AerCap Holdings N.V. (AER) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, please standby. Good day, and welcome to the AerCap Holdings N.V. Q1 2021 Financial Results Conference Call. Today’s conference is being recorded, and a transcript will be available following the call on the company’s website. At this time, I would like to turn the conference over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir. Joseph McGinley: Thank you, operator, and hello, everyone. Welcome to our first quarter 2021 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Pete Juhas. 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 results or events to differ materially from those expressed or implied in such statements. Aengus Kelly: Good morning, everyone, and thank you for joining us for our first quarter earnings call. I’m pleased to report a strong quarter of earnings, with $228 million of net income or $1.76 per share. While there are still many challenges facing the aviation industry, we continue to see an improving environment with significant momentum in air traffic recovery in certain regions of the world, and airlines looking to the future with increased confidence as evidenced by our strong leasing performance in the first quarter. It is a testament to the focus and commitment of the AerCap team that during the first quarter of this year, we were able to lease 60 aircraft, including 28 wide-bodies, a quarterly record for AerCap. This was accomplished despite the pandemic and the efforts required by our team to complete the GECAS due diligence, negotiate the GECAS transaction and raised $28 billion of funding. So clearly, the first quarter was an exceptional one for AerCap as we announced the GECAS transaction. We believe that this is the right acquisition at the right time in the cycle to create value for all our shareholders. As we mentioned in our announcement, we expect the transaction to close in the fourth quarter of 2021. Until then, we will continue to work hard to make sure we are positioned to hit the ground running from the start. I am pleased to report that we recently closed $28 billion of funding commitments with our banking syndicate related to the transaction, consisting of a $19 billion bridge loan, a $5 billion term loan, and importantly, we have also secured an additional $4.3 billion revolving credit facility, which will further enhance the financial strength of the combined company. Pete Juhas: Thanks, Aengus. Good morning, everyone. Our total revenues for the first quarter were $1.095 billion compared to $1.238 billion for the first quarter of 2020. Basic lease rents were lower in the first quarter, primarily as a result of airline restructurings and aircraft transitions. This includes the impact of cash accounting, which was $100 million for the quarter. Our cash collection rate was around 80% for the first quarter, and our deferral balance modestly increased by 5% to $514 million as of March 31. The first quarter tends to be seasonally slower for airlines because it’s the winter season in the northern Hemisphere. And of course, this year, we’ve had the additional impact of ongoing COVID related travel restrictions in many countries. We expect these metrics to improve over the course of the year as the vaccine rollout continues and as passenger traffic recovers. Operator: We’ll begin with Jamie Baker with J.P. Morgan. Jamie Baker: Hey, good afternoon, everybody. So a couple of questions for monk and me. The final slide, operating cash flow estimate for the next 12 months, $2.4 billion. That’s the same number that it was last quarter. So obviously a positive that you affirmed the guide, but some might push back on the fact that you didn’t increase it with one more quarter rolling forward. So how does this guide tie into current collections and lease rate trends? What can we read from the $2.4 billion? Aengus Kelly: Well, Jamie, we’ve really assumed a gradual recovery here in terms of air traffic. And so as we forecast operating cash flow for the future, we have assumed that our aircraft gradually increased their flying during the course of the next 12 months, but we haven’t built in a rapid recovery there. So look, I think it could be higher than that. It’s maybe a conservative projection in that respect. But I think it’s a reasonable one for us. Jamie Baker: Okay. Second question, what sort of regulatory, I guess, gold posts or biomarkers are you looking for, whatever you need to be, to be clear and comfortable issuing GECAS deal-related debt? And have you hedged any of the financing costs? Spreads have obviously rallied as of late so just curious why you’re not locking in the funding sooner rather than later? Pete Juhas: Yes. So Jamie, we’ve got a number of