Good day, everyone, and welcome to the AerCap Holdings N.V. Second Quarter 2023 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 would 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 2023 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 June 30th, 2023. A copy of the earnings release and conference call presentation are available on our website at aercap.com. This call is open to the public and is being webcast simultaneously at aercap.com and will be archived for replay. We will shortly run through our earnings presentation, and 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-up. I will now turn the call over to Aengus Kelly.

Thank you, Joe, and thank you for joining us for our second quarter 2023 earnings call. I'm pleased to report another quarter of strong earnings for AerCap, generating adjusted net income of $596 million and adjusted earnings per share of $2.56. This reflects widespread demand for our assets, strong cash collections, and our constant focus on execution. As a result, I'm pleased to update our earnings guidance for the year to a new higher range of $8.50 to $9. This includes gains on sale of approximately $1 in the first half of the year. Given the strength of the business and consistent cash generation, I'm also pleased to announce another $500 million share repurchase program. This takes total authorizations so far this year to $1.5 billion, over 10% of our market cap at the beginning of the year. This commitment indicates our confidence in both the outlook for the business and the value we see in AerCap today. As I mentioned, demand for aviation assets continues to be robust, which is reflected in our significant levels of activity in Q2. Over the last three months, our platform executed 215 transactions across aircraft, engines, and helicopters. This comprised of 124 lease agreements, 32 purchases, and 59 sales. Of note in the period was the continued strong demand for current technology aircraft where we signed a large number of lease extensions as airlines look to keep whatever capacity they have in the air. Likewise, all the aircraft sold in the period were current technology units, with around 40% of these sales going to airlines. I believe the shortage of aircraft in the system has also helped airline profitability as it enforces capacity discipline across the sector, resulting in healthy yields. Our customers are, in general, in good health at the moment and optimistic about the future. On the engine side, demand for spare engines remains high in the face of higher aircraft utilization, new technology durability challenges, and part supply constraints at the MROs. We are helping our customers through these challenges by providing financing and spare engine support through our AerCap engines franchise business and SCS, our joint venture with Safran. The engine team continues to invest in the most fuel-efficient engines as well as recycling older technology engines into the spare parts market, combined with a healthy level of sales activity. Switching to the industry overall, I think it will be helpful to elaborate on how strong the demand environment is in comparison to the supply available in the market today. For this, I believe it's useful to provide some historical context. So I'm going to refer back to 2018 when demand was fairly good in all regions of the world and the OEMs were delivering aircraft close to the scheduled delivery dates. Widespread disruption began in 2019 when supply was severely impacted by the grounding of the 737 MAX even as flights grew by about 2%. The following year, both demand and supply fell sharply as COVID-19 spread around the world. Then we saw the consistent recovery in demand, taking us to June 2023, where we recovered