Aircastle Limited (NYSE:AYR) Q1 2022 Earnings Conference Call July 13, 2022 9:00 AM ET
Company Participants
James Connelly – SVP, Corporate Communications
Mike Inglese – CEO
Aaron Dahlke – CFO
Conference Call Participants
Mark Streeter – JP Morgan
Operator
Good day, and welcome to the Aircastle Q1 2022 Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to James Connelly, SVP of Corporate Communications. Please go ahead.
James Connelly
Thank you. Good morning, everyone, and welcome to Aircastle Limited’s first quarter 2022 financial update call. With me today are Mike Inglese, Chief Executive Officer; and Aaron Dahlke, Chief Financial Officer. Other members of the manage team are on the line and they will 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 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 today. Before we begin, we want to acknowledge the shock and pain felt by all of us and the people of Japan, as a result of the tragic death of Former Prime Minister Shinzo Abe. On behalf of the Aircastle family, we are extending our deepest wishes through peace, harmony and healing to our parent partners and all the people in Japan.
Since our last call in April, we continue to see broad improvement across the aviation marketplace. Despite supply chain disruptions, rising fuel costs, or consumer concerns over inflation, we’re still seeing consistent demand for travel. In many regions of the world, demand is still unmet as airlines and aviation infrastructure participants struggle to ramp up operations to meet this resurgent travel demand.
According to IATA, demand as measured by RPKs increased 79% in the three months comprising our first fiscal quarter, as compared to the measure in 2021. International demand is up an average of 316% as compared to 2021, with strong showings in North America, Europe and Latin America. Even Asia has seen pockets of improvement but a broader recovery will depend on the continued easing of restrictions.
Although, it’s been an uneven process, our customers have largely regained operational balance. For Aircastle, the quarter saw continued improvement with 101% cash collections, and a 58% increase in cash flow from operations compared to the first quarter of last year. And from Q1 and start (ph) Q2, we’ve placed five aircraft back into service and unleased with five airlines. We’re just about at the halfway point for our 15 E2 (ph) deliveries to KLM Cityhopper, which are helping the airline reach its sustainability goals. We delivered the six E2 to KLM in the first quarter but the seven delivered shortly thereafter in June.
Our momentum is building into the second quarter and as of today, we made additional three acquisitions, including the 737 MAX 8, which is on lease to Aeromexico and an A321neo on lease to the Airbus to Mexico. These are the most efficient narrow body aircraft available. It’s worth noting that the net book value of the new technology aircraft increased 84% over the 12 months. As of right now, new technology represents approximately 20% of our overall fleet by net book value.
Continuing with portfolio management, during our first fiscal quarter, we sold four aircraft with an average age of 17 years, with these sales bringing in proceeds of nearly $60 million and a net gain of $4 million. Over the past two years, we’ve consistently maintained a conservative balance sheet with minimal forward orders and strong liquidity. During the quarter, we bolstered our liquidity by extending one of our unsecured revolving credit facilities and upsized it by $50 million, giving us a total of $1.4 billion available for borrowing under our revolving credit facilities at the end of the first quarter.
Looking ahead to 2023, our investment grade ratings, which was recently reaffirmed by Fitch, gives us confidence as we explore potential opportunities and the timing in the unsecured market. As we’ve done in the past, we continue to explore other potential sources of debt financing to meet our liquidity and growth objectives. In addition to our current undrawn revolving credit facilities, we enjoy excellent banking relationships, which we can leverage as we choose to pursue resources in the secured lending markets as well.
The financial pain we took in our last fiscal year for aircraft lost in Russia is largely behind us and during our first fiscal quarter, we collected $25 million from letters of credit from our former Russian lessees. We are pursuing both the remaining letters of credit as well as insurance claims, however, as we discussed on our last call, we expect this to be a protracted process particularly on the insurance front.
Global aviation continues to prove to be a resilient industry during what had been an unprecedented health crisis brought on by COVID-19. Though we’re pleased to see markets returning to very high travel demand, the industry will continue to require vigilance and flexibility. COVID-19 refuses to disappear and case numbers have recently escalated in a number of regions.
For airlines and OEMs, there also does not appear to be any immediate easing of supply chain issues or staffing challenges as we are all learning to live with the lasting effects of COVID. So it’s difficult to forecast the near-term given the many countervailing macroeconomic and geopolitical forces, we believe the long-term fundamentals for air travel remain intact. When challenging phases have presented themselves in the past, Aircastle’s deep team with multi-cycle experience has always found ways to creatively build solutions for our customers while protecting our asset values.
As we move forward, we’ll continue to pivot towards new technology single aisle aircraft that are the most attractive assets that to our customers and represent sound, liquid investments. We believe our conservative balance sheet, our investment grade ratings and the unique support of our shareholders Marubeni and Mizuho leasing have us well positioned for future growth along with the broader aviation and aircraft leasing industry.
One final note before I turn it over to Aaron, as sustainability remains a key focus for the industry, I’m pleased to share that Aircastle will be rolling out our first ESG report in the second quarter of this 2022. This first report is intended to provide our many stakeholders with an understanding of what sustainability issues matter most to Aircastle and how ESG factors into our operations, strategy and culture. We’re looking forward to sharing this report with you shortly and would welcome your feedback.
Now, I’ll pass the call over to Aaron, who will go through our first quarter results in more detail.
Aaron Dahlke
Thanks, Mike. For the first quarter of 2022, we’re pleased to report net income of $8 million and adjusted EBITDA of $153 million. Strong customer collections supported a 58% improvement in our operating cash flows compared to the first quarter of 2021 and customer collections for the first quarter represented 101% of leased and financing revenues.