milestones there. We’ve got our AGM coming up, as you know. We’ve got – we’re putting in our regulatory approvals, we should have about half of them submitted by the end of May. And so those are key things that we’re progressing. And as part of those, you’re in dialogue with some of those regulators before you submit them. So on the hedging side, we’re monitoring the market, and we’ll look to put things in place at the appropriate time. Jamie Baker: Okay. Thank you very much. Aengus Kelly: Sure. Operator: We’ll now move to a question from Ross Harvey with Davy. Go ahead, please. Ross Harvey: Hi, afternoon, Gus and Pete. I’m just wondering in advance of the GECAS deal completion. Can you comment on your priorities for the AerCap business itself, particularly in regards to leverage levels as the objective simply to reduce as much as possible. And on sale leasebacks, I mean, are you looking to get meaningfully involved? Aengus Kelly: Well. Ross, I think first and foremost, the priority of the business on an operational – from an operational standpoint hasn’t changed for one minute over the course of the last six months, and the focus is on getting our airplanes leased and getting paid. And I think you saw clear evidence of that in the first quarter by the quantum of aircraft that we were able to sign leases for at 60 aircraft. So that will remain front and center. Of the business every single day. And when we get to closing, of course, we are working closely with GE to be able to hit the ground running in reference to sale-leaseback I think that would be at the margin, Ross, to be quite honest. Ross Harvey: Understood. Thanks, Gus. Second one as a follow-up, I’m just wondering, you highlighted $150 million of SG&A synergies in the recent 6-K. And just wondering, can you talk us through that number and whether we should consider benefits in other cost lines? Thanks. Aengus Kelly: Well, Ross, you’ll see other benefits in terms of depreciation and things like that coming through. I think you’ll also see some interest benefits relative to where GECAS is today when we put the financing in place. So you will see it in other lines as well. And that’s going to be – on the depreciation side, we would expect that to be several hundred million dollars relative to where they are today. Ross Harvey: Great. Thank you very much. Aengus Kelly: Sure. Operator: Now moving to our next question, and that will come from Moshe Orenbuch with Credit Suisse. Moshe Orenbuch: Great, thanks. You had mentioned that the – that you’re fully leased through 2022. But I guess, is there some possibility that you’ll have – once the deal closes, that there’ll be kind of aircraft that are available because of the GE business that would allow you to create some transactions or activity? Aengus Kelly: Sure. I mean, when we say we’re fully leased as the AerCap order book, we don’t have anything available until 2023. What the state of the – where GECAS stands on its order book, that’s managed separately within the parameters of the sale agreement, purchase agreement, and we’ll see them, Moshe, when we get to the post closing how many airplanes they have left in what time frame and how that positions them to take advantage of trends in the market. Moshe Orenbuch: Got it, thank you. And you mentioned the LATAM bankruptcy situation. Pete, could you talk about how that’s accounted for? Where those assets are, how they’re marked and what that might mean when there’s a resolution? Pete Juhas: Well, we don’t have anything on our balance sheet for that, Moshe. So we haven’t accrued anything. Ultimately, I would expect that to come in as other income. But as I said, ultimately, it will be decided by the bankruptcy court. I think in terms of amount, it could be several hundred million dollars, but we’ll really have to wait and see how that all plays out. Moshe Orenbuch: So you’re saying it would be all revenue essentially? Pete Juhas: Yes. But again, that’s subject to – it’s hard to predict the timing of that and the ultimate amount. I’m just giving you an idea of what it could be. Moshe Orenbuch: Right. But anything would be more than zero, right? Pete Juhas: Yes. That’s true. Moshe Orenbuch: Very good. Thanks very much. Pete Juhas: Sure. Operator: We’ll now hear from Helane Becker with Cowen. Go ahead. Helane Becker: Thanks very much, operator. Hi, everybody. Thanks for the time. Did you say how your deferral requests are trending? I think you talked about the cash collections being 80%, but have airlines now then stopped asking for further deferrals and are just paying you back? Aengus Kelly: It’s a mix there, Helane. As we look around the world at the moment, as you heard the news from the U.S. carriers during the week things are going well