AerCap Holdings N.V. (AER) Q3 2014 Earnings Report, Transcript and Summary

Peter Wortel - Former Vice President of Investor Relations Aengus Kelly - Chief Executive Officer, Executive Director, Chairman of Group Executive Committee, Member of Group Treasury & Accounting Committee and Member of Group Portfolio & Investment Committee Keith A. Helming - Chief Financial Officer, Chairman of Group Portfolio & Investment Committee, Chairman of Group Treasury & Accounting Committee and Member of Group Executive Committee

Gary S. Liebowitz - Wells Fargo Securities, LLC, Research Division John D. Godyn - Morgan Stanley, Research Division Richa Talwar - Deutsche Bank AG, Research Division Howard S. Goldberg - Citigroup Inc, Research Division Jason Arnold - RBC Capital Markets, LLC, Research Division Arren Cyganovich - Evercore ISI, Research Division Mark Streeter - JP Morgan Chase & Co, Research Division Scott Valentin - FBR Capital Markets & Co., Research Division James Ulan Glenn D. Engel - BofA Merrill Lynch, Research Division Darryl Genovesi - UBS Investment Bank, Research Division Andrew Light - Citigroup Inc, Research Division Joe Gill - Goodbody Stockbrokers, Research Division Robert Smalley - UBS Investment Bank, Research Division

Welcome to today's AerCap Holdings Third Quarter Results Conference Call. [Operator Instructions] This call is being webcast, and an audio version of the call will be available on the company's website. The call is also being recorded for replay purposes. I now hand the call over to Peter Wortel, Head of Investor Relations.

Thank you, and good day, everyone. Welcome to the 2014 third quarter results conference call. With me today in New York are Aengus Kelly, AerCap's CEO; and Keith Helming, AerCap's CFO. Before we begin today's call, I would like to mention that in addition to this earnings call, AerCap will also host a group presentation with analysts and investors today at the New York Palace Hotel, in the drawing room, starting at 11:30 A.M. Doors will open at 11:00 A.M. The presentation there will not be webcasted. I also want to remind you that some statements made during this conference call that 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. In addition, this conference call contains time-sensitive information that reflects management's best judgment only as of the date of the last call. AerCap does not undertake any ongoing 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 related to forward-looking statements can be found in AerCap's earnings release dated November 4, 2014. 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. I'll now turn the call over to Aengus Kelly.

Thank you, Peter. Good morning to all of you in the U.S., and good afternoon to those of you in the Middle East and Europe. Thank you for joining us today for our third quarter earnings call, the first full quarterly set of results reported by AerCap following the completion of the ILFC transaction. While it is still relatively early in the integration process, we are pleased to report that our integration plan remains at or ahead of schedule in all material respects. Today, we have incurred no unscheduled aircraft downtime, minimal unplanned labor attrition and substantially all of our assets have been transferred to Ireland, which is where we now have the largest portion of our staff in operation. The operational progress, in particular the merging of the main IT systems by September 30, represents a key milestone, which enables our technical and risk management teams to actively monitor the combined portfolio on a single platform. For their efforts on this and the many other work streams associated with the integration plan, I will again want to reiterate my thanks to the entire AerCap team around the world. The success of the transaction is borne out by the results. In Q3, AerCap generated adjusted after-tax net income of $316 million and adjusted earnings per share of $1.49, and we finished the quarter with $44 billion of total assets on the balance sheet. Our net spread or NIM, which is the crucial measure of the company's performance, continued to run at a 5-year high of 10.1% during the quarter. Our fleet utilization was 99.3% during the quarter. And as of September 30, AerCap had $6.6 billion of available liquidity on hand. During the quarter, we executed 134 aircraft transactions, which means that we effectively bought, sold or leased more than 1 aircraft every 24 hours. One noteworthy transaction we closed during the quarter was a sale-leaseback deal with Virgin Atlantic, a long-time customer of AerCap. This transaction was for 777-9s, one of the most attractive aircraft types available, worth approximately $900 million based on appraised values. The delivery starts of these aircraft are also very attractive, with the first one having delivered last month. This transaction is an example of how the AerCap franchise can lever both at scale and the in-service fleet with customers to obtain highly attractive assets for the benefit of our shareholders. Turning to the order book. As of September 30, we have committed to purchase 391 aircraft valued at approximately $29 billion to be delivered through 2022. Despite the long lead time, I am pleased to report that we have already placed 90% of the delivery through 2016 and almost 60% of all deliveries between now and end 2019. The average lease term on the new aircraft is approximately 12 years. And on the use side, we have one of the lowest remarketing tasks the combined entity has faced in many years, with less than 50 aircraft to place before end 2015. The average lease term we have achieved in used aircraft of 58 months during the quarter reflects a robust demand environment we have been observing. This strong level of placement activity on both new and used aircraft is a result of our attractive order book, modern in-service fleets and the global reach of the AerCap platform. The duration of the leases provides both stability and visibility into the future profit and cash flows of AerCap. As I noted on the Q2 call, we continue to see favorable market for modern technology equipment. We are moving the A320 and 737 family aircraft, particularly the A321 and 737-800 on attractive terms. On the wide-body side, we also see good demand for the 330. We were also observing good demand for high-quality 767s and 757s. The attractive nature of our order book is evidenced by the strong placement activity I referenced earlier. Turning to receivables. We have not witnessed any unusual level of activity on receivables or repossession, given the time of year we are in. We are, of course, extremely vigilant with regard to the impact of macroeconomic trends and geopolitical risks on our customers. Current events, such as Ebola, the Ukraine conflict and unrest in the Middle East, are all carefully monitored by our risk management team. To date, these events have not had a material impact on our business. What I've also mentioned on the Q2 call, the business is run on 4 key principles, which are the proactive management of credit risk, maintenance of a portfolio of in-demand aircraft funded by a long-term stable liability structure that has a suitable leverage ratio, and a hedging policy designed to manage the business to accommodate changes in the business environment and fluctuations and interest rates. With that, I will hand you over to Keith before we start the Q&A.

