Please stand by. Good day, and welcome to the AerCap’s Q2 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 McGinley, Head of Investor Relations. Please go ahead, sir.

Thank you, operator, and hello, everyone. Welcome to our second quarter 2024 conference call. With me today is our Chief Executive Officer, Aengus Kelly; and our Chief Financial Officer, Peter 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 that 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 August 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 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'll now turn the call over to Aengus Kelly.

Thank you for joining us for our second quarter 2024 earnings call. I am pleased to report another quarter of strong earnings for AerCap generating adjusted net income of $592 million, and adjusted earnings per share of $3.01. These results reflect wide-spread demand for our assets, strong cash collections and a constant focus on execution. As a result I’m pleased to increase our earnings guidance for the year to $9.20 to approximately $10.25, not including gains on sale in the second half of the year. On capital allocation, I’m delighted to announce more organic growth this quarter with the closing of 36 Aircraft transaction with our customer Spirit Airlines. This is the third transaction in the last seven months that we have closed on a bilateral basis with the customer, taking the total purchase commitments to over 50 neo and MAX aircraft. This is of course in addition to the transaction for 150 new CFM LEAP engines with SES that we announced at the Capital Markets Day. Year-to-date we have spent $3.2 billion on Flight equipment and returned over $720 million to our shareholders in the form of stock repurchases and dividends. Importantly, this was all done without levering of our balance sheet. We are also announcing another dividend of $0.25 per share for Q2, which will be payable in early September. These highlights showcase the power of the AerCap platform. As I mentioned, demand for aviation assets continues to be robust as reflected in our consistently high levels of activity. Over the last three months, AerCap executed 246 transactions across Aircraft, Engines, and Helicopters, comprising of 162 lease agreements, 47 purchases, and 37 sales. The rate of aircraft extensions, which we discussed at a recent Capital Markets Day, continues to be elevated at over 80% in Q2. On the…

Thanks, Gus. Good morning, everyone. Our GAAP net income for the second quarter was $448 million or $2.28 per share. The impact of purchase accounting adjustments was $169 million for the quarter or $0.86 a share. That included lease premium amortization of $32 million, which reduced basic lease rents; maintenance rights amortization of $99 million, which reduced maintenance revenue; and maintenance rights amortization of $37 million, which increased leasing expenses. The tax effect of these purchase accounting adjustments was $25 million or $0.13 a share. So taking all of that into account, our adjusted net income for the second quarter was $592 million or $3.01 per share. I will briefly go through the main drivers that affected our results for the second quarter. Basic lease rents were $1,568 million. That’s a slight decrease from last quarter, which is primarily due to aircraft coming off power-by-the-hour rent arrangements, as I have mentioned on previous earnings calls. Basic lease rents reflected $32 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 second quarter were $180 million. That reflects $99 million in maintenance rights assets that were amortized to maintenance revenue during the quarter. So in other words, maintenance revenue would have been $99 million higher or $279 million without this amortization. Maintenance revenues were higher than normal this quarter, primarily due to higher amounts of end of lease payments that we received during the quarter, and that is due to the timing of lease maturities. Net gain on sale of assets was $129 million for the second quarter. We sold 31 of our owned assets during the quarter for total sales revenue of $793 million. That resulted in…

Thank you. [Operator Instructions] We'll go first to Jamie Baker with JP Morgan.

Hey, good afternoon, gentlemen. So Gus, you called out the Spirit deal for 36 airplanes, the backstop on another, I think you said 52. I mean, look, Spirit's a weaker credit. I'm not asking you to deride a customer, but we have to wonder what additional steps you've taken to protect against a deferral or potential insolvencies. So how is this deal different from a more plain vanilla transaction? And if it's not, I guess you just believe you can handle the remarketing effort if it comes to that?

Yeah, look, I think, Jamie, here this is a win-win for ourselves and for Spirit. It provides them, as you allude to, some much needed liquidity. It provides us with extremely attractive, the most attractive aircraft in the world, the 321neo in a time slot that would be impossible to get us in 2027 and 2028 on what we believe are attractive terms for our shareholders. So that's the genesis really behind it, Jamie. And like we move an airplane every 24 hours somewhere in the world.

