Avation PLC

Good morning, ladies and gentlemen, and welcome to the Avation Half 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 on the right-hand corner of your screen. Just please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and will publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand over to Group General Counsel, Duncan Scott.

Thank you. Today, on the 1st of March, Evasion published its unaudited half-year results for the six months ended 31st of December, 2023. A copy of our results announcement is available on our website at www.evasion.net. The conference call is being webcast and recorded, and the webcast will be available for replay on our website. Please note that certain statements in the conference call, including answers to your questions, are forward-looking statements, including without limitation statements regarding our future operations and performance, revenue, 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, 1st of March 2024. 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 Ovation's business are included in Ovation's regulatory announcements, including its annual report and our unaudited results announcements. Ovation assumes no obligation to update any forward-looking statements or information in light of future information or future events. Unauthorized recording of this conference call is not permitted. I now hand over to Executive Chairman Jeff Chatfield.

Thank you very much. Thank you for joining this investor call where we discuss our half year results. In the six months ended 31st of December, 2023, Avation continued to de-lever its balance sheet, added liquidity and improved collections of receivables. Transition one aircraft to a new lease with Cebu Pacific and dealt with the repossession and sale of an aircraft leased in India. The company expects to conclude the delayed sale of an off-lease ATR 72, shortly, at which point the fleet will be fully utilised for the first time since early 2020. According to IATA, the latest market update, 2023 was marked by strong industry-wide recovery and the company's seen market valuations for commercial aircraft increase. These factors are supportive of the company's business plan. So if I take you now to the snapshot. As at 31st December, 2023, Avatian's fleet comprised 35 aircraft leased to 15 airlines in 13 countries. Avatian owns a diverse fleet comprising 52% narrow body aircraft, 30% regional turbo props and 18% wide body by value. 76% of Evasion's lease revenue is derived from Asia with the remainder derived from Europe. The fleet has good metrics with 6.9 year weighted average age and 4.6 year weighted average remaining lease term. Fleet assets have a net book value of 871 million. Total assets are around 1.2 billion and there is 450 million of future contracted lease receivables. the portfolio as at 31st of December. Evasion's diversified fleet is dominated by fuel efficient regional and narrow body aircraft, which generally operate on domestic and short haul routes. These sectors were the fastest recover after COVID. Regional and narrow body aircraft types have seen strong demand and market value growth since the end of the pandemic. Upon the completion of that transaction we talked about, Avation's fleet will be 100% utilised, which is a very important point to get to. Avation has two firm orders for ATR 72 aircraft scheduled for delivery in 24. The original scheduled delivery dates for these aircraft were April and May and were pushed back to later in the year by agreement with the manufacturer. Our 28 purchase rights are available for new ATR aircraft to be delivered by the end of June 27. In terms of customer base, as of 31st of December, Aviation had 15 customers in 13 countries. We'll add a new customer on commencement of a lease of an ATR 72 to start in March or April. Around 76% of Avation's customers are located in Asia, with the remainder in Europe. Avation's top three customers buy revenue of Vietjet, AirBaltic and EVA Air, who currently provide around 59% of monthly revenue. And Airbus A32200 commenced a new four-year lease with an existing customer with Cebu Pacific in early December. The earliest leased expiry is September 24, although we currently expect that lease to continue through to March 25, at which point we'll release the aircraft. Aviation has a focus on new or relatively young latest technology aircraft and is therefore a natural seller of midlife or older aircraft. In terms of operational highlights, the company terminated the lease of a 12 year old ATR72500 aircraft on lease to an Indian airline in October 23 and repossessed the aircraft. The lease was terminated due to a payment default. The aircraft was not in good maintenance condition and was sold as is where is to another airline resulting in a loss of 2.9 million. The company is pursuing the lessee for recovery of losses, but has made a total bad debt provision in the half year results for the amount due. Avation's last off-lease ATR 72 aircraft is expected to start a new lease with a new customer in March or April. This is the last remaining aircraft delivered to the company by Virgin Australia in 2020 following Virgin's period of administration. I'll now hand over to Ian Corp, the CFO, who will provide details on the financial results.

