Good day and welcome to AerCap's Third Quarter 2022 Financial Results. Today’s conference is being recorded and a transcript will be available following the call in the company’s website. At this time, I'd like to turn the conference over to Joseph McGinley, Head of Investor Relations. Please go ahead, sir.

Thank you, operator and hello, everyone. Welcome to our third quarter 2022 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 November 3, 2022. A copy of our 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 we'll allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow. I will now turn the call over to Aengus Kelly.

Thank you for joining us for our third quarter 2022 earnings call. We are pleased to report another quarter of strong earnings for AerCap. During the third quarter, we generated $2.21 of adjusted earnings per share and adjusted net income of $537 million. We generated strong net income and cash flow and achieved our target leverage ratio well ahead of our expectations. As a result, we are raising our full year EPS guidance from a range of $6.50 to $7 to a range of $8 to $8.50. As we've discussed in prior quarters, the environment for aircraft leasing continues to strengthen and we are seeing this reflected in our financial results. On the operational side, the impact of this strengthening demand is clearly evident. The best indication of this was in the execution of a record 255 transactions in the third quarter. This included lease agreements for 137 aircrafts, 24 helicopters and 23 engines. We also completed the purchase of 15 aircraft, 16 engines and three helicopters, and sold 21 aircraft, 13 engines and three helicopters. The amount of data emanating from this level of transaction activity is unparalleled and gives AerCap unique insight into the market allowing us to make meaningful decisions earlier and with more conviction. Today is the reason we are considerably more optimistic about global widebody demand than many others. We believe that the shortages we are currently experiencing in the narrowbody markets will be replicated in the widebody market. And like the narrowbody market, the tight supply will persist for the next few years. As an example, in the third quarter alone, AerCap signed 30 widebody leases, of which 11 were from our order book and 19 were for used aircraft with broad-based demand in Europe, Asia and South America. This will be sustained by…

Thanks, Gus. Good morning, everyone. We had a very strong performance in the third quarter. Our adjusted net income was $537 million, or $2.21 per share. The impact of purchase accounting adjustments which include lease premium amortization and maintenance rights amortization was $123 million in the third quarter, including a reduction to revenue of approximately $80 million and an increase in leasing expenses of $43 million. We also had transaction and integration related expenses of $4 million for the quarter. Taking all those into account, our GAAP net income for the quarter was $440 million, or $1.82 per share. I'll spend a few minutes going through the main drivers that affected our results for the third quarter. Basic lease rents were $1.473 million for the quarter a slight increase from the strong results in the second quarter. Our basic lease rents reflected $51 million of lease premium amortization during the third quarter. As I've mentioned on previous calls, the lease premium asset is amortized over the remaining term of the lease and reduces basic lease rents. Maintenance revenues for the quarter were $120 million. That reflects $30 million of maintenance rights assets that were amortized to maintenance revenue during the quarter. In other words, maintenance revenues would have been $30 million higher or around $150 million without this amortization. Net gain on sale of assets was $69 million for the quarter. During the third quarter, we sold 17 of our owned aircraft, 10 of our owned engines and three helicopters for a total of $373 million. So that represents a gain on sale margin of 23% for the quarter. Our other income was $62 million for the quarter which included $29 million of proceeds from unsecured claims. This primarily related to recoveries on our unsecured claim related to Aeromexico. Leasing…

Thank you. [Operator Instructions] We will take our first question from Ross Harvey with Davy. Please go ahead.

Hi. Thanks. I was hoping that we could talk about excess capital because you have done frankly a very remarkable job bringing the debt to equity ratio down below 2.7 already. I'm hoping Gus and Pete, you might talk us through your priorities around how you deploy capital. I recall you would have look at the CapEx and M&A and delevering and shareholder returns in the past and how they can fluctuate? How do you assess those at the moment? And perhaps in the case of share repurchases, just how you would think of structuring those? Thanks.

Thanks, Ross. Well, on the first point, yes, indeed. We have brought down the debt equity ratio which is a real cash flow measure to below 2.7 times, as Pete mentioned, despite the challenges presented from COVID and Russia, et cetera. That shows to me the stability and the robust nature of the business. As regards deploying excess capital, we will now begin to generate excess capital and as we have done in the past, we're very careful stewards of that excess capital and how we deploy it. As we look today at the opportunity set that's in front of us, there's no doubt as I've made clear before that the acquisition of our own share is a highly attractive use of that excess capital as it is generated.

Thank you very much.

We will take our next question from Mark DeVries with Barclays. Please go ahead.

