Avation PLC

Good afternoon and welcome to the Avation PLC full-year results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted at any time using the Q&A tab situated in the right-hand corner of your screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives 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, Evasion 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.evasion.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 from this conference call regulatory announcements, including an annual report and 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. Baytion's generated profit includes fleet utilisation, maintain liquidity and continue 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 pre-pandemic levels, while international travel has recovered to around 89% of pre-pandemic 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. At the end of the year, Avatian's fleet comprised 36 aircraft, at least 17 airlines in 14 countries. Avatian owns a diverse fleet comprising 51% narrow-body aircraft, 31% regional turboprop aircraft and 18% wide-body aircraft by value. The fleet has good metrics with a 6.4-year weighted average and 5-year weighted average remaining lease. Fleet assets have a net 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 narrow body aircraft, which generally operate on domestic and short haul international routes. These sectors were the fastest to recover after the COVID-19 pandemic. Utilisation of Avation's fleet has improved during the year as three off-lease aircraft were sold and another aircraft started the lease with a new airline customer in Nepal. Avation has also agreed to sell one of its two last off-lease aircraft and lease the remaining aircraft. They're expected to close the transaction shortly and a new lease to commence in November 2023. Aviation has two firm orders for ATR72 aircraft scheduled for delivery in April and May 2024. And we have 28 purchase rights going forward on ATR aircraft. In terms of customers, we had 17 customers in 14 countries, and we'll add another customer on commencement of the lease, which will start in November 23. Around 74% of Avation's customers by revenue are located in Asia, with the remainder in Europe. Avation's top three customers by revenue are Vietjet, Air Baltic and EVA Air, which currently provide 56% of monthly revenue. A lease for an Airbus A3-2200 expired earlier this month. The aircraft has been delivered to a maintenance repair organisation 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. Baytion has a focus on new and relatively young aircraft and therefore is a natural seller of midlife and older aircraft. highlights. Well, these are mainly operational highlights. The company sold two ATR 72 aircraft in December 22, which had been unutilised since re-delivery from the customers. The company also sold a Boeing 737-800 which had been unutilised 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 Invasion'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 an ex-virgin Australia ATR 72 to Yeti Airlines in Nepal started in September 22. The lease is currently performing well. Aviation terminated the lease of an ATR 72 to an airline in Myanmar in August 22. The airline had ceased operations following a military coup in that country and was in default. The 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 Ian Court, the Chief Financial Officer, who will provide details on the financial results.

Thanks, Geoff. The next few slides of the presentation provide a summary of Avatian'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 unrealised 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 ATR 72 aircraft, which was repossessed from an airline in Myanmar. The gain on revaluation of aircraft purchase rights relates to evasions purchase rights for 28 ATR 72 aircraft, which are valued using a black skulls option valuation model. The gain on an equity investment is a mark to market adjustment to the value of shares in Philippine Airlines which they should receive following the airlines Chapter 11 restructuring process. aircraft transition costs are principally repair and maintenance costs incurred in the transition of three aircraft which was sold in the year and two additional aircraft, which will be sold or least 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 costs 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 to 4.5% from 4.0% over the year due to increases in floating rates and mandatory scheduled repayments skewed towards lower cost facilities. Ovation refinanced two floating-rate euro loans with long-term fixed-rate debt in November 2022, increasing the proportion of fixed-rate debt to 95.8%. Turning to key ratios, net asset value per share increased 4% in US dollar terms to $3.41, equivalent to £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 non-cash 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 the continued amortization of loan balances. Turning to the liquidity updates company has managed its liquidity position over the year deploying 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 environments and 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 30 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 via a Chapter 11 bankruptcy process. The shares are due to be exchanged for listed shares in Powell Holdings Inc, the holding company, in the first quarter of 2024. The company may look to monetise this asset in the coming year. The patient has four unencumbered aircraft which may be sold or refinanced. We are in the process of selling one unencumbered ATR 72 aircraft at the moment. The next slide shows the maturity profile of ovations, loans and borrowings. Other than scheduled monthly and quarterly loan instalments, 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 Ovation has been able to manage additional assets without increasing headcount. I will now pass you back to Geoff for the conclusion of the presentation.