to approximately 90% of 2018's levels. OEM deliveries also recovered in this timeframe, but only to around 73% of 2018 levels. As you can see from the chart, they've continually lagged demand in the period, leading to today's widespread aircraft shortages. This is particularly important when we think about the persistence of the situation today and why we believe this supply-demand imbalance will last for several years into the future. The engine bottlenecks in the OEMs and MROs will not be resolved for a number of years as fixes have yet to be agreed for the engine durability issues facing the newer technology narrow-bodies. And even then, it will take several years to roll out any new fixes across the fleet. I also don't believe a scenario in which passenger yields soften due to a mild European or U.S. recession would derail this dynamic as the positive momentum from Asia emerging out of COVID restrictions is getting underway. Remember that when airlines consider fleet planning, they do so in years and decades, not weeks and months. As such, short-term disruptions don't really impact demand. They too know that these supply issues are going to persist. They continue to seek to secure aircraft to meet their growth plans. The chart on the right-hand side shows just how acute the change and supply has become with the normalization of storage rates of new technology aircraft. This occurred as a result of the global reactivation of aircraft. Storage rates today would be even lower if it weren't for the reliability issues around the new engine technology. So taking that into account, we are close to zero today, what I would term discretionary storage. With this avenue closed and demand continuing at pace, the leasing channel is the airlines' best source of near-term lift. On the sales side, we continue to see strong and broad-based demand for our assets, closing $818 million of transactions in the quarter. This resulted in our highest-ever quarterly gain on sale of $166 million, which represented a 25% margin. Encouragingly, this was not confined to aircraft assets. We also saw strong gains in our engine and helicopter sales with record volumes in each category. This further confirms the benefits of the asset diversification AerCap now enjoys. The operating performance of the core businesses allied to our aircraft trading activity generates significant amounts of capital, but this is only one-half of the equation. The other half is that we must also allocate your capital effectively. In that regard, we have continued to take advantage of the dislocation between private market professional aircraft purchasers and the value implied in our fleet by the public equity markets. The book equity from the assets we sold in Q2 was $176 million. We generated $166 million in gains on sale by selling the aircraft above book value. In addition, we generated a further $65 million in equity from repurchasing approximately $300 million of shares at an 18% discount to AerCap's book value. This meant we more than doubled our equity value by selling aircraft above book value and buying shares below book value, all the while improving the overall quality of our portfolio. So in summary, this was another great quarter for AerCap with broad-based demand for our assets and focused execution, generating strong earnings and cash flow throughout the business. We continue to complete numerous transactions every day as our customers position themselves for continued growth in demand. Our confidence in the future remains strong, and we look forward to demonstrating this to you in the quarters and years to come. With that, I will hand the call over to Pete for a detailed review of our financial performance and favorable outlook for '23.