Okay, fair enough. And then second, so Mark and I are, we all keep hearing about how tight global aircraft supply is, and we don't disagree, but at the same time, you have these massive guides down from several U.S. airlines. You've got some Western airlines, both discounted and full service, that are guiding down. The Singapore results yesterday were soft. I mean, we're trying to reconcile airline results with aircraft supply and, well, quite honestly, we're having a hard time. How do you reconcile those two realities? Thanks in advance.

That's a very fair point to make, Jamie. How, on one hand, can you say that there's tremendous shortage of aircraft when a number of the carriers are saying there's excess capacity in a very large market like the United States? One of the huge challenges the airlines have at the moment, and Allegiant called it out yesterday, Allegiant is a much smaller airline, but they did $30 million cost just associated with not having the MAX aircraft. What they also have, which is very hard to explain to the analysts, is the complexity of trying to keep extending a fleet that you want to get out of. It's very inefficient within the airline. If you're an airline now and you're short the neos or the MAXs or the 787s, you will have trained pilots, you will have bought spare parts, you will have geared up your operation for the entry of those aircraft. When they don't come, your pilots don't sit at home, but effectively they do because you wouldn't have hired them, so you've lower hours being worked overall on average than otherwise you would have. There are hidden costs in the airlines that they have, and they're having to keep prolonging the life of assets they prefer not to have, that are older, that are more complex from a maintenance standpoint, that are more complex from a cabin configuration standpoint, leading to inefficiencies in the airline sector. So, when we say shortage of aircraft, well look, we're saying particularly new aircraft because if the airlines could accelerate their transformation into a single type of asset so that they're only operating one asset, that would give the maximum operational leverage and efficiency. When they're operating multiple fleets, particularly older ones, that's harder to do. So the next thing…

We'll go next to Terry Ma with Barclays.

Hi, thank you. Good afternoon. So you mentioned you've done kind of three bilateral transactions similar to the one with Spirit. Are you seeing more of those opportunities come to the market and maybe just talk about what's driving that? And aside from timing differences compared to an OEM order or a particular aircraft type, are there any other advantages like returns or pricing you're getting?

Well, obviously we talked to the OEMs and orders and as you know, we have not been able to reach terms with the OEMs over the last few years, which is that I've always said, fine by me, I don't care if we never buy another airplane again, I care about deploying your capital, our capital, the shareholder’s, at the best risk-reward return for the long term in the business. And certainly if we got an opportunity with the OEMs where it made sense for a regular order, we do that. In an instance like the Spirit deal and earlier on with the GOL transaction, it was a situation where we were able to provide assistance to a long-time customer and we were able to get what we felt were attractive assets, well-priced, so we're getting assets we felt in the timeframe and at economic terms that made a lot of sense for our shareholders.

Got it. And then a question for Pete for the net spread. I know you guys don't manage to that, but it's outperformed a bit the last two quarters. So how should we think about that for the rest of the year taking into account any remaining power-by-the-hour cash collections and bond refinancing? And on the bonds you have a few lower-cost bonds coming due later this year, which I'm sure you contemplated into your interest expense guidance at the beginning of the year. But credit spreads have also come in by about 40 basis points. So maybe just put all that together, how should we think about the net spread? Thank you.

Sure. Sure. Well, you're right about that. So obviously we factored in all of our plans for raising debt later this year into our net spread guidance. So basically, as I’ve mentioned before, the main driver of that recently has been those power-by-the-hour leases coming off and reverting to regular lease arrangements. So that's basically all happened now. So we're not going to see any further impact of that from this quarter onwards. So I would say, I think for the balance of this year, we should be around where we were for the second quarter, because as you said, there are countervailing effects. On the one hand, you've got higher rents coming in. On the other, you have some higher interest expense as well. But I think we'll be around where we are today.

We'll go next to Moshe Orenbuch with TD Cowen.

