Avation PLC (AVAP) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Avation PLC Financial Year 2021 Investor Update Conference Call. My name is Natalie, and I will be the operator for today's call. [Operator Instructions] I will now hand you over to Duncan Scott, Avation Group General Counsel. Please go ahead.

Great. Thank you, and good morning and good afternoon to everyone. Today 30th of September, Avation published its unaudited financial results for the financial year 2021. A copy of our earnings release is available on our website at www.avation.net. This conference call is being webcast and recorded, and the webcast will be available for replay on our website. Please note that certain statements in this conference call, including answers to your questions are forward-looking statements, including without limitation, statements regarding our future operations and performance, revenues, operating expenses, other income and expense items. These statements and any projection as to the company's future performance represent management's estimates of future results and speak only as of today, September 30th, 2021. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information on the factors and risks that may affect Avation's business included innovation's regulatory announcements from time-to-time, including its annual report and half-year results announcements. Avation assumes no obligation to update any forward-looking statements or information in the light of new information or future events. Unauthorized recording of this conference call is not permitted. I will now hand over to Executive Chairman, Jeff Chatfield.

Thank you, Duncan. Thank you for joining us for the report on the company for the 2021 financial year. Avation is a commercial passenger aircraft leasing company. The business has existed for 4 to 15 years. And for 14 of those 15 years of business has been profitable with high-growth and strong investor returns. COVID has created the most difficult year for the aircraft leasing, sector -- the aviation sector and our business. The financial results reflect the difficulties of the last year. The company has faced and resolved the number of threats, including significant -- disruption of the airline industry throughout the year. The failure of our biggest customer, Virgin Australia and the necessary extension of the company don't secure bonds from May 21 to October 26. We believe that the industry is now emerging from the period of COVID -- of the COVID-driven disruption. Avation strategies has been a concern of liquidity and cash flow, ensure survival and allow focus to be directed to the maintenance of the business, customers and leasing platform, which have been reserved as the impacts of the pandemic precede and air travel returns. The aircraft leasing distance is thrived in part, because the demand for popular aircraft has always outstrip supply, which has driven up lease rates and enable lessors to reposition aircraft with relative ease when an airline customer failed. This aircraft shortage dynamic broke down during COVID, which lessors vulnerable, but we are now seeing a return to the normal operating environment with an expectation of increased demand for aircraft. Presentations are here in 3 sections: the first provides an overview of the company. Second, provides some of the results. And finally, we discuss the strategy we've implemented to deal with COVID over the last 18 months before taking a look at the pathway forward, and then opening up the meeting for questions-and-answers. So Slide 1, a snapshot of Avation at June 30th '21. The year ended June 30th '21 has been the most challenging in the company's history. The COVID and pandemic persisted throughout the year, disrupting airlines, aircraft leasing and valuations. As at June 30 '21, the company had 44 aircraft in the fleet, serving 19 different customers in 15 countries. Avation's managers and leases regional, narrow-body and twin-aisle aircrafts. The fleets is split by 16%, 52% -- 3% by value, respectively, between twin-aisle narrow-body and turboprop. The aircraft fleet has a 4.8 weighted average age and a 6.4 weighted average remaining lease term. As at June 30th, fleet assets totaled $1.1 billion. Avation has $668 million in unearned contracted revenue from existing operating leases, and a further $50 million in finance lease receivables. The company has maintained a full complement of commercial, legal, financial and technical personnel to ensure as a skill set necessary manage the lessor platform successfully in the post COVID-19 recovery phase. The challenges resulting from pandemic created a significant workload, and I would like to thank Avation's employees for their commitment, focus and diligence during the period. The next slide displays our portfolio. Avation diversified fleet at June 30th was comprised of 44 aircraft with a focus on regional and narrow-body aircraft. It is these sectors that has seen the fastest return to service as we emerge from the pandemic. 84% of Avation's fleet is focused on regional and domestic travel, which has now recovered to 85% of 2019 pre-COVID levels. During the year, Avation rescheduled its ACR order book to reduce committed capital expenditure. Avation now holds orders for totally 2 aircrafts and purchase rights of 28 ATR 72-600 aircraft, representing a material source of potential growth for the company long-term. These represent a valuable asset as the purchase rights [ remind ] a visible pathway to grow. The next delivery date for new ATR aircraft is not until October 2022. Avation believes newer aircraft carry a lower risk of obsolescence and provide greater potential long-term cash flow to service debt through long-term leases. The next slide shows customers. Today, we have 19 customers in 15 countries. Avation's customers include 7 flag carriers, while flag carriers are not excluded from the impacts of COVID-19 associated travel restrictions, these airlines are more likely to receive government support, due to the national importance of the carrier. These airlines typically also service domestic routes as countries have moved beyond the peak of the pandemic domestic travelers recovered faster than international air travel. It is important to note Avation's geographical spread of customers and as the pandemic is in different stages around the world. Around 2/3 of Avation's customers by revenue are located in Asia, including airlines based in countries that had a less severe impact from the virus. We've also been fortunate in Europe, where our largest customer are airBaltic has been performing well and has received a government equity injection. As we've been able to conserve the majority of our customers' fleet, team, a business model, we believe Avation's business is largely intact. Let me hand the call to Rich Wolanski, who will provide more detail on the financial results and key ratios.

