AYR - Aircastle Limited (AYR) Q1 2023 Earnings Call Transcript
2023-07-12 10:33:10 ET
Aircastle Limited (AYR)
Q1 2023 Earnings Conference Call
July 12, 2023 9:00 AM ET
Company Participants
James Connelly - Senior Vice President, Corporate Communications
Mike Inglese - Chief Executive Officer
Roy Chandran - Chief Financial Officer
Conference Call Participants
Mark Streeter - JPMorgan
Doug Runte - Deutsche Bank
Presentation
Operator
Good morning. Thank you. If you -- at this time, we'll begin the Aircastle Limited First Quarter 2023 Financial Update Conference Call. Today's conference is being recorded.
And at this time, I'd like to turn the floor over to James Connelly, SVP of Corporate Communications. Please go ahead, Mr. Connelly.
James Connelly
Thank you. Good morning, everyone, and welcome to Aircastle Limited’s first quarter 2023 financial update call. With me today are Mike Inglese, Chief Executive Officer; and Roy Chandran, Chief Financial Officer. Other members of the management team are also on the line and they'll be available during Q&A.
We'll begin the presentation shortly, but I'd like to remind everyone that this call is being recorded and a replay will be available through our website at www.aircastle.com. There you can also find the press release and PowerPoint presentation that accompany this call.
I would 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. Certain facts that could cause actual results to differ materially from Aircastle Limited's expectations are detailed in our SEC filings, which can also be found on our website. I'll direct you to Aircastle Limited's press release for the full forward-looking statement legend.
With that, I'll now turn the call over to Mike.
Mike Inglese
Thanks, Jim. Good morning, everyone, and thank you for joining us. Last week we were pleased to share the news about an additional $500 million equity commitment from our shareholders, Marubeni Corporation and Mizuho Leasing. We believe this will solidify our investment-grade status and enhance our ability to source sufficient liquidity as we continue to grow our fleet of newer narrow-body passenger aircraft over time. We're grateful for the additional commitment and believe it's a clear validation of our shareholders' long-term investment philosophy and their confidence in Aircastle's team, investment strategy, and prospects of the aviation industry.
When we last spoke three months ago, I highlighted the industry's return to profitability in 2022. Despite continuing macroeconomic volatility, we're pleased to see improvements sustaining into 2023. Two weeks ago, CAPA reported that the seat capacity for Europe and North America are above 2022 levels and slightly below 2019 equivalents by single-digits, while capacity in the Middle East, Latin America and Africa exceeds 2019 levels.
IATA also shares this positive view of the global aviation demand and their recently released global outlook for air transport, IATA predicts 2023's industry-wide RPKs will be approximately 88% of 2019, primarily due to pent-up demand, which remains buoyant in spite of economic headwinds. On a longer-term horizon, IATA predicts the demand for air travel is expected to double by 2040, growing at an average annual rate of about 3.4%.
Lastly, at last month's Paris Air Show, Boeing and Airbus received significant orders for new aircraft, most notably passenger narrow-bodies. We shared the industry consensus that aviation is on a path of long-term growth. However, this growth will be impacted by changes in the macroeconomic environment, including higher interest rates, resulting in higher financing costs, supply chain blockages, labor shortages and rising costs at OEMs and MROs; slowing GDP growth and persistent inflationary pressures; consumer frustration at airport logistic delays we saw last summer have not been fully resolved; global trend towards economic and political deglobalization, which impacts international connectivity; and lastly, aviation stakeholders will have to enact ambitious structural improvements to advance the industry's carbon transition.
As we pursue growth amid these challenges, we believe managing risks, prioritizing liquidity, and maintaining conservative balance sheet are fundamental path to weathering volatility in economic cycles. These are the principles that saw us through the pandemic, and these are the principles that have anchored our growth strategy since our founding.
Turning now to our results. We're pleased to update you on our continued profitability and portfolio growth in the first quarter of 2023. We finished fiscal Q1 with net income of $23 million and adjusted EBITDA of $191 million. Despite significant competition for new technology aircraft, our team successfully acquired six new tech aircraft during the quarter and one [Indiscernible] A320 CEO. At quarter end, new technology now makes up nearly one-third of our fleet compared to 19% a year ago.
