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

At this time, I would like to welcome everyone to the AQZ FY '26 Results Conference Call. [Operator Instructions] I would now like to turn the call over to the Chairman, James Jackson. You may begin.

Thank you, and good morning, everyone, and thank you for joining Alliance Aviation's FY '26 Full Year Results and Equity Raising Presentation. I'm James Jackson, the Chair of Alliance, and I'm joined here today by our Managing Director and CEO, Mr. Stewart Tully; and our Interim Chief Financial Officer, Mr. Simon Vertullo. Now the agenda for today, I'll start by taking you through an overview of the year. Then I'll hand over to Simon to cover the FY '26 financial performance in more detail. Stewart will then provide more detail on the strategic reset that is underway and the action we are taking to position Alliance for improved performance. I'll then take you through the balance sheet initiatives we have announced today, including a $40 million fully underwritten equity capital raising before providing an update on our strategy and the outlook for FY '27. Following that, we will then open the call for questions. So starting off on Slide 7. Alliance delivered an underlying profit before tax of $38.2 million for FY '26 within our revised underlying guidance range. To improve the company's performance and position Alliance for long-term sustainability, we have taken a series of decisive decisions and actions and an end-to-end review of the business, resetting key commercial arrangements, sharpening our focus on FIFO and implementing a more disciplined focus on costs and capital allocation to position Alliance for ongoing success. Our core contracted FIFO operations continue to perform well. This is the foundation of Alliance's business, supported by long-term customer relationships, operational capability and ongoing demand from the Australian resource sector. Importantly, improved cost control, stronger charter performance and early benefits from the strategic reset and performance improvement programs did improve performance in the second half of this year with underlying PBT, profit before tax, increasing by 61% from first half to second half. Now Slide 8. Turning to the headline numbers for FY '26. The underlying revenue, $712.6 million, underlying EBITDA, $177.5 million, underlying PBT, $38.2 million, underlying NPAT was $26.8 million. Operating cash flow before aircraft purchases and AerCap payments was $17.7 million. Revenue and flight hours were lower than FY '25, reflecting the planned end of aviation trading activity and the reduced wet lease flying under the revised Qantas arrangement as flagged. Core FIFO activity remained resilient through the year. Statutory PBT was a loss of $129.9 million and statutory NPAT was a loss of $90.9 million, mainly reflecting the noncash impairment and asset write-downs on the Fokker aircraft fleet. Our net debt increased to $459.8 million at 30 June 2026, reflecting lower cash generation, elevated maintenance expenditure, ongoing fleet investment, including the final stage of the AerCap fleet expansion program. Alliance remains compliant with its banking covenants. The fleet of 80 aircraft at year-end include 45 Embraer E190s and 35 Fokker aircraft. During the year, we continued to simplify and optimize the fleet as part of our fleet renewal strategy, which I will cover shortly. Slide 9, Strengthen Alliance Aviation. FY '26 was a year of decisive action across both operations and the balance sheet. On the operational side, we have reset the economics of our largest wet lease contract. We've commenced a business-wide efficiency program. We have progressed our fleet transition and we have strengthened the leadership team with the appointment of Mr. Steven Greenway as incoming CEO. At the same time, we've taken steps to strengthen the balance sheet. Today's fully underwritten equity capital raising, together with amended debt facilities and a planned asset sale program provides a clear pathway to reduced leverage and improved financial flexibility. Importantly, these initiatives are not stand-alone actions. Together, they support a deleveraging profile, targeting approximately 2.1x net debt to underlying EBITDA by June 30, 2027, while continuing to position Alliance to improve our profitability, our cash generation capability and shareholder returns. Slide 10. While we are navigating a challenging period for the company, it's important to consider Alliance's important role in the Australian aviation industry. We remain Australia's leading provider of contract and charter services, operating a fleet of 80 aircraft and delivering approximately 110,000 flight hours each year. More than 90% of our revenues are contracted, supported by long-term relationships with blue-chip customers across the resources sector, government and aviation. We operate in a market with high barriers to entry. We have a fully owned fleet, and we have a strong track record of safety and operational excellence. Thanks to our hard-working employees. And this includes an on-time performance of approximately 95%, which in the industry is a very high measure. The Board remains confident in the underlying strength of the operating business. The operational and balance sheet initiatives outlined today are designed to improve returns and better position Alliance to realize the value of these foundations. Now before I hand over to Simon to go through the FY '26 financials in more detail, I'll touch briefly on the outlook for FY '27. I will cover this in more detail later in the presentation, but it's important to state that we do expect the actions we have taken to result in improved earnings, cash generation and balance sheet strength in FY '27. Now I'll hand over to Simon Vertullo, our Interim Chief Financial Officer.