Thanks, Jeff. The next few slides in the presentation provide a summary of the financial results. Further detail is included in today's stock exchange announcement, which is also available on the Company's website. Until financial year 2021 summary. During the financial period, Avation generated total income of $120.1 million, down 12% year-on-year, with revenue of $117.7 million, down 13%. This is primarily driven by the failure of Virgin Australia, which resulted in some of the fleet being unutilized for a majority of the year. Operating loss totaled $62.7 million. This was impacted negatively and dominated by the prolonged impact of the pandemic, which has resulted in $87.4 million in impairment to the value of the fleet and $25.4 million for expected credit losses. And end of the pandemic appears to be in sight with the rollout of global vaccination program supporting a return to growth in passenger numbers. A return of air travel to pre-COVID levels may result in an increase in the value of aircraft that could reverse some of the impairments in future periods. This resulted in a total loss after tax of $84.9 million for the year. Fleet assets declined 13% to $1.1 billion, due to the impairment of the fleet, depreciation and the disposal of 4 aircraft during the period. At the onset of the pandemic, the company elected to post capital expenditure to preserve liquidity. The weighted average cost of total debt increased from 4.5% to 5.4%, due to the added interest [ coupon ] component resulting from the senior notes extension and an increased margin on the Company's warehouse facility in the second half of the year. The loss per share was $1.31 per share for the year. On to the next slide, which provides the analysis of Avation's debt. During the period Avation initiated a process to extend the date of maturity of a $342.6 million outstanding an Avation Capital S.A. Senior Notes from May 2021 to October 2026. The extension provides sufficient financial flexibility to support the continued development of the business. The extensions for more than 5 years, and the company retains the option to refinance and call the notes at any time. The extension of the maturity date and other revisions to the term and conditions of the notes has been accounted for as a substantial modification of the terms of a debt instrument in accordance with IFRS 9 -- under IFRS 9. If the modification to the terms of the debt instrument is substantial, the existing liabilities extinguished and a new liability is recognized at fair value. The fair value of the notes and the date of the extension based on the quoted open market price of the notes of $0.82 in the dollar was $281 million. Total fees and costs incurred in connection with the extension amounted to $11 million and includes $3.5 million for the fair value of the share warrants issued to the holders of the notes. The difference between the extinguished liability and the new liability, less fees and costs incurred has been recognized as a gain of $50.3 million in the statement of profit or loss. And we mentioned this, because that is the only way that we could account for that extension on the bond. Net indebtedness has declined by almost $114 million over the past year. There was an increase in the weighted average cost of the group's secured debt facilities to 3.9%, up from 3.6%, due to an increase in the margin applied to the Company's warehouse facility since December 2020. This is in the increase in coupon following the extension of the duration of the notes resulted in the weighted average cost of debt to the company, increasing to 5.4% from 4.5% as at June 30 -- which was at June 30, 2020. At year-end 90.9% of total debt was fixed or hedged interest rates, Avation's debt to assets ratio was 73.9%, which reduced from the 2020 figure of 75.7%. The chart shows the evolution of the Group's cost of debt over the past 8 years. On to the next slide, where we have provided a range of key ratios on a comparative basis. The net asset value per share fell to GBP1.64, compared to GBP2.86 as at June 30, 2020. Dividends were suspended as part of a response to COVID-19, and that we hope will be a temporary suspension. Administrative expenses on a cash basis, excluding the warrant expense declined by $1 million or 9% over the past year, meeting our commitment to reduce cash administrative expenses in response to the virus. Debt-to-EBITDA has improved to 7.7x from 8.4x. Operating cash flows were impacted by the increase in trade debtors from the COVID-19 support Avation provided to its airline customers. Funds from operations to debt improved during the period, EBITDA as a function of interest expense dropped by a small margin. Onto the next slide, which provides an update on Avation's cash and liquidity position, which has been the focus of our efforts over the past year. Total cash has improved over the past year, and we have 3 unencumbered aircraft as at the end of the year. Loan maturities are typically aligned with lease terms and with a long average lease duration of 6.4 years associated with fleet, both of Avation's senior debt has significant duration. We've been successful in obtaining waivers for any of the covenant issues as at June 30, 2021. The unsecured bonds, which now have an additional interest component on top of the original 6.5% coupon of either 2.5% peak payment in kind or 1.75% cash at a maturity date of October 31, 2026 and the callable early time. Avation also accessed the equity capital markets in March for a $10 million share issue and expect to sell underutilized debt as expected to sell further underutilized aircraft before the end of the year, which will also enhance liquidity further. Liquidity is expected to improve over the next 2 quarters. We have already announced the sale of an A220 that will release over $10 million in equity, but we also expect to sell a majority of the 6 remaining ex virgin ATR aircraft that combined are expected to release approximately $50 million that can be used to pay down debt and fund future growth. Add to this the significant collections in the millions of dollars from the administrations of Virgin Australia and Philippine airlines, and we see how our liquidity position will improve. This supports the return to growth that we are looking for in the coming years. I will now hand the call back to Jeff for an update on the Company's COVID-19 strategy and the pathway forward for the company.