Great. Thanks. Maybe kind of following up a similar line of questioning, given all the things that you do see, do you think that the balance sheet is going to be sort of larger or kind of stable over the next few quarters? How do you see that evolving? I mean, are there other opportunities, things that might come up kind of on a spot basis or anything like that?

Sure. Well, first, welcome back, Moshe. It's good to have you on the call again.

Thank you.

So in terms of the balance sheet, we would expect it to grow somewhat during the second half of the year. And that's primarily due to CapEx. So we had about $3 billion of CapEx during the first half of the year. We're expecting a little over $4 billion during the remainder. Now, we don't know if all that will come through. But as Gus mentioned, we've also done some incremental deals as well. So that's really going to be the driver of the balance sheet, increasing for the balance of 2024 and then somewhat in -- it will also increase in ’25 as well, as we look at it, or CapEx, and factoring in some level of sales as well.

Perfect. Thanks. And congratulations on the recent upgrades. But it's also true that your leverage ratio has actually improved over the course of the first half of the year. Can you talk about your thoughts as to how you might manage that in the current environment? Obviously, you've started the dividend. How do you think about share repurchase and other forms of capital deployment over the next several quarters?

Sure. So as you mentioned, this quarter we are at 2.4 to 1 net debt-to-equity. So that is below our target level. It's about where we were last quarter as well. So it's been obviously very positive to get to that point. I think during the remainder of the year, we'll still run below our target. But I think we'll be somewhat closer to that. It really depends on how much we do deploy, obviously. Some of it depends on the CapEx. Because we have more CapEx coming in the second half of the year, you create a little less excess capital. Similarly, we've done a lot of sales in the first half. So we've done $1.7 billion of sales so far this year. I think we'll probably do $2.5 billion for the full year, give or take. So that's been front-end loaded. But I think that it will trend up somewhat, our leverage ratio, but I don't think we'll get to 2.7 times.

Thanks.

Sure.

We'll go next to Stephen Trent with Citi.

Yes. Good afternoon, everybody, and thank you very much for taking my question. Actually, the first sort of a follow-up on Moshe's question, the credit rating side looks really good. Longer term, do you guys have any sort of bogey in mind, roughly speaking, where you'd hope to be with Moody's and S&P?

Look, I think we're very happy with BBB+, Baa1, which is the highest rated, less independent lessor there is in the world. We certainly want to push Fitch over the line as well. They're on outlook Positive. I think this provides us with extremely competitive funding. If I look at our five-year unsecured spread today, it's around 95 basis points, 96 basis points, which is about 20 basis points north of someone like JP Morgan or Wells Fargo. So that's extremely competitive. We're always very conscious of the balance between return on equity for our shareholder and making sure that we have access to a very flexible debt and significant pools of debt. But at some point, of course, if we went much lower, then that would significantly dilute the returns to our shareholders, and we're very conscious of those, how we deploy the capital for our shareholders. And today, you saw, again, organic growth. We've returned $3.4 billion, though, to our shareholders in ’23 and ’24. We have a remaining $600 million left in our share buyback current authorization. And so it's a balance between all those items, but I think I'm very happy with where the rating is today.

Oh, okay Angus, very helpful. And just one other quick, my follow-up here, I appreciate you guys mentioned the U.S. being the biggest market. And you've done some drawdown in China. Could you refresh my memory, geographically speaking, if there's any areas of the world where you're seeing really good momentum at the moment? Thank you.

I think, at the moment, there's pretty robust demand from -- the airlines certainly want to keep what they have. That's true across the world. And you saw that in the extension levels, 80%. So, on a global basis we're extending the vast majority of the assets. It's a very good indicator to start with. In terms of placement and growth, we're certainly seeing strength out of the Middle East. And we will continue to see, it’s I think we're going to see strength out of Asia Pacific, because the Asia Pacific recovery out of COVID has been slower than the Americas or the European market, the two other major markets. And I think that's where we'll see a recovery. If we look at global traffic in June, we exceeded June 2019 by 3%, despite international traffic being down. And that international traffic is predominantly driven, the decline in international traffic is predominantly driven in the Asia Pacific region, which is down about 10 points or 11 points on 2019. So there's lots of room to come back. I suspect that we'll see it in that region. But of course, from our perspective, as we said, look, we will buy, sell, or lease 1,000 aviation assets a year. So from AerCap’s perspective, we have the infrastructure, the capability to rapidly move assets from an underperforming region to a performing region if needs be. But at the moment, it's reasonably robust around the world.

