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Macquarie Infrastructure Corp (NYSE:MIC)
Q1 2020 Earnings Call
May 5, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome -- welcome to the Macquarie Infrastructure Corporation First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [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 -- Managing Director, Investor Relations

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 the 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 non-public information. The presentation has been prepared solely for information purposes and is not as 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 -- Chief Executive Officer

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 four key priorities: first, protecting the health and safety of our employees and customers. Second, keeping our businesses operating safely and efficiently. Third, enhancing our liquidity in part through cost reductions. And four protecting the value of our operating businesses, which will enable us to proceed with the pursuit of strategic alternatives in a manner consistent with maximizing value for shareholders.

I will address the first three priorities before handing over to Liam, to discuss our financial results and the measures we have undertaken to address the current environment. I will then comment on our pursuit of strategic alternatives before opening the call up to your questions.

MIC's businesses are providers of essential services and important members of the communities in which they operate. To protect our employees and customers we have implemented remote working for those whose jobs can be conducted off-site and made changes in our field operations to enable our employees to do their work, while maintaining appropriate physical distance. And where physical distancing is not possible, we have increased the frequency of cleaning and disinfecting and the use of personal protective equipment.

Our businesses have remained opened and operational. Atlantic Aviation continues to support general aviation, as well as cargo and medical flights. Hawaii Gas is delivering gas to the residents of Hawaii and IMTT is storing and handling valuable liquid commodities. And I would like to take this opportunity to publicly thank our employees for their service during this extraordinary period. They have remained focused on delivering the essential services provided by our businesses. They have been selfless and focused on the safe and efficient execution of their responsibilities.

Regarding our third priority, we have taken decisive steps to increase our liquidity. First, we drew down on our MIC and Atlantic Aviation revolving credit facilities in order to increase our available cash balance. Second, we made the difficult, but prudent decision to suspend our quarterly cash dividend, which will result in our retaining substantial capital, should suspension remain in place through the balance of the year. Third, we repaid and simultaneously amended the Atlantic Aviation revolving credit facility. As a result, there is no leverage based maintenance covenant in the debt facility. This greatly reduces any default risk for Atlantic Aviation. And fourth, we move swiftly to meaningfully reduce costs.

I would also note that we do not expect to receive any material benefits from the CARES Act. As a result of these steps, even if the level of activity seen in April persist for the balance of the year. Based on our current and forecast financial resources, we believe that we will be able to fund our operations and contractual commitments without additional capital and without using the funds drawn on our holding company revolving credit facility.

Starting in mid-March the limitations on travel implemented by governments to curb the spread of COVID-19 have reduced demand for the products and services provided by, our Atlantic Aviation and MIC Hawaii businesses.

Atlantic Aviation's primary source of gross profit about 60% is fuel sales. Fuel sales are linked to flight activity and flight activity has declined by approximately 80% percent versus this time last year. Approximately 20% of Atlantic's gross margin is generated from hangar rental, income that is likely to persist even in the current circumstances. The remaining gross margin is the result of providing services associated with flight activity, services such as aircraft cleaning, de-icing or catering.

Although the performance of MIC Hawaii is broadly linked to tourism, and tourist visits to Hawaii have dropped to nearly 0, a sizable portion of its business is serving the everyday needs of Hawaii's residents. The business continues to meet the islands' need for safe, reliable gas products used in basic applications like cooking and hot water heating. This has resulted in aggregate decline in gas sales across the business of between 30% and 40%. Partially offsetting the downturns of Atlantic Aviation, and MIC Huwaii is the improved contribution from IMTT.

IMTT has benefited from increased demand for storage as a result of the global supply and demand imbalance in petroleum products and storage availability. Storage utilization is expected to increase to over 95% by mid-May and to average in the low-90s percent range for the full year. I know for the both of IMTT's large terminals are essentially fully leased. Storage rates achieved on new and renewing leases have been consistent with expectations, and some customer support forward contract renewal dates, thereby reducing IMTT's lease renewal risk over the balance of the year. Partially offsetting the increase in demand, have been reductions in ancillary services, such as throughput blending and heating. The timing and extent of any recovery from the impact of COVID-19 and the related travel restrictions is uncertain, although I think we can all agree that it is likely to be in fits and starts. But we can deliver on our preparedness and cost management initiatives in the short-term and remain confident in our ability to achieve our medium-term objective of unlocking value for shareholders.

At this point, I'll turn the call over to Liam, for details about financial performance during the first quarter.

Liam Stewart -- Chief Financial Officer

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 it continued throughout April at 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 cost of goods sold. These were almost exclusively the cost of jet fuel and all of that cost is variable. Atlantic Aviation also reported approximately $250 million of SG&A in 2019. The cost reduction initiatives implemented asset value totaled nearly $50 million on an annualized basis. These comprise primarily staff costs and items that can be deferred. Staff cost represent approximately half of the Atlantic's SG&A. In 2019, MIC Hawaii recorded approximately $165 million accounts. Approximately three-quarters of that was 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 nature of the MIC Hawaii business. Nonetheless, we continue to focus on ways we can be more efficient at each. Partially offsetting the savings from expected increase in COVID-19-related cost 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 Huwaii. 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 one-quarter of this amount is deployed through March. These are projects that will reinforce the infrastructure characteristics of our businesses, particularly IMTT. The approximately $350 million worth of projects under way 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 the 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 size of COVID-19. We have subsequently used $275 million of cash fully repay the Atlantic Aviation revolving credit facility as I'm 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 seperate production. 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 billion 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 continues for the remainder of the year.