Thanks, Jeff. The next few slides of the presentation provide a summary of Vivation's half-year financial

Just bear with us, ladies and gentlemen, just while we reconnect Ian. Just bear with us one second, Ian, if you could just allow me just to reconnect you. Thank you very much indeed. Just bear with us, ladies and gentlemen, as Ian is now reconnecting to the room. Bear with me one second. Ian, if you could just allow me to take control there, I will be able to bring you back in. Thank you very much indeed. Hi, Ian. You're back in the room. Can you hear us okay?

Yes, I can. Thanks.

That's lovely. Please, if you could start from this slide, that would be great. Thank you.

Okay, so on this slide, we have the summary of the half year results. And in the six months ended 31st December, 2023, total revenue and other income was $46.3 million. Lease rental revenue increased by $1.3 million to $43.9 million compared to the six months ended 31st December, 2022. This increase is due to improved fleet utilization. Maintenance reserve revenue decreased by $4.5 million, principally due to a $5 million worth of non-recurring credits recognised in 2022. Other income reduced by $5.5 million from $7.1 million in the six months ended 31st December 2022 to $1.5 million in the six months ended 31st December 2023. The decrease is principally due to a $3.3 million release of an FX hedging reserve and a $3.2 million claim recovery from the Virgin Australia administration, which were both recognized in 2022. Operating profit was $17.5 million compared with $35.4 million in the prior year. A loss after tax of $9.6 million for the half year is after charging $4.7 million, which is the amortization of a debt modification gain on amendment of the terms of Ovation Capital's Senior Pick Toggle Notes under IFRS 9. Net indebtedness has been reduced by $31.8 million during the period as the company continued to deliver its balance sheet. Total assets were largely unchanged at around $1.2 billion at both 30th of June and 31st of December 2023. As noted on the previous slide, net indebtedness has reduced by $31.8 million. The weighted average cost of debt increased from 6.1% to 6.3% over the period. This is due to repayments of secured loans which have a lower interest cost than the company's unsecured notes. The face value of unsecured notes outstanding was $341.6 million at 31st December compared to $345.2 million at 30th June 2023. Reduction in the outstanding amount resulted from an $8 million repurchase in the period, less the value of PIC interest added. The weighted average cost of secured debt was 4.7% at 31st December, and 96% of ovations debt is now at fixed or hedged interest rates. The ratio of net debt to total assets was further reduced to 59.7% as at 31st December 2023, and secured loans will continue to amortise rapidly in 2024, with scheduled repayments amounting to $58.5 million. Turning to key ratios, net asset value per share decreased 5.5% to $3.25, equivalent to £2.56 at the year-end exchange rate. Lease yield improved to 10.4% for the six-month period due to better fleet utilization. Admin expenses, excluding non-cash share warrants expense, was 9.1% of revenue in the six months ended 31st December compared to 8.3% for the year ended 30th of June 2023. The debt to equity ratio was 3.2 times and the ratio of debt to total assets was 63.4% at 31st of December. Regarding liquidity, the company's total cash balances have increased to $150.1 million at 31 December, which includes $43.5 million of unrestricted cash. Restricted balances have increased to over $106 million and are now generating significant amounts of interest income for the company. Collections from trade receivables have improved and we have seen an overall reduction in receivables of about $14 million since the 30th of June, 2023, mostly due to repayments of rent arrears. Other current assets includes 8 million shares in Philippine Airlines, which were issued to us as part of the restructuring of the airline following that airline's bankruptcy. These shares are due to be exchanged for listed shares in Powell Holdings, the holding company of Philippine Airlines, and the exchange is currently awaiting approval by the Philippines SEC. The company may look to monetize this asset once the listed shares are issued. The current portion of finance lease receivables includes amounts receivable under purchase options for two ATR 72600 aircraft. The airline holding these options is currently considering exercising them. The next slide shows the maturity profile of evasions loans and borrowings. Other than scheduled monthly and quarterly loan installments, there are no significant near-term loan maturities. The company's outstanding bonds with a face value of $341.6 million mature in October 2026. And the next slide illustrates the expiry profile of Avations leases. As Jeff mentioned earlier, the earliest possible contractual lease expiry date is now September 2024, although the airline is expected to continue this lease until March 2025. There are no other scheduled lease expiries until early 2026. I'll now hand you back to Jeff Chatfield for the market outlook and strategy discussion.

