Good day, and welcome to the AerCap Holdings N.V. Third 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.

Thank you, operator, and hello, everyone. Welcome to our third 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 October 27, 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 for joining us for our third quarter 2023 earnings call. I am pleased to report another quarter of strong earnings for AerCap, where the underlying business continues to perform very well, generating adjusted EPS of $2.81, our highest quarterly EPS since the closing of the GECAS acquisition. As a result of this strong performance and an improved outlook for Q4, I'm delighted to announce that we are once again increasing our earnings guidance for the year. On a GAAP basis, we generated net income of $1.1 billion in the third quarter and earnings per share of $4.86. This includes $646 million of proceeds from the settlement of certain insurance claims related to aircraft formerly on lease to the Aeroflot Group, which was the result of tremendous efforts made by many teams in AerCap over the course of the last 18 months. I am also pleased to announce another $500 million share repurchase program. This takes total authorization this year to $2.65 billion which is equivalent to 18.5% of our market cap at the beginning of the year. This has allowed us to mitigate the impact of the overhang from GE sales and reduced their stake from 45% at the beginning of the year to approximately 14% today. It should be clear from our actions that we see significant value in our stock today and that these repurchases create long-term value for our shareholders. Aviation assets continue to be in high demand once again reflected in strong levels of activity in the third quarter. Over the last three months, our platform executed 219 transactions across aircraft, engines, and helicopters, comprised of 134 lease agreements, 33 purchases, and 52 sales. Demand from our customers is robust. Our customers are increasingly motivated to lock in lift for the years ahead. Of the used aircraft lease agreements signed in the quarter, nearly 80% of them were extensions, which is one of the highest extension rates we have ever seen. Remarkably, this was even higher on the widebody side, hitting over 90%. This reflects the ongoing shortage of aircraft, which I'll go into more detail later on. For similar reasons, we also continue to see strong demand for our assets in the sales channel with many bidders competing for our portfolios. This was reflected in both healthy quarterly sales volumes of $682 million as well as gains on sale with unlevered margins of 24%. As I've referenced in prior quarters, this is equivalent to the near doubling of the equity held against those assets on a levered basis compared to where our equity is trading in the public market at just over 80% of book. So in essence, during the last quarter, we sold aircraft at almost 200% of their book equity value to expert aircraft buyers and repurchased our book equity at 80% of book value in the public equity market. These gains speak to the deep embedded value in our portfolio and the strength of our book values. Switching to the supply side. You can see from the chart on the left, the OEMs are significantly behind the target delivery set in 2018. We have spoken many times about how today's supply-demand dynamics resulting from the MAX grounding, COVID-19, and more recently, production challenges have led to supplier capacity