BOC Aviation Limited (8BO.F) Earnings Call Transcript & Summary

I'm now actually going to ask my colleague, Hillary from Equity Research, to join me on the podium. And hopefully, we're going to be connected remotely with Robert Martin, who's Chief Executive Officer of BOC Aviation. Hillary, actually covers BOC Aviation on the equity side. I follow it on the debt side. So I'm going to ask that Hillary lead most of the questioning moderation once Robert Martin finishes his presentation. Robert, I'm very glad that you could join us virtually. Sorry that various logistical challenges made it impossible to be here today. But look forward to seeing you in 3 dimensions in the near future. And look forward to hearing your insights in 2 dimensions here right now. Hopefully, our connections work and the technology is cooperative. Robert?

Thanks, Doug, and many thanks to Deutsche Bank for inviting us to speak at your conference. Operator, if you can turn to Page 3, please, of our presentation. So for those of us who don't know us, we're a leasing company based in Singapore with a global reach. We will be celebrating our 28th anniversary in November this year. And as you'll see on Page 3 on the left-hand side, the company has basically been through 3 periods of our history. First of all, we are set up as a joint venture between Singapore Airlines and the U.S. leasing company called Boullioun Aviation Services. We were then joined -- actually the only Singapore company that's had both GIC and Temasek as investors in 1997, when we basically corporatized the company. And we were then taken to a choice of either IPO or trade sale in 2006, when the market was hot. And Bank of China were the acquirer on the 15th of December that year. They basically set us a 10-year target to go to IPO, which we hit on time in 2006. And now I'm pleased to say that we've just achieved our fifth year as a listed company. Now we've always grown organically. We've never acquired another company. On the right-hand side of the chart, I just show you how we've grown. And we grew pretty slowly up until 2006, picked up the pace by 2013. And we've now more than doubled the size of the company since then. And we sit around $24 billion in assets today. So turning to Page 4. Just giving an idea of what we've done over this period. Since 1993, we've basically purchased 890 aircraft, totaling just over $50 billion. We've leased over 1,000 aircraft on a global basis to airlines in 57 countries and regions. And we've been a very active player in the debt market. So more than $36 billion in debt raised since Bank of China acquired us. And one important point is we've been in the debt capital markets as a regular issuer since we got our investment grade ratings back in 2012. Now any good leasing company knows the first 3 core competence: purchasing, leasing and financing are very important. But the most important of all is when you come to lock in the gain on sale on your investments because that's the time when you basically justify all of the assumptions you made to that point. We sold more than 380 aircraft to date. Now we tend to write very long leases wherever we can. And so we've only transitioned 90 aircraft, so roughly sort of 10% of those we've acquired. And we only have to repossess an average of 2 aircraft a year since our inception back in 1993. Just turning to Page 5. One thing that sets us aside in our market is, we have a globally diverse management team. Combination of myself and Steven Townend, our CFO; and Paul Kent, who come from the U.K.; Zhang Xiaolu; and Deng Lei, who come from Mainland China; and then David Walton, who comes from the U.S. This brings good global perspective to the discussions we have particularly, when you're going through a problematic period like we've seen over the last 18 months. And everyone has a combination of deep aviation, leasing and banking experience. Turning then to Page 6. It just talking about how we invest. And the one thing about BOC Aviation is, we invest all the way through the cycles, both in upturns and downturns. But the nature of our investment tends to change depending upon where market liquidity is and how our customers are faring. And so what you tend to see in periods of downturn, which are those areas marked in yellow, whether it be the global financial crisis or the European crisis or even now COVID-19, we tend to increase the amount of purchase and leasebacks during that period. And at the same time, we may take relatively lesser of our own deliveries. The flip side to that is, as markets pick up, we will basically put in place our own order book. And you'll see in years of higher liquidity, we basically have a larger proportion of our own orders and the manufacturers coming on to the books. Now obviously, when it comes to selling aircraft, the best time to sell is basically when liquidity is high. So as you'll see in the gray parts of the chart, our liquidity basically, when we see market liquidity being high, we tend to sell relatively more aircraft into that liquidity. Now up until 2015, that would have been mainly selling to individual investors or small portfolios to individual investors. In 2015, we started doing ABS transactions, and we've done 2 notable ABS transactions so far. And at some point, I expect as we move out of