there. China, things are going well in other parts. But you have to remember, the first quarter, obviously, we had recent events in Brazil. And we had a slowdown in Europe post-Christmas in January, February, which – and a lot of European countries, are still under locked down. So in that environment, we had to give a little bit more grant to some of the carriers. But in return for that, then, we’ll always try and keep these deals NPV neutral. So we may have got extensions to our leases as part of those discussions as well. Helane Becker: Okay. So then would that be included in the portion maybe of customers that you’ve restructured leases for? Like is there some percentage that you might have had to restructure leases at either lower rates or extensions? Or would you do extensions in that case, if you were restructuring outlook? Aengus Kelly: Of course, I mean, you’re not talking about big numbers here. I mean, as we said, the total number of be increase in deferrals is 20… Pete Juhas: $24 million. Aengus Kelly: $24 million, Helane, it’s not a big number in totality. Helane Becker: Right. Got you. Okay. All right. And then will you be filing documents publicly on the GECAS, the approvals that you’re asking for the regulatory forums. Will they be filed, so we’ll be able to see what’s happening there? Joseph McGinley: I think that depends on the jurisdiction, Helane. There are about 20 approvals at the moment that we’re expecting to file. So I think it depends on each individual jurisdiction, whether that’s publicly available or not. Aengus Kelly: What language is plied into Helane. There won’t be English. Helane Becker: Yes. I’ll need to get Google translated out. All right. Thank you. Aengus Kelly: You have to push up on your Kazakh. Helane Becker: True. Thanks. Aengus Kelly: Sure. Operator: And now we will take a question from Vincent Caintic with Stephens. Vincent Caintic: Thanks. And first question on the lease rates going forward. So it’s nice to see that the net spread expanded 30 basis points quarter-to-quarter. I was curious with your strong – the 60 orders you have, or 60 placements you have, how are the lease rates looking on new deliveries? And then when I think about the rent deferrals you have and the repayment of those deferrals, how does that affect your yield since, I think, we’re in cash accounting here is – as those airlines pay back the rent, should we just expect the net spread to climb over the next coming quarters? Thank you. Aengus Kelly: Let me answer the first part about the lease rate. So Vincent, look, as you noted, we moved at least 60 airplanes, a huge number, given the pandemic and the background we are facing and the other demands on the organization. In terms of the lease rates, of course, look, it’s evident that there is demand out there. When an airline takes an aircraft, no matter what they pay for it, there’s still a lot of cost associated with they’re committing to crew costs, labor costs, maintenance costs, all those costs are part of taking an airplane. So the fact that they’re willing to take them, means there is confidence out there in the future. Now as part of that transaction, there is a variable element to most of these new leases at the beginning for the first 12 months or so, where their rental will move around based on utilization. And then following that period, to go into a fixed rate lease. And that varies from – and that varies from aircraft to aircraft. But it’s over the first 12 months or so where there’s variability on the lease rate to facilitate the airlines restarting traffic. Pete, do you want to comment on the deferrals? Pete Juhas: Yes. So Vincent, on the second one, so the repayment of the deferrals themselves won’t affect the net spread because if you think about it, in the deferral cases, we have recognized – we’re accruing the revenue in those cases, and we’re building up a deferral balance. So obviously, as those deferrals get repaid, that’s a positive for cash flow, but it doesn’t have an impact on revenue, and therefore, on that thread. What will have an impact on revenue and the net spread is when you have airlines coming off of cash accounting and actually flying these planes, because that’s obviously impacting revenue today. I mentioned it’s about $100 million, right. So that’s going to be the biggest driver, the return of flight for most of those because, obviously, those have mostly been airlines that are in bankruptcy or other restructuring, right. And so as they emerge from those, you’ll start to see those revenues come in because they’ve basically been almost no revenues now. Vincent Caintic: Okay. That’s very helpful. And yes, I was mixing up the deferrals on the cash accounting, so I appreciate that and looks good