Yeah. Thanks. So the updated EPS guide for the year implies a run rate of somewhere around $2.5 a share in 4Q. Is that a fair run rate to assume heading into 2023? Are there some non-recurring items in there that we should think about?

Well, I think it's actually, I mean, if you look, we've gone 635 so far this year, Mark in adjusted EPS. So we are guiding to $8 to $8.50 so that's the range there right, which is basically $1.65 to $2.15 for the fourth quarter. And I think, what we've seen in the past and you've heard us talk about is things can move around from one quarter to another. So we'll have to see, that's why we have a range for it. There are a number of items, maintenance for instance, gains on sale, other things that could easily slip from fourth quarter to first quarter or vice versa, so that's why we've got the range. I mean, I'd say, if you take the mid-point of that range that's kind of our best estimate at the moment. But if you look at this quarter, we did have some things that were one-time items that were positive, so like the mark to market gain that we got. We had very high gains on sale of 23% margin, so if you look at the full year that tends to -- that's about 10% for the full-year for example. So we have the unsecured claims from Aeromexico that we got in this quarter as well. So I think, as you think of a normal quarter, I would remove some of those items from that.

Okay. That's helpful. Thanks.

Sure.

We will take our next question from Jamie Baker with JP Morgan. Please go ahead.

Okay. Good afternoon, everybody. Can you walk us through an actual example of how interest rate adjustments work for forward placements? So for an aircraft that you're going to deliver this quarter or next, I'll assume the order was placed, however, many years ago but that the lease, I'm guessing was inked, I don't know, 18 months to 36 months ago. So for contracts with adjustments, how much higher will the lease be as a result of set adjustment?

Jamie, it's Gus here. If I can ask you to pick up a pen, you just pick-up a pen.

Okay.

I'll talk you through it, okay. So what you would assume, let's say, for standard narrowbody airplane. You'll have a loan, somewhere around $36 million. So $36 million is the part that's interest rate sensitive. What you want to do first is, workout, okay, of that $36 million, how much do I need? How much is the interest bill going to go up each month for a 1% move in rates? So you divide $36 million by 12, to get the monthly impact and by 100 to get 1%. So $36 million divided by 1,200 is $30,000, so what you need to be indifferent Jamie, this is simplistic example. For every 1% movement in rates in your contract, you need the lease rate to go up by 30,000. So to take an example, let's say, two years ago, we wrote a lease rate, say it was $300,000 is the lease rate, and what we call the adjustment factor per 1% was $30,000, now it will be per basis point but stick with me with 1%. So in that timeframe, if interest rates have gone from 2% to 4%, when the aircraft deliveries, if the relevant index which might be say the seven year swap rate or the five year treasury has gone from 2% to 4%, your lease rent will go up by $60,000. And these are obviously example number, illustrative numbers.

Yeah. No. Of course, thank you for that Gus, because it's a question I get rather often from your investors. And second, last quarter your forward 12 month CapEx was $5 billion, this quarter, it's $6 billion. I realize we're mixing time periods here but I guess, I'm just surprised with the OEM challenges. I mean, this can't be an implicit acknowledgment that OEMs are putting their houses in order because it doesn't sound like they are, is this just modeling noise?

I would say, on that Jamie, we will have to see how that delivery profile actually plays out with the OEMs as we get into 2023. The OEMs provide guidance to us every few months on the delivery profile. Personally, I think it's more likely than not but that will shift down to the right of this, but we have to wait till we get the guidance from the OEMs. But certainly as you saw in my comments earlier on, there are stresses that aren't immediately obvious to everybody in the supply chain, both for production of aircraft and the maintenance of those aircraft and those engines. You must remember that there's a finite supply of parts that go into an airframe or an engine. But the engine is the easier one to understand. When the engine comes off wing prematurely, the engine manufacturer is typically on the hook under their flight hour agreements to compensate the airline for lost flying time of the airplane that can no longer fly while the engine is in the shop. So if you are the engine OEM, what you want to do is get that airplane back in the air very quickly. The engine OEM typically doesn't make money when the airplane is delivered to the customer, they make money or lose money over the life of the engine post-delivery which is in sharp contrast to the airframe OEM. So when there is a shortage of parts which there is and if engines are coming off wing faster than expected, the bias of the engine OEM be it in self-interest will be try to divert as much parts as they can to the MRO shops, not to production engines. So. I think, we've yet to see all of this play out over the course of the next couple of years, but it is a factor that's out there.

That's great, Gus and if I could just be super quick third one slide it in. In relation to the question prior to this, would you consider share repurchases with excess capital before securing rating agency upgrades? How you are prioritizing the upgrades?

