Q4 2019 Earnings Call

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[music], good morning, ladies and gentlemen, and welcome to the fly.

Leasing fourth quarter and full year 2019 earnings conference call.

At this time all participants are in listen only mode. Later, we will conduct a question answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone.

I'd now like to turn the conference over to your host not Dallas with Investor Relations.

Thank you and good morning, I'm, Matt Dallas, the Investor Relations manager, a fly leasing and I'd like to welcome everyone to our fourth quarter and full year 2019 earnings conference call.

Fly leasing, which we will refer to as fly for the company issued its fourth quarter and full year earnings results press release, which is posted on the company's website at fly leasing dot com.

We have a slide presentation that accompanies todays call, which is available to participants on the webcast.

If you are not accessing the webcast you can find a copy of today's presentation in the Investor Relations section of our website on the events and presentations page.

Representing the company today on this call will be column Barrington, Our Chief Executive Officer.

Julie rule, our Chief Financial Officer, and Steve thesis, the President and CEO will be down the company that manages and services Flys fleet.

This conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Forward looking statements include but are not limited to.

Statements regarding the outlook for the company's future business and financial performance.

Forward looking statements are based on the current expectations and assumptions applies management, which are subject to uncertainties risks and changes in circumstances that are difficult to predict.

Actual outcomes and results may differ materially due to factors that are summarized in the earnings press release and are described more fully in the company's filings with the FCC.

Please refer to these sources for additional information.

An archived webcast of this call will be available for one year on the company's website.

And with that I'd like to hand, the call over to calling Barrington, the CEO a fly leasing column.

Thank you Beth and welcome everybody and thank you all for joining us.

That's why supporting excellent financial results for the fourth quarter and full year 2019.

Indeed, 2019 with slides best year ever with record high operating lease revenue of $464 million.

Record high earnings per share at $7.12 and a record high return on equity of 29.2%.

He described the success with that strategy that we put in place over the last few years, but just be execute expertly by the PBM team that's supported by strong industry conditions.

We've entered the new year with robust growth pipeline of laces technology, Airbus narrow body aircraft and attractive piece of high demand aircraft to long term leases to the best speak of Global Airlines.

Strongest balance sheets are not company's history.

To address the news is just on everyone's mind this morning.

We think the outbreak optimistic Kuroda virus cobot 19, Norton constant dialogue with I left season business pockets worldwide.

The bars first and foremost health crisis.

Simply that with all those impacted by it.

To date, there's been no negative impact to the court ruled the virus and apply in terms of contracted payments analyses.

That said the boss exactly have a negative impact on passenger demand and global airline profits this year.

Hi, there lots utensil sab's is domestically within China.

In 2000, China and increasingly more broadly.

At this point no one knows how long the impacted the grow the bars or d. the bars itself lost.

Further from spread.

However, flying be done executives that have decades of experience through multiple cycles and the aircraft leasing industry, including financial crises was terrorist attacks in Prague viral outbreaks outbreaks.

We know from experience that historically the profit margins back with aircraft. That's always been much more stable and those are the airlines evens Who's a theater shocks.

Let me know to that if history is a piece it air traffic flows and airline profitability unlikely to recover rapidly once the current crisis has abated.

Turning to one headline to another continuing grounding of the seventh we set a max and the delayed delayed and deliberate and those models unlikely impact aircraft supply again in 2020.

As a reminder, the Mac situation has led to direct impact on site.

To Max aircraft are required to under a purchase leaseback transactions and both are on long term leases.

We do not have any massive an order.

Hi enters 2020 was the strongest balance sheets, and our company's history with more than 313 billion in cash net debt to equity ratio of 2.3 times, a no near term debt maturities.

We are well positioned to support our committed pipeline direct minimally indeed been opportunistic should arise.

We will continue to execute on our strategy with a relentless focus on delivering value for our shareholders.

Operationally fly at a very good here in 2019.

Thanks to the implementation of our strategy and the comprehensive acquisition financing leasing management and just condition services provided by beat them global platform.

