Avation PLC

Good afternoon, ladies and gentlemen, and welcome to Ovation PLC half-year results call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Participants may ask a question by submitting written questions using the Ask a Question button on the Spark Live webcast page. I would like to remind all participants that this call is being recorded. I will now hand over to Duncan Scott, Group Legal Counsel, to read out the legal disclaimers. Please go ahead.

Thanks, Millie. Please note that certain statements in this investor call, including certain answers to your questions, are forward-looking statements, including without limitation statements regarding our future operations and performance, revenues, operating expenses, other income and expense items. These statements and any projection as to the company's future performance represent management's estimates of future results and speak only as of today, 25th February 2025. 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 Evasion's business are included in Evasion's regulatory announcements from time to time, including its annual report and half-year results announcements. Evasion assumes no obligation to update any forward-looking statements or information in light of new information or future events. Unauthorized recording of this transmission is not permitted. Thank you, Millie. That's me done.

I'll now hand over to management to begin the presentation.

Good afternoon, everybody. I'm Geoff Chatfield from Vation PLC. I'd like to give you a snapshot of the company and the results as of the 31st of December 2024 for the half year. So as at that date, we had 32 aircraft split between wide body, narrow body and turboprop by value. So principally we're a narrow body lessor. The weighted average aircraft age is 7.9 years, which is quite good. We have 4.2 years remaining average lease term, 1.1 billion US dollars in total assets, and 365 million in unearned contracted receivables, which is the rate that airlines need to pay us for the aircraft. Next slide, please. So the portfolio as of 31st of December, As I said, 55% of its narrow body. So we have a mixture of Airbus A321, A320 and A220 aircraft. That's the core of the fleet. We also have a ATR order book, which is very important for growth opportunities, although by value it's small. So we have 13 ATR 72 600s. 11 on order and 24 purchase rights, which are options to buy the aircraft out for the next 10 years. So we have a sort of a growth, inbuilt growth opportunity with those. It's a very important sector. ATR is a subsidiary of Airbus and Leonardo, and it's the only manufacturer of that size aircraft in the world at the moment. So very important piece of business and we're well positioned for it. Next slide. So in terms of customers, we have 15 customers in 13 countries. So we like to have a lot of diversity in our customer base. So we're not focused in one geography. So we have... all over the world, EasyJet, AirBaltic, some in India with alliances, a subsidiary of Air India, Vietjet, Mandarin's a government-owned airline in Taiwan, EVA. Philippine Airlines, Cebu, Fiji and others. We've announced today that we're in the process of buying our first plane with Etihad, which is a very important acquisition and that's an A320, which will be a good acquisition for the fleet and good for credit. So we're fairly diversified. Next slide, please. So the order book and purchase rights, 11 ATR 72 on order for delivery between Q1 25 and Q2 28. The market value of those at December 31st, 2024 was around US dollars 23 million per aircraft. All of them have the latest technology engines and are SAF compatible, which is good. We've sold two of them, which were acquired from Purchase Rights for delivery in March, April 25. And the net cash proceeds from each is about five million. And the aircraft scheduled for delivery in October and November 25 have been placed for lease, have been contracted for lease. So in other words, at the moment, we're sold out and we're fully utilised. we have 24 purchase rights following that order book, which goes out to the June, 2034. Next slide, please. Next slide. Next slide. So in summary, I'll quickly read this and then hand over to Ian Cork, our CFO, to present the half-year results. Total income rose to 55.4 million for the half, which is a substantial increase. The EBITDA increased to 55.6. The operating profit, which is an important number in our business, increased to 18.8 million. The profit after tax was 0.87 million. In our result, there's a lot of one-off big numbers that impact the results. So the important numbers to look at are operating profit, Total assets, 1.1 billion. The net debt was down to 606 million. And the NAV per share increased to £2.94. Ian, do you want to take over from here?

