Avation PLC (AVAP) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Avation Plc's Financial Year 2026 Results and Investor Call. [Operator Instructions] I would like to remind you all that this call is being recorded. I will now hand over to Duncan Scott, Group General Counsel, to read out the [indiscernible].

Thank you. Welcome to everyone, and thank you for joining our presentation. Please note that certain statements in this presentation, including certain answers to your questions, are forward-looking statements, including, without limitation, statements regarding our future operations and performance, revenues, operating expenses and 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, 30 September 2026. These estimates involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information on the factors and risks that may affect Avation's business is included innovations, regulatory announcements from time to time, including its annual report and half year results announcements. Avation assumes no obligation to update any forward-looking statements or information in light of new information or future events. Unauthorized recording of this transmission is not permitted. I'll now hand over to Jeff Chatfield, Executive Chairman.

Thank you very much, and good afternoon. I'll provide you with an overview and update for the financial results. So if we can have the next slide, please. So this is a snapshot of the business at 30th of June. We had, at the time, 33 aircraft, we had 16 customers around the world. The principal business of the company is narrow-body aircraft. So we had 59% narrow-body aircraft by value. Credit ratings have improved and the BBB, 9.1 years average aircraft age, 3.8 years remaining lease term, $1 billion in assets. and $303 million in unearned contracted revenues. Next slide, please. So the portfolio at 30 June. We have 15 ATR 72s in the current fleet, with 13 on order. followed out -- followed by '19 purchase rights that go roughly out to 2032. We have numerous narrow-body aircraft, principally Airbus A321. We have an Airbus A330. And we also have an ATR engine, which at 127 on lease. Next slide, please. Customers, this displays out our customer deconcentration because we've been spreading them out as much as we can. We like to have sort of 2 aircraft with an operator. So we've been adding names to this list since the last time we presented such as Fine, Cabo Verde, et cetera. Our strategy has been to further diversify, which lowers the risk and gives us opportunity to place aircraft with existing customers should they become available. And so we've done a fairly good job in increasing the diversification. And this slide is as at the current day, 30th of September. So next slide, please. So for the financial results, the details I'll pass to our new Chief Financial Officer, Mr. Andrew Hiscock, will run through them. So thank you, Andrew.

