Macquarie Infrastructure Corporation (NYSE:MIC) Q3 2020 Results Earnings Conference Call November 9, 2020 7:50 AM ET
Jay Davis – Managing Director, Investor Relations
Christopher Frost – Chief Executive Officer
Nick O’Neil – Chief Financial Officer
Conference Call Participants
TJ Schultz – RBC Capital
Tristan Richardson – Truist Securities
Steve Tusa – JPMorgan
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[00:00:03] Ladies and gentlemen, thank you for standing by and welcome to the Macquarie Infrastructure Corporation, third quarter 2020 earnings call. At this time, all participants are in listen only mode. After the speaker presentation, there will be a question and answer session to the question during the session. You will need to start one on your telephone. Please be advised that today’s conference is being recorded, if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Jay Davis. Thank you. Please go ahead, sir.
[00:00:40] Thank you and welcome to Macquarie Infrastructure Corporation’s earnings conference call this covering the third quarter of 2020. Our poll today is being webcast and is open to the media. In addition to discussing our financial performance on this call, we have published a press release summarizing the results and filed a financial report on Form 10. Q with the Securities and Exchange Commission. These materials were released this morning and copies may be downloaded from our website at w w w dot Macquarie Dotcom Mitzy. Before turning the proceedings over to Macquarie Infrastructure Corporation’s chief executive officer, Christopher Frost, let me remind you that this presentation is proprietary and all rights are reserved for any recording, rebroadcast or other use of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Corporation is prohibited. This presentation is based on information generally available to the public and does not contain any material nonpublic information. The presentation has been prepared solely for information purposes, and it’s not a solicitation of an offer to buy or sell any security or instrument. This presentation contains forward looking statements, we may in some cases use words that convey uncertainty of future events or outcomes to identify these forward looking statements, including those used to describe the anticipated specific and overall impacts of covid-19 forward looking statements in this presentation are subject to a number of risks and uncertainties.
[00:02:14] A description of known risks that could cause our actual results to differ appears under the caption risk factors in our forms 10k and 10 to our actual results. Performance prospects or opportunities could differ materially from those expressed in or implied by the forward looking statements. Additional risks of which we are not currently aware, could also cause our actual results to differ. The forward looking events discussed in this presentation may not occur. These forward looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward looking statements after the completion of this presentation, whether as a result of new information, future events or otherwise, except as required by law. During today’s call, we will reference the non gap measures earnings before interest, taxes, depreciation and amortization or eat it up and free cash flow as defined by us. A reconciliation of these non gap measures to the most comparable gap measures can be found in our tendu and in the tables attached to our earnings press release. Also participating in today’s call is Macquarie Infrastructure Corporation’s chief financial officer, Mick O’Neill. With that, it is my pleasure to welcome MIC’s Chief Executive Officer Christopher Frost.
[00:03:36] Thank you, Jay. Thanks to those of you joining our call this morning. I hope you and your families are safe and well together with our financial results. For the third quarter published early this morning, we announced that we have entered into an agreement to sell items that we will discuss both the sale and the quarterly results on our call this morning. Given the great performance of our identity this year, we have been able to move forward with our pursuit of strategic alternatives, notwithstanding the challenges presented by covid-19. Following a robust process, we are pleased with the outcome of the sale of arms and have a position of Mesi to continue to pursue strategic alternatives and further unlocking of value for shareholders. Specifically, we have entered into an agreement to sell identity to an affiliate of Riverstone Holdings LLC for approximately two point sixty five dollars billion, including the assumption of identities one point one dollars billion of debt outstanding. The sale is expected to close late in the fourth quarter of 2020 or early in 2021, subject to the receipt of required approvals and satisfaction of the conditions preceding the agreement. At this point, we do not believe there are any material hurdles to closing in the anticipated time frame regarding the use of proceeds. It is our intention to apply all the net proceeds from the sale to the payment of the special dividend and the reduction of holding company debt. First, following closing, it is our intention to make a special distribution to shareholders of approximately ten dollars and seventy five cents per share in cash. Second, we expect to apply approximately 400 million dollars to the repayment or offset of our holding company level convertible notes, EMI support will set a record date and payment date for the dividend after closing.