the COVID-19 period, we'll be back in that market again. Just turning to Page 7, we're looking at our first half results. So the first thing I'd like to say before I get to results themselves is, if you compare it with the first half of the previous year, the first half of the previous year was a record performance for BOC Aviation. And so we are comparing with the top of the cycle in terms of our earnings cycle. So in the period since then, our revenues were up 7%. Operating cash flows were flat. Our profit before tax -- impairment charges went up 5%. And our net profit after tax due to our conservative accounting and the way we took impairment and as well ECLs meant that we had a reduction of 21% first half on first half. But if you look at the right-hand side of the page, you'll see we didn't change our dividend policy. We continue to pay 30% of the first half year's profit to our investors, which was an interim dividend of USD 0.1098 in the first half. On the balance sheet side, it gradually increased. The increase was much as we'd have liked because we have a number of delayed deliveries that I'll talk to later. We did, however, on the liability side of the balance sheet, make sure we have very strong liquidity and it even stays at that level today. It's even higher than that today. And today is an important day for us, we're repaying a bond issue tonight of $500 million. And we're obviously throwing down that liquidity to repay the bond issue. Our total equity for the first time in the first half of this year hit USD 5 billion, and our net assets per share moved up in line with that by 5%. Just turning to Page 8. Just a few comments on the first half. So we celebrated an important milestone in the first half. We surpassed USD 5 billion of cumulative earnings for the first time. And in line with the 5s, we also celebrated our fifth year as a listed company. As you know, as a listed company, we do turn over our directors and basically our Chairman. We have new Chairman, who chaired his first AGM, Mr. Chen Huaiyu and we're happy to have him on the board. He was previously General Manager of Sydney branch Bank of China and is now an EVP back in BOC head office. And 2 other directors as well were changed during the period, Mr. Wang Xiao and Madam. Wei. Both of them sort of Bank of China appointees, who came from Corporate Banking and the HR side of Bank of China accordingly as their general managers changed. Now another way to look at our profitability to compare it with second half of last year, and you'll see that our profitability was significantly up on second half of last year. So I think when we look backwards, probably second half of last year will be the bottom of our profitability cycle as we move forward. We had an active first half. We took delivery of 34 aircraft from both major manufacturers at a mixture of wide-bodies and narrow-bodies. Of those, 18 were through purchase and leasebacks that we put in place last -- committed to last year and took delivery this year. And 16 of those were our own orders coming in from the manufacturers. We continue to sell aircraft. In the start of the year, the aircraft sales market was somewhat subdued. But as the half year has gone on, that is picked up. And we're seeing much greater appetite now in the aircraft sales market as we move into the second half of this year. And we signed 26 lease commitments during the first half. Now we ended the half year with a total fleet of 536 planes, 377 owned, 37 managed and 122 on order. And we've maintained our young average fleet age of 3.7 years and our long lease term remaining of 8.1 years. Now the purchase-and-leaseback market wasn't as much in our favor this year as last year, but we did committed to purchase 8 Airbus A320NEO family aircraft through the purchase-and-leaseback market in the first quarter. And we continue to focus, obviously, on latest technology aircraft with 100% of our deliveries this year being in that category. Just turning to Page 9 and talking about the liability side of the balance sheet, liquidity. So raising debt funding is always been a core competency of our company. We've raised over $36 billion since Bank of China acquired us. We're now the largest Singapore-based corporate issuer of U.S. dollar bonds, in aggregate since September 2012. And in the first half, we raised $1.5 billion of bonds and $500 million of bank loans. And our average debt cost has moved down from 3.2% to 2.9%. Now liquidity remains strong. The majority of that is in unutilized credit facilities totaling $5.4 billion with about $0.4 billion in cash. And we maintained our strong credit ratings, A- from S&P and Fitch. And we had our outlook upgraded to stable by S&P Global and maintained at stable by Fitch. So we still have very strong access to liquidity. Turning to Page 10. If you look at sort of the last 3.5 years, you can see we've continued our revenue growth. We had a slight dip in the core lease rental contributions as the impact of some of the restructurings, particularly those cores driven restructurings took effect in the first half of this year. And the underlying profitability of the company is good, as you can see from the bottom right chart with our profit before tax and impairment charges. And it was only with the impairment charge and some ECL