Thanks, Gus. Good morning, everyone. We had a strong performance for the second quarter. Our adjusted net income was $596 million or $2.56 per share. The impact of purchase accounting adjustments was $132 million for the quarter. This included lease premium amortization of $41 million, which reduced our basic lease rents, maintenance rights amortization of $29 million that reduced our maintenance revenue and maintenance rights amortization of $62 million that increased our leasing expenses. In the second quarter, we recognized $14 million of recoveries related to the Ukraine conflict, primarily consisting of proceeds from engines that we recovered that were outside Russia at the time of the invasion of Ukraine that we sold during the quarter. Taking all of that into account, our GAAP net income for the second quarter was $493 million or $2.12 per share. I'll talk briefly about the main drivers that affected our results for the second quarter. Basic lease rents were $1,561 million, an increase of $25 million from last quarter. This reflected strong cash collections, and we also continued to benefit from power-by-the-hour rents from our lessees that are on PBH arrangements in their leases. As I mentioned, our basic lease rents reflected $41 million of lease premium amortization, which reduces our basic lease rents. As I've mentioned before, 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 $156 million. That reflects $29 million of maintenance rights assets that were amortized to maintenance revenue during the quarter. In other words, maintenance revenue would have been $29 million higher or $185 million without this amortization. Net gain on sale of assets was a record $166 million for the quarter. We sold 52 of our owned assets for total sales revenue of $818 million, and that resulted in a gain on sale margin of 25%. As of June 30th, we also had $809 million worth of assets held for sale. So, we're on track for our sales target of $2.5 billion for the full year. As I mentioned earlier, net recoveries related to the Ukraine conflict were $14 million, which primarily represents recoveries related to a smaller number of engines. Asset impairment was only $2 million for the second quarter. Interest expense was $427 million, which included a $3 million benefit from mark-to-market gains on derivatives. Our leasing expenses were $229 million for the quarter, including $62 million in maintenance rights amortization expenses. Equity in net earnings of investments under the equity method was $34 million for the quarter, again reflecting strong earnings from Shannon Engine Support, our engine leasing joint venture with Safran. SES increased its fleet by 42 engines during the second quarter in order to build spare engine capacity for CFM and had an owned and managed fleet of just under 500 engines as of June 30th. We continue to maintain a strong liquidity position. As of June 30th, our total sources of liquidity were approximately $19 billion, which resulted in next 12 months sources to uses coverage ratio of 1.4 times. That's above our target of 1.2 times coverage and represents excess cash coverage of around $5 billion. Our total operating cash flow was approximately $1.2 billion for the quarter, and that was driven by continued strong cash collections during the quarter. Our leverage ratio actually decreased from 2.56 times to 2.51 times this quarter, even after $1.4 billion of CapEx and almost $300 million of share buybacks during the quarter. So that really shows the large amount of capital that AerCap naturally generates each quarter. Our secured debt to total assets ratio was approximately 14% at the end of June, which is the same as last quarter. Our average cost of debt was 3.4%, a slight increase from 3.3% last quarter. And during the quarter, we completed our most recent bond offering of $1 billion. Our book value per share was $71.46 as of June 30th, which represents an increase of 14% over our book value per share of $62.43 as of June 30, 2022. During the second quarter, we repurchased approximately 5.1 million shares at an average price of $58.54 for a total of $296 million. And so far in the third quarter, we bought around 950,000 additional shares for a total of $61 million. So we currently have $143 million remaining in this program. As Gus mentioned, we have announced a new $500 million share repurchase authorization that will run through the end of this year. As a result of the strong performance for the first half of the year and our outlook for the remainder of the year, we are raising our earnings per share guidance for the full year. On the last earnings call, I said that we expected to be at the upper end of our range of $7 to $7.50 for the full year, excluding any gains on sale and we are now increasing our range to $7.50 to $8 before any gains on sale. The outperformance is mainly driven by higher lease revenue both from strong cash collections as well as higher utilization of assets that are in power-by-the-hour rents. Most of those power-by-the-hour arrangements will end later this year, but for now, they're contributing additional revenue for us. We've also seen a strong performance from the engine leasing business including SES, which has also been a driver of the outperformance relative to our original guidance. During the first half of this year, we've had gains on sale of $265 million or $0.98 a share on an after-tax basis. So that's about $1 a share, and when you add that dollar to the new range of $7.50 to $8, you get a total EPS estimate of $8.50 to $9 for the full year. And that does not include any gains on sale for the second half of this year. So overall, this was another strong quarter for AerCap. Our financial performance was very positive, mainly driven by higher revenues. We continue to see a very strong market for sales and produced our highest gain on sale ever. We have $19 billion of liquidity, and our leverage ratio is 2.51 times, which is further below our target and which gives us a significant amount of excess capital. Against this strong backdrop and a supply-demand environment that we expect to continue to be positive for some time, we have raised our earnings guidance for the full year. And today, we've announced a new $500 million share repurchase program, bringing our total authorizations for the year to $1.50 billion. And with that, operator, we can now open up the call for Q&A.

