AerCap Holdings N.V. (AER) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the AerCap Holdings N.V. Second Quarter 2021 Financial Results. 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 second quarter 2021 conference call. With me today is our Chief Executive Officer, Aengus Kelly and our Chief Financial Officer, Peter 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, maybe forward-looking statements. Aengus Kelly: Good morning, everyone. And thank you for joining us for our second quarter 2021 earnings call. I'm pleased to report strong quarter of earnings with $250 million of net income, or $1.92 of earnings per share. The positive headline for the quarter is that the airline industry is witnessing an unprecedented and rapid recovery in air travel in many of the world's major markets. For AerCap, this has led to increased demand for our aircraft and a significant increase in our cash flows for the period. Looking ahead, we expect further improvement for the remainder of the year. With solid earnings, a strong balance sheet and an improving leasing environment, we are excited about the opportunities that lie ahead for AerCap. When we look at the global leasing environment, we're becoming increasingly optimistic with clear signs of a rebound in markets around the world. There may of course be some setbacks along the way. But there can be no doubt in the huge progress made in the past six months, in particular to get the world flying again. The global vaccination program is clearly having a positive impact, reducing infection rates and serious illness. This has given many governments around the world the confidence to relax restrictions on daily life, including air travel. According to the CDC, early evidence in the U.S. suggests that 99.5% of the COVID related deaths in the last six months were amongst the unvaccinated. This reflects the efficacy of the vaccines, even against the highly contagious Delta variant in protecting against serious illness caused by COVID-19. Slide 4, you will see the clear link between the growth in air travel as a percentage of people vaccinated. Peter Juhas: Thanks, Gus. Good morning, everyone. Our total revenues for the second quarter were $1.232 billion compared to $1.197 billion for the second quarter of 2020. Basically, rents were lower in the second quarter, primarily due to airline restructurings and aircraft transitions. This includes the impact of cash accounting, which was $54 million for the quarter. We saw a significant improvement in our cash flows in the second quarter. Our cash flow from operations with $771 million, an increase from $400 million in the first quarter. As of June 30th, our deferral balance is $463 million, a decrease of 10% from $514 million as of March 31st. Our accounts receivable balance was $150 million, a decrease of 30% from $215 million as of March 31st. Our maintenance rents were $131 million in the second quarter, which was down from $224 million in the prior year period. Operator: Thank you. We will take our first question from Helane Becker of Cowen. Please go ahead. Your line is open. Helane Becker: Thanks very much, operator. Hi, everybody. I hope everybody's doing well. So, I don't know who would answer this question. Maybe you, Aengus could answer it. I'm trying to get a sense if you think that Chinese airlines are, I don't know if stockpiling is the right word. But if they're acquiring a lot of leased aircraft to cover their domestic demand, because they don't plan on having Max's flying anytime soon. Aengus Kelly: Well, Helane the first thing about the Chinese market you can see on the slide is the rapid rebound we've seen there. And you can see that of the three major markets in the world, it's the one that has surpassed 2019 traffic levels. So, all of our customers in China are doing well. And I would say about the Chinese carriers, they are not stockpiling airplanes. They're taking all the airplanes they can to satisfy the demand that they see in front of them there. And the Chinese carriers don't have huge order books of aircraft, they have not ordered Boeing airplanes in several years. And indeed, the last time they paid, they ordered Airbus aircraft has been a couple of years ago. So, what that actually means Helane, is that they will need to take airplanes from the leasing market as we go forward. That can be used airplanes, we have put the first - just signed deals for the first used aircraft to go into China, which is an innovative thing for anyone to have done. And as the leader, that's what we do, we'll be the first to do these things. And then on the forward order aircraft, we are continuing and we are seeing now demand from the Chinese customers for aircraft off the order book. And we expect that to continue as our market continues to grow. Helane Becker: Gotcha. And are those widebodies or narrow bodies that you're signing or both? Peter Juhas: At the moment, its predominant new technology, narrow bodies, air capsule widebody and new technology assets. Our first one isn't debatable until 2024. Helane Becker: Okay. Peter Juhas: We've placed everything off the . Helane Becker: That's awesome. Thank you. And then, actually, thank you for that answer. And then my other question is on eVTOL. How are you thinking about those assets, especially in light of the GECAS acquisition, where you're going to get a bunch of helicopters, which are sort of VTOLs but not necessarily new technology eVTOLs. Is this a business that you