Good day, and welcome to AerCap Holdings N.V. First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After speaker presentations, there will be a question-and-answer session. Today's call is being recorded and a transcript will be available following the call on the company's Web site. I would now like to hand the call over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and hello, everyone. Welcome to our first quarter 2020 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 5, 2020. A copy of the earnings release and conference call presentation are available on our Web site 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.

Thank you, Joe. Good morning, everyone, and thank you for joining us for our first quarter 2020 earnings call, in what is clearly a remarkable time. Our thoughts go out to those of you who are being directly impacted by this virus and to our staff, suppliers and customers who are working tirelessly in such trying circumstances. Despite the impact of the coronavirus in the first quarter, AerCap produced a strong quarter with net income up $277 million and earnings per share of $2.14. Now, how any company emerges from a crisis depends firstly on what condition it was in when it entered both from a financial and operational perspective, and then critically what the company does during the period. AerCap has been through several crises before and has emerged stronger from each one. The key in our experience is to have a strong, independent liquidity position going in. AerCap has that with 8.2 billion of liquidity on hand, $28 billion of unencumbered assets, a seven-year low debt equity ratio of 2.5x are very manageable CapEx, particularly relative to our size. Our expected CapEx for the rest of 2020 is 2.7% of our total assets. It is vital in times of stress that one in the platform that can handle multiple challenges. AerCap’s platform is unrivaled in this regard. To remind you, AerCap has bought, sold and leased over 2,000 aircraft in the last five years alone, including over 500 widebody transactions. These numbers and the associated infrastructure are unmatched in the industry. Turning to airline credits, it is very important to look at the credit quality of AerCap’s customer base when assessing our financial strength. Approximately 70% of our fleet is flag carriers for Chinese and U.S. majors. Relatively speaking, this gives AerCap a stronger base from a credit…

Thanks, Gus. Good morning, everyone. I’ll start on Slide 7. AerCap produced a strong financial performance in the first quarter with net income of $277 million, an increase of 18% over the first quarter of 2019. Our diluted earnings per share were $2.14, an increase of 27% from 2019. Our book value per share increased 14% over the past year. On Slide 8, our total revenues for the first quarter were $1,238 million, an increase from $1,205 million last year. Our basic lease rents were lower, primarily due to downtime and re-leasing activity and the write-off of $16 million of lease receivables in the first quarter. Our maintenance rents were $134 million in the quarter and were higher mainly due to lease terminations as well as higher end of lease compensation that we received during the quarter. Our net gain on sales for the quarter was $58 million, an increase over last year. And our other income was lower because we had higher interest income and some insurance proceeds that came through in the first quarter of 2019. On Slide 9, our net interest margin for the first quarter was around $725 million. Our average cost of debt was 4.1% for the first quarter, a slight decrease from 2019. Our net spread was 7.7% for the first quarter and our net spread less depreciation was 3.1%. The average age of our fleet remains just over six years and the average age of our new tech aircraft, which represent 59% of our fleet today, is two and a half years while the average age of our current tech fleet is 11.5 years. Our average remaining lease term continued to be 7.5 years which is one of the longest in the industry. Turning to Slide 10, we sold 12 aircraft in the…

Thank you. [Operator Instructions]. Our first question today is from Helane Becker of Cowen. Please proceed with your question.

Thanks very much, operator. Hi, everybody, and thank you for the time. I just have two questions. When you do deferrals, how do we reflect that on the income statement? So maybe that’s for Pete.

Sure. Thanks, Helane. So when we have a deferral, we continue to reflect that as revenue as long as we believe that the amount is – that the lease rent is probable of collection. And as Gus mentioned, on the deferrals that we’ve got our security deposits and other security well exceed those that we’ve done.

Okay. And then my other question is I know you don’t comment on specific clients and that’s fine, but there have been some discussions that one of your biggest clients has asked for debt for equity swaps and things like that. And I just kind of wonder how you think about that conceptually? I know you’re in the leasing business, not the airline business, but maybe you could just talk about your view on that and how we should think about that big picture?