Thanks very much, Jeff. Yes. So the first slide, if you could go to the next slide, please. So our first slide here sets out the key financial highlights of the year, and the major headline is that the group has delivered a very healthy profit of after tax of $8.4 million for the year. In addition, we've improved net asset value per share by nearly 20% to $4.39 or $3.33. And off the back of this, we're very pleased to announce the dividend of USD 0.15 being 50% increase on the last year. In November of last year, we issued a new $300 million unsecured note is derisking the balance sheet by taking out maturity to 2031, and we redeemed our old notes, which would have matured this year. S&P Global Ratings have upgraded us in the year from B- to B. Moody's assigned a B1 rating and a fit to maintain its be and all the rating agencies have given us a stable outlook. Since year-end, I'm very pleased to report that we've also signed a $100 million committed warehouse facility, which will be drawn down as needed to support our future growth. Next slide, please. Moving on to operational highlights. We've had a very busy year. We took delivery of 2 ATRs and placed them straight away with new to customer their airlines. And we also completed the sale of the Boeing 777 in September of last year, making a [indiscernible] profit in the process. On the transactions side, we transitioned 5 ATRs to new customers on 6- or 8-year leases. and we extended our Airbus A330 lease with ever Air by 4 years, which takes the lease out to 2031. Turning to our order book. With ATR, we now have 13 aircraft on order with deliveries out to 2029. We hold the additional '19 purchase rights deliveries taking us out to 2034, which provides us with a solid pipeline of turboprop growth over the next few years. And since the year-end, I'm also pleased to report we signed a lease on 2 ATRs with Finnair, the national flight carrier of Finland. And one of those aircraft has already been transitioned with the other 1 imminent. And we also recently signed another lease on the newer ATR with another customer, which, again, is taking delivery very soon. Next slide, please. So turning to the results summary. Our total income was comparable year-on-year at $112 million, and this reflects strong levels of utilization in the year and includes maintenance reserves of -- maintenance reserve revenues of $21.6 million and end of lease compensation of $6.9 million. I'm very pleased to let this feeds through to a healthy profit at the operating profit level where we delivered $64 million flowing down to profit after tax where we achieved a strong $8.4 million result. I'll share a little bit more detail on underlying performance and comparables in the next slide. But moving on here, we had total cash balances again healthy at $105 million. a reduction of $25 million since last year, principally driven by higher levels of maintenance reserve utilization this year in planned shop visits and also share buybacks, which we'll talk about more later. On debt, we continue to pay down the principal on secured debt, achieving an $80 million reduction in net indebtedness, which reduced to $523 million at the year-end. And this accommodated in our NAV per share improving to $3.33 or $4.3 which also significantly benefited from the share buyback program having bought back more than 10% of the equity in the year. Next slide, please. So as in prior years, we wanted to give you some explanatory notes on the operating profit and profit before tax, which includes some significant noncash items, and so I'm separating them out here to show the underlying strong performance of the group and also assisted on the year-on-year comparison. So looking at the top section first. That's the operating profit where we have $64.3 million, which includes of $1.4 million unrealized loss on revaluation of our aircraft purchase rights and deposits being significantly smaller than last year's charge, and this is because in our Black Scholes pricing model, the natural reduction in auction values as the purchase rights approach maturity was largely offset by independently assessed ATR value increases and an increase in the treasury yield curve inputs into the equation. This resulted in much lower net charge of $1.4 million versus the $21.6 million last year. But as you can see by adding that back into the noncash items, underlying operating profit of just under $66 million, so comparable with last year's operating performance. Then on the second half of the -- the bottom half the slide, profit before tax also includes costs associated with the final redemption of the company's old notes, which were redeemed in 2025. So the total cost there of $4 million plus $10 million, making $14 million made up of amortization and redemption losses we booked last year were booked in the air, but I'd like to emphasize that following the redemption, this amortization and the cost is now complete and will not impact future periods. Adding back both noncash items, underlying profit before tax of just under $26 million, so again comparable with last year's performance. Next slide, please. So moving on to debt. We can present a very healthy picture, where we've reduced our total loans by $76 million with net indebtedness having followed and reduced to $523 million. Our weighted average cost of debt increased slightly from 6.6% to 7% and predominantly reflecting the mix effect where the unsecured notes now represent a larger proportion of our total debt with the secured debt having been paid down and a very slight increase on average interest rates on debt reflecting market conditions. Importantly, we fixed more than -- we fixed more of our debt in the year and now at 97.3% of our debt is fixed. So we are very well protected against future interest rate volatility. So overall, we've improved our net debt to total assets ratio by reducing it by 2.5% to 52.3%. And note that all the rating agencies indicate a stable outlook for the company. Next slide, please. So turning to the key ratios. Our NAV per share improved by 19.9% at $4.39 or $3.33. 8% of this increase reflects higher equity and 12% represents the significant accretive effect of our share buybacks. In pound sterling terms and increase is also helped by a 4.8% effective exchange rate movements. So lease yield slightly to 10.7% from 11.3% in the year, principally due to the application of IFRS 16 on the 4-year lease extension of the A330 with [indiscernible] where the IFRS requires us to reflect the renewal rates into the revenue recognized from the date of signing the extension. On an underlying basis, lease yields remain comparable year-on-year. Administrative expenses rose to 9.3%, principally due to high levels of transactional activity already discussed as well as staff costs where we've taken on high levels of contracted staff in the sales and marketing around the world in general overhead costs increasing as well. Turning to key metrics. The picture is strong in all the key metrics with debt-to-equity improving to 2.2x and net debt-to-EBITDA improving to 5.3x. And for those with a focus on cash, the funds from operations to debt ratio improved from 9.5% to 10.2%, whilst EBITDA for interest expense improved to 2.5x. So overall credit quality continues to strengthen. Next slide, please. So finally, on liquidity. Operating cash flow was $31 million in the year versus $91 million in 2025. The year-on-year difference is really explained by working capital movements in finance lease receivables and maintenance reserves, which were broadly neutral this year compared to significant inflows in 2025. The prior year included an inflow from the sale of 2 ATRs on finance lease and also maintenance reserve utilization was significantly lower on last year versus this year because of some plant shop visits that we have this year. Our principal use of cash included nearly $49 million on the CapEx program for our aircraft and the engine, the engine being used as a sales tool, and we spent over $15 million in share buybacks, which is improved the NAV per share, as I already mentioned. And finally, we also bought back $14 million on bonds, $12 million on the old bond and to date, $2 million on the new board, which we hold in treasury. In summary, we remain focused on disciplined capital allocation to enhance shareholder value. All our debt is current, and we remain in compliance with all of the covenants to a cash balance of $105 million, the main reason for the reduction being the maintenance reserve utilization, share buybacks already mentioned, and of that balance, 50% was unrestricted, which is 9% up on last year, giving us operational security. And that, along with other sources of liquidity being the refinance bond, the 10 unencumbered aircraft that we have at year-end. and other refinancing opportunities as well as the new $100 million committed warehouse facility will provide meaningful flexibility to grow. So thanks very much for your attention. I shall now pass it back to Jeff to discuss the outlook and strategy.