Thank you very much, Ian. The market outlook and strategy, clearly the Asian market is now rebounding strongly after COVID, which is one of our core markets. We have a significant order book and purchase right position for sort of modern, very fuel efficient, low CO2 emissions, ATR 72. So it creates a strong opportunity for aviation to transition to a low CO2 fleet as the global aviation industry itself aims to decarbonize and become more sustainable. The company is contemplating converting a number of purchase rights into firm orders for ATR aircraft to grow the fleet. We also believe that interest rates may have peaked therefore there will be opportunities to refinance debt in future at lowest at lower costs if you look at the overall uh market you clearly see um as we have a strong presidency in Asia, where we generate 76% of our revenue, we're pleased to note that the Asian market is now recovering strongly, having lagged behind other regions somewhat since the end of the COVID pandemic. In terms of value recovery, interestingly, ATR 72, 600s and 737 max 8s have the strongest market value growth from mid-2019 to January 24, which is an interesting recovery curve for valuations of aircraft types. Apparently, there's debate around interest rates, but there is, as recently as February 24, there's been commentary from the US around three interest rate cuts this year, which would certainly provide the opportunity for the company to review and optimize its capital structure. In terms of going forward, carbon is becoming a real issue with airlines and the cost of carbon and the imposts of carbon offsets and levies. So we believe that low CO2 emissions aircraft such as the ATRs are more attractive and they certainly support Avation's business model and provide a growth pathway. So in terms of the ATRs, we're considering purchase rights exercises. extending our order book skyline into the future um we're focused on fuel efficient low co2 aircraft we we have we are a holder of 28 purchase rights for these aircraft and we believe that that this will be highly supportive of our of our business plan concluding so the aviation sector is bouncing back especially in asia aircraft values are rising The company's taking more steps to increase its liquidity. We're certainly well placed in terms of the low CO2 emissions and we are positioned for market and fleet growth given that where we have such a strong order book. So thank you very much for your attention. That concludes the presentation. We'll now hand back to the operator and deal with the question and answer session.

That's great. Jeff, Ian and Duncan, thank you very much indeed for your time this morning. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab situated on the right-hand corner of the screen. Just while the company take a few moments to review your questions submitted already, I'd just like to remind you that a recording of this presentation along with a copy of the slides and the published Q&A can be accessed via your InvestorMeet company dashboard. I'm going to bring your cameras back up, guys. So just bear with me while I do that. Jeff, as you can see, you've got a number of questions from investors. So firstly, thank you to everybody for engagement. And if I may just hand back to you, Jeff, if I could ask you just to read out those questions and pass them out and I'll pick up from you in due course.

Thank you. We'll share them out, I think. So the first one, the discount to NAV is becoming a major problem. Why do you think this exists and what are you planning to do about it? Great question. We have a view that obviously the share price is not reflective of the NAV. And the steps that we can take to narrow that gap, clearly we can buy back shares at some point. We have shareholder authority to do that. And that's something that we can consider from time to time because clearly with the price where it is, it's quite a profitable thing to do. We're not really that excited about spending money on too much, if you like, investor relations promotion, because that seems to... be a tough path to follow. So we're more interested in buybacks and potentially in future when interest rates go down, then clearly the company will be generating lots of cash. So we could talk about reinstating dividends and things of that nature at some point. The next one, could you please clarify what's behind the sizable increases in cash? I think I'll hand this one to Ian.

Yeah, I mean, very, very simply, we are collecting maintenance reserves from a lot of our customers. And, you know, the maintenance reserves sit there and then get reimbursed to airlines when they carry out maintenance work. And recently, you know, we've been collecting more maintenance reserves from airlines and we've been paying back in reimbursements. So the cash is just being added to our balance sheet.

