Macquarie Infrastructure Holdings, LLC
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Macquarie Infrastructure Corporation Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] At the company’s request, this conference is being recorded. I will now turn the call over to Jay Davis. Sir, please go ahead.

[Jay Davis:]

Thank you, Brian and good morning everyone. Welcome once again to Macquarie Infrastructure Corporation’s earnings conference call, this one covering the third quarter of 2015. Our call today is being webcast and is open to the media. In addition to discussing our quarterly 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 last evening and copies maybe downloaded from our website at www.macquarie.com/mic. Before turning the proceedings over to Macquarie Infrastructure Corporation’s Chief Executive Officer, James Hooke, 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 non-public 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. 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 Form 10-K. 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 and 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. With that, it is my pleasure to introduce Macquarie Infrastructure Corporation’s Chief Executive Officer, James Hooke.

[James Hooke:]

Thank you, Jay and thanks to those of you participating in our earnings conference call this morning. We appreciate you taking the time to join us for this update on the performance and prospects of MIC. In addition to comments on MIC’s results for the quarter just ended, you will hear two forward-looking themes come through in my remarks this morning. First, that in a volatile market environment, we remain confident in our ability to find and execute attractive investments that will help MIC continue to grow. And second, given that we see numerous opportunities to grow, it’s more important than ever that we remain disciplined in our capital deployment efforts. More on those in a moment. Let me start by spending a few minutes on our results for the third quarter and year-to-date periods ended September 30, 2015. As reflected in our results press release and 10-Q published last evening, we have reported $1.41 per share in adjusted proportionately combined free cash flow for the third quarter. That’s ahead of the consensus figure of the $1.31 per share by 7% or 8%. The $1.41 figure reflects the consolidation of IMTT, contributions from acquisitions and improved operating results in general, but at Atlantic Aviation in particular. There is a little more noise than we would like in the year-on-year third quarter results comparison and this is related to first, the timing and closing of the IMTT transaction in the third quarter of 2014; second, the timing and closing of our sale of district energy in the third quarter of 2014; third, the inclusion of swap break fees and transaction costs as we put in place a new debt package at BEC in the third quarter of this year; and fourth, the timing of maintenance CapEx at IMTT and the amounts and timing of maintenance CapEx at Atlantic Aviation in the third quarter of this year. Adjusting for this noise, we believe the $1.41 of free cash flow per share should be viewed as a year-on-year increase of at least 9% and a continuation of the very solid performance of our businesses over the past several years. Specifically in the third quarter of 2014, IMTT deployed $11.2 million of maintenance CapEx. Because those expenditures were made early in the quarter when we included IMTT’s results on a proportionately combined basis, the total of IMTT’s maintenance CapEx spend ascribed to MIC in the third quarter of 2014 was approximately $6.2 million. Said differently, in the third quarter of 2014, MIC owned 100% of IMTT for 84% of the days in the quarter, yet recorded only 55% of the maintenance CapEx deployed during this period. In the third quarter of 2015, as the owner of 100% of the business, the third quarter 2014 comparison is versus the entire $11.2 million, not just 55% of that number. IMTT deployed $12 million in maintenance CapEx in the third quarter of this year, a sequential increase and one that moves them closer to deploying $40 million for the year, but a result that contributed to the difficult comparison. At Atlantic Aviation on the other hand, maintenance CapEx deployments have accelerated from $4.6 million through the first nine months in 2014 to $13 million through the first nine months of 2015. The combination of lower than expected maintenance CapEx by IMTT and the outperformance of Atlantic Aviation and a holistic approach to managing maintenance capital expenditures has provided us with an ability to deploy capital opportunistically at Atlantic Aviation. In this case, the preemptive investment of maintenance CapEx at Atlantic Aviation this year could provide the business with additional financial flexibility in the future. Bottom line, MIC’s growth in free cash flow per share for the quarter was 9% not the headline 3% when we removed the timing effects of these maintenance capital expenditures and growth in free cash flow per share for the 9-month period was 24% on the same basis. Above all, the results produced by our businesses in the third quarter this year, was consistent with or slightly ahead of our expectations. As previously foreshowed, we have excluded a couple of items in our calculation of adjusted proportionately combined free cash flow in order to provide you with a clear picture of the ongoing cash generation generating capacity of our various businesses. These items are one, as we have in each previous instance, we have excluded interest rate swap breakage fees of $31.4 million in the second quarter and $19.2 million in the third quarter related to the refinancing of IMTT’s long-term debt in May and the repayment of BEC debt in July. And second, we have excluded approximately $9.3 million in first half transaction costs incurred in connection with the acquisition of BEC. I did want to call your attention to some changes we have made in our reporting format as well, particularly our press release. In August, I may have mentioned of the fact that we are increasingly managing our business as a whole and last as a group of disparate entities. That was evidenced in the third quarter in four key areas

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open. Please go ahead.

