Good day, and welcome to AerCap's Q2 2025 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 2025 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 August 30, 2025. 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. I will now turn the call over to Aengus Kelly.

Thank you for joining us for our second quarter 2025 earnings call. We are pleased to report a record quarter of earnings, generating GAAP net income of $1.3 billion and earnings per share of $7.09. This reflects strong execution and demand for our assets as well as the successful outcome in our contingent and possessed insurance case in the commercial court in London in June. Adjusted net income was $502 million, and adjusted EPS was $2.83. Given these strong results and our improved outlook for the year ahead, we have increased our 2025 full year adjusted EPS guidance again today. Global passenger traffic continues to grow, led by APAC and the Middle East. In the U.S., domestic traffic declined after slower growth in April, but international traffic performed better, demonstrating the resilience of long-haul demand. This phenomenon of international growth outpacing domestic growth is a trend that we've seen throughout the year and around the world. On the aircraft side, we continue to see strong demand from our customers, despite the uncertainty regarding tariffs and trade. This is evidenced by our 99% utilization rate and 97% extension rate in the second quarter. These high levels of utilization and extension rates have persisted over recent years, resulting in more options on placements and stronger returns overall. In fact, across the 30 extensions we completed in Q2, the new leases signed were on average higher than their previous lease despite being older aircraft now. The resilience of international travel means the broad-based demand for wide-bodies continues. This was shown by the lease agreements we signed for 777 and A330ceo with carriers in Asia, the Middle East, and Europe in Q2. Furthermore, as a result of the deals we have signed or have in the pipeline in Q3, we have only 2 wide-bodies available for lease between now and the end of 2027 out of a fleet of more than 250 widebodies. On the narrow-body side, we see similar trends. We signed lease agreements with 12 different carriers in the quarter, including 6 A320neo placements from our order book with a carrier in the Middle East. We extended 26 used aircraft with an average age of 16 years that are on lease to carriers, predominantly in Europe and Asia. There has been a lot of focus on the OEM supply shortages over the last number of years which, of course, have been helpful for lease rates and sales pricing. These delays have also resulted in fewer opportunities for organic growth via sale leasebacks. That dynamic is beginning to change and deals are beginning to present themselves. Of course, they have to meet our return targets, but I am confident that as OEMs ramp up deliveries over the next few years, AerCap will be well positioned to take advantage of these opportunities given the combined strength of our balance sheet and customer relationships. Spare engine demand remains particularly robust today, given the challenges with new technology aircraft in particular, keeping utilization levels high. Our engine platforms are focused on supporting their OEM, airline, and MRO customers. Spare engine support is a key part of AerCap's overall proposition to customers. And our portfolio of over 1,200 spare engines, 90% of which are new technology, mean AerCap is well positioned to do so. On new deliveries, our organic growth strategy continues with the purchase of 31 new LEAP engines across the SES and AerCap platforms, taking total deliveries for the year-to-date to 84%. A further 46 LEAPs are expected to deliver through the end of this year. We also delivered 36 engines to various airline customers in Q2 alone under commercial lease agreements. So overall, activity remains robust across the platforms. Finally, we are set to expand our MRO support capability with an engine leasing partnership with Air France-KLM announced at the Paris Air Show, which we hope to finalize later in the year. This mutually beneficial partnership provides spare engine support for customers of our Air France-KLM's MRO operation and quicker MRO slots for our own fleet. Turning to milestones, the overall, the helicopter landscape remains reasonably robust. Global fleet utilization remains high, aided by continued OEM production discipline and supply chain constraints which, like the aircraft industry, are likely to persist for some time. From an AerCap fleet perspective, we continue to adopt a balanced portfolio management strategy, investing in new technology helicopters at accretive returns, while divesting of midlife and out of production types. During the quarter, we continue to see a high percentage of helicopters of varying types extending with their existing operators. This included deals with operators in the U.S., South Korea, India, and the U.K. So in summary, this was another great quarter for AerCap with earnings and cash flows remaining strong throughout the business. We continue to deploy your capital effectively with the purchase of approximately $3 billion of new equipment and the repurchase of over $1 billion of stock year-to-date. In addition, we expect to spend another $3 billion in new equipment through the end of 2025 and have a further $800 million in share repurchase authorization outstanding. Going forward, this means that AerCap is in an exceptional position to provide unique support to our customers and strong returns to our shareholders. With that, I'll now hand the call over to Pete to review the financials and the outlook for 2025.