Thank you. The next one talks about the stock market value of the business on the basis of NAV and the value of futures orders before COVID. COVID has disappeared. Are you surprised the market continues to value the business poorly? Mark L. Well, I think I've dealt with some of that. I mean, the Most lessors are based, listed lessors are valued as a consequence of NAV and also return on equity and other metrics. Clearly, as interest rates go up and the cost of money goes up, then investors have a different view. But our discount is substantial and therefore we need to narrow that gap because clearly of the listed lessors, we have the greatest discount. So that is something we've got to address at some point. The next one's from Damien. Airlines reported to be anxious to retain aircraft. Are there discussions going given renewals in leases? I think Soren Ferre can answer this one.

Yes. The short answer is no. Traditionally, airlines are going to start looking at extending their aircraft probably 12 months, 12 to 18 months before the end of the lease. So we are not there in that time window.

Okay. This is a question from Robert. Please clarify the smaller amount of secured debt amortization in the first half of 24 compared to prior periods. Ian, do you want to do that? I thought it was the opposite, but anyway.

Yeah, I mean, we do from time to time refinance loans. So as loans are coming close to maturity, we might refinance them and then push the balloon or remaining installments out in time. So I believe that's what's happened recently.

Damien asked, do you expect further progress on receivables in the second half of 24? I'll answer that one. The answer is absolutely yes. Damien also asked, can you expand more of the debt buyback appetite and how you're starting to plan for the 26 bond repayment refinancing? We have an appetite to buy back more bonds and have done bought $8 million worth back in recently. And clearly we're price sensitive. So if the bonds are cheap and we've got sufficient liquidity, we can look at them. In terms of the 26 bond repayment, well, if you look at our slides, Clearly, we're making substantial progress on our secured debt pile. So by the time we get to 26, we won't have much secured debt left. So there'll be an opportunity for a refinancing, probably by way of banks at some time between now and it's the end of October 26. Mark has asked, what are the levers that impact NAV in both directions? Ian, do you want to deal with this?

Yeah, I mean, principally profit or loss. And if you have a look at this year, this financial report, a revaluation of interest rate swaps, which I think was a $5 million negative that went through the equity statement, which also impacts NAV.

The next one's from Laurent. What has been done to close the price to net book value gap? We trade at 0.4. Is there a strategic process and thinking going on in London? Well, clearly, we've touched on that earlier and we can buy back shares. I mean, there was a strategic interest in the company last year. At the moment, things are fairly quiet on that score. The next one is from Tim. Do you and Jeremy Raper agree on the path forward? Presumably he's involved to unlock the NAV discount and that has persisted for four years. Well, we take feedback from all shareholders. So if a shareholder writes to us or asks a question or comments, we address that. We've listened to Mr. Raper's comments. Clearly, he'll be motivated to unlock the NAV discount and therefore get his share price up at some stage. We clearly are all motivated to do that, me as well. Next one's from Markel. Does the company have dialogue with a new 80% shareholder who came and registered the last three months for you to share their views? Well, that's Mr. Raper, and he, like every other shareholder, if he makes a comment, we certainly listen to it and have done so and will continue to do so. Charlie asks, has there been a significant recovery in trade receivables in the period? Would you expect these to remain broadly where they are going forward? I think we sort of answered this and the answer is yes. Joel asks, will the directors look to purchase shares given the large disconnect between NAV and the current share price? And the answer is yes. What drove the decision to change the maintenance reserve policy? Can you extend the time on which the, 28X purchase rights can be exercised. The decision to change the reserve policy was in line with what other lessors do. And what was happening is we're actually deferring incorrectly a lot of revenue. We can't have a hundred million dollars sitting there in reserves that may never get spent during the time of the leases. So, you know, apropos, if it's in excess, and I mean, it was only a small amount, if it's in excess of what can ever be used, then it's got to be released appropriately and accounting needs to match the real world. Can you extend the time, the 28, and the answer is theoretically yes, because it just requires the exercise of existing aircraft. The next one's Aaron. There was a big cash inflow for maintenance reserves in working capital. What is driving this? Is it one-off? Well, it was normal reserves. Ian, do you want to comment on that one?