for net spreads. So second question, so I had a chance to go through your shareholder circular, and I appreciate all the detail there. I just wanted to talk about any incremental thoughts. And particularly, one of the frequent investor questions I get is on the prior revenue guide of at least $7 billion because it seems like if we add AerCap and GECAS together, that revenue should be at least $8 billion. And given it seems like net spreads are doing better, just wanted to get your thoughts on whether one plus one equals two on the combined revenue side? Or is there something else we need to consider? Thank you. Pete Juhas: Yes. I mean, it’s not as simple as that, unfortunately, because you have a number of purchase accounting impacts that you’re going to have and also the accounting is just different the way that GECAS and AerCap do it, right. It’s not it’s not apple to apples and everything. And so I think that’s really why we guided to what we did in thinking about it. So you can’t just sum up the two and say, okay, that’s what it’s going to be. Vincent Caintic: Okay. Got you. I’ll follow-up offline, but thanks so much. Pete Juhas: Sure. Okay, no problem. Operator: Next question will come from Koosh Patel with Deutsche Bank. Koosh Patel: Hey, good morning, guys. When we think about the cash accounting balance, what is the view internally on this? Do you guys think that the $100 million is representative of a peak number here? And just following on to that, how do we think about reintegrating this figure into the revenues? What do we think is the possible upside here? Do you think maybe, over time, we get maybe $60 million to – $60 million of that back? And if you could provide any type horizon that you guys kind of have in mind, that would be great, too. Aengus Kelly: Sure. So I think that the cash – we will continue to see impact of cash accounting, I would say, throughout this year. But we’re going to – it’s going to abate over time, basically. So I think that $100 million is a reasonable guide if we’re thinking about it over the next couple of quarters. But as I said, as the airlines come out and as they – as those bankruptcies or restructurings are completed, then we’re going to see those come back. So it’s going to happen over time. But in terms of how much of that recovers, yes, look, I think that you could see 60 – on that $100 million, you probably see like $60 million recover. As I said, it’s not going to be an all at once thing, but it’s going to come back, $60 million to $70 million, something like that, I would guess. Koosh Patel: Okay. Okay. Great. And then the second question I had, sorry – the second question I had was, recently, we saw Aeromexico announced that they’ve struck some agreements to restructure some of the 787 leases they have. And just wanted to see if you could update us as to whether any of the aircraft – that AerCap owns and has unleased to Aeromexico are included in this? Or just a general status update on the aircraft you guys have in place with Aeromexico? And do you intent for them to stay with Aeromexico long-term? Or are you in the process of remarketing these? Aengus Kelly: We expect the Aeromexico aircraft to stay there. And the Aeromexico procedures now are in front of the court for approval and assumption of the revised transaction. Koosh Patel: Okay. Thanks a lot guys. Appreciate the time. Operator: We’ll move to a question from Catherine O’brien with Goldman Sachs. Catherine O’brien: Good morning, everyone. Thanks for the time. Actually, I have one more on cash accounting. This is the first time we’ve actually seen that cash accounting impact decline since the start of the pandemic, at least versus what I have tracked. And that’s despite the HNA bankruptcy earlier this year. So just wondering, what’s driving that? Are some of the aircraft back on new contracts? Or is any of that driven by aircraft on the ground, but no longer official under lease? I was just wondering what was driving the sequential decline? Thanks. Pete Juhas: Sure, Katy. So well, H&A, actually, we had put them on cash accounting in the fourth quarter, so they were already on it. But we’ve had a couple of airlines come off it. I mean, part of the impact that you saw in some of the quarters last year was due to Norwegian, for example, and we’ve placed all of our Norwegian planes now with other carriers. So you are seeing what we’ve been doing, obviously, in many of these cases, the majority of the planes will stay with those carriers, as Gus mentioned, with Aeromexico, for example. But in other ones, we have moved those planes elsewhere, and so you’re going to see less of an impact, right, because they’re just – you’re moving the planes out of where they were. So I think that’s