Thanks, James, and good morning, everyone. Turning on to the income statement on Page 13. I note that underlying revenue for the year was $712.6 million. Underlying EBITDA was $177.5 million and underlying profit before tax was $38.2 million. The main drivers of year-on-year performance change were the end of aviation trading activity, lower wet lease utilization, elevated maintenance expenditure and higher depreciation and financing costs tied to prior fleet investment. We saw improved earnings momentum in the second half with the benefits of the strategic turnaround initiatives beginning to show through. Contract revenue increased, repairs and maintenance costs fell by $4.9 million and overhead expenditure stabilized. There is still work ahead, but these results are early evidence of the strategic reset and the improvement to financial performance. Moving to the underlying EBITDA bridge on Page 14. This shows the movement in FY '26 underlying EBITDA compared to FY '25. The most significant drivers were the planned exit of aviation trading and higher repairs and maintenance expenditure, partly offset by growth in FIFO contract revenue. The bridge also shows the impact of increased fuel costs being fully offset by fuel recovery mechanisms in our FIFO and wet lease contracts. Turning to Slide 15. You can see how underlying profitability improved in the second half. This bridge compares H2 with H1 and shows how our improved performance initiatives began to translate into earnings in H2. The improvement was supported by higher contract revenue, lower repairs and maintenance expenditure and reduced employee costs, partly offset by lower wet lease revenue. Importantly, the underlying EBITDA margin also expanded across the half from 24% to 26%. The direction of travel is encouraging with the business delivering improved profitability in H2 despite lower wet lease hours. That reflects the early impact of restructuring, cost discipline and a more active approach to managing the cost base in line with revenue. Turning to the balance sheet on Page 16. Total assets reduced to $1.1 billion, mainly reflecting the Fokker fleet impairment and write-down of related inventory and assets. This flows through to net assets, which decreased to $373 million. Net tangible assets were approximately $2.32 per share. Assets held for sale relate to surplus and noncore aircraft assets identified under the fleet review program. Net debt increased to $459 million, reflecting lower cash generation and ongoing fleet investment. Alliance remains compliant with all banking covenants. The balance sheet position at 30 June was affected by the impairment and cash performance in FY '26. This impairment was noncash. James will provide more on the balance sheet initiatives shortly. Slide 17. Capital expenditure reduced materially in FY '26 with total capital expenditure decreasing 40% to $162 million. Existing fleet maintenance expenditure was $135.6 million, broadly similar to FY '25, while growth CapEx was $26.6 million, including 2 AerCap E190 aircraft and associated entry-into-service costs. Maintenance CapEx stayed elevated despite lower flying activity, reflecting the age profile of parts of the Fokker fleet, ongoing heavy maintenance requirements, inflation in maintenance and labor costs. Growth CapEx has fallen sharply as we have moderated the fleet expansion program. This will continue in FY '27 with fleet renewal CapEx expected to wind down as the AerCap transaction completes in H1. Slide 18, turning to cash generation. Operating cash flow before aircraft purchases and AerCap payments was $17.7 million for FY '26. Statutory operating cash flow was $17 million compared with $105 million in FY '25. Cash flow was affected by lower profitability, elevated maintenance expenditure, higher interest costs and fleet investment activity. Cash performance improved in H2, reflecting the early benefits from the strategic reset, including lower maintenance expenditure, better working capital management and reduced capital requirements. The cash flow bridge shows both sides of the story. FY '26 was a peak investment year for the business, but H2 showed improvement as CapEx and working capital requirements fell. With that, I'll hand over to Stewart to discuss various operational initiatives underway.