Thank you, Richard. And the next Slide is our COVID-19 liquidity strategy. Avation's COVID-19 strategy is focused on maintaining liquidity and cash flow. Avation took a pragmatic approaches airlines customs suffered from major disruptions. Avation was the first mover in working with airline customers to help them through this difficult period, our support involved a loan to permit of the proportion of the monthly rent. This is not a rate decrease of holidays, it was aligned of what airlines need to and indeed have begun to repay the deferred rents. To balance this reduction in cash Avation implemented three key strategies to preserve cash flow. First, has been to adjust the amortization of senior loans associated with the fleet, fleet with key lending banks. The second was to reduce cash expenses. The third step has been to reduce capital outgoings. This includes moratorium on capital expenditures, so that has seen no new deliveries of aircraft into the fleet on a temporary basis, as well as a temporary suspension of dividends. There are two ATR aircrafts scheduled for delivery in late 2022. We have been in position with the customer, this will represent only small equity commitments for each aircraft, given that we've paid $3.5 million pre-delivery payments for each aircraft and expect to be able to finance most of the remainder of the acquisition costs. By carefully managing cash flow, Avation's going to navigate through COVID-19 to position itself. For opportunities post-pandemic, and as Richard just explained, we expect our liquidity position to be quite strong. So the outcome -- COVID strategy outcome, next slide. The next slide will provides a summary of the outcome Avation has successfully delivered on with customers and lenders to deal with the pandemic. We entered into a rent of deferral agreements with 14 of our 19 customers. Airlines were required to continue to pay maintenance reserves as part of deferral agreements. The total rate deferred by airlines is $25.9 million. Avation has successfully mitigated the impact of lower rents on cash flow by rates and rescheduled $35.2 million in loan amortization. One of the Avation's most important achievements during the year was extension maturity to-date of the $342 million outstanding notes from May 21 to October 26. This extension provides stability to become its capital structure and will assist the company successfully navigating the remainder of the COVID-19 pandemic. Avation lowered its cash administration expenses by 9%, compared with the year ended June 30, 2020. In terms of customers, next slide. Air travel is continuing to recover towards levels that existed prior to the pandemic, according to IATA’s monthly passenger traffic for July '21, domestic travel is now at 84% and international travelers at 26% of pre-COVID levels. International travel is expected to increase over the next six months as companies adopt vaccine and testing requirements in inbound travelers. Notably, this regime has recently been adopted by the US, EU and the UK travelers, which will open up some of the busiest international air routes. With many Western Asian countries now approaching and exceeded 70% vaccination rates. There is an expectation of an opening up of major European, US and Australasian routes in the coming months. 13 of our 90 customers have been charged normal rents at this time. Three of our airline customers have entered into formal or informal restructuring process as a result of the pandemic, including Virgin Australia, Philippine airlines and Braathens. Braathens has now completed its administration process and survived as a customer. In relation to Virgin Australia Basin had 13 aircraft returned and has successfully repositioned seven of these aircraft over the past year. During worse, the pandemic, either by selling them or enter into new leases with new customers. Avation has reduced its debt associated with the remaining six aircraft, which