Thanks, Gus. Good morning, everyone. Our GAAP net income for the second quarter was a record $1.259 billion or $7.09 per share. This included net recoveries related to the Ukraine conflict of $973 million or $5.48 per share. This reflects the award we received in the favorable decision by the London Commercial Corp in June. The impact of purchase accounting adjustments was $82 million for the quarter or $0.46 per share. The net tax effect of both of these items was $134 million or $0.75 per share. As a result, our adjusted net income for the second quarter was $502 million or $2.83 per share. Besides the insurance award, there were 2 main items that affected our results for the second quarter. First, we had a tax provision release of $41 million; and second, our SG&A expense was higher than normal due to higher stock-based compensation expense which was driven by some upfront recognition of expenses. Going forward, we expect stock-based compensation expense to return to a more normal run rate of around $30 million a quarter. Turning to sales, our net gain on sale of assets was $57 million. We sold 18 of our owned assets during the quarter for total sales revenue of $374 million. That resulted in an unlevered gain on sale margin of 18%, which is equivalent to a multiple of 1.7x book value. The sales volume was a little lower than normal during the second quarter mainly due to timing of deals closing. As of June 30, we had $470 million of assets held for sale, and I currently expect our sales to be around $2.5 billion for the full year. Our liquidity position continues to be very strong. As of June 30, our total sources of liquidity were approximately $22 billion. That includes $2.7 billion of cash and $12 million of revolvers and other committed facilities as well as expected sales and operating cash flow. Our sources-to-uses coverage ratio at the end of the quarter was 1.9x, which amounts to excess cash coverage of around $10 billion. Our leverage ratio was 2.2:1, down from 2.4:1 last quarter. That decrease was primarily driven by the favorable insurance judgment that we received in June. Our operating cash flow was approximately $1.3 billion for the second quarter, and our average cost of debt remained the same at 4.1%. We bought back 4.7 million shares during the quarter for a total of $445 million. That takes us to over $1 billion of share repurchases so far this year. We currently have around $800 million of available capacity remaining in our existing share repurchase authorization. Turning now to guidance, in February, we projected adjusted earnings per share of $8.50 to $9.50 for the full year 2025, not including any gains on sale. On our last earnings call, given the strong performance in the first quarter, we raised our guidance to the top half of that range. As Gus mentioned, today, we're raising our full year 2025 adjusted EPS guidance to approximately $11.60. That includes $1.10 of gains on sale that we had in the first half of the year, but it doesn't include any gains on sale for the second half of the year. In the first half, the outperformance relative to guidance was driven by higher lease revenue, including net maintenance contribution, and we would expect lease revenue to continue to be strong in the second half of the year. We also had some benefits from higher other income in the first quarter as well as the tax release in the second quarter. So that results in full year guidance of $11.60. This reflects our strong performance year-to-date and our positive outlook for the rest of the year. So in closing, we're coming off another strong quarter for AerCap in terms of earnings and EPS and of course, the favorable decision in our insurance case. We continue to be in a position of strength with a strong balance sheet, low leverage, and strong liquidity. We're confident about the outlook for the business, as you can see from our increase in full year guidance and our repurchases of over $1 billion of stock so far this year. And with that, operator, we'll open up the call for Q&A.

We will take our first question from Terry Ma with Barclays.

Maybe just to start off with the partnership with Air France-KLM. Is there any way you can maybe size that opportunity and talk about how much excess capital you kind of deploy into that? We kind of take a step back, maybe just update us on how you're thinking about capital allocation. You guys continue to be under-levered relative targets. So maybe just talk about deployment of that capital overall.

Sure. Let me start with the Air France-KLM joint venture. This opens up another broad customer base to our engine business. And the great advantage for Air France-KLM as they move into the LEAP overhaul business is that they have a partner now that has experience of moving hundreds of LEAP engines around the world on time and on spec for the existing OEM CFM. So that's very important. As regards to how big it will grow, we'll have to see over time. Initially, it will be a small amount, but like all these investments, these are long-term in nature, and it's something we're looking to regarding the long term. I'll let Pete answer the question on the capital allocation.

Sure. Thanks, Gus. So Terry, in terms of capital allocation, so far this year, we've deployed a little over $1 billion for share buybacks. We've also bought $3 billion of aircraft, as Gus mentioned, and we've got another $3 billion of buybacks of CapEx later this year as well as the remaining $800 million in our program. And as we look at it, look, you know we always look at all different alternatives for deploying excess capital. We are seeing some attractive opportunities with some of the airlines now, now that you're starting to see more aircraft delivering in their order books, we think there will be opportunities there. We also think that there will be opportunities on the engine side to deploy more capital there. And of course, share repurchases continue to be attractive. So I'd say those will be the main avenues as we look out today in terms of deployment of excess capital for the remainder of the year.

