AerCap Holdings N.V. (NYSE:AER) Q1 2024 Earnings Call Transcript

AerCap Holdings N.V. (NYSE:AER) Q1 2024 Earnings Call Transcript May 1, 2024

AerCap Holdings N.V. beats earnings expectations. Reported EPS is $3.29, expectations were $2.34. AER isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the AerCap Holdings NV Q1 2024 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’d like to turn the conference over to Joseph McGinely, Head of Investor Relations. Please go ahead, sir.

Joseph McGinely: Thank you, operator and hello, everyone. Welcome for our first quarter 2024 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Pete 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 may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements. AerCap undertakes no obligation, other than that imposed by law, to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call.

Further information concerning issues that could materially affect performance can be found in AerCap’s earnings release dated May 1, 2024. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation and will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Aengus Kelly.

Aengus Kelly: Thank you for joining us for our first quarter 2024 earnings call. I am pleased to report that the AerCap platform has delivered another quarter of consistent earnings and profitability. During the first quarter, we generated $3.29 of adjusted earnings per share, up 40% over last year and adjusted net income of $658 million. Importantly, we continued our consistent increases in book value per share, which was up 27% year-on-year to $87.47. As a result of this strong first quarter performance and the improving outlook, we are increasing our full year 2024 guidance to approximately $9.20 per share. As I mentioned on our last call, the focus of the entire AerCap management team is on maximizing value for you, our shareholders.

To earnings per share and book value per share growth not just for an individual quarter, but for the long-term. On the operational side which underpins everything we do, the platform continues to work well, executing 152 transactions in the quarter. Demand for travel continues to rise particularly in China where new passenger records were set in the first quarter. Airlines in China flew almost 180 million people in Q1, including 14 million international trips, which is still 22% behind the 2019 international levels. The continued supply/demand imbalance creates significant pricing tensions where we regularly have multiple bidders for available aircraft. On the used aircraft side, we signed lease agreements for A320ceos, Embraer E1s, 737 Freighters and 777s.

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Q&A Session

On the new side, demand remains robust. We are sold out entirely on 787s, A330neos, Embraer E2s and Airbus A220s, with enviable slots on the 320neos and 737 MAX programs. Frankly, the most challenging issue we face is trying to predict with certainty the month or even quarter that these new aircraft will actually deliver from the manufacturers. Turning to the engine business. It continues to present opportunities reflected in healthy activity in the period, and I look forward to discussing this subject with you next week. Finally, on the helicopter side, we saw good demand in the first quarter for our Sikorsky 92s, where we signed up extensions and new agreements with a number of operators. In summary, this was another strong quarter for AerCap.

Demand remains robust, past generation is strong and earnings per share grew by over 40% year-on-year. The company and industry continues to benefit from a positive macro backdrop, and we are well-positioned to take advantage of us for the years to come. With that, I will hand it over to Pete before we have the Q&A session. Thank you.

Peter Juhas: Thanks, Gus. Good morning, everyone. Our GAAP net income for the first quarter was $604 million or $3.02 per share. The impact of purchase accounting adjustments was $86 million for the quarter. That includes lease premium amortization of $33 million which reduced basic lease rents, maintenance rights amortization of $35 million which reduced maintenance revenue, and maintenance rights and lease premium amortization of $17 million which increased leasing expenses. During the first quarter, we recognized $23 million of net recoveries which is included in net recoveries related to the Ukraine conflict. The tax effect of the purchase accounting adjustments and net recoveries related to the Ukraine conflict was $9 million.

So taking all of that into account, our adjusted net income for the first quarter was $658 million or $3.29 per share. I’ll briefly go through the main drivers that affected our results for the first quarter. Basic lease rents were $1,586 million, an increase of $10 million from last quarter. As I mentioned basic lease rents reflected $33 million of lease premium amortization which reduces basic lease rents. Lease premium assets are amortized over the remaining term of the lease as a reduction to basic lease rents. Maintenance revenues for the first quarter were $179 million and that reflects $35 million of maintenance rights assets that were amortized to maintenance revenue during the quarter. So in other words, maintenance revenue would have been $35 million higher or $214 million without this amortization.

Maintenance revenues were higher than normal during the quarter due to cash collections and the timing of maintenance events. Net gain on sale of assets was $160 million for the quarter. We sold 43 of our owned assets during the first quarter for total sales revenue of $920 million. That resulted in unlevered gain on sale margin of 21% for the first quarter. As of March 31st, we had $459 million worth of assets held for sale. Other income was $93 million for the quarter, which consisted primarily of interest income and certain one-time items. Interest expense was $492 million which included $3 million of mark-to-market losses on interest rate derivatives. Leasing expenses were $149 million for the quarter, including $17 million of maintenance rights and lease premium amortization expenses.

Income tax expense for the first quarter was $94 million, which represented an effective tax rate of 14.3%. That included a discrete tax benefit of $8 million that we recognized in the quarter. Excluding this tax benefit, our effective tax rate was 15.5%. We continue to maintain a strong liquidity position. As of March 31st, our total sources of liquidity were approximately $19 billion, which resulted in next 12 months sources to uses coverage ratio of 1.7 times. That remains well above our target of 1.2 times coverage and represents excess cash coverage of around $8 billion. Our leverage ratio at the end of the quarter was 2.4 to 1, a decrease from 2.47 to 1 at the end of 2023. Our operating cash flow was approximately $1.4 billion for the first quarter driven by continued strong cash collections.

Our secured debt to total assets ratio was around 14% at the end of March, in line with prior quarters. Our average cost of debt was 3.9% for the first quarter and during the first quarter we purchased 4.3 million shares at an average price of $77.89 for a total of $336 million. Our book value per share as of March 31st was $87.47, an increase of 27% over the last 12 months. In February, we projected adjusted earnings per share of $7.50 to $8.50 for the full year 2024 before any gains on sale. Given the strong performance this quarter, including higher maintenance revenues, we’re raising our guidance to the top end of that range. So, we now expect adjusted EPS before any gains on sale of approximately $8.50 for the full year 2024. We had around $0.70 of gains on sale in the first quarter, so when we add those gains that takes us to a new estimate of approximately $9.20 of EPS for the full year 2024, not including any gains on sale for the remainder of the year.

So, overall, the strong performance that we had in 2023 has continued in the first quarter of 2024 and you can see that in our results. We continue to see a strong environment for leasing as well as for aircraft sales, which was reflected in the gain on sale margin this quarter. We also continue to generate a significant amount of excess capital during the quarter and ended with a leverage ratio of 2.4 to 1. With these strong results and a positive outlook going forward, we’re now raising our guidance to the top end of our previous range. Now with that operator, we can now open up the call for Q&A.

Operator: Thank you. Given the company is hosting the Capital Markets Day next week, we ask that analysts focus their question on today’s call on the quarter. [Operator Instructions] We’ll go first to Terry Ma with Barclays.

Terry Ma: Hey, thank you. Good morning. Your net spread was down about 10 basis points quarter-over-quarter, but if I remember correctly, I think PBH should have been a 30 basis point impact. So, maybe just walk through the moving pieces to net spread this quarter and maybe just the outlook for the rest of the year.

Peter Juhas: Sure. So, you’re right. You’re right. We had mentioned last quarter that PBH would have an impact on net spread and it was down 10 basis points relative to last quarter. That’s a little less than we had expected. That was due to having some more PBH rents in the quarter than we had initially expected. So that will drop off a little bit next quarter. I do think it’s worthwhile mentioning though that we aren’t managing to net spread. That is — obviously it’s a metric that we look at, but it’s not saying that we manage to specifically.