Be down remains a strong an active pocket to fly because its principles owning 18% of flight stock.

We acquired a first 80 21 meal at year end and during 2019, we purchased a total of 11 aircraft, but temps investment at $332 million.

At the start in 2025 and get more aircraft confounding did for purchase this year, including seven eight week 20 Neal family aircraft.

These taxes this represents an investment of approximately $450 million.

As of today one of these 11 aircraft has been delivered to fly.

In 2019, we sold 85 aircraft for total proceeds, including and good end of lease income of approximately $900 million generating total economic gains of $100 million to $49 million, an 18% premium to the book value at the aircraft sold.

The average age of these 35 aircraft was more than 10 years.

Incidentally the Fivea five years since the start in 2015 fly has sold a total of 113 aircraft from its portfolio.

Either 113 sales a generated total economic gains of $268 million.

10% premium to our net book value.

A profitable sales are not one tool for selected events and demonstrate the value contained in our balance sheet.

The sales through the last five years than to the AC rigs for 127 aircraft that we owned on January one 2015.

At the end of 2019 slide eight aircraft confessed for sale.

Oh piece contracted sales threed being completed and the remaining five are expected to close in the press topic 2020.

In 2009, P. no annual lease wake factor was 11.3%.

At year end average fleet age was 7.6 years their average remaining lease term was 5.3 years.

We started off 2020 with six aircraft remaining to be remote reebok's. It this year.

All the two of these are now committed.

And during 2019, a seat utilization was 99%.

Fly has continued to maintain a consistent operational strategy based on three main principles disciplined to aircraft acquisitions Conservative financing an active fleet management.

We are rigorous on pricing refusing to overpay for aircraft to accept module. These tends to add less popular models nearly to build duffy size.

Aircraft that I Pex is concerned obviously provide doesn't lease margins at the two stronger and more consistent gains could there so down to third parties.

Like I say is aircraft at substantial gains quarter after quarter quarter and year after year validates the strategy demonstrates that we had been executing it in a consistent disciplined way.

Well I had outstanding financial results in 2019, a best year ever.

Oh, Judy will take you through the detailed financials for the fourth quarter and fully you later in the call.

I'd like to give you some headlines for the.

Our total revenues of $575 million with 37% head of the previous year.

Our adjusted net income of $246 million correspondent to need P.S. I'm $7.75.

At year end up book value per share it was $28.42.

32% increase to India.

We had an adjusted return on equity of 32%.

At year end, our net debt to equity was 2.3 times.

And then finally fly has cash on balance sheet capacity to fund our committed aircraft purchases plus other aircraft that we expect to par opportunistically.

Our results reflects the significant development supply over the last three years selling older less performing aircraft optimizing our capital structure and most importantly, upgrading a fleets with newer and more profitable aircraft.

We tend to continue these activities.

During the year, a public <unk> four months and financial outlook was recognized by one notch upgrades in our corporate rating from standard and Poor's.

Upgrades to Creditwatch positive for Moody's.

These factors along with a strong earnings and balance sheet have already had a positive impact and flies funding cost.

In November we repriced, our 365 million dollar term loan to LIBOR plus 1.75%.

25 basis point margin reduction.

But at the same time, extending the time by more than two years to August 2025.

The turndown is our largest facility.

Like financing is conservative based principally a long dated amortizing unsecured debt.

We have demonstrated that we can reduce leverage and an acceleration into having to reduce it from four times equity at the end of 2018 following completion of a large portfolio acquisition in that year.

2.3 times equity at year end 2019.

But those are shareholders lenders, a particular leave impressive feature flies performance over the last two years, that's been the substantial growth not book value.

Stood at $878 million at year end 2019.

25% increase year over year.

This growth has also been affected enough book value per share.

Go by 46% in the last two years on stood at $28.42 on December 31 last.

Why is a $1.6 billion pipeline committed aircraft deliveries most of which is either on lease are committed to lessees.

We're also focused on additional acquisitions and the buying more aircraft if they meet the disciplined investment criteria that I referred to earlier.