Over the last three quarters, 89% of the assets we acquired were new tech aircraft. Although our recent investments keep us in line with long-term technology trends, our fleet of mid-life aircraft remains in robust demand, because of OEM production delays, as well as servicing challenges experienced on some new technology engines. Our total liquidity of $2.6 billion as of early July positions us well as we move forward. Not having a large forward order book gives us the flexibility to raise and deploy capital quickly leveraging the strong relationships we have built in the secured and unsecured lending markets. Likewise, we have built equally effective relationships with our trading partners, who are confident about our team's efficient and professional transaction execution.
As we look to the future, our experienced team will continue to provide creative solutions for our customers, while maintaining a risk-focused objectivity of the broader aviation marketplace. Our growing new tech fleet keeps us abreast of the technological transition taking place across our customer base, while our mid-life aircraft remain in strong demand. As a demonstration of our commitment to our own sustainability goals and those of our customers, we continue our investment focus in the most fuel-efficient, low-emission aircraft.
Later this month, we'll also be releasing our 2022 ESG report, Aircastle Second. We invite all Aircastle stakeholders to read about our 2022 sustainability story and share their feedback. With a conservative balance sheet, an investment-grade rating and the strong support of Marubeni Corporation and Mizuho Leasing, we continue to be well positioned for future growth.
Now I'll pass the call over to Roy, who will go through our first quarter results in more detail.
Roy Chandran
Thanks, Mike. For the first quarter, we reported net income of $23 million and adjusted EBITDA of $191 million, 25% increase from the first quarter of 2022. Gains of $43 million include $10 million from routine sales of four aircraft with an average age of 17-years, as well as a $33 million gain from the conversion of 10 leases from operating to finance sales type leases.
Operating cash flow for the first quarter were $100 million, a 7% uptick when compared to the fourth quarter of 2022. We invested $306 million in the first quarter, adding seven narrow body aircraft, six of which were new technology. As Mike mentioned, this is our third consecutive quarter where we have invested nearly 90% of our acquisition investment dollars into new technology. It is a testament to our execution team that they can close deals in a competitive market for new narrow body aircraft. We continue to diversify our funding sources, closing on our third [Jolco] (ph) financing in March.
In April, we successfully paid out $500 million of senior notes due in maturity. Our next major repayment is in September. And as always, we remain steady -- ready to access the unsecured markets when appropriate. Our net debt to equity at the end of the quarter was 2.8 times. Our pro forma net debt to equity goes down to 2.2 times, when factoring in the $500 million equity commitment we're expecting from our shareholders. We finished the year with total debt at the end of the quarter of $4.7 billion, of which 80% was unsecured. The weighted average interest rate on our debt was 4.69% at the end of the first quarter.
Continuing on with liquidity, As of July 7th, we had total liquidity of $2.6 billion, this includes $1.5 billion of undrawn liquidity facilities, unrestricted cash of $83 million, projected 12-month adjusted operating cash flows and committed sales of $560 million and equity proceeds of $500 million.
Looking ahead, as we source attractive growth opportunities, we will limit forward commitments, maintain our conservative leverage and thus affirm our dedication to maintaining our IT status and make it a strategic priority to improve our ratings.
And with that operator, we're happy to open the call up to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question today comes from Mark Streeter from JPMorgan. Please go ahead with your question.
Mark Streeter
Good morning, Aircastle team. Roy, you said two things very important, I think, in your prepared remarks there. Number one, you mentioned the 2.2 times leverage pro forma for the $500 million from your parent. So I wanted to clarify that, because you also added I think your last line was improve your credit ratings. So I've talked to a couple of investors, and I think there was an assumption that, that $500 million could be used for growth, could be used to continue to buy newer technology aircraft and get younger and so forth, but you're sort of implying that it's going to go straight towards, sort of, debt reduction so forth and sort of running at that lower 2 times leverage, which I agree would set you up maybe at S&P And Moody's for upgrades to mid-BBB?
But can you just sort of talk about exactly what your plans are here, because as you try to fund growth and so forth, because I don't think it was -- I don't think the market assumed it was just going to go to, sort of, lower your leverage down to that level?