constraints and in-service reliability. I think it's worth scaling the impact of the supply chain disruptions by taking the most recent Pratt & Whitney announcement as one example. In August, Pratt & Whitney issued a special instruction to operators of GTF-powered A320 aircraft, requiring engine removals for accelerated inspections due to a production quality escape. This they expect will lead to an average of 350 aircraft on the ground from 2024 through 2026, peaking at 600 to 650 aircraft in the first half of next year. A shaft is a turnaround times remain more elevated than usual at approximately 250 to 300 days. This will cause significant disruption to both existing Pratt & Whitney operators as well as delaying slot availability for other programs. Putting that peak of 650 aircraft into context, in the first nine months of the year, Airbus delivered 488 commercial aircraft in total, which if that rate continues, would be equal to 650 units. So as a result of these Pratt & Whitney issues, the market will be like on a net basis, hundreds of aircraft, further tightening demand. The Pratt & Whitney team is working around the clock to address these issues, and we are confident they will execute on this, but it will certainly take time. Other manufacturers are also working through their own unique challenges. From an aircraft perspective, we continue to run the business for the long term. Today, that is best served by recycling capital from assets into equity. Given the robust demand for our assets, we are able to generate significant amounts of excess capital from operations every quarter, supplemented by sales at significant gains. On the deployment side, we are taking advantage of the GE overhang as well as general weakness in the stock market to repurchase large blocks of stock at a significant discount to book value. In fact, we've already bought back more stock in 2023 than we did in any other year, both in terms of number of shares and percentage of shares outstanding which underlines our confidence in the value on offer today. To put numbers on it, those 35.7 million shares were repurchased at an average price of $58.03, a discount of 26% to today's value. The positive impact of these repurchases as well as the strong underlying performance of the operational business has led to annualized book value per share growth of 18% over the last six quarters. As many of you will know, our sole focus is on creating long-term value for AerCap's shareholders. So whether it's buying aircraft from the manufacturers, completing sale and leaseback deals with airlines, retiring debt, or repurchasing shares, we will continue to focus our efforts on whatever generates the highest risk-adjusted returns. With book value at $78.28 at the end of Q3, the clear winner today is share repurchases given these significant discounts. So in summary, AerCap had another very strong quarter. The utilization of our assets continues to improve. Our fleet continues to grow with the addition of new technology aircraft. Our order book is well placed into 2025, and we continue to sell used assets at attractive prices. We ended the quarter with a strong balance sheet as evidenced by our low debt-equity ratio and high levels of liquidity. And through our capital allocation strategy, we continue to return capital to shareholders and to generate strong double-digit growth in our book value per share. With that, I'll hand the call over to Pete for a review of the financials. Thank you.