was around $30 million at the time of the version failure to just $6 million today. Avation expects to sell the least most of the remain six aircraft by the end of this calendar year. This will boost Avation's cash position and improve operational efficiencies. Virtually all of the fleet will then be income producing. In addition, we expect to receive the payout from creditors trust of a minimum of $9.5 million in early '22. At this point, the Avation administration will almost be fully resolved. The third airline is Philippine airlines, which find five of the voluntary additional relief under Chapter 11 in the United States in order to complete a prearranged restructuring process. Avation [empower] agreed terms how to retain the use of the Boeing 777-300ER on lease renovation. Going forward, a successful restructuring will ensure innovation will commence collecting rents on the aircraft for the first time since early 2020, under the restructuring innovation, we'll also be able to see payments relating to utilization since the September 1, 2020 on a power by the Airbus, along with ministry notes with proportion rent outstanding for the period prior to '20 -- versus September 2020. The aircraft will revert to fixed rate lease for the remainder of the duration of the lease from March '22. These three airlines have been through restructuring and managements makeup and majority of the impairment and credit losses recognized in the profit and loss for the year ended June 30 '21. Conclusion. The conclusion of Avation continues to navigate its way through the most challenging period in its history, as well as a history of aircraft's leasing, but we believe we're through the worst of the impacts from the pandemic. The disruption created by COVID-19 is expected to receive following the completion of global vaccination programs that support return to increase levels of air travel. This trend is already evidenced in regional domestic travel, and we expect to be followed by a recovery in international travel as we move through the remainder of the 2022 financial year. The fundamentals of the business model remain intact. The recent Chapter 11 filing for the voluntary restructuring by Philippine Airlines should lead to a resolution of one of the last remaining lease defaults resulting from pandemic. Avation is set to emerge from pandemic with a slightly smaller fleet with higher levels of utilization and a long time for repayment of the company's unsecured notes following extension of their maturity to October 2026. Avation's cash and liquidity position is expected to improve in the coming months through the expected sale of underutilized aircraft, the receipt of distributions from creditors from Virgin Australia, as well as Philippine airlines. This will have the combined impact of improving operational efficiency, increase in liquidity, which can then be used to pay down debt and fund the fleet growth plan for late '22. The company believes that airlines will require a significant number of leased aircraft in the post-pandemic phase, due to a large number of older aircraft that have been retired and the impact on -- of the pandemic on airline's balance sheets, reducing their ability to finance the purchase of aircraft directly. As a result of the pandemic-related financial turmoil, there's likely to be opportunities to buy aircraft from airlines, aircraft -- airlines and lessors looking to adjust or reduce their portfolios. Avation is positioning itself to take advantage of Avation's opportunities -- whereas optimistic about the long-term opportunity for airline travel, particularly in the regional and narrow-body aircraft sectors. We recently completed a small share placement early this year, which the directors and senior management, including myself, subscribe to 10% of the placing. So we continue to support believing and aligned with the company and its investors. I'll now commence the Q&A session.

