U.S. Markets closed

Edited Transcript of MIC earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 Macquarie Infrastructure Corp Earnings Call

NEW YORK Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Macquarie Infrastructure Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Timothy Frost

Macquarie Infrastructure Corporation - CEO & Director

* Jay Davis

Macquarie Infrastructure Corporation - VP & Head of IR

* Liam Stewart

Macquarie Infrastructure Corporation - CFO

================================================================================

Conference Call Participants

================================================================================

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Torrey Joseph Schultz

RBC Capital Markets, Research Division - Analyst

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Macquarie Infrastructure Corporation Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Jay Davis, Managing Director of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

Jay Davis, Macquarie Infrastructure Corporation - VP & Head of IR [2]

--------------------------------------------------------------------------------

[Welcome] to Macquarie Infrastructure Corporation's Earnings Conference Call, this covering the third quarter of 2019. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance on this call, we've published a press release summarizing the results and filed a financial report on Form 10-Q with the Securities and Exchange Commission. Materials were released this morning and copies may be downloaded from our website, 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. 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. 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 at various times make reference to 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 published this morning.

In addition to Christopher Frost, participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Liam Stewart. At this time, it is my pleasure to introduce Macquarie Infrastructure Corporation's Chief Executive Officer, Christopher Frost.

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Jay, and thanks to those of you joining our call this morning. As many of you'll have seen by now, along with the publication of our earnings press release this morning, we distributed a second release announcing our intention to actively pursue strategic alternatives for MIC. This decision to pursue strategic alternatives reflects confidence in our ability to unlock significant additional value for shareholders by selling MIC or selling each of its businesses or executing on other strategic transactions. The decision follows a thorough review by our Board at its annual strategic retreat this fall.

The review included analysis and support from a range of financial, legal, tax and industry advisers. For the past 2 years, we have been focused on executing initiatives in support of 3 strategic priorities. These have been: one, the investment in the infrastructure of our businesses; two, the strengthening of our balance sheet; and three, the prudent management of our available capital and resources.

As a result, we have streamlined our portfolio through the successful sale of 6 smaller and noncore businesses on attractive terms. Use the proceeds from these sales to dramatically strengthen our balance sheet and with that extended the maturity of our remaining debt and deployed or committed to deploy capital into each of our businesses to improve both their competitiveness and their resilience.

You will recall that I've said on many occasions that the successful execution against these strategic priorities would not only improve the performance of MIC but also increase the number and quality of strategic alternatives available to us. Therefore, we believe now is the logical time for us to actively pursue these alternatives. Specifically, we intend the pursue the sale of MIC or the sale of its businesses or other strategic alternatives to realize greater value for shareholders.

In addition to sales for cash, strategic alternatives could involve the spin-off of one or more of our businesses, a merger or joint venture. Our focus will be on maximizing value for shareholders. We have not and will not set a time limit for these activities, but will advance the effort as quickly and efficiently as possible just as we have done with the sales of smaller and noncore businesses.

Consistent with that objective, we have appointed financial and other advisers to assist us in any process. Along with this announcement, as noted in our press release this morning, MIC has entered into a disposition agreement with Macquarie Infrastructure Management USA, the external manager of the company. It is public and was filed with the SEC this morning. The agreement sets out the terms under which the arrangement with our manager will be terminated for those businesses, which are sold or otherwise divested as well as the payment to be made to the manager. The payment is consideration in general for the future earnings the manager would have generated under the existing Management Services Agreement. The amount paid to the manager will be based on the equity proceeds realigned above a threshold level and after deducting transaction costs, taxes, paying off or reserving for the payment of holding company level debt and the disposition payment. The payment increases along the sliding scale based on increases in the proceeds realized, thereby, more closely aligning the interest of the manager with those of our shareholders. To be clear, we remain confident in the long-term prospects for each of our businesses. It is worth briefly reminding ourselves of the unique investment merits. With 19 terminals and over 48 million barrels of bulk liquid storage capacity, IMTT is one of the largest providers of independent liquid storage and handling services in the U.S. It benefits from premier positions in 2 of the 4 major petroleum and chemical storage markets in the U.S.

Given its position in these key markets, IMTT is well placed to capitalize on growing demand for storage and handling of bulk liquid products. This demand includes the storage and handling of petroleum products related to the implementation of IMO 2020 as well as storage and handling of chemical products related to natural gas development in the U.S.

We believe storage utilization of IMTT has troughed as evidenced by the consistent increases in utilization over the course of 2019. And IMTT continues to benefit from a strong pipeline of development opportunities, both within and outside of its fence line. With 70 fixed based operations across the U.S., Atlantic Aviation is the preeminent provider of fuel and ground support services to the general aviation market. The fundamental driver of Atlantic Aviation's performance, the level of general aviation flight activity in U.S. remains robust.

