Alliance Aviation Services Limited (AQZ.XA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Alliance Aviation Services Limited FY '25 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Scott McMillan, Managing Director. Please go ahead.

Thanks, Rocco. Good morning, everyone, from a cold and very dismal and wet Sydney, really turned on the weather for us. Sitting with me in the boardroom here in Sydney is our newly anointed Joint Managing Director, which I'll explain shortly, Stewart Tully; and our Chief Financial Officer and Company Secretary, Andrew Evans. They'll be doing most of the talking. I'll talk to you a little bit about strategy, about our Aviation Services business and our fleet. But first, I'd just like to congratulate Stewart on his elevation to the Board. It's been something we've been working on now for quite a few months. And the Board finalized the appointment yesterday. So we now have a good succession plan in place. I'm not going anywhere anytime soon. So these guys are going to have to put up with me for a long time here. But the theory behind this is that Stewart, who has been running the business on a day-to-day basis since March of last year, will now have the full reins of the business. We have every confidence in his ability. He'd be on the Board of Directors, obviously. And my focus, as it has been sort of steering over the last probably 18 months is to really drive our Aviation Services business, and I'll talk to you a bit more about that during the course of the presentation. So what I'll do now is to hand over to Andrew Evans in the first instance, and he'll just go through the financial highlights. And as we go through -- you got any questions, just note them down, and we'll do our very best to answer those at the end of the presentation. So I hand over to you, Andrew.

Thanks, Scott. Good morning, everybody. Next slide, please. Thank you. Just the financial highlights there. I'm not going to run through all of them, but the key ones are our business is driven by flight hours. And for the fifth consecutive year, we had record flight hours, which drives our revenue and EBITDA, obviously, and they are records as well. Probably the key one -- 2 key highlights on this page is that we have returned to paying a dividend. The Board approved a fully franked dividend of $0.03. That's the first dividend since FY '20, I think, Scott. And also, very pleasingly, our net debt is down to $378.1 million. We were at $425.5 million at December '24 when we last presented. So seeing very good movement in our net debt position. That's the key highlights from a financial perspective. I'll hand to Stewart to walk us through the operational highlights. Next slide, please. Next slide. Thank you.

As Andrew mentioned there before, we've had a fifth consecutive year of record flight hours, which went up 8.7% to 113,621 hours. That was primarily driven from our wet lease hours, which hit 83,212 hours. And we introduced -- we completed the 30th aircraft for Qantas under that contract, which went into service in February. So we'll expect the full year effect of that in FY '26. We did have some challenges in 2025, which we've been clear about during the year. A number of weather events, particularly the cyclone in Queensland, which hit our operations heavily in the third quarter, a protected industrial action from engineers and a number of significant aircraft damage events, which hit those flight hours during the year. And regarding to staff, we've pretty much stabilized our staff numbers now as we come to our increase in our fleet nears completion. And we renewed all of our safety certificates, which we're very proud of. Next slide, please. Next slide.