With that, I'll turn the call back over to Chris.

Christopher Frost -- Chief Executive Officer

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 navigate in 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 appoint a 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 to 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 of that businesses, particularly of Atlantic. We think the outlook for IMTT is positive over the short-to-medium term given, we expect the market structure for the 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 sale 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 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Tristan Richardson from SunTrust. Your line is now open.

Tristan Richardson -- SunTrust Robinson Humphrey. -- Analyst

Hey, good morning, guys.

Christopher Frost -- Chief Executive Officer

Good morning, Tristan.

Tristan Richardson -- SunTrust Robinson Humphrey. -- Analyst

Appreciate -- I really appreciate all the commentary on -- 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 a, we think of it as three heavy and resid and gasoline and distillates, and then also the kind of other chemicals, vegetable, tropical etc. I mean maybe just if you could touch on sort of what you're seeing in the markets for each of those three categories?

Christopher Frost -- Chief Executive Officer

Yeah, 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 -- up to over 95% from mid-May. I think two 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 -- that was the tanks associated with the Shell refinery that we are able to get under contract, around a third of the business is with respect to heavy and residual oil and again, we were sort of seeing good demand, so that 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 -- SunTrust Robinson Humphrey. -- Analyst

Helpful. So have you guys seen any meaningful -- obviously, you've 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 -- Chief Executive Officer

Yeah, 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 -- able to do that. I think we are 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 seven weeks was really to -- 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 -- to lease as much capacity as we could and to maximize the term on those contracts. So we are pleased that we are able to actually lease that additional capacity and drives average contract term for over 12 months. So I think in terms of answering the question, yes, we would be open to repurpose -- repurposing storage. But I think the fundamental point there is that we would want to, we would want that to be contract back.

Tristan Richardson -- SunTrust Robinson Humphrey. -- Analyst

Appreciate it, Chris. And then just last one for me. You noted in your prepared comments, seeing some -- some signs of perhaps flight activity coming off of -- 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, very recent history?

Christopher Frost -- Chief Executive Officer

Yeah. Look I think what we've sort of seen over the last week 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 have seen enough of that. So 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 are clearly watching on a daily basis. But I think it's too early to -- to call it as a -- as a trend.

Tristan Richardson -- SunTrust Robinson Humphrey. -- Analyst

Thank you guys very much appreciate all the commentary.

Christopher Frost -- Chief Executive Officer

Thanks, Tristan.

Liam Stewart -- Chief Financial Officer

Thanks.

Operator

Thank you. And our next question comes from TJ Schultz from RBC Capital Markets. Your line is now open.

Christopher Frost -- Chief Executive Officer

Good morning, TJ.

TJ Schultz -- RBC Capital Markets. -- Analyst

Hey, how are you doing.

Christopher Frost -- Chief Executive Officer

Good morning.

TJ Schultz -- RBC Capital Markets. -- Analyst

Good morning. I just -- 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 like they goes away in a year?

Christopher Frost -- Chief Executive Officer

Look, I think what we've sort of said, I think it's -- it's difficult to predict how long this supply demand imbalance is going to last for, I think a lot of, a lot of people anticipate that it will be a medium-term phenomenon. 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 right. And with respect to contract tenor as things come up for renewal, because folks are clearly concerned about not being able to get storage. So I think as I've said, with Tristan our objective was clearly to actually drive utilization to maximize the term of the contracts that we were able to get. Not 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 rise at that time.

TJ Schultz -- RBC Capital Markets. -- Analyst

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 -- are you more focused on -- or is one of these more reasonable for us to assume? Thanks.

Christopher Frost -- Chief Executive Officer

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 -- to run a parallel process for as 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 -- that we are still committed to the sale of the company or each of the operating businesses, that our -- 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 moving 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 recovery setting in 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 the timing, that we'll do that and maximize value and ensure that we remain in control of the process in the time table.

TJ Schultz -- RBC Capital Markets. -- Analyst

Okay, thank you.

Christopher Frost -- Chief Executive Officer

All right, thanks TJ.

Operator

Thank you. And our next question comes from Thomas Shen from GoldenTree. Your line is now open.

Thomas Shen -- GoldenTree -- Analyst

Hi. Kind of the -- 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 -- Chief Financial Officer

Hi, Thomas. It's Liam. It's Liam, why don't I take that? I think the price cash burn is probably more one that's appropriate for a start-up rather than -- 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, only then the remaining 20% is by it's 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 all of it in the course of the last six weeks, 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.

Thomas Shen -- GoldenTree -- Analyst

Great, thank you.

Operator

Thank you. 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 -- Chief Executive Officer

Thank you for participating in our conference call today. We remain focused on driving growth in 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 in 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

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Jay Davis -- Managing Director, Investor Relations

Christopher Frost -- Chief Executive Officer

Liam Stewart -- Chief Financial Officer

Tristan Richardson -- SunTrust Robinson Humphrey. -- Analyst

TJ Schultz -- RBC Capital Markets. -- Analyst

Thomas Shen -- GoldenTree -- Analyst

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