Next slide, please. And next slide, please. So we are continuing to take delivery from our order book and placing new ATRs because clearly, we have a lot of order. We are continuing to transition or new leases on the ATR. We will -- we're attempting to secure opportunities to grow the narrow-body fleet in the secondary markets as well as with sale and leasebacks from airlines. We're looking to -- either prepare to either transition or extend the 4 Airbus A220. And we continually broaden the group's funding and capital base as we've demonstrated by getting $100 million warehouse in to support growth. Next slide, please. Clearly, there is a big opportunity to place ATRs on this slide. It talks about the replacement curve, principally where 1,100 aircraft will need to be replaced between sort of up to the year 2044, which is a lot. It's probably more than they can make. So it's a very good situation to be in to have an order book. There's also growth and we've demonstrated that by adding new clients and one of our strengths has been to place new ATRs with new clients. So we have an additional growth there of 19 additional ATR aircraft. Next slide, please. So in summary, the summary of the situation is we've returned to profitability. We've reduced our debt significantly. We've refinanced the $300 million bond, which was -- would have been to now. So that was done last year. We have a lot of transactions. Clearly, there's a lot of transitions. There's a lot of new aircraft. There's secondhand aircraft. So there's a lot of activity. And the order book gives us fleet growth. And I guess the challenge for the company is to be able to buy aircraft in the secondary market or by sale and leasebacks with airlines to -- so to be able to grow. Next slide, please. So thank you very much for the -- listening to the presentation, and we'll allow the floor to be open for questions. They've given you instructions on Q&A. So I'll pass back to the operator for now.

[Operator Instructions] I'll now hand over to Jeff Chatfield, Executive Chairman to read out the questions.

Thank you very much. I will share these around. I'll answer the first one. So the first one images, we your aircraft there about Baltic termination fees and so on. We -- and I've also asked are we considering buying some of the new aircraft orders. . I'll split that question into 2. So we -- the Air Baltic, we have 4 aircraft were Air Baltic. They -- Air Baltic has decided to go down the Chapter 11 process in the United States. -- our view will be we are willing to work with the airline to continue to lease the aircraft, if that's appropriate, given all of the aircraft at Air Baltic are leased. But that would be in sensible commercial terms. Clearly, an airline that has all of its aircraft lease needs to come to a sensible commercial terms with its lessors in order to keep the planes. Failing that will simply transfer them somewhere else. So we have about $23 million in reserves and deposits against those aircraft. So we're sort of well secured. And Tony Romano, who is on the call and would love to jump in to the second half of this question is probably the most experienced A320 marketer in the world. So Tony, do you want to just jump in for a minute and talk about the market? Tony?

