Macquarie Infrastructure Corp (MIC) Q1 2021 Earnings Call Transcript

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Macquarie Infrastructure Corp (MIC)
Q1 2021 Earnings Call
May 4, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Macquarie Infrastructure Corporation's First Quarter 2021 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] Please note this conference is being recorded.

I will now turn the conference over to Jay Davis, Head of Investor Relations. Please go ahead.

Jay Davis -- Head of Investor Relations

Thank you, and welcome to Macquarie Infrastructure Corporation's earnings conference call this covering the first quarter of 2021. 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 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, 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 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 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 our 10-Q and in the tables attached to our earnings press release. Also participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Nick O'Neil.

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. We intend to provide you with an update on our results for the first quarter, including our revised guidance the sales processes involving our remaining businesses and our two upcoming shareholder meetings. I will begin with the proposal that will be put before our shareholders later this week and next. Our Special Meeting of Shareholders will take place at 3:00 p.m. Eastern Time on Thursday, May 6. At the Special Meeting, shareholders will be asked to approve a plan of merger as part of a reorganization of the company. Under the plan, MIC would become a wholly owned subsidiary of a newly formed entity, Macquarie Infrastructure Holdings LLC or MIH.

The reorganization facilitates the sale of our remaining businesses in any order without altering the tax efficiency of such sales, as MIH would be treated as a partnership for federal income tax purposes. The approval of the plan authorizes MIC's Board of Directors to determine if and when reorganizing the company would be in the best interest of shareholders. Consistent with our previous statements, we expect to implement the reorganization only after we've entered into an agreement to sell Atlantic Aviation and just prior to the closing of such sale. We currently expect to sell Atlantic Aviation this year. The regulatory approval process associated with MIC Hawaii makes it more likely that a sale of that segment occurs in 2022. Please refer to our proxy statement for a complete description of the matters to be considered at the special meeting of shareholders. We would welcome the opportunity to discuss the proposal with any shareholders who may have questions about the matter.

Our Annual General Meeting of Shareholders will commence at 10:00 A.M. Eastern Time on Wednesday, May 12. At that meeting shareholders will be asked to approve the reelection of our directors to one year terms, to ratify the appointment of KPMG as our auditors for 2021 and to approve on an advisory basis the compensation of our seconded executives. Both the special meeting and the annual meeting will be conducted virtually and instructions on how to participate were delivered to shareholders of record with the relevant proxy statements. As noted in our earnings press release published this morning, the sale processes involving our remaining businesses are progressing. Given this and not wanting to prejudice MIC's position with potential buyers, we will limit our remarks during this call to the following points. We are pleased with the level of interest from potential buyers, particularly in our Atlantic Aviation business and remain confident in our ability to unlock value for shareholders through separate sales of Atlantic Aviation and MIC Hawaii.

In connection with the sale processes, we are winding down operations of our shared services center MIC Global Services. Functions other than those supporting the public company are being allocated to or reconstituted in our remaining businesses. Following the sale of Atlantic Aviation, we expect to distribute the net proceeds to unitholders of MIH by way of a special distribution. The subsequent sale of MIC Hawaii would be achieved through a sale of the units of MIH and unitholders would receive a per unit consideration from the purchaser. I will not speculate on any outcomes with respect to value or the timing of any sale announcement.

Regarding our ongoing businesses. We continue to focus on ensuring the health and safety of our employees and customers. The protocols we've had in place for the past year to protect against COVID-19 continue to work effectively. The operations of both of our businesses are being carried out without interruption. MIC'S financial and operational results for the first quarter reflect an acceleration of the COVID-19 vaccine program in the US yielding one an increase in general aviation flight activity that exceeded our expectations and two a substantial uptick in the number of visitor arrivals to Hawaii that contributed to an increase in gas consumption. Together with lower expenses at the holding company level, MIC generated approximately $77 million of adjusted EBITDA excluding non-cash items for the quarter up 2% on the first quarter in 2020.