Yeah, I mean, it's similar questions than we just already answered. So it's not a one-off. I mean, we will continue to collect maintenance reserves as part of the agreements.

The next one, the market doesn't ascribe any value to the purchase rights that Ovation's recently tweeted and the graph showing Ovation's cost of debt is higher than other lessors. Would Ovation issue equity around the current share price compared to price purchase rights in the firm orders, if not how they're financed? Do you need a partner with a lot of cost of debt to fund the purchase rights? So that's sort of a loaded question. I'll deal with that. The purchase rights are extremely valuable because the exercise price is below the market price for those aircraft and maths are what they are. So the market, I think the market gives a general discount to the NAV rather than a specific discount to the mathematics of aircraft prices. The next one, we tweeted a chart showing the cost of debt is higher than other lessors. Well, our cost of secured debt, that is so bank debt, is the same or lower than other lessors. It's just that in our particular situation is we have a fairly big bond out there with a high coupon that is higher than other lessors. It's a mix of debt problem and an amount of debt problem rather than a cost of debt problem. Our cost of bank debt is probably lower than other lessors. So the mix of bonds and bank debt needs to be improved and something we're working on. And the amount of debt, as Ian explained to you earlier, we're rapidly getting rid of debt. We're de-levering. Next one, do you need a partner with a lower cost of debt to fund the purchase rights? Well, we have the same sort of cost of, if not lower, of asset-backed debt that we, as anyone else has. And I know that we actually have lower costs than anyone else. And we've basically been through a review with the ECAs, which are the export credit agencies, which has opened the door again on export credit financing, which is quite cheap debt, actually, because it's sort of insured. Convert your purchase rights into firm orders. Well, we have... sufficient liquidity to convert a reasonable number of purchase rights into firm orders organically. You know, we can do it ourselves. So we don't need to issue equity to convert purchase rights into firm orders. And we wouldn't do that because clearly that isn't in our current shareholders' best interest. The next one's from Hazel. How are we thinking about the purchase? Well, organically, we can pay the PDPs and there is debt of cheap debt available. As I just said, you know, within the last couple of weeks, the ECA market's been open to us again. Is Ashley on the I can't see it is Ashley Nichols on the. I mean, do you want to address this, the ECA question? You know, you've successfully, have you got an upgrade and you've got the market open? So maybe you inform shareholders.

Of course. We have been in touch with the ECAs and the European ECAs are actually applying at the moment for the processing of an improvement in our rating. So if that comes through, then we should be looking at even better rates from the European ECAs.

Well, that's something we'll need to announce if and when it happens. Next one is from Mark. What is the case for not selling assets and repurchasing shares at a discount to NAV? The problem with reselling assets is every time you sell an asset, your revenue goes down. And you could strongly argue that... selling assets is a bad thing. We should and can and will at some stage repurchase shares with cash that's organically generated. There is a strong argument that if you read our result, our result was significantly impacted by the repossession and sale of a plane in India. there's a strong argument that says we should have got that plane fixed it up because it was in terrible condition and released it. And then we wouldn't have lost $3 million on that plane. Our results impacted by $3 million worth of that plane in India and about 5 million of IFRS 9 non-cash amortization. So every time you sell an aircraft, your revenue goes down. And our job is to have aircraft on lease, generate excess cash and use that to buy back shares. Next question, will the PAL shares be freely tradable once the exchange is completed? Minimum hold or lock up period? We understand that once the SEC gives approval, they're freely tradable. Hazel, can you give us an idea of what a new ATR would lease at versus Current rates. I don't really understand what a new ATR would lease at versus current rates. Soren, can you interpret that question? I guess he's asking if ATR lease rates improving. All right, we've lost Soren. Yeah. You want me to talk about lease rates? Well, yeah, in general, yeah.

