Good day, and welcome to the AerCap's Fourth Quarter and Full-Year 2019 Financial Results Call. 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 full year 2019 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 February 13, 2020. 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 will allow time at the end for Q&A. As a reminder, I would ask that analysts limit themselves to one question and one follow-up. I will now turn the call over to Aengus Kelly.

Thank you, Joe, and thank you for joining us for our fourth quarter 2019 earnings call. I am delighted to report record earnings per share of $8.43. In the fourth quarter AerCap generated $2.34 of earnings per share, a 44% increase over Q4 2018 continuing our long track record of consistent earnings growth. During the year, the AerCap team executed 353 aircraft transactions, which included 192 lease agreements, 65 aircraft purchases, and the sale of 96 midlife and older aircraft. This unmatched scale of activity demonstrates the breadth and depth of AerCap’s relationship with airlines, manufacturers, and investors around the world. We entered 2020 in a position of strength. We have $40 billion of contracted future lease rents. For the next three years, over 97% of our lease rents are already contracted. Our average lease does not expire until the third quarter of 2027. All of this gives us tremendous visibility into our future cash flows. Moreover today, new technology aircraft make up 58% of our fleet. That is the highest percentage of new technology aircraft of any major lessor in the world. AerCap has taken delivery of more new technology aircraft than any other aircraft lessor or airline in the world. As a result, AerCap is helping its customers meet their environmental and sustainability objectives. Our new technology fleet today is concentrated on the most in-demand variants: the A321, A320neo, the A321neo, the Boeing 787-9 and A350-900. The average age of our new technology aircraft is approximately two years, and we know that these aircraft will form the core of the world's passenger fleet for decades to come. Our current technology fleet is also concentrated on the most liquid aircraft types, the Boeing 737NG, the A320CEO, and among the wide-body, the A330 and 777, which remain the mainstay of…

Thanks Gus. Good morning, everyone. AerCap produced a very strong performance in the fourth quarter and a record performance for the full year. As Gus mentioned, in the fourth quarter, we generated earnings per share of $2.34, an increase of 44% over the fourth quarter of 2018. Our net income for the quarter was around $310 million, a 33% increase over the fourth quarter of 2018. For the full year, our net income was $1,146 million, an increase of 13% over 2018 and our EPS was a record $8.43, an increase of 23% over the prior year. Our utilization rate was very high at 99.8% for the fourth quarter. We were upgraded to BBB flat by S&P in October, and we are on positive outlook from Moody’s, so we continue to have an upward rating trajectory. Our credit metrics continue to improve, and we ended the year with a debt-to-equity ratio of 2.6 to 1. We’ve also reduced our secured debt to total assets to around 22% which is down from 25% at the beginning of the year, and we expect to get down below 20% during the course of this year. Our average lease assets increased by $1.4 billion over the fourth quarter of 2018 as a result of new deliveries. Our book value per share continue to increase the strong double-digit pace and was up 15% over the past year to $72.08 as of December 31st. We’ve continued with our share repurchase program and in the fourth quarter, we bought 3.4 million shares for just under $200 million. For the full year 2019, we bought 12 million shares for a total of $607 million. And today, we also announced a new $250 million share repurchase program that will run through the end of June. So altogether, it was…

[Operator Instructions] We will now take our first question from Jamie Baker from JP Morgan. Please go ahead.

Good morning. This is Abdul Tambal on for Jamie Baker. Just a quick one for me. Could you comment on the level of support the Chinese government can provide for the airlines in the region? And have the airlines asked for rent relief at this point?

Sure. The Chinese government has said that they are waving taxes and other duties associated with fares. That's public knowledge. I am sure like they've stated that they've encouraged the financial institutions to work with all Chinese companies in the economy to help them through this difficult period. In terms of our own participation in that, our customers -- they've been with us for over 40 years, some of them. And of course, we are going to try and help them through this period. They’ve been around for 40 years, I have every confidence they are going to be around 40 years.

Got it. Thank you. And just a quick follow-up. So, what are Moody's and Fitch waiting for to upgrade you since – haven't you already met their respective hurdles? And if so, is it just a matter of time at this point?

Well, look, we have a good dialogue with all the rating agencies. We speak to them all frequently. So, as you know, we are on positive outlook from Moody’s right now. So, we're hopeful that we'll get an upgrade from them sometime soon. With Fitch, we’ve also had good discussions, and we believe that based on their metrics that we do deserve an upgrade today. We think we meet all of their metrics. So, you’d really have to ask them what they are waiting for, but from our perspective, we will continue to push for an upgrade because we do think it’s warranted.

And certainly, if you look at how we manage the leverage of the balance sheet over the course of 2019 and into the year end as well as the discipline around that, we firmly believe that we've met the metrics for Fitch.