The fundamental drivers of our operating businesses improved during the first quarter. Based on data reported by the FAA, flight activity nationwide was up 8% in the first quarter versus the first quarter in 2020 and just 3% below the level recorded in 2019. Activity levels for the month of March exceeded those in March of 2019 by 7%. Flight activity at the airports on which Atlantic Aviation operates was up 5% for the quarter versus 2020 and was just 6% below the level recorded in 2019. Activity at those airports in the month of March was up 3% versus March of 2019. The difference in the overall industry results and those of our business remains Atlantic Aviation's exposure to business-oriented locations that have yet to see a full recovery in activity. As has been the case for much of the past year, leisure-oriented locations in the Intermountain West and Florida regions continue to lead the recovery. However, we also saw an increase in activity of business-oriented locations, including New York and Chicago in March.

On top of the increase in flight activity Atlantic Aviation continued to benefit from steady growth in tenant hanger rent year-over-year. Activity levels across the portfolio increased through the first half of April although slowed as expected in the second half of the month reflecting typical seasonal factors. The driver of the performance improvement at MIC Hawaii was increasing visitor arrivals to Hawaii. This resulted in an increase in consumption of gas by commercial and industrial customers, including hotels, laundries and restaurants. The number of visitors increased to 33% of 2019 levels in the first quarter, up sequentially from 19% in the fourth quarter of 2020. Preliminary indications are that the number of visitors to Hawaii in April was consistent with what we saw in March.

At this point, I will turn the call over to Nick for some additional color on our operating performance, capital management strategies and revised guidance for 2021.

Nick O'Neil -- Chief Financial Officer

Thank you, Chris, and good morning, everyone. I'll begin by commenting on some of the capital management initiatives we completed during the quarter. In February, we launched a tender offer for any and all of our convertible notes, of which there were approximately $403 million outstanding. The offer closed on March 16 with approximately $359 million of notes being tendered at par plus accrued interest. Since then, we have purchased an additional $6 million of notes in the open market also at par. In total, we have repurchased 91% of the notes outstanding and we expect to continue to acquire notes in the open market. In any case, we will continue to reserve cash equal to the balance of the notes outstanding.

In April, we fully repaid the $100 million of senior secured notes outstanding at MIC Hawaii and amended the remaining debt to remove the change of control risk that could have otherwise affected the reorganization of MIC and the subsequent sale of MIH and MIC Hawaii. The benefits of the repayment and amendment that they one facilitate the timely reorganization of MIC and the sale of Atlantic Aviation prior to the sale of MIC Hawaii and two leave MIC Hawaii with a prudent level of leverage on a stand-alone basis as the business recovers. The remaining debt outstanding at our MIC Hawaii businesses totals $94 million and consists of two term loans with a weighted average remaining maturity of approximately 2.3 years. We had approximately $290 million of unrestricted cash available in our consolidated balance sheet at the end of April or approximately $250 million after reserving for the convertible notes that remain outstanding. We believe this amount of cash results in a reasonable net leverage position, and is an appropriate level of liquidity given the current and expected performance of our businesses.

Turning to our financial performance for the quarter. Gross margin at Atlantic Aviation is still being affected by the mix of activity across the portfolio including smaller planes, shorter trips and leisure-oriented travel. As a result, gross margin was down 2% versus the prior comparable quarter. However, the team at Atlantic Aviation continued to manage expenses effectively. Atlantic Aviation generated adjusted EBITDA of just over $67 million for the quarter, up 2% over the first quarter in 2020. The free cash flow of over $50 million produced by Atlantic Aviation, a $10 million increase year-over-year, reflects lower interest expense, cash taxes and maintenance capital expenditures. Importantly the strong cash generation positions the business well with respect to funding its growth agenda for the year.