Thanks, Gus. Good morning, everyone. AerCap had a record performance for the third quarter. Our GAAP net income was $1.1 billion or $4.86 per share. This included a recovery of $646 million related to our Russian aircraft which is included in net recoveries related to the Ukraine conflict. The impact of purchase accounting adjustments was $113 million for the quarter. This included lease premium amortization of $41 million, which reduced our basic lease rents, maintenance rights amortization of $23 million that reduced our maintenance revenue, and maintenance rights amortization of $49 million that increased our leasing expenses. The tax effect of the insurance settlement proceeds and the purchase accounting items was $67 million. So taking all of that into account, our adjusted net income for the third quarter was $639 million or $2.81 per share. I'll talk briefly about the main drivers that affected our results for the third quarter. Basic lease rents were $1.575 million, an increase of $13 million from last quarter. This reflected strong cash collections, and we also continue 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. Lease premium assets are amortized over the remaining term of the lease as a reduction to basic lease rents. Maintenance revenues for the third quarter were $126 million, and that reflects $23 million of maintenance rights assets that were amortized to maintenance revenue during the quarter. In other words, maintenance revenue would have been $23 million higher or $149 million without this amortization. Net gain on sale of assets was $130 million for the quarter, and we sold 45 of our owned assets during the third quarter for total sales revenue of $682 million. That resulted in a gain on sale margin of 24% for the third quarter. We also had $421 million worth of assets held for sale at the end of the quarter. Through the first nine months of this year, we've sold over $2.1 billion worth of assets. And for the full year, we expect sales to be between $2.5 billion and $3 billion. As I mentioned earlier, net recoveries related to the Ukraine conflict were $646 million in the quarter, and that represents recoveries of insurance claims on our Russian aircraft on lease to the Aeroflot Group. Interest expense was $447 million, which included $7 million of mark-to-market losses on derivatives. Our leasing expenses were $166 million for the quarter, including $49 million in maintenance rights amortization expenses. And in the third quarter, we also had a one-time tax benefit of $44 million. We continue to maintain a strong liquidity position. As of September 30, our total sources of liquidity were approximately $20 billion which resulted in the next 12 months sources to uses coverage ratio of 1.7x. That's well above our target of 1.2x coverage and represents excess cash coverage of around $8 billion. Our leverage ratio at the end of the quarter was 2.51x, the same as last quarter, even after $1.6 billion of cash CapEx and almost $1.2 billion of share repurchases during the quarter. So that really shows the significant amount of capital that AerCap generates on a consistent basis. Our total operating cash flow was approximately $1.3 billion for the quarter, which was driven by continued strong cash collections. Our secured debt-to-total assets ratio was around 13% at the end of September, down slightly from 14% last quarter. Our average cost of debt was 3.5%, a slight increase from 3.4% last quarter. And our book value per share was $78.28 as of September 30 and which represents an increase of 21% over our book value per share of $6.59 as of September 30, 2022. During the third quarter, we repurchased approximately 20 million shares at an average price of 58.25 for a total of $1.2 billion. During the first nine months of this year, we've repurchased around 34 million shares for just under $2 billion. As Gus mentioned, today, we've announced a new $500 million share repurchase program that will run through March 2024. As a result of the strong performance for the first three quarters, we're raising our earnings guidance for the full year. The outperformance has mainly been driven by higher lease revenue, both from strong cash collections as well as higher utilization of assets that are on power by the hour rents. Most of those power by the hour arrangements will end later this year, but for now, they're continuing to contribute additional revenue for us. For example, this quarter, we had around $50 million of revenue from PBH leases. The significant amount of share repurchases that we've done this year are also a driver of higher EPS because we've reduced our share count by 34 million shares during the course of this year. In terms of updated guidance on the last earnings call, we said that we expected to be in a range of $8.50 to $9 of EPS for the full year, which included $0.98 of gains on sale for the first half of the year but excluded any gains for the second half of the year. We now expect to be at the top end of that range, so around $8 of EPS before gains on sale. And for the first nine months, we've had gains of $1.47. So, that takes us to our updated guidance of around $9.50 of EPS for the full year before any fourth quarter gains on sale. In September, GE completed another secondary offering of AerCap stock. And following these two successful offerings, GE has now reduced its stake in AerCap from just over 45% at the beginning of the year to 14.5% at the end of September. In addition to the shares that GE sold to the public, concurrent with these two offerings, AerCap has repurchased approximately 28 million shares from GE for a total of around $1.6 billion. So overall, this was a record quarter for AerCap in terms of GAAP earnings as well as adjusted EPS. Our financial performance was very strong, mainly driven by higher revenues. We recovered $646 million from our Russian insurance claim. We were the first aircraft lessor to do so. And of course, we still have an outstanding insurance claim that we'll continue to pursue vigorously. Following the strong performance for the first three quarters with a positive supply-demand environment continuing, we have once again raised our earnings guidance for the full year. So far this year, we bought back over 14% of the stock. And today, we've announced a new $500 million share repurchase program, bringing our total share repurchase program for the year to $2.65 billion. And with that, operator, we can now open up the call for Q&A.

