AVATION PLC ORD 1P (AVAP.L) 2026-09-30 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Avation PLC's financial year 2026 results and investor call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. Participants may submit written questions using the Ask a Question button on the SparkLive webcast page. 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 legal disclaimers.

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 in Avation's 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 will now hand over to Jeff Chatfield, Executive Chairman.

Thank you very much, and good afternoon. I will provide you with an overview and update for the financial results. If we can have the next slide, please. This is a snapshot of the business at 30 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 they are B, B1, single B. 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. The portfolio at 30 June. We have 15 ATR 72s in the current fleet with 13 on order, followed by 19 purchase rights that go roughly out to 2032. We have numerous narrow body aircraft, principally Airbus A321-200s. We have an Airbus A330, and we also have an ATR engine, which is a Pratt & Whitney PW127M on lease. Next slide, please. Customers. This displays our customer deconcentration because we've been spreading them out as much as we can. We like to have two aircraft with an operator. We've been adding names to this list since the last time we presented, such as Finnair, 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. We've done a fairly good job in increasing the diversification. This slide is as at the current day, 30th of September. Next slide, please. For the financial results, the details I'll pass to our new Chief Financial Officer, Mr. Andrew Hiscock, which will run through them. Thank you, Andrew.

Thanks very much, Jeff. Yes. The first slide, if you could go to the next slide, please. 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 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. Off the back of this, we're very pleased to announce a dividend of 1.5 U.S. cents, being a 50% increase on the last year. In November of last year, we issued our new $300 million unsecured notes, de-risking 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 minus to B. Moody's assigned a B1 rating, and Fitch maintained its B. All the ratings agencies have given us a stable outlook. Since year-end, I'm very pleased to report 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 two ATRs and placed them straight away with new customer airlines. We also completed the sale of the Boeing 777 in September of last year, making a $4.1 million profit in the process. On the transactions side, we transitioned five ATRs to new customers on six or eight-year leases, and we extended our Airbus A330 lease with EVA Air by four years, which takes the lease out to 2031. Turning it to our order book. With ATR, we now have 13 aircraft on order with deliveries out to 2029, and we hold the additional 19 purchase rights for deliveries taking us out to 2034, which provides us with a solid pipeline of turboprop growth over the next few years. Since the year-end, I am also pleased to report we signed a lease on two ATRs with Finnair, the national flag carrier of Finland, and one of those aircraft has already been transitioned with the other one imminent. We also recently signed another lease on a new ATR with another customer, which again, is taking delivery very soon. Next slide, please. 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 reserve revenues of $21.6 million and end of lease compensation of $6.9 million. Very pleasingly, 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 will share a little bit more detail on underlying performance and comparables in the next slide. Moving on here, we have total cash balances again healthy at $105 million. A reduction of $25 million since last year, principally driven by high levels of maintenance reserve utilization this year in planned shop visits, and also share buybacks, which we will 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. This culminated in our NAV per share improving to £3.33 or $4.39, which also significantly benefited from the share buyback program, having bought back more than 10% of the equity and issue in the year. Next slide, please. As in prior years, we wanted to give you some explanatory notes on the operating profit and profit before tax, which includes some significant non-cash items. I am separating them out here to show the underlying strong performance of the group and also assist on the year-on-year comparison. Looking at the top section first, that is the operating profit where we have $64.3 million, which includes a $1.4 million unrealized loss on revaluation of our aircraft purchase rights and deposits being significantly smaller than last year's charge. This is because in our Black-Scholes pricing model, the natural reduction in option 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 a much lower net charge of $1.4 million versus the $21.6 million last year. As you can see, by adding that back into the non-cash items, underlying operating profit of just under $66 million, so comparable with last year's operating performance. On the second half of the bottom half of the slide, profit before tax also includes costs associated with the final redemption of the company's old notes, which were redeemed in 2025. The total cost there of $4 million plus $10 million, making $14 million made up of amortization and redemption losses were booked in the year. I would like to emphasize that following the redemption, this amortization and the cost is now complete and will not impact future periods. Adding back both non-cash items, underlying profit before tax, just under $26 million. Again, comparable with last year's performance. Next slide, please. Moving on to debt, we can present a very healthy picture where we have 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%, 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. A very slight increase on average interest rates on debt reflecting market conditions. Importantly, we fixed more of our debt in the year, and now 97.3% of our debt is fixed, so we are very well protected against future interest rate volatility. Overall, we have improved our net debt to total assets ratio by reducing it by 2.5% to 52.3%. All the ratings agencies indicate a stable outlook for the company. Next slide, please. Turning to the key ratios, our NAV per share improved by 19.9% to $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, the increase is also helped by a 4.8% effective exchange rate movements. Lease yield eased slightly to 10.7% from 11.3% in the year, principally due to the application of IFRS 16 on the four-year lease extension of the A330 with EVA Air, where the IFRS requires us to reflect the renewal rate 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 have taken on high levels of contracted staff in the sales and marketing around the world, and general overhead costs increasing as well. Turning to key metrics, the picture is strong on all the key measures with debt to equity improving to 2.2 times and net debt to EBITDA improving to 5.3 times. For those with a focus on cash, the funds from operations to debt ratio improved from 9.5% to 10.2%, whilst EBITDA to interest expense improved to 2.5 times. Overall credit quality continues to strengthen. Next slide, please. 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 two ATRs on finance lease, and also maintenance reserve utilization was significantly lower last year versus this year because of some planned shop visits that we had 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. We spent over $15 million in share buybacks, which has improved the NAV per share, as already mentioned. Finally, we also bought back $14 million on bonds, $12 million on the old bond, and to date, $2 million on the new bond, 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. Cash balance at $105 million. The main reason for the reduction being the maintenance reserve utilization share buybacks already mentioned. Of that balance, 50% was unrestricted, which is 9% up on last year, giving us operational security. 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, all provide meaningful flexibility to grow. Thanks very much for your attention. I shall now pass back to Geoff to discuss the outlook and strategy.