Thanks, guys. Hello to everyone. I'll start on Page 5 of the presentation. Our reported net income for the third quarter was $340.9 million. During the third quarter, we incurred post-tax expenses of $12.6 million relating to the ILFC transaction. Adjusted net income, as mentioned, which excludes the various items listed, including the adjustment for maintenance rights related expense, was $315.8 million. Both reported and adjusted net income included $20 million of nonrecurring income. Slide 6. Reported earnings per share were $1.61 in the third quarter. Again, as mentioned, adjusted earnings per share were $1.49. The average shares outstanding during the third quarter were 212 million. Slide 7. Total revenue in third quarter was $1,251,000,000. In the third quarter, maintenance-related revenue was $50 million. Net gain on the sale of assets was $3 million, and other income was $26 million. Slide 8. Net interest margin or net spread was $906 million in the third quarter. The annualized margin as a percent of average lease assets, as mentioned, was 10.1%, up from 8.8% during the same period in 2013. Slide 9. The impact from asset sales in the third quarter was a pretax gain of $2.8 million. And during the third quarter, we sold 10 aircraft from our own portfolio, 2 aircraft from our managed portfolio and executed part-out transactions for 3 aircraft. Slide 10. Leasing expenses were $28.9 million for the quarter, and SG&A was $96 million. Also, in the third quarter, as previously mentioned, we incurred $14.4 million of transaction expenses relating to the ILFC acquisition. Page 11. AerCap's unrestricted cash balance at the end of the third quarter was $1,744,000,000. And our total cash balance, including restricted cash, was $2,418,000,000. Operating cash flows were $885 million for the third quarter. Slide 12. Our available liquidity sources over the next 12 months is $9.7 billion, and contracted debt maturities and CapEx over the same period is $6.6 billion (sic) [ $6.7 billion ]. This results in excess liquidity coverage of $3 billion and a ratio of sources to uses of 1.45x. These sources do not include additional financing for deliveries of new aircraft purchases. Slide 13. At the end of the third quarter, AerCap's debt balance was $30.8 billion, and our adjusted debt-to-equity ratio was 3.5:1. Our book equity is $7.6 billion, and the average cost of our debt for the third quarter was 3.4%. Slide 14. With regards to the financial outlook for fourth quarter 2014, total revenue is expected to be approximately $1,250,000,000, which is $5 billion on an annualized basis. Depreciation is expected to be approximately $530 million or $2.1 billion on an annualized basis. This reflects expensing the maintenance rights assets over the remaining economic life of the aircraft. Interest expense is expected to be approximately $280 million or $1.1 billion annualized. Leasing and SG&A costs are expected to be $125 million to $150 million or $500 million to $600 million on an annualized basis, and the tax rate is expected to be approximately 17.5%. So those were the financial highlights for the quarter, and I'd now like to open it up to Q&A.

Operator, can you start the Q&A, please?

[Operator Instructions] We will now take our first question from Gary Liebowitz from Wells Fargo Securities.

Gus, I was wondering if you could characterize the market for midlife aircraft, secondary trading market. Earlier this year, it seemed to be a lot of new money coming into the space. Do you still think that's the case? And how should we be thinking of your aircraft divestiture strategy over the next couple of quarters?

Gary, we are seeing good leasing demand for midlife aircraft today. When I say midlife, we're looking at airplanes between, say, 8 and up to 15 years of age. And if they're 737s, A320 family machines, we're moving them fairly easily. In terms of new money coming into the sector, certainly, there is. As you see there, we talked [ph] it through the aircraft we've sold, and all of the aircraft we sold during the quarter were older aircraft that would be actually closer to the 15-year mark than the 8-year mark. So yes, there's still a good bid out there.