Yes. Thanks, Stewart. As Stewart said, we're getting towards the end of the growth in our fleet. We -- at balance date, we had 10 undelivered E190s, being the last 10 from the AerCap deal we did 2 years ago. Since balance date, we've settled on 4 of those. One of those has already been sold, and that was part of the deal that we announced last year where we're selling 6 airframes to a company called EirTrade in Ireland and 12 engines to an engine leasing company in the United States called Beautech. So that transaction is now almost complete and settles financially this Friday. Of those remaining 9 aircraft that were undelivered at balance date, we intend to take 2 of those into our operating fleet during the course of this financial year. And the remainder will be unsold as part of our aviation services activity. We may retain some of the airframes for future use, but those aircraft are fitted with very, very valuable engines. And I think those of you that follow our company closely are well aware of the issue that's confronting many operators around the world with Pratt & Whitney engines. There's a very significant shortage of GE engines because the Pratt & Whitney powered aircraft are all grounded and there's a big demand for the GE engines give it to the Embraer E190. Many of the operators of 190s are retaining their aircraft for a couple of -- well, quite a few more years yet to run and they're desperate for engines. So that's going to be a good part of our business going forward, trading those engines. The -- that's on the trading side. On the operating side, we now have the full 30 aircraft into wet lease operations with Qantas. And the last of those 30 aircraft went into service in February. So FY '26 will be the first full year of 30 aircraft in service with Qantas. Again, some of you attended our Investor Day back in May. And at Brisbane Airport, you would have seen the 2 new -- new to us, we bought from Airbus in October last year. The hangar that contains our head office, which many of you have visited over the years. That is on the market still. We have 3 organizations keenly interested in buying that. But we are holding out at it. It's a very valuable property, and we're not in the business of sacrificing. So that will sell during the course of this current year. And the final point on that page, I think Andrew will talk to shortly. We did 2 fairly significant transactions in Aviation Services in the second half with the sale of our rotable inventory to a company called AVIAN. AVIAN are a very large supplier of spare parts and are the world's largest supplier of Embraer inventory. They even supply Embraer themselves based in Florida. And that inventory will remain in Brisbane and will be added to by a fairly significant influx of spare parts from the United States. That's important for us because it's taken the capital off our balance sheet, converted to cash. The significant inventory that we held in Brisbane now will improve our on-time performance and recovery from delays because all those spare parts will now be based on Brisbane Airport, and we won't be waiting for them to come down from Singapore or from our own stores. And then we also -- which I mentioned previously, the 6 aircraft that we sold to EirTrade obviously contained 12 engines. 10 of those have been delivered and paid for. And the last 2 will be, as I said earlier, will be delivered on Friday and paid for on Friday. So we've really got to a point now where we've got total clarity over what we want to do with our fleet. With the Fokker part of the fleet, those aircraft are still performing incredibly well and will remain in our fleet for many, many years to come. And the great advantage that we have, of course, is that we own all these aircraft, and we can deal with them in any way, shape or form, and we're not dealing with leasing companies. So with that, that's the end of our fleet, and I will hand to Andrew, who will go through our EBITDA waterfall.

Next slide, please. So yes, one of the key obviously to any business is how we convert our profit or EBITDA into operating cash. And this financial year, it's a fairly simple slide. We had our EBITDA of $207 million. We then paid our interest, obviously, of $30 million. And the inventory there, which is shown at $61.5 million is basically the replacement of the inventory that we used in our capital maintenance -- base maintenance and also our entry into service maintenance, which will be talked about in the coming slides. And then there's just a small timing difference on receipts and payments and accruals, which basically levels you back up to the operating cash and a very strong number of $105.6 million. So very, very simple. Now to talk about the debt position. So next slide, please. So we commenced the year by securing additional funding to support our growth over the FY '25 and FY '26 year. We did that in August last year by securing another $150 million through ANZ and Pricoa. Our financiers, ANZ and Pricoa and NAIF are very supportive of our business, and we're very happy to provide that additional funding, and it really sets us up for our future in doing that. Our total debt actually increased -- our net -- our total gross debt increased by $137 million, which really was used to fund the acquisition of the aircraft during the year, the purchase of the 2 hangars and also our entry into service costs. But pleasingly, our net debt-to-EBITDA is sitting at 1.8x at the end of the year. And we do see this coming down in FY '26 to probably something like 1.65 to 1.7. So trending in the right direction, and it really is showing that we are in a very strong position from a cash perspective. I've highlighted there the weighted average debt maturity. This includes not only when the debt matures, but also our mandatory repayments under some of the facilities that we have. And it shows that we have no significant repayments required for a couple of years yet. So we're in a very strong position from that perspective as well. Next slide. Thanks. I'll hand back to Stewart.

Just in regard to ESG, there's plenty of information on the next 3 slides. But I think for this purpose today, we'll take them as read. However, if there's any questions at the end of the presentation, we'd be happy to take them on these topics. If you could move to Slide 11, please, income statement.