Importantly, Atlantic Aviation also enjoys a significant pipeline of opportunities for the expansion of operations at existing bases and the addition of new bases to its network.

MIC Hawaii comprises a stable regulated gas production and distribution business, our market-leading propane distribution business and some of the largest solar power facilities in Hawaii. Together, these operations are at full front of efforts to develop a cleaner, more sustainable energy complex in Hawaii.

We also remain confident in the cash-generating capacity of our businesses as presently configured and in the health of our balance sheet. We firmly believe the steps we have taken over the past 2 years have made each of our businesses more resilient. As a result, we are reaffirming our dividend guidance for the payment of $1 per share for the fourth quarter of 2019.

In addition, based on our view of the performance of our businesses, we intend to pay a dividend of $1 per share per quarter in 2020. As ever, this assumes our businesses and operations are performing at levels that support the dividend and does not assume a sale of any business. In addition, it is subject to general economic conditions and stability in the broader market. I'll provide additional color on our next steps in a few moments, but I don't want to overlook the continued stable performances of our businesses in the third quarter. At this point, I'll ask Liam to share some of the highlights with you.

--------------------------------------------------------------------------------

Liam Stewart, Macquarie Infrastructure Corporation - CFO [4]

--------------------------------------------------------------------------------

Thank you, Chris. I'll be brief. MIC's financial and operational results for the third quarter of 2019 were consistent with our expectations are across the board. They reflect continued good performance at Atlantic Aviation, driven by effective management of the business and growth in general aviation flight activity year-on-year. An improvement in the contribution from MIC Hawaii, reflecting the sale of the mechanical contracting business sold in late 2018 and the continuation of the positive trends at IMTT that were present in the first half of the year. IMTT's results for the quarter reflect the ongoing increase in utilization, partially offset by lower average storage rates.

Utilization averaged 85.2% for the quarter, up from an average of 82.9% in the second quarter and 82.1% in the prior comparable period.

We continue to expect utilization to be in the mid- to high 80s percent range at year-end. Demand for heavy and residual oil storage on the Lower Mississippi River has driven the improved performance. Heavy products are used as feedstocks in secondary refining processes. As a result, IMTT's heavy and residual oil storage capacity on the Lower Mississippi River is largely full other than the crude oil tanks related to the refinery that IMTT purchased in July.

As such, IMTT has paused large-scale efforts to repurpose storage capacity. We continue to expect that IMTT will generate EBITDA for the full year of between $287 million and $297 million or between $248 million and $258 million, excluding the refinery termination fee received in the first quarter of this year.

IMTT has also benefited from increased throughput revenue and increased ancillary services fees in 2019.

Atlantic Aviation delivered a good result for the third quarter against FAA-reported general aviation flight movement industry-wide that were up 0.7% overall. Based on the same FAA data, flight activity at the airports on which Atlantic Aviation operates increased by about 1%.

As in the second quarter, Atlantic Aviation sold more jet fuel this year than last and generated more revenue from hanger rentals, an increase in expenses particularly salaries and benefits, reduced the amount of improved gross margin flowing through to EBITDA.

Atlantic's EBITDA result also reflects approximately $3 million of negative adjustments, primarily related to its maintenance business. Excluding this, the results for the third quarter this year will be a modest improvement on the third quarter in 2018. The adjustments will also impact Atlantic Aviation's results for the full year, of course. However, we are reaffirming EBITDA guidance for the business in a range of $275 million to $285 million.

MIC Hawaii generated substantially more EBITDA in the third quarter of this year compared with last. You will recall that the 2018 results included the write-down of the mechanical contracting business that was subsequently sold in the fourth quarter of last year. That aside, MIC Hawaii performed in line with expectations. Unseasonably warm weather this year reduced demands for gas modestly and labor costs increased. We expect MIC Hawaii to deliver a full year result consistent with our prior guidance as well.

The Corporate and Other segment recorded costs of $5 million compared with cost of $6 million a year ago. The results for the third quarter of this year reflects the recategorization of transaction costs, associated with the sales of our renewables businesses to discontinued operations now that those transactions have caused approximately $2 million have been recorded in ongoing operations in the first half of the year.

I'm pleased to report the closing of the sale of our remaining operating and renewable business as anticipated in September. In total, we generated net proceeds from the sales of our various interest in renewables businesses of approximately $210 million after transaction costs and taxes.

Available liquidity principally balances on existing credit facilities was approximately $2 billion at quarter end. We anticipate having a cash balance at year-end of approximately $300 million, the majority of which would be available to support our dividends or to fund a portion of our growth projects in 2020.

As foreshadowed during our last conference call, the Lower Mississippi River subsided to levels of permitted work on various growth and maintenance products in the region to proceed. As a result, our spending on growth projects increased sequentially in the third quarter to approximately $52 million. We now expect to deploy between $200 million and $220 million on growth projects for the year, lower by about $50 million versus our original expectations.