It’s extraordinarily rare for us to convert debt to equity. It will only be done in very unusual circumstances. We’ve done it with Norwegian Airlines. That’s part of the restructuring of that airline as its business plan changed and the government of Norway invested in the airline. But generally we won’t do that. And for AerCap to become an equity investor in an airline, what’s happened is that the prior equity expense has lost [ph] everything effectively. So it’s a very expensive road to go down and it’s certainly not the norm.

Okay, that’s very helpful. Thank you.

The next question is from Koosh Patel of Deutsche Bank. Please proceed with your question.

Hi. Good morning, guys. Aside from rent deferrals, I understand that there can be multiple other avenues at least for your customers. Could you talk to us about what some of those might entail? For instance, we’ve heard that some customers are capturing a portion of their security deposits and maintenance reserves. Is that accurate?

Well, I can’t speak to other leasing companies. I can only speak to ourselves. I would say the vast, vast, vast majority of things we do are around rent deferrals. When it comes to security deposits or maintenance reserves, you generally will only give those back if you receive letters of credit in return. So often times that doesn’t really help an airline, because to get a letter of credit, they may need to put cash collateral up. So it will depend. But as Pete said, when we look at aircraft deferral positions, we have entered at March 31 approximately 300 million. We have another 300 million give or take that we expect to put in place. But against that, there’s 1.1 billion of security deposits and a multiple again of maintenance reserves.

Thanks. And then considering the 60 aircraft deliveries that are deferred for this year, is there any cost to you for this or is that mostly a function of OEM production reductions?

It’s, I would say, not something we can really comment on with the manufacturers. Suffice it to say that those airplanes that we deferred, we would not have deferred them unless the deferral was on competitive terms, because we have actually replaced over half of our MAX aircraft already. I don’t believe any other leasing company had managed to do that. And I should just go back to talk on the deferrals. Just to be very clear, as I said in my prepared comments, we get paid every single day by our customers. Even in the second quarter in the month of April, we received over $200 million in cash from our customers.

Great. Thanks a lot, guys.

The next question is from Jamie Baker of JPMorgan. Please proceed with your question.

Hi. Good afternoon, gentlemen, and thanks for a very solid presentation. I think [indiscernible] working from home [indiscernible] air travel. A question on the deferral numbers, Aengus or Peter, I believe that you said that, “in progress.” Does this presumably represent the peak? Is the reality or the assumptions that airlines [indiscernible] have already raised their hand? And also on the percentage of recapture that you’re assuming in 2020, is that also – is that only to the leases or those that have been granted or is that actually your assumption for the “in progress” discussions? Thanks. And then I’ll hand it Mark for a follow up.

It was Jamie a little bit difficult to hear you, but I think you’re asking are we at peak deferral at the moment? And I would say that we certainly feel that mid-April was a low point for air traffic globally. That’s what we feel based on what was observed, what we see from Eurocontrol, as I mentioned in my prepared comments and what we’re observing in China. They’re certainly on the road back. I can tell you that in the Chinese market we are getting paid now again the regular rate on rental. Could we see airlines ask for another few weeks, a month of deferral in certain cases? Sure, we could. But from what we’ve seen at the moment, those granted deferrals in February and March primarily in China, they are back on track at the moment.

Okay, that’s helpful. Mark?

Yes. I just wanted to jump in. Pete, a question for you. In the fourth quarter presentation for the sources and uses walk, there was a mention of 3.1 billion – forecast of 3.1 billion of operating cash flow for the next 12 months. In this quarter’s deck, it’s 2.7 billion. So it’s gone down by 400 million. Is that just a function of lower CapEx or is there a rent deferral number as part of that 400 million reduction?

Thanks, Mark. So that reflects a few things. Firstly, it reflects lower CapEx. It also reflects all the deferrals that we’ve done, what we expect to do and it also reflects our expectations around maintenance revenue like that. But those are the three [indiscernible].