the main driver because if I look at last, I think, fourth quarter, we said it was $117 million. So yes, it’s down somewhat this quarter. It’s hard to know exactly – as I was saying in the previous answer, exactly how that’s going to play out over the next few quarters. But I do expect that to come down over the course of the year. Catherine O’brien: Maybe one quick follow-up to that, Pete. So should we like with a good exercise for us to be to just track the progress of these bankruptcy proceedings, and that will give us probably a good sense of when we should expect to see the remainder of that $100 million come down if you’re expecting the majority of those aircraft to stay with their current lessees. Is that the right way to think about it? Pete Juhas: Well, I think for – certainly for the major ones, I mean, some of these are not bankruptcies. They’re just where we have assessed the airline as not probable of collection. And some of those are quite small. And frankly, I don’t think it would be worth following those situations. But for the major ones, yes, I mean it will be – once the restructuring is agreed, and you have an agreed leases on those planes and that bankruptcy court or equivalent in some countries, has certified that, yes, then you should see them coming back, right. So that’s – that will be the trigger in most of those cases. Aengus Kelly: I think, Katy, it’s fair to say, underpinning that, and the exit from bankruptcy will be driven by the vaccination profile that airlines will exit from those structures when they’re confident that the vaccine is moving along well in all of those countries. Catherine O’brien: That totally makes sense. And then just for my second question, just on this higher level of placement activity you saw in the quarter, can you just give us a sense of how far out those placements are delivering? And then a little bit of a follow-up to an earlier question, but how should we think about lease rate factors on deliveries that you are contracting a couple of years out in the future versus perhaps lease rate factors of what you’re seeing now in terms of used aircraft that you’re putting on to a second lease and just how those compare versus pre-COVID? It really sounds a little bit of a multipart one. Thanks for the color. Aengus Kelly: Sure. Well, if I start with airplanes that have come back to us over the course of the last 12 months, they just have to be moved now. And all those are at – about half of the 60 were airplanes that have either come back or coming back in the very near future. And those aircraft being placed in this environment. And in that example, as I said, there, it’s positive that the airlines want to see – want to take additional metal, which is great. But by the same token, given the pandemic is still with us, and the vaccine rollout is still progressing, there’s a variable element to the lease rental, which we based on utilization for the first 12 months. And then after that, it will flip into a fixed rate rental, which will be down a bit from where it was pre-pandemic. That’s obvious. As to the airplanes that are coming off our order book in a couple of years’ time, that’s a totally different market. That’s one where you don’t have to do any business and you’ll wait and you’ll see how it goes. Catherine O’brien: Thank you so much for the time. Aengus Kelly: Sure. Operator: And now we will hear from Andrew Lobbenberg with HSBC. Andrew Lobbenberg: I’m just quite curious to build on the previous question because, Gus, you were speaking about the aircraft that are being placed in the current market that are on power by the hour and then are going on to a fixed rate, but at a discount. I don’t know what you can say. But I mean, the aircraft that are transitioning from Norwegian to North, I mean, North Atlantic are going around telling everyone they’re paying precisely half what Norwegian are paying. I don’t know what commentary you can offer to it, but I’d be interested to see what you can say around that. And then just the other bunch of aircraft that I’m curious about is the 350s. I think you had a LATAM, which they look to be keeping, but now they’re not. A bit surprised given what lovely shiny plans they are that they don’t want them. But how is that impacting your economics? Or why have they held on to them and then returning them? And how easy will it be to remarket? Aengus Kelly: Sure. Yes. Look, on the North Atlantic rates, I can’t comment on what they were – what North Atlantic is saying about their perception of what Norwegian used to pay. I just don’t know. But again, on that rental, it will step up over time, and then it will be a reasonable deal for us. But very importantly, from our standpoint, a very attractive aspect