[00:05:29] In arriving at the amount of net proceeds, we assume the following taxes and expenses will be paid capital gains taxes of approximately one hundred and fifty eight dollars million transaction expenses, in addition to those already incurred of approximately twenty five million dollars, and the disposition payment to the company’s external manager of approximately twenty eight million dollars. Considering the expected use of sale proceeds, we expect our leverage ratio to be approximately four point three times net debt to 12 months EBITDA. If we did not apply a portion of the proceeds to the holding company debt, our leverage ratio would likely be over six times a level we do not consider prudent. Cash currently on hand will be used to repay or offset the amount outstanding on revolving credit facility or potentially to fund the repurchase of a portion of our shares. If we do not repurchase any shares and the cash is not required to manage our leverage during the coming year, we will look to return it to shareholders in a subsequent special dividend. In any case, shareholders will receive the benefit of any surplus capital, either as an increase in net proceeds on the sale of the remaining businesses or as distributions prior to such sales. With the agreement for the sale of items, we have characterized the business of the discontinued operations for financial reporting purposes as required. We’ll cover this more detail shortly. In summary, we are pleased with the outcome achieved in the sale of our NTT. It leaves them, I see, in a strong position relative to moving forward with the processes for Atlantic Aviation Animacy, Hawaii, in a manner and at a time consistent with maximizing value for shareholders.
[00:07:18] Touching briefly on the performance of our businesses in the third quarter. We remain focused, above all, on ensuring the health and safety of our employees and customers. We continue to be fortunate that we’ve had a low incidence of covid-19 among our employees, a circumstance attributable to the diligence of the teams on the ground. Our businesses remain open and operational, and each will continue to enhance safety just for employees and customers. They might seize financial and operational results for the third quarter, primarily reflect one stable general aviation flight activity levels consistent with the end of the second quarter, but lifted the contribution of Atlantic aviation on a sequential basis and to the continued impact of covid-19 on the tourism industry in Hawaii. Together with the results for corporate and other, our ongoing operations generated adjusted EBITDA that was down 13 per cent versus the third quarter of 2019, but substantially higher than the levels recorded in the second quarter of this year. Importantly, we expect to see sequential improvement in EBITDA generation over the next 12 months and believe that our businesses will continue to produce sufficient cash to fund ongoing operations and growth capital projects to which they previously committed. Looking more closely at the performance of our operating businesses. Atlantic aviation and the US general aviation industry show continued resilience through the third quarter. Domestic general aviation productivity was stable throughout the quarter, down by approximately 14 percent industry wide. This is the prior comparable period. Consistent with the end of the second quarter, Atlantic aviation saw a shift in patterns of activity towards primarily leisure oriented locations and away from business oriented locations.
[00:09:07] International Events Travel, which we previously highlighted as key contributors to a full recovery, remains subdued. Atlantic Aviation continues to monitor this closely and believes the recovery will largely depend on a more complete rollback of covid-19 precautions across geographies. As expected. In this context, activity at the airports on which the business operates was lower than the industry overall, down 19 percent. The deeper decline reflects the weighting of its network toward larger, more populous and business focused regions, although that waisting remains a positive for the growth of the business over the long term. Similarly, fuel sales continue to be disproportionately affected by the shift in the use of smaller aircraft on shorter flights, and we’re down approximately twenty three percent versus the prior comparable period. Regarding cost savings in Atlantic aviation, the management team continues to control operating expenses, allocating resources as necessary to locations with increasing activity. Yesterday, cost savings, excluding the environmental remediation provision book last quarter, total approximately 50 million dollars. The sustainability of these savings will depend on the rate of recovery and productivity, although it is expected that expense reduction efforts this year will yield some permanent savings. The performance of Misty Haviva Stadium, the third quarter due to the continuing requirements for visitors to quarantine for 14 days on arrival, meaning the state was effectively closed to tourism throughout the quarter. Tourist visits for down 94 percent are in the third quarter compared to the same period in 2019, resulting in a 37 percent reduction in the amount of gas sold as demand remains elusive for commercial customers, including resort hotels and restaurants.
[00:10:57] Importantly, on October 16, the government lifted the 14 day quarantine requirement, provided visitors can demonstrate that they have tested negative for covid-19 within 72 hours prior to arriving in the islands. Since then, the number of visitors to Hawaii has increased, although the recovery is likely to be gradual and result in a modest uptick in gas sales over the remainder of the year. That assumes, of course, lockdowns or quarantine requirements are not reimposed. The management team in Hawaii continues to control costs while maintaining a safe and reliable services to its customers. All classified as discontinued operation, I note that I intend to continue to perform well in the third quarter utilization average ninety five point eight percent and ancillary services revenue were broadly flat with the prior comparable period. Market conditions remain constructive for storage across most products, and that was reflected in contract renewals during the period of capacity that came up for renewal, was released to new or existing customers, but marginally higher storage rates. Certain customers sought to renew contracts early to ensure continued access to storage capacity. Agents management team maintain strong cost control with expense increases related to COBA 19, largely offset by reductions in other areas. At this point, I’ll turn the call over to Nick for some additional color on the results for the quarter, as well as our outlook on performance for the remainder of the.