Okay. Also, I guess, you talked about the 10.1% net interest margin you had in the quarter. I know you're not giving formal 2015, '16 guidance. But should we think of that as a sustainable NIM level?

Gary, when you look at our interest expense for the quarter, it's at 3.4%. And we're receiving, on this season, some benefit from the fair value of the ILFC debt. So we are replacing as the debt runs off with longer-term financing. So the interest expense will increase and levelize around the 4%, 4.1%. So obviously, with that increase, we'll lose a little bit of that spread. But otherwise, it should stay pretty constant, at least for the foreseeable future.

Okay. Then just one more for you, Keith. The $21 million you reported in equity investment income, were there unusual items in there?

There's $20 million of nonrecurring income in one of our joint ventures, so it's a one-off item.

And the next question comes from John Godyn from Morgan Stanley.

Gus, though it's a little bit less topical today, a couple of months ago and on the last call, the view on the cycle was extremely, extremely topical. I was hoping that you could sort of update your thoughts on where we are in the cycle, as well as specifically perhaps speak to the decision of the manufacturers, Boeing, to take narrow-body rates even higher. How do you see all this playing out?

So as I've said, look, we're moving an airplane a day. So at the moment, we see very good demand for modern technology assets. We're running at 99% utilization. The remarketing task the company is facing, on a combined basis, is one of the lowest we've faced in many years. That's probably the best indicator I can give you of demand in the here and now. What the manufacturers are planning to do in 2018 and 2019 is subject to an awful lot of change. That's a ways out. One thing we do know about Boeing and Airbus, and they have proven it time and again, is that ultimately, they do act like a rational duopoly, and they never produce white tails. They have the ability to match the demand and the supply in the market, and they have always done that in the past. So when they announce future rate increases or you hear big orders, that's not really something that we're particularly concerned about. We're much more focused on deliveries when they actually happen. We know that historically, both of those manufacturers have always matched supply and demand, even if you go back to the worst day of 2003, post SARS, and again, in 2009 post Lehman. Neither one of those OEMs produced white tails and stuck them on the tarmac, which produced -- which is what we produced, significant overcapacity in the industry and that, of course, is in contrast to the shipping industry where you see dozens of manufacturers just covering variable cost and making the ships. That doesn't happen in this industry. So for that reason, I'm not as concerned about the pronouncements they make in Seattle and Toulouse. I've more interest on what they actually do and deliver.

Very helpful. And one of the concerns that I sometimes hear from investors is that the lessors are perceived as lagging the cycle a bit. Of course, your leases, there's a certain churn to it. And if we did look at lease rates and the impact on your financials, we could certainly conclude that. But I wonder, as you guys think about the cycle, what sort of kind of very short-term indicators that aren't lagging do you anchor to? What gives you confidence that lessors are not a lagging indicator?

Well, you got to remember, the lessors lease into the future. But we lease airplanes -- we're leasing airplanes now in 2017. So I would say that's not a lagging indicator. That's a future indicator. And so the other thing is -- that's on the new side. On the used side then, we have more or less, given our scale, we are more or less leased out through the end of 2015. We've less than 50 airplanes to move, which is not a huge amount for this platform and lower than we've seen in many years. So we're moving used aircraft that are coming back in 2016 as well. So that's what we would look to ourselves, as how is the market for our aircraft that are coming off lease in 2015 and 2016. And on the new side, how is the market for aircraft that are delivering in 2016, 2017.

And the next question comes from Michael Linenberg from Deutsche Bank.

It's actually Richa Talwar filling for Mike. So first, just a housekeeping question, and I apologize, Keith, this is going back to a question I believe you answered. But that $20 million of nonrecurring income, can you give us more clarity on what that's tied to?

Again, it's in one of our joint ventures, and it's primarily insurance related.

Okay, great. And then, Gus, I was curious to hear your thoughts about the U.S. Fed ending quantitative easing and the consequent impact that might have on interest rates in your business. I mean, there is a view that higher interest rates are inherently good for aircraft leasing, given that it's a harbinger for better economic prospects, which means a healthier customer base and higher lease rates. But we've also been hearing from investors that a higher interest rate environment can also be negative, obviously, for net interest margin, and it's also been something that's driven up the sharp demand for aircraft recently. So I was curious to hear your thoughts around that.