that we took in the first half of this year was the reason why our net profit after tax slipped from where it was last year. Just turning to Page 11, with a snapshot of our fleet. So you can see now that sort of our orders going forward are predominantly A320NEO family, 737 MAX and 787s. What I would say is in the first half, we saw some delays, particularly on the 787 side, where we had about 10 aircraft slip out in the first half. And as well, we had some shorter-term delays of the Airbus A320NEO family as well. But the second half of the year, things are looking reasonably robust. We will -- I think in those 2 aircraft types, we'll see some more delays second half. But I'm hopeful that sort of by the end of the year, most of those aircraft should get delivered. Just turning to Page 12. One thing that we like to talk about to investors about is the future revenue visibility. And I think I've already mentioned we have a long average remaining lease terms above 8 years. And this translates into future committed lease revenue of close to $20 billion from a combination of those leases that we've written for the future as well as the existing leases in our book. And as you can see from the top right-hand side in terms of scheduled returns, we have a very small number of scheduled returns going all the way through to 2025. And in terms of the fleet growth, it's slow but sure. You can see there's an increase from 358 to 377 in the first half of this year. Now one thing that I and Steven, our CFO, are heavily, heavily focused on is our operating cash flow net of interest. This is a major metric that we watch and is also one of the key KPIs of the company to ensure that we continue to get the cash flow in. And with the work we did last year to put in place purchase and leaseback, there's 85 purchase and leasebacks that we committed to last year. 39 of those are already delivered by the end of last year, another 17 by the end of June. But we still have another 29 to deliver between now and 2023. And this helps to stabilize the cash flow situation so that we have long-term sustainable cash flow. And you'll see that put in numbers on the right-hand side of the page there, where we're in broadly our cash flow is in line with what was the record half year a year ago. Just turning to Page 14. In terms of sources of debt, now more than 2/3 of our debt comes from the bond markets, as you'll see in the top left-hand chart there, and our loans are down 22%. Now in both 2020 and first half of 2021, we did tap into the BOC backstop credit lines. That's what they're there for, for periods of tension in the marketplace. But you'll see that the proportion has dropped as we gradually have refinanced some of those drawings under the BOC RCF facilities. And you'll remember that we increased and renewed those facilities to $3.5 billion through till December 2026 last year. We've always and the company had a gradually amortizing overall corporate debt profile. This is very important. We do not rely on short-term debt. And you'll see our near-term maturities in the bottom right-hand side are very low compared to the liquidity we're holding of $5.8 billion. It's basically covered through the end of 2023. And one thing I'd just mention is now, our book is very much an unsecured book. 95% of our aircraft are financed on unsecured basis. Just turning to Page 15 then, looking at our investments. We've averaged about $4 billion a year of investments since we did the IPO back in 2016. In the first half of this year, it would have been higher than $1.1 billion if all of the deliveries, particularly the 787s have delivered. But those should now deliver in the second half of this year and bring us close to the $4 billion for the year -- for the total year. And as I mentioned earlier, we have close to $20 billion of future revenues. So just turning to Page 16 then and bringing things to a conclusion. So I think we had what I would describe as respectable first half performance given the challenging environment that we're operating in. Record high first half profits and other income of $1.1 billion, stable operating cash flows compared to the same period last year, a solid profit. And of course, importantly, for investors, we maintain the same interim dividend payout as in previous years. Looking forward, we continue to focus on sustainable long-term earning is important to us. The core business now has $20 billion of aircraft assets. So they're generating returns on lease with an average lease term remaining of 8 years, remember. And this brings us in committed future lease revenues of somewhere around $20 billion. The order book continues to provide future balance sheet growth. And we have record high total liquidity to support not only the growth we have coming but also to the extent we find good transactions in the marketplace to supplement our own order book. So profit to always have focus on the long term. We're a global aircraft operating lessor. We're committed in the long term. We play all the way through the cycle. We've got earnings resilience, 27 years of unbroken profitability across multiple cycles during that period. And this was a year of 5s, where we celebrated our fifth year since the IPO with more than $5 billion in cumulative earnings. So Doug, thanks. And back to you.

