Avation PLC (AVAP) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Avation PLC Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand you over to Duncan Scott, Group General Counsel. Good afternoon to you.

Thank you. Today, on the 28th of September, Avation published its unaudited financial results for the year ended 30th of June 2023. A copy of our results announcement 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 our answer to your questions and 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, 28th of September 2023. 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 are included in Avation's regulatory announcements, including our annual report and unaudited results announcements. Avation assumes no obligation to update any forward-looking statements or information in light of new information or future events. Unauthorized recording of this conference call is not permitted. I will now hand you over to Executive Chairman, Jeff Chatfield.

Thank you, Duncan. Thank you for joining this investor update call where we will discuss our full year results in the year ended 30 June 2023. Avation's generated profit, improved its fleet utilization, maintained liquidity and continued to substantially reduce debt. The company is well positioned to execute its business strategy as the aviation sector continues to recover from the effects of the COVID-19 pandemic. According to the [ IATA ] market update, global domestic air travel now exceeds prepandemic levels while international travel has recovered to around 89% of prepandemic levels. We expect that growth in travel will continue to drive demand for leased aircraft as airlines rebuild and grow their fleets, which supports the company's business plan. So I'll take you to the snapshot. The snapshot as at 30th of June 2023. The beginning of the year, Avation's fleet comprised 36 aircraft, leased 17 airlines in 14 countries. Avation owns a diverse fleet, comprising 51% narrowbody aircraft, 31% regional turboprop aircraft and 18% widebody aircraft by value. The fleet has a good metrics, with a 6.4 year weighted average and 5-year weighted average remaining lease. Fleet assets have a net book value of $899 million. Total assets are around $1.2 billion, and there is $492 million of future contracted lease receivables. The portfolio. Avation's diversified fleet is dominated by fuel-efficient regional and narrowbody aircraft, which generally operate on domestic and short-haul international routes. These factors were the fastest route to recover after the COVID-19 pandemic. Utilization of Avation's fleet has improved during the year as 3 off-lease aircraft was sold and another aircraft started to lease with a new airline customer in Nepal. Avation has also agreed to sell 1 of its 2 last off-lease aircraft and leased the remaining aircraft and expected to close the transaction shortly and a new lease commenced in November 2023. Avation has 2 firm orders for ATR72 aircraft scheduled for delivery in April and May 2024, and now we have 28 purchase rights going forward on ATR aircraft. In terms of customers, we had 17 customers in 14 countries and will add another customer on commencement of a lease, which was starting November '23. Around 74% of Avation's customers by revenue are located in Asia, with the remainder in Europe. Avation's top 3 customers by revenue are VietJet, Air Baltic and EVA Air, which currently provides 56% of monthly revenue. A lease for an Airbus A320-200 expired earlier this month. The aircraft has been delivered to a maintenance repair organization for its maintenance check, and then we'll commence a new lease with Cebu Pacific. The next lease expiry is not -- so our next lease expiry is not until September 2024. Avation has a focus on new and relatively young aircraft and, therefore, is a natural seller for midlife and older aircraft. Highlights. Well, these are mainly operational highlights. The company sold 2 ATR72 aircraft in December '22, which have been unutilized since [ redelivery ] from the customers. The company also sold a Boeing 737-800, which has been unutilized since it was repossessed from Garuda following Garuda's default on the lease in April '22. The aircraft required extensive maintenance work before the sale, which was arranged and overseen by Avation's in-house technical team. As previously announced in our July trading update, we're in the process of selling one of our last off-lease aircraft. This sale has been delayed due to, amongst other things, supply chain issues with spare parts, but the sale is expected to be completed shortly. A new lease for ex-Virgin Australia ATR72 to Yeti Airlines in Nepal started in September '22. The lease is currently performing well. Avation terminated the lease to an ATR 72 to an airline in Myanmar in August '22. The airline has ceased operations following a military coup in that country that was in default. The Myanmar aircraft is now on lease with an airline in Tahiti, who are performing well. Our last remaining off-lease aircraft is due to commence the lease to a new customer in November following the completion of the required maintenance tasks. I'll now hand over to Iain Cawte, the Chief Financial Officer, who will provide details on the financial results.