Got it. Thank you very much.

We will now take our next question from Moshe Orenbuch from Credit Suisse. Please go ahead.

Great. Guys, as you think about the opportunity once Boeing does start delivering the MAXs, how do you think about what's best for you and your customers? Do you want to be at the front end of that? Can you get better economics by being more flexible? Can you talk a little bit about what you are thinking about in that perspective?

Sure. Well, there are - most of our - I think we had leased over 50% of our order book already. So, most of our leases are contracted with customers that are going to deliver for the first couple of years after the aircraft returns to service. That's assuming that all the customers want the airplanes. I imagine that the majority of them will continue to want the aircraft. I believe that it will be a good airplane when it's returned to service. And in terms of opportunity, I just don't see the situation where Boeing will have that many white tails. I mean, the only situation with the white tails is if the lessors has not leased an airplane and it's being built. And that's kind of their own fault really. And they're going to have to place that in a hurry. But Boeing won't have white tails to spare, because they are so far behind because of the production halt, the deliveries to customers who needed them to meet their growth targets, particularly if you're an all-Boeing customer. If you had expected to receive 20, 30, 40 of these airplanes and you only receive half that amount, Boeing would have an obligation to you, I believe, to try and give you any additional slots that became free. So I don't envisage a huge amount of opportunity at the front-end once it comes into service. Now, will there be opportunity further out? Perhaps there might be. And of course, we'll always be talking with Boeing about opportunities like that.

Got it. And Peter, I guess, since your lease rates are contracted and your depreciation is pretty much set, the fact that interest rates have been lower, I mean, it should be a - you talked about your spread being stable and some - can you kind of frame out what that benefit could be in the cost of funds over the course of 2020?

Sure, Moshe. So, look, I think that we'll continue to have an average interest rate for the year of around 4.2%, which is what I had said at the Capital Markets Day. So, I think that's probably still our best estimate. We have about $3 billion of funding to do this year. And so, that's going to be done at lower rates than that average amount. So, it's going to start bringing it down, but we've got $29 billion of debt in total. So, it takes time for that to roll through, but we should still see some steady decrease in that number over time. But just because the $3 billion is a small percentage of the overall 29%, it takes time for that to -- for you to really see much of an effect.

I think it's very important, Moshe, when you look at the net spread, you have to factor in we could have held on to those aircraft that we sold or we could have taken the sales proceeds and bought additional airplanes that may well have elevated the net spread in the near-term, but may have been the wrong things to buy in the long-term. And so, what we did instead of doing that, we bought our own stock. And as Pete said, you've seen that our earnings per share from 2015, where the company has a much better portfolio with a fully integrated company’s lower leverage, higher credit ratings, and the earnings are up from $5 and change to $8.43 and a much better company as it were. So, they are all part of how to think about the net spreads. And also it's worth noting once again, of course, that when we give you an interest number, it includes all fees and cost associated with terminations. So the cash coupon is obviously less than that.

Right. Thanks. I certainly understand the impact on the net spread of buybacks. Thanks

We will now move to our next question from Catherine O'Brien from Goldman Sachs. Please go ahead.

Good morning, everyone. Thanks for the time. So, from data that we have, 2019 looks like it actually had the highest number of aircraft coming back into the market from airline defaults we've seen in quite some time. But we didn't see any impact on AerCap's portfolio lease yield. So just two questions on this. First, is that more a function of your risk department doing a good job avoiding the majority of situations? Or is it really, overall supply being tied to the MAX grounding and other OEM delays? And then, second question is this, all these planes are even absorbed broadly by the market? Are there still some aircraft out there that needs to be placed that could impact supply demand this year?

Well, Catherine, first of all, I would say that the capability of AerCap's platform is unrivaled. And that's proven time and time again. But what is also true is that, no doubt, airline defaults make headlines, but they don't necessarily make big charges on highly diversified extraordinarily capable aircraft leasing platforms. And so if you go back over the last 15 years, going through the worst downturn we've seen ever in aviation following the financial crisis, fuel will be at $146 a barrel, the Eurozone crisis, the list goes on. Our credit costs have averaged just over 1% of lease revenue. That hasn’t historically been the primary driver of return in AerCap's business. And so, I think it's very different. You've got to really separate the world's leading platform in AerCap from anyone else when you think about capabilities to deal with defaults. And again, in 2019, as you've seen in previous years, we tend to outperform many issues like that.