Okay, really appreciate it. Thank you.

We'll go next to Hillary Cacanando with Deutsche Bank.

Hi, thank you for taking my questions. Just regarding your transaction with Spirit, obviously, you're taking deliveries before 2030 since they're from Spirit's order book. But I was just wondering how long the wait would be at this point if you were to place an order directly with Airbus for narrow bodies and what would the wait time be for the wide bodies? I would imagine its past 2030 but just wanted to see what they were actually at this point?

I would imagine it is past 2030, Hilary. I mean, any airline orders we've seen recently, particularly on the Airbus side, have deliveries commencing in 2030 and not getting many airplanes in 2030 either. Really, the heart of those orders is 2032, 2033, and beyond. So from our perspective, that's a very long way out there. The ’27, ’28 timeframe we feel is a much more attractive timeframe.

And you would say that's the case for wide bodies as well and same with Boeing? At Boeing as well in terms of being sold out until 2030?

I think it's more, on the wide bodies, you might get one or two before 2030, but it won't be many. Hilary, I cannot so I wouldn’t, if you went for an order, I wouldn't imagine that there'd be much available on the 787 line, to be fair, before 2030. And it's a function of the ramp up to how they get on. But not much would be the short answer.

Got it. And then just a follow-up question. You know, your share buyback strategy obviously has been very accretive, very successful, with the stock trading global value in the past. But I was wondering how we should think about your buyback strategy, when the stock is, obviously it’s trading above your book value and I guess going forward as well. Does that change your strategy at all or not much?

Well, look, Hilary, I mean, we've been, as you can see, we kept buying shares throughout the year. We've deployed $700 million for when a lot of the year was above book and we have $600 million in our authorization. So, and we're selling assets at very big premiums to book equities. You can see this quarter was another quarter where we sold at 170% of book. But again, look, what we always look at is, what's the best use of our capital? Is it debt pay down? Is it buybacks? Is it M&A? Is it buying aircraft for organic growth or engines for that matter? And we've done a lot of the latter in the last few months between the big engine transaction and then the aircraft transaction. So we always just try and pick what will generate the best long-term risk-adjusted return for our shareholders.

Got it. Thank you. And, you know, looking forward to seeing you at our conference in September.

You bet.

We'll go next to Kristine Liwag with Morgan Stanley.

Hey, Gus, Peter. There's very strong demand for next generation engines. And can you discuss how you think about the mature size for the Shannon Engine Support JV with Safran? How large could this be? And can you provide more details about the economics of spare engine leasing versus more of your traditional aircraft leasing?

Well, I think the way to think about the spares business is there's, I mean, it's big, but it's not unlimited potential for growth in that business because if you think about, there's about 22,000 or 23,000 large commercial aircraft in the world. I'm excluding turboprops and small aircraft. There you've got about, say, 46,000 engines in service. The sparing ratio, depending on the engine type, is, you know, 12% to 15%. So that's your spares portfolio. If you say there's 46,000 in service, take 13%, 14%, that's 5,000 engines in change, maybe 5,500 engines. That's the sparing size. As the world's fleet of aircraft grows, then you will have, as I said, the spares requirement will grow by 12% to 15%. So that's how it works. So there's not an unlimited, it's different to aircraft because I said it's only sparing. When it comes to the economics of the engine business model, slightly different to the aircraft business model because an engine really holds its value over the long term as it's overhauled. And the market value of the engine doesn't tend to depreciate a tremendous amount if you've got the right engine. And on the engines, it's fair to say, because of the slower depreciation of the assets, your value in the engine business is created over time, whereas on the aircraft side, you make a lot of your money on the first lease, to be fair. And then at the back end, you're managing engines. So I would say that there's a timing difference in how the two businesses work.

