Macquarie Infrastructure Holdings, LLC
Q1 2020 Earnings Call Transcript

Published: 5 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Macquarie Infrastructure Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions].I'd now like to hand the conference over to your speaker today, Jay Davis, Managing Director, Investor Relations. Please go ahead.

[Jay Davis:]

Thank you, and welcome to Macquarie Infrastructure Corporation's earnings conference call, this covering the first quarter of 2020. Our call 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 www.macquarie.com/mic.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. 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 is 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.A description of known risks that could cause our actual results to differ appears under the caption Risk Factors in our Forms 10-K and 10-Q. 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-GAAP measures, earnings before interest, taxes, depreciation and amortization, or EBITDA, and free cash flow as defined by us. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in the tables attached to our earnings press release.In addition to Christopher Frost, participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Liam Stewart.With that, it is my pleasure to welcome MIC's Chief Executive Officer, Christopher Frost.

[Christopher Frost:]

Thank you, Jay, and thanks to those of you joining our call this morning. I hope that you and your families have remained safe and well through this period. The first quarter of 2020 will surely go down as one of the most extraordinary periods in modern history. Each of us has been affected by the COVID-19 pandemic and associated economic slowdown in ways we could not have imagined as recently as the start of this year. While we don't know how the pandemic and its effects will play out, particularly with respect to the timing of any recovery, we will be forthcoming about our assumptions and what we know today.At MIC, our response has been focused on both dealing with its immediate effects and ensuring the company and its businesses are positioned to weather the pandemic and associated economic slowdown. We have 4 key priorities

[Liam Stewart:]

Thank you, Chris, and good morning, everyone. For the first quarter of 2020 versus the prior comparable period, adjusted EBITDA declined by 25%. Excluding the impact of the refinery termination fee received in March of 2019, EBITDA would have declined by 7%.Free cash flow declined by 34%. Excluding the refinery termination fee, free cash flow would have declined by 13%. Free cash flow was reduced by the lower EBITDA, higher maintenance capital expenditures and higher interest expense relative to the prior comparable period.The increase in maintenance capital expenditures was largely a function of timing. The increase in net interest expense reflects the revolving credit facility drawdowns and lower interest income, offset by the repayment of the convertible notes in July of last year.MIC's consolidated results for the quarter don't fully reflect the magnitude of the impact of COVID-19. The effects of reduced activity were felt only during the last two weeks of March but have continued throughout April of both Atlantic and MIC Hawaii. I note that the rapid decline in wholesale commodity prices reduced EBITDA by approximately $5 million across the quarter.Before I address our cost reduction and liquidity enhancement efforts, I want to explain how we think about our businesses and operating costs in the current environment.In 2019, Atlantic Aviation recorded approximately $450 million of costs of goods sold. These were almost exclusively the cost of jet fuel, and all of that cost is variable. Atlantic Aviation also recorded approximately $250 million of SG&A in 2019. The cost reduction initiatives implemented at Atlantic totaled nearly $50 million on an annualized basis. These comprise primarily staff costs and items that can be deferred. Staff costs represent approximately half of Atlantic's SG&A.In 2019, MIC Hawaii recorded approximately $165 million of COGS. Approximately 3/4 of that were fuel costs that are again variable in nature. Our ability to reduce SG&A meaningfully at either MIC Hawaii or IMTT is limited relative to Atlantic Aviation given activity levels at IMTT and the nature of the MIC Hawaii business. Nonetheless, we continue to focus on ways we can be more efficient at each.Partially offsetting the savings are an expected increase in COVID-19-related costs of approximately $7 million to support the safety of our employees, as Chris noted. We have also deferred planned maintenance capital expenditures at Atlantic Aviation and MIC Hawaii. We expect these deferrals will be offset by incremental spending at IMTT in 2020, primarily on regulatory compliance. Consolidated maintenance capital expenditures should total approximately $60 million for the year.As we discussed during our fourth quarter 2019 earnings call, we expect to deploy between $200 million and $225 million into growth projects during 2020. Approximately 1/4 of this amount was deployed through March. These are projects that will reinforce the infrastructure characteristics of our businesses, particularly IMTT. The approximately $350 million worth of projects underway at IMTT are backed by contracts with an average initial term of 19 years and are expected to generate an incremental $39 million of annualized EBITDA when completed. We have reviewed each of these with the relevant counterparties and, to date, only one relatively smaller project has been delayed.We expect each of our businesses to benefit from the deferral of payroll taxes as provided for under the CARES Act, noting that this is simply a timing benefit. We may also realize a tax benefit in consolidation with the allowed carryback of net operating losses. Regarding our balance sheet, we ended the first quarter with approximately $1.15 billion of cash on hand. This amount includes the approximately $350 million of cash on our balance sheet at year-end, plus the drawdowns of approximately $875 million on the revolving credit facilities at Atlantic Aviation and MIC during the first quarter.The decision to draw down on these revolvers and maximize liquidity was driven by the speed of the changes we observed in our businesses in the face of COVID-19. We have subsequently used $275 million of cash to fully repay the Atlantic Aviation revolving credit facility and have simultaneously amended the agreement to remove the leverage-based maintenance covenant from the facility. I'll touch briefly on a couple of ratings agency actions before I hand the call back to Chris.As noted in our 10-Q, each of Standard & Poor's and Moody's downgraded Atlantic Aviation in April. S&P also downgraded MIC in a separate action. Because the S&P methodology does not permit a subsidiary to carry a higher rating than its parent, the downgrade of MIC also lowered IMTT's stand-alone rating. None of these actions have any impact on the covenants in our debt facilities. However, collectively, they will increase our interest expense by approximately $2.8 million annually.In conclusion, based on the planning and stress testing that we have done, we are confident that with the cost reductions initiated to date and the suspension of our dividend, we have sufficient liquidity to fund our operations through 2020 if the trends observed in April continue for the remainder of the year.With that, I'll turn the call back over to Chris.