Sure. On interest rates, there's a couple of aspects to it. The first one, though, is that we don't speculate on interest rates as a company. So we will hedge the business to material fluctuations in interest rates. So therefore, the concern of the net spread being reduced for rises in interest rates shouldn't have any material impact on the existing leases that are out there. Then the question is, if rates rise, what does it mean to the future leases you've locked in? However, on virtually all our forward order aircraft, there's a mechanism in there where you agree the lease rent today and then it adjusts as interest rates rise or fall. So your net interest margin is a natural hedge built in to the lease until delivery. So effectively, the lease rates floats, then it delivers, then it fixes, so you're not exposed until it actually delivers, and at that point, you hedge it. Now, generally, you are correct that interest rate -- a higher interest rate environment is generally correlated with an improving global GDP, asset inflation as well, very importantly in the market, and that's what we've seen in the past. Of course, though, the word of caution is that it's the velocity of the movement in rates, not necessarily the absolute level they get to, that is the concern. So if interest rates gradually go up in a controlled fashion, at the short end of the curve up to normalized LIBOR levels, then the business will adjust to that as lease rates are a function of interest rates where you have the risk, if -- that if there was a sudden shock, as we saw with the Lehman crisis in 2008, then that will be different because it would take a longer time for the lease rates to adjust. But absent those outlier events, generally your assertion is correct about rising rates and the business environment.

We will now take our next question from Jason Arnold from RBC Capital markets.

Gus, just to follow-up on previous comments on the used market. Has anything changed in the relative appeal of re-leasing sale or part-out of aircraft coming off lease since last quarter, maybe just given kind of those comments on the midlife strength?

There are a number of aircraft that we had assumed will be part of that, but we're actually seeing some re-leasing activity on those aircraft. It's not enough to -- I could say that it's moved the needle tremendously. But there's certainly aircraft that we had thought we would not be re-leasing that we are re-leasing. But the bulk of the portfolio is not in that age category or that aircraft type category, as you know. The vast majority of the portfolio is on the 320, 737, 777 and 330 family. But I mean, if you have a good quality 757 or 767, you'll definitely find a home for it.

Super, okay. And then I was just curious if you could expand on your thoughts around the global macro. Are there any regions or country exposure that you're a bit more concerned about? And then maybe conversely, can you speak to regions or countries that are doing well or better than your -- expected or that you're more excited about?

Sure. Well, I'll just go through the regions, maybe the easiest thing. The North American market, as you've seen from the results of the majors and all the airlines, in fact, here, is extremely strong and probably as healthy as it's been for many decades. South America, we see reasonable demand there. It's okay. We were obviously following the events in Brazil with the election, but we're still placing aircraft down there. Growth has stalled off from what it was a few years ago when it was at much higher single digits, but still moving airplanes down there. Europe and EMEA, in general, has been, I would say, the horsepower of the business, to be fair. When I say EMEA, I mean, Europe, Middle East, Africa, a lot of that has to do with the fact that there was very little ordering of aircraft in Europe over the course of the last 5 or 6 years. And so we'd be moving a fair number of aircraft there. Russia, obviously, the events are well known with the Ukraine crisis. As I said, to date, that has not impacted us. But of course, if things were to escalate materially out there, then that would have an impact on many industries, not just our own, of course. China, China is doing fine. We're still moving airplanes there. Of course, it's not at the double-digit growth rate that it was, but it's still a market where we're doing a fair bit of business. Southeast Asia, there's been a lot of commentary in the press about has there been over-ordering down there. What I would say in relation to that is that the traffic will grow to the expected levels to absorb those orders. But whether or not it will grow at the level required to absorb them in the time frame they were ordered, i.e. are those orders expected to deliver in the next 5 years, maybe it may take 7 or 8 years to do it. But again, I go back to my comment about Boeing and Airbus at how they moderate supply into the industry. They will not cannibalize their customer base. If an airline at Southeast Asia goes to Toulouse or Seattle and says, "I have ordered 100 airplanes, and I'm supposed to take 25 next year," and they say, "We can only take 10 or 15," Boeing and Airbus will say to them, "Okay. There are certain penalties attached to that, but we will give you a lower number of airplanes. We will not force you to take all of them and put you into bankruptcy," that's what I mean by cannibalizing their own customer base. So with the duopoly we have in place in the supply side, and that isn't going to change anytime soon on large aircraft -- on the regional side, of course, we have Embraer. But on the large commercial aircraft side, that duopoly isn't going to change. And therefore, I think that any over-ordering that -- and you see that, by the way, and from some of the airlines in Southeast Asia that have already announced deferrals of aircraft, and that has been accepted by the OEMs. And the OEMs both know that this is part and parcel of the business, that's why they're quite happy to accept larger orders than perhaps an airline may ultimately need in the time frame they're ordered. But they both know that in time, those airplanes will get delivered.

And the next question comes from Arren Cyganovich from Evercore.

The comments that you just made, Gus, about Europe being pretty strong in terms of transaction activity and demand, maybe could you just talk a little bit about that relative to the weakness we're seeing from an economic standpoint in the region, how resilient you expect that to be? It looks like passenger traffic out of IATA this morning were showing about 4% increase in growth, I think, or something around that nature. Just some thoughts on the European demand for your portfolio.