Next slide, please. Next slide, please. We are continuing to take delivery from our order book and placing new ATRs because clearly we have a lot on order. We are continuing to transition or renew leases on the ATRs. We are 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 four airBaltic Airbus A220s. 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 up to the year 2044, which is a lot. It's probably more than they can make. 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. We have an additional growth there of 19 additional ATR aircraft. Next slide, please. In summary, the situation is we've returned profitability, we've reduced our debt significantly. We've refinanced the $300 million bond, which would have been due now. 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 second-hand aircraft. There's a lot of activity. The order book gives us fleet growth. I guess the challenge for the company is to be able to buy aircraft in the secondary market or buy sale and leasebacks with airlines so as to be able to grow. Next slide, please. Thank you very much for listening to the presentation. We will allow the floor to be open for questions. They have given you instructions on Q&A. I will pass back to the operator for now.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Participants may submit written questions by using the Ask a Question button on the SparkLive Webcast page. I will now hand over to Jeff Chatfield, Executive Chairman, to read out the questions.

Thank you very much. I will share these around. I will answer the first one. The first one is from Magnus, re your aircraft, airBaltic, termination fees, and so on. They have also asked, are we considering buying some of the new aircraft orders? I will split that question into two. We have four aircraft with airBaltic. airBaltic has decided to go down the Chapter 11 process in the U.S. Our view will be, we are willing to work with the airline to continue to lease the aircraft if that is appropriate, given all of the aircraft at airBaltic are leased. That would be in sensible commercial terms. Clearly, an airline that has all of its aircraft leased needs to come to sensible commercial terms with its lessors in order to keep the planes. Failing that, we will simply transfer them somewhere else. We have about $23 million in reserves and deposits against those aircraft, so we are sort of well secured. Tony Romano, who is on the call and would love to jump in for the second half of this question, is probably the most experienced A220 marketer in the world. Tony, do you want to just jump in for a minute and talk about the market? No Tony? Tony, please unmute your line. Thank you.

Sorry. The A220 fuel efficient liquid asset 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 Geoff said, with the confidence in airBaltic continuing, the airplanes will stay. If not, we have a backup plan for those airplanes.

Perfect. Thank you. The next one's from Douglas Runte at Deutsche Bank. Talking about fuel. Have we discussed any arrears or requests for rent deferments excluding airBaltic? I'll answer that quickly. No, we haven't actually, which is interesting. A220s don't use a lot of fuel per seat. They're 20% more fuel efficient than anything else. ATR sip fuel. So, if you're an operator, you want to fly ATRs or A220. No, no one has actually asked us for a deferral because of fuel. The next question is, someone's asked who can you transfer A220s to? No one seems to look. Well, there's hundreds on order, so that's not actually correct. There's plenty of A220s on order and big airlines are now taking them. Next one. In our business, we've just successfully transitioned a couple of aircraft from a weak operator to Finnair. We're really experienced in this. We did, I think 13-ish from Virgin, which was a sort of a challenge, which was a lot of aircraft. But we do it all the time. We transition them. That's sort of what we do for a living, what a lessor does for a living. Sadly, it does cost a bit. You've got legal fees and you've got to bring them up to spec, which is a pain, but that's what you need to do. It's the 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, lease yields 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 anticipated 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 two ATRs to Finnair, but that's now behind us, so it should improve as well. So I think from a sort of general perspective, a steady state is around 11.3%.