Thanks, Jeff. The next few slides of the presentation provide a summary of Avation's financial results. Further details are included in today's stock exchange announcement, which is also available on the company's website. So turning to the summary of financial results. In the year ended 30th of June 2023, total revenue and other income was $99.3 million. The reduction in revenue compared to the prior year is mostly a reflection of the reduced fleet size. Operating profit was $70.6 million compared with $90.2 million in the prior year. Operating profit includes a $2.8 million gain on derecognition of a finance lease, a $20.5 million gain on revaluation of aircraft purchase rights, a $7.5 million unrealized valuation gain on an equity investment and $11.4 million of aircraft transition costs. The gain on derecognition of a finance lease represents the positive difference between the outstanding finance lease receivable and a broker valuation for the ATR72 aircraft, which was repossessed from an airline in Myanmar. The gain on revaluation of aircraft purchase rights relates to Avation's purchase rights for 28 ATR72 aircraft, which are valued using a Black-Scholes option valuation model. The gain on an equity investment is a mark-to-market adjustment to the value of shares in Philippine Airlines, which Avation received following the airline's Chapter 11 restructuring process. Aircraft transition costs are principally repair and maintenance costs incurred in the transition of 3 aircraft, which was sold in the year, and 2 additional aircraft, which will be sold or leased in financial year 2024. Net indebtedness was reduced by $61.7 million in the year as the company continued to delever its balance sheet. Total assets were largely unchanged at around $1.2 billion at both 30th of June 2022 and 2023. Turning to the analysis of Avation's debt. As noted on the previous slide, net indebtedness has been reduced. The weighted average cost of debt increased from 5.7% to 6.1% over the year. This is principally due to scheduled repayments of secured loans with lower interest cost than the company's unsecured notes, which do not amortize. The face value of unsecured notes outstanding was $345.2 million at 30th of June 2023 compared to $348.1 million at 30th of June 2022. The reduction in face value resulted from repurchases in the year, less the value of PIK interest added. The weighted average cost of secured debt increased from -- to 4.5% from 4.0% over the year due to increases in floating rates and mandatory scheduled repayments skid towards lower cost facilities. Avation refinanced 2 floating rate euro loans with long-term fixed rate debt in November, increasing the proportion of fixed rate debt to 95.8%. Turning to key ratios. Net asset value per share increased 4% in U.S. dollar terms to $3.41, equivalent to GBP 2.69 at the year-end exchange rate. Lease yield improved to 9.7% for the year due to better fleet utilization. Admin expenses, excluding noncash share warrants expense, were 8.3% of revenue in the year ended 30th of June 2023 and have reduced overall by 5.3% compared to the previous year. Debt-to-equity and debt-to-assets ratios have been improved by continued amortization of loan balances. Turning to the liquidity update. The company has managed its liquidity position over the year, with growing funds generated from operations and aircraft sales to pay down debt. Restricted cash balances have increased over $90 million and, in the current interest rate environment, are now generating significant amounts of interest income for the company. Collections from trade receivables are improving, and we've seen an overall reduction in receivables of about $5 million since 30th of June 2023, mostly due to repayments of arrears from a Southeast Asian airline. Other current assets include 8 million shares in Philippine Airlines, Inc. issued as part of the restructuring of that airline for a Chapter 11 bankruptcy process. The shares are due to the exchange for listed shares in Power Holdings Inc., a holding company, in the first quarter of 2024. The company may look to monetize this asset in the coming year. Avation has 4 unencumbered aircraft, which may be sold or refinanced. We are in the process of selling one unencumbered ATR72 aircraft at the moment. The next slide shows the maturity profile of Avation's loans and borrowings. Other than scheduled monthly and quarterly loan installments, there are no significant near-term loan maturities except for a $3 million loan maturing in December this year and a $4 million loan maturing in June 2024. The company's outstanding bonds, with a face value of $345.2 million, mature in October 2026. On the next slide, we've included a metric for total assets divided by the number of employees in the company to illustrate that Avation has been able to manage additional assets without increasing headcount. I will now pass you back to Jeff for the conclusion of the presentation.