Yeah, I'm staying on this slide just to give a bit more detail on those numbers. So, you know, the six months ended 31st December this year are characterised by improving operating performance and strong cash generation. As evidenced in these numbers, total income was up 19.8% and EBITDA was up by 45.1% compared to the six months ended 31st December 2023. These results are a reflection of the fleet's 100% utilisation throughout the period and include $9.3 million of maintenance reserve revenue. Operating profit increased by 7.2% compared to the first half of 2023. Operating profit includes a $15.4 million unrealised loss on the revaluation of aircraft purchase rights and deposits paid for aircraft, $1.7 million gain on the sale of a new ATR 72600 aircraft, and a $1.4 million reversal of previously recognised impairment charges. Net indebtedness has been reduced by 45.3 million since the 30th of June. The reduction was achieved with $36.7 million of loan repayments and $8.6 million added to unrestricted cash balances. Loan repayments in the period included $18.7 million repaid on the sale of two ATR 72600 aircraft. Following the payment of a half pence final dividend and a net reduction of 4 million outstanding shares in the period, net asset value per share increased by nine pence to £2.94. Next slide, please. Looking at the company's debt structure, we note that total debt and net debt continue to decrease due to scheduled repayments of secured loans and the repayment of two loans related to aircraft sold in the period. Net debt now represents 56.1% of total assets. The average cost of debt has increased to 6.6% and the average cost of secured debt has increased to 4.9% over the half year. This reflects the amortising nature of secured loans, which are being paid down aggressively, while the more expensive unsecured notes are non-amortising. Unsecured notes now represent nearly half of Evasion's debt stack. Ovation is substantially hedged against future interest rate changes. Next slide, please. Turning to key financial ratios, lease yield has improved to 11.4%, reflecting the fact that the fleet was fully utilised during the period. Admin expenses, excluding non-cash share warrants expense, amounting to $4.4 million, are well controlled and now represent 8.3% of revenue. Key credit ratios are showing material improvement due to the improvement in operating performance and continuing with reduction in leverage. Net debt to EBITDA, a key indicator, is now at 5.7 times, and the ratio of EBITDA to interest expense is now above two. Next slide, please. Liquidity has improved. with unrestricted cash balances up by $8.6 million to $32.2 million. Total cash balances, including restricted cash and fixed deposits, improved by $7.7 million to $125.6 million. The decrease in finance lease receivables reflects the sales of two ATR 72600 aircraft in the period, pursuant to the exercise of purchase options held by the lessee. Aviation holds five unencumbered aircraft with a total book value of around $148 million, which may be refinanced. $13.1 million in trade receivables and shares in PAL holdings, which are valued on the balance sheet at $10.6 million. A recently signed $85 million financing facility is expected to provide additional liquidity and is expandable to allow for the financing of additional aircraft subject to lender approval. Next slide, please. The company's loan maturity profile is dominated by the $331 million face value of unsecured notes, which are due to mature in October, 2026. We are currently in dialogue with our investment banking partners, exploring alternatives to refinance this bond issue, and we'll report on this project in due course. The warehouse loan, which matures in September, 2026, principally finances the company's Boeing 777-300ER aircraft. The lease for this aircraft has recently been extended by another four years to December, 2029, due to the expiry of an early lease termination auction. As such, we are confident that this loan can be refinanced. Next slide, please. There's only one lease expiry this year. The aircraft, an ATR 72600, is currently undergoing final checks before transitioning to a new airline customer based in South America. Once transitioned, this aircraft will be Avacian's first venture into this continent. Lease expiries in 2026 include two older ATR 72500s, which will be sold to the lessee on completion of their finance leases, and four ATR 72 600s for which we are seeing strong interest in the market for follow on leases. Two of those aircraft have already been placed with airlines, subject to the completion of lease agreements. I will now hand you back to Geoff to take you through the market outlook and strategy section.