Thank you very much, Ian. 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 to new technology, low CO2 aircraft. And we have one of the world's largest order book slash purchase rights for ATR 72 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's sort of received numerous inquiries around That order book and that strategy. So what else we do? So we're leasing our ordered ATR 72 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 impulse on airlines who don't go to SAF or other technologies. and that will drive demand for ATR, especially ATR 72 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, that's all. The next strategy, well, We, as I said, we're focusing on fuel efficient, low CO2 emission aircraft, and moving towards sustainable aviation. So as sort of 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's bounced back. You know, 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 note that there's a lot of Q&A, a lot of questions. 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 able to deal with them all, but we'll try to deal with some of them. So the first pre-submitted question was probation has six 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 inquiries, like all of the sort of strategic, if you like, inquiries that companies received in the last year have been around the ATR order book or the ATR portfolio or the ATR futures. 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 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 obviously got ongoing discussions with ATR, including next week, around the timing of them. 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's not right to place six a year, but that's a commercial discussion with ATR at the time. The next question was strategic review in April 2020. I'm not in a position to comment on what happened in 2020. 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 a strategic review if that was the appropriate pathway to take. The next question was 2024, the two ATR deliveries. Well, we have, no, they're on storage, they're not made yet. We've paid money to ATR for all of our audiobooks. 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 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 storage, they're being made. And we don't need to put up any more money. The next one, speculative orders. Presumably having ATR available on demand to a customer will allow a higher lease rate factor. Yeah, well, we're not really in the market to speculate too much. You know, we prefer organic growth. And at the moment, airlines seem to be ordering or buying 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. Retail investors, the overall difference is purchase rights, purchase options and firm options, including financial commitments. So we've paid for all of our long-term purchase rights and rescheduled the order numerous times. So we've got plenty of sunk money in there. A purchase right is effectively an undated option and it becomes firm when we agree a delivery date with the manufacturer. So it's effectively an undated option with a non-dated delivery time until it's agreed. Over a period of time, we pay increasing amounts of money as you become closer to delivery for the aircraft. So by the time that the thing's delivered, we've had to put in all of the money and the balance is paid by finance on delivery. so that's okay next one singapore aircraft leasing scheme this is a really good one for ian to answer given that he's close to that yeah hi everyone so the question is about the singapore aircraft leasing scheme which is a five-year

renewable concessionary tax rate issued by the government of Singapore to leasing companies. Our five year membership of the scheme will expire in May 2024, and we will be applying for a renewal of that scheme membership. you know, 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 five-year extension, it would still be at 8%.

The next question is about the technical team. Effectively asking, is it something we can rent out? Most big leasing, most leasing companies have a technical team, real leasing companies like Evasion 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 stuck with consultants who are varying quality. And so 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. There are real supply chain issues out there with transitioning aircraft and our team has done a great job. I really don't know how pure financial investors are managing that problem. The next one's around option expiry dates. Well, no, we won't publish them because we constantly renegotiate them. So that's not something we would publish given that the publication may be out of date quickly. Well, no, okay, the next question is about transferability. So if you are a less or like a patient 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 mightn't 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, you know, there are, other option holders in the world probably not with 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 um so you know we have in the past i think of ian would know but four or five 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. Ian, do you remember that?