Sure. There's a couple of aspects to it. As I said, the first thing was that there wasn't that much ordering in the first place by a lot of the European airlines over the course of the last few years due to the weak outlook. And so there was a replacement requirement, if you will, a restocking requirement. But beyond that, it's such a massive market. When we talk about Europe, the Middle East, I said EMEA, in general, but it's backed by Europe. I mean, it is the biggest market in the world when you look at it like that. So you get a -- the IATA numbers you're looking at, 4% to 5% in Europe, that's a big number for -- when you translate it because it's such a huge market. So sure, the economic growth is weak, obviously, at the GDP level. But I think the combination of the fact that it's a restocking, but also just the scale of the market as well, means that there has been demand for asset there. And also, from a leasing company standpoint, quite frankly, we haven't seen the consolidation we've seen in the United States. So we haven't seen the situation in Europe where you have very large consolidation into very powerful airlines. You still have some very large and powerful airlines there. But there's a lot more fragmentation and I don't see that changing anytime soon, and that fragmentation plays to the advantage of a leasing company.

And then in terms of expense synergies with ILFC, how far are you into your plan? And when do you expect that to reach the full synergy level?

Yes. We're about halfway through the transition plan, and effectively, we'll be there by the second quarter of 2015.

And then lastly, the -- where is the amortization intangible benefit showing up? Is that -- it's showing up as a benefit to depreciation in this quarter? Where's that showing into -- through the income statement?

That's correct. The depreciation that you see for the quarter is lowered by the amount that we reflected in the adjusted net income calculation. So otherwise, the depreciation would be a higher amount.

We will now take our next question from Mark Streeter from JP Morgan. Mark Streeter - JP Morgan Chase & Co, Research Division: Question from me and Jamie on a couple things on asset sales. You've sold over $2 billion since you closed the ILFC transaction. You have the $1 billion run rate. Do you think you can do $2 billion every year? Or is the market that robust that the pace can continue that you're on?

I mean, Jamie, if you wanted to, we could sell plenty of airplanes. The -- what you've got to make sure is that our shareholders get rewarded. We have a very big, powerful global platform. And when we sell an airplane, we got to get paid. I'm not going to sell it to some guy who then turns around and flips it for $1 million more because there's a scale in this platform, of everything we can do, from being the largest part-out business in the world to the largest lessor, we can do an awful lot. So we got to make sure, when we sell, we get close to full value for our sales. So long as we get what we perceive to be value, then we'll continue to sell. This year, as you saw, the combination of assets we've sold plus some of the deals we did in our forward order book have resulted in that $2 billion. We have given the guidance of $1 billion and that -- as future guidance, we think that's a good benchmark. Keith?

That's correct, yes. Mark Streeter - JP Morgan Chase & Co, Research Division: And of the $44 billion of asset value you have combined right now, have you identified how many -- what dollar amount of assets might be eligible for sale? I know there's a recurring amount as aircraft age, but is there a dollar amount you can give us on what you might look to sell if the market's there for you?

We just stick with $1 billion, Jamie. It's where we are -- I'm sorry, Mark, at the moment. That's just what we have, is the $1 billion, as we look forward on an annualized basis. That can move around. One year like this year, you might sell a bit more. Another year, you might sell a bit less, et cetera. But that's what it is, $1 billion. Mark Streeter - JP Morgan Chase & Co, Research Division: Okay. And then just one final question, can you talk a little about the interplay with oil prices and how you think about your own fleet strategy here, with WTI now at $77, and I look on the screen here -- is there a price where you start to alter how you think about the mix of your order book and used aircraft and how willing you are to maybe sell used aircraft because in theory, they become more economical as oil prices fall? Where is that sort of breaking point in terms of where is it alters your thinking regarding the fleet?

Sure. And on oil, I mean, of course, look, you have to look at the general direction you think oil is going to go over the long term. And the airlines, our customer base -- and that's what we take our guidance from. What does our customer want? We are not the market. The customer is the market. And the customer base is of the view firmly, because we discuss it with our customers on an ongoing basis, is that yes, oil has come down in the very, very recent past. And just the fall this morning was due to the Saudi Arabian announcement. So it is volatile. And I don't think -- we don't see any evidence yet that our customers are altering their longer-term fleet plans based on the recent decline in the price of oil. They are, of course, looking to extend some older assets that you may have on the books right now that you might have thought, maybe it wouldn't have been economical to extend them. So they're doing that now. But overall, the longer-term view of the airlines is that the best hedge against their single post [ph] exposure item is a modern fuel-efficient fleet. Don't forget, 99% -- 95% of them wouldn't have the ability to hedge without posting cash collateral, which could get into a lot of trouble, so they view having a fuel efficient fleet as the key long-term hedge and the biggest risk in their business and the one that they have no control over. So as of yet, we have not seen any change in that behavior.