[Operator Instructions] The first question is from the line of John Cummins from WH Ireland.

Good afternoon, gentlemen. Just a couple for me, if I may. Firstly, just as far as -- you said that, obviously, you may have the potential to reverse those impairments if aircraft values do increase. But can you just clarify, so at this point in time and what you see, you don't see any requirements at all for any further impairments across the fleet assets?

I'll answer that question. No, not at the moment. We believe that aircraft valuations are actually going up, as evidenced by a transaction that we're completing at the moment. And we're confident that we've done enough impairments for the moment. We don't see any more right now.

Thank you, Jeff. And another follow-on for yourself, probably. But I mean, can you give any -- what is it -- at what point do you fell -- do you think you'll feel comfortable with acquiring -- making aircraft further aircraft acquisitions? And then if there are any particular aircraft categories types that you think are providing very good value as you see the market at this point in time. Thank you.

That's a good question. The answer is we've had sort of a global experiment on what types of aircraft are valuable and recommends the quickest. And it's quite interesting in the sense that regional and narrow-body, short durations aircraft or aircraft with a short mission seemed to be recovering the fast, as well as they are statistically they are. So things like the A220, the Airbus A220 aircraft are increasing in value and very popular and we can sell them all day. The ATR are also going well, we've demonstrated we can deal in a lot of ATRs in a short time, which is great. So it's the financial -- the answer to your question is it's a financial calculation, the opportunity to acquire aircraft when it presents itself with the right returns provided that they're profitable and will make its money over the long-term is what we're looking for. So we're confident we'll -- we've demonstrated a great ability to trade aircraft in our 15-year history. So we're confident that, that will continue. But it's profitability and will drive it.

The next question is from the line of Ross Harvey from Davy.

Hi, Jeff. Hi, everyone. Few questions for me, first one is on the ATRs. Just in regards to the two that are delivering next year, you might make a comment on how the progress is going there on that marketing front, whether that's been placed or you've got targets? And just in regards to the options, what your thoughts are on those on potentially selling those? I've got a second question to follow, but I might just ask that first.

Well, I'll take part of that. I mean, we see demand for the ATR aircrafts around the world. And we are -- the situation that one of our competitors or the major competitor in that sector has some financial difficulties. So clearly, we've got a pretty strong opportunity in the sector. And then certainly will be demand without question. We're seeing it now. I mean, we wouldn't be able to sell all those aircraft that we've sold and placed them were that not the case. [Interpreted] until the end of next year. So there's plenty of time to place them.

Yes. And in regards to those purchase rights, Jeff, what's the kind of the latest thoughts on those, keeping them -- executing them or selling them?

It's a good pathway to growth. I mean, that the regional travel sector has statistically rebounded the fastest. And there's plenty of demand developing. And consequently, the queues that competitor -- the Q400s are not made anymore. So there's certainly going to be lots of demand for those aircraft in the coming years. And it is a long way down the track in terms of time, so we've got plenty of time to decide. There's no decision yet on placing or selling. But I think it's likely that we'll place them.

Yes. Perfect. One that might be more for Iain and Richard then, it's just on the cash collection side. So I know you updated us on that metric earlier in the year. I think it was 71% in Q1. It is being, kind of, mid-60s in the second half last year. Can you give any update on what that might have been in Q2 and into Q3?

I think Iain's got two answers to that question. But Iain, of course the CFO.

I'll take both. Yes. Ross, the average over the year is just over 70%. So it's kind of fairly consistent with earlier in the year. And obviously, we anticipate that, that will improve quite dramatically in the coming year as we put aircraft back on to leases. And also take collections of arrears that are built up with some of the airlines. So in theory, that rate should be above 100%, if we execute on our plans.

That's great.

Just on that, obviously, with the power situation and power recommencing the payment of rent, cash collections will increase dramatically.

Yes. That will help. One perfect one, perhaps more again for Iain. But on the leverage front, I'm just wondering, is there a certain tariff that you have in mind for, kind of, a steady state leverage moving forward post pandemic? I mean, clearly, it will take a bit of time before the air traffic systems, back up and running and cash collections coming in where you'd like? But, you know, how you got a figure in mind where you'd like to reach a certain leverage level before you reinitiate growth in the business? Or are all these kind of moving parts that you don't really think about it and kind of numbers terms that you're targeting?

Well, we don't give evidence...

