AerCap Holdings N.V.

Welcome to our first quarter 2019 conference call. With me today is our Chief Executive Officer, Angus Kelly, and our Chief Financial Officer, Pete Uhass. Before we begin today's call, I would like to remind you that some statements made during this conference call, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual events or results to differ materially from those expressed or implied in such statements. ERCAP undertakes no 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 can be found in ERCAP's earnings release dated May 1, 2019. A copy of the earnings release and conference call presentation are available on our website at ercap.com. This call is open to the public and is being webcast simultaneously at aircap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Ingus Kelly.

Thanks, Joe. Good morning, everyone, and thank you for joining us for our first quarter 2019 earnings call. I'm pleased to report another quarter of strong profitability generating earnings per share of $1.68. This result is driven once again by a robust performance of the underlying business and our disciplined capital allocation strategy. AirCap is the largest aircraft lessor in the world. This scale provides us with tremendous amounts of data. For example, in the last five years alone, we have bought, sold, or leased over 2,000 aircraft. This is approximately 10% of the in-service large commercial aircraft fleet. In an opaque market, this gives us a unique knowledge advantage, and this is a key differentiator in the aircraft leasing business. Allied to this knowledge advantage, the real foundation of AirCap's success is our longstanding, deeply ingrained culture of action and discipline. You can see that culture at work in our proactive forward order placement, which are 90% placed through December 2021, in our globally diversified funding sources, which we have spent years cultivating, and in the speed and forcefulness of our execution around airline defaults. These scale and knowledge advantages, coupled with our culture of action and discipline, have enabled AirCap to produce superior economic results quarter after quarter, year after year after year. Over the past five years alone, we have generated over $15 billion of operating cash flow, over $5 billion of net income, $30 of earnings per share, and we have increased our book value per share by 200% during that period. So that's the past. Now what I want to talk about is how AirCap is positioned for the future. As of today, AirCap is over $40 billion of contracted revenue, That's more than five times our market capitalization. 51% of our portfolio is comprised of the most in-demand variants of new technology aircraft. No other lessor in the world is close to this. Our average lease expiry date is mid-2026. We have a long-term debt structure in place and $10 billion of liquidity. And as our track record has demonstrated, we have a platform that is unrivaled in its capabilities. So as we look to the next five years, we are very confident that the business will continue to generate strong profitability. Very few businesses in any industry can show this level of top-line predictability on a consistent and sustained basis, and critically, also have the track record to match. Turning to demand side of the business, IATA reported a 5.3% increase in global RPKs in February. Growth was driven by Europe at 7.3%. and Asia Pacific at 6.3%, offset by an expected reduction in the Middle East of 1%. Load factors remain strong at 80.6%, and this is a key indicator of whether or not there is support for this level of growth in the industry. The actual indicator for air cap of whether or not there is support for growth at these levels is what is actually happening with our aircraft placement activity every day in the market. and there we continue to see solid demand. So overall, we see a generally healthy environment for airlines, notwithstanding some recent smaller airline failures. For context, there have been over 200 airline defaults in the past five years, and AirCap itself has dealt with over 60 in its time as a public company. Yet our default costs have averaged approximately 1% of lease revenue in that time. So whilst airline defaults are certainly a significant driver of news headlines, These results show that airline credit has not been a material driver of profitability when the risks are managed correctly. As a truly globally diversified lessor with 200 airline customers in 80 countries, we are better placed than anyone to deal with airline credit issues. Jet Airways is an excellent and tangible example of our culture of action. Aircap had its aircraft repossessed and critically deregistered out of India before anyone else in the industry. That is the norm, and we see it time and again, be it with Air Berlin or Primera or Monarch, etc., etc. This is one of the many areas where the capability and knowledge of the AirCap platform produces superior economic returns for our shareholders. Frankly, when it comes to managing customer defaults, having no security deposits, but a platform that has the willingness and the capability to act is far superior to having three months of security deposits and no willingness to act, or six months, or worse, no capability to act. On the topic of the MAX aircraft, we currently have five aircraft that have delivered to a carrier in Asia. We are still awaiting further information on its potential return to service, but we would clearly expect to see some impact on our 2019 deliveries. At the moment, it is too early to say when there will be a return to service on a global basis. On capital allocation, We continue to see considerable value in our stock, given the discount of book value. In contrast to the volatility in the financial markets and our stock price, our business continues to add value on a consistent basis, growing book value per share to $64.92. And we will continue to take advantage of that disconnect. So to close, we operate a long-term stable business model. We have one of the longest average remaining lease terms in the industry, even though some of our competitors have a younger fleet. This is another clear and tangible example of the competitive advantages AirCap has and how these competitive advantages bring superior economic returns for our shareholders. As I mentioned, our average lease expires in the middle of 2026, which provides a very durable and earnings cash flow profile. In closing, our first quarter results are another demonstration of the power of the AirCap platform. We will continue to run our business according to our core principles, because we know that by doing so, we will generate significant value for our shareholders. With that, I will hand the call over to Pete.