We're particularly excited about a 21 committed athree 20, Neal family purchase leaseback aircraft, the first of which we acquired in December.

We had seven more athree 20 found the aircraft mixture of Neos and they have Eightytwenty Neos and 80 21 views scheduled for delivery in 2020, the 11 more in 2021.

The last two aircraft and this program expected in 2022.

We've also exercised its options for eight suite 20, Neal family aircraft with nine on exercised options remaining.

Fly remains a compelling value proposition as our shares continue to trade the significant discount to book value per share and low multiple of our yes.

We are experiencing a positive supply demand relationships the attractive and popular narrow body aircraft the comprise approximately 70% Flys fleet.

Meanwhile, we have a 2 million billion dollar pipeline of new narrow body acquisitions, including 28 eight weeks into new family aircraft that the latest technology.

Peanuts narrow bodies and production.

But you are proving to be particularly popular with airlines around the world.

Lie that shareholders also benefits from the world leading aircraft to lease management services provided by be them.

With low leverage improved financial Racing's and pencils luncheon capacity, it's largely a long days it and secure debt.

The financial markets remain supportive to fly into our industry generally both in terms of providing attractive debt and as buyers of aircraft on lease.

We also raised the global aviation industry, which despite negative macro issues such as the one we are facing today.

Hi, good numbers have doubled every 15 years since 1988.

And remember that this impressive growth of more than 30 years, but the size of two Gulf was daus 911, and 12 financial crisis.

With that I'll hand over to our CFO, Julie will take you through our fourth quarter full year financial overview.

Thank you column.

Q4 fly is reporting record net income 75.2 million 44 million increase from Q4 20 <unk>.

Earnings per share increased over 150% from 95 cents a year ago to 43 in the current quarter.

Well I cheap Aro, we have 35.9% a seventh consecutive quarter of double digit Arlington and a more than 100% increase from a year ago corridor.

These stellar financial results were driven largely by aircraft sales, we sold 10 aircraft in the quarter with an average age of nearly 12 years, including flights to Athree Fortys, which were sold for an economic.

60 aircraft sales were from portfolio sales a strong demand continues in the secondary market while the other port aircraft were sold when their leases expired.

For the full year flies reporting net income of 225.9 million also record for fly and 140 million increase from 22.

Earnings per share increased nearly 150% from southern 12.

2012 from 288 in the prior year.

Are you with 29.2% for the here at more than 100% increase I'm 20 include.

Our record financial results for the year were driven largely by the sale of 35 aircraft with an average age of over 10 years as well as a larger average fleet side.

As a result applies outstanding financial results for the here and the Robert de leveraging enabled by selling aircraft at significant gains to book value. We ended the year with a net debt equity ratio of 2.3 times down from four times at the beginning of the year, beating our yearend estimate of 2.5 times.

On the revenue side was operating lease rental revenue in Q4, 20, <unk> decreased 8.6 million driven by the aircraft sales we've discussed on the call.

Although operating lease rental revenue declined versus Q4, 20, <unk>, we look forward to ramp up this year, given our acquisition pipeline.

I believe the quality of earnings is strong as demonstrated by flies increase that spread.

Total revenue increased 26% 254.3 million in Q4, 20, <unk> hundred 22.3 million in Q4 20.

Thank you for 20, <unk>, so I recognize 48.4 million.

He said.

The vast majority of which with the latest aircraft that were sold at lease expiration.

Well I recognize 14.7 million of net gains on the sale of aircraft in Q4.

Together with <unk> lease income represents a 31% premiums net book value of the 10 aircraft sold.

For the full year twice operating lease rental revenue increased 1.7 million based <unk> fourth quarter revenues increased 156.7 million to 575 million or over 37%.

20, <unk> well I recognize 70.8 million of end of lease income that's compared to 20.3 million in the prior year.

Well I recognize 97.3 million net gains on the sale of aircraft and 20, <unk> 35 aircraft, which combined with retained industries income represented 19% premium netbook value.

Turning to expenses.