[00:12:26] Thank you, Chris, and good morning, everyone. Before I discuss our financial results for the quarter, I would like to provide a bit more color on our classification of identity that’s held for sale and therefore a discontinued operation in the current period. Identity is the only entity discontinued operations in the prior reported periods of solar and wind power generation businesses, as well as the joint venture interests in a solar power development company with discontinued operations as well as igniting identity is held for sale, triggered to additional events, both of which are flowing through our financial results for the quarter. First, by entering into an agreement that is likely to result in the sale of identity in a taxable transaction, we booked the tax on the difference between our book and tax basis in the business as a deferred liability, 158 million dollar increase in our deferred tax liability will become a current liability on closing of the sale. Second, we were required to assess the carrying value of our investment in 1980 for any impairment. That assessment indicated that the carrying value was greater than its fair value, their value being determined by reference to comparable businesses in the market, less cost associated with selling the business. Consequently, we wrote down the value of our investment on t seven hundred and fifty dollars million, of which 725 million was goodwill. You can see that in the financial statements and footnote for discontinued operations.
[00:14:08] We also reviewed the carrying value of both Atlantic aviations and mitchy Hawaii’s assets, including goodwill, and determined that no impairment was required in respect of those segments. Collectively, our continuing operations, Atlantic Aviation Immodesty, Hawaii and the corporate and other segment showed strong improvement in the third quarter from the lows for the second quarter. Consolidated, adjusted EBITDA, excluding non-cash items generated in the third quarter, totaled sixty million dollars, down from the sixty nine million dollars recorded in the prior comparable period, adjusted free cash flow conversion was good, although lower interest expense and low maintenance capital expenditures not wholly offset an increase in tax liabilities this year in total and must be generated adjusted free cash flow of thirty eight dollars million in the quarter, down from fifty dollars million in the prior comparable period, but up nicely from the second quarter. Regarding our operating businesses, Atlantic Aviation generated EBITDA fifty four million dollars in the quarter down in the prior comparable period, up sharply from the seventeen dollars million recorded in the second quarter. I note that second quarter EBITDA included a seven million dollar provision for remediation of environmental matters. Expense savings continue to support Atlantic Aviation’s financial performance. As Chris noted, net savings year to date have been approximately 15 million dollars, excluding the expense increases in the first quarter of the year. Savings achieved since the start of the pandemic have been approximately 18 million dollars.
[00:15:54] While savings remain activity dependent. Atlantic Aviation was generating savings of approximately two million dollars per month. As of the end of September. Atlantic aviation free cash flow generation was strong at thirty nine million dollars versus forty two million dollars last year. Lower interest expense taxes and maintenance capital expenditures made up for some of the decline. Based on Atlantic Aviation’s current performance, the business is expected to be able to meet all its obligations, including the funding of the growth projects to which it has committed using internally generated resources. NYSE Hawaii generated EBITDA seven million dollars in the current period, the same as in the second quarter, compared with twelve million dollars in the third quarter in 2019. Business continue to be affected by the state’s mandatory quarantine of visitors. During the quarter, free cash flow was four million dollars, compared with eight million dollars in 2019. Looking ahead, we expect Mississippi to generate EBITDA from continuing operations for the full year 2020 of between two hundred and two hundred and fifteen million dollars. As Chris discussed, Atlantic aviation is showing steady performance, and that has continued through October. Assuming a continuation of current trends through the balance of the year, we expect Atlantic aviation to generate EBITDA of between one hundred and eighty five and one hundred and ninety five million dollars in 2020.
[00:17:28] We expect Mesi Hawaii to generate EBITDA for the full year in the range of between 35 and 40 million dollars, reflecting our expectations around a gradual recovery in tourism, the Chris noted. Now, consolidated EBITDA guidance assumes holding company level expenses in the corporate and other segment of approximately 20 million dollars. We ended the third quarter with four hundred and twenty nine dollars million of cash on hand across our continuing operations, including one hundred and fifty million dollars drawn on our corporate revolving credit facility. You recall that we drew down on our revolving credit facilities out of an abundance of caution at the beginning of the pandemic, given the performance of the ongoing businesses in the third quarter. We repaid four hundred and forty nine million five hundred ninety nine dollars million strong, giving us the ability to review repayment of the balance of Karzi. At the end of September, leverage is five point seven times net debt to EBITDA in our ongoing businesses over the trailing 12 month period. Considering the use of proceeds from the sale of A.T., we foresee heading into 2021 with consolidated leverage of approximately four point three times, as Chris mentioned, with the expectation that EBITDA growth will reduce leverage from that level during 2020, but will now turn the call back over to Chris comments. Thank you.
[00:18:59] Thank you. Nick. The third quarter was an exciting, extremely busy one for and I say we are pleased with the outcome of the sales process for NTT and with the results generated by our ongoing businesses, Atlantic aviation in particular. We continue to expect to see a recovery going into 2021 which will support our ongoing pursuit of sales of the remaining businesses. We continue to believe that the sales of Meisei or its remaining businesses is the best path to unlocking value for shareholders. Plus, assuming the remainder of the year plays out as expected, we will end 2020 in a strong position with ample financial flexibility going forward. With that, I thank you again for your participation in that call this morning. At this time, I will ask the operator to open the phone lines for your questions.