In general, yes. We've seen a slight improvement in these rates across the board for all ATRs, whether it's new ones or used ones. And that trend seems to be continuing going forward because there is a shortfall of ATRs. There is actually a shortfall of capacity, generally speaking. And ATR is having a number of issues. So there are new aircraft coming on the market as well.

Julian's asked about picks and bond coupons. Well, there's a break-even point there where you issue pick or buy back bonds. So we don't really want to talk about bond strategies at this stage for any reasons, for many reasons. The next one asks about the Indian customers. Ian, do you want to address this? I mean, we've made a very, very prudent provision for that debt. We're assuming we don't get it.

Yeah, I mean, the amount that we're pursuing from the customer in India is about 2.6 million, which you'll see is actually quite close to the loss on sale that we've booked. And we'll pursue them using every tool available to us. There was a security deposit, which obviously was forfeited when we repossessed the aircraft. And that's been taken account of in calculating that loss.

I mean, factually though, since then they have paid some small amounts of money. So our position has slightly improved since in this half because they've paid some money. But we've provided for it in full. Ken asks, substantial hardware change required to upgrade engines to the PW127XT. Would it be now to upgrade engines to improve their credentials, access green finance? The answer to that is no. It's in our interest to sell new aircraft and all our new stuff will be the new engine. So what we're looking for, the ideal customer for us is an existing ATR or Q400 operator with old technology that we can provide a new fleet for out of our purchase rights and therefore replace the old aircraft with new aircraft. Soren, do you wanna talk about fleet rollovers? Go ahead, Soren. Soren's disappeared. All right. So I think basically one of the marketing strategies is to look for airlines that have a lot of old technology aircraft, whether they're Q400s or old ATRs, and roll them into new, as you correctly point out, new aircraft with new engines. Nandeep has asked, I think Soren said airlines consider freight requirements 18 months expires. You had a slow slide showing many lease expires in 26. So is it fair to accept many renewals in the next year at lease rates that affect the higher interest rate environment when the leases were originally set? The answer is yes. I would argue, we would argue that they're not all 12. What Sauron was talking about was extensions of leases. What we see from customers is a shorter period of time. So a new customer may come along and need a plane six to 12 months out. So there's sort of a gap between or different timetable in leasing renewals or extensions than there is in, if you like, a new origination. So we're in a much better position to get higher lease rates from totally new customers than existing customers. Because airlines, obviously, they know that there's You know, they don't want to pay you any more money, but, you know, a new one that comes along might have a genuine use for the aircraft and we'll have to pay the market rate. Libby is asking, arguing about the share price being a 50% discount to NAV. You know, we live, you know, we've got a billion dollar balance sheet and... As you know from London, if you buy 10,000 shares, the share price can change by 20p. So it's a sort of a, you know, if we suddenly spent, you know, half a million pounds on shares as a company, then the share price would dramatically change. So there's no point selling a 20 or a $50 million aircraft to buy, It may make you feel good for a little while, but as I said earlier, our job is to generate money out of leasing aircraft. Tim asks if the purchase rights are so attractive, why has innovation converted any yet? Well, we've delivered out of purchase rights and options in our history something like, $600 million or $700 million worth of aircraft, around 38 aircraft, I believe. So we have converted many in our history. It's what we do from time to time. We've only actually got two left at the moment. That appears to be all the questions.

You have, Jeff. You've taken all the questions from investors. And thank you once again to everybody for your engagement this afternoon. Jeff, I know that investor feedback is particularly important to you and you've got a lot of investors on today's call. So if I may just hand back to you for a few closing comments just before I redirect investors to let you have their thoughts and expectations.

Okay. Roger asked the last question about the customer. Yes, it was the Indian customer.

That's perfect. Jeff, thank you very much indeed for updating investors and to the rest of the team. Ladies and gentlemen, if I may ask you please not to close the session as we'll now automatically redirect you for the opportunity for you to provide your feedback in order that the company can better understand your views and expectations. This will take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Avation PLC, I'd like to thank you for attending today's presentation and good afternoon to you all.