Aircastle - Q1 2025

Transcript

Operator (participant)

Good day, and welcome to the Aircastle Limited First Quarter 2024 Financial Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to James Connelly, Senior Vice President of Corporate Communications. Please go ahead, Mr. Connelly.

James Connelly (SVP of Corporate Communications)

Thank you. Good morning, everyone, and welcome to Aircastle Limited's First Quarter 2024 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 will begin the presentation shortly, but I would like to remind everyone that today's 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 will 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 (CEO)

Thanks, Jim. Good morning, everyone, and thanks for joining us today. This morning, I'm pleased to share that Aircastle finished the first quarter with net income of $16 million, primarily as a result of a 14% increase to our lease, rental, and finance lease revenues compared to the first quarter of 2023. Our cash flows from operations were up 46% compared to the first quarter of 2023, and during the quarter, our fleet utilization was over 99%. Before we discuss the first quarter in more detail, I'd like to call to everyone's attention the good news we shared on July 1st, specifically, that our shareholders, Marubeni Corporation and Mizuho Leasing, had contributed $300 million in new equity to complete the $500 million equity commitment they made in July of 2023.

This commitment is an outstanding demonstration of our shareholders' belief in the long-term prospects of Aircastle's unique business model, and that Aircastle is a core component of their broader investment vision. The shareholder group relationship we enjoy now goes back over 10 years, and Aircastle benefits from both equity support and liquidity support by way of revolving credit facilities, as well as expanded access to Asian markets. In addition, we recently saw another example of commitment between our shareholders. On May 14th, Marubeni announced that they had executed a share purchase agreement with existing Mizuho Leasing shareholders, which brings Marubeni's equity stake in Mizuho Leasing up to 20%. On behalf of Aircastle's global team, I want to express our thanks and appreciation to our shareholders, and I want to reiterate Aircastle's commitment to profitably grow our portfolio with the most sought-after passenger aircraft available.

As we pursue this growth, we see many favorable market indicators supporting global aviation. Last month, IATA published their Global Outlook for Air Transport. This publication shared significantly favorable estimates for 2024. The airline industry matched 2019 levels of RPKs in February of 2024, and for 2024 as a whole, IATA estimates almost 12% growth in RPKs and 10.4% growth in the total number of passengers as compared to 2019. Over the next 20 years, IATA predicts that world passenger volumes will increase by 3.8% per year on average. Global aviation could reach total revenue threshold this year of nearly $1 trillion. Although that'd be a landmark achievement, airlines are still anticipated to operate with slim margins in 2024. Labor and funding costs have increased. Supply chain issues continue to challenge airlines.

As we move forward, the cost tied to decarbonization commitments are going to be a factor for both airlines and customers. On the topic of supply chains, 2024, Boeing 737 MAX deliveries are well below 2023 levels. The Airbus A320 deliveries, on the other hand, are up slightly versus 2023. But overall, both Airbus and Boeing have output forecasts that fall well short of global growth demand for narrow-body aircraft. The resulting shortfall between supply and demand has created a very competitive market for aircraft investors and lessors looking to grow their asset bases. For existing fleets, demand is high for placements and extensions, and we're seeing this reflected in lease rates and market values, especially for the narrow-body passenger variants in which we specialize.

For the past few quarters, we've been highlighting the capacity disruptions caused by unscheduled aircraft groundings, largely stemming from Pratt & Whitney's GTF on-wing reliability issues. These issues have not improved materially and are currently over 500 A320neos grounded as a result of the powdered metal issues. Aircastle has a unique position in aircraft leasing. With no significant order book, we're able to trade both new and current technology aircraft with our experienced and efficient team. Over the past several years, we have significantly grown the new technology portion of our fleet. As of the end of the first quarter, new tech narrow-bodies composed 37% of our fleet. As successful as we have been in growing the new tech fleet...