[Ian Zaffino:]

Hi, great. Thank you. Very good quarter. Congratulations.

[James Hooke:]

Thanks, Ian.

[Ian Zaffino:]

The question would be on the aviation side and maybe give us a little bit more color on what exactly you mean by owning more of these FBOs and how that’s really impacting you? And also as from the same topic, can you talk about maybe the impact of maybe what’s happening in the oil patch or maybe the lack of impact that’s happening on the business from the oil patch and just give us a little bit of better understanding what you are seeing there, too? Thanks.

[James Hooke:]

Sure. I think in terms of the first part of the question, which is the EBITDA growth that we are getting at Atlantic Aviation and how it benefits from the acquisitions, the same-store EBITDA figure is 8.7% for the first half and 8.5% for the third quarter. So, we’ve seen very stable same-store EBITDA growth whether its year-to-date or on the third quarter. And I think what we’ve tried to say is, notwithstanding that, transactions or additional FBOs are excluded from your same-store comparison. One of the reasons we’re able to get so much gross profit growth, so those figures I gave you were gross profit not EBITDA, one of the reasons we are able to get such high gross profit growth is because, our existing same-store locations are picking up volume that is originating from or hit into the sites we’ve acquired elsewhere. So, whilst we look at it on the same-store basis, there is some benefit in those same-store locations that we’re getting from the network effect of our FBOs. What pleases me however, in relation to Atlantic is, I think it’s pretty clear that we have better same-store growth than any participant in the industry. So, I think we’re clearly picking up market share on our same-store activities, which is why we are pleased with it. In relation to what’s happening in the oil patch locations within the Atlantic Aviation portfolio, I would say we’re getting smacked as you would expect us today. If you look at traffic in and out of Houston, its down, if you look at locations in Texas and North Dakota and Wyoming it’s down. Atlantic doesn’t have as much oil services or oil destination exposure maybe as other networks, but certainly if you look at places like Midland, Texas, I think the take off in landing activity is down sort of 15% and 20%. So, while we say that Atlantic same-store activity is, is up by the amounts we’re talking about included in that is, there are some locations that to quite the industry pilots are blowing and going, and some and I would say the oil patch ones are second wind to a degree. And so the portfolio outcome for Atlantic isn’t the fact that every single of our 69 locations is firing on all cylinders, it’s just that the majority of them firing on all cylinders, but there are still softness. So the oil patch sites aren’t doing particularly well, but that’s why we have a portfolio.

[Ian Zaffino:]

Okay. Okay, thank you. And then just, if I could just go back to the first quarter a little bit more, so you are basically seeing a greater percentage of sort of take off landings that are I guess taking fuel or taking services. Now, the next question would be how big can that opportunity be, and when we look at sort of the growth of the business, we get attractive on some landings, but does that sort of add an incremental benefit or does add any comment to that benefit, but how large and incremental benefit could that be? And then I’ll pass on to the next person.

[James Hooke:]

Yes, so it’s a good question, let me go through. Obviously flight activity across the network or sort of across the industry is the starting point, then you have to look at what share of flights visit you at your locations and I think the visits to our locations is up higher than the number of flight activity. You then look at, okay of those aircraft that visit you how much fuel do they take, and that’s the function how big are they relative to the fleet and so, I would say we probably get slightly disproportionately large aircraft compared to the overall size of the GI fleet and then what is their fuel rate i.e. how much of their fuel tank do they fill when they come to you. And again, I think on that metric, we again do well. So, I think they all contribute to the superior than flight activity levels, part of that is network effect and part of that is just sophistication and quality of the offering. But, I think when it all comes together it produces better than industry activity results. How big is that opportunity set, I think the answer is every time we’ve tried to quantify and we sort of it’s like peeling the onion, we find a new way of doing business smarter then so, we find the new opportunity. So, I am not going to quantify the two reasons; one is, we always look at it from a new perspective, but second is just the usual corporate not telling, because that would make life too easy for others in the industry.

[Ian Zaffino:]

Alright, thank you very much guys. I’ll pass it on to the next person.

[James Hooke:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jeremy Tonet with JPMorgan. Your line is now open. Please go ahead.

[Jeremy Tonet:]

Good morning.

[James Hooke:]

Good morning, Jeremy.

[Jeremy Tonet:]

Congratulations on the strong quarter.

[James Hooke:]

Thank you.

[Jeremy Tonet:]

I was just curious following up on the Aviation side, if you could talk a bit, we say the deal with landmark and significant, I was just wondering how this impacts your business and is there any opportunities or challenges this can present for your?