Got it. That's helpful. And then I guess as a follow-up, I think leasing expenses excluding the maintenance amortization expense was in the $60 million range this quarter. It's been kind of below average last 2 quarters? What's the outlook for that for the remainder of the year?

Yes. So leasing expenses have been lower. They were also lower in the first quarter. They came down a bit more in the second quarter, mainly that has been due to the high level of extensions and fewer transitions that we've been seeing. As you saw, our extension rate in the quarter was 97%. So that's almost a record high. And what the impact of that is it's reducing the amount of leasing expenses that we have. So I think that will continue to trend at lower levels than we had originally expected because of those factors.

Any further questions, Mr. Ma?

No, that's it.

We will take our next question from Moshe Orenbuch with TD Cowen.

Great. I apologize because I missed a bit at the beginning, but the increase in your second half or full year kind of CapEx. Does that already encompass your expectation for potentially higher sale leasebacks? Or is that something that would be kind of additive to it?

No. That $3 billion that we mentioned, Moshe, is just what we've contracted to date. So that's just from the order book. But any incremental things that we do would be additive to that number.

Got it. How should we consider the possibility of that number exceeding $3 billion compared to being lower at this point, in terms of potential upside or downside?

Well, we're starting to see the OEMs pick up their pace of deliveries. I mean you saw Boeing's results the other day. So I think that we are seeing production rates increase, albeit off a relatively low base. So I think as a starting point, that $6 billion for the year is a reasonable one for us just in terms of our order book and what's currently contracted, and then things can be additive from there. And one of the benefits that you get if you're doing sale leasebacks or in particular, engine deals is that it allows for more rapid deployment of capital than say if you were doing an OEM order where you're going to get those aircraft in the 2030s. So that is one of the benefits of those two. How much will it be this year? Hard to know, but we do have excess capital available, and we would like to deploy it.

Got it. Since you mentioned the engine business, could you discuss the potential amount of capital you might invest in that area? You can choose the time frame for your discussion and elaborate on how significant this could be for your AerCap.

We achieved $5 billion in engine orders last year and $10 billion since the GECAS acquisition, which illustrates the size of these orders. Unlike an aircraft order from an order book, engines can be delivered just weeks after we finalize the contract. This is because they are spare engines that are urgently needed, which is the reason behind these purchases. They can be placed immediately into the spare engine pool for the OEMs, leading to a quick deployment of capital. Thus, the potential impact can be significant.

We'll take our next question from Catherine O'Brien with Goldman Sachs.

Maybe just a follow-up on the capital allocation question. Leverage is running well below target. It sounds like you have potentially new opportunities in the sale leaseback market. But how do you think about the relative attractiveness of those sale-leaseback opportunities versus maybe deploying more capital to engines versus buying back AerCap shares? Is the lack of a re-up on the buyback just that you still have $800 million left? Just would love to know kind of how you're thinking about ranking those opportunities.

Yes. That's the rationale for the buyback right now. We have a little over $800 million remaining, and we want to utilize that first. That's why we're not announcing a new authorization at the moment. As you mentioned, our leverage ratio is low at 2.2:1. This is partly due to the judgment we received in June regarding our insurance case, with the funds coming in at the end of June and early July. This reduced the leverage ratio by around 20 basis points from 2.4 to 2.2. When considering opportunities, share buybacks are certainly one option. However, we're also looking at potential sale-leaseback opportunities with airlines and some engine deals. We'll evaluate each option individually, but a combination of those strategies is most likely for deploying excess capital this year. Beyond that, M&A and new aircraft orders are probably less prioritized at this time.

Okay. Great. And maybe just for my follow-up, an 18% gain on sale is nearly double your historical average. So definitely not trying to pick at that. But there's been a lot of focus from investors across the aviation industry on what Boeing starting to get their act together in production could mean. And that 18% is a little bit lower than the last couple of quarters. Is there any difference in the types or ages of assets you called at this quarter versus the last 2 or 3? Just trying to see if there's any read-through to demand for aircraft in the secondary market or if this is just really like a normal fluctuation based on the types of assets you sold?

Sure. I really think it's a normal fluctuation...

Catie, I was just going to say there that this is just a normal fluctuation. There's nothing more to see there. In terms of demand, it's still extremely strong. Look, the real evidence of that is the extension rates. You can see that we extended an all-time high of 99% of the aircraft. That's what speaks to the strength in the market, whether Boeing is making 34, 36, or 38 airplanes is not going to affect that demand.

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

Yes, maybe the first one for Pete. When we met up at the airshow, we had a pretty deep discussion with you on tariffs. Given how things have sort of moved around, how are you thinking about it now? And how is the tariff environment kind of impacting the business?