Roy Chandran
Hey, good morning. Thanks for that. I think you're exactly correct and the additional equity ultimately is to -- if rebuild the business post-COVID, right? So the majority of it will go towards acquisitions and getting us back in -- onto more, sort of, stable run rate. I think my point about getting to a higher level of rating, I think it remains a strategic alternative option. And if you look at, kind of, how we trade relative to your peers, we tend to think that the credit markets don't treat us as well, and we believe that the single biggest thing we could do ultimately is to improve our rating to get a better reception in the credit market.
So first and foremost, I think, yes, it's to reset the portfolio, get back on track like us, like most of our peers took some body blows during COVID and the Russian invasion of Ukraine. And I think the message is we're not going to be operating at 2.2 times. I think that's just an output from the $500 million. Ultimate operating leverage is probably 2.7 times to 2.8 times, I mean, that's where we'd like to operate. And we'll do everything else that we need to do to get a fair hearing from the agencies.
Mark Streeter
Okay. So that was really the second part of the question, which is where do you saying leverage needs to be in order to convince, because you're already there with Fitch. But with S&P and Moody's, where do you think you need to be to get to mid-BBB? Is it, you know, is it the 27 level? Do you think they're going to want to see leverage a little bit lower? Or do you think it's more of a function for getting those upgrades that you mentioned, just continuing to get younger, more focused on newer technology aircraft? Is it more the qualitative or is it the quantitative that's holding you back right now?
Roy Chandran
I think it's a bit of both, right. Historically, the agencies have always held us up to higher standard, given that we tend to operate in the secondary market. And they've always used debt to equity as a proxy ultimately for risk. I think we'll have to do both. We'll have to improve the portfolio, profitability, freshen up the portfolio and get to a leverage level that, you know, which is makes sense to get us the right returns. But I don't think we'll go so far as to dropping leverage dramatically just to classify the agencies.
Mark Streeter
Okay. Now thinking about this $500 million, I know it's coming in, in two tranches. But there have been some portfolios for sale. We saw Macquarie, for example, get dramatically younger by plane Alaska there's still a stub piece of Alaska they did not purchase. Does this $500 million allow you to when we think about 2.5 turns of leverage on it and so forth, does it open up the possibilities more of looking at some bigger portfolio trades for Aircastle? Or should we expect more singles and doubles, so to speak, as you continue to march towards a younger portfolio?
Mike Inglese
So, Mark, I think it opens up that possibility more obviously, but it's not something that we're necessarily counting on as we think about growing the business from here. We'll be going up to the plate. We'll be hitting singles and doubles. And if we get one down the middle, we may hit a home run. But it's, you know, we're not counting on home runs. We're not planning to be the New York Yankees.
Mark Streeter
Well, I guess I have the All-Star game on my mind. So that's why I made the baseball reference. Okay, last question for me. Back to you, Roy, can you just talk a little bit about the lease reclassification and what's behind that, especially, I'm not sure exactly -- I know exactly what's going on there. And I'm sure there's probably some bond investors on here as well that are sort of wondering the accounting behind the switch here and why that results in the game?
Roy Chandran
Well, I'll try not to screw it up. But at a very high level, right? I mean, these underlying leases were restructured. And given the terms that the restructuring and the length of the restructuring, they ultimately require you to reclassify them from operating lease to a sales-type lease, right? And so at the time it was done, the assumption was that the classification would change. But obviously, during the onset of COVID, a number of these restructurings and with particular, let's say, in mind was not consistent in their repayments. And so as a consequence of that, what you end up doing is you effectively continue to depreciate the asset, but hang the receivables up on the balance sheet.
And so when you get to a point when the let's see, is consistent in repayments and it's fairly predictable, you are then able to affect the conversion fully. And when you do the conversion, you fully depreciated. Now you've substantially depreciated the asset and yet you still have a high level of, sort of, receivables that's sitting up on the balance sheet. And so the reclassification results in a game, right? To a certain extent, you're just bringing back into the income receivables that were due.
Mark Streeter
Okay. And just this a one-off related to one of the high-profile restructurings? Or can you give us a little bit more color on that? And should we expect any more? Or it's pretty much this one of the, sort of, last sort of COVID-related or whatever sort of accounting moves we should see within the book?