Thank you, Simon. We're on to Slide 20, wet lease update. A central part of the FY '26 reset was to renegotiate our largest wet lease arrangement with Qantas. As we've previously discussed, part of our wet lease portfolio had become commercially unsustainable. Cost inflation across labor, maintenance, logistics and compliance reduced profitability under the previous arrangement. The revised Qantas agreement addresses that directly. It raises prices from the 1st of July '26, adds a mechanism that escalates prices annually to better reflect future cost increases and delivers a staged reduction from 30 to 23 aircraft over FY '27. That staged reduction in committed aircraft does not simply mean less flying. It means better utilization of that fleet, lower capital intensity and more flexibility to reallocate aircraft to other customers and opportunities that generate the best returns. This is a commercial reset. It strengthens the economic sustainability of the wet lease arrangement, improves margins and cash generation and gives us more flexibility as we progress fleet renewal and refocus capital on our core FIFO business. At the same time, we continue to value the Qantas partnership. This revised arrangement is designed to put that relationship on a more sustainable footing for both parties. Moving on to Slide 21. The revised Qantas arrangement is one of a number of actions we have taken to improve the performance of the business. During FY '26, we started a group-wide improvement program focused on 3 priorities: improving capital allocation, improving free cash flow and improving sales and customer management. On capital allocation, we have revised our fleet plan and identified surplus and noncore assets for sale, including aircraft, hangars, engine cores and surplus parts inventory. The objective is to simplify the business, reduce capital intensity and direct capital to where it earns the right returns. On free cash flow, we have put a more disciplined engine procurement strategy in place, reduced maintenance expenditure, started an organizational staff review and tightened controls around operating costs. On sales and management, we are reviewing customer contracts against required return thresholds and have acted where arrangements fall short of our profitability and return targets. The Qantas contract renegotiation is the clearest example of that discipline in action. While important progress has been made, the job is not yet done. Our focus remains on executing further initiatives to strengthen the balance sheet and improve shareholder returns. Moving on to Slide 22 and cost optimization program. Turning to cost optimization. We have seen the impact of these actions in the second half with the turnaround moving from planning to execution. As the wet lease block hours fell in H2, we acted to align the cost base with lower flying activity. Block hours fell 14% in H2, labor costs fell 15.3% and repairs and maintenance fell 14.6%. There is more work to do, but we're beginning to see the cost base respond to lower flying activity. We have also introduced tender and contract arrangements across parts procurement, rotables, heavy maintenance programs and achieving cost reductions. Overhead growth has ceased with further cost-out initiatives underway. Looking into FY '27, as the number of aircraft committed under the revised Qantas arrangement progressively reduces, we're continuing to adjust our operating model and cost base to reflect future flying activity. This also includes changes to our workforce with employee consultation underway. These decisions are never easy, and I want to thank our people for their professionalism, commitment and continued focus on our customers and safety during this period of change. In aggregate, these benefits are expected to result in $27 million of cost savings in FY '27 and an annualized cost reduction of $38 million from FY '28, supporting the long-term sustainability and profitability of the business. I'll now hand back to James to provide more detail on balance sheet initiatives we have announced today.