Thank you. We have your first caller in the queue, we'll hear from Helane Becker from TD Cowen. Please go ahead.

Thank you, operator. Hi, team. I have a question about the assets lost in Russia. Can you update us on the status of the lawsuit and insurance recoveries?

Sure, Helane. So, look, as we've said on prior calls, we're continuing to pursue claims against our own insurers as well as the Russian Airlines insurers and reinsurers. And as part of those efforts, we continue to have discussions with the Russian insurers regarding a potential insurance settlement regarding some of our aircraft that were lost in Russia. But given the sensitive nature of those discussions and the uncertainty regarding any potential recovery, we're not going to comment further on any of that.

Okay, that's fair. Thank you very much. And then just on the demand outlook, I hear what you're saying about the demand picture and I don't disagree with anything that you said this morning, Aengus. But my question is, why do my investors not believe what you're saying? I say a lot of the same things you’re saying about demand and infrastructure issues and so on, but the push-back I get is that maybe I'm not that smart and that somehow the demand is going to fall dramatically and cause another decline in asset values for aircraft. So how would you respond to those questions?

Well, I think. Helane, we see, firstly, as I said, no sign of demand abating. And some of the commentary that has come out of one or two of the U.S. carriers in the last week or two about a decline in yields, that's of exceptionally high levels. They do not impact the demand for aircraft. Aircraft demand is decided by an airline over a decade-long period. What happens in one quarter or two quarters to yields is absolutely irrelevant to that decision-making timeframe. And what we can see is that every 15 years, the number of people traveling doubles; that's always been the case. We can see the first thing people do post-COVID is spend on travel. And now even if we do see a mild recession in the U.S. or Europe, what we have is the growth coming out of Asia too. So I don't see it. And we've been telling the market we have long before anyone else saw because of the visibility we have into the market dynamics that the supply issues would last years, and we were saying that a couple of years ago and we continue to see that trend. And what's blatantly obvious is the results of the business. Just look at the values that we're selling aircraft for. This is a global market. It's not affected by what one airline says in any one market. So we just don't see that at the moment. And if you look at the values we're selling airplanes for, the lease rates, etc., and it's very important, Helane, the track record of AerCap over 20 odd years has been, and we've gone through so many different issues over that timeframe, and the company has always made money.

That's very helpful. Thank you very much. Thank you.

We'll hear next from Catherine O'Brien from Goldman Sachs.

Good morning, everyone. Thanks so much for the time and congrats on the quarter. A question on your sales this quarter, which were very strong once again. We only have six clean data points of post-merger sales, which now could include a significant portion of engines, like this quarter with the combination of demand from the production line and continuing ongoing issues driving spare demand at least feels like from the outside that engine demand might even be a little bit tighter than aircraft demand, which is obviously also very tight. Can you just help us think about in rough numbers, the breakout in proceeds this quarter tied to aircraft and engines? And then how to compare the sales margin between aircraft and engines just because it feels like this is obviously a significant part of the business now will be great just to think about those dynamics a little bit more? And then sorry for a very long-winded question, but any quick comment on the recent GTF headlines? I know your pool of engines are mostly GE and Safran. Thanks so much.

Thanks, Catie. I'll address the first part. This quarter, sales comprised approximately 35% to 40% engines in total. Regarding margins, we are experiencing strong margins across all our products. We're seeing high demand for our older engines and aircraft, which has been a key driver for sales given the current market conditions. Now, I'll hand it over to Gus for the GTF update.

Yes, as it relates to the GTF, this will be another issue that will impact the supply of aircraft and spare engines into the markets for, I suspect, years to come. We fully believe that Pratt will solve this issue and that their fix will start getting rolled out before the end of this year. But with that quantum of engines coming out of the system, that is a lot of lift that won't be in the system next year and possibly stretching into 2025 if I were to hazard a guess at how long it will really take to fix this issue. So again that all points to a market where we will have increased demand for older aircraft. Airlines know this, and we've been saying this to you guys for some time as well. We've been highlighting that the airlines have been our biggest buyer of used aircraft for quite some time. And as I said in my prepared comments, that happened again in Q2, where 40% of our sales were to airlines, and these are older aircraft that we're selling to them 18, 19-year-old airplanes.

Makes sense. A good time to be in the engine leasing business, I guess. And maybe just a last quick one for Pete. Does your new 2023 EPS outlook assume that the better-than-expected cash collection, power by the hour and SES performance that you've observed in the first half and driven by the expected results carried through in the second half? Or is there potentially upside if those strong trends continue? Thanks so much for the time.

Yes, I mean, it basically assumes the environment that we're currently seeing. So I would expect all of those trends on all those fronts to continue as they are. It doesn't really build in like a lot of increase from there, but basically a continuation of those trends.

Great. Thanks so much for the time.

Sure.

We'll hear next from Jamie Baker from JPMorgan.

Hey, good afternoon, Gus. Thanks for the GTF color. That was one of the issues that Mark and I wanted to explore. But just to follow-up on that, can you confirm that the entirety of releases have hold or high water clauses meaning that the onus of all this and time off win falls on the airlines and Pratt to reconcile?

Correct, Jamie, it does.

Perfect.