And the next question comes from Scott Valentin from FBR & Co. Scott Valentin - FBR Capital Markets & Co., Research Division: Just with regard to the follow-up on oil prices. Gus, when you talk to airline CEOs, are they talking about expanding the number of routes, given the lower oil prices will help achieve profitability faster? Would that create incremental demand for aircraft?

I think if you go to mature, experienced airlines, they realize that oil is a volatile swing factor, and that to base their route network around a relatively recent phenomenon in oil price would be high risk. It takes time to set up new routes, advertising, generally a new route is a loss leader for an airline. There has to be some promotional seats, there's a lot of advertising. And one of the hallmarks of an airline that may not be run in optimal fashion is that they open lots of routes and then promptly close them thereafter. A well-run airline will have very few routes that it opens and that are shortly closed thereafter. I don't see that yet. I think it's much more based on the fundamentals, underpinning the decision to take a route rather than the spot price of oil. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And Keith, just a question on tax rate. It sounded like, in the press release, you guys had moved most of the assets to Ireland. And I would have thought maybe the tax rate would have came down a little bit faster. You guys are guiding for a 17% tax rate?

Yes, the 17.5% that we're talking about for the fourth quarter is based on the full year calculation. So that 17.5% takes into consideration the quicker movement of the assets effectively. But then next year, you'll see, obviously, the rate go down below the 17.5%. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay, okay. And then in terms of the cost of debt, I think, Keith, you mentioned, I didn't hear the whole response, but 4.1%, I think, is what you commented as being kind of the current market versus the 3.4% currently because of accounting adjustments?

Yes, that's right. Correct. As we continue to put longer-term debt in place on the debt that is running off of the ILFC debt portfolio, that rate will go up to around a 4%, maybe a 4.1% level. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And one final question. The debt-to-equity ratio came in, I think, 3.5:1, a little bit lower than we thought. Is that reflection of the pace of the aircraft sales or -- and do you think you can -- everyone's kind of looking at when potentially you could achieve investment-grade rating again. Is that time frame accelerated now that the debt-to-equity ratio is a little bit lower than we thought? Or is it still kind of the same time frame you felt before?

Yes. The time frame for the 3:1 is, again, toward the end of 2015, so -- which is much quicker than our original expectations. But that's what we think it will be at the end of next year.

We will now take our next question from Moshe Orenbuch from Crédit Suisse.

This is James Ulan for Moshe. On depreciating foreign currencies, do you guys have any thoughts on how your customer base could be influenced if the dollar continues to appreciate or if things stay at the same levels they are today?

In terms of currency volatility, of course, we are indirectly exposed because a number for our customers will earn local currency and will not have access to hard currency, be it euros, yen, sterling, dollars, obviously. And the one thing that you have to look at is it's -- the decline in the price of oil also helps these guys an awful lot too. The decline in the price of oil has offset -- more than offset the decline in emerging market currencies against the dollar. So really, on the currencies, again, it's about the velocity of the move. If we saw a really sharp, sudden weakening in any particular currency in the space of a few weeks, then that would have an impact. What I'm talking about is the devaluation. That's the type of thing that would have an impact, but it's generally country specific, and so sure, it may result in a default here or there. But as you've been tracking us now since 2005, and we've been through many spikes and lows in various currencies, it's not something that has materially moved the needle as to the results of the company.

Got you. And then following up on Scott's question, can you guys give us the pace of the increase from 3.4% interest expense to 4%, 4.1%?

Yes. So next year, we'll probably be around 3.6%, and then probably 3.9%, 4% the following year.

We will now take our next question from Glenn Engel from Bank of America Merrill Lynch.

The jump in depreciation from $455 million to $530 million, is that because the maintenance guy goes from a bad guy to -- a good guy to a bad guy?

That's correct. I mean, again, if we -- based on the adjusted net income, the aircraft assets would be depreciated over their economic life, all value, including the intangible, and that would create a higher level of depreciation above the $455 million.

And the SG&A goes from $125 million to $130 million, $150 million in the fourth quarter, what drives that?

Yes. There's -- the SG&A for the quarter was a little bit low relative to some timing of legal-related expenses, which are more transaction related.

And finally, you mentioned Russia is an -- as an area to look at. Is there any problem getting planes out of Russia? Or is that just a normal airline economic problem?

Yes, it's normal course of business. I mean, we took an airplane out of Siberia during the quarter for the back out on lease. We took another airplane out of Armenia, and it's -- we got it out within 48 hours and now we're marketing it at the moment. So we haven't seen any difficulty -- any undue level of difficulty there.