Thank you, Stewart. Now today, on Slide 24, we are undertaking a fully underwritten equity raising of $40 million. The raising comprises an institutional placement and a pro rata accelerated non-renounceable Entitlement Offer. The Entitlement Offer will provide eligible institutional and retail shareholders with the opportunity to participate at the offer price of $0.70 per new share. All new shares will rank equally with the existing Alliance shares. The proceeds from this capital raising will be used primarily to support working capital and to reduce debt. This provides an immediate improvement in the company's financial position and complements the other deleveraging initiatives that are already underway. The Board carefully considered the size and the structure of this raising. It is designed to provide a meaningful reduction in leverage immediately while preserving the company's capacity to deliver the strategic turnaround and complete the fleet transition. The offer is fully underwritten by Barrenjoey with the institutional component opening today and the Retail Entitlement Offer to follow in accordance with the timetable set out later in the presentation. All eligible directors intend to exercise their rights under the Retail Entitlement Offer and take up their rights. So we move on to Slide 25. This slide shows how the proceeds form part of the broader balance sheet plan, and the equity raising will generate approximately $40 million in gross proceeds. After the transaction costs, the allocation of working capital, the balance will be applied to debt repayment and enhanced liquidity. This delivers an immediate reduction in net debt on a pro forma basis. The raising is only the first step, and I must emphasize that, first step in our deleveraging program. We're also pursuing the sale of surplus and noncore assets, including surplus aircraft, 2 Brisbane hangars that are no longer fit for our use, engine cores and parts inventory. We are currently targeting proceeds from the sale of these assets of approximately $60 million to $75 million or more through this financial year. These proceeds will be additional to the equity raising and will be directed towards further strengthening liquidity and reducing leverage. Our liquidity plan, though, does not rely on every asset sale occurring at a particular point in time. However, successful execution of that asset sale will provide additional capacity to accelerate deleveraging. Taken together, the equity raising, asset sales and improved operating performance support our objective of reducing net debt to underlying EBITDA to approximately 2.1x by 30 June 2027. Moving on to the balance sheet on Slide 26. This slide illustrates the immediate effect of the raising on the balance sheet. At June 30, the reported net debt was $459.8 million. On a pro forma basis after applying the proceeds of the offer, pro forma net debt reduces to approximately $420 million. Available liquidity increases from $29.2 million to approximately $69.2 million before the transaction costs, providing greater headroom to manage normal working capital requirements, complete the remaining fleet transition commitments and operate the business through the turnaround. Pro forma net debt to underlying EBITDA reduces from 2.7x to 2.5x. This is an immediate improvement, as you would expect. But again, as you would also expect, we recognize further deleveraging is required. That further improvement is expected to come from 3 sources: stronger earnings from the revised wet lease economics and cost-out program, lower capital growth expenditure as the AerCap transactions complete, and proceeds from the asset sale program. Our objective is to establish a balance sheet that is appropriate for the earnings, cash flow profile of the business with sufficient flexibility to manage operational requirements without returning to the elevated investment levels experienced during the recent now completed fleet expansion. Moving on to Slide 27, debt facility overview. In parallel with the equity raising, we have worked constructively with our lenders to align the debt facilities with the company's business plan and deleveraging program. We have been able to amend terms with the ANZ, including the deferral of scheduled amortization and the extension of the relevant facility maturity to September 2027. This provides additional time for the operational initiatives, the asset sales and improved cash generation to translate into lower debt. Following the raising, the company will have a pro forma debt position of approximately $420 million and leverage of 2.5x net debt to underlying EBITDA. Our remaining debt maturities are spread across the ANZ facilities, Pricoa notes and the NAIF facility. The extension reduces