And generally, that's downstream. There'll be a flight hour agreement generally between the airline and the engine OEM, and that's where the support or penalties or whatever you want to call it, will be assessed.

Perfect. And second, so I understand everything you were saying about global demand. Corporate appears to be largely stalled at the moment. It's really leisure that's exploding. Last week, Southwest announced that they're going to try to re-optimize their network in response to this new normal. United is leaning very heavily into international wide-bodies. As you talk to network of planners across your customer base, what does this all mean? I mean, what are the implications for global fleets and by extension AerCap as a result of this new normal?

It's important to consider the commentary from Southwest and Alaska last week, but that perspective is very focused on the U.S., as they primarily operate domestically. We're looking at a global view and the developments occurring across all regions. The U.S. was the first major area to recover from COVID, followed by Europe, and now we are seeing progress in Southeast Asia and China. Amid all of this, there are ongoing supply constraints. For instance, last week, both Air France and IAG expressed strong optimism about the international market. While some of this growth is driven by corporate demand, it is mainly leisure travelers who are willing to spend on business class fares. As AerCap is the largest marginal supplier of aircraft engines and helicopters globally, this bodes well for the future.

Sure. Okay, thank you very much. Appreciate it, everybody.

Stephen Trent from Citi. Your line is open.

Good afternoon, everybody, and thanks very much for taking my questions. Just two quick ones from me. First, you guys, I think, have been very effective on the M&A side over the years onboarding aircraft from GECAS, ILFC, etc. Do you think over the next several years you may have other M&A opportunities or perhaps you're too big and it's going to raise too many eyebrows from antitrust authorities?

It's difficult to comment on that. We prefer to be active in the market when others are not, and as shown in our presentation, we typically buy assets when others are staying away. You won’t find us at events like the Farnborough Airshow, where many of our competitors are waiting in line to get in. Moving forward, we will be most aggressive wherever we see value. Currently, we believe that AerCap shares represent the best value in the market. We are selling assets to professional aircraft traders at significant gains and then using those proceeds to buy back our own shares, which are undervalued according to the public equity market. As long as this opportunity exists, we will continue to take advantage of it.

Very, very clear and super helpful. And just one very quick follow-up to Catherine's question. I think I heard you say that commercial airlines have been acquiring around 40% of your used aircraft. Could you give me a sense as to what that number approximately was pre-pandemic? Thank you.

Yes, I mean, historically, it would have been less than 20% and it's got up as high as 50%. And in fact, in the last quarter Q1 results, we showed the history of that actually and we can send that on to you after the call. So it's a persistent strength of airlines buying the older.

That's very helpful.

Yes, no problem.

We'll move next to Hillary Cacanando from Deutsche Bank.

Hi. Thank you for taking my questions. So you've done a great job reducing your leverage ratio. I just wanted to see how you're thinking about your leverage position versus the buyback just given your low leverage ratio; it looks like you could even lever up even more. So is there any change in your thinking around the 2.7 target or is that still kind of what you're thinking, I guess, longer-term in terms of leverage?

Yes. Thanks, Hillary. So as we said, we're at 2.51 times now, so that's below our target and we are doing this new authorization. I mean, when you think about it, in March, we did the first authorization, we bought back 9 million shares from GE for $500 million. In May, we did the second program. We've used about $350 million of that so far, right? So we've got around $150 million left in that authorization. And as we've talked about and as Gus talked about, we still see significant value in our stock. So we're not waiting around for GE to come to market to use that. And when you think of all three programs together, that's $1.5 billion; that's more than 10% of our market cap to me in the year. So it's a lot, but we're going to continue to deploy a lot of capital for buybacks. And I think the fact that we're below our targets just shows that there is more capacity to come.

Okay, got it. Thank you. And then just in terms of the composition of your engine portfolio, just wanted to find that is it mostly new technology engines like the lease and the GTF or is it kind of evenly distributed between the new tech and prior generation engines like the CFM56? And in terms of what you're selling, what the most in-demand engines are? Is it the GTF or the LEAP or is it kind of evenly allocated?