Thanks, Stewart. I think I've covered the major highlights of our income statement in our opening remarks. As you can see that we had very strong revenue growth, not only across our flying revenue, but also through our aviation services trading. The highlights there, obviously, the aviation services, which Scott has talked about, where we sold 5 airframes in FY '25 and another one in early FY '26. We sold some excess engine cores, we sold the 10 engines to Beautech. And also, we are able to sell our Embraer inventory, as Scott mentioned, to monetize some of the value that we had in inventory there. Probably the #1 item here is depreciation has increased from $73 million to $92 million for the year, and that's really reflecting the number of operating aircraft as it went from 72 to 79. The aircraft mix, so we're flying more of the Embraers now than from a Fokker point of view and also the utilization of those aircraft. So that depreciation really reflects the increased activity. Obviously, in our finance costs have gone up as our debt went up, and that's pretty stable now and will start to come down as we pay down a little bit more debt. And also, we do get a little bit of a win with the reduction in interest rates as well. From a tax perspective, it's in line with profitability and obviously -- but we don't forecast any cash taxes to be payable until FY '27, which is pretty what the position that we've had for some time now. Next slide, please. From a balance sheet point of view, a very strong balance sheet with our net assets increasing by 14% year-on-year. And more pleasingly, our net tangible assets per share has gone up from $2.39 to $2.70, which shows that we're in a very strong position from that perspective. Key highlights on this page is that our inventory has significantly dropped not only due to the sale of the Embraer parts, but we also -- from an accounting perspective, we've taken the position to transfer some of our rotables Fokker aircraft into PP&E, which is probably where they belong. Our total assets mainly increased due to the acquisition of the aircraft, as we've discussed. The right-of-use assets is just the increase of around the leases for the additional hangars that we have at Brisbane Airport now. Borrowings have obviously increased to fund the growth of the capital expenditure. As I said, it went up $137.4 million for the year. But again, pleasingly, our net debt dropped to $378.1 million from its peak of $425 million at the end of December. Next slide, please. From a cash flow perspective, as I said, our operating cash is very strong, and I've given you the reconciliation there. But pleasingly, our closing cash was up $65 million from June '24, mainly driven by the aviation service activity at the end of FY '25. Our payments for property, plant and equipment, as it's outlined there, is all around the expansion of our fleet and the hangar. And then the proceeds and repayments of borrowings is that net increase of $137 million to fund that growth. Next slide, please. Capital expenditure. I think we've touched on this already about the payments for our CapEx for the year. Probably the one item I need to point out in the forecast is the number around our engines where we've got $59.8 million forecast for the next year. We're just taking the opportunity to increase the engine capacities on our Embraers as part of the aviation services trading and part of the selling of the additional aircraft, we'll take the opportunity to resize and get more cycles in for our engines going forward. So really, it's more growth CapEx rather than base maintenance. I'll hand it back to Stewart to talk about fleet. Slide 16, please.

Thank you, Andrew. On fleet, Scott touched on most of the topics on this fleet slide already. However, a couple of updates from the half year. We spoke about our transition of North Queensland. That's our Cairns and Townsville base from Fokkers to E190s. We have completed the Cairns transition, and we're currently in the transition of Townsville base which will be completed by October. And what that delivers us, it delivers us some great operational efficiency by way of pilots, cabin crew and engineering support. And we're currently redeploying those aircraft to a couple of places, both to Brisbane and the Perth to both help out with operational resilience for our on-time performance, take advantage of some of the new opportunities, particularly in ad hoc charters that we've spoken about over the last year that we haven't been able to deliver because of our capacity. And yes, with the Fokker fleet itself, as Scott said, we'd like to sweat those assets, keep them going, and there's no urgency to replace those fleets at all. And we'll do that at the right time that aviation services supplies aircraft a few at a time over the next few years. But we can take more questions on that at the end of the presentation. Next slide to Scott on strategy and outlook.