[James Hooke:]

So, I don’t think it really changes the industry that much. And the reason I would say that is Signature as always been a very good competitor and Landmarks always been a very good competitor and we are used to competing with them as we speak. We don’t actually compete, we only compete head-to-head with Signature at, I think it is three or four of that 69 locations. So it won’t really increase the overlap with signature, it will mean that we are competing with them at another three to four locations, but those were locations where we already competed. So, I don’t think that will change too much, I think the industry structure will obviously be a little better, having two large participants rather than three. And the final is that, signature will need to divest a number of locations, I suspect to get DOJ approval, we don’t know how many, it will need to divest, yes I suspect the DOJ process is just kicking off in relation to that. So, some of those sites may become available and if they became available at a reasonable price, we would obviously be interested. But I don’t think it will really change the landscape enormously.

[Jeremy Tonet:]

Great, thank you for that. And turning to midstream, the conversations that you are having these days, I was wondering if you might be able to share a bit more seems like its longer grieving process for some participants to come to the new market realization. I’m just wondering, these people are approaching you or how these conversations starting or any other color you could share with us would be helpful?

[James Hooke:]

Sure. So, I think in terms of the discussions, I would we’ve had more discussions than we’ve ever had across the sector. It’s a combination of people approaching us directly, banks approaching us try to deal up, banks approaching us saying that they are not approaching us on behalf of someone, but clearly they are approaching us on behalf of someone and that’s also reaching to other people. So its any combination of deal flow in terms of it, we’ve had more discussions than ever before. I think what I have observed though over the three months is, and I contrast this to what happened in the CP&E space with solar and wind developments. Some solar and wind developers immediately grieved and basically started selling projects for reasonable prices again as soon the yieldco meltdown occurred. And I suspect that’s because they have smaller balance sheets and needed to transact relatively quickly and didn’t have the luxury of playing bluff poker. I think in the midstream space, people seem to have the luxury of playing a longer game and so it’s taken us slightly longer to see opportunities there. They have also been to be honest, just a number of opportunities that when we diligence them, some times when you diligence things there is more there than you think and sometimes there is less there than you think from the outside. And I would say, to-date this is being mixed, but with probably 70% of the time there is been less there than we thought rather than more though certainly that’s not universally true. So, I think that’s where we are at, you know it also still gets down to the fact and this is sort of universally true which is people keep focusing if they did a deal with us on what the accretion would be. And that doesn’t really interest us one way or the other the real question is what’s that target with? So, I think in the case, in the case of acquisitions we’ve had people say, but you could afford to pay 20% more to which our reaction is that’s a fascinating, I mean interest story, of course, maybe I could. But your business isn’t worth 20% more. And so, I think over that time, we’ve sort of seen things progress, I do think that we’ll still be patient, but I also think compared to what we’re seeing in terms of ability to deploy capital on an appropriate risk rate of return. We just see at the moment we haven’t found one where the appropriate risk return has been in the sort of range where we’d pull the trigger. But, we are looking at a number of those transactions. I think as refinancing what’s come around in the midstream space that will occur. I think as you see people having to tap markets with pretty expensive capital whether its refinancing debt or whether its sort of more complex mandatory converts so those sorts of things, you start to see the cost of capital in that space is going up for people. But those things haven’t happened, don’t happen and haven’t happened quickly.

[Jeremy Tonet:]

Thank you. Thank you for all that. We do very much appreciate your conservative approach to capital deployment to create a novel tech, so that’s great to see. And just one last one for me if I could as far as IMTT and renewals there, I am wondering if you could just give us a sense for how the market is and where rates are relative to where they were before and any other color on that?

[James Hooke:]

Yes. Look, it’s a good question. I think I would describe the market as still pretty short in terms of contract tenure and duration. I would also say the pricing is essentially inflation linked rather than fantastic step ups. The one – we did have a large renewal in New York Harbor that we did just after the quarter finish that essentially renewed 70% of the capacity we have in by own, up for renewal this year and that renewed on a 5-year contract with the price step-up. That’s probably the first long-dated 5-year step up that we have seen. Some – it caused us to sort of wonder is that a green shoot that we are starting to see in the industry or is that just a single data point, I would still call it a single data point. But at this point in time I think I would want to see a trend of green shoots before I would declare green shoots. But I think in New York Harbor we had seen a level – a slightly more robust activity than we had seen, but I would say it is basically and it was good to get that volume locked away at a price increase for 5 years. But I would still say it’s – it feels like what we have been seeing for the majority of this year.

[Jeremy Tonet:]

That’s quite strong demand. Could that lead to an expansion in that area?

[James Hooke:]

It’s too early to say. As I have said, we will get that done and dusted. There are growth CapEx opportunities. We are looking Bayonne, but we will see. So it’s sort of all of these things if you have got 200 customer contracts or 400 customer contracts, each one of them its own human interest story. And so it’s probably too early – I would say it’s way too early to draw trends. But it was just a – it was better than the alternative.

[Jeremy Tonet:]

Great. Thank you for that.