[Christopher Frost:]

Thanks, Liam. The steps taken over the past two years to strengthen our balance sheet and improve our financial flexibility have positioned us well relative to navigating this period of significant uncertainty. I'll spend just a couple of minutes on what we are seeing in the market at this point and on our outlook for the second quarter.Trading appears to have stabilized at each of Atlantic Aviation and MIC Hawaii, although at low levels relative to historical norms. Our team at Atlantic is confident in the resilience of general aviation and the ability of that business to weather the current economic slowdown. They point to conversations with customers who are anxious to get back to flying and note that bookings are on the rise. And flight activity started to improve in the past week, slightly, but it has improved. In Hawaii, the governor has extended quarantine rules and travel restrictions through the end of May. It could take a while for tourism to recover in the islands, but we note that although the consumption of gas is correlated with tourism, that correlation is not one for one.Our outlook for Atlantic and MIC Hawaii depends on the relaxation of travel restriction. Once travel restrictions are eased, we believe we will start to see a recovery in activity at our businesses, particularly at Atlantic. We think the outlook for IMTT is positive over the short to medium term, given we expect the market structure for petroleum products to continue to be constructive for storage. And our continued focus on the repositioning projects discussed previously give us confidence with respect to the longer-term outlook for IMTT.Our businesses remain providers of essential services, backed by physical assets and with a preferred position in their respective markets. They have capable management teams in place and are well positioned financially to get through this downturn. Regarding our pursuit of strategic alternatives, it remains our intention to continue with the sales processes launched earlier this year. Infrastructure investors generally take a long-term view of market cycles and valuation, and we remain confident in our ability to unlock additional value for our shareholders based on the level of interest expressed thus far. Although we were positioned well to engage in sales processes this year, the timing of these is less certain now. This uncertainty makes the actions we have taken to preserve liquidity even more important.We believe we have the financial resources that will ensure we have adequate time to pursue this course of action and that it will maximize value for shareholders. With that, I thank you again for your participation in our call this morning. At this time, I will ask our operator to open the phone lines for your questions.

[Operator:]

[Operator Instructions]. And our first question comes from Tristan Richardson from SunTrust.

[Tristan Richardson:]

Appreciate - I really appreciate all those commentary on how you guys are responding in the current environment. Just a quick question on IMTT. Just thinking about the products that your tanks face. Can you talk a little bit about just sort of the - we think of it as 3 major categories of products? We think of heavy and resid and gasoline distillates, and then also the kind of other chemicals, vegetable, tropical, et cetera. I mean maybe just if you could touch on sort of what you're seeing in the markets for each of those 3 categories.

[Christopher Frost:]

Yes, certainly. Just to sort of recap, I mean, as we said in the prepared remarks, we've taken utilization up from 86% at the end of last year, up to over 95% from mid-May. I think 2 points to note is one, that effectively, all of the leasable capacity at St. Rose and Bayonne is occupied, and we've effectively leased all available capacity.In terms of what we're seeing in terms of each of those categories, I mean, clearly, in terms of crude, and as you may recall, our exposure to crude storage is very limited. We only had about 800,000 tanks of crude storage that was available, and that was the tanks associated with the Shell refinery that we were able to get under contract. Around 1/3 of the business is with respect to heavy and residual oil. And again, we were sort of seeing good demand for that. But you may recall from our fourth quarter earnings that we were already effectively full with respect to that product market, particularly for fuel and fee.And then with respect to clean products or refined products, that we are able to sort of see increased demand for gasoline and particularly on the distillate side, which drove utilization up at Bayonne. So we're sort of seeing good demand there. And then, similarly, with respect to some of our unleased chemical storage, we're also able to pick up utilization or contracts for that sector as well.

[Tristan Richardson:]

Helpful. So have you guys seen any meaningful - obviously, you underwent a period for a couple of years of repositioning some of your tankage. Are you seeing that in the current environment in terms of just adapting to where you're seeing the strongest demand?