Great, that's very helpful. And as a follow up, I mean, we're starting to see other business models capitalize or try to monetize this engine shortage with an engine leasing company doing more MRO type work, either in modules or full exchanges. I was wondering how interested are you in expanding into something like that? I mean, we're seeing EBITDA margins for those kinds of businesses, be it like 35% or plus, but at the same time, it is a lot more labor intensive and it's more a wrench turning type job. So just checking to see what's your appetite for that? Do you see that attractive? And would that be a lateral shift as you expand out the spare engine leasing business?

I don't think we're going to get into ever overhauling engines, but things like engine swapping, we do that all the time. We've been doing that for 20 years. That's nothing new. And you do it to manage your cost base. And I'm sure if you looked at our EBITDA margin as a company, it would be huge. Pete, what is our EBITDA margin? But while I'm talking, you work it out there, Pete. But I would say, I would say when it comes to the module swaps, of course, you're doing all those things. For example, our biggest department internally is maintenance. Our technical department, how we manage it, because it's our biggest controllable cost. And it's an important part of how you drive AerCap’s profitability. Every time there's an engine going to shop, every single month for every engine, we'll track all the utility usage of that engine. We'll be looking at that engine a year out when it's going into the shop, we'll be saying what parts of it need to be repaired. We'll work with the airline and say, okay, we want your estimate of work that needs to be done on the engine. We'll go through that. Then when the engine is in the shop, we'll be on site to make sure that the work that we want done is being done and there's not excess work being done on the engine. And we'd have experts in every engine type, which many wouldn't have. You know, they'd have generalists. You really have to know inside out high pressure, low pressure turbines of every engine type in your portfolio in order to manage your shop visit costs. But so, yeah, I would say that we do all those things. Pete, what's EBITDA margin?

Yeah, it's around 90%.

90%? Okay.

It's a bit unfair to look at an EBITDA margin for a financial business, because interest is obviously a big component but yeah, it would be around 90%.

I'm sorry, if I could do a follow up on that 90%. If you were just to capture your engine exchange business, is that also at 90% EBITDA margin? I just want to make sure where [cross-talk]?

Engine exchange is part and parcel of every day. I mean, sorry, Kristine. Engine exchange is just part and parcel of what we do every single day in the business. It's reflected there and there's nothing new about that. To be fair, everybody does it. I mean, we sell engines to a lot of people who do exchanges.

Great. Well, thank you very much. And great to hear you guys.

Sure.

We'll take our next question from Anthony Berni with Susquehanna Financial Group.

Good afternoon. This is Anthony on for Chris. Thanks for taking our questions. The adjustments for maintenance rights were a little elevated this quarter relative to recent historicals. I know you mentioned that was due to the timing of the lease return. Should we just try to make sure that we don't have a lot of people who do exchanges? Should we just treat this as a one-time bump, or do you expect elevated maintenance revenue going forward?

Well, there are two elements of that that I would mention here. So we had higher maintenance revenue this quarter, and I do think that we also had that in the first quarter of the year, and really that has been due to more events happening. These are return of some aircraft on their existing leases and then going out on new leases, so some of those were pretty chunky during the quarter. And so if I look at overall, I'd say that probably boosted our first half earnings by call it $80 million or so, maybe $100 million, and some of that is really timing. So I think that it's been higher in the first half of the year. Some of that was just brought, it just happened to be lumpy there. The normal run rate, normally we would think of like maintenance revenues, less leasing expenses on an adjusted basis of around $30 million to $40 million a quarter, so it's certainly been high the last couple of quarters, but again, that's just timing. And then in terms of the maintenance rights amortization, that has also been high this quarter, and again, that's really driven by events. When the events happen, that amortization is high, so you generally see those things happening in tandem.