Thank you very much, Ian. If I can have the next slide. So clearly there's a lot of growth in the air passenger market globally. The IATA statistics are very strong and they demonstrate plenty of fundamental demand. And obviously, there's a lot of supply constraints for aircraft. So those existing aircraft are valued more. They're in demand. So it's a very good time to own a lot of aircraft because the values of them are going up. Next slide. What we're doing is... reducing our concentration risk and improving our credit quality. So in other words, we're getting more customers, more spread out, and in some cases, better customers. You could argue that airlines that have survived COVID have had the ideal sort of credit tests. So if they've survived, they're probably good credit. But even so, we've been out looking for high quality credits to lease aircraft to. So over time, our concentration risk has diminished and therefore our credit quality has gone up. Next slide, please. Asia Pacific's fastest growing regional market as an important market to us. I mean, we're based in Singapore, so it's easy to get around the region. We will continue to place the ATR aircraft from our order book and as well as the aircraft coming off lease. We noticed a lot of demand in the secondary market for ATRs, but as the supply of secondhand aircraft dry up, then new will become more and more valuable. There are opportunities in secondary market for narrow body aircraft. Clearly, we've announced today that we're in the process of acquiring an Airbus A320 with Etihad. That's a fantastic opportunity for the company because it's a very high credit, good aircraft, new location. And once you... Leasing aircraft to airlines in general, you get to see more deal flow from them. So by doing that, we reduce our revenue concentration and boost our fleet credit quality. And having better clients gives you more access to the debt and bank markets for refinancing on improved terms. Next slide, please. So in conclusion, there's a strong air travel market, especially around where we're based. Our fleet is currently fully utilised and in demand. We are fortunate to have an order book and excellent access to the secondary market. We're continuing to reduce our revenue concentrations. We're boosting our... We're lowering our credit risk. We're boosting our profile on credit. And we've demonstrated strong cashflow generation, growth, growth in revenue, and we're substantially reducing leverage. Next slide. So I'll now pass to Millie for the Q&A section.

Ladies and gentlemen, we will now begin the question and answer session. Participants may ask a question by submitting written questions using the ask a question button on the Spark Live webcast page. I will now hand over to the team to read out the written questions.

Thank you. I'll deal with these. I see there's a few questions on the website. The first one is from Nandeep. Congratulations on the result. Could you please describe the ideal JV partner to get involved in future ATR orders? Do we have a preference for a purely financial partner or partner with an operational strategic interest? Does ATR need to approve any partnership? So, you know, there are, we have a number of people come in, a number of, especially if you like, new money entrants to the business from time to time that are interested in the growth opportunities that the ATR order book presents. And so it's possible we may take a partner and, Which would be good in the sense it would remove, you know, make it easy to finance, easier for the order book to grow. A good financial partner or even strategic partner could help. It's not mandatory, but it's something we're looking at given there's inbound interest in it. And we've literally, you know, received a number of people that are interested in getting involved and will help. examine the opportunities that they represent in due course. And that's the same question that Brandon Brandon's asked. There's a question from Matt Harnell. Matt, how does the lease yield on the new plane with Etihad compared to the current fleet? It's actually exactly the same. So it's within the... So the yield is the income from the aircraft versus its value. And surprise, surprise, it's actually exactly the same as our normal stuff. So... It compares well with the current fleet and it'll just provide growth in revenue as well as asset base. Next one's from Brandon. Company seems to be doing a lot right with all the metrics looked at. Why do you think the share price isn't reacting well? Time will tell. I mean, clearly we're doing a lot more in investor relations at the moment. You know, there's been a bit of a, Turmoil in London Stock Exchange in terms of, well, the environment of the London Stock Exchange. We're considering lifting the shares to the top tier of the London Stock Exchange, the equity shares commercial segment, whatever it's called, which is the highest sort of segment on the London Stock Exchange and allows you to be in although we'd only be a very small part of them, allows us to be in the indices and all the rest of it. So clearly we're doing what we can to improve the shares. We've demonstrated we can buy back shares. We paid a dividend. We're certainly doing what we can. I hope that's answered your question. Next one's from Sid, are there still some pending unpaid lease payments from airlines from the COVID days? Have you written them off? This is a good question for Ian.

Hi, Sid. We've actually been very successful in recovering the debts that were accrued during the COVID pandemic. And obviously, there were some airline restructurings and we had to take write-offs afterwards. when airlines went through Chapter 11 or other bankruptcy restructuring processes. But we've been pretty successful in recovering the rump of the receivables that built up during that period. In fact, I think we're down to about $13 million as of 31st December, and we're pretty confident that we can recover all of those receivables.