Okay, great. And then just one last one from me and we’ll turn it over. I think there’s a lot of confusion about your relationships with Boeing and Airbus from the perspective of if you have aircraft that are being built obviously and are in that order book, and I realize everything is placed right now, but what happens if the airline just says, we’re not taking delivery. And I realize that in this environment, this is a concern investors have. Will airline take delivery of aircraft that simply go directly into storage or is that just not part of the business model, if you will? Will you work with the OEM in a situation like that to defer that delivery? Thank you.

Mark, you will normally work with the OEM and the airline to defer the delivery. The only exception would be if the airline is in bankruptcy and then it’s different of course, but that’s very rare. And of the airlines that are in bankruptcy, we don’t have any airplanes scheduled to deliver to them. But at this point if there’s an airplane up for delivery, we will generally work with the manufacturer. And as you can see Mark, we have already pushed out over 60 airplanes in the near term. And as I mentioned in my prepared comments, I would expect that 2021 or 2022 you’ll see significant amounts move out. So what’s always happening is that the three parties concerned are trying to work together to avoid those types of situations. I’m not saying they can’t ever exists, but what you’ll see if that the three parties are working together to prevent those situations from happening.

Great. Thanks for the time.

Pleasure.

The next question is from Moshe Orenbuch of Credit Suisse. Please proceed with your question.

Great. Thanks. I wanted to kind of return to the question about the estimated operating cash flow. So the 2.7 billion that you have in this chart includes the deferrals that you’ve done, the deferrals that you expected and could you talk about what it assumes for those airlines who have received deferrals to start repaying both their regular rents and the back rent and any kind of thoughts there? Thank you.

Sure, Moshe. As Gus mentioned, the deferrals tend to be two to three months in duration. Then the airlines start repaying those afterward over a period of time basically during the remainder of the year. And so that’s what that reflects. And I said, it’s not just the deferrals that we’ve executed to date but also the ones that are – where we’ve had discussions with the airlines on them. So that 2.7 billion number reflects those. It reflects, as I mentioned before, the changes in CapEx that we’re expecting during the year. It reflects leasing expenses that we’ll have, maintenance revenues, that type of thing. So basically it reflects everything that we can see to date as we look forward over the next 12 months.

And I guess just to follow up on that, Pete, like how will we be able to kind of observe how’s that tracking? Are you going to tell us what your receivables are at the end of next quarter? I guess how are we going to know that that forecast either – as we get into the second quarter is either better or worse than that?

Yes, it’s a 12-month forecast, Moshe. You can see our operating cash flow. Like, in the first quarter operating cash flow was 628 million. So you’ll see that on the cash flow statement. As Gus mentioned, I think the second quarter should be the [indiscernible] for this just given what’s happened with the industry, so we should see a gradual recovery in subsequent quarters. But even this quarter we’re going to have several hundred million of that of operating cash flow.

Okay. Thanks very much.

Sure.

The next question is from Catherine O’Brien of Goldman Sachs. Please proceed with your question. Catherine O’Brien: Hi. Good afternoon, everyone. Thanks for the time. So just a couple of questions on your airline customer portfolio. Are there any airlines you would categorize as through the worse either in terms of demand? It sounds like maybe some geographies in Asia, you’re already seeing that or just in terms of liquidity concerns being behind them. If so, what kinds of familiar customers will be talking to you would you say from this category? And I guess really what I’m trying to get at is, are there a subset of your customers that have come back and confirmed that they are really confident in their lease commitments with you? Thanks.

It’s a straightforward question, Catherine. I guess as I said, if we look over in China where – and Southeast Asia in fairness, of course there are some [indiscernible] down there. But they seem to be coming at this side slowly. And the level of activity is approximately half of what they were doing last year in China, if not more. And so most of our exposure to China is with airlines that have significant state ownership in them as well have received significant state support. So we’re not seeing any more requests from that part of the world. In Europe, then, we are seeing vast amounts of state support also come in on par with what’s been announced in the U.S. with the U.S. majors seeing that with clearly this Air France-KLM announcement, what we’re likely to see out of Germany as well and what we’ve seen from smaller carriers and smaller carriers around Europe too. In the U.S., we saw very large amounts [indiscernible] overall point I would say was that of course, some guys just aren’t going to make it here and we’ll have to see how that progresses through the year. But the vast majority of our operators are going to make it through and they’ll be flying around at the end. But no doubt there will be a bunch of defaulters, it’s just very hard to say at this stage and what they’ll be. But you have to look at who you’re talking to here is AerCap. We’ve moved 2,000 airplanes in the last five years. If we get an airplane back, we’ll find a home for it and/or for the security position we have as well. Thank you. Catherine O’Brien: I appreciate that. Thanks for entertaining a pretty broad question there. So maybe a follow up to that. I feel there is some confusion out there as to what actions you can’t take if a lessee defaults on payments. Can you just walk us through like the actions you would take? And if we’re thinking about taking those actions at a different pace than you would normally today, given maybe there’s a little bit less demand for those aircraft coming out of repossessions? And maybe correct me if I’m wrong, is there demand for those aircraft coming out of repossessions? Thank you.