would be thinking about getting involved in? Aengus Kelly: At the moment, Helane, our focus is on the GECAS transaction. As I said in my comments, when we looked at the analysis, we did of that of GECAS in December of 2020, January of 2021, we were in a very different environment. The vaccine hadn't even started to be rolled out really anywhere in the world. And our expectation of a recovery on a global basis was very different to what has transpired. If we look at the level of vaccine deployment, in the advanced economies of the world, and the resulting increase in air travel, we like the transaction a lot then we like it a lot more now, to be honest. Your reference to the helicopters, it will be a long, long, long time before any eVTOLs go out and do search and rescue for humans. At best at the moment, it's coffees that are being delivered on local drones and prescriptions. Helane Becker: That's fair. Okay, that's really fair enough. Thank you very much for your help in your answers. Have a nice day. Aengus Kelly: Pleasure. Operator: Thank you. We will take our next question from Jamie Baker of JP Morgan. Please go ahead. Jamie Baker: Hey, good afternoon everybody. So, given the progress that you're making on the regulatory front, Mark and I are sitting here wondering what the remaining gating items might be before you're comfortable pulling the trigger on the debt raise, in order to stay on track for a fourth quarter closing? Any thoughts on that? Aengus Kelly: Jamie, I think we're looking at a fourth quarter close still. We've made tremendous progress in this quarter. We had the shareholder vote from AerCap. We had the DOJ approval, we've had the European Union approval, and we're on track. And we're monitoring all the time as to whether or not it's appropriate to look to the debt financing, but you want to get through the regulatory - all the regulatory approvals first. Jamie Baker: Okay, that helps. And then, just given the recovery that we'd seen in the ABS market in the improved viscosity for lack of a better term in the aircraft market. And your base case thinking about the pace of asset sales post-closing, has that changed at all? Earlier this week, Avalon stated that they were of the mindset that many values have bottomed. And just looking for some color on that, if you agree. Aengus Kelly: I certainly would, Jamie. I think in our underwriting case, again, as if I recall back to when we were agreeing the economics of the transaction around Christmas of last year, we had a very different outlook of the pace of recovery. As you see there was no vaccine deployed at that point in time. And our view on asset sales was that it would be a longer road before we would be able to sell significant amounts of assets, and the market would recover. Clearly, that is not the case. The market is recovering. We see the bid coming in for assets. And so, I would be confident that we will continue to de-lever the balance sheet ahead of our original base case as well. Jamie Baker: Okay, that's helpful, guys. Thank you very much, everybody. Aengus Kelly: Pleasure. Operator: Thank you. Our next question will come from Ross Harvey from Davy. Please go ahead. Ross Harvey: Hi, Gus, hi Pete. I just wanted to ask you about the unsecured claims. And firstly, Gus we hear your crackly around the hundreds of millions of potential further benefits come later this year, you might clarify them. Also, can you just cover whether there are other customers that perhaps underperformed during COVID with whom you expected the mediclaims that we haven't got around to just yet. What type of figures might come out of that particular channel in the future? Aengus Kelly: Well, to answer your question, first of all, we have received $186 million in cash from the LATAM claim that was received on the 3rd of July. So as Pete noted, that is not included in that improved operating cash flow number of our $700 million plus for Q2. The remainder of the claim, it's agreed with the counterparty what they will pay. And we would expect that subject to court approval. We would expect to receive several $100 million during the course of this year. Other claims beyond that are not at that level of materiality Ross, the LATAM claim given our exposure to us and the size we had meant that it was an outside claim, and the recovery of the airline itself and its operating performance have driven that. Ross Harvey: Okay that's good thanks, Gus. Secondly, just looking at the order book and it looks as though it increased by about 10 aircraft, if I just look at the Q1 order book, take out the purchases during Q2. Is there anything behind that? Am I doing the math wrong or was there a sale leaseback maybe in there? Aengus Kelly: MAX : Ross Harvey: Right. Thanks. I think those were my two questions. Thank you. Operator: We will take our next question from Cathy O'Brien from Goldman Sachs. Please go ahead. Your line is open. Cathy O'Brien: Hey good morning everyone, thanks so much for the time. So, we just coming back to this cash from ops is significantly better than last quarter and I think the highest it has been since the start of the pandemic. Do you expect this to trend higher going forward? Just given the positive trends you're seeing on collections and deferral requests, are there any other puts and takes we should think about? Thanks. Aengus Kelly: Look Cathy, so it was - for sure, it was a significant improvement from the first quarter, we're seeing cash collections run into