Got it. That's very helpful. Thank you. One more on the -- just the leasing expenses were down almost 20% year-over-year, and 1Q is down a solid 10% year-over-year as well. Are you doing anything differently to control costs on that line, and should we expect kind of year-over-year declines in the second half as well?

Well, we are -- that is one of the areas that we've highlighted before in terms of when we are able to use some of our existing spare engines to avoid engine swaps, right? So you put an engine in, swap it in, and avoid engine overhauls and other costs. That's a way to drive down those leasing expenses. And I'd say that is one of the things that, from a strategic standpoint is a key benefit of having the engine leasing business, because obviously we've got a much bigger pool of engines that you can utilize for that purpose.

Great. Thank you so much.

Sure.

We'll take our next question from Mariana Perez Mora with Bank of America.

Good morning, everyone. So I'm going to tap again on the U.S. Airlines weakness and them trying to actually retire at this unprofitable capacity, but also recovery to the global traffic. Can you give us some color around like how these rates look like today versus a year ago for like the difference of assets like engines and particularly the current generation aircraft where you have like an average of what, like 15 years old average? However, what type of rates are you seeing there versus a year ago?

You're certainly continuing to see increases there. And we laid a lot of that out in the charts on our Capital Markets Day where you could see the material increases that we've seen over the last few years across the board. And that continues to be the case. The real driver of that for those 15 to 20 year old assets is what we've just been speaking about in my mind is, why are airlines willing to pay so much? Because they have -- it's cheaper to do that than have a shop visit on an engine. There's no point paying, as I said, 10 million dollars to overhaul a 7B engine if you need the aircraft and the engine for the next four or five years, not the next 10 years, which is what you need to recover that type of investment. And you know probably have to overhaul the cabin as well, to be honest, if you're going to try and keep that airplane flying for another 10 years. So to me, that's what I see as a big driver. And that's and it's likely to stay that way, as I've said before, till the end of the decade, because it will take time for the ramp up to occur on the new technology assets.

And if we were to see this, I'll say, like slow down, how strong is the demand? And it's mostly about replacement going forward. How do you manage what you sell versus what you actually extend the lease on for these like older aircraft, particularly not just engines?

Well, it depends on how we view the assets. Do we, is it an asset that we would like to be out of? And then we'll be more inclined to sell the asset. But I think you can see through our behavior over the last, must be nearly 18 years, 20 years, a public company, that the average age of the assets we sell has always been towards on an average basis around 15 year mark, which is what we sell. So because we do feel that at some point, even though the values are very strong today, as we get to the end of the decade, those values are likely to decline. And again, that's why we've shown you our strategy in several Investor Day presentations, the sunset strategy of how the portfolio is created. We often say to you that people should never look at the average age of a portfolio of a leasing company, it's utterly meaningless. The key is to look at the average age of the components of the business. If you have a young fleet of 777s or 737s, you will lose money. Because you won't -- those planes will not be flying in 2035, 2038 and if you bought them in 2015, that's what you need to happen. And at AerCap, you could see we've had a tremendous discipline in that regard over the last 12 years, never ordering those type of aircraft. And we have been exiting that type. And you can see that in the charts that we provided as well on the Investor Day.

Thank you. And last one from me. If you were to see more opportunities like the one with Spirit Airlines, where you can actually get orders of new aircraft in the near term, like I imagine like you have, how do you manage your strong balance sheet? And how much are you willing to lever up on like actually taking the opportunity of this environment, if it were to happen?

Well, I think, look, we have plenty of capacity on our balance sheet to take advantage of any opportunities that comes in. I'm not concerned about that. It's just having the discipline to pick the right opportunities. We're looking at many different asset acquisition opportunities on a daily basis, but we hit very few of them. The ones we’ve managed to do are ones where we've worked on a bilateral basis with a partner, a customer who's been a partner for a long time and tried to do something that works for them and for AerCap.

This concludes the question-and-answer session. I would like to hand the call back over to Angus Kelly for any final remarks.

Well, thank you all for joining us today on the call. We look forward to giving an update in three months' time. Thank you.

This does conclude today's conference call. You may now disconnect.