Our reduced expectations for 2019 represent largely a deferral of projects into 2020. Importantly, the deferral is not expected to have an impact on either our consolidated EBITDA or our tax liability in 2019, given most of the delayed projects was scheduled to be placed in service in 2020 or beyond.

With that, I'll hand the call back over to Chris for a few additional observations.

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Liam. Between now and early 2020, with the support of our advisers, we will refine our analysis of various strategic alternatives. As I mentioned a few moments ago, these could include the sale of MIC, sales of one or more of our businesses or any of spin-offs, a merger or joint venture as a means of generating value for shareholders. We will update the market when the Board has approved a specific course of action or has otherwise determined that further disclosure is necessary or appropriate. While we are setting a specific path forward, we will continue to focus on our current priorities, particularly on investing in the infrastructure of our businesses. We remain confident in our ability to further diversify the product and customer mix at IMTT by delivering new renewed capacity, connectivity and capability that positions the business well over the medium to long term. At Atlantic Aviation, we will continue to pursue acquisition and development opportunities to expand the already significant footprint of the business and the services it provides to customers.

In general, both acquisitions and development projects will also add value in the form of extending the weighted average remaining lease life of Atlantic Aviation's portfolio. And MIC Hawaii and Hawaii Gas will benefit from ongoing investment in the reliability and sustainability of the energy complex in Hawaii.

We're confident that our nearly 4,000 employees across our businesses will continue to focus on what they do well. Namely, managing and operating our businesses safely and efficiently, while providing the high level of service and support that customers have come to expect. In summary, we intend to pursue strategic alternatives that could include the sale of MIC or of its businesses. We have solid businesses with good prospects, and we're confident in our ability to deliver value in a sales process should that be the most appropriate path forward, just like we have in our sale processes to date.

MIC's third quarter results were consistent with our guidance and reflective of the stability inherent in the asset class. We reaffirm our previously provided guidance with respect to the performance of the businesses over the balance of the year and the distribution of $1 per share as a dividend in the fourth quarter. And finally, we intend to pay a dividend of $1 per share per quarter in 2020. This assumes our businesses and operations are performing at levels that support the dividend does not assume a sale of any business and remains subject to general economic conditions and stability in the broader market. 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 questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question coming from the line of Jeremy Tonet with JPMorgan.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Just want to start off with the strategic actions you guys are taking today, and wondering if you could provide a bit more color as far as the -- how active your conversations have been with potential buyers of the businesses? Or any color that you could share as far as appetite out there?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Jeremy, I think you would appreciate that we're not able to comment on that.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

Got you. Okay. And maybe you could talk a bit about the disposition agreement with the sponsor there? And walk us through the mechanics, how that works a bit?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [5]

--------------------------------------------------------------------------------

Yes. Certainly. I think the important point to note is the disposition agreement sets out the terms upon which the manager will be terminated following either the sale of the company or any of the operating businesses or any other strategic alternatives that we may pursue.

As I mentioned in my prepared remarks, the disposition agreement includes a payment to the manager, which seeks to represent the potential earnings the manager may have earned had it continue to operate or manage the business or the company. Importantly, the payment is based on the equity proceeds realized to the company. It is subject to a minimum threshold, and we adjust the proceeds for transaction costs, estimates of any taxes that will be payable on the disposition and also paying off or reserving for the payment of both corporate level debts. The payments increases along the sliding scale based on increases in the proceeds that are realized.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

--------------------------------------------------------------------------------

Great. I was just looking to the language a bit here, and there's something about the date of January 2022. Is there anything -- could you explain a bit more about how the time line works there?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [7]

--------------------------------------------------------------------------------

The disposition agreement has a term of 6 years on it. And the course that you're referring to represents an additional payment to the manager to the extent that we have successfully executed on the strategic priorities -- or sorry, alternatives within that time period.

--------------------------------------------------------------------------------

Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

--------------------------------------------------------------------------------

Got it. And then maybe just a final one on IMTT here. Wondering the utilization stepped up a bit here. Where do you see that kind of exiting the year versus your prior expectations at this point? And how do you think about the trade-off between increasing utilization and the rates that you guys are looking for, the tenor of the contracts? How that all mixes together?

--------------------------------------------------------------------------------

Liam Stewart, Macquarie Infrastructure Corporation - CFO [9]

--------------------------------------------------------------------------------

Yes. Jeremy, it's Liam. So clearly, this quarter we've seen a step up in utilization. And then I'd note that it's sort of first step up we've seen year-over-year as well. So we do see signs of utilization continuing to improve. Our guidance i.e., sort of for the -- sort of year-end spot utilization is in that sort of mid- to high 80s range as well and that's consistent with what we've said previously.