Thank you very much, Iain. We'd like to talk about the future, which is very important for investors. So our 2024 focus -- and this is probably very important. So investors will be aware that the world sort of changed with new technology, low-CO2 aircraft. And we have one of the world's largest order book/purchase rights for ATR72 aircraft. These will be the first aircraft that are allowed to fly on 100% sustainable aviation fuel, which is sort of a very fortuitous situation for the company because the price was established effectively as an airline price many years ago, so we've got a good price and a large order book. So the company has sort of received numerous inquiries around that order book and that strategy. So what else we leased? And we're leasing our ordered ATR72 aircraft. We're maintaining our focus on liquidity, and we're looking to widen our customer base. In terms of future strategy, you'll be aware that the regulators of the world are forcing changes in behavior of airlines. So you'll have airlines taking low-CO2 aircraft even if they probably weren't planning to do so. So you can see that there's financial impacts on airlines who don't go to SAF or other technologies. And that will drive demand for ATR, especially ATR72 aircraft as well as the A220 to a degree, given the A220 is probably 20% more fuel-efficient than anything else on a per seat basis. So we're well positioned to transition to a low-CO2 lessor. The next strategy will -- we -- as I said, we're focusing on fuel-efficient, low-CO2 emission aircraft and moving towards sustainable aviation. So as probably one of the world's largest purchase right holders, you'll see us use that asset strategically. Obviously, ATR are not producing many aircraft per year. So we expect or we hope that, that order book will expand and also the duration will probably expand out in time. We believe that the market, due to a variety of factors, will improve for that aircraft given they've now effectively got a monopoly with no competitors. And there'll be 100% sustainable aviation by 2025. So in conclusion, clearly, obviously, the aviation sector has bounced back. Passenger numbers have demonstrated that. We've demonstrated we can return to profit, and we've substantially lowered our leverage. We're certainly strategically aligned to the sustainable future in terms of the environment, and we're positioned for further recovery and organic growth. Now I know that there's a lot of Q&A. A lot of questions been submitted. We'll share these around and hopefully get through what we can. If you have any more, please submit them. I can't promise we'll be out there with them all, but we'll try to deal with some of them.

So the first presubmitted question was Avation has 6 ATR purchase rights until mid-2027 to fulfill. Will you be able to find customers for those? Or do you have some of these plans? Well, we've had a number of inquiry -- all of the sort of strategic, if you like, inquiries the company has been received in the last year have been around the ATR order book or the ATR portfolio or the ATR future. So you've got people out there who are very, very interested in the ATR sector and our order book, in particular, because of our SaaS contract with ATR and so on. So the answer to that question is we're confident of being able to deal with them. I'm not sure we've got -- obviously got ongoing discussions with ATR including next week around the timing of them. We -- they have made it plain to us that they can't deliver that many aircraft. So you would expect that we would be able to push it out in time if we were unable or don't want to or the market is not right to place 6 a year, but that's a commercial discussion with ATR at the time. The next question was the strategic review in April 2020. I'm not in a position to comment on what happened in 2020. Yes, there's a lot of activity in this sector. Clearly, there's a lot of money coming in. The inquiries we've been receiving are all around the ATR order book. If we had an inquiry that came in, we would probably consider revisiting the strategic review if that was the appropriate pathway to take. The next question was 2024, the 2 ATR deliveries. Well, we have -- [ they aren't in stores ]. They're not made yet. What we paid -- so we paid money to ATR for all of our order books. So 100% of the actual equity that will be needed for those 2024 deliveries has already been paid. So the aircraft are being made. We have signed -- I mean we don't announce LOIs, and this may be something we need to announce in answering this question. But we do have an LOI with a customer for those deliveries. So we do -- we are fairly confident on where they're going to go, and we have numerous clients that are actually looking for them. So we have more demand than we have aircraft at the moment. So the answer to the question, no, they're not in [ stores ]. They're being made, and we don't need to put up any more money. The next is speculative orders, presumably having ATR available on demand to a customer allow higher lease rate factor. Yes. Well, we're not really in the market to speculate too much. We prefer organic growth. And at the moment, airlines seem to be ordering or identifying their requirements for aircraft well ahead of time. So I don't know that we need to speculate. We probably just need to organically deliver as and when they order. Terminology, retail investors, the overall [indiscernible] purchase rights, purchase options and term options, including financial commitments. Well -- so we've paid for all of our long-term purchase rights and rescheduled the order numerous times. So we've got plenty of -- [ some ] money in there. A purchase right is effectively an undated option. And it becomes firm when we agree a delivery date with the manufacturers. So it's like -- it's effectively an undated option with a nondated delivery time until it's complete. Over a period of time, we pay increasing amounts of money as you become closer to delivery for the aircraft. So by the time the thing's delivered, we've got to have to put in all of the money and the balance is paid by finance on delivery. So that's again -- next one, Singapore Aircraft Leasing Scheme. This is a really good one for Iain to answer given that he's close to that.

Yes. Hi, everyone. So the question is about the Singapore Aircraft Leasing Scheme, which is a 5-year renewable concessionary tax rate issued by the government of Singapore to leasing companies. Our 5-year membership of the scheme will expire in May 2024, and we will be applying for a renewal of that scheme membership before it expires. And at the moment, the tax rate that, that scheme allows us to benefit from is at 8%, and that's a standard tax rate across all members of the Aircraft Leasing Scheme. And we understand that if we apply for a further 5-year extension, it would still be at 8%.