Before depreciation decreased as compared to the part of your quarter due to aircraft sales.

Interest expense declined more significantly due to a number of factor.

Well aircraft filled or the largest contributing factor to the decrease in interest expense.

The decrease their cost of debt correct, because liability management efforts.

In addition, we have a higher level of unencumbered assets than a year ago.

I see <unk> expense is up 8.6 million in Q4 as compared to the here go quarter, primarily due to fleet activity a portion of which are at least related cost. The previously you had been deferred and amortized and are male expense.

Accounting standard.

Also in Q4, 0.3 to 4.3 million loss on modification and extinguishment of debt.

Jordan, which represents non cash write off of that cost.

Adept modification and extinguishment costs incurred related to the repricing an extension of the term loan and the repayment never warehouse facility, which carried a higher rate of interest and other facilities as well the debt repayments due to aircraft sales.

Overall total expenses as a percentage of total revenues declined from 74% to 49%. Thank you for 29 <unk> as compared to Q4 20 include a decrease of 34%.

With a full year, although operating lease rental revenue increased depreciation and interest expense were down.

It's primarily due to aircraft sales with interest expense declined more significantly increased the factors I just noted with respect to Q4.

I see no sense is up 4.1 million for 29.

Merely due to create activities, including lease related costs as well as higher management and servicing fees due to fleet growth.

For the full year total expenses as a percentage of total revenues dropped 26% as compared to 22.

Now I'd like to cover our guidance for Q1 2020.

The first quarter of 2020, we're expecting operating lease rental revenue of 80 687 million.

We expect amortization of lease incentives of 1 million.

Canceled aircraft is expected to be 30 to 33 million.

We expect end of lease income of approximately 2 million.

Depreciation expense will be approximately 31 to 32 million.

We expect interest expense of 27 to 28 million.

Debt extinguishment costs are expected to be approximately 1 million related to aircraft sales.

Maintenance and other costs are expected to be one to 2 million.

We expect <unk> expense of approximately 8 million without consideration of any foreign exchange gains or losses that may occur.

Overall Q1 pre tax income, it's expected to be more than 50 million.

Record net income in 2018 and positive momentum extending into 2020, we expect flights leverage level to remain low with a net debt to equity ratio below three times in the near term.

I'll turn it back to college for closing remarks.

Thank you Julie.

So let's recap on to the highlights of 2019.

We achieved 37% growth in total revenues to $575 million.

We sold 35 aircraft short economic gain of $149 billion, 18% above book value.

We produced $246 million of adjusted net income equivalent to $7.75 of adjusted EPS.

I don't produce a touchy to 2% adjusted orally.

We continued our track record of growing book value, which was $28.42 per share at year end.

32% higher than year ago.

We reduced our leverage considerably during the year, bringing it down to 2.3 times.

Meanwhile, looking ahead.

We have a pipeline of aircraft, including options valued at $2.1 billion and including Turkey, seven at the latest generation and bus Neo aircraft.

We expect to add to this pipeline through acquisitions and of over $900 billion unrestricted cash and on encumbered assets.

And the studios just said, we've given pre tax guidance of over $50 million for the March quarter.

These outcomes are obviously all highly positive demonstrate that fly continues to represent a deal a real value proposition.

So that's a we're not ready to take questions.

Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchtone telephone.

If your question husband answered or you wish to remove yourself from the Q. Please press the pound key.

Your first question comes from Catherine O'brien with Goldman Sachs. Your line is open.

Good morning, everyone. Thanks, so much of the time [laughter]. So in the past I believe you've noted and you know you've noted I believe in the past. He noted that the decision to exercise your remaining easy 20, new options, there's still quite a bit of time before you have to make that decision, but I guess first could you give a sense of when the first those decisions he made.

And then does the calculus for exercising those change all with the impact to the Corona virus or do you think there's sufficient demand for the these aircraft to the Max gardening and an Airbus living please thanks.

Well, I think and those who said enough not prepared remarks that Kathryn we've exercised piece of the 70 up will you be 17 options. We should have remaining to us know and these of delivery over the next few years, so to be them team around marketing those aircraft no.