Sure. So look as we look at it, I mean, we've got positive outlooks from Moody's and Fitch right now, which is very good. We're clearly in a positive trajectory with both of those and hopefully, we can get those over the line get upgraded. But we've been very clear with all the rating agencies that our target leverage ratio is 2.7 to 1. That's what we're going to manage the business to and when we have excess capital, we'll plan to distribute it up to that level, so it's not, we're not going to wait for the rating agencies which we don't control. I mean, that will come or it won't, we're hopeful that it will. But all we can do is just manage the business and use the excess capital when we got it.

I would bear in mind Jamie, of course, in that regard that that was our target ratio coming into COVID which we are at and that was a ratio that was well able to get us through COVID and indeed not just survive it but thrive in it.

Mark and I appreciate the answers. Thank you, gentlemen. Take care.

Sure.

We'll take our next question from Moshe Orenbuch with Credit Suisse. Please go ahead.

Great. Thanks. Given the really strong gain on sale that you had and I don't know whether that was unusually strong or not, but I guess and the answers to the previous questions are there ways to kind of accelerate the ability to buy back stock just given, both where the stock trades and the ownership structure at this point given that you're now below your leverage target and the sale market is as strong as it is?

Well, Moshe, thanks very much. We've always been very clear that the number one task here to make sure the balance sheet is rock solid before it distributes any capital and that is unchanged. You are right that we've had very strong gain on sale in the quarter just gone. As Pete highlighted that was higher than usual, normal is around 10 and in this quarter, it was over 20% odd margin. Of course, we're always looking to see what else we can do that makes sense for the long term of the business.

Yeah. And I'll just add, Moshe, I mean as we look at the fourth quarter, we do have a fair amount of sales. We estimated before that we would have $2 billion of sales this year and I still think, we'll be around that target, but we will have to see if all those come in or some slip.

Got you. Maybe just as a follow up, Gus, I mean you talked quite a bit about the environment for the engine market, are there ways for AerCap to benefit, obviously, you're benefiting quite handsomely right now, but are there ways that you can kind of even extend that or is there anything you can do to make it you know to make that even kind of larger and bigger contributor?

It is -- no dialog, it is a significant contributor already. The obvious one you see is the benefit of the SES, but there's tremendous synergies that come through the business as well through our technical line in managing our own engine shop visits. We have of course by some distance, the leading engine leasing franchise in the world by quite a distance, maybe by a factor of 3 times. And we certainly want to make sure we maintain that global leading position in the engine business as this technology matures.

Thanks very much.

We will take our next question from Hillary Cacanando with Deutsche Bank. Please go ahead.

Hi. Thanks for taking my questions. So now that you've exceeded your leverage target, I would assume the rating agencies will probably be revisiting your rating. Could you just go over what they will be focused on obviously, one of the -- their focus point was to leverage ratio, but what else do you think they will be looking at for a potential upgrade?

Well, I think on the metrics, Hillary, that we meet all of the metrics as when we talk about that with the rating agencies. I think, the real thing for them to think about that they will consider and could affect the timing here, it's just the overall macroenvironment, right? And so -- but I think, metrics wise, I think we're there on all of the metrics as far as we know based on our discussions with them. And I do think, leverage was the main one, obviously, we committed to get back down to our target leverage ratio. We had committed to doing that after the GECAS transaction, we got there by the end of last year but then we had the whole Russian situation that obviously brought it up. So, I think, I agree with you, now that we're back there. I think, we are in line on all of the metrics and it's really just a question of looking out at the macro environment, how do they feel about that.

Okay. Got it. Thank you. And then I just had one more follow up question. You've previously said that renewal rates have picked up due to delay -- lack of aircraft in the market, could you just talk a little bit about what you're seeing for renewal lease rates? Obviously, when lease rates -- there is usually a step down right in lease rates when customers renew. But are you -- of the lease rates -- renewal lease rates actually now higher than what they normally would be just given the current supply constrained environment? And if so, do you expect this trend to continue for the foreseeable future? Thank you.

Yeah, Hillary. There is no doubt as we said that lease rates are going up at the moment. That's a function of two items, of course, you have the interest-rate increase and you also have the shortage of certain types of aircraft as well. We expect that the shortage of aircraft will persist for quite some time into the future relative to demand. And, of course, look there is still one very large market out there that has not yet opened, but in time, it well, which is the Chinese market, of course, now we're not saying that will happen today or tomorrow but over some of period of time in the future it well, and this is a long cycle business. So you do have to look into the future. An important data point for yourselves is the amount of aircraft that airlines are buying off us is higher than ever. The airlines also know the challenges that Boeing and Airbus face. And what they are doing now for the first time, almost 40% of our aircraft sales are to airlines. Airlines are buying airplanes off us that they thought they would be exiting, kind of 20 year old A320 737s, et cetera. So that's a very good indicator of the likely longevity of the supply issues.