Sure. Thanks, Ron. So we've seen a very limited impact of tariffs on our business so far. As you know, we've been strong advocates for a zero-tariff regime around the world. We were very glad to see the announcements between the U.S. and the U.K. and then the U.S. and the EU that came over the weekend. I believe those remove a lot of the uncertainty around tariffs for aviation. So that's very helpful. And what we'd like to see, I think those are a good precedent for other deals that could be done around the world. So that's very helpful. Look, all that being said, this has moved very quickly. But if those can serve as a precedent and we get back to the zero for zero regime, I think that's best for aviation. It's helpful for the industry overall. And as I said, so we've seen very minimal impact, and we hope that a lot of this is behind us now.

Got it. Got it. And then maybe just a broader question. When you think about the return profile on an engine versus the return profile on an airframe, kind of at a high level, how do you guys think about that? I mean, what's better for you all an airframe or an engine?

Ron, I wouldn't say one is better than the other. There's different aspects to them. The engine initially has a lower lease yield because no one is paying for seats, lavatories, or all that bio-furnished equipment. However, over time, the aircraft depreciates faster than the engine because you have to depreciate those components that are specific to the first, let's see. So you get a higher lease rate at the start on aircraft, but you have a shallower depreciation curve over the long term on the engines. The key point of investing in anything in aviation is that you are buying the right assets for their remaining economic life, be that 5 years or 25 years and you're buying it at the right price, and you know the value of the assets when you buy it. And AerCap has demonstrated that in this industry for 20-plus years that no one has that judgment better than this company?

Got it. And then maybe just one last question. With demand for wide-bodies clearly increasing, do you think you need to build up your backlog on wide-body orders more so?

Definitely not. I will build my skyline when it makes money for my shareholders. I have no interest in buying any asset at all if it doesn't make adequate return for shareholders in AerCap. I still believe the cheapest widebodies in the world are available on the New York Stock Exchange under the ticker AER.

We will take our next question from Jamie Baker with JPMorgan.

So Gus, do you believe we are at the peak of returns? If not, when do you think we will reach that point? We're asking because lease rates haven't fully aligned with the cost of debt. We're starting to consider whether competing capital could be a factor, specifically if less disciplined capital is pursuing deals at lower rates. We're just thinking out loud here, but some recent transactions from United seem to have taken business away from AerCap, so we're curious about the implications of that.

Sure, Jamie. I can't speak for others in the industry, but I will let Pete talk in a moment. Over the long term, AerCap has consistently been able to pass on interest costs, and we've done that again this year, as you'll notice. Interest expenses have risen by 5% and lease revenues have kept pace. From my viewpoint, I've always indicated that we aim for returns of 8% to 10% above the treasury rate, which is what this company has historically achieved in various markets. This business is very stable if managed well and approached with a long-term perspective. If you're only a temporary player, you may invest your money, but whether you'll achieve success is uncertain. We've shown significant restraint in how we deploy capital. We believe in our capital allocation methods, whether that involves buying back our own shares or making other investments; I truly think that the best aircraft are available daily on the New York Stock Exchange under our ticker. It's true that some deals may go elsewhere, but that's where we maintain our discipline. For 20 years, we've demonstrated that discipline across all market conditions, and we plan to keep doing so.

Okay. I appreciate that. And then maybe for Pete, you're nicely below the 2.7 debt-to-equity target. You touched on that in your prepared remarks. So what's more likely from here, running it back up to the target or maybe tightening that target and pushing for low A ratings?

Yes, Jamie. I believe we will operate closer to our target. I expect it to approach around 2.7, whether that's 2.4 or 2.5, in that range. We do not plan to reduce this target because I believe we are currently in a good position with the rating agencies. Ideally, reaching A- ratings would be excellent. However, our main focus is on what benefits our shareholders the most and how we can achieve the highest returns for them. If it requires lowering the leverage target over an extended period while ensuring higher liquidity and making other adjustments, we will consider that. Given our progress from low BBB- ratings a couple of years ago to BBB+ today, that's a notable achievement. While we aspire to improve further, there are many opportunities for us to invest capital, and we intend to pursue those.

We will take our next question from Kristine Liwag with Morgan Stanley.

And maybe, Gus, following up on your comments on AerCap's success for the past 20 years, I mean we've seen all the numbers. And at this point, I mean, you are the largest aircraft lessor in the entire world. So congratulations on that success. But I guess when we look for growth and Wall Street is always looking for the incremental growth, as you continue to deliver that strong return and the business continues to delever and we look at your forward order book and purchase and leasebacks, it kind of decelerate starting 2027. I mean how do we think about the size of AerCap in the next 5 years or even, I mean, 20 years maybe a little too far out, but maybe in the next 3 to 5 years, how big could you be? And are you getting to the point on return that you're too big that getting that outsized 8% to 10% consistently over the treasury rate may be getting harder? And if that's the case, where do you see incremental growth?