[Interpreted] we need to get the credit rating up, which requires a reduction in leverage, which probably requires growth. I don't know that you can shrink too much and get your credit rating up enough to lower the cost of funds. So I think growth will be important -- sorry, Iain can take you off there. Apologies, you can jump in.

So that's quite right. I think you've answered the question.

Okay. Great. One final one, if I can, and I kind of hog the line here for a bit, but just on the impairment side. I'm just wondering, is there kind of a proportion of the figure this year that would have been related to the restructurings and perhaps a percentage that would have been related to just your generic value assumptions or do you split one versus the other? Any kind of comment there would be helpful. And that's it from me, thanks.

That's a question for Iain.

Yes. Hi, Ross, so I mean, the biggest single impairment was on the 777 that was on lease to or even at least the Philippine airlines. So that takes up about 1/3 of the overall balance. And then on the ex Virgin ATRs, there's about another 32% of the total. So those are the two major components of the impairment charge this year. And then there's obviously been a general softening in residual values, because of COVID, and that's kind of been across the board, and that kind of makes up the balance.

The next question is from the line of Brian Charles from R.W. Pressprich.

Hi, good morning. And congratulations on that, you're getting very difficult environment in terms of cash flow and liquidity. In terms of the market outlook, I want to make sure, am I reading something correctly on the income statement. The aircraft purchase rights were $150,000 charge for the full-year, but I think that's coming off of a $7.9 million charge through the first six months. Was that $7.9 million largely offset in the second six months in terms of the value -- like a reversal of the charge of those valuation rates?

That's a question for Iain.

Yes. Hi, Brian. Yes, when we rescheduled our supply contract with ATR, we gained an additional three purchase rights. So when you're looking at December, we had $25 million, and that number is now $28 million. So that accounts for part of the reversal of that $7 million reduction that we saw in the half year accounts. And the other factor is that we also adjusted the pricing of the contract with ATR, when we rescheduled the order book, and that has had an impact as well.

Yes, Brian, we have the price of ATR improved, which means over time, those purchase rights or options will actually improve significantly in value, because, obviously, we have very cheap aircraft. And which would make us if we exercise them. Will be the largest lessor customer that ATR has, I believe, which will be a good position to be in, in a recovering market.

Yes, fair enough. And it sounds like a good step to navigate a difficult environment and take advantage of lower aircraft prices. Yes, okay, thank you. Away from that, I don't know, do you have any color or anything you can talk about in terms of maybe upcoming lease maturities? I know you have something coming up with Air France?

We have an upcoming maturity with Air France, but we have also -- and we don't like to announce LOIs, but we've actually signed to place that aircraft today with an LOI with another airline. So that will transition to another airline. We may need to make an announcement on that in due course. We don't normally announce LOIs, but since you've asked the question, that's the situation. So that playing won't be stored for any material amount of time, we'll just transition.

[Operator Instructions] The next question is from the line of James Chin from Caravel Asset Management.

Hi, thanks for taking my questions. Has a follow-on to the previous [Technical Difficulty]

Hi, sorry I can't hear. Can you try that again or perhaps email your question? That's better.

Is it better? Yes, I just wanted to get an update on near-term lease maturities beyond the one with Air France, the two ATRs with Loganair and 737 with Garuda? That's the first question. And then I have a follow-up.

Yes, yes -- well, the Air France one, as I've just announced, has been transitioned to another airline. The Garuda aircraft we are repossessing, because the Garuda looked like going through, they only have three aircraft left to place, actually.

Okay, great. And just one more, if I may. Have you begun receiving cash-based revenue from the power by the hour -- on a part [Technical Difficulty] is it something [Technical Difficulty] mentioned earlier, I might have missed it.

I'll answer that one. Not yet. It's soon to be agreed. So the process has started, but not yet, but we will soon.

Okay. That would be great. I'll return to queue.

There are no further questions at this time. So I hand back to Jeff Chatfield for closing comments.

Well, thank you very much for your time today or this morning and this afternoon, depending where you are. Clearly, a difficult year. And for the company is well placed to grow again in the future and navigate its way through the COVID situation. We've taken our impairments, we've managed the business, and it's all been about survival. So thank you very much for your time and support. And if you've got any questions, please contact us at any time. Thank you.