[00:19:53] Ladies and gentlemen, as a reminder, if you wanted to ask a question, please, press star, followed by the number one on your telephone keypad, we’ll pause for a moment to compile the Q&A roster. Again, that’s star one. And your first question is from the line of TJ Schultz with RBC Capital Markets.
[00:20:12] Good morning, T.J.
[00:20:12] Hey, good morning. Congrats on the transaction. I just want to look ahead to the aviation, so on Atlantic to try to transact on that. Do you feel you need to see the complete picture after the COGAT impact subsides or to potential buyers want to see the impact? And it’s the largest question, the flight activity levels for some of these large events, or is it the run rate of general corporate travel post covid just any color on the timing of that process?
[00:20:47] Yeah, it’s up in the prepared remarks. We remain committed to the sale of them. I say Hawaii diplomatic aviation to unlock value. We haven’t set a timetable for completion of those transactions. And, you know, based on how pretty that valuation marks of Atlantic aviation, I believe it is likely to be our most valuable operating business. And therefore, I think waiting a period of time until we see a full recovery of general aviation traffic would be the value maximizing strategy for shareholders, even when you look at time adjusting the distributions. And so I would sort of say that we anticipate the prepared remarks and on previous earnings calls that, you know, we expect this year to continue to remain at current trading levels, so, say, 20, 20 percent down on flight activity. But as we move into 2021, we anticipate a further recovery of business traffic, further recovery in terms of international adventure and traffic. So that’s the way we’re thinking about it at the moment.
[00:22:04] Ok, and then from this point, what are the expected tax impacts, the sale of Atlantic or Hawaii or the leverage you have there from a tax strategy perspective?
[00:22:17] Well, I think as I’ve sort of said previously, to the extent we would have sell Atlantic aviation via a take down of the listed entity, that would be a tax free transaction for shareholders. Why? We haven’t disclosed the tax status of that business, but they would be there would be some tax leakage to the extent that we were to execute the sale of Hawaii through a sale for cash.
[00:22:49] Ok, I’ll leave it there. Thank you, guys. C.J..
[00:22:53] The next question is from the line of Tristan Richardson, Truist Securities.
[00:22:58] Hey, good morning. I really appreciate all the commentary around IMT there. One quick question there. Could you talk about the tax line item that you called out for? IMT was the goodwill write down beneficial to basis for the purposes of taxes, or is it just kind of reflective of where your basis was?
[00:23:25] Morning. So the good will, right, sort of didn’t have a tax impact, the amount of taxes that were disclosed. So fifty 58 million dollars is more reflective of where the tax basis of my city’s investment in 92 was. And obviously the purchase costs paid by people expected to be paid by some.
[00:23:54] Helpful, appreciate it and then and then, Chris, I appreciate the commentary on the remaining two businesses. It sounds like the guidance I’m paraphrasing here, but it seems sort of a gradual recovery in Hawaii, but no specific recovery in it and Atlantic. Is that kind of a fair way to think about the two hundred two hundred fifteen?
[00:24:21] I think as I sort of said in the prepared remarks, that we anticipate the balance of this year will probably stabilize what we’re seeing at the moment. But our expectation is that in 2021, as we see an increase in business activity and we also see an increase in international traffic and events, that is likely to close out the recovery over the course of 2021.
[00:24:57] Ok, thank you, guys. Appreciate it.
[00:25:01] Your next question is from the line of Steve Trussel of Tinner Capital.
[00:25:11] Congratulations on the IMT sale, wanted to delve a little bit deeper right now in the press release, it mentioned that the company looks to repay or offset holding company level debt of the 400 million approximately for the convert. If you could delve a little more deeper into the whole concept of repay or offset, I’d appreciate it. Thank you.
[00:25:39] The first comment is obviously pleased to be able to reserve enough cash to take out the converts, we think that’s obviously important in ensuring that we’ve got a prudently managed balance sheet in terms of the sort of language and there is no event, if you like, that is triggered by the sale of identity as it relates to those converts. And so we’ll have a look at and we’ll have a look at the repayment of those converts post closing the reserve on two to.
[00:26:17] So the bottom line is you don’t think there’s a change of control put or requirement to the visa bans? OK.
[00:26:23] All right. So correct.
[00:26:28] Ok, I read a little bit differently, but thank you for the color.
[00:26:38] Thank you, ladies and gentlemen, I would like to turn the conference over to Christopher Froths.
[00:26:44] Thank you for participating in our conference call today. We look forward to speaking with you on our next quarterly call or prior to that, the circumstances were with. I wish you good day.
[00:26:56] Thank you, ladies and gentlemen, for participating in today’s conference call, we ask that you now disconnect your lines.