Thanks, Gus. Good morning, everyone. Our net income for the first quarter was $234 million, and our diluted earnings per share was $1.68. We completed 81 aircraft transactions in the quarter, including 16 wide-body transactions. This included purchases of 17 new technology aircraft during the quarter for capex of $1.2 billion, and the sale of 19 midlife and older current technology aircraft. Our utilization rate remained high at 99.2% for the quarter. Our basic lease rents increased in the first quarter as our average lease assets grew by over $2.3 billion year over year. Our net income was lower in the first quarter of 2019 than in the prior year period, primarily due to lower gain on sales compared to the first quarter of 2018. In the first quarter of 2018, we sold a much higher volume of aircraft and also had a record amount of gains on sale. Our earnings per share was slightly lower in the first quarter, as our purchases of 17 million shares since January of 2018 basically offset the impact of the lower gain on sale this quarter. And that's a result of our disciplined and consistent capital allocation strategy. The average age of our fleet continued to decrease, and we're now operating in the low sixes. The average age was 6.2 years at the end of March. We've reduced the age of our fleet in the right way by buying new technology aircraft that will be in demand for the next 25 years. The average age of our new technology fleet was only 1.9 years at the end of March, while the average age of our current technology fleet was 10.8 years, and we believe this barbell approach is the correct way to manage the portfolio. Our average remaining lease term for our existing fleet is now 7.4 years, taking us out to the third quarter of 2026. We continued to maintain very strong liquidity of over $11 billion, and our leverage ratio was 2.8 to 1 at the end of the quarter, which is in line with the revised target we set earlier this year. We continued with our share repurchase program and bought back 3.1 million shares for $137 million during the quarter. We currently have around $150 million remaining in our existing authorization. Our basic lease rents for the quarter were $1.75 billion. continuing the growth we saw in the third and fourth quarters as we took delivery of new technology aircraft and grew our aircraft assets. Our maintenance revenues for the first quarter were $87 million, which was in line with last year. Our net gain on sales was approximately $22 million for the first quarter, which, as I mentioned, was significantly lower than the $89 million last year, which was a record number. This was really due to the lower volume of sales this quarter, as well as the composition of those sales. Our other income in the first quarter was higher than last year, primarily due to insurance proceeds that we recognized in the quarter, as well as higher interest expense resulting from our higher cash balance during the quarter and our higher interest rate that we earned on that cash. Turning to slide seven, our net interest margin was $757 million for the first quarter, and the increase over last year was due to growth in our basic lease rents driven by higher average lease assets. Our average cost of debt was 4.2% for the first quarter, with the increase from 2018 driven primarily by the roll-off of fair value of debt related to purchase accounting. The average cost of debt of 4.2% includes all fees, including debt issuance costs, upfront fees, commitment fees, and original issue discounts. It also includes the impact of finance leases. And if you add all of those up, they come to about 40 basis points that's included in that 4.2%. Our net spread was 8.1% for the first quarter, slightly below the 8.2% we reported last quarter, and the decrease from the first quarter of 2018 was due to the lower average age and longer average remaining lease term of our fleet. The average age of our fleet decreased from 6.8 years to 6.2 years at the end of March, and this was achieved through a combination of purchases of new technology aircraft and sales of older current technology aircraft. Our average main lease term, as I mentioned, has now moved out to 7.4 years, which is one of the longest in the industry and longer than any of our publicly listed U.S. peers. That's due to the fact that we're placing almost all of our new aircraft on 12-year leases, and we're also placing and extending many of our used aircraft on longer lease terms. Our net spread last depreciation was 3.3% for the first quarter, an increase from 3% in 2018. This was primarily due to lower maintenance rights amortization, as well as a lower depreciation rate on our assets generally. And as the average age of our fleet has fallen, our depreciation rate has also decreased. So effectively, in the first quarter of 2019, we continued to generate strong returns on a better positioned portfolio with a lower average age, a higher proportion of new technology assets, and a longer lease term. Turning to slide eight, Our net gain on sales was $21.5 million for the first quarter. As I mentioned, we sold 19 aircraft with an average age of 15 years. That resulted in sales proceeds of $340 million for the quarter. Our gain on sales margin was around 7% for the first quarter. And as you can see