Thanks, Stewart. I think the overriding theme here is steady as she goes. As you all know, you've all been very patient shareholders. The Board has an absolute focus on settling all of the growth in getting the maximum efficiency out of the fleet, our assets and our staff and getting the highest cash conversion we can and rewarding shareholders with further dividends, and that was an important part of our Board deliberations over the last few months is to give shareholders an indication of where we're heading. The days of sort of 20% and 30% growth in the business are behind us. Our goal is to settle in, concentrate on efficiency and cash conversion. And I think in the last 6 months and the last 4 months, particularly, that's shown to be a successful start to our new strategy. So as I said earlier, we've got our full 30 aircraft in place now with Qantas. Our relationship with Virgin is strong also, and there's negotiations going on there about some extensions and expansions of the relationship. Up in Rockhampton, many of you have visited our facility up there. We've got another aircraft entering base maintenance just arrived from the United States on the weekend. The quality of work that's coming out of there is very high. We are, like anyone else in the industry and other industries, finding it more difficult to get qualified staff. And even if we could, the ability to house them in Rockhampton is very low. But we do have a very strong apprenticeship program there. We've got 40 people on the program coming through, and they're all local kid, and that process is working well. We will feed our own operation out of that apprenticeship program. And on sort of current trajectory, we hope to have 3 lines of base maintenance operating by the end of calendar '27, yes. That will -- it's a bit later than we anticipated. But the benefit to the company in a whole range of different ways is worth the way. So in terms of the strategy and outlook, the outlook solid/strong. A real focus on cash and shareholder rewards. And as Stewart said earlier, we're at the end of our hiring thing. So our training programs and all that sort of stuff have fallen back to what we steady state. And in terms of staff and staff turnover, it's actually reasonably settled now, and that's all working well. So from our perspective as management, we will be just really focusing on cost control, cost out, efficiency, fleet utilization and cash conversion. So I think that's the -- I think we go to the next page. Okay. Thank you. The first point there. Bernie Campbell has joined our Board in February with the retirement of our previous Chairman, Steve Padgett. It's important to note too that Steve has been retained by the business as an aviation adviser for at least the next 12 months. And we consult with them on a regular basis. There's a little bio there of Bernie. I won't read it to you, you can read it when you've got an opportunity. As I said in my opening remarks, I'm very pleased to have Stewart Tully join us on the Board and to become Joint Managing Director. Stewart has been with us for 10 years. He's been in the industry for 34 years, comes from a family that's been involved in the aviation industry for a very long time, and we couldn't have had a better candidate. It's also important to note that the Board has appointed a recruitment consultant to identify another director that has aviation skills to bring to the Board. And the final point there is the company has engaged a corporate adviser to assist the Board in a strategic review of the company. And that has already kicked off, kicked off in May, and we'll gather momentum once we have the financial year program. So we get into that in September, and we'll report on that at the AGM. So that's the Board update. I think with the appendices, we might just go quickly through that, and then we can go to the Q&A. So if we go to Page 20. Yes. So Page 20 is just our national footprint for our contract book. In terms of our contracts, we -- for those that have been following us for many years, no matter we have a very steady and very proud history of contract retention, and that map reflects that. One of our great strengths of the business is that we're not scared of geography. We are based all over the country. We are the preeminent provider of high services in the country. And we only have one significant contract renewal this financial year. And we do have some smaller ones. And in all of those, we will be seeking fairly significant increases to offset the additional labor costs that we've incurred. We're about halfway through that program now. It is always a very difficult discussion to have with customers about increasing their rates, but it's a necessary one. So when we look at what we're -- what the outlook is, we've taken into account all of the new costs. And the important thing from our perspective is that we have 11 EAs. We have only 4 of those yet to be concluded. Once they're done, we won't be involved in any negotiations for around 3 years. So will give our HR department an opportunity to be an HR department rather than an IR department. And again, will be part of our drive for efficiency and out of our staff as well as our team. There hasn't been any significant changes in that national footprint since we last reported to you. But very, very stable operation. And just to give you an example to some of the people that may not have been following us for a long time. One of the great strengths, as I said, is our geography. If you look at in the middle of the Northern Territories of Granites, which is the most isolated mine in the world, we fly to the Granites from Darwin, Perth, Alice Springs and Brisbane, and no one else can do that. That doesn't mean that we treat our customer out there in any other way other than a very, very good customer, great relationship. And just to give you an example, that mine is growing, and we're about to start some additional flying for them from Brisbane using E190s. So if we move to the next page, Page 21. Since we last reported, there's 2 new overseas routes that we're flying for Qantas, Port Vila in Vanuatu and Tontouta in Noumea. And that -- so there's those 5 international routes that we fly for Qantas with [indiscernible] being one of those. That operation, I said now is 30 aircraft strong. And of course, included on that map are the services that we operate for Virgin. We go to the next slide, please, Slide 22, which is our commodity exposure. We have previously presented this as a pie chart. Now the bar chart, I think presents better. And I think that's pretty much self-explanatory. So in the FIFO space, our biggest exposure is gold. And with the gold price the way it is, all of our gold customers are doing particularly well. But the one thing there that, again, has been one of our strengths is that we -- in the FIFO space, we only deal with large companies with large balance sheet and mining minerals that the world absolutely needs. So that gives us great stability in our contract book and gives us, I guess, protection against the fluctuations in various mineral prices. So that's the end of the presentation proper. So we move to question and answers.