of the North transaction was; one, they’re getting a lot of cash and that cash has come in; and two, we don’t have transition costs associated with reconfiguring a wide-body airplane for a new customer. In relation to the A350s, yes, you’re correct. LATAM are handing them back. And yes, they’ll be leased at a lower rate in today’s market, but they will get leased. These are attractive airplanes, and we have quite a number of discussions ongoing around them. But of course, as you heard earlier from Pete, our claim against the LATAM as stays will be based on any loss that we suffer from the reduced rentals that LATAM would have paid us versus what we will get in the market for those aircraft. So that should the idea of that is to offset the losses we would incur. Andrew Lobbenberg: Thanks. But is it fair to say that the 350s will be easier to remarket than the 78s, because it’s a tighter market? Or is that naïve? Aengus Kelly: No, I wouldn’t say that. I think the 787 is an aircraft that has – it’s a smaller airplane. And so it has a very large user base, and it’s been an excellent aircraft into service. But the A350 is a slightly larger airplane, but we’ll deal with this. Andrew Lobbenberg: Thank you. Operator: And ladies and gentlemen, this will conclude your question-and-answer session. I will turn the call back over to Aengus Kelly for any additional or closing remarks. Aengus Kelly: Well, thank you all very much for joining us on this call. We look forward to seeing many of you, well, I suppose, virtually by proxy at our AGM that’s coming up shortly. But I would like to hand you back to Joe as you may have seen on Monday, we published our annual report on environmental, social and governance aspects, our ESG report. Joe, may you want to say a few words? Joseph McGinley: Sure. Thanks, Gus. So just for those of you who are new to the AerCap story, ESG is something that our Board and senior management have been hugely involved in for a long period of time. And what’s always formed a part of the strategy of the company. We’ve made concerted efforts in recent years to increase our transparency and reporting in the area. So with that in mind, we published our comprehensive 2021 ESG report earlier in the week. I’d like to just highlight a couple of key initiatives from that report. The first is that we doubled the level of carbon offsetting of our own operations and business travel to 40% in 2020, and we have to take the higher in the coming years. And to do this, we partner with First Climate to invest in solar cell modules that provide clean electricity in China as well as a biodiversity project in Brazil, which helps prevent DFAR stations as well as providing sustainable income for local families. And the second is that we increased our target for the most fuel-efficient new technology aircraft in our fleet to 75% by the end of 2024, and that includes the impact of the GECAS transaction. And we see that as the best way for us to make an impact on the industry. So you’ll find more of that report on our website and feel free to reach out to me directly after the call if you have any further follow-ups. So with that, operator, you can now close the call. Operator: Thank you. Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation, and you may now disconnect.AER Ratings Summary
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AerCap Reports Q1 EPS & Revenue Beat
AerCap Holdings (NYSE:AER) reported its Q1 earnings results on Tuesday, with EPS of $2.34 coming in better than the Street estimate of $1.95. Revenue was $1.87 billion, beating the Street estimate of $1.76 billion.
The company affirmed its 2023 adjusted EPS guide ($7.00 - $7.50 excluding gains on sale) at the higher end, reflecting its confidence in the outlook for 2023. Furthermore, AER’s Board has approved a new share repurchase authorization of up to $500 million.
According to the analysts at Deutsche Bank, the current weakness in shares represents a good buying opportunity as fundamentals remain very favorable and valuation remains attractive.
AerCap Reports Q1 EPS & Revenue Beat
AerCap Holdings (NYSE:AER) reported its Q1 earnings results on Tuesday, with EPS of $2.34 coming in better than the Street estimate of $1.95. Revenue was $1.87 billion, beating the Street estimate of $1.76 billion.
The company affirmed its 2023 adjusted EPS guide ($7.00 - $7.50 excluding gains on sale) at the higher end, reflecting its confidence in the outlook for 2023. Furthermore, AER’s Board has approved a new share repurchase authorization of up to $500 million.
According to the analysts at Deutsche Bank, the current weakness in shares represents a good buying opportunity as fundamentals remain very favorable and valuation remains attractive.