Our first question comes from Jamie Baker with JP Morgan.

So the cost of debt is up about 30 basis points year-on-year, but you still managed an increase in net spreads this quarter, and of course, that's what the market wants to see. But I've got to assume that deferrals catching up contributed to that somewhat. We also know, of course, that lease rates are increasing, but with a lag. I guess the question comes down to how do these two issues intersect? Deferral fading at some point, lease rates continuing to firm, I mean, is that the way we should be thinking about it? And can you hazard a guess as to where net spreads might settle out next year?

Sure, Jamie. So in terms of the deferrals, we had some repayments of past amounts, really some kind of catch-ups on cash accounting lessees that impacted a little bit this year. We also benefit, as I mentioned, in terms of the PBH rents, right? Now that was a benefit in 2022 as well, to be fair, right? But that is something that has helped us there. But what we are seeing, and I'll turn it over to Gus for this, but we are seeing significant increases in lease rates. That's been a feature really throughout last year and this year. And I think, if anything, that's really been accelerating pretty much across the board. But Gus, do you want to comment on that?

For sure. Yes, lease rates have gone up across our asset classes, base aircraft engines, helicopters, all are up significantly this year. But I think, Jamie, it was really important to note about net spread is, it can't be looked at in isolation because as we sell older assets. And bear in mind, of course, an asset has the same rental in the first month as it does on the 120th month. But of course, the cost associated with that asset is a lot lower in terms of its interest expense. So, you have a much wider net spread on older assets. So, as we sell those older assets, we take that money, we sell it at a big gain, and then we buy back our stock at a discount. So the thing to really look at, you have to look at it in combination is the net spread and the earnings per share because I'm taking earnings away from the revenue line, but I'm maximizing their value by putting it through the EPS line. Whilst improving the portfolio because as we're selling our older assets at book gains, buying our stock, we have sold off assets that are older than the ones that are left in the books.

Okay. That all makes sense. That's helpful. And then second, Mark Streeter and I were talking to one of your competitors, I guess, last week, they mentioned that they're seeing four out of five expiring leases being under discussion for extension. Are you seeing that same trend or are more customers simply buying the aircraft from you? Also, what's the incremental IRR when a lease is extended at its original terms? I mean, I'm sure it varies widely. But could you quantify what that typically does for returns?

What I can say is that, on average, 80% of our assets are extending, and for widebodies, that number is 90%. The benefits of extensions depend on the terms, making it difficult to determine how much of an incremental improvement extending or releasing assets will provide. Our current focus is on making the best economic decision, which is certainly in our favor at this time. Additionally, the airlines understand that the OEMs will not produce the number of airplanes they are claiming, and every airline with experience is aware of this. Consequently, they're responding by stating they need the capacity and cannot take the risk of fewer aircraft. As a result, we have seen significant purchases of aircraft from us since we are the largest seller of used aircraft globally, along with a notable number of extensions. This is the reality that airlines face, and I believe it will remain unchanged for years to come.

We'll go next to Stephen Trent with Citigroup.

Can you guys hear me okay?

Yes.

Great. I apologize for having some trouble with my phone today. I appreciate you taking my question. I'm very interested in how you have been repurchasing shares. We've noticed GECAS's stake has decreased to around 14% or 14.5%. When considering the medium term, what are your high-level thoughts on capital structure efficiency and capital deployment? What do you think your ideal target capital structure is? Additionally, with all the cash you're generating, do you have any perspective on dividends? I’d love to hear your thoughts. Thank you.

Sure. Thank you for your question, Stephen. Regarding our capital structure, we currently have a net debt to equity ratio of just over 2.5 times, which is below our target of 2.7 times. We expect to maintain that range, managing towards a 2.7 times target. There may be times when it dips lower or goes slightly higher, but that's our plan. As for share repurchases, we see a significant opportunity given the stock's current position. The excess capital we've generated has allowed us to help accelerate GE's sell down, reducing its stake from 45% to 14%, which is a substantial amount of shares sold over the year. This has certainly benefited us in that process.

To your point about the cash flow generation, it's well made. We have managed to buy back already 14.5%. The new authorization will take it to close to 20%, which would put us in the 99th percentile of the S&P for buybacks. But we did this without borrowing money, we delevered while we did it. That is the key point. Again, if you put everything to the side and say, how is this business doing? We bought back almost or buying back 20% of the business and delevered while we were doing it.

We’ll take our next question from Helane Becker with TD Cowen.

Thank you very much, operator. You mentioned in your prepared remarks, Gus, that you are seeing an increase in demand for widebody aircraft. When considering the release of these aircraft, extending their leases, or taking them back, how long are customers looking to use them? Is it just to cover what they anticipate will be a gap for a year or two, or are they looking at a longer term, like six to seven years?

Near in the latter Helane, it varies some asset to asset. But generally speaking, most of these extensions are very long term. There'll be three to eight years. In some cases, on the wide-bodies, they could be even longer on the extensions. Some discussions at the moment are double-digit years on the wide-bodies.

Okay. That's really helpful. And then just for my follow-up question. Like, I understand the whole share repurchase idea, and it makes perfect sense, but could you take the Company private and borrow at the same cost that you borrow as a public company? And does it make any sense to go down that path?