Our next question is from Gironan about capital, given the current share price with NAB, why not buy back some more shares? As an alternative for buying another aircraft, are there current limitations? We demonstrated we can buy back shares and we're willing to do so and may from time to time do so, but You know, there are real, obviously, we're in the business of being a lessor and Etihad is a fantastic credit. And ultimately, what drives our profitability and our ability to buy back shares is the cost of money, the cost of capital. And so, you know, cost of debt, right? And so in terms of raising our credit rating, we lower the cost of debt and therefore can generate more cash and therefore can ultimately can buy back more shares. So it's very virtuous for the company to generate more positive cash flows. So bigger is better is your answer. But that's, you know, we can also and may and probably will, if they stay down at these levels, buy back more shares. um there's a question from tim james around the um valuation the purchase rights this is a good question for ian yeah hi tim um i mean we're using a black skulls option pricing model for the for the purchase rights um and without sort of getting too lost in the details of that model i mean there are

several inputs that changing those inputs can lead to a change in the valuation. And the principal changes will be time to expiry, the market value of the asset, our contract price, and then risk-free interest rates. And just to answer your question, I mean, we haven't changed the market value that we used in that assessment between 30th of June and 31st December. So the principal factors that have generated that decrease are the change in time to expire of the options and a reduction in the risk-free interest rates.

And the next one is from Tim Jeck. Thank you for the opportunity to ask questions. Could you give more info on the options for people not familiar with the industry? When do you have to make prepayments and decide to buy them? Are these rights to buy planes at a specific price? Who takes the inflation risk? So you're basically, there are options with a, if you like, the right to acquire an aircraft at a price. Our, Historically, I mean, it's a matter of public record that the price that we pay for those aircraft has been below inflation because in our original, when the original order with ATR was entered into between innovation, very valuable order. We negotiated very hard on the escalation rate and we made sure that the escalation rate was below the inflation rate. So over time that's worked out extremely well for us in a recently high inflation environment. And so a lot of the equity in the company has been built up by effectively exercising purchase rights. Ideally leasing and then selling aircraft. That's the way we've made substantial profits over the years and it's worked really well. And the reasons for that are the price is lower than inflation. In terms of the prepayments, yeah, we make modest prepayments, you know, 12 months. six months, 18 months out from delivery. And we, the balance of the aircraft's paid on delivery and it's usually the proceeds of a financing one way or another. So it's a very, it's not as aggressive as narrow body aircraft. If you like the payment, the prepayment schedule and it's quite manageable. The next question is from Tim James. ATR announced its first ATR placement in Canada in November 24. Yesterday, the Exchange Income Corporation Canada announced the acquisition of a Canadian airline that operates 72 600s in the Canadian Arctic, saying the ATR is an excellent fit for tough weather and short runways. Is there an opportunity for Ovation to place 7,200 600s in North America, or are you focused on EMEA? Really good question, really interesting one. Theoretically, there is a massive opportunity to place ATRs in the United States. So since the year 2000, something like a thousand routes in the United States, have been airline routes have been lost because uh principally they don't have enough equipment the sort of the small jets that flew them are no longer produced so there is in theory a massive opportunity in the united states um the united issue with the united states is Airlines need, well, there's a couple of issues, but one of the issues is aircraft need to have a front door so that people can get on and off the aircraft from an air bridge to the front of the aircraft. And ATRs, in that great French tradition, typically have a back door. So people have to walk on... outside the aircraft on a tarmac to get to the back door and load that way. Now, that's not a great thing in cold weather. It doesn't really work in the US. Our order book allows for front doors. So we can order ATRs with the front door. And in theory, ATR have now developed a front door because they have a customer that's ordered front doors. So in theory, the United States is potentially an interesting market. Clearly, there's a market position there. There's a market opportunity. They fit within the scope clauses. So the US has got scope clauses around the size of aircraft and the union rules. So the only real growth opportunity for an airline in the US inside the scope rules is actually using ATRs. So ATR have appointed a salesperson in the United States and that person's running around marketing the aircraft and we will see where that goes to. The theoretical number, if you're into those things, the theoretical number of aircraft that the United States would need is 240 aircraft, which is really a lot of aircraft. And we will see where it goes. The next question is from Mr. Affan regarding the value of the midlife. It's not midlife yet, but regarding the Boeing 777-300ER. The valuation has gone up. Is that reflected in book value? Ian, do you want to do this one?