from the chart on the right, sales volumes and margins tend to move around from quarter to quarter, but the margins have remained consistently high, generally in the 7% to 10% range, but sometimes above that. We've only shown you the last eight quarters here, but the story is really the same as you go further back. We've consistently generated gains on sale for the last 14 years. And it's also worth noting that these are unlevered gains measured as the sales proceeds over the cost of goods sold to the assets. Because we're levered at 2.8 to 1, an asset margin of 7% is equal to an equity margin of around 27%. We've continued to see strong demand from buyers for our midlife and older aircraft. We said in February that we expected to sell about a billion dollars of assets in 2019. And given the fact that we've sold $340 million in the first quarter and currently have a held for sale balance of $633 million at the end of March, at this point, we expect to do at least a billion and a half dollars of sales for the full year. In turning to aircraft purchases in the first quarter, we took delivery of 17 new technology aircraft, for CapEx of the $1.2 billion, which was about what we had expected to do. Turning to the next slide, our SG&A expenses were around $67 million for the quarter, which was a decrease of 22% from $86 million last year. That's mainly due to lower stock compensation expense, which was higher than normal during the first half of last year. But it's also due to a reduction in some other compensation-related expenses. Our maintenance rights expense was about $21 million for the first quarter, down from $54 million in 2018, and this was primarily driven by the lower maintenance rights asset balance, which has come down substantially since 2014 and is now just over $1 billion. Our other leasing expenses were around $70 million for the first quarter, a slight decrease from about $79 million last year, and that's still a little higher than normal due to some aircraft transitions that we had during the quarter. We continue to maintain a very strong liquidity position. As of March 31st, we had available liquidity of $11.1 billion, and that includes our cash, our revolvers, our other undrawn facilities, and our contracted sales. Together with our operating cash flows, that gives us total cash sources of $14.3 billion, which is 1.4 times our cash needs over the next 12 months. This amounts to excess cash coverage of around $4.3 billion. As you can see, we've exceeded our target level every quarter for the past two years. In fact, we've always exceeded this target ever since we first put it in place five years ago. We raised around $2 billion of financing during the first quarter, including public unsecured bonds, unsecured loans, and secured loans. Maintaining this diversity of funding sources is an important aspect of our strategy and we'll continue to seek out new sources of liquidity. We currently borrow from over 120 banks and other financial institutions around the world at as well as from the public capital markets. But it's not just our liquidity and funding that remains strong. AirCap's credit metrics have improved considerably across the board since we were upgraded to investment grade ratings in 2016. As Gus mentioned, new technology aircraft now make up more than half our fleet, and of course that number will continue to climb as we take new deliveries. Our order book commitments are very manageable and represent 39% of our total assets, compared to 56% in 2016. We brought our debt to equity target down to 2.8 to 1, and we're currently at that target level. And we reduced our secured debt to total assets from 28% in 2016 to 25% today, which is a reduction of around $1.2 billion of secured debt. As I mentioned before, our average age is now in the low sixes. Our fleet is now more than a year younger, and our average remaining lease term is now a year longer. And we've accomplished all of that in the right way by selling older, less liquid assets and taking delivery of the most in-demand new technology aircraft. And finally, our book value per share of $64.92 today is up by 32% since the end of 2016. And while this isn't a credit metric, it does show that we've been able to create significant economic value for our shareholders while at the same time improving the credit profile of the company and positioning it for long term success. And in fact, On the next slide, if we look at the last five years since the ILFC acquisition, you can see that on average, we've grown our book value per share at an annual rate of about 14%. That's a very high level of consistent economic value creation year after year. To wrap up, first quarter was another strong one for AirCap. We continue to make good progress in placing our new aircraft. We're now 90% placed through the end of 2021. Around 95% of our lease rents for the next three years are already contracted. We continue to sell older and midlife current technology aircraft at attractive prices, and the market for those assets remains robust. Our portfolio is now over 50% new technology aircraft. We ended the quarter in a very strong liquidity and capital position, and we've significantly improved our credit metrics across the board. So with that, now we'll turn it over for Q&A.