near-term financing pressure and provides greater flexibility as we continue to work to execute the turnaround of the business. We remain focused on careful cash management, disciplined capital allocation and reducing leverage. The combination of the equity raising announced today, the revised facility arrangements, the planned asset sales and improving operational performance gives us a credible pathway to a more and required sustainable capital structure. Moving on to Slide 28, which is the equity raising timetable. This sets out the key dates for the raising. The institutional offer is expected to be complete first with the existing shares recommencing trading on 27 August. The Retail Entitlement Offer is scheduled to open on 2 September and close on 11 September with the new retail shares expected to commence trading on 21 September. Eligible retail shareholders should refer to the retail offer booklet for full details of the offer, including eligibility, key dates and instructions on how to participate. Taken together, these actions represent a significant strengthening of our balance sheet and establish a clear pathway to further deleveraging through FY '27, one of our significant objectives. Before we turn to strategy and outlook, I'd also like to address the announcement we made last week that Stewart Tully will step down as Managing Director and CEO at the end of October. On behalf of the Board, I'd like to acknowledge Stewart's contribution over more than 11 years as CEO at Alliance and the key role you've played in leading Alliance through a very challenging period and positioning the business for long-term success. We're also very thankful that Stewart has agreed to stay on to effect an orderly transition with Steven Greenway due to commence in the role of CEO as of 1 October 2026. And with Stewart at this point, staying on to help the transition through to the end of October and maybe longer. Stewart brings more than -- Steven brings more than 25 years of international aviation leadership, experience across Asia, Australia, the Middle East and North America, including senior roles at flyadeal, which is in the Middle East, WestJet in Canada, Scoot in obviously Singapore and Mango Aviation Partners. The Board believes Steven has the experience and capability to lead Alliance through its next phase of strategic execution. And I look forward to introducing Steven to you all at our FY '26 AGM. Alliance's strategic priorities remain unchanged: performance improvement, fleet transition, customer relationships, safety, reliability, cash generation and improved returns. Turning to Slide 31, strategy and outlook. As noted earlier, Alliance has a clearer strategic focus, improved commercial arrangements and an operational improvement program into FY '27. Our priorities for FY '27 are quite clear: improve profitability and free cash flow generation, execute the strategic turnaround, progress surplus asset sales, reduce leverage, strengthen the balance sheet, execute the fleet renewal strategy and improve the returns on our investment capital. We will also deliver a smooth transition of leadership for our people, customers and shareholders as Steven takes over from Stewart. We are guiding to underlying EBITDA between $175 million and $190 million for FY '27 and an underlying profit before tax of $55 million to $60 million for FY '27. That guidance reflects improved economics from the revised wet lease arrangements, expected benefits from the operational turnaround, cost reduction initiatives and continued investment in fleet renewal and operational capability with much lower growth capital requirements from the second half. It also reflects timing and execution risk on surplus asset sales and is subject to the normal operating assumptions and risks, including aircraft utilization, customer demand, fuel costs, labor availability and economic conditions. Alliance expects improved earnings, cash generation and balance sheet strength in FY '27. The actions taken over the past 6 months, including the wet lease reset, strategic improvement program, balance sheet initiatives, including today and leadership succession plan have established a much stronger foundation for the business going forward. While there still remains significant work ahead, Alliance is now better positioned to improve returns, target a reduced leverage, as mentioned earlier, of 2.1x net debt to underlying EBITDA by the end of FY '27 and deliver sustainable long-term value for our shareholders. Thanks to Alliance's people across Australia for their continued focus on providing industry-leading safety and service to our customers and to our shareholders for your continued support. I will now open the line to take questions, and thank you.

