AYR - Aircastle Limited (AYR) Q3 2023 Earnings Call Transcript

2024-01-11 11:05:26 ET

Aircastle Limited (AYR)

Q3 2023 Earnings Conference Call

January 11, 2024, 09:00 AM ET

Company Participants

James Connelly - SVP of Corporate Communications

Mike Inglese - CEO

Roy Chandran - CFO

Chris Beers - CLO

Conference Call Participants

Doug Runte - Deutsche Bank

Jim Barr - Loomis Sayles

Presentation

Operator

Good day, everyone, and welcome to the Aircastle Limited Third Quarter 2023 Financial Update Call. Today's conference is being recorded.

At this time, I would 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 third 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 will be available during Q&A.

We'll begin the presentation shortly, but I would like to remind everyone that this call is being recorded. And the replay will be available through our website at www.aircastle.com. There you can also find a 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 will now turn the call over to Mike.

Mike Inglese

Thanks, Jim. Good morning, everyone, and thanks for joining us today. I'd like to share key highlights of Aircastle's third quarter followed by my view of the broader business environment. Roy will then cover our financial results, followed by Q&A.

Last quarter, we shared the news that we received the first tranche of a new $500 million equity commitment from our shareholders, Marubeni Corporation and Mizuho Leasing. I'm pleased now to update you on how we've been putting that capital to work for us in the third quarter and what is a robust and competitive trading market.

We acquired six aircraft this quarter for $269 million, which included four A320neo family aircraft. This brings our year-to-date acquisitions to 14 aircraft, 11 of which were new tech. We continue to prioritize these new tech aircraft investments while also responding to the significant market demand for current tech aircraft, which I'll elaborate upon shortly.

On the sales side, we sold eight aircraft with an average age of 19 years for a net gain of $20 million in the quarter. Our transaction teams continue to find success with both new and longstanding trading partners who appreciate our experienced approach and our ability to close deals efficiently.

Year-to-date through November, Aircastle executed over 100 transactions and we're excited to be carrying the momentum noted in the third quarter through the end of our fiscal fourth quarter and into fiscal year 2024. With increased trading activity, we're seeing strong financial results. We finished the third quarter with net income of $26 million and adjusted EBITDA of $213 million.

This quarter, Fitch upgraded their rating for Aircastle to BBB+ with outlook stable. We believe this improvement reflects Fitch's view for our unique business model and the outstanding shareholder support that is bolstering our long-term growth initiatives.

Looking across the aviation marketplace, we believe optimism is well warranted. Various data points indicate growth in commercial aviation and the important role that leasing plays in aviation finance. Last month, IATA reported their latest projection for global airlines to earn a 2.7% profit margin on record revenues for 2023. A recent update from the IMF projects global GDP sustaining a 3% growth rate through 2028. Global inflation, which was at its height in 2022, fell in 2023 and is projected to fall further in 2024 onwards.

Meanwhile, in the United States and many major European markets, unemployment remains relatively low compared to previous cycles. For global aviation, these factors are fueling strong demand for travel on a global basis. It's expected to finally match pre-pandemic levels in 2024.

In certain regions, such as the U.S., demand is consistently exceeding 2019 levels. Airlines are profitable despite continuing supply chain and OEM issues, labor shortages, and currency challenges. Airlines have also been able to adapt to the evolution of customers' travel preferences which business and leisure priorities underwent a rapid change when the travel market reopened after the pandemic.

On the subject of supply chain challenges, I'd like to briefly elaborate on the maintenance issues experienced by some new engine types which have received a fair degree of public coverage. New-tech narrow-body passenger aircraft now make up over a third of Aircastle's net book value. These aircraft have 100% utilization and the leases tied to these aircraft stipulate that the responsibility for routine maintenance lies with the aircraft operators. We're in regular dialogue with customers who operate aircraft with exposure to maintenance events that have been expedited or engines with component recalls.

At this time, we have no immediate concerns about the potential exposures these issues may have on our customers, and we believe that they're appropriately managing through the financial and operational process of remediation with the relevant OEM provider. The projected timeline for these engine groundings is expected to peak in 2024, but it will likely extend well into 2026. As a result, we're seeing high demand for current-tech narrow-body placements and extensions. That multi-year forecast for new-tech engine remediation runs parallel with the global narrow-body shortage resulting from the recent COVID-era impacts and from enduring production delays at Boeing and Airbus.