So let me start with AerCap repossesses airplanes very quickly. I think, historically, as you can see from listening to us for the last 15 years, we are generally – I can’t remember a situation where another lessor was faster than us to pull airplanes out. So what if someone stopped paying? We would enforce our security. We may seize assets of the airline in different jurisdictions. We may put leans on their cash flows. There are many things we will do. And that generally if you want to get the airplane back, you’ll get it back. There’s never been a jurisdiction in the world ever that we could not take an airplane out. Now generally what you will do is you will move extremely quickly because your concern is that when the airline stopped paying for the aircraft, they’ll continue to fly it and burn green time off the airplane. The second reason you want to move very quickly is you’re in a hostile jurisdiction. You want to get it out before leans can attach to your airplane, which has never happened to us in any material level. So in this instance, there are airplanes of course that we’re taking back – that we I should say put in our control. As you’re listening publicly, some airplanes that are under our control [indiscernible] and then there are other airlines where we have taken airplanes and put them under our control even in this environment. However, the instance of where an airline is going to use the airplane and burn green time off the engine, that clearly isn’t the risk at this point in time. So if you have a contractual agreement with the airline and you have all your records, you may as well leave the airplane there rather go through the effort and expense of moving it in this environment. But be under no illusion that we don’t believe in the airline or we’re in a hot spot jurisdiction, we’ll take the airplane in. Catherine O’Brien: Okay, great. That’s very clear. I appreciate that. And maybe if I can just sneak one quick follow up to Helane’s question earlier on Norwegian? You noted that this is very unusual. I don’t think in my time covering this space I’ve seen something like that. It definitely seemed unusual to me. What are the circumstances if you can say? Is it something about the jurisdiction? Is it something tied to COVID? I imagine you’re not envisioning many more of these types of deals happening over the next couple of years. Thanks. That’s it from me. I appreciate it.

No, we won’t see many of those types of structures happening. In the case of Norwegian, what we had was an airline that had entered into a huge growth phase that was stumped obviously over the course of the last few months completely and it’s been retreating. We have a new management team in place in the airline also. And we also have the conditions under which the Norwegian government would come into the airline. So the combination of those factors was the reason and given the environment we’re in was probably the reason why lessors proceeded with this Norwegian agreement which is highly unusual and I can’t think of one like this ever before. Catherine O’Brien: Thanks very much.

The next question is from Ross Harvey of Davy. Please proceed with your question.

Hi. Good afternoon and thanks for taking the time. Three questions from me. The first is likely [indiscernible] will take about 0.5 billion from sales leasebacks and in the post COVID environment. I’m wondering, are you looking at any such transactions and do you see any of the excess cash coverage being deployed in such a way? Secondly, [indiscernible] in the CMD deck that there were 63 used aircraft requiring placement in 2021. I’m wondering is there any update on that particular figure. And finally more of a long-term question, but there has been speculation about the pace of recovery in air traffic over the coming years, and I’m wondering do you believe there will be structured efforts post-COVID beyond the more cyclical and time limited health-related impacts?

