Air Lease Corporation

Hey, ladies and gentlemen, and welcome to Air Lease's fourth quarter 2018 earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question and answer session, and instructions will be given at that time. Should anyone require operator assistance during today's conference, please press start and zero on your touchtone telephone. And as a reminder, today's call is being recorded for replay purposes. I'd now like to hand the conference over to Mary Liz DePalma, Head of Investor Relations. Please go ahead.

Thank you. Hello, everyone, and welcome to Air Lease Corporation's fourth quarter and year-end 2018 earnings call. This is Mary Liz DePalma, and I'm joined this afternoon by Steve Haase, our Executive Chairman, John Pfluger, our Chief Executive Officer and President, and Greg Willis, our Executive Vice President and Chief Financial Officer. Earlier today, we published our fourth quarter and year-end 2018 results. A copy of our earnings release is available on the Investor section of our website at www.airleascorp.com. This conference call is being webcast and recorded today, Thursday, February 21st, 2019, and the webcast will be available for replay on our website. At this time, all participants to this call are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the Q&A session. Before we begin, please note that certain statements in this conference call, including certain answers to your questions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes, without limitation, statements regarding our future operations and performance, revenues, operating expenses, stock-based compensation expense, and other incumbent expense items. These statements and any projections of the company's future performance represent management's estimates for future results and speak only as of today, February 21, 2019. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Please refer to our filings with the Securities and Exchange Commission for a more detailed description of risk factors that may affect our results. Airways Corporation assumes no obligation to update any forward-looking statements or information in light of new information or future events. In addition, certain financial measures we will be using during the call, such as adjusted net income before income taxes, adjusted diluted earnings per share before income taxes, and adjusted pre-tax return on equity, are non-GAT measures. A description of our reasons for utilizing these non-GAT measures, as well as our definition of them and the reconciliation to corresponding GAT measures, can be found in our earnings release and 10-K issue today. This release can be found in both the investors and press section of our website at www.airleasecorp.com. Unauthorized recording of this conference call is not permitted. I would now like to turn the call over to our CEO and President, John Pugar.