Okay, understood. And then, we've been talking about the competitive backdrop in pricing in the sale leaseback market improvement for the last couple of quarters now. Can you give us any color on how far we are off the bottom of that market? And if you are getting any closer to where AerCap would consider participating? Thanks

Catherine, we did actually come close there in January, we did come close to the sale leaseback on some A350-900s. We didn't quite get there in the end. But so, there was certainly much closer than we had been. So that's a positive and we'll see how this year unfolds. Having said that, of course, we had pretty much everyone involved in the aircraft financing business in Dublin, the several thousand people here for the Airfinance Conference two weeks ago and there, you could see that there was still, of course, extremely buoyant and stable demand for investments in aircraft.

Great. Thank you for the time.

We will now take our next question from Helane Becker from Cowen. Please go ahead.

Thanks very much, operator. Hi everybody and thank you very much for the time. So, two I think, relatively easy questions. One is, do you still - I think at Investor Day, Pete, you talked about $1 billion in aircraft sales. Is that still your target?

Yes. Helane, that's still our best guess for the year. I mean, I would say, if conditions continue, we - as Gus mentioned, at the Airfinance Conference a few weeks ago here, there was a huge interest - continue to be a huge interest in used midlife and older aircraft. So the demand continues to be there. The ABS market continues to be very strong. So, from a financing side, buyers can get financing - attractive financing for these portfolios. So I think that, if that continues throughout the year then could it be more than $1 billion, it could. But at this point, we are only in mid-February. So, I would say $1 billion is still probably our best guess for the year.

Okay. And then my other question really has to do with the delays. So, you are more an Airbus than a Boeing-focused firm. Although, obviously, you do have the MAX order and the 787s and so on. But two questions with regarding to that. With all the delays from the OEMs, is the core EPS target that you talked about at Investor Day still intact, A and B, the airlines get to go back to Boeing and ask for compensation. Do you guys get to do the same thing?

Why don't I take the first part of that just on the EPS target. Yes, so our guidance is unchanged. We still think it will be between $7 and $7.40 for the year excluding any gain on sale.

So, Helane, of course if you look, the sharpest split pretty much down the middle, we're actually 50% Boeing, as I just charted it up there on the appendix slide of all our airplanes. But of course, you can go back to Boeing and of course, we have losses associated from the MAX and we will ensure that the shareholders of AerCap do not bear those losses. And that we will receive adequate compensation from Boeing in connection with those costs that we are suffering and what format that takes. I don't mind with what currency it is, as long as I can cash that currency in.

Right, exactly. That makes sense. Okay. Well, thanks guys. I appreciate the help.

Sure.

We will now take our next question from Ross Harvey from Davy. Please go ahead.

Good afternoon guys. Three questions for me please. The first one is partly related to a question earlier, but having set a very strong base on the core EPS from 2019, I am just wondering what specific factors within the cost line we should expect to see move, such that the figure would come in broadly flat year-on-year in 2020? Secondly, in relation to marketing, so obviously, you've got 97% for the lease rents through end of 2022 contract, and that’s what was the case with the CMD sort of implies you've got a conservative time horizon on a lot of your forward placements, clear benefits for revenue visibility. But in light of the recent OEM delays, would you be minded to adjust that at all in the future? And finally, on the exercising of the A320neo family aircraft options, can you shed any light on what particular variance you are attracted to within that and the reasons behind it?

Sure. Well, Ross, let me take the first one. So - and if you look at our 2019 performance, excluding gains on sales, so if we take that out, that's about $7.20, which puts us roughly in the range for 2020 in the middle of that range that I gave before it's $7 to $7.40. And when we look at what's going to happen with the overall balance sheet during the course of the year, given these delays, we expect that it will be roughly flat. So, there aren't really any big movements on the cost side. SG&A, I think, we talked about before, but I think that will continue to run at maybe $65 million to $70 million a quarter. The depreciation rate, that will be - as I said at the Capital Markets Day, I still expect it will be around 4.6%, 4.7% for the year. And average interest rate, as I said before to Moshe, around 4.2%. So, I don't think you are not going to see any major changes in any of those items during the course of the year. The big thing that can swing obviously is, leasing expenses and maintenance revenues, right? Those are the two things that can swing a lot. And some of that is timing, but other parts, it's permanent benefits that you get. So, that's what I would say for the year.

And Ross, on our leasing strategy of placing airplanes far out, that's a function of our capability as an aircraft lessor to be able to do that. So we'll continue to do that to place well into the future. In terms of the option, it was focused on the A320 and A321 variants.

Okay. Great, thank you very much.

You are welcome.

We will now take our next question from Michael Linenberg from Deutsche Bank. Please go ahead.

Hey, guys, this is Koosh Patel. Just a quick question here. So one of your largest competitors recently announced that they are committing $6 billion to proactively work with their customers as they deal with the coronavirus. Are you in a position where you may consider stepping up to do something similar or what are your thoughts on that?