There’s a good few questions there, Ross. Let me deal with the easy one here, 2021 placements out of the Capital Markets Day last November, many of those aircraft are already placed. The vast majority will be placed already. And turning to sales leasebacks, look, at our focus at the moment is just making sure that we understand completely the extent of the crisis impact will have on AerCap making sure that we maximize our liquidity. As Pete mentioned and I said in my prepared comments, we were able to put in place the seven-year debt facility. We have a group of our longstanding banking partners that closed actually this week and as a matter of fact it closed and we finally signed yesterday. The credit committee approvals were taken in the depths of this coronavirus in early April. That’s demonstrates the extent that we have access to capital. But at the moment when it comes to sales leaseback transactions, I believe there will be plenty of those there. The reality on the far side of this to talk about the industry outlook is that airlines will need lessors a lot more than they did over the last few years and I do believe there will be fewer lessors. In this environment not having a global platform is a massive disadvantage. And those who’ve entered this space on the base of trying to pick up yield over the last few years, I suspect that they will retreat from this space over the coming years and they are reluctant to reinvest. So I think on the far side of this, opportunity will not be the issue and there’s no need to rush into it. There will be plenty there. And because airlines will be focused on retiring debt or government aid and we’ve seen clear evidence of this behavior from the financial crisis. Once the banks receive significant government aid, the priority to retire that [indiscernible] because it’s strategically impaired and practically impaired the ability of management to run the business, and I do believe we’ll see the same behavior here. And so there will be a greater focus on using operating lessors when we get to the far side of this, then spending billions of dollars of their own money buying airplanes in Boeing and Airbus.

That’s very helpful. Thank you, Gus.

Welcome.

The next question comes from Vincent Caintic of Stephens. Please proceed with your question.

Thanks. Thanks for taking the question. Just a few quick ones. On the CapEx, the remaining 1.2 billion of CapEx for this year, just wondering if that’s confirmed or if there’s a chance that that might get pushed back? And then how are discussions that you’re having with airlines on confirming 2021 orders?

Look, I think it’s likely that most of that CapEx will occur, of course, as we start production because some of that slide [ph] to the right. I think that’s obviously a real possibility out there. The 2021 deliveries, again, of course as I mentioned earlier in the call, the idea is to work with the manufacturer and the airline and see what can be taken and what can’t be taken. But as I said, I would envisage that the most of our slots will be taken by the airlines at this point. But no doubt we are in discussions and a significant portion will get pushed out to the right from 2021 to 2022. That’s just a fact given the numbers we gave you are before the cuts that were announced by Boeing and Airbus last week on the 320neo, the 737, the 787 lines. So no doubt some of our CapEx – a good chunk of our CapEx in 2021 and 2022 is going to move out to the right.

Okay, very helpful. Next on the aircraft sale margins, so they were very strong this quarter and I’m impressed that you had ample sales of 150 million. If you could maybe share what sort of margins are you seeing today on sales and how much demand is there and kind of generally who’s buying in this environment?

Yes, the April sale margins would have been consistent with the March sales. Look, in today’s world you have to have an infrastructure and knowledge and experience to execute sales. I’m sure many lessors won’t have executed 150 million in sales in the last three months, let alone in April and that just is a differentiation and the capability of this platform versus others.

Okay, very helpful. And last one from me, just an update on your funding initiatives. So I’m encouraged you’ve returned 3 billion of the facility. What sort of priorities are you thinking in terms of financing? Are you looking more in other unencumbered aircraft portfolio or are you able to do still unsecured debt? And what sort of – of the costs are for the various sources of funding you have. Thank you.

Thanks, Vincent. It’s Pete here. So on the funding side, our plan is to continue to fund the business in the way that we have before which is primarily on the unsecured side, although as we’ve talked about many times we have a number of funding alternatives that we use. We do it in a number of different markets. That’s one of the benefits of having the 120 bank relationships that we have. And so when we look at that secured funding that we just talked about, that was done with a number of European banks and it was done at levels that were consistent with where we would have been pre-COVID, right? So very little disruption in that market. So that’s something that we’ll continue to do, but fundamentally as I mentioned, we’re committed to running this business as an investment grade company and that means we’re going to do a lot of unsecured funding. We will be doing that and looking at other alternatives too. So I don’t see any real change in our funding profiles going forward. Obviously, as we look at it now, spreads are wide in the unsecured bond market and we think that’s unwarranted. We’d hope to see those come in. But we’re going to maintain strong liquidity for this business.