OEM delays and new tech engine groundings have sustained and extended the demand for current tech aircraft that even aircraft lessors might not have anticipated a few years ago. As a result of these factors, we believe the inflection point, when new technology narrow-bodies will overtake current tech, keeps moving further and further into the future. Despite supply constraints, we still have been able to deploy capital towards high demand current tech aircraft, which continue to yield high returns. In the first quarter of 2024, we added 9 aircraft to our fleet for approximately $225 million. The net book value of our fleet now stands at around $7.3 billion, up 7% from the first quarter of last year.

During the quarter, we were pleased to see that our consistent profitability and fleet growth, along with portfolio transformation, was recognized by S&P, who revised their outlook for Aircastle from stable to positive. Our total liquidity of $2.6 billion as of July 5th positions us well as we move forward. We're investors who know how to get the most return from our assets by managing residual values and efficiently executing lease transitions. We also know we can source acquisition funding quickly because of the strong relationships we have built in the secured and unsecured markets. We benefit from these strong relationships with a growing number of trading partners, who appreciate our experience, deal execution skills, as well as our ability to efficiently close acquisitions without financing contingencies.

As Aircastle celebrates our twentieth year in aircraft leasing, we'll continue to provide creative solutions for our customers while maintaining a risk-focused objectivity on the broader aviation marketplace. And now I'll pass the call over to Roy to go through the first quarter results in more detail.

Roy Chandran (CFO)

Thanks, Mike. For our first quarter, we earned net income of $16 million on total revenues of $205 million. Compared to the first quarter of last year, a 14% improvement in combined rental and finance lease revenue reflects an improved lease rate environment and close to 100% utilization of our fleet. Our first quarter Adjusted EBITDA was $185 million. This quarter, we acquired nine narrow-body passenger aircraft. Our $7.3 billion fleet remains 81% unencumbered. The high demand for current tech narrow-body aircraft, which Mike discussed, was reflected in the 13 lease extensions we completed during the first quarter. Cash flow from operations is up 46% compared to the first quarter of 2023, primarily as a result of higher maintenance payments and the timing of cash paid for interest.

Turning to funding, we repaid $500 million in senior unsecured notes and have no significant debt repayments until August 2025. At the end of the first quarter, total debt was $4.7 billion, of which 82% was unsecured. The weighted average interest rate on our debt at the end of the first quarter was 5.2%. We finished the first quarter with net debt to equity of 2.4x. With the additional $300 million of capital we just received, our pro forma net debt to equity will be 2x. As Mike had mentioned earlier, this quarter, S&P revised their outlook for Aircastle to positive. Recall that last year, Fitch upgraded Aircastle's rating to BBB+.

We believe that these improvements and similar improvements enjoyed by a few of our peers, reflect the profitability momentum of our business and the robustness of the aircraft leasing segment. As of July 5th, we have total equity of $2.6 billion, composed of $2 billion of undrawn facilities, unrestricted cash of $100 million, and projected adjusted operating cash flows of $500 million. Moving forward, our plan is to leverage our additional equity efficiently in order to continue to improve cash flow and profitability metrics through the acquisition of higher-yielding narrow body aircraft. Above all, we are dedicated to maintaining and improving on our IG ratings with the strong support of Marubeni Corporation and Mizuho Leasing. With that, operator, we are happy to open the call up to questions.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. Again, it's star one to ask the question. We'll take our first question from Mark Streeter from JPMorgan.

Mark Streeter (Managing Director)

Great, thanks, and good morning, everyone. So Mike, one of the things we've talked about a couple of times this week on a couple of webinars we've hosted, is this dynamic of the world is tight on aircraft, and you talked about supply and demand and everything. Yet in the U.S., and it's evident this morning with Delta's announcement and weak guidance, that, you know, there's a lot of angst at the low end of the fare spectrum. There's some overcapacity causing some fare weakness, and so forth. So how do you any comments or observations just on sort of this North American phenomenon, where you can argue there, clearly, the evidence says there's overcapacity versus sort of the world situation? And does that impact the way you think about your portfolio? Is the U.S. so unique?

Is there just so much strength in Asia and in other markets that that's what, you know, nets into this, you know, still very tight, tightening environment? Because I think some investors are getting confused by the North American trends versus the global trends.