We are finding very strong interest in the aircraft type.

The modern fuel efficient aircraft are very much aligned with it with airlines interest at the moment and obviously, it's too soon to say will be if the CRO. The virus will have any impact from that but.

So far we get found no impact of the progress on our end.

Marketing so.

You know, we will be making decisions on there on the remaining options over the next years, but there's no hurry on us to decide on Ddos is.

Is there any like is there or is there a period. When you will have to make that decision or is it pretty flexible on the remaining nine.

It's pretty flexibility to reignite, it's it's not within the <unk> and into next year or two.

I understood and then my second question adoption spread out through the whole who'd program spreads out through 2000 to 25.

Okay understood. Thank you and then in terms. Your aircraft sales are you still seem to same level appetite fair owned aircraft. As you were maybe say six months ago, and then are there any particular very interesting. The most interest and then I guess kind of secondary question that is obviously after very year over a very active year of aircraft sales.

In 2019 can you frame your expectations for this year, you know you've done calling the fleet or are there more to come so I guess long winded question, but mostly it's appetites all the same any particular variance you're getting you're seeing particular demand for and then expectations for this year. Thank you.

Steve would you like to cover go that's.

Sure.

So caps on more Oh 2020, all fly has budgeting <unk> five and seven aircraft sales.

In terms of demand and this is really pretty virus because anything that is.

And is evolving pretty quickly now.

Demand is still very strong.

Primarily driven by all this new capital that's come into the sector.

Especially all what we call ABS accumulators people looking to.

Portfolios together to ABS, Oh, plus the other various funds that are buying for a long term hold.

So why now we don't see.

Andy waning of of demand, but again, it's early days it must virus and Oh, we're hoping that things do slow down. So it gives us an opportunity to go out and acquire some better returning deals for blog.

Okay understood and then just one quick modeling one oh, let's see appropriate tax rate to use going forward I believe last year, you had mentioned, 15%, but it seems like this year came in but lower than that thanks.

Hi, Catherine this is due beauty would you let a couple of them that's one.

Yes, I Katherine so hmm I think.

He says we're looking at the statutory rate and Arlon, which is 12%.

We get out some noise in Q4 with much lower than that but going forward. We do expect a tax rate approximating the statutory rate in Ireland.

Great. Thank you so much all the time.

Thanks Catherine.

Your next question comes from Helane Becker with Cowen Your line is open.

Hey, guys, it's actually I kind of Guy here My first I'm, just I'm on Air Asia, what we've seen that they're looking to defer some lease payments are given the current of Iris do you have any other customers are looking to do the same and is that contemplated within your within your rental guidance right now thanks.

Well color I think I'm, the only <unk> and airline that has actually asked to for rental payments is Airasia X.

To which we don't have any exposure and it's only a I think it's only a minority ownership by the Air Asia Group. So we have not had any and request for a rent reductions or to federals at this point of time.

Okay, Great and then appreciate the move that you guys have done and improving the quality of the fleet over the past couple of years.

But your but your lease equipment assets are now back to where they were at the end of 2016, just just curious if you could speak to you know what you would <unk> how you envision the fleet over the next five to 10 years like what size do you want to get too is there a goal I'm just I'm just curious if any.

Yeah, well, we don't have any specific goal color, but as you've seen from and a presentation. We have it reasonably good pipeline of yeah. The laser technology Eightytwenty Neal. So we continue to focus on the popular Hi Tech Martin aircraft.

We lived up Tuesdays Opportunistically buy some reason be all Multan mid life.

Although types, but basically our focus now would be on the on on the laser technology, because I think that's one where airlines are going themselves I think that the whole them.

Concerned about the environment Airlines are consistently looking out for that the most button aircrafts with the with the lowest emissions.

Okay, Great and then just just last one there's been some some chatter about potential opportunities.

The Liberty from financial stress from customers in China. Just curious if you guys. We've had conversations like that as well.

If you have really any appetite to do something like that.