Looking into the long term, the inflection point when new-tech overtakes current-tech and global narrow-body passenger fleet continues to move to the right. As a leader in the mid-life aircraft trading, we see this long-term horizon positively supporting our unique and necessary business model.

Our new-tech acquisitions keep us aligned with the evolving industry technology trajectories. Our diverse fleet of narrow-body passenger aircraft meet the needs of our customers, as evidenced by our third quarter's utilization rate of 99%.

Lastly, as noted in our earnings release earlier today, we received gross settlement proceeds of approximately $43 million in late December related to four aircraft formerly unleashed to Rossiya and Aurora Airlines that were unrecoverable following Russia's invasion of Ukraine. This settlement serves to mitigate in part our losses under our contingent and possessed aviation insurance policies. We continue to have ongoing settlement discussions for the other five remaining aircraft still in Russia.

However, there's no assurance that these discussions will result in any settlement, and if so, in what amount. We continue to pursue all legal avenues available to us in respect to insurance litigation and recoveries.

Before I conclude, I just want to acknowledge the contributions of our team towards delivering a strong fiscal quarter. The unique and diverse perspectives of our global team and their multi-cycle expertise in commercial aviation is what makes Aircastle an extremely reliable, competent, nimble counterparty to airlines and lessors around the world. The equity commitment we received from our shareholders in our second quarter and the additional commitment we expect to receive in fiscal '24 will enable us to continue to grow profitably while still maintaining our investment-grade status. We remain committed to pursuing value-enhancing investments by maintaining a conservative balance sheet while allocating capital effectively and efficiently. We're well positioned for future growth because of our unique business model, along with our improved investment-grade rating and the support of shareholders who view us as core to their broader mission.

Now I'll pass the call over to Roy, who will go through our third quarter results in more detail.

Roy Chandran

Thanks, Mike.

For the third quarter, we reported net income of $26 million, our total revenues of $239 million. Our third quarter adjusted EBITDA was $213 million. This quarter, we also acquired six narrow-body passenger aircraft. The net book value for our fleet is $6.8 billion, 80% of which is unencumbered.

Our average fleet utilization improved again, achieving 99% during the third quarter. As compared to the third quarter of 2022, the total number of new technology aircraft in our fleet has increased 46%. This quarter, we also sold eight aircraft with an average age of 19 years for proceeds of $73 million and gains in sale of $20 million.

Turning to funding, last quarter we issued $650 million unsecured senior notes with a coupon of 6.5%. Those proceeds were used to fund general business purposes, as well as the repayment of $650 million of unsecured senior notes at their stated maturity in the third quarter. We finished the third quarter with net debt equity of 2.3 times. Over the years, our experience and reputation in the financing community has enabled us to successfully execute transactions in both the secured and unsecured markets.

As Mike mentioned, the Fitch upgrade to BBB+ Outlook Stable further elevates our IG status, which in turn enhances our ability to source efficient funding. And finally, just this month, we successfully expanded the size of our Development Bank of Singapore that age in revolving credit facility from $375 million to $600 million and extended its maturity from May 2025 to January 2028.

As of November 30, 2023, total debt was $4.4 billion, of which 79% was unsecured. The weighted average interest rate on our debt at the end of the third quarter was 4.9%. We continue to keep forward commitments to the minimum, while diverse liquidity sources enable us to competitively execute on transactions.

As of January 5, we had a total liquidity of $2.8 billion. This included $1.8 billion of unwronged facilities, committed capital of $300 million, unreserved cash of $100 million, and projected 12-month adjusted operating cash flows and committed sales of $600 million.

Moving forward, our plan is to efficiently leverage our additional equity and deliver high profitability through the acquisition of attractive narrow-body aircraft investments. Above all, we are dedicated to maintaining our recently upgraded IG status ratings with the strong support of Marubeni Corporation and Mizuho Leasing.

And with that, operator, we are happy to open the call out to questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Doug Runte from Deutsche Bank. Please go ahead with your question.