MIC Hawaii generated adjusted EBITDA of slightly under $14 million in the first quarter, down 11% versus the first quarter last year. The result reflects a decrease in the amount of gas sold, partially offset by lower selling, general and administrative expenses. The free cash flow produced by MIC Hawaii of $9 million was approximately $1 million higher than in the first quarter of 2020. As with Atlantic Aviation it reflects lower maintenance capital expenditures, cash taxes and interest though partially offset by the reduction in EBITDA.

On the back of the performance of our businesses in the first quarter, we raised our EBITDA guidance for 2021. We now expect Atlantic Aviation to generate between $245 million and $260 million of adjusted EBITDA for the year. The increase is inclusive of any expenses allocated to the business as a result of the wind down of our shared services center. Based on demand during the first quarter, we believe that the ongoing rollout of effective COVID-19 vaccines will continue to boost activity at leisure-oriented locations through the summer. Consistent with our prior guidance, we assume the bulk of the recovery at business-oriented locations as well as international and event-driven travel will occur during the second half of the year. We continue to expect the business to return to 2019 levels, including patterns of activity by the end of 2021. Factors that could affect the outcome to the upside include an acceleration in the reopening of the economy or sustained leisure demand above historic levels through the remainder of 2021.

The current guidance does not assume a spreading of COVID-19 variants resistant to the current therapies or resurgence of COVID-19 generally. The better-than-expected number of visitors to Hawaii during the first quarter supported an upward revision in the adjusted EBITDA guidance for MIC Hawaii to between $35 million and $45 million in 2021. Assumed volume-driven increases in revenue are expected to be partially offset by higher propane costs and higher selling general and administrative expenses. We expect the costs recorded in our Corporate and Other segment to be lower than previously estimated due to the wind down of our shared services center. Segment adjusted EBITDA is now expected to be a loss of approximately $15 million for the year, down from a $20 million loss previously.

At this point, I will hand the call back over to Chris for a few closing comments.

Christopher Frost -- Chief Executive Officer

Thank you, Nick. Our highest priority remains unlocking value for shareholders through the sales of both Atlantic Aviation and MIC Hawaii. The processes related to the sales are progressing and we are confident in our ability to sell Atlantic Aviation in 2021. If approved by shareholders at our special meeting on Thursday of this week, the flexibility to reorganize MIC will allow us to complete the sale of Atlantic Aviation prior to a sale of MIC Hawaii without altering the tax efficiency of the sales. We believe the additional flexibility provides a real benefit to shareholders and your Board of Directors unanimously recommends a vote in favor of the proposal. If you have not yet voted please do so.

With the anticipated sales of our operating businesses, we are moving to unwind our shared services function. Our operating businesses are performing well, increases in general aviation flight activity and in the number of visitors to Hawaii led to better-than-anticipated financial performance in the first quarter. On the strength of that performance, we have raised our consolidated earnings guidance for 2021 to a range of between $265 million and $290 million.

Thank you, again, for your participation in our call this morning. I will now ask our operator to open the phone lines for your questions.

Questions and Answers:

Operator

Thank you, sir. At this time, we will be conducting question-and-answer session. [Operator Instructions] Our first question today is from Tristan Richardson of Truist Securities. Please proceed with your question.

Tristan Richardson -- Truist Securities -- Analyst

Good morning, guys.

Christopher Frost -- Chief Executive Officer

Good morning, Tristan.

Tristan Richardson -- Truist Securities -- Analyst

I really appreciate all the updates. Thanks for all the comments, particularly on the big step forward on strategic alternatives. Just a quick one on activity levels, you noted, the guidance assumes sort of a return to activity levels reached in 2019 by year-end 2021. I guess, since you noted strong activity in March and April versus 2019 should we think of that by year-end 2021 assumption, as a sort of a comfortable outlook that would get you toward the lower end, or since you're already sort of seeing activity levels in March and April look toward that 2019 should we think of-if the rest of the year goes as well as April and March has that there is potential upside to that comment?