Thanks again for the time.

Yeah look I think again as we said in our prepared remarks, the whole virus and particularly in China. It's a health crisis the moment, but that's what I'm. Most focused on we have long term relationships with a lot of airlines in China, and the bus and in Asia in fact around the World you just some of these go back over 30 years, we obviously work.

With those that clients as best we can to support them as best we can if there are and if there are opportunities for either moving aircraft or a sale leasebacks Revolution. If you look at us.

And you know again.

But however, all the time.

Putting best interest to fly on a day kozar stakeholders, the tough for a minds.

Great. Thank you.

As a reminder, it is star one on your telephone keypad to ask a question.

Your next question comes from crews Patel with Deutsche Bank. Your line is open.

Hey, Good morning, guys just had a couple here on the on the option.

Could you live so when the first of those it's going to deliver or is that a part of what you haven't 2020 to seven you're talking about.

No the options as Steve I don't know when you'd like to come to that Steve said, it's not one of the seven Steve do you want to comment on them on options leverage.

Well question I would say that.

It's it's sort of fluid right now Oh for two reasons because of the virus that's going alone, but also because of the production line at Airbus. So we're running cost and discussions with Airasia.

About picking up these options and we may pick up some as early as ended this year.

But it's more likely it won't be a leaner and 20 to 23.

But you'll see us pickup options.

Got it and then.

When I think about.

When you receive on on these aircraft.

So I guess the perception the industries and airline typically is able to negotiate a better rate analysts or.

True assume that you would get the seen pricing that airasia has negotiated on these assets or is there a renegotiation of a price how should we think about that.

That's what.

Sure when it was the best way to think about it is that Oh, the pricing is not.

Or something that airasia or Airbus won't disclose we've negotiated our prices up flat when we did the original package.

And with Airasia.

On the deal. So it's set and then installing subject to a escalations on what happened so.

I can't comment whether it's their price Oh.

Because we don't have visibility on what they're just California.

We're just held if there were attractive prices for us and made socks.

Got it Okay, and then I think to go after that couchette just the reason we can be flexible on all of this is we don't don't have any pre delivery payments up on these aircraft.

Okay, that's very helpful.

And then lastly have you seen any change from a change in behavior from any of the Chinese less source with whom you may compete.

Purchase leaseback market over the course of the last couple of months.

Do you all know there too.

Yeah, Yeah. So okay I'll eat the only observation I I would make is that we've definitely seen in the last year.

The Chinese or less horse selling more and more aircraft that they've acquired over the last five years than in the.

And just five years right. So they become net sellers in my mind.

But we haven't seen any material change since the virus, but we do expect that to change like.

We'll take a lot of these castle.

Probably little tied on funding or one or would you still exposure.

And Mike I think you're going to see more opportunities come well above the Chinese law source.

Okay, great things like us.

Thanks Bruce.

Hi, again it is star one on your telephone keypad, if he would like to ask a question. Your next question comes from Jamie Baker with JP Morgan Your line is open.

Hi, This is a bookable on for a genuine mark up most of my questions have been answered, but just to clarify.

<unk> prepared remarks, you mentioned that there's been no impact from the a virus underpayments. So just to be clear Oh, you're not sina indications with the customers will last for a rental deferral that assistance and how would you characterize the level of supports they may have either from you or other parties.

Steve you want to comment on that one.

Yeah. So.

Somebody and they actually when I asked about Eurasia, and just so everybody is clear.

Airasia X is a separately owned airline.

Is lifted or Asia owns approximately 17% of that so that's the arrangement group.

Oh that is the only airline any airasia group that is currently asking for deferrals.

And as Colin said, we have zero exposure to Airasia X.

Our age group, which includes all its affiliates in the Philippines, Indonesia, Thailand, India, and Malaysia has not requested.

Any deferrals.

And I would say that Tony is a unique manager has a very deep bench airasia and one of the most capable management team. So we've come across.

And we think they will navigate this virus better than any airline in Asia.

Understood. Thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for participating and have a wonderful day you may now disconnect.

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