very high rates, they're over 100% for the second quarter. So, that was a big positive. And as the recovery continues, we expect to see that trend continue. So, I do expect both the collection rates and the overall amounts of cash to come up going forward. So yes, I mean, I think that we're going to see is over the course of the year, as we deliver the new the aircraft that we've transitioned, they are currently in transition, we will start to see revenues pick up and we'll start to see cash collections increasing as the year progresses. Cathy O'Brien: That's great. And then, with credit markets pretty open for aviation paper, as Jamie noted earlier, ABS market back open, sounds like bank debt is making a comeback. Have you seen a resurgence in some of the tourist capital that seems to be declining pre pandemic, or kind of status quo? We'd just love to get some high-level thoughts. Thanks. Aengus Kelly: I certainly think there's more educated tourists in town now, to keep using my term from the past. I think that those people who knew what they were doing pre pandemic, have understood the resilience of the value of an aircraft asset. And on a relative risk reward basis to what else is available in the world today. See that it is a good store of value and does provide a fair risk return profile for an investor. And I think those that have the capacity to manage assets, or have manager of those assets, that is a Tier 1 player in the industry can harvest that return. So, I would say Cathy, like a lot of things in life, there was some exuberance pre pandemic in the last probably 18, 24 months prior to that. But I think those that invested in a platform or a manager are sophisticated and are back. And we think it will be a robust sales market for AerCap as we get into 2022. Cathy O'Brien: That's great, if I can just sneak one more quick modeling one, cash accounting impact was $54 million this quarter, down from $100 million the first quarter. At what point Pete, do you think that's going to flip to a net positive to revenue as you get some of that added more back? Thanks. Peter Juhas: Yeah, so the cash accounting impact was down in the quarter. And we're going to see cash accounting continue, as I've mentioned before, during the course of this year, but I do expect it to come down. This quarter was a little further down, just due to some one-time items than we then - so it would have normally been a little higher than that $54 million. But the trend will continue. And then what happens when the aircraft, we are placing these aircraft in many cases with new airlines. And so, there's some transition period for those aircraft. And so, once as I was saying, once those aircrafts get to those new lessees, once they're delivered, then you have the revenue pickup. You start doing revenue on them again. And so, that's why I say, we'll see a couple of quarters where revenues are lower, as we saw this quarter. But as the year progresses, that will continue. And that's really how that cash accounting in that will flip in, in terms of increased revenues. Cathy O'Brien: Thank you. Operator: We will take our next question from Mark DeVries of Barclays. Please go ahead. Mark DeVries: Yeah, thanks. Significant proceeds. Gus, you indicated your de-lever and all is faster than the plan in front of this GECAS deal. Should we assume that you're not going to have to interfere that much ? Aengus Kelly: Operator? Excuse me, sorry, operator you might just go to the next question. We'll give Mark an opportunity towards the end. It just seems like his line is a bit muffled at the moment. So, we might just move on to the next question. And then we'll put Mark back in the queue again. Operator: We will take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead. Moshe Orenbuch: Great, thanks. Given that you had greater aircraft sales and other less source are reporting that could you just talk about the environment as you see it and the expectations that you had with respect to the GECAS deal back in March and where they stand today? And sort of how you think about the outlook for that? Aengus Kelly: Sure Moshe. As we look forward, as I said, we think that those participants who are in the markets now and have been in the market prior to the pandemic understand how resilient an aircraft asset is, the right aircraft asset well managed. And we'd be quite confident that as the recovery continues to gather pace, that there'll be a strong bid for aircraft assets, as we come out the far side of the GECAS transaction. Moshe Orenbuch: Good, that's good to hear. Also, I guess, a little bit confusing, your cash flows obviously significantly improved, then you talked about some opportunities in other cash that's going to be collected. I mean, I assume, obviously, cash is cash. But when you think about, in the quarter you talked about an expectation of $2.6 billion, I think it's a couple of $100 million higher than it was in the first quarter. But at the same time, you had just mentioned or Peter just mentioned that you're expecting some significant collections in Q3 from or you received collections in Q3 from LATAM. So, I guess as we're looking at your cash flow, can you talk a little bit about how those recoveries will impact that over the next couple of quarters? Aengus Kelly: Sure, Moshe. So, I would view the 2.6 I'd say, in general, we tend to be pretty conservative about these numbers, as you've probably seen. So, what that incorporates is that that includes