The next question is about the technical team, effectively asking, is it something we can reach out? Most -- being the least, most leasing companies have a technical team. Really, leasing companies like Avation and the big guys have a team, which allows them to reposition aircraft, transition them, repossess them and so on. The people that don't have a technical team are generally pure financial investors, and they tend to get staff with consultants who are varying quality. And so the advantage -- the real advantage in having your own technical team is cost and also time because as you can see from our own operations, it's taking a long time to transition aircraft. And our technical team has been delivering in a fairly difficult set of circumstances. The supply -- there are real supply chain issues out there with transitioning aircraft. And our team has done a great job. And I really don't know how pure financial investors are managing that problem. The next one is around option expiry dates. Well, no, we won't publish them because we're going to possibly renegotiate them. So that's not something we would publish given the publication may be out of date quickly. Well, okay, the next question is about transferability. So if you are a lessor like Avation and you don't have a customer, then you can -- not that we wouldn't have a customer, you can take delivery of an aircraft or order it and sell it. So you might be able to sell an option, but you can certainly sell an aircraft easily. So -- or you can even do joint ventures with other people like there are other option holders in the world, probably not as good a contract as us, but if we -- if they had a delivery that we needed, we would effectively joint venture with them on that delivery and vice versa. So we have in the past -- I think Iain would know that 4 or 5 years ago, we did exercise some options and take delivery and sell them immediately and make a several million dollar gain on both the aircraft. Iain, do you remember that?

Yes. I remember the transaction. I mean we exercised options and did a back-to-back sale of the aircraft on delivery at a profit. I can't remember the exact amount of the profit. It was millions of dollars, I think.

Next one's about NAV evolution. Well, yes, I mean we're not in a static environment. The investors and financiers in the business requires strategic or organic growth in some way. And so we have -- in real life, we have a huge green order book that is genuinely popular with people. The question is the cost of financing and what we found is we're not an investment-grade company. We're below that. So the unsecured market, the bonds are very expensive. But the bank market, which is based on asset values, is still open, and it's still viable. So as long as the -- organically, the company can generate sufficient cash to invest in a little bit of organic growth, it can easily bank finance what it needs to finance. So that does increase the NAV. If you grow and you've got more revenue and you've got more assets, then the NAV will go up. You talk -- the next one talks about share buybacks. Well, we clearly also -- we've got to be willing to buy back bonds, which we did earlier in the year because that's also an immediate profit. So the current view on the company is to be, when appropriate, chomping, trying to chomp through the bonds. The next question asked about a discount to NAV in the share price and would be able to buy a small amount of share as well. I mean my shareholder increased. Simply buying 1% of the company, that might make investors feel good for a day, but it doesn't make a long-term difference. We've got to manage the fundamentals to the capital structure. Next one, can you talk to any forward refinancing? Well, we -- the obvious thing that we're doing, which Iain sort of alluded to us, we've been paying off a lot of debt. So we basically run out of bank debt sooner or later and then at which point, probably sometime in the financial year 2027, will need to deal with the bond and presume -- mathematically, by that time, we shouldn't have a lot of asset-backed debt left. So that will be the time to think about a refinancing. And hopefully by then, interest rates will stabilize, and we'll know where the world is in terms of what the interest rate environment is. So [ listen ], the gentleman has asked it, but [ Phil ] has asked about growth. Well, you've got growth coming. You've got 2 aircraft being delivered inside 6 months. So that is growth. Do you have any view on timing of aircraft deliveries for the 2? Yes, I -- next year, I believe that ATR has sold out of -- ATR themselves have got production issues. So there is no -- we understand that they're pretty much sold out in 2024. Now given our position, we may be able to get aircraft from them. So if they -- basically by exercising options, but it will be a tight market next year because they've got terrible supply issues and constraints on the amount of aircraft they can even produce. And we had a comment on the $11 million transition cost. This would be one for Iain.

Yes, [ Bill ], I think in your question, you referred to one transition. I mean those costs actually relate to 5 aircraft. So we had 2 aircraft that were sold in December 2022, 1 aircraft that was then sold in February 2023. And we've also spent money repairing the 2 aircraft that we're dealing with at the moment, so the 1 that is ready to be sold now and the last 1, which will be put on lease later this year. So that $11 million is actually spread out for 5 different aircraft.