The simple answer is yes. I mean, we did revalue the 777 at 31st December based on the additional four years of lease revenue that we'll see because of the expiry of the early termination option on the lease. And we obviously, we used the new residual value in that calculation as well, which reflects the current market for those types of aircraft.

The next one is from Damien Brewer of Canaccord. Thank you, Damien. I've read your research. Great job. Thank you very much. Can we talk a little bit about the Etihad A320 and the yield and the bond and the bond refinance? Okay, so in order, well, we're a lessor, so we get to see... lots of secondary opportunities to buy aircraft. So, you know, every week from other lessors, we would see deal flow appearing. because there's a lot of this $160 billion worth of, um, secondary trading goes on between, um, less source, as I understand it each year. So there's a lot of buying and selling goes on. We see a lot of, a lot of deal flow and that our view was that aircraft, you know, given the yield is similar to our fleet, it's the same as our fleet and it's a great credit and good aircraft and would help our, um, Credit profile, it was a very, very, very strong, compelling case to buy it. In the bond, yeah, well, there's choices around the bond because, I mean, at the moment, it's not really refinanceable until close to the end of this year because it's a 4%. pre-payment penalty. It's callable at 104 until October of this year. So we're not going to pay 4% to call it early. So we can either issue a new bond or we can do a term loan with banks because clearly we did one a couple of weeks ago that was a great success that was substantially, the coupon's substantially lower than what we'd ever get in terms of the bond market. So we have choices there and we're going to evaluate those choices carefully. We're going to do some work with the credit rating agencies to see how our credit's improved, because clearly it has. Our total debt's come down. We've got $148 million worth of unencumbered aircraft. Clearly we're in quite a good place. So we can see what the credit trajectory is. And we will talk to a number of, at the right time, we'll talk to investors, the bond investors and see what their views are. And we'll also talk to banks to see where we get to with the term loan market, because clearly in our business, coupon is everything and it drives the yield and drives the cashflow and drives the profitability of the company. I think that's the complete answer. And goodness me, there's a question from Ken Bywater, which is about seven questions. The first part is if ATR values increase significantly. Well, we haven't done... JV, you know, we could contemplate it. You know, we've had expressions of interest from people, so we wouldn't give away any upside. The concept of pooling maintenance reserves imply the excess reserves be accessed earlier. Well, you can access, you can access reserves whenever you do a refinancing or a financing you know the concept of you know it's all belongs to the company all the money belongs to the company so one way or another you can do whatever you want with it next question is ovations have been holder ovations been holders of philippine airlines equity for some time um we are um We're in the process of starting the process to sell those. We've only recently got them freely tradable. And so we've already, we're already got a toe in the water in terms of selling them to prove that we can sell them. And, you know, in a, in a sensible and measured way, we will be exiting that, that, that investment and, uh we have a well to ken's question we have a strong management team you know we only see um four of them on the uh on this call but we have um lessors and marketers and lawyers and engineers and a strong you know very strong team we have um there's two executive directors you know we've got a we've got a sensible team there um Strong demand for ATR 7200 leases, similar trends for other aircraft types. Well, narrow body commercial aircraft are the most in demand thing in the world. So if you have a 737 or an A320 available, you would, it's easy to place. And then last of these questions is we posted a tweet about we got 100% shareholder approval regarding dividend. Has this led to greater emphasis on dividends as a return to shareholders? I think we've demonstrated that we're willing to look after our shareholders as they are the owners of the company. We've bought back shares. We've paid a small dividend. We are growing the revenue, growing the profits. We're doing what we need to do to for shareholders, we don't just emphasize one thing over another. Right, I think that's most of the questions or is it more? It's a few more from the top, Jeff. All right, okay, I'll share them around. Brandon Barrett, we hear a lot about private credit. Is this active in the aircraft leasing area? Well, Ashley would know this.

Yes, Jeff. There is private credit available, but the whole debt market for aviation is quite competitive. Where we find the best margins and the lowest pricing tends to be more in the commercial bank and the more public markets. The private markets are there, but they do tend to be a little more expensive. There's plenty of debt and credit around. But as you said earlier, we do tend to go looking for the cheapest for our shareholders.