the $186 million that I mentioned that came in on July 3rd, right. So, that's in that 2.6. But beyond that we haven't included anything else for any other LATAM recoveries or any other airline recoveries for that matter, frankly. So, I'd be very surprised if we didn't come in above that number. But we've put it out there, as I said, we've historically been conservative in projecting this. And we were doing this in order to look at our liquidity and make sure we have enough to cover the debt maturities that are coming up and the CapEx that come up. So, that's not something that we want to mess around with. And that's how we look at it. Moshe Orenbuch: Got it. Thanks so much. Operator: And we'll take our next question from Vincent Caintic of Stephens. Please go ahead. Vincent Caintic: Thank you for taking my question. First question on portfolio lease rate expectations. I was just wondering if you could talk about sort of, if you could help us, how should we expect the portfolio rate going forward. I know you've improved activity. Your cash collections are coming down. So, that's great. And you've got some new leases. And then I think you've also had restructuring of some leases where maybe there's some variable aspect to it. But maybe if you could help us understand how the forecast, the portfolio lease rate going forward? Thank you. Aengus Kelly: Sure. So, just to clarify there, our cash collections have been going up, not down. But in terms of the portfolio, lease trades Vincent, it's really driven by the same things that I was talking about before. So, I mean, it's predominantly, it's those basic lease trends that are coming through. And as those aircraft that are currently transitioning, go back on lease, or as the aircraft that are currently in cash accounting, they start to return to regular service, regular accrual accounting. That's when you will see those numbers picking up. So, it's really, that's what will drive it more so than the cash collections number. And I do expect that that will go up, as I said, during the course of the year. Vincent Caintic: Right, and apologies for that. And so those aircraft returning, I guess, at the service are back on lease. Is there sort of like a timeframe or where you we can see like a chunk of these aircraft coming back and generating rents? Aengus Kelly: Yeah, really over the next couple of quarters. That's what I would really look at. I mean, that's when the bulk of it will happen. It's spread out, but most of it over the next six to seven months or so. Vincent Caintic: Okay, great. Thank you. And second question, so and this is on capital management and particularly share buyback. So, I know we have the pending GE acquisition but your leverage is the lowest then 2.4 times. You've got good gains on sale of aircraft. You've got these unsecured claims that are in the hundreds of millions and cash collections are improving and more cash was coming in. So, and then finally, your book values 75 while the stocks trading at 52. So, just wondering what your thoughts are there? Are you going to maybe continue to pause until the GE acquisition is complete, or maybe any thoughts of taking advantage of the lower share price? Thank you. Aengus Kelly: Well, today, the focus is all about getting the GECAS acquisition done. We want to get the business back on the upward rating trajectory. As you may recall, just prior to the pandemic, we were on the verge of upgrades from Moody's at the time. And we held on to the investment grade rating throughout the pandemic. And we want to put ourselves back there where we move the racing an upward trajectory, that would be job number one. And from that point forward, then you've always seen us as very prudent managers and stewards of the capital. And we'll take the right decisions as we get to the far side. Vincent Caintic: Understood, thank you very much. Operator: We will take our next question from Ron Epstein from Bank of America. Please go ahead. Ron Epstein: Hey guys. Good morning. Good afternoon. What impact are you seeing from 787? It's our understanding that you might not see any or many aircraft delivered until very late in the year, maybe early next year? How are your customers reacting to it? And from your point of view, do you have a walkaway rights, can you read negotiate price? Just that program seems to be the, in some ways, the gift that keeps on giving? Aengus Kelly: Well Ron, the 787 has been the most popular widebody ever introduced. So, we have tremendous confidence in the aircraft. As you know though the delivery process of Boeing is not going well at the moment and as they announced yesterday, they only expect to deliver, I think it was less than half of the inventory they currently have. At the moment, from our perspective, we don't have any 787s to place until 2024. We do have aircraft delivering, of course that are leased and are being built. And we're working with our customer and with Boeing, for the right outcome. I do think that, in general, on the widebody markets, what we'd like to see, of course, is return to normal traffic on the North Atlantic route, because that's the biggest widebody market in the world and would be held for the 787. No doubt. As we saw the Europeans have opened up to non-essential travel to the Americans. And we would be hopeful that in the near term, the U.S. administration will reciprocate that. It will have a huge benefit to American industry to do it. It'll improve the demand for the aircraft