Nick O'Neil -- Chief Financial Officer

Yes. Thanks for the question, Tristan. I think in terms of guidance, what we're assuming is the recovery to 2019 flight activity levels by the end of the year. And importantly, also the patterns of demand that we've seen historically, and what I mean by that is really geographic mix and purpose of travel. And so as part of that, we are assuming that, there's a transition from what we're seeing at the moment which is sort of leisure-oriented travel toward those sort of historic patterns of demand, which obviously include a recovery in business oriented or business-focused travel, return of events and the return of international travel. So as part of that, we are sort of expecting a transition.

I think the other point to note is that and there's obviously part of the step-up in guidance is that that leisure-oriented demand as we've pointed out has been -- has exceeded our expectations thus far for the year. There's obviously a lot of discussion at the moment regarding pent-up demand for a lot of different things coming out of the pandemic. And so we may see a continuation of that leisure-oriented demand through the summer, which could be -- could give rise to upside relative to the call it the midpoint of guidance.

Tristan Richardson -- Truist Securities -- Analyst

That's helpful. And just a follow-up. I mean clearly without discussing value directly you just -- you noted that you're pleased with the level of bids you're seeing. Can you talk about expectations as we think about your business should we see -- are there any major differences between your business and some of your peers out there where there is a clear and direct marker such that expectations versus that marker would be meaningfully different?

Christopher Frost -- Chief Executive Officer

Tristan, I think you are asking us to speculate a little on the value of Atlantic, which I won't do. But what I have said is that we are pleased with the level of interest and I think that people would recognize that Atlantic is really a market-leading FBO network and is very well placed. We obviously have a great geographical and customer mix. And I think that has been evident through the rapid and sustained recovery that we've seen. It's got great exposure to the top US general aviation markets. I would also argue that it's exceptionally well placed to play a leadership role in the consolidation of the FBO sector, particularly after a change of control in the number one and the number two players. And I think it also has a leadership team that has a significant track record in terms of acquisitions and M&A. So as I sort of said, I'm happy to restate what I said on my third quarter earnings call, but I believe out of the three operating businesses, Atlantic represents the most valuable. We are pleased with the level of interest that we have in Atlantic. We are currently under process. But it would be inappropriate to speculate as to what a sale value would be at this stage.

Tristan Richardson -- Truist Securities -- Analyst

Appreciate it, Chris. And then just one last one for me. You talk about the tentative plan would be proceeds would be distributed via a special distribution to unitholders. If the plan is to have a sale transacted upon in 2021, is it reasonable to expect that we could see a special distribution from MIC or MIH as early as 2021?

Christopher Frost -- Chief Executive Officer

Well, what I would sort of say to that is and consistent with previous remarks. Certainly, it's my objective and expectation that we will be able to close a transaction in 2021. I will certainly be driving toward that outcome. And without speaking for the Board of MIH, I see no reason why we wouldn't look to distribute the net proceeds on a similar basis to what we did with IMTT.

Tristan Richardson -- Truist Securities -- Analyst

That's great. Really helpful. Appreciate it. Thank you guys so much.

Christopher Frost -- Chief Executive Officer

Great. Thanks, Tristan.

Operator

The next question is from T.J. Schultz of RBC. Please proceed with your question.

Christopher Frost -- Chief Executive Officer

Hey. Good morning, T.J.

Nick O'Neil -- Chief Financial Officer

Good morning, T.J.

T.J. Schultz -- RBC Capital Markets -- Analyst

Hey. Good morning. I'm just going to stick on Atlantic. So as you work through this sales process is 2019 cash flow at least the starting point for the discussions, or how do you kind of navigate this process when there's still some changes in travel patterns and what may be smaller planes or smaller margins on the higher leisure travel kind of driving activity now? And I guess the unknown is still the return of these larger events business travel, international travel that would kind of lead to better margins?