Thanks, Kristine. Well, look, from our perspective, this is a growing industry, aviation. Every 20 years, it doubles in size. And aircraft leasing is doubling within that itself. So it's continuing to grow every year. So I'm not worried about growth over the long term; it always comes. And indeed, if you just look at the amount of CapEx we contracted in 2024, it was $6 billion plus that we managed a contract that wasn't there at the beginning of the year. So I'm not concerned about where the order book is. I'd be extraordinarily concerned if I was ordering airplanes that were going to have a negative effect on my shareholders, and we followed the GAAP model of growth at any price. That's something we'll never do. The objective of this company is to create value for our shareholders. And that means growing profitability. And that does not necessarily mean growing revenue. Of course, we have grown revenue tremendously. We've grown the balance sheet tremendously. But at the right time, and I'm very confident that given the growth industry, AerCap's position in the industry, the relationships we have, the influence we have that profitable growth opportunities will come our way. And in any event, as I said earlier on in the call twice, I certainly believe that the best value aircraft in the world are available under the ticker AER down on the NYSE.

As a follow-up, we have observed a slight decrease in the annualized net spread over the last few years due to rising interest expenses. With the balance sheet continuing to improve and leverage decreasing, are there additional ways to further lower the interest costs? Additionally, when do you anticipate that the annualized net spread will begin to increase again?

Yes, thank you, Kristine. I expect the net spread to expand moving forward, experiencing quarterly increases and continuing into the next few years. The portfolio yield and lease rate factor are on the rise, which will contribute to this overall increase in net spread. However, it's important to note that net spread is not the only measure of our performance; we are ultimately focused on earnings per share (EPS). I believe profitability will improve in the future. In response to Jamie's earlier question about whether the industry has reached peak profitability, I don't think we have. There is a delay in realizing the financial results from the deals we're currently making, so even if the market looks strong now, the benefits will take time to materialize, likely over the next few years. We also have a favorable trend with COVID leases coming to an end, which will take some time to impact our profits but will be beneficial overall. There are several positive factors for our company as we look ahead to the next few years.

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

I know you already wrote down your exposure to Azul late last year, but that was before they filed for bankruptcy. I was just wondering if there could be any other impact from Azul's bankruptcy from your end?

Thanks, Hillary. Yes. So last year, you're right, we did take a provision against Azul, and as we look out today, Azul is still in bankruptcy, they have been making progress in their restructuring plan. We don't see any impact compared to where we were. So I think minimal impact this quarter from Azul, and we think we're fully provisioned there for how this restructuring should play out.

Okay. And then so far, we saw about 10 very young A320neos getting retired in the market. And parted out to harvest the engines just given the demand for spare engines. I guess that speaks to the strength of the engine market. So I just wanted to get your thoughts on that phenomenon and if that's something that you expect will continue?

There are a couple of points to address. Regarding the report of A320neos being dismantled, there are 220 aircraft in Egypt that are being disassembled. For the A320s you mentioned, my understanding is that only the engines have been removed while the aircraft themselves are not being dismantled. This is to allow Pratt & Whitney to meet its commitments to its customers. As far as I know, the teardowns are only occurring for the 220s in Egypt.

We will go back to Catherine O'Brien with Goldman Sachs.

Maybe just one more on the sale-leaseback opportunity. Are these more opportunistic from distressed airlines? Or is this just a function of more deliveries, driving less competition per RFP? Just was curious, as I know that market has been pretty competitive and not very attractive the last couple of years. Just wondering what's driving the shift.

Well, Catherine, first of all, we have to execute on them. Now we have done so over the years. And you can see that indeed last year with the amount of CapEx we put on the books that was not there at the beginning of the year. It's highly unlikely we're going to be competing in open bid sale-leaseback transactions. It's where we bring other things to the table in terms of our installed fleet, our engine business, etc. There are different things we bring to the table that others don't. So I can't say that every deal is uniquely bilateral, but we certainly wouldn't be entering into many sale-leaseback transactions. I don't think we have, whether there's just open bids or everybody is bidding against us.

There are no further questions at this time. Mr. Kelly, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you very much, everyone, for joining us for the call, and we look forward to speaking to you during the quarter. Enjoy the rest of the summer. Goodbye.

This concludes today's call. Thank you for your participation. You may now disconnect.