Yeah, 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...

know millions of dollars i think this one's about nav evolution well there's yeah i mean we're not in a static environment you know the investors and finances the business requires you know strategic or organic growth in some way and so we have in real life you know we have a huge green audible that is genuinely popular with people. The question is the cost of financing. And what we've 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 organically the company can generate sufficient 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 your NAV will go up. The next one talks about share buybacks. Well, 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, trying to chomp through the bonds. The next question asks about a discount to nabbing the share price and would be able to buy a small amount of shares. Well, I mean, my shareholding 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 of the capital structure. Next one, can you talk us through any forward refinancing? Well, the obvious thing that we're doing, which Ian sort of alluded to, is 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 of 2027, we'll need to deal with the bond. And mathematically, by that time we shouldn't have a lot of asset-backed debt left. So that'll be the time to think about a refinancing and hopefully by then interest rates will have stabilized and we'll know where the world is in terms of what the interest rate environment is. So the gentleman's asked, Phil's asked about growth. Well, you know, you've got growth coming. You've got two aircraft being delivered inside six months. So that is growth. Do you have any view on timing of aircraft deliveries for the two? Yeah, next year, I believe that, ATR have sold out of, ATR themselves have got production issues. So we understand that they've pretty much sold out in 2024. Now, given our position, we may be able to get aircraft from them if they basically buy exercising options, but it will be a tight market next year because they've got terrible supply issues We had a comment on the $11 million transition cost. This would be one for Ian.

Yeah, hi, Adil. I think in your question you referred to one transition. I mean, those costs actually relate to five aircraft. So we had two aircraft that were sold in December 2022, one aircraft that was then sold in February 2023. And we've also spent money repairing the two aircraft that we're dealing with at the moment. So the one that is ready to be sold now and the last one, which will be put on lease later this year. So that 11 million is actually spread over five different aircraft.

Question from Damien regarding moving to low CO2 fleet. How do you see this transition occurring as a natural seller of old and mid-like aircraft? Yeah, at the moment, all aircraft, all aircraft are scarce, especially wide bodies. But at some point, that'll change. And the governments of the world are 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 we see deal flow in Neo and new generation equipment all the time. So it won't be that hard 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 prioritise paying debt versus buying plans? Well, it's mathematics. You need to do your... It's simply mathematical computation. Paying down debts, a very good thing. But obviously at some point, shareholders need to see some growth. Next question is, Do management expect any difficulties securing lessees or financing for new ATRs? The answer, no. 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, Lee Shield, this is one for Ian.

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

The next one, ongoing leases are hell and high water. In general, they're fixed, but so is the finance. So we fix the finance as well as fix the lease rent. Ian, do we have an estimate for aircraft transition expenses in 2024?

Yeah, we do. And it'll 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 which goes on lease in later this year. So we're probably talking sort of three to $4 million in total.

Next one asks about, which is a good question, actually. It talks 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 are happy to do that down the track. So that is a, you know, not a bad idea to do JVs to exercise Tim has asked the difference between our cost of purchase through the purchase rate compared to the cost of the brand new ATR. Well, we got a discount because we negotiated a price escalation cap with inflation. It's something we didn't do a good job on. And so our price has gone up a lot lower than inflation and therefore a good thing. I can't comment on precise prices because ATR would, I'd breach an agreement with ATR. Tim's asked how long does it take to manufacture an ATR? Well, it's really, at the moment, I think it takes two years. You'd need to ask them that. In terms of Advance notice, you know, six months is a good number. Less than that's a bit hard. So, you know, you need to give them about six months notice. Next question is, the two ATRs placed the new or existing customers. We've signed an LOI with a new customer. Nandi, could you discuss the effect of rising interest rates on lease rates? Yes, so interest rates have gone up, therefore lease rates have gone up. But it's still viable, you know, as interest rates have gone up, we've passed on increased rents 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.

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

Well, thank you very much for your time and attention and patience. I mean, clearly the... plot covered regime and the high inflationary environment and the rising interest rate environment coupled with supply change supply change difficulties hasn't made it an easy environment um but i mean the the opportunity is fantastic you know the demand for aircraft you know, if they're right here, right now and available is fantastic. You know, you can 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. You look forward to some organic growth and, you know, we look at every part of the capital structure constantly. We look at every opportunity constantly and we've got good advisors and strong peers and hopefully we can manage to reward our shareholders, which are very, very important to the company. And thank you for your support.

Perfect. Jeff, Ian, 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 Aviation PLC, we would like to thank you for attending today's presentation and good afternoon to you