[Operator Instructions] And your first question comes from Phil Chippindale at Ord Minnett.

First question, just on the active aircraft fleet. So 79 as of 30 June. You flagged 2 additional E190s coming to active service over the course of FY '26. What about on the F100 side? Are you still expecting to take 2 out of service this year?

Yes. I think we mentioned in the first half that we expect 2 F100s to come out of service this financial year. That remains the case. We're on track to retire those F100s and those E190s will effectively come in and replace those.

What's the -- when would you expect the E190s to come to active service?

We have one coming into service around November and the second one will come into service in Q4 FY '26.

It's important to note too, Phil, that in our sort of long-term planning on the fleet, we'd always anticipated just paving those aircraft out, absorbing the spare parts into our remaining operations. However, we're at a pretty advanced stage of a deal for a company in Europe to take those aircraft from us at what we think is a pretty reasonable price. So that's been a really good change in the fleet outlook as well.

Okay. Just pivoting to Slide 14, and Andrew mentioned earlier that $59.8 million on the engines that you're spending in '26. But can we just delve into that a little bit more detail? What work is being undertaken? How many engines does it impact? And I guess a follow-on question for that is, should we expect any of this to be recurring into FY '27?

No. Look, Phil, it's an -- we're just taking the opportunity as part of the trading of the aircraft that we're going to sell to increase the capacity of our engines, particularly in the E190 space. It's more growth spend rather than fleet spend. So it will be a one-off sort of impact. And we'll -- we've been saying for a while now that our business as usual CapEx going forward will sit in that $90 million to $100 million space. Multiple ways you can think about that in that we talked about $1 million to $1.2 million per aircraft in service. And if you look at your base maintenance at 5,000 hours for Fokkers and 7,500 hours for Embraers, and then said that you are paying down -- paying for all the cycles on your engines on a yearly basis, you come up to the $90 million to $95 million. So there's -- and then from a -- if you're doing a modeling from a terminal value sort of point of view, you're always willing to match your CapEx to your depreciation. So that's where that sort of $90 million to $100 million comes in.

Okay. Understood. Last question for me, and I'll jump back in the queue. Just on net debt at the May Investor Day, you had a target of $315 million to $360 million of net debt as of the end of FY '26. I see you haven't included that in the results presentation. Is that still your expectations or target for the end of the year? Or is there any change to that?

No, I think that's the range that we would expect. I think that we would probably require a little bit more aviation services trading to get to the lower end of that range. But I'd be comfortable to say that we'll probably hit that number.

And our next question today comes from Billy Boulton with Morgans.

Your second half this year was a bit weaker than -- a lot weaker, sorry, than your first half. I just was wondering if you could talk about the third quarter versus fourth quarter performance and also how the business has trended into the first quarter so far this year in FY '26?

Yes. Look, you're right. The third quarter was the weakest quarter that we had, Billy. Our flight hours were down considerably in that third quarter due to the aircraft damage, but also mainly the severe weather events being the floods in Queensland and also the cyclone that occurred in Southeast Queensland in the late part of February. So our hours from Q3 to Q4 went up about 7% and our revenue and EBITDA accordingly. So a stronger finish to the year, and we've had a good start for July. Our flight hours are up for July as well.

And Andrew, could we also get some idea about how you think about D&A and net interest next year?

So D&A will increase. Obviously, we've got more aircraft flying. And as I said, the mix of Embraer flying to Fokkers from an hours point of view makes that D&A increase. So I would see that going up in the range of somewhere between $100 million to $105 million. And the other one was interest. Look, I think that our interest will drop a little bit. We've still got the interest on the lease liabilities, obviously, but our interest will drop slightly as we paid down some debt. But we didn't have the full debt for the full year in FY '25, so I see that number somewhere between $28 million and $30 million in total for the year.

And sorry, just back on Phil's question about the fleet. Am I correct in that you've also got -- so you've got 2 E190s currently in entry into service. So you'll have 4 E190s in total joining the fleet next year?