Mike Inglese (CEO)

Yeah. Look, Mark, there's clearly a little bit of a disconnect between what Delta was talking about this morning and some of the issues.

... in the U.S., but the beauty and the fundamental premise of our business is we have assets that are portable. So while there may be some softness in the U.S. in terms of excess capacity, I don't think we're seeing that anyplace else in the context of our customers in the other regions in the world. So we have significant exposure with U.S. airlines. We continue to monitor their performance and what their plans are. And as we think about, you know, investing as well as selling, which is the fundamental premise of our business model, you know, we're keeping that in mind, but we're not over panicking or thinking about the U.S. dramatically differently today than I'd say we were 12 months ago.

Mark Streeter (Managing Director)

Any difference, Mike, in terms of just, you know, renewal percentage in the U.S. versus rest of world, or ability to drive rate increases in the U.S. versus rest of world? Or, you know, is this really more impacting, you know, older aircraft that may or may not be retired or something like that? Like, what is what we're seeing out of Spirit and Delta and so forth, what does that actually mean for your business in terms of the hard numbers?

Doug Winter (CCO)

So, Mark, this is Doug Winter. Just in the context of the US carriers, we actually really haven't had any scheduled lease expiries in this time frame to deal with, either by way of extension or alternatively, transitioning aircraft. And I think looking ahead, we have very little to even none as we look into 2026, if I'm looking at my list. Sorry, into 2025, if I'm looking at my list correctly. We have been continuing to extend the majority of our aircraft. I would probably say somewhere in the range out of, you know, 8 out of 10, approximately.

When I look at 2025, because you'll see that our, you know, our filing, you know, indicates 26 aircraft to be dealt with, if you will, in 2025, there's only about 4-6 within that population that I'm still toggling between extensions and potential transitions. The rest, we feel very comfortable that we've got defined outcomes for. But it is interesting because we are finding in a few instances, some very interesting potential transitions that could be, you know, kind of definably more lucrative than extension outcomes as we look into next year.

Mark Streeter (Managing Director)

Great. That's a great color. Thank you very much.

Doug Winter (CCO)

But this is all outside the U.S. Yeah.

Mark Streeter (Managing Director)

Yep. No, that, that's perfect. That's what I was looking for. And then just a second topic real quick, Roy, for you. You know, we just had meetings with S&P and Moody's to talk about the aircraft leasing, you know, set. And, you know, clearly you're on a path to, you know, that S&P upgrade with the positive outlook and so forth. Moody's just seemed a little bit more reluctant. You know, we specifically talked about the path for Aircastle to get to, you know, a Baa2. What do you think? You know, what's the work you have to do with Mark Wasden and his team at Moody's to convince them to, you know, be on the same path that S&P is on right now, and obviously get them closer to Fitch as well? What's, what's sort of the difference, what you're hearing out of Moody's versus the other agencies?

Roy Chandran (CFO)

I think the, you know, primary difference is really methodology. Both S&P and Fitch, I think, you know, obviously, numbers matter and results matter, and they focus on that. I think they tend to also focus on, you know, sort of trajectory and improvement over time. You know, on the margin, I think give us more credit for that. I think those two agencies are also heavily weighted towards, you know, how much, you know, shareholder support we have. It's very clear that, you know, the recent equity infusion, along with credit support, you know, gave both Fitch and S&P much more credit than Moody's did. Separately, I think, you know, if you looked at Moody's latest review, Moody's tends to look at their numbers on a full year basis.

Typically, because of our fiscal year end, we are sort of one quarter off, and so it's a little bit of apples and oranges. The comparisons of everyone else on a full year basis, and we are, you know, one quarter behind. So I think, you know, they'll get there ultimately, as we—as long as we continue to, you know, put out the improving credit metrics. It's just a different methodology and I think a time frame.

Mark Streeter (Managing Director)

Great. Thanks, Roy. Hope to see some members of the team over in Farnborough. Appreciate it. Take care.

Roy Chandran (CFO)

Thanks, Mark. Thanks.