Great. I'll turn it over to Hillary to start with the questions, please.

Thank you, Robert. So I'm just going to start off with the first question before we turn it over to the audience for additional questions. So Robert, during the second quarter earnings season, many of your airline customers talked about improving demand, returning to profitability in the second half of the year. But now with the Delta variant starting to impact travel, many of the airlines came out in the past few weeks and said that they are seeing some softness in bookings. And a lot of them have guided lower for the third quarter. So just curious, are you seeing any changes in talking to your customers in terms of maybe deferral requests or payment trends? Or do you think that this is just a temporary blip that might impact the airlines for the next quarter or 2 but not really impact the lessors?

Well, first of all, I have to have a slight difference of view on what our airline customers were saying at the second quarter. Bear in mind, I sit in the middle of Asia. And basically, I think what you're referring to is the U.S. carriers, who have views that they turn profitable in the second quarter. We basically segment the market in 2 different ways. One is by geography, and the other way is by the type of carriers. Let me talk about geography first. So if I look at our portfolio, I would say, North America, Europe performing very well at the moment, so is domestic China. But the laggard is clearly Southeast Asia. And in Southeast Asia, we have 4 things that basically are holding them back. The first thing is there was no government support there, and I don't see that changing during the balance of this year, with the exception of Singapore. The second thing is a lack of domestic capital markets, again, with the exception of Singapore. The third thing is, unfortunately, vaccination rates have been very slow relative to the rest of the world. And fourth thing is borders just haven't opened up at all. Governments haven't seen the need, or in some cases, like Australia, they've gone backwards in terms of their plans to open up. So when I look at the world, I think, generally, Europe, U.S. and China are the drivers of the positive parts of our market and will continue to be so because they have the combinations of government support. They also had debt capital markets and equity capital markets that were open to them. Whereas Southeast Asia is at the other end of the extreme, and some are in the middle there, and you have India, the Middle East and Latin America. Russia, by the way, has been a very positive story during this period. I should just mention Russia and the former CIS states, they've done pretty well during this period. So my view is the world is going to stay with mixed results throughout the balance of this year through until probably next summer. And the positive results are going to come out of the Western world and domestic China. And I'm afraid the rest of the world, we're going to see lack that.

Okay. Got it. So let's go to the audience for questions. Anyone?

I'll ask a quick one. Robert, you moved very quickly and very large scale relatively early in the pandemic to make some very significant investments, including in North America. I'm wondering where do you see the best opportunities now to put additional capital to work and to what extent and what scale do you see that from your space going forward?

Yes. I think the -- frankly, Doug, the easy part of the countercyclical strategy is over. So the days when you could go and meet with carriers and do large deals, we did $7 billion last year of commitments of purchase and leasebacks that spread over last year through to 2023. Those days are gone. What it's going to be now is quite different. Now it's going to be, look at arbitrage opportunities between parts of the world where people have excess orders another parts of the world where they have demand beginning to increase. And I think those opportunities will predominantly be on the narrow-body side. But also let's not forget the freight market. The freight market has gone gangbusters during the last 2 years because of the unique situation we find ourselves in COVID with wide-body passenger aircraft not flying, thus the bell is not being used and a lot of freight being driven on to dedicated freighters. So I think narrow bodies and freighters are the 2 areas where we see opportunity. And geographically, it's going to be, I think, taking aircraft from those weaker areas I talked about earlier and basically placing them into strong areas. And that's exactly what we've been doing.

I guess by extension, is there also an opportunity to take aircraft out of people who entered the space in the last, call it, 5 to 10 years and who may have discovered with great pain that a 12-year sale leaseback kind of requires the airline to be around for 12 years, if you're going to get your money back as you expected? Is there opportunity to pick things up, particularly in your part of the world from smaller, newer entrants, who've gotten their fingers burnt?

Yes. It's interesting, because that's been the theory. But let's talk about reality. Reality is, if you look at where aircraft have delivered to lessors, we track this month-on-month. Chinese-owned lessors took 42% of all aircraft deliveries over the last year. Japanese-owned lessors took about 15%. And then -- so that the balance was spread across U.S. and Ireland. And so the theory that a number of those new players dropped away or were going to drop away doesn't seem to have happened. And I put this down to the strength of the liquidity in the market, particularly liquidity in the U.S. dollar bond markets. And this time around, a lot more of those players had access to debt capital markets that they haven't had in previous downturns. Now there are smaller players who basically didn't play necessarily in the new aircraft space, played in the used aircraft space. But we haven't seen a lot of those coming to market yet. Obviously, those fly came to market. There's a couple of smaller ones in Asia Pacific who may at some point come to market. And then we have Nordic with their restructuring. But there certainly has not been a flood of these opportunities, which is what we would have expected, had liquidity not come back.

And I guess, I'll ask Hillary take the last question, please.

So with AerCap buying GECAS and flight leasing is suddenly being taken over, there's been lot of, I guess, speculation about consolidation in the industry. Just wanted to get your view, I guess, on the consolidation industry. And how those -- the leasing of the upcoming merger with AerCap and GECAS change the competitive dynamic?

Okay. Well, the first thing to say is, if you look back over the last 10 years, our industry has become less concentrated rather than more concentrated. Now why has that happened? Well, post the AerCap takeover of ILFC, you'll see that the relative size of both the top 2, the top 5 and the top 10 lessors in the industry as a percentage of the total leased aircraft has come down as these new entrants came in. So that's the starting point. I suspect we're not going to see a lot of consolidation activity in the top 10 lessors. Going forward, it's more likely people in the top 10 picking up players outside of the top 10. But I think with the amount of liquidity that's in the market, that could get delayed, again, relative to previous downturns.

Great. Thanks very much. It looks like we're actually finishing right on time at 12 noon. On behalf of Hillary and myself, Robert, I'd like to thank you for participating virtually. Look forward to seeing you in 3 dimensions sometime in the relatively near future. With that, I think, operator, we can disconnect.