[James Hooke:]

Thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Young Cho with Wells Fargo. Your line is now open. Please go ahead.

[Young Cho:]

Great. Thank you. Just going back to the question on midstream again, just talk about what kind of midstream opportunities you are seeing right now, whether it’s more kind of pipeline related or transport. And you said that the returns that you are seeing in the market offset against the risk, it wasn’t as I am telling where you would jump in, did you talk about where it is right now and would – what it would has to be for you to be more interested in?

[James Hooke:]

So in terms of the assets that we are looking for in that space, our assets that I would say are very similar to the assets we own. Ideally marine terminals and logistics facility, if they were pipelines connected to our marine logistics facilities, we would. Other aspects of pipeline businesses we like up, but the price at which they are transacting at the moment is just is high from our perspective. There is no – we don’t like those businesses we just think there is a lot of capital chasing interstate pipelines. So I would say the majority of what we are focused on is terminaling opportunities. In relation to the return threshold, tend not to look at that in terms of EBITDA multiples more in terms of the IRR that we are targeting on those things and obviously for sort of competitive parse this is probably not a great idea for us to say exactly what our target is. Suffice to say that there are some people who want to sell their business and get a – and have the vendor pay a single digit IRR. And we have no interest in we will have the buyer pay a single digit IRR and we have no interest in investing money at those levels at all. The second though it comes down to which is where it all gets whereas the budget goes here is what is the earnings growth trajectory that someone builds into the business case? So there are some people who claim to be selling businesses on the sort of 12%, 13% IRR, but when you strip out the nonsense in the acquisition case, it’s a considerably lower IRR. So I would sort of just say the other thing which people have difficulty within this is sort of I guess you see in behavior or economics play out in casinos across the USA everyday is if someone who was previously 30% or 40% more valuable than they are today, they look into a view of value that’s closer to where they worth 30% to 40% to go rather than where they will be in 6 months to 12 months time. And so I just think there is a process whereby peoples reference to what their businesses worth is a function of where it was trading nine months ago rather than where it’s at today. And I get that, I certainly understand that this sort of psychology behind that, but in many of these cases where one of those businesses was trading nine months ago is it bears nothing in terms of our view as to what fundamental value of that business is.

[Young Cho:]

Okay. And as the margins are seen, so our expectation is kind of moderating to more realistic levels?

[James Hooke:]

Yes. I would say that at this point of the discussion that’s certainly the case. I would also say though however the GP/LP interest is not a purely aligned interest in this space. And so I think it’s been harder for us to work through some GPs have a view of value that has moved, but it was probably never in the zip code and is still two zip codes away but at least is in the same state. But it’s got ways to come.

[Young Cho:]

Got it, great. Thanks for that. And just one last question for me, so in the past you guys provided kind of maintenance CapEx expectations for IMTT, you guys provided for this year, was there an update for 2016 whether you should be seeing any additional kind of cost savings going forward?

[James Hooke:]

Yes. So the only guidance that’s out there or commentary for 2016 for IMTT maintenance CapEx is that we think we will get it to $40 million for ’15. And the question in ’16 is will we be able to get it lower than $40 million. So I think probably the revised guidance is it will around $40 million, but that was sort of revised in the middle of the year that we brought maintenance CapEx down to that run rate. We haven’t provided a new revised framework, though I do think in the medium to longer term we think we can prudently get it a little lower than that. And so that’s – but we haven’t given a dollar figure there. Obviously, we always retain the right to sandbag and that maybe one effect.

[Young Cho:]

Got it. Okay. Thank you.

[James Hooke:]

Okay.

[Operator:]

Thank you. There are no further questions. I will now turn the call back to James Hooke, Macquarie Infrastructure Corporation’s CEO for closing remarks.

[James Hooke:]

Thank you very much, Brian. We will be on the road participating in a number of conferences and road shows over the remainder of the year. And we look forward to seeing you at many of these events. Jay will likely be in touch with you either way. As always, we make sure you would leave every difficult question to him. I would like to thank the management teams at all of our businesses, the management team at IMTT especially who have done a great job at integrating IMTT into MIC’s business. And the management team at Atlantic Aviation who have made more hay than the amount of sun shining should have seen them make. I want to thank our lenders who remain very important business partners of us and continue to support our business in all we do. And finally, I would like to call out to our Asset Director for Hawaii Gas, Lex Wolf who ran the marathon on Sunday suffered severe pain as a man as unfit as him running a marathon would suffer and then got on a flight to Hawaii immediately Monday to spend the week out there. Superhuman effort for him and for those who are interested, he ran the marathon in just under 5.5 hours, which as I am told is actually close to world record time. Thank you very much for your support. And we look forward to speaking with you soon. Good bye.

[Operator:]

Ladies and gentlemen, this does conclude today’s program. You may all disconnect. Everybody have a wonderful day.