Thanks, Mary Liz. Well, good afternoon to all of you, and thank you for joining us. I'm happy to report that Air Lease enjoyed another good quarter and year. For the fourth quarter, we recorded diluted earnings per share of $1.24, and Our revenues were up 13% over last year's fourth quarter, and our portfolio metrics remained strong and consistent. Our balance sheet grew to $18.5 billion with 275 owned aircraft at the end of the year. During the quarter, we took delivery of 12 new aircraft from our order book and sold five aircraft, two to Thunderbolt II, one to Blackbird Capital II, and two aircraft to third-party buyers. One of our scheduled fourth quarter order book aircraft did slip into Q1 this year, as we are still experiencing delivery delays from Airbus, which we anticipate will continue through the first half of 2020. For the full year 2018, we achieved diluted earnings per share of $4.60, a pre-tax margin of 38.1%, a 14.3% pre-tax return on equity, and $1.25 billion of operating cash flow. It was truly a busy and productive year, including a significant new order for Boeing aircraft that we announced at the Farnborough Air Show, robust single and twin aisle lease placements to our ever-expanding customer base, which Steve will highlight with you, considerable success in the debt capital markets, issuing $3 billion in senior unsecured notes, and expanding our bank facilities, and of course, closing our highly successful Thunderbolt II midlife aircraft management platform. ALC now stands with 708 aircraft owned, managed, and on firm order. We have 91% of our order book placed on long-term leases through 2020 with no change to date in the good pace of forward lease placements. As a result of our placement progress, ALC continues to have significant forward visibility with almost $26 billion in total committed rentals. So with 2018 behind us, how is 2019 looking so far? Well, first and foremost, we are excited because 2019 will be a high-growth year for ALC with 80 aircraft delivering, all of which are under long-term profitable lease contracts. That growth will be funded by a prudent combination of our liquidity, including operating cash flow, senior unsecured notes issuance, expanding bank and capital markets access, and aircraft sales. Greg will review with you further on the progress we've already made on the debt capital market side and our funding plan. On the aircraft sales side, demand from buyers remains strong. For example, since the beginning of the year, we have met with a very significant number of qualified potential buyers, most of whom reached out to us. We also told you last quarter that we were contemplating another Thunderbolt transaction, and work on that is ongoing. Having said that, the diverse fire base we have for our aircraft allows us to be non-dependent on any individual sales channels or structure, such as the ABS market. Furthermore, let me remind you that our Blackbird Capital II joint venture provides us with adjunct capital to take advantage of opportunistic transactions as they may arise and provides an ongoing avenue for management of customer concentration. In summary, suffice it to say... that we remain diligent in all regards as it relates to financing and sales, and that the growth ahead of us will be achieved without sacrifice to our key financial targets and investment grade ratings. Second, looking at 2019, overall lease demand remains robust, fueled by continued global passenger growth and the replacement of aging aircraft. We do not see that any signs of potential slowing of global economic growth is impacting the airline marketplace or demand for our aircraft. We have made good progress on lease placement this year, including China, as you will continue to see from our press releases. Yes, the leasing market is highly competitive, but that has been the case for several years now, and you see our portfolio metrics remain consistent. We still see our key order book competitors, the major players, being rational and disciplined. Remember, a key metric is lease rate factor versus just the lease rate itself, as this is a function of what you get in lease rate versus what the aircraft costs you. And we believe our aircraft cost basis from our large-scale and evolving order book gives us a key competitive advantage. Also, remember that the lease rate is not the only economic element in a lease transaction. For example, return conditions are also important in the total economic equation and maintain the value of the aircraft, and we continue to remain disciplined in this area. As we predicted, we believe the oversaturated sale-leaseback market is showing signs of slowing, and we have not really seen any more significant new entrants from China in the leasing space for well over a year now. Let me remind you that ALC is not a player in the sale-leaseback market, and our order book model means we control the new aircraft positions, which on an overall basis still remain in short supply. Third for 2019, the health of our global airline customers remains positive overall. Yes, there will be further airline failures this year, as we've seen with Germania, for example, where ALC had no aircraft on lease and no exposure as of that insolvency filing. Looking back in history, almost every year we see airline bankruptcies, and that is the same view looking forward. The airline landscape continues to evolve primarily with the expansion of low-cost and ultra-low-cost carriers. Airlines large and small need to continue to determine their business model, their niche, and their strength. Some fail in this task, which brings me to a key point. ALC has prudent risk management practices in place. Our views on placing aircraft with a specific airline and how each lease is constructed is built from decades of experience. As far as airlines and the risk headlines today, we have no aircraft at Avianca Brazil, none at Jet Airways, none at Norwegian, and none at Gourmany, as I mentioned earlier. And we protect our existing business and leases with security deposits and maintenance reserves. We don't always get it perfect, but as we've stated before, the biggest risk mitigation of all is the quality of your aircraft, picking the most modern, young, widely distributed aircraft in the world. Where we do run into problems, such as with Primera Denmark last year, we had no aircraft delivered there, but rather have forward commitments which we've been able to lease elsewhere. Fourth, we do remain watchful on several important industrial areas, specifically the industrial recovery at Airbus, stabilization of new generation engine technical problems, and overall production rates at the OEMs. We continue to receive delay notices from Airbus, and recently there have been some accessory gearbox and other issues in the Pratt Whitney gear turbofan engine, which continue to impact our customers. While we believe that Airbus has their industrial recovery plan in place and that Pratt Whitney are getting their arms arms around these issues, we fall just short of saying that these problems are fully behind us. And as we have stated for quite some time now, we remain concerned about the global supply chain requirements for ongoing ramp-up in single oil production rates. Fifth, and finally for 2019, we continue to work with both Boeing and Airbus on new aircraft programs, specifically the NMA or 797 at Boeing and the A321XLR at Airbus. There are still key decisions to be made across all fronts on these programs, and ALC continues to evaluate the merits and market potential of these potential new aircraft types. The absorption of the C-series by Airbus and the EJET program by Boeing does bring a new dynamic to the lower-end aircraft size in the marketplace, and ALC continues to evaluate these products and their role in the global marketplace. We've reached no decisions yet, but we're studying closely. Let me close by thanking our best-in-class team at Air Lease here for another year of award-winning work. And award-winning is correct. We received many awards for 2018. As well, a special thanks to our board of directors, our suppliers, financiers, joint venture partners, customers, and investors for their continued belief and support in Air Lease Corporation. Let me now turn this over to our executive chairman, Steve Haase, to provide his commentary in color. Steve?