Lease rental revenues of $144 million represented a 9% improvement compared to the first quarter of 2021, primarily due to the increase and [indiscernible] lease and fewer customers on cash based accounts. Maintenance and other revenue included receipt of $25 million letters of credit related to former Russian customers.
During the quarter, we wrote off the remaining balance of our narrow body Russian based aircraft. Excluding the effect of Russia related impairments, expenses are essentially flat to the first quarter of 2021. Lower interest and depreciation expense are offset by normalized post recovery personnel and travel expenses.
Turning to our capital structure, our net debt to equity leverage was 2.7 times a slight improvement from 2.8 times at year end. At the end of Q1, our total debt was $4.5 billion of which 86% was unsecured. The weighted average rate on our debt was 4% at the end of Q1, consistent with year-end. As Mike mentioned, our liquidity position remains robust. We have no debt maturities to refinance this fiscal year. Therefore, we can avoid current market volatility.
As of July 1, we had total liquidity of $1.9 billion, this included $1.2 billion of undrawn revolving credit, unrestricted cash of $200 million, contracted asset sales of $100 million and projected 12 months adjusted operating cash flows of four $400. Altogether, that provides us 1.6 times coverage of our contractual obligations through July 1, 2023.
We believe our conservative balance sheet brought access to capital, strong liquidity position and investment grade ratings position as well. With a seasoned management team, solutions focused global employees and our long term focus, investment grade rated owners, we are optimistic about the future.
And with that, operator, we are happy to open up the call to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And we will take our first question from Mark Streeter with JPMorgan. Please go ahead.
Mark Streeter
Good morning, everyone. So, on the Russian freighters that were not written down, that was sort of unique now that everyone, of course, has taken the Russian impairments and so forth. Can you give us an update on how that’s working out? And if you feel like you can recapture value there or where those aircraft set?
Mike Inglese
Yeah, Mark. So we did take some write down on those assets in our last fiscal year and we talked about that on our last call, there are — is still some value remaining on our balance sheet for those two freighters and we continue to pursue discussions with the former lessee to recover those assets, the outcome of which is still uncertain, but we’re in a continued dialogue and we’re hopeful, we’ll make some progress in the coming quarter.
Mark Streeter
Well, yeah and thanks for clarifying that because I should have said that you didn’t write down fully, unlike, all your peers, which wrote down everything 100%. So, can you remind us again what percentage of the original value is left that you haven’t written down? And has anything changed with the sanctions or that give you more or less confidence that you can recapture that remaining value?
Aaron Dahlke
So I can’t do the math on your first percentage question. But I would say our confidence level is about the same as it was when we talked to you three months ago. And as I said, I can’t give you a lot more color yet, but we still are working it very frequently, every week and think we’re making some progress.
Mark Streeter
Okay. And then just one more for me. We had a call yesterday with Mark Walston (ph) and the Moody’s team. We were talking about inflation and whether or not inflation is good or bad for aircraft lessors. So curious if you can talk a little bit about — I mean, you mentioned the fact that you don’t have any debt maturities near term, so you can kind of wait out the market volatility. So that’s a good thing. But can you talk a little bit about sort of how your leases are set up from a CPI inflator perspective, you don’t have an order book, so it’s a little bit different, right? You’re not doing necessarily the same forward placements as some of your peers and so forth. So maybe if you can talk a little bit about just how we should think about Aircastle and inflation and this high inflation environment?
Mike Inglese
Yeah. So look, I think when you talk about high inflation like we’re in right now, if that was sustained for a long period of time, I don’t think that’s good for anybody. However, in the context of our specific business model, as you noted, we don’t have any big forward order commitments. And so we don’t have sort of escalation issues of any magnitude in the context of our future deliveries of aircraft in a typical lease. There are no CPI readjustment mechanisms like you might find in the real estate industry with leases over time.
So impact on us, it will certainly impact our customers, fuel prices, in particular, but so far given the level of demand we’re seeing for air travel, it appears that a fair chunk of what happened to fuel prices has been passed along to customers. which you’ll know if you’ve flown recently and see ticket prices. So a normalized level of inflation above what we’ve seen for the past decade and a half. I think fundamentally would be okay for a hard asset business as we think about its impact on asset values going forward.
Mark Streeter
Okay. Let me just throw in one more. Just kind of I think we have time. You mentioned right upfront in the deck the surge in demand. I’m assuming you’re talking about a surge in demand for aircraft and leases on top of the surge in traffic globally and so forth. Are you in the camp now that are we in an aircraft shortage at this point? Is it just single aisle or we heading towards one? Is it just single aisle focus? Or do you think that some of these surging demand trends could impact the twin aisle market as well?
Mike Inglese
Look, I think it’s more applicable to the single aisle aircraft at the moment. I think there’s still a fair bit of twin aisle capacity that has yet to go back into meaningful service. I don’t think what we’re seeing in that space would lead us to think that that’s going to change significantly in the short-term. Ultimately, I think you’ll see a fair bit of the A330s and some of the other twin aisles come back into service as the market moves forward, given some of the OEM production issues. But I think the demand as we’re seeing it obviously on the passenger side and then on our customer side for additional lift, I think is still significantly greater on the narrow body side.
Mark Streeter
Great. Thanks, Mike and team.
Mike Inglese
Thanks, Mark.
Operator
[Operator Instructions] And it appears, there are no additional questions at this time. I’ll turn the conference back to James Connolly for any additional remarks.
James Connelly
I just want to thank everyone for participating in today’s call. Please feel free to reach out to me, if any questions or feedback. Hope you all have a great day.
Mike Inglese
Thanks, everyone.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
Be the first to comment