Well, I think, look, overtime, as we generate the type of capital and cash flow that we're generating, we're going to keep buying back more and more of the Company if the opportunity continues to present itself. And if you look at our past behavior, Helane, that's what we did. To do a levered buyout now, I think that will be challenging on our balance sheet. But if you just simply look at the quantum of capital that this business is generating every year and for that matter, has generated for 15 years, over some period of time, we will get there or thereabouts, I suspect.

Our next question comes from the line of Catherine O'Brien with Goldman Sachs.

Gus, referring back to your earlier comment, I believe that any capable airline team recognizes that the OEMs often deliver less than what is promised. We have heard from a few U.S. airline management teams expressing the need to adopt a more proactive approach in managing their positions in the skyline further into the future than they traditionally have, due to the lengthy lead times and ongoing delays. AerCap, as you know, has a substantial order book that begins to decrease in 2027, although that may change. How do you view future orders if airlines start to position themselves earlier than they normally would? I realize this is just a perspective from a couple of airlines at this point, but does this shape your thinking in any way?

No, really, no, I mean the only thing that we think about is how to create value for our shareholders. As I said at one of the conferences recently, my shareholders pay my wages. The shareholders of Boeing and Airbus definitely do not. And so, we are more than happy to order aircraft when we believe that the price is right for the risk we're taking. There are plenty of ways to grow in this business. It can be sale leasebacks. It can be orders from the manufacturers. It can be M&A. It can be repurchase of shares, return of capital to our shareholders. But one thing we will never do is grow for the sake of growth. As I said many times, there's always a bunch of clouds hanging around the tents in Farnborough and La Borger waiting to order aircraft when everyone else is there. That's not the time to be ordering airplanes. The last time we ordered a significant number of airplanes was in March of 2020 when we ordered Neos. That is when you buy. That's also in the same environment where we bought GECAS. So, great discipline is required and that discipline is dealing with the manufacturers, but just overall in the capital structure, realizing why you're here. You're here for your shareholders and no one else.

That's great for the shareholders on the line, who appreciate that one. Maybe just one on the guidance repeat, and I don't want to sound too greedy because you guys beat my numbers on both core and gains or not core, but x gains and with gains. But on my math year-to-date, adjusted EPS x gains is about $6.20. So your $8 guidance implies a small step down in 4Q EPS gains versus 3Q. Is there something on timing of leases expenses or something we should be aware of or power by the hour rolling off? Or perhaps there's just some element of conservatism on timing of deliveries versus sales given everything going on in the supply chain.

Sure. I think power by the hour will be about the same in the fourth quarter, maybe slightly lower. However, we did experience a $44 million benefit this quarter on the tax line, which was the release of a deferred tax liability that we realized we should have released earlier. This accounts for about $0.20 of this quarter’s earnings. Overall, there hasn't been any change in the environment, and nothing significant stands out for the fourth quarter as we see it. I'm hopeful that we can exceed the $8 guidance. You’ve seen our performance throughout the year, both including and excluding gains, so I'm optimistic we will achieve that.

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

Just on the GTF issue, I know the maintenance is the airline's responsibility. But I have some investors ask if there could be a scenario where an airline that hasn't affected aircraft on lease, expiring next year, decide to return the aircraft back to the lessor people inspection. Could that actually happen that you saw with the burden of GTF inspection actually fall in the last for?

No. In the unlikely event that an airplane must be returned, which is highly improbable, if it was under lease, the airline is required to return the engine in the condition it received it, which means it should be in fully operational condition. They would need to either fully repair it or provide us with a cash equivalent. Therefore, we will not incur any costs. That responsibility would ultimately fall to Raytheon and Pratt & Whitney.

Got it. Okay. So even if they do return it to you, they have to return it in the condition, the on that. Okay. Got it. And then in the next year, I know you have some maturities coming up early next year. I was wondering if you kind of go over your capital market strategy for next year.