And the next question comes from Darryl Genovesi from UBS.

So a couple of questions. I guess, first, just a point of clarification on the guidance. The $530 million in depreciation expense for fourth quarter, I thought you said -- it says in the presentation that, that reflects the maintenance for its asset over the remaining economic useful life. So that would -- wouldn't that essentially imply kind of a flat Q4 depreciation expense relative to Q3 on the same basis?

Yes. I mean, we’re talking about adjusted net income. So adjusted net income, the depreciation level would be around the $500 million plus. But on a reported, you'll see something very comparable in fourth quarter that you see here in third quarter.

Okay. And then similar for the $130 million to $150 million in leasing and other SG&A, that would exclude the share-based comp and also the ILFC integration expenses?

It excludes the integration expenses, but it does include the share-based comp.

Okay. And then, I guess, just a couple on the balance sheet. I guess, with regard to working capital and maybe focus on cash predelivery deposits and then payables. And so those are kind of the big items. Can you just give us some guidance around where those should normalize, if you're kind of already there or if there are further opportunities once the ILFC integration is complete?

Yes. I mean, with regard to the predelivery payments, I mean, there's -- a significant portion of that is the fair value of the order book, $2.4 billion of the $3.4 billion, and that $2.4 billion will be set as, first, cost to the aircraft as they deliver. And then the other almost $1 billion were actual PDP payments on the order book itself and obviously, just -- it's prepayments on buying the aircraft.

Okay. And then on the cash balance? Should that kind of come down over time because that's sort of 4-ish times where you were with standalone AerCap? Is that all right or...

Yes, I mean, look, the first thing is we're going to try and we're going to maintain this 1.2x sources and use it for 12 months. So part of the cash balance will be driven a little bit by, obviously, that requirement. But you see that there's a reasonable amount of cash in the restricted category, and we do have several things -- we're looking at initiatives to reduce that amount and put it in the unrestricted bucket.

We will now take our next question from Andrew Light from Citigroup.

Gus, AerCap was involved in a project with Airbus several years ago to convert A320 family planes into freighters, which I think was ultimately aborted. But I understand that might be revising again. First of all, are you involved? And secondly, do you think that could be a significant support of the residual values there in 320 family planes?

Andrew, that's right. We were -- at the time, it became an aborted effort. It's a joint venture between Airbus and a Russian entity to convert the 320s into -- old 320s into freighters, particularly old technology 320s, with the older engine variant. Now what you will have seen in some of the press was that we -- our subsidiary AeroTurbine has been doing some work with someone who is looking to convert A320s into freighters. But we're really just facilitating it. We're doing the conversion work for some of the freighters at our own facilities. We have an MRO facility in Arizona. And so we're just doing it for them and resourcing some airplanes, but we're not actually converting our own freighters into A320s, but more just facilitating it through selling and doing some of the modification work ourselves for the third party. Over time, when we have a look at that market again, yes, sure, maybe. But to be honest, it's we're a few years down the track now, so those A320s that we had targeted, they're the different engine variety than the CFM56-583 and V2500-A1-powered airplanes, they're gone now out of the system, really, at this point. So any of the newer-technology engine A320s that we have now, we're seeing a good leasing market for them. So we're not as motivated, really, to have a look at the freighter alternative for them at the moment, but that could change over time.

Okay. And on the integration and transaction expenses, do you expect any significant amounts going into 2015? Or was it really mostly all done this year?

Most of them will be incurred this year. We'll have a handful in the first part of 2015, but it will not be material.

We will now take our next question from Joe Gill from Goodbody Stockbrokers.

I have 3 questions, please. First, I'd like to ask about oil as well in terms of -- have you done work on the relationship between oil prices and demand for new technology aircraft as against new aircraft? And at what levels do you think you'd experience some pushback in demand from airlines for the new engine variances against extending their existing fleets are going for used aircraft? The second question is in relation to narrow-bodies. In terms of leases that are being renewed or rolled over, what's your experience in terms of the rates you're achieving for 737 versus A320? And is there any relative weakness in either of those types? And the last question, in relation to wide-bodies, on the A330 lines, what are your thoughts about engine production demand for A330 CO [ph] ahead of neo coming into production and what effect that's having on values?