Christopher Frost -- Chief Executive Officer

I think what I would sort of say is that the interested parties or potential buyers are going to take a long-term view with respect to the prospects and performance of Atlantic Aviation. And it's unlikely that they would be participating in a process where they did not have high conviction regarding the recovery in general aviation. And I think that the performance of Atlantic Aviation since the second half of last year, I think is ample evidence of the defensiveness and the strength of general aviation of an asset class. So I don't want to sort of speculate as to what a potential purchases business plan looks like. But I think in terms of the thesis that general aviation is going to recover. I think it is playing out when we look at the operational and financial performance of the business.

T.J. Schultz -- RBC Capital Markets -- Analyst

Okay, understood. And then, just it's unclear, the sale of Atlantic, is that tax free, or is there some tax leakage that we need to expect?

Nick O'Neil -- Chief Financial Officer

No.

Christopher Frost -- Chief Executive Officer

Sorry, Nick, you take it.

Nick O'Neil -- Chief Financial Officer

Yes. So there is no corporate capital gains tax on the sale of Atlantic assuming obviously that we have implemented the reorganization. Unitholders in MIH may be subject to capital gains tax. They'll obviously depend on their own circumstances. But key point or key objective of the reorganization is to mitigate the corporate capital gains tax as part of that process.

T.J. Schultz -- RBC Capital Markets -- Analyst

Okay, perfect. Understood. I'll just leave it there. Thank you.

Christopher Frost -- Chief Executive Officer

Great. Thanks, T.J.

Operator

The next question is from David McColl of Fort Washington Investment Advisors. Please proceed with your question.

David McColl -- Fort Washington Investment Advisors -- Analyst

Hey, good morning guys.

Christopher Frost -- Chief Executive Officer

Hi, David.

Nick O'Neil -- Chief Financial Officer

Good morning.

David McColl -- Fort Washington Investment Advisors -- Analyst

Glad to hear the positive update on momentum for Atlantic. Regarding Hawaii, I know there were a lot of difficulties last year associated with getting boots on the ground to do due diligence. So I'm curious, if that's hampered your view of potentially closing that transaction in 2021, if that's a material concern at this point? And has access to Hawaii improved for due diligence, assuming potential buyers aren't going down to check out the beach?

Christopher Frost -- Chief Executive Officer

David, thanks for the question. As I said in my prepared remarks, our expectation is that we would complete a sale of MIC Hawaii through a takeout of MIH in 2022. That timing reflects the fact that a sale of Hawaii Gas will require the PUC approval for the change of control. And consistent with my previous remarks, we anticipate that that process could take between six to 12 months or even longer. And I certainly don't want to speak on behalf of the PUC. And so that is what is conditioning, what I said in my previous remarks about 2022. What I also said is that we are confirming that we are currently in process with respect to the sale of MIC Hawaii through the sales structure of the takeout of MIH. And we need to see how that process plays out. But certainly, the state opening up post October 15 last year has been constructive for that.

David McColl -- Fort Washington Investment Advisors -- Analyst

Okay, perfect. So we could see the sale announcement in 2021 but transaction will close subject to regulators?

Christopher Frost -- Chief Executive Officer

Yes. Look, I won't sort of speculate on the timing. But certainly, our expectation is that we can close the deal in 2022.

David McColl -- Fort Washington Investment Advisors -- Analyst

Perfect. All right, thank you all.

Christopher Frost -- Chief Executive Officer

Thank you.

Operator

We have reached the end of the question-and-answer session. And I will now turn the call over to Christopher Frost for closing remarks.

Christopher Frost -- Chief Executive Officer

Thank you for participating in our conference call today. I hope you and your families remain safe and well. We look forward to engaging with you over the coming months and updating you on our progress at our next quarterly call or prior to that as circumstances warrant.

With that, I wish you good morning. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Jay Davis -- Head of Investor Relations

Christopher Frost -- Chief Executive Officer

Nick O'Neil -- Chief Financial Officer

Tristan Richardson -- Truist Securities -- Analyst

T.J. Schultz -- RBC Capital Markets -- Analyst

David McColl -- Fort Washington Investment Advisors -- Analyst

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