubeni.

As part of those steps, Mizuho Bank did, in fact, invest more capital into Mizuho Leasing, in anticipation of trying to find additional opportunities outside of Japan for the business to expand its portfolio. And aviation, obviously, is one of those areas that fits that bill.

With respect to Mizuho Bank and the credit facility we did with them, we have always been trying to diversify some of our funding sources. As we move forward in the world, we have our revolving credit facility with a number of U.S. and European banks.

We subsequently put in place a revolving credit facility with some Southeast Asian financial institutions. We've done unsecured loans with DBJ in the Japanese marketplace. And so, adding to our evolving capacity as a first step and the first increment with Mizuho Bank was what we did in the summer of this year.

So, it's our hope and expectation that we'll continue to be able to expand our presence among the Japanese financial community and find additional funding sources to help support the business, its liquidity, and its growth prospects as we move forward.

Mark Streeter

Great. That's helpful. And then just with Mizuho Leasing, how are you managing because they -- their other aviation investments, I'm just trying to get a sense for going forward, how should we think about for your two parents, Marubeni and Mizuho Leasing sort of your -- sort of exclusivity, if you will, in terms of their platform for aviation investments? Are there any conflicts of interest that we should be worried about? Or that you need to manage as they might be running money differently in Japan or in Asia, then what they're running through Aircastle, just trying to get some updated clarity on that?

Mike Inglese

Yes. So look, being an owner in Aircastle capsule and making the size of investment they did in our business, we think is a pretty strong statement about their commitment to what they're doing with us. It doesn't mean that that's necessarily the exclusive thing that they will do in aviation investing.

They did another small investment with a Chinese leasing company that was selling some assets. They've always been active through our joint venture in one form, and in a direct lending, in a secured lending way to aviation. But clearly, the investment in Aircastle is a large bet. And it's something that they expect to make a good return on as they think about the long-term future for this business.

Mark Streeter

Okay. But there's -- certainly there's no exclusivity, if you will, we should think about it the way we think about other equity owners in terms of they can -- they have full freedom to run money separately, and so forth. But -- so they're -- you're obviously doing all your own sourcing and so forth. So, we shouldn't have to worry about that, right? It's not as if there's sort of some conflict of interest that certain deals are going somewhere, like, say, in Fly where they have an external manager, they had their call this morning, obviously, they have that conflict of interest with Babcock & Brown that they have to manage through. There's nothing like that really, for Aircastle going forward?

Mike Inglese

No, look, I don't see it that way. And I -- in time, is there a possibility that they may look to consolidate their aviation activities someplace and could that someplace be Aircastle? I think that's a possibility. But I think it's too early to be sort of talking about ad or advertising ad as we march kind of into the future together in this endeavor.

Mark Streeter

Okay, great. Thanks, Mike for the clarity. I appreciate it.

Mike Inglese

Thanks Mark.

Operator

Our next question will come from Jim Barr with Loomis Sayles. Go ahead.

James Barr

Hi. Could you just talk a little bit sort of about some of the aircraft that you have with airlines that are in the process of restructuring? I know that on your previous call, you'd mentioned kind of LatAm and some things with Avianca Brazil and other aircraft if you could give us an update there?

Mike Inglese

Sure. So, in the case of the LatAm bankruptcy, we have 13 aircraft that were operating with LatAm, 10 A320 narrow-bodies and three 777s. We are like many of our peers, working through the bankruptcy process with them on what the arrangements for the aircraft will be on a go-forward basis, both during the remaining part of the bankruptcy process and what we expect that will look like when they emerge from bankruptcy.

They have not made any definitive fleet decisions yet in the context of that proceeding. So, there's not a significant update I can give you. I think it's our expectation that our aircraft will be part of LatAm going forward. But we're not at the finish line yet in the in the context of what they're doing, and how they're moving forward here in reorganizing and downsizing their fleet in the context of the world today.

James Barr

Okay. Thank you. If I could ask you another question. On your kind of debt to equity target, I don't know if your thoughts around what you think is the appropriate debt to equity target would be changed at all if you have sort of a long-term goal, or where do you think is most efficient to operate?

And kind of an administrative question, you said you have agreements to sell the 21 narrow-body aircraft and based on -- I realized they haven't closed, but based on kind of the pricing that you're seeing with that pricing be kind of already reflected in the balance sheet and any need for a future impairment related to those aircraft?

Mike Inglese

So -- I forgot your first part of that question already. Target debt to equity

James Barr

Target debt to equity?