Okay, great. Thanks very much, guys. I appreciate it. Thank you.

Sure.

The next question is from Ron Epstein of Bank of America. Please proceed with your question.

Hi. Good morning, good afternoon, guys. Just a couple follow-on questions. When you look at the production decisions at the OEMs, one of the things that seem to jump out and strike me was the 787. Getting back up to 10 per month in the current environment seems aggressive. I don’t know, are you seeing that kind of demand for that airplane?

Well, the 10 they’re talking about is ones that they have already had on order. I think you saw United’s confirmation. They were going to take 787. You saw American’s confirmation. They were going to take 787. So I don’t think this is about selling new airplanes in this market. It is airplanes that are in the production system that they are going to deliver. And I think what they [indiscernible] is more reflective of where they think demand is. Because what we’re selling today is what they think demand will be in two years.

Got you. And then moving on to the 737 program, they completed 50 more airplanes in the quarter, so they now have about 450 in inventory and on top of that there’s 400 approximately that have been granted by the airlines. So you’ve got effectively 850 737s that have to enter into service either through delivery of Boeing or back with the airlines. How do you think about that as a headwind when you think about demand for the 737?

Well, I think timing is the key there, Ron. First of all, when will they be [indiscernible] on a global basis? Now one certification for a global product is not enough. And certification – so that’s the first thing. You got to have global certification. We’ll have to see when that occurs. Thereafter, I suspect that the delivery profile will be very low, as Boeing has indicated themselves. So I think you’ll see a slow reproduction of those airplanes and I think Boeing has made that clear both from the stored fleet [indiscernible] that’s in the Boeing field at the moment. But I do think to be fair to the MAX 8 that in a couple of years’ time is that airplane will be seen as a very desirable aircraft to be had by airlines. I don’t think – assuming that’s premised on a successful reentry and global certification of the airplane.

Yes, that makes sense. And maybe just another quick one, if I may. What do you think about the future of the E2 program now that it appears Embraer and Boeing are kind of going their separate ways?

E2 is the old plane. Look, it is the only alternative in the world from the regional jet business now apart from Airbus and Boeing. What Embraer needs to look at is over the next three or four weeks, because Airbus will make changes to the 220 to make sure that it is compliant with – that a pilot flying a 320 can fly a 220 and that there will be commonality in the cockpit. That’s where Airbus will trend. And so Embraer should have a decent sized market there that they can sell into over the medium to long term due to the fact that the Airbus product will be very standardized with the 320. That will take time. It will take some time over the next three to five years, but there’s a market there for the Embraer product, no doubt about it.

And then maybe just one last one. When you look at – these disruptions create opportunities, right. When you look at what’s out there now, are there some interesting opportunities for you guys to pick up some assets that, let’s call it, the fire-sale prices?

Look, as I said on that, Ron, what you need to do now is just make sure you take stock of the impact of this crisis, what impact it will need – what impact it will have on aircraft and what we need to do? Clearly we have a huge amount of liquidity and we’ve significantly reduced any outgoings and the platform that we have. I do believe though that on the far side of it, it is likely that those big lessors will be far more in demand than they were over the last three or four years. I think it’s likely that we’ll return to this situation that we’ve got the most of the last 30 years. And that airline certainly coming out of this will be extremely focused on repaying debt, particularly with government aid. That will be the number one focus of the management team. And as I said, the evidence of that is what occurred after the financial crisis with financial institutions around the world and I saw that firsthand in dealing with AIG on the sale of ILFC. I think we’ll see a repeat there, which will mean that there will be less motivation for airlines to ordering airplanes from the two OEMs and far more motivation to use a leasing product that doesn’t chew up money that they can use to repay government debt and get control back of their airlines.

Thank you very much.

Very welcome.

There are no additional questions at this time. I’d like to turn the call back to Aengus Kelly for closing remarks.

Thank you all very much for joining us on the call. And we look forward to talking to you again in three months’ time. Take care.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.