Okay. Thank you very much. Very helpful. Thank you.

We will take our next question from Ron Epstein with Bank of America. Please go ahead.

Yeah. Good morning, Gus. Just a very -- a couple of quick questions. On the time on wing on engines, I mean are you seeing that the new generation CFMs, the LEAPs or the GTFs which are coming off wing more prematurely?

Well, it's -- at the moment probably by bit the -- little bit the GTFs are coming off a bit faster than the CFMs at the moment. Both engines so do face issues but I would say, at the moment, slightly more weighted towards the GTF engine.

Got it. And then, it's interesting yesterday at Boeing's Investor Conference, Calhoun came out and said, in pretty low uncertain terms, they are not going to do a new narrow body until sometime in the middle of the 2030s. I would imagine, I mean that's probably be got to be a pretty good thing for all the narrow bodies you own, right? Can you just make -- what does that mean for you? Ad what does that mean for the residual value of your fleet if there's no impending threat of anything new coming out to replace them?

Clearly, Ron, it enhances the residual values of all those aircraft that we have. As you've heard me say in the past, I think it would be an error to launch a new airplane now without the engine technology being able to provide any new airframe with the type of operational savings that would persuade an airline to switch out of a very good airplane such as a MAX 8 or an A320neo, both are excellent aircraft. So in that regard, the danger would have been to me, if they were to launch a new airplane with suboptimal technology, the other side would say, don't touch that airplane, wait for me, you have a very good airplane with me, wait for me, I'll have the leap change in technology, no pun intended, in the mid-30s and you will regret ever taking a sub-optimal aircraft. And history has always shown that to be true. Panic decisions to build airplanes, suboptimal always end in tears and I think Dave Calhoun is obviously an extremely experienced Executive in the industry and knows all and has seen all the mistakes made by various airframers over the years. And to my mind, it is most definitely the right decision for all concerned.

Got it. And then maybe just one last quick reference question. Are you seeing a customer preference for A320s or 737s?

On the MAX 8, the MAX 8, an excellent airplane. Real bounce back there on the MAX 8 and we see parity now on lease rates between the MAX 8 and the 320neo, something of course we hadn't seen up until last few months. So really good demand there on the MAX 8, but where Airbus has the lead is on the 321, the capability of it. But that must be tempered by the fact that many airlines don't actually fly the aircraft to the limits, to the edge of the envelope, many airlines don't need to do, don't need as much airplane as a 321 offers, but there's no question that 321 has the lead there over their competing Boeing products. And I would say to be balanced on the widebody side while the 330neo is very good airplane, the 787-9 has the lead there as well.

Got it. Thank you very much.

We will take our next question from Vincent Caintic with Stephens. Please go ahead.

Hey. Thanks for taking my questions. Two questions, so first, I appreciate the updated guidance and the implied fourth quarter. And understanding that there were some maybe one-time items or some moving parts over the past three quarters. But when I think about the lease rates and also the expenses that you've had so far, just wanted to get a sense of whether the third quarter is a good jumping off point when we think about the fourth quarter especially given the strength you've been discussing in terms of demand for lease of aircraft, so that's first question. And second question, just wanted to follow up on the insurance claims and what, any update in terms of the process and the timing when we think about the resolution of the rest of lease claims? Thank you.

Well just on the first point, Vincent, yeah, so I think the third quarter is good but I would look at those items, like the unsecured claims that we got through -- that came in like the mark to market. And then on the gain side that's really dependent on the mix of aircraft that we sell. So I think, you have to look at sort of all of those things when you normalize it and think of what a run rate would be. But other than that, yeah, I mean I'd say that most of the other items, I mean, depreciation as you know, it doesn't move around very much, leasing expenses and maintenance can move around and so that that can be a swing factor. But SG&A doesn't really move, lease rents don't tend to move that much either, so...

In a quarter-on-quarter.

So in a quarter.

And regards the insurance proceeds, there -- we can't comment on that, I'm sorry, Vincent.

Okay. Understood and that's very helpful. Thanks very much.

Sure.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Aengus Kelly for any additional or closing remarks.

Thank you all very much for joining us for the call and we look forward to discussing our full year results with you in the New Year.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.