Sure. So if you look at this year, I mean we've come both to the capital markets funding, but also done a number of other financings outside the capital markets, so unsecured bank loans, secured bank loans, a small amount of ECA financing, et cetera. And we'll look to do the same thing next year. And I'd say that probably means three to four trips to the market or markets and we will try to vary that. But that's kind of how we're looking at it. And I think when you look at it in total, the total amount of financing that we'll do next year is pretty much the same as what we've done over the last 12 months.

We'll take your next question from Vincent Caintic with Stephens.

I wanted to talk about the lease extensions of the economics, so very interesting to hear about the 80% to 90% of the activities, lease extensions. Just wondering the lease extension versus, say, a new aircraft delivery is the economics similar to that? Or are you may be able to get higher lease rates or just maybe if you can compare and contrast the two?

Of course, there are variations, and I'm not trying to be evasive. When you first lease a new aircraft, you typically have the smallest margin due to high initial capital costs and debt. Currently, both new aircraft we are leasing and those we are extending are experiencing upward rental pressure, and I wouldn't make much of a distinction between the two. We have withheld a number of aircraft for leasing, and you may have noticed that we recently announced several large transactions involving new technology assets and similar extensions across the board, which will reflect the same levels I mentioned.

Great. That's helpful. And then just a second quick question on the guidance. So for the $9.50 doesn't include any implied fourth quarter gains, but if you could talk about the pipeline, I think I heard $2.5 billion to $3 billion of sales of that number came up and is the recent trend of over 20% gain on sale margin. Is that continued to be achievable going forward?

Sure. First, regarding volume, we have approximately $420 million of assets available for sale at the end of September. As I mentioned, I think we will be looking at a range between 2.5% and 3% for the full year, depending on the timing of some of these closures. When it comes to gain on sale margins, historically, we've typically generated gains in the 8% to 10% range each year. If we examine the past 15 years, this year has seen higher margins, attributed to a few factors. One factor is the strong demand that Gus highlighted across various sectors, both leasing and sales. Additionally, it depends on the specific assets we're selling and the buyers involved. This quarter, the assets were generally older, averaging around 17 years, which can enhance margins in certain cases. Overall, we anticipate maintaining levels that exceed historical averages.

And it's just as Pete said, there historically for the last 15 years, you're running at circa 10% gain on sale margin. But that gain, I'd say, on an equity basis, on a levered equity basis, is about 133% of our book equity.

We'll take our next question from Jordan Lyonnais with Bank of America.

Good afternoon. I have a quick question about the lease extensions. Are you noticing any differences in the 80% that could impact the age of the fleet being released? Also, is there still a strong market for selling the older units?

Yes. It's a broad situation. Honestly, we aren't extending younger aircraft. The youngest ones are at least 12 years old, so most extensions are for planes that are in their teens in terms of age. We’ve sold a significant number of assets this quarter, primarily older aircraft. For the past 15 years, the majority of what we sell has been older than the average age in our portfolio, and I don't expect that to change moving forward, as I’ve mentioned in earlier quarters. Additionally, the airlines understand there will be delays for many years ahead, which is why we're seeing such long extension periods. A considerable portion of our aircraft sales in the last year have been to airlines, and the average age of those aircraft is over 15 years. They recognize that this is not a short-term issue. If it were, they would simply approach me for short-term extensions and be willing to pay a premium, but they know that's not the reality.

This does conclude the question-and-answer session. I will now turn the call back over to Gus.

Thank you, operator, and thank you all for joining the call. This was our record quarter in our history for earnings. During the year, we've had a record level of buybacks. With the new authorization, we'll have bought back almost 20% of the business. As I mentioned, we've been in the 99% on the S&P 500 for buybacks. And vitally, we did that without borrowing money. In fact, AerCap delevered while it did it and also grew its balance sheet the large overhang that we faced at the beginning of the year from GE with a 46% stake is now down at 14%. And so, as we look forward with the challenges facing the supply chain in the industry and our own position as being the largest marginal supplier of aircraft and engines in the world, we feel very positive about the outlook for the Company in the long term. Thank you very much, operator, and thank you for joining us.

This does conclude today's presentation. You may now disconnect.