Sorry. And so yes, the A220, fuel-efficient liquid asset, a number of customers which are growing each year, evidenced by the AirAsia order -- we're in contact with a number of operators looking for a second home, should we need to, as Jeff said, with the confidence in Air Baltic continuing, the airplanes will stay. If not, we have a backup plan for those airplanes.

Perfect. Thank you. So the next one is from Douglas [indiscernible], Deutsche Bank talking about fuel -- have we discussed any areas of request for rent deferments, excluding Air Baltic. I'll add to that quickly. No, we haven't actually, which is interesting. So A220 is don't use a lot of fuel per seat. They're 20% more fuel efficient than anything else. And ATR SIP fuel. So if you're operating, you want to fly ATRs or A220. So no, no one has actually asked us for a deferral because of fuel. The next question is someone are seeking to transfer A220 to no one seems to look well, there's hundreds on orders. So that's not actually correct. There's plenty of A220s on order and big airlines are now taking them. Next one. And I mean, our business -- we've just successfully transitioned a couple of aircraft from a weak operator to Finnair, so we're really experiencing this. We did, I think, 13-ish from Virgin, which was sort of a challenge, which was a lot of aircraft -- we do it all the time. We transition them. It's sort of what we do for -- what a lessor does for living. And -- I mean, sadly, it does cost a bit. You've got legal fees and you've got to bring them up to PC, which is a pain, but that's what you need to do. It's a cost of doing business. . Next question, lease yields, I think Andrew Hiscock would love to answer this one.

Yes. As I touched on in the presentation, so lease yield has come down from last year's 11.3% to 10.7%. Most of that is driven by the IFRS 16 adjustment where from the date of signing, the extended lease we have to recognize the reduced rent that we anticipate for the renewal. But on a cash basis, we'll obviously still be bringing income in at the old rate. There was a slight effect as well from the transition of the 2 ATRs to Finnair, but that's now behind us. it should improve as well. So I think from a sort of general perspective, a steady state is around 11.3%.

Well, this question goes on for more. Well, the utilization at the moment is 100% aside from the Air Baltic and others. Next question, can you give more granularity pacing in the ATR order book? This is perfect for Tony Romano. Tony? On mute, I think. I don't know, Tony, I'll answer it. So the aircraft is sort of 3 and 4 a year. So it is quite slow, sadly, because they don't make that many of these things and they're super popular and basically sold out. And so yes, it's not fast, but it is there. We can get you more details on how -- and -- the second question, Douglas asked, can the warehouse be used for PDPs? And the answer is not really the warehouses for aircraft. Next question is the buyback program. We will continue with our buyback program because we had a lot of investors give us feedback from the U.K. saying that they like the buyback program, the investors sort of suggested that it would be really good for the whole company to buy back shares, which we have done, and it's been a very successful program. The next question is break down the NAV in percentage terms by our existing fleet. That's broken down. You could do that if you look at the slide in the presentation, with the pie chart on the right and the fleet on the left, so you could sort of work it out. The next question is 18 months since DEE took over Nordic, can you run through the market impact that in the ATR market? I think this is one for Tony within reason, if he's off mute. Tony did work at DEE for a while or MAC as well as Airbus. Do you want to comment on that, Tony?

Yes. So yes, the market is buoyant for ATRs. As we said earlier in the presentation, there's really no competition in that space now that Bombardier is no longer producing regional turboprop. So it's an active buoyant market with a lot of confidence in it. .

The next 1 is from Damian Brewer. Can you comment on financing for new fleet direct deliveries? Do you see a certain loan to value? This is a question ideally for Ashley. Ashley Nicholas deals with the banks, actually.