Roy Chandran
Yes. I think you're -- the prediction is correct. It's -- we review it as fairly one-off, and it is sort of a legacy sort of COVID restructuring, lessee. And we don't anticipate the same level of sort of conversion gains in the future.
Mark Streeter
Okay, great. Mike and Roy thanks very much. Appreciate it.
Roy Chandran
Thank you.
Operator
[Operator Instructions] Our next question comes from Doug Runte from Deutsche Bank. Please go ahead with your question.
Douglas Runte
Yes, good morning. And thanks Mark for asking many of my questions. A question on the equity. I guess, over the last 3.5 or so years you've been a net seller of aircraft with the portfolio shrinking. So I guess the question on the equity big picture would be, why now are you seeing opportunities now have lease revenues or lease opportunities caught up with the rise in interest rates, which doesn't necessarily seem to be the case? What's the consideration set here that makes now the time to jump in with more equity?
Michael Inglese
Yes. Look, I think simplistically, we think the market is heading in the right direction. From a realignment, I would not tell you that lease rates have kept up with the rise in interest rates in the last 15-months, but I don't expect that to be the case forever. And so bringing in some equity this year and somewhere next year, we think is consistent with the, sort of, time line for finding those opportunities and being in a position to capture them. You can't do a lot of shopping if you have to then go figure out where you're going to get your money from later.
So I think it's the nature of putting equity in the business. There's no specific way to do it. I'm not sure we're necessarily going to just be looking and playing big game hunting and then saying, okay, now we're going to put equity in to do this specific thing, that's not traditionally been our approach. And we think this way and this timing is more consistent with how we've executed our business strategy over the last 15-plus years.
Douglas Runte
That's very helpful. And then a question for Roy. You talked about the upcoming debt maturity. I'll revisit a question I've asked a couple of quarters ago. Is this an opportunity to, I guess, better match your average debt maturity with your average lease term? Or do you think with interest rates and spreads where they are, it's better to stay on the short end, I guess what are you thinking in terms of cap structure strategy?
Roy Chandran
I think, you know, cap structure strategy hasn't changed materially. We, as always, sort of remain positioned to do a transaction when it makes sense. But against -- and always have the option, obviously, with a fairly robust liquidity from our liquidity facilities. So I think longer term, we always want to try and match debt maturities at lease term, that's an objective. It's not always possible given, kind of, the nature of the business. But strategically, we'd like to be able to build out the maturity stack and push it out as far as we can, offset obviously by the ability to raise efficient financing.
In the current market, it’s, you know, it is what it is, right? So -- and we like our peers can't sit on the sidelines forever. But on the other hand, you've got to pick your thoughts. So -- but we -- as we proved before, we're always ready and if it makes sense, we'll be back in the market.
Douglas Runte
Great. And then a last question, finishing on an up note. You talked about the continuing demand for middle-aged narrow-bodies. I'm wondering if you can provide just a little bit more color, some anecdotes. We've seen the appraisers move up their valuations and assume lease rates for this category of aircraft pretty dramatically over the last 12-months since you're actually there doing stuff. I'm wondering if you could provide a little bit more color, maybe anecdotes and some numbers?
Michael Inglese
Numbers are not really prepared to get into. But I think, look, anecdotally, and I'm sure you've heard this from our peers, given what's happening with the supply chain and production levels, there are many, I would say, more extension discussions ongoing with customers, then -- on a historical basis, we would have seen. And in cases where those aren't happening, the number of prospects and placement opportunities, I think, are in as good a shape for moving these assets as we've seen in some time. So -- there's good demand. There's clearly a supply-demand issue in the world in the context of old and new. And what's happening with the production of new aircraft and that dynamic today continues to benefit us in the context of those lease extension discussions and what it means for the placement activity for the team.
Douglas Runte
Great. Thanks very much. And look forward to seeing you Mike and team in September on the Deutsche Bank conference.
Mike Inglese
Sounds good. Thanks, Doug.
Operator
And ladies and gentlemen, it appears there are no additional questions at this time, I'd like to turn the floor back over to James Connelly for any additional remarks.
James Connelly
Just want to thank everyone for joining the call today. Please reach out if you have any questions. You can be made further information. And thank you. Hope you have a great day.
Operator
And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
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Aircastle Limited (AYR) Q1 2023 Earnings Call Transcript