To begin with, the portfolio is predominantly focused on CFM and the LEAP engine, mainly consisting of the GEnx, GE90, LEAP-1A, and LEAP-1B. This is a positive aspect. Additionally, our NEO order book is nearly 70%, likely the highest among lessors that emphasize CFM. Furthermore, 75% of our engines are new technology engines. We anticipate that this will lead to significant developments.

Okay. Is that where you're seeing the most demand, I guess?

We're seeing demand across the board; it doesn't matter because with the level of aircraft utilization, the lack of supply, the demand for new and used engines is extremely strong.

Thanks. Got it. Great. Thank you so much, and we look forward to seeing you at our conference in September. Thank you, guys.

You bet.

We'll move next to Chris Stathoulopoulos from Susquehanna International Group. Please go ahead.

On to Jamie's question, we're going to try to ask this in a different way. So, Aengus, you talk about demand being strong across the board; I understand that and about the global supply shortage here. In the U.S., there is this view out there that we could be moving towards an oversupply condition just by looking at seats, but also order books through some of these more U.S.-focused carriers, Alaska, Southwest, and Frontier. I don't want to debate that part. But if I would love to hear your view on where do you think we are in terms of supply-demand balance? And how do you see that progressing through mid-decade for markets like the Trans-Atlantic, Intra-Europe, Transpacific, and Intra-Asia-Pacific? Thank you.

As we currently observe the Intra market, let’s start with the North Atlantic, the most lucrative market. The demand for widebody aircraft was significantly impacted during COVID, leading to a substantial reduction in supply as many aircraft were scrapped. Scrapping larger aircraft like the A380 equates to losing several 767s, which is significant. Additionally, many airplanes were converted for freight use, and Boeing had no production on the 787s, while Airbus also made drastic cuts to production and is unable to ramp it back up quickly. Therefore, I expect the transatlantic market to remain robust. While there could be economic downturns in the U.S. or Europe, history shows that even during significant downturns like post-9/11 and the financial crisis, the market tends to rebound strongly. Currently, we do not see indicators suggesting a downturn. An intriguing aspect will be the geopolitical factors affecting the Transpacific markets, which have been experiencing substantial growth. There has been high demand and fares from China to the United States, although that market is currently struggling. Nevertheless, there remains a critical shortage of widebody aircraft. The Intra-Europe market is also performing well, as we noticed a recovery in the European market on the narrow-body side beginning 2 to 2.5 years ago. Though the competitive landscape in Europe is fierce with numerous airlines affecting profitability, it doesn’t concern me because airlines will continue to pay their bills regardless of their profit margins. The manufacturing and maintenance of aircraft are incredibly challenging tasks, involving significant technical expertise. Given the complexities of safely transporting hundreds of people at high altitudes for extended periods on the same aircraft, it’s not surprising that manufacturers are currently facing difficulties. However, I am confident that they will overcome these challenges, even though they may linger for some time. Regarding U.S. carriers, they have been the primary purchasers of older aircraft from us because they are skeptical about the delivery timelines set by Boeing and Airbus. Concerns about overcapacity are primarily tied to these delivery schedules, and if I were to speculate, I wouldn’t place much confidence in those aircraft arriving on time.

Okay. So as we think about these four areas here, it sounds like for AerCap and by extension and however, we want to weight the read through here for the carriers, that Transpacific here is the biggest opportunity as we think about the next few years or into mid-decade, is that fair?

I believe the Transpacific route could really serve as another significant catalyst if it rebounds. As mentioned, we're looking at this into the mid-decade, and ideally, we'll observe some improvement in the geopolitical issues by then, which could provide an additional boost.

At this time, there are no additional callers in the queue. I'd like to turn the conference back over to Aengus Kelly for any additional or closing comments.

Thank you all for joining us for the call. Much appreciate it. And we look forward to talking to you in three months' time or else seeing you before then. Thank you.

That does conclude today's teleconference. We thank you all for your participation. You may now disconnect.