I think at the moment, our customers are suffering and their families are suffering. And then, we want to try and support them in any way we can and whatever we can do to help them, we will be able to do. We carry $10 billion of liquidity on hand at any given time. No one carries more liquidity in the world than AerCap. So, I am sure we can more than outmatch anyone, but at this point in time the focus of the company is helping the partners that have been loyal to this company for 40 years.

Great. And then just shifting gears, one on the modeling side, as well. On the $7 to $7.40 core GAAP EPS, you guys talked about at the Investor Day, what's driving the contraction in lease yields in 2020 that you guys guided as well?

Well, that trend has been going on as you look at over the years, I mean, it's really a function of some continued drop in the average age of the fleet. So it's going down. The average age will go down to about six years by the end of 2020. So that's the biggest contributor to that. And part of that is, it's obviously the new deliveries that we are taking that when they come on right they are at a lower yield, and that grows over time. But it's also due to the fact that, as Gus mentioned before, the aircraft that we sold, so we are selling mid-life, some higher-yielding aircraft, but we are reinvesting those proceeds in buying back our stock. So that's why you see that effect on the leasing.

And very important though, what you are seeing is that we've been able to hold the yield to last depreciation and interest constant while using the proceeds to significantly boost earnings per share by taking advantage of the arbitrage of selling our assets at 135% of book equity and buying back the same equity at 76%. So, as long as that arbitrage exists, it's something we are certainly going to continue to do. And it's really the geography of the P&L that's being moved but underneath it is really substantive point is that the quality of the company has improved and the earnings have improved also.

Got it. Thanks guys.

Sure.

We will now take our next question from Vincent Caintic from Stephens Inc. Please go ahead.

Okay thanks. Thanks for taking my questions. So back on the effects of the coronavirus and this is kind of going to be maybe a broader question, but sort of - I fully expect this to be a short-term phenomenon. But what sort of things, I guess, should we be paying attention to in terms of maybe risks and opportunities? So, to the extent that maybe it's versus others are there opportunities for you to step into other financings and give some – kind of if you could give us a history lesson in past epidemics, what has happened? And have you sort of what's that challenges have you seen in sort of maybe what opportunities have you seen if other, say, liquidity providers have had issues with this? Thanks.

Look, I think, thousands of people have died. I am not sure I necessarily want to talk about opportunities that arise from something like that. What I can tell you is that in the past, what we have done is we've worked with our customers. We know that China is the future. Those customers that we have will be with us for a long, long time to come. They are going through an extraordinarily difficult time right now. But they will come through it. And what I expect to see is what we've seen in the past when customers get into some difficulty is that we will see we will probably defer some rents given that their revenue line has obviously fallen significantly and we probably defer rents for a month or two to help them out on a case-by-case basis. But that will be the focus of our efforts is how can we help our customers through this period rather than profit from it.

Okay, understood. Thank you. And then, the second question will that then, if you were understanding that this is hopefully a short-term phenomenon, if you were to defer rents it sort of actually show up on your lease near-term or do you continue to accrue that and then eventually collect on those rents? Thank you.

Yes. What you'll normally do with that if you do defer rents and that will be case-by-case basis and that will just be a receivable that will be repaid overtime and that's typically that's always been the case. I mean at the year-end, our total receivables for the entire company was $47 million. And now it's for the entire business. And in the past, when our partners have had issue for whatever reason, we have worked with them and it gets repaid pretty promptly.

Okay, great. Thanks much.

[Operator Instructions] We'll now take a follow-up question from Catherine O'Brien from Goldman Sachs. Please go ahead.

Thanks for the follow-up. Just one quick modeling one. So at the Investor Day, I think you guided to $4.2 billion in expected CapEx this year and I was just wondering, is that number still intact? And if so, how much of that is driven by MAX deliveries? Thank you.

Sure, Catherine. So, we - if you look at the appendix slides, you'll see that we moved out our estimates of MAX deliveries for the year. So now we are only assuming four aircraft delivering. And so that really takes our CapEx for the year down to about $3.3 billion is our estimate for the year. Again, look, obviously, there is a lot of uncertainty around those MAX deliveries, both this year and next year. So we'll have to see how that plays out. But that's our best guess at the moment.

Okay. Got it. Apologies for having that. Thank you.

Sure.

As there are no further questions, I would now like to hand the call back to our speakers for any additional or closing remarks.

Thank you very much all for joining us for the full year 2019 results. In closing, we had another strong quarter of earnings with EPS up 44%. And this has been achieved through the strong leasing capabilities of AerCap, disciplined approach to portfolio management, and proactive risk management. We look forward to speaking to you all in three months time. Good bye.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.