I think as you see in the results for this quarter, notwithstanding the improvement in utilization, the sort of average storage revenues down sort of in the low single-digit percentage -- single-digit percentages year-over-year. So clearly, as we see that improvement in utilization rises, taking some time to recover. And as we've said, we anticipate that the utilization recovery will come first and then the late recovery will follow thereafter. What we continue to see sort of to seek, to engage with our customers around meeting their needs in respect to one, sort of utilization as well, but two, also in terms of what we can do to extend tenor.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question coming from the line of Tristan Richardson from SunTrust.

--------------------------------------------------------------------------------

Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [11]

--------------------------------------------------------------------------------

Liam, could you talk a little bit more about the maintenance business in terms of a revision, is that kind of a restatement of past results or is it an asset write-down? Just kind of curious because...

--------------------------------------------------------------------------------

Liam Stewart, Macquarie Infrastructure Corporation - CFO [12]

--------------------------------------------------------------------------------

No. It's not a write-down. It's really just a reversal of some prior period maintenance revenue. And Atlantic does a little bit of maintenance, and it's obliged to, on the -- some of the lease agreements it has with a few FBOs. So it's really noncore to the overall business. And in the quarter, we had a very good results from a volume perspective. The FAA activity was slightly us stronger to Atlantic FBOs, and it was across the industry. And I wouldn't anticipate that we'd see this going forward.

--------------------------------------------------------------------------------

Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [13]

--------------------------------------------------------------------------------

Helpful. And then just lastly, on the disposition agreement. I guess just traditionally, we just think of the sponsor is generally aligned in its ownership of MIC shares and would be beneficiary of any value creation proportionate to its ownership as any shareholder would, but can you talk just about sort of the Board's decision and/or just what the Board was weighing as it sort of offered this agreement to the sponsor?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [14]

--------------------------------------------------------------------------------

Yes. Tristan, I think it's important to note that Macquarie's 15% shareholding is quite separate and distinct from its rights and obligations under the Management Services Agreement. The 2 should be separated. The disposition agreements that we talked about really deals with how we're treating the manager on termination following the sale of the company or the operating businesses. So I think it is important to sort of see them as quite separate and distinct.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And our next question coming from the line of TJ Schultz with RBC Capital Markets.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [16]

--------------------------------------------------------------------------------

Would you sell St. Rose and IMTT band separately? Or is IMTT to be sold in its entirety?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [17]

--------------------------------------------------------------------------------

I think, TJ, you'd appreciate that we're not going to speculate at this stage on hypotheticals. As I said in my prepared remarks that we're going to use the balance of this year and the early part of next year to refine our analysis of the different strategic alternatives with the support of our advisers, and we will do that as efficiently and in a timely way possible. And once the Board has made a decision on the preferred course of action, we'll look to update the market then.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. Is the -- in the disposition agreement, is there an incentive to undertake a whole company transaction? Or is it the same either way if it's a whole company transaction or assets to different buyers?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [19]

--------------------------------------------------------------------------------

There is no differentiation with respect to the strategic alternatives being pursued.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Okay. And then in that agreement just a lot of moving parts still haven't gotten through the whole thing, but can you clarify the base management fee waivers going forward if a qualifying event occurs or the caps you announced last year recouped? Or are they waived going forward?

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [21]

--------------------------------------------------------------------------------

You'll see in the agreement, then you'll recall that the manager agreed to waive a portion of the base management fee as part of the disposition agreement. The manager has undertaken not to reverse that waiver during the period of the agreement.

--------------------------------------------------------------------------------

Torrey Joseph Schultz, RBC Capital Markets, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Okay. And just in the interim here, do you -- how much -- at IMTT, as you operate the business, how much capital do you expect to deploy into IMTT next year for growth projects?

--------------------------------------------------------------------------------

Liam Stewart, Macquarie Infrastructure Corporation - CFO [23]

--------------------------------------------------------------------------------

Yes. Rob, I'm going to give you the sort of segment-by-segment breakdown, TJ. So guidance we have revised down this year to be sort of $200 million to $220 million and that largely reflects the sort of projects at IMTT, which will fall over into 2020 as well. And then we have today roughly $150 million of growth capital committed across all of the MIC verticals for next year and consistent with historical norm, with a large proportion of that is at IMTT.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And I'm not showing any further questions at this time. I would like to turn the conference call back over to Mr. Christopher Frost for closing remarks.

--------------------------------------------------------------------------------

Christopher Timothy Frost, Macquarie Infrastructure Corporation - CEO & Director [25]

--------------------------------------------------------------------------------

Thank you for participating in our conference call today. We remain focused on continuing to execute on our strategic priorities and will again be on the road meeting with investors and analysts in the weeks ahead. We look forward to speaking with many of you during that time. With that, have a great day.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect. Good day.