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

First question, just on the asset sales. You've mentioned aircraft -- some aircraft hangers and parts. Can you just give us maybe a sense of the quantum of aircraft that you'd be looking to sell as part of that portfolio? And then just a related issue is just on the timing, that $60 million to $75 million, presumably it's going to be second half weighted. Is that a fair assumption?

Listen, Phil, it's both -- it's actually -- well, I don't know about percentages, but a certain amount is weighted to the first half, Phil. So you will see the assets held on the balance sheet. That comprises 2 Embraer aircraft, okay, and some aircraft hangars and the ROU assets associated with that, okay? Then you probably -- then the balance is probably around about that 50%, but they're not categorized as assets held for sale. And they're progressive, probably actually running from around about September to the end of the year. They comprise Fokker aircraft coming to the end of their life, engine cores, which have no more cycles and as well some parts that are no longer required in the business.

Okay. So just thinking about the profile of the net debt over the balance of the year, you're starting the year pro forma at $420 million. You've got that $33 million payment to AerCap in the first half. And if we sort of assume asset sales were spread 50-50, we'd basically be looking at a net debt number of a similar level come 31 December. Does that sound broadly right? And then you see that improvement in second half, obviously, with no AerCap payment?

Yes. Okay. I see what you're saying. So yes, if you swap the capital raise for the settlement of the AerCap, they roughly offset. Listen, we're hoping to progress those asset sales as quickly as possible.

Just on the topic of the Qantas wet leasing arrangement, you guys have reduced the arrangement on 7 aircraft there. Can you just walk us through sort of the timing of that step down from the 30 aircraft to 23?

Thanks, Phil. The step down has already commenced. So we've taken 1 aircraft back from Qantas already and the second one soon. And then 5 additional E190s will step down between February and June next year. So by the 1st of July next year, we'll be at 23 aircraft or 23 E190s for Qantas.

Okay. And then in terms of those 7 aircraft, you've highlighted that there's 2 E190s for sale currently. Obviously, there's a balance of 5. Can you just talk to your intentions there? And I'm sort of looking at the comment on one of your slides where you're talking about growth initiatives. Just wondering about those 5 aircraft, some of them will be presumably going towards Fokker F100 replacement. Is that a fair assumption? And then is there any that are sort of left over for sort of perhaps some growth opportunities or new business opportunities in either the contract or charter segments?

Phil, I think that one of the benefits of doing the agreement the way we have agreed with Qantas was that there's optionality there for us. And this will be driven by, obviously, economics and return on capital going forward. So if we can redeploy those aircraft, then clearly, there's a growth opportunity if we have the contracts to apply them to. If not, in the short term, they could be seen as surplus, and we may seek to monetize them. There's also the opportunity to use them from a parts perspective and the engines. So we believe that we haven't landed exactly because we don't actually have those contracts forward. But I can say that we are seeing new business opportunities at the moment. And so we've now got, let's say, a foresight into seeing, well, we will have some aircraft next year, maybe we can actually move to service those potentially new customers as well.

Okay. I've got some questions on just the net debt-to-EBITDA ratios that you've got on Slide 26. So I might take that offline with Simon after the call.

Your next question comes from the line of James Ferrier with Canaccord Genuity.

On Slide 18, what was the $31.9 million of that was spent on aircraft and engine deposits, I think is a reference. What did that relate to?

That is the -- on the -- with respect to the AerCap transaction, James.

Okay. This is the 6 remaining aircraft to -- so if we take that $31.9 million added to the $33 million you owe in first half '27, that's essentially the full amount owing for the 6 remaining aircraft.

Yes. And then that deal was recut James. So basically, over the second 6 months, we received roughly 1 aircraft per month and then the deal closes out at December.

Yes. Understood. Okay. Makes sense. So just in terms of the fleet movements then, and Phil sort of covered the asset sales components and how you're thinking there. When you look at FY '27 guidance, -- and I guess your starting point is you had 80 aircraft in the fleet at the end of FY '26. What assumptions are you making on fleet size and existing fleet CapEx and D&A for FY '27 within that guidance?

I'll go just on the BAU CapEx, it's $137 million. I'll hand over to Stewart on the fleet.

On the fleet side, you'll see in the presentation, the fleet of 80 there, but there's a footnote that during FY '26, we have put into storage 5 Fokker F100s and we expect to do a few more during FY '27. So that will bring the operating fleet down to around 72. And that's been part of our plan to refine the Fokker 100 fleet -- and the -- with the 7 aircraft coming back from Qantas, that doesn't reduce our fleet. It just redeploys them more, as James talked about, gives us optionality in that fleet.

Yes. And from that 72 then, Stewart, you would add on the 6 Embraers that will come in from AerCap?

No. No, that's not the case. So we can talk about the AerCap.

Yes. They're mostly parted out, James.

Parted out for sale or part of that for use in maintenance?

Yes. Parted out for use with surplus potentially going into sale as well. They're old hulls with good engines. The full part out does give us surplus major components. So we'll consider the sale of those as well.

And then the last part of that question was what's the D&A expense that you have embedded within the '27 guidance?