Mike Inglese

Yeah. So, look, our view on that hasn't changed much. I think we have historically run in the sort of two and a half range give or take. And with our new ownership, I think we have the ability to perhaps run somewhere between two and a half and three times over time without jeopardizing our investment-grade rating.

But I think it's important to point out that given the nature of this business and given the size of the investment that our shareholders just made, maintaining an investment-grade rating is a very important facet of our business strategy going forward.

In the context of our commitment for the aircraft, we have, I'm happy to say those contracts were agreed pre-COVID prices. So, to the extent those sales are consummated, which is our expectation today, we don't expect there will be any P&L effect of any material magnitude up or down on the conclusion of each of those sales.

If for some reason, no sales didn't go forward and we were either remarketing or looking to resell those assets, I think it's a safe assumption to say they wouldn't be selling at the at the prices in the context of what we have today.

James Barr

Okay, that's helpful. Just one other administrative, I think you mentioned this, but with the change in your fiscal year, will you still be reporting our year end results? And do you expect to kind of have a call to update us on that or will it be sort of a longer period as you -- fiscal year?

Mike Inglese

I'm trying to do -- we're still working our way through that. But it's our intention to have regular reporting with everyone in the context of how we've operated this business historically.

And so in the context of our next update, it'll probably be in January, as I mentioned in our prepared remarks, even though our fiscal year will end in February and then practically speaking, with a February year end, our 10-K for this new fiscal year probably wouldn't be filed in mid-April timeframe and that's when we would expect to have a year-end update in the context of our new fiscal year.

James Barr

Very good. That's all I have. Thanks for the questions.

Mike Inglese

Thanks.

Operator

[Operator Instructions]

And our next question will come from Matthew Phan with Bloomberg Intelligence. Please go ahead.

Matthew Phan

Hi, thanks for taking my question. This is the first time I'm on one of your calls. So, I apologize this this is somewhat basic. Given your older fleet on average versus some of the other aircraft lessors with outstanding dollar bonds, can I just ask your thoughts on how you manage the fleet around utilization and given that market value seems to be falling more for older aircraft, so with respect to utilization and also potential asset impairment on how do you manage those risks?

Mike Inglese

Look, we managed our business the way we manage -- have managed it for the last 15 years. We try to invest in aircraft that we believe will be in demand with airlines through thick and thin, clearly in the context of happening in the market today and with COVID, appraisers are suggesting that value declines for older aircraft are bigger than value declines for newer aircraft.

But in the context of airlines making decisions, it's the same decision framework, it's -- what is the all-in cost of operating an aircraft, whether it's new or used, what's the capital costs, what's the maintenance costs? And how does that fit in the context of my cleat needs my root structure, my network and the overall economics for running an airline.

So, none of that has changed. But it's certainly a more challenging environment today than it was 12 months ago in this industry in the context of what we expect to be excess supply versus demand as we work our way through the COVID situation.

Matthew Phan

Okay. Thanks. If I can ask a quick follow-up, I noticed that your lease terms are also I think, a bit shorter than some of your peers? Could I ask what is you know how much of the portfolio might be coming off lease on the coming year? And whether there's any -- sort of what sort of risk there is to the lease rate you might get on those aircraft?

Mike Inglese

So, currently, I think in round numbers, if we think about what I have off lease today, there's 10 or 11 aircraft in the state, I'd say 4% or 5% of my fleet by net book value. And during next year, in 2021, we have an additional 14 narrow-bodies that will have natural lease expiring.

So, in the context of placing assets in today's environment, -- again, as I said, in this environment, the lease rate you would expect to be placing at today is less than you would have expected 12 months ago. But we continue to have good dialogue with new and existing customers for either extending aircraft or placing them in new homes and we'll continue to work our way through that process. So, between now and the end of 2021, we have a placement task of somewhere around 20 to 25 aircraft that are worth in aggregate somewhere in the neighborhood of 7% or 8% of our net book value.

Matthew Phan

Thank you very much.

Mike Inglese

Thank you.

Operator

And with no further questions, I'd like to turn the clock back over to Mike Inglese for any additional or closing remarks.

Mike Inglese

Thank you, operator. Thanks, everyone for taking the time today. We look forward to continuing the dialogue with you. If anyone has any follow up questions or thoughts you can reach out to any one of us. You all have Frank's contact information and I think you all know how to find me. So, thank you and look forward to talking to you soon.

Operator

And this concludes today's conference. Thank you for your participation and you may now disconnect.

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