Yes. Why don't we deal with the oil one first? As I said, we don't see any evidence that any of our customers are altering their behavior based on the recent decline in the price of oil. Their view is that oil is their single biggest cost. It's an uncontrollable cost. And the best possible hedge given the strength of their own balance sheet to rising fuel prices in the future is new engine technology equipment. So we don't see any change in that behavior. We're still seeing very strong demand for our neo, A320neo, 78s and 350s. On the narrow-body rollover, we are seeing, as I commented on, very good demand for 320s and 737s. In particular, the 321 variant and the 737-800 will be the 2 standouts. But 320s, we are moving on good terms. On the wide-body 330, clearly, in end of production. There's -- you can place A330s, that's not a problem. A330-300s, you can place them all day. The question is, versus what you're buying for, what's your lease rate? So we'd have no problem buying an A330 tomorrow. We know what we can lease it for. We just got to make sure that if we're taking delivery of an A330 coming into the end of the production line, say, in 2018, that you know that your asset price reflects what the lease rental will be at that time. Same as it was for A320 CLs [ph] . Again, absolutely no problem moving them. It's just a question of what's your asset price. So the assets that will be most impacted by residual value of the new technology assets will be the ones rolling off the production lines just prior to the launch of the new one. But so long as you know that going in, and you've placed your order appropriately, then you're fine. The area where you may face some difficulty is if you, for example, have placed an order for existing technology equipment just before the OEMs announced the new tech, and your order stream was right up against the end of the run for the new tech. And so therefore, you'd pay top dollar price and you didn't have the information that there was going to be a new aircraft type, then you might face some issues. But the key is that we know what the lease rates are for those assets. And so long as we got the right price for them, we'd be fine.

We will now take our next question from Robert Smalley from UBS.

Just one quick question from the fixed income side. In terms of the unencumbered asset test that you guys have in some covenants, 135%, where does that stand and what kind of cushion do you have?

We're well north of the 135%, and I think we're around the 1.6, 1.7 level.

Any plans to bring that down a little bit? Or is that just really -- does that come out as a function of the ongoing business and balance sheet?

It's -- right now, it's just -- it's obviously just a fallout of really combining the 2 companies and where we stand. We're going to try, and again, I think one of the metrics that we talked about before is that we're going to try and keep the amount of secured debt below 30% of total assets, and that will keep us well within the ratio.

Okay. And I know the ratings question was asked earlier. But are you getting any body language from the rating agencies about them being a little bit more perspective about your outlook and your rating? Or do you think that you'll have to hit the numbers first for a couple of quarters -- hit their metrics first for a little while before they consider you for the upgrade?

Look, I mean, we have a well-defined plan as to how we get back to investment grade. We set that up and established that before the acquisition was completed. And of course, we're giving the agencies very frequent updates as to where we stand, and we'll wrap with integration in all of the other items. So yes, I think they'll make their call when they make their call.

[Operator Instructions] We will now take our next question from Michael Rodnick [ph] from AMI [ph] Group.

I just wanted to chase down this fuel issue just a little bit more. Do you see the potential for the re-leasing of your assets to another tier of airlines as you go forward? I'm thinking the Spirits of the world here in the United States.

Spirit is a great airline. I have to say, they're a tremendous airline, they do great stuff, so we'd be delighted to give Spirit more assets. They are a very important customer of ours. We've got over 20 airplanes down there in South Florida. And the Spirits of the world, we obviously know as well, sure, they look at all different types of equipment, but they have a big order book of their own. And not speaking for Spirit specifically, but in general, as I said, most airlines are quite happy maybe to extend things like 75s, 76s. We talked about A320 or 737s, they're highly fuel-efficient airplanes as they are. The assets that would be on the margin would be more like the 75 or 76, et cetera. Older 330s before the revised engine technology. And those assets are the ones where, at the margin, you're seeing the price of oil encouraging airlines to maybe extend them for a little bit longer than we had originally envisaged. But overall, the trend is still -- the fleet planning at our customers, it's focused on the newer technology assets for the longer term.

Okay. And also, last quarter, you talked about the smallest re-leasing exposure you'd had in years as far as the combined entities. I think it was something around or above 85 aircraft. Can you give us a little bit of color on where you're at with the re-leasing activities and if that's pretty much the same as what you reported last quarter?

Yes. So as I said in my comments there, we're now down to less than 50, which is a very low level for the combined entity. We are moving a significant number of airplanes. And of course, the accelerated sales activity helps with that too. But we are now, we're down at less than 50 to the end of 2015 that have to be moved.

Okay. And then just 2 other quick questions. Your progress on the $100 million reduction in SG&A, are you still on target for, I think, you said fourth quarter '15?

Again, the transition to full integration will complete -- be complete probably by the second quarter of 2015.

Okay. And last question, the tax rate at 12.5% for Ireland, your guidance, I believe, was fourth quarter '15 for that as well. Is that still current?

The 12.5% is what will hit in future periods, not obviously this year. And next year, it will probably be just slightly north of 12.5%. But the following year, in 2016, we'll be at that rate.

As there are no further questions in the queue, that will conclude today's Q&A session. I would now like to turn the call back to AerCap for any additional or closing remarks.

Thank you, operator. Thank you very much for joining us on the call today. We hope we'll see as many of you as possible at the New York Palace later on this morning. Thank you.

Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.