Doug Runte

Yes, good morning. It's Doug Runte from Deutsche Bank. Question on the insurance proceeds. It seems like a very attractive amount relative to the market value of these four aircraft if they were not inside of Russia. Can you say how this compared to your book value at the time of, I guess, February of 2022? More or less about the same?

Mike Inglese

I don't think we've necessarily sort of disclosed that. I think the commentary that I would like to offer is in terms of recovery. It's relatively attractive from the perspective of net impairments. And Chris can jump into this. I think we're going to continue to pursue claims and to see whether we can sort of realize some further proceeds from Russia.

Chris Beers

Yes. Hi, it's Chris. Just to pipe in there as well. We were very satisfied with the - with our settlement. We think it's fairly valued our claims against the Russian parties. And we're going to continue to aggressively pursue claims against our C&P insurers. And as Mike mentioned, in his prepared remarks, we are in discussions and hopefully can reach some other settlements. But we'll find out whether that's possible or not.

Doug Runte

Completely understood and appreciate the granularity that you can provide. I guess when you do get these proceeds that I think obviously reduces the potential costs of other insurers, do they need to explicitly or implicitly sign off that your self-help is reasonable?

Chris Beers

Because of the litigation, Doug, I'm probably not going to go there. But because these settlements, you are right reduce our claims against our C&P insurers and mitigate the losses. So we're hoping that it will be viewed favorably.

Doug Runte

Great. Thank you very much. And congratulations on getting the proceeds. A question on the engine issues that you raised. Very important industry issue. I'm wondering when you have NEOs, GTFs in particular, leaps to a lesser degree. And you're collecting maintenance reserves on an hourly basis. Are you having, I guess, difficulties calculating that? Are they substantially higher amounts than you're collecting on, say, a CFM56 where there's a long history? How are you working on that with the airlines since even the engine manufacturers themselves don't seem to know what the PBH cost is? How do you accrue maintenance reserves?

Mike Inglese

So, Doug, without getting into too many specifics, I would say the bulk of GTF customers and NEO customers are most of those leases on a return comp basis. So there's not a lot of near-term impact in terms of thinking about the level of maintenance reserves.

Doug Runte

But I guess eventually, as Pratt Shows reluctance to provide ongoing service agreements, perhaps it's going to be more of an issue.

Mike Inglese

Yes. There's a lot to this story that's left to develop and play out over time.

Doug Runte

Great. Appreciate your level of disclosure. Thanks very much for the call

Operator

[Operator Instructions] And ladies and gentlemen, at this time, it's showing no additional questions. Actually, we do have a question that has just joined. We have Jim Barr from Loomis Sayles. Please go ahead with your question. Mr. Barr, is it possible your phone is on mute?

Jim Barr

Ops, sorry about that. Thank you for taking my question. I'm looking at the fleet utilization numbers for the quarter, and they've certainly moved up nicely. Maybe you could talk about the expectation of that utilization as we move forward, given kind of known lease events.

Mike Inglese

Yes. Look, I think where we are today, Jim, and our utilization throughout last year was somewhat dragged down by the time lag in getting some of our wide bodies back into service. So with the delivery of those, I would expect our utilization to stay very high and more consistent with our pre-COVID utilization performance than what we've seen in the last couple years.

Jim Barr

Okay. And maybe as a follow-up, the cash from operations also has moved up nicely, and I know you've given a number in the liquidity forecast. Maybe if you could sort of comment on anything special there. I think there was a comment in the release about deferments and the progress there as well.

Mike Inglese

Jim, I don't think we specifically commented on that. I think the general commentary is that deferrals is pretty much a known event in this quarter. I think we've worked through, like most of our peers, worked through kind of the various deferrals offered to clients during COVID. Cash flow obviously is picking up. Lease revenues have definitely picked up as people continue to pay on time and as we acquire more assets.

So I think the trajectory generally is positive, and we're hoping that it will continue to stay that way as we work in additional investments into the fleet.

Jim Barr

Okay, great. Thank you very much for taking my questions.

Mike Inglese

Thanks Jim.

Operator

And, ladies and gentlemen, at this time, showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Mike Inglese

I just want to thank everybody for calling today, and please reach out for any questions. Have a great day.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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Aircastle Limited (AYR) Q3 2023 Earnings Call Transcript