as well. And at the moment in fairness, as you saw in our chart, the European Union as a whole has the same level of vaccination as the United States. But the North Atlantic market is based on Western Europe. And in most of those countries, the vaccination rate is substantially and materially ahead of what's in the United States. So, I do think that in relation to our 787 program, we can get those markets up and running. I think it'll be a big boost for the U.S. aerospace industry as a whole. Ron Epstein: And then when are you expecting to take delivery of the 787s now? Do you have any idea? Aengus Kelly: Well, it'll be customer by customer. And we're working with Boeing and a customer on a case by case basis. And we can't go in to for confidentiality reasons the specifics of that. Ron Epstein: Got it. And then maybe just following up on one of Helane's questions. What are you guys thinking broadly about Urban Air Mobility, eVTOL? Is the business there for a lessor? Can those aircraft be leased even? I mean, how would one even think about residual values? I know this is a giant question, but maybe just in a snippet, is there anything interesting to do there for lessor? Aengus Kelly: Look, I do think in time, there is a market there. The big question is you hit the nail on the head there, Ron, it's the applicability. A lessor one is an asset that can be transitioned to most customers around the globe. If an asset is uniquely configured for a specific mission, to reconfigure a low value asset, and move it to another part of the globe, maybe from Canada to Jakarta, that's what you need to be able to do for a lessor's product to work. But I do think that the electric powered vehicles are coming. I think that's a given. The timeframe and to what the missions will be and as to whether or not they can be commercially sized to aircraft that can carry humans, that's another matter altogether. Ron Epstein: Got it. All right, cool. Thank you. Operator: Our next question will come from Andrew Lobbenberg of HSBC. Please go ahead. Andrew Lobbenberg: Hi there. I'm really intrigued to ask you about the sort of compare and contrast between your efforts to remarket the 78s to North Atlantic, and the 350 is going to Delta. And I know you're obviously constrained on what you can say about that individual client contracts. But the contrast and the nature of the companies is quite dramatic. How do you think it'll work? But you know, they're two very high value transactions for you, aren't they? So, I'm just interested to understand the relative attractions and the relative economics of how those moves work for you, obviously accepting you'll be completely constrained? And then my other question after that would be just to see, I mean, I sense the biggest area of pain within the industry now is Southeast Asia. And I clearly don't think you've got too much exposure to it. But how daunting is the development in the aviation industry in Southeast Asia and the restructurings, which may be less orderly, perhaps than the ones in Latin America that you've had exposure to? Aengus Kelly: Sure. Let me start with the last question, Andrew. AerCap's exposure to Southeast Asia is 5% of our book. That's it. We haven't been a big player there. We didn't really get involved in the airlines that were placing massive speculative orders and building the business on sale leasebacks. As you know, we didn't do a sale leaseback prior to the pandemic, I think it was 2013. So, we weren't really and that's where a lot of the sale leaseback market was. Now as related to the two widebody placements that you're referring to. As I said in the earlier question, the key for lessor in the portfolio is assets that have global applicability and global demand. And that's where you need to have the best-in-class assets. And the 787 is without doubt, the best-in-class, small or mid-size widebody out there. And the A350 900 is the most popular the larger widebody aircraft. So, we were going to get demand for them. A key variable in these transitions is transition expense. When we look at North Atlantic, yes, it's not Delta Airlines. But by the same token, one, it raised significant capital. Two, it is in a much slim down business model than what Norwegian was doing on the North Atlantic. And very importantly, for us, there was little to no transition cost involved in that transaction. And of course, look, Delta speaks for itself. We were very happy to get those aircraft away. It also shows the advantages of scale in that scenario, where you have a large package of airplanes that can help an airline actually materially impact their fleet, rather than ones and twos. Andrew Lobbenberg: Yeah, fair enough. All right, thanks. Operator: This will conclude today's question-and-answer session. I would like to hand the conference back to Mr. Aengus Kenny, for any additional or closing remarks. Aengus Kelly: Thank you, operator. Thank you all for joining us today for the earnings call. We look forward to seeing you all in person in the near future. So, assuming quite a number of you will be at the Deutsche Bank Conference in September which I'll be out in person as well. And I think the sooner we can all see each other in person, the better. So, thank you very much indeed. Operator: This will conclude today's conference call. Thank you all for your participation. You may now disconnect.AER Ratings Summary
AER Quant Ranking
Related Analysis
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.