Well, next one's from Afan. What's the intention with the Pell Holdings? Well, the intention is to sell it and use the money on other things. The next question is from R Larkin. Has the village considered narrow-body freighters or freighter conversions or the portfolio such as A321? We tend to like modern freighters. newish commercial aircraft is what we're interested in. Freighters are sort of, in our view, a niche market and they're more ideally suited to older aircraft. And so it's not really our, or midlife aircraft, it's not really our area. Although people do do well out of freighters because in general they have very long leases. But it's not really our business. Although, you know, we've considered it, but it's not really our business. Next one's from Adam. Does value of order increase or decrease as the time to exercise a purchase right goes closer? The answer is... It can do either, depending on interest rates, the market value of aircraft. The time value does diminish, obviously, but if there's a high inflation rate or high interest rate, then they'll go up. So it's... It's a volatile number, unfortunately. And you've also got money. I mean, you've got money in there. So the money doesn't change, but the value of money changes with interest rates and so on. The next one's someone called OP. What's the plan for the bond? Well, the plan is to investigate the bond market in parallel with... looking at the credit ratings and looking at the actual bond market as well as the bank market at the right time. And so we've started that process already. So we're probably six months early, but we've already started to look at it. The next one is from Colin. Congrats on the turnaround, strong cash positions, share price still attractive. How are the lease rate trends for ATRs and A320s? Well, they're going up. I mean, clearly, you know, in this industry, rents have gone up. Next one is from Tim. What is the target IRR converting the purchase rights? Well, if you look at the research from your brokers, you'll see that we have a quite a, you know, we're a leveraged business. So we have 11% unlevered income, if you like, and a 20% profit margin. So you know, we make sure that we maintain a reasonable IRR. I mean, do you want to, Ian, you want to jump in here? I mean, we, you know, it's a combination of credit, cost of money for that credit, as well as aircraft.

Yeah, I mean, we have to tailor the IRR expectation to the credit that we're leasing the aircraft to. So if you're dealing with smaller regional airlines in certain difficult jurisdictions, then you're going to demand a higher return from the lease than if you're leasing to a huge state backed airline. IRR leasing to Singapore Airlines, but we can generate much better IRRs leasing to smaller regional airlines, which is part of the attraction of the ATR market for us.

Okay, so keeping going, we'll do a few more, three or four more. This is from Matt. How do you expect the capital allocation split between debt, growing the asset base, returns to shareholders in 25 compared to 24? Ian, do you want to tackle this one again?

I mean, at a high level, there'll be more focus on growing the asset base simply because, you know, we've got aircraft deliveries that we need to take this year. And you'll have seen that we've just announced the Etihad aircraft purchase as well. So, you know, over the last few years, you've seen us deleverage quite aggressively. I mean, the focus will now be more towards growing the asset base.

The next one's from Reno Bianchi in New York. What accounts for the change in restricted cash bail, $40 million restructuring restricted cash, a further decrease in near-term horizon? I think that's due because the money was on fixed deposit of greater than...

duration wasn't it ian do you want to yeah that's right i mean we've we moved about 40 million dollars into fixed term deposits um so that that will i mean that is part of the restricted cash balance but i mean they're not forever they're like three or three months less than six months up i mean anything over three months you it's not cash correct it's just an accounting classification uh some of those fixed deposits have a term of initial term of more than three months, and therefore they get classified as fixed deposits rather than cash.

Next one's Matt. It's from Matt. Maintenance reserves revenues higher than recent periods. I think it will be steady. I don't think it should be. I mean, a lot of lessors consider all of maintenance rent. They call it ranked and they consider it to be revenue, but we only sort of recognise 10% of it. And I think that that's going to be consistent. Next one's Reno, talking about long-term strategy. Well, the long-term strategy is to continue to Generate cash, manage the business, grow the portfolio, and in an organic way. And that, I think, is all of the questions. That's all the questions, I believe. That's it. All right. Thank you. I'll hand back now to Millie. Thank you very much.

Thank you very much. That concludes today's call. Thank you and have a nice day.