[Christopher Frost:]

Yes. Look, I think that - I mean, clearly, our objective given the current market, was to drive utilization back up to that historical level of that sort of 94% to 96%, and that we're able to do that. I think we're open-minded as to whether or not we would repurpose any additional capacity. But I think consistent with wanting to enhance the infrastructure characteristics of the business, we would need to see that backed by contract so that we're able to recover the capital spend and in a return on that capital.But I think our focus over the last 7 weeks was really to lease as much capacity as we possibly could. And I think we've talked about before on previous calls that often, there is that tension between term and price, and our focus here was really to lease as much capacity as we could and to maximize the term on those contracts. So we're pleased that we're able to actually lease that additional capacity and drive average contract terms for over 12 months.So I think in terms of answering the question, yes, we would be open to repurposing storage. But I think the fundamental point there is that we would want that to be contract backed.

[Tristan Richardson:]

Appreciate it, Chris. And then just last one for me. You noted in your prepared comments seeing some signs of perhaps flight activity coming off of the lows. Is it - perhaps too early to say, but is this indicative of a trend? Or just any commentary there in terms of just the very recent history.

[Christopher Frost:]

Yes. Look, I think what we've sort of seen over the last week is that sort of 80% step-down has probably moved to 70%. I think that is partly driven by some of the states relaxing or reopening. But I would caution strongly against sort of saying that we've seen enough of that for a sufficient period of time to sort of say it's a trend.As we said in the prepared remarks, we're also seeing additional flight activity related to cargo, to military, including medical missions. It could also be a function of that, something that we're clearly watching on a daily basis, but I think it's too early to call it as a trend.

[Operator:]

And our next question comes from TJ Schultz from RBC Capital Markets.

[Torrey Schultz:]

Just first, a follow-up on IMTT. So do you expect any of the recent contracts for things like crude storage to extend longer than the year you've entered into? Or is there some level of capacity there that we should think about as something you just capitalize on here, given the market dislocation, but likely goes away in a year?

[Christopher Frost:]

No. Look, I think what we've sort of said, I think it's difficult to predict how long this supply/demand imbalance is going to last for. I think a lot of people anticipate that it will be a medium-term phenomena.I think as we have talked about quite a lot over the past couple of years, is that if we're able to drive utilization back up to that historical average, then it puts us in a better negotiating position as respect to rate and with respect to contract tenor as tanks come up for renewal because folks are clearly concerned about not being able to get storage.So I think, as I said with Tristan, our objective was clearly to actually drive utilization to maximize the term of the contracts that we're able to get now that we are effectively full as contracts come up for renewal, which is predominantly going to be in 2021, we would look to drive both term and rate at that time.

[Torrey Schultz:]

Okay. Makes sense. And then just on the asset sale process. Are you pursuing a sale of the entire company to one buyer as kind of one path and then a sale of the distinct business segments to different buyers as a separate path? Or are you more focused on - or is one of these more reasonable for us to assume?

[Christopher Frost:]

Look, I think in terms of - as a point of principle, our objective was clearly to maximize value for shareholders. And we looked at that by looking at what the after-tax proceeds would be to shareholders. Our intention was to run a parallel process for as long as we could before making a decision as to which was the preferred course of action based on the present value of those proceeds to shareholders.What I said in the prepared remarks is that we are still committed to the sale of the company or each of the operating businesses, that our expectation is that given the level of interest from large sophisticated infrastructure investors who have the capability to value these businesses through the cycle and take a long-term value, we are still sort of prepared to move forward. But there are a number of logistical issues that we're all experiencing as well as the fact that we would like to start to sort of see a recovery setting both at Atlantic and Hawaii Gas.So I think our view is that we will pursue whatever path we think maximizes value for shareholders. Given some of the current trading performance of the business, we would clearly want to sort of see a recovery take place in order to maximize value.I think what we've also said is that the measures that we've put in place, particularly through the suspension of the dividend and the cost saving, is really designed to ensure that we can design a process and a timing that we'll do that and maximize value and ensure that we remain in control of the process and the time table.

[Operator:]

And our next question comes from Thomas Shen from GoldenTree.

[Thomas Shen:]

Kind of the lowest level of activity at Atlantic Aviation, kind of that down 80%. Any sense for how much kind of monthly cash burn would be at that business?

[Liam Stewart:]

Thomas, it's Liam. Why don't I take that? Because I think the price cash burn is probably more one that's appropriate for a start-up rather than for an infrastructure business. And as we said in the prepared remarks, 60% of Atlantic's gross profit is derived from fuel sales. There's another 20% that's derived from activity-related revenue, and then the remaining 20% is base tenant rentals. I think the way we think about it at an aggregate level, with the cost reduction initiatives that we've implemented, the liquidity initiatives that we've implemented over the course of the last 6 weeks, that we are confident in our ability to sustain our operations for the duration of 2020 and then at the Atlantic level with minimal incremental support from MIC.

[Operator:]

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Christopher Frost for any closing remarks.

[Christopher Frost:]

Thank you for participating in our conference call today. We remain focused on driving growth and value for our shareholders, both through effective management of our businesses and the pursuit of strategic alternatives for the company. We look forward to speaking with you on our next quarterly call, or prior to that, if circumstances warrant. I hope that you and your families continue to remain safe and well through this period. And with that, good morning, and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.