Question from Damian regarding moving to low-CO2 fleet. How do you see this transition occurring as a natural seller of old and mid-life aircraft? Yes, at the moment, all aircraft are scarce, especially widebodies. But at some point, that will change. And the governments of the world is sort of forcing it to change. So you don't want old -- in our view, you don't want old-technology aircraft. You want the new stuff. And we've had a fantastic -- we've got one of the best trading teams in the world, and with -- we see deal flow in NEO and new-generation equipment all the time. So it won't be that hard to try to acquire them. And clearly, you're playing chicken if you keep the old stuff. If you're a lessor at the moment, you would be selling the old stuff. How do you prioritize paying debt versus buying planes? Well, it's mathematics. You need to do -- simply mathematical computation. Paying out debt's a very good thing. Obviously, at some point, shareholders need to see some growth. Next question is, do management expect [indiscernible] securing lessees for financing for new ATRs? The answer -- no. The April, May 2024, no. In future, not really, no because there's too many inquiries now and airlines are taking them even though they may not even want to. Airlines need to report their CO2 numbers to various people. And so globally, you're seeing demand. We've had airlines in South America say -- come and talk to us about ATR deliveries, which is something we're not used to seeing. The next one, I've answered. The lease yield, this is one for Iain.

Yes, the question is about what is lease yield today. I think with a fully utilized fleet, lease yield will be just above 10% this year, rising to 11% in the following year.

The next one, ongoing -- related to the Helen Highwater, they -- in general, they're fixed, but so is the finance. So we fixed the finance as well as fix the lease rate. Do we have an -- Iain, do we have an estimate for aircraft transition expenses in 2024?

Yes, we do. I mean it will be much reduced. It won't be $11 million. I mean we've got one aircraft which is going through maintenance at the moment. Total cost of that will be around $2 million, and then we've just got to finish off the last aircraft, which goes on lease in later this year. So we're probably talking sort of $3 million to $4 million in total.

Next one asked is about -- which is a good question, actually. I've talked about JV partners to fund purchase rights. I mean as I said earlier, I mean, we effectively do have done that and are willing to do that, and I'm happy to do that down the track. So that is a -- not a bad -- it's not a bad idea to do JVs to exercise purchase rights if need be. Tim has asked the difference between our cost of purchase through the purchase right compared to the cost of the brand new ATR. Well, we've got a discount because we negotiated a price escalation cap with inflation. It's something we did do a good job on. And so our price has gone up a lot lower than inflation, and therefore, as they go on over time, it's a good thing. I can't comment on precise prices because ATR would -- breach an agreement with ATR. Tim's asked, how long does it take manufacturing ATR? Well, this really, at the moment, I think it takes 2 years. You need to ask them that. In terms of advanced notice, 6 months is a good number. Less than that's a bit higher. So you need to give them about 6 months notice. Next question, the 2 ATRs [ plus ] the new or existing customers. We've signed an LOI with a new customer. Then, could you discuss the effects of rising interest rates and lease rates? Yes. So interest rates have gone up. Therefore, lease rates have gone up. But it's still viable. As interest rates have gone up, we've passed on increased rates to customers, new customers. And so every lessor in the world will need to be able to do that because clearly, otherwise, they'll all be losing money. Well, that's the end of the questions today. Thank you very much.

Perfect, Jeff. Yes, you have addressed all those questions from investors today. And of course, the company will review all questions submitted today and will publish the responses on Investor Meet Company platform. But before we direct the investors to provide you with their feedback, which is particularly important the company, Jeff, could I please ask you for a few closing comments?

Look, thank you very much for your time and attention and patience because I mean clearly the [indiscernible] COVID regime and the high inflationary environment and the rising interest rate environment coupled with supply chain supply change difficulties hasn't made it an easy environment. But I mean the opportunity is fantastic. The demand for aircraft, if they're right here right now and available, is fantastic. You could place anything really quickly if you've got it sitting on the ground ready to go. The question is getting it sitting on the ground ready to go is challenging. But look, thank you for your patience. We look forward to some organic growth. And we look at every part of the capital structure constantly. We look at every opportunity constantly, and we've got good advisers and strong peers. And hopefully, we can manage to reward our shareholders, which is very, very important to the company, and thank you for your support.

Perfect. Jeff, Iain, Duncan, thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and, I'm sure, will be greatly valued by the company. On behalf of the management team of Avation PLC, we would like to thank you for attending today's presentation, and good afternoon to you all.