Well, his question goes on for more. The utilization at the moment is 100%, aside from the airBaltics and others. Next question: Can you give more granular into pacing in the ATR order book? This is perfect for Tony Romano. Tony? On mute, I think. No, Tony. I will answer it. The aircraft is sort of three and four a year. It is quite slow, sadly. Because they do not make that many of these things, and they are super popular and basically sold out. So, yeah, it is not fast, but it is there. We can get you more details on how the. The second question Douglas asked, can the warehouse be used for PDPs? The answer is not really. The warehouse is 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 has been a very successful program. The next question is, breakdown the NAV in percentage terms by existing fleet. That is 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 DAE took over Nordic, can you run through the market impact out in the ATR market? I think this is one for Tony within reason, if he is off mute. Tony did work at DAE for a while, or NAC, as well as Airbus. Do you want to comment on that, Tony?

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

The next one's 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, who deals with the banks. Ashley.

Yes. Interestingly, I was just at a conference in Europe just recently, and there were plenty of bankers and lenders all willing to and wishing to lend money 75%, 80% debt to value. So plenty of liquidity on that side.

Next question is from Renee. How can you claim the book value of the purchase price so high when an Indian startup airline can order 40 aircraft probably at a much lower cost? That's speculation around an order. The production rate is probably around 40 a year. So if they've sold out for the next few years, the Indian startup, in theory, would be waiting for the end of the decade to be able to get their first aircraft. So the value of our aircraft is we can place them in mid-next year because we've got them being delivered. So if you're an airline, you don't want to wait till the end of the decade. The next question is, there's a very good question from Rob Byid. What's the strategy of adding more narrow body aircraft and the availability of A320s? At the moment, aircraft prices in the market are extremely high. Transactions that we're seeing. There must be investors out there that are diversifying their portfolios. In terms of financial investors diversifying, they are driving aircraft prices to extremely high levels. Clearly, we're in the business, so we don't want to overpay. It's very important to get a good price at the start. The challenge for us is to have a bilateral deal with another lessor or with airlines in a SLB situation, sale and leaseback situation, where we can get aircraft that are at a sensible price so we can deliver profits and be cash flow positive. Clearly, it's not easy, not in an environment where aircraft prices are this high. So we don't have a perfect answer for that, but we are working on it. The next question is from John Cherney around PPE and notes, and perfect for Andrew Hiscock.

Okay. Yeah. Thank you. The first question was on PPE. We will be providing, obviously, in the results when the audit's complete, we will be providing a full note on PP&E. Your question around depreciation. The revaluation gains obviously do not go through the P&L. The impairment reversal as a result of the fair value residual values does, so that is partially offset some of the depreciation. The revaluation gain, obviously, that comes back as a higher depreciation charge later. In regard to lease yield, you are asking lease yield was 11.5% at the half year. As I mentioned earlier, the IFRS 16 impact has brought the percentage down a little bit, and then with the two aircraft, the ATRs transitioning to Finnair, that also brought it down a little bit as well. That is now going back up as the aircraft are all fully utilized again.

The next question is from Renee Maxwell around airBaltic and Seabury. We cannot really comment. We need to have a negotiation around the extension of, or termination of any aircraft with airBaltic, and we have not had that yet. We do not expect a material change over the long term. Next question is from Michael Ronzio asking about bond yields. Ashley could talk about capital allocation.

Yes, of course. We have, obviously, the pipeline of orders, so we have cash that is allocated to those, and any aircraft that are available to purchase off the secondary market or SLB market. If there is surplus cash after that, then we are looking at the next best use. You are right to point out that the bond is undervalued and the yield is high. We consider it to be extremely good value, and we have been buying it back continuously. We think it is great value, and we will continue to do so while it is cheap.

Thank you for that. The next one from Mark Littleton about share price. Well, we are doing everything. We have brought out a great set of results. We have increased our dividend by 50%. We have generated a solid profit. We have increased the net asset value of the shares to £3.33, and yes, the share price has not changed, but if you know the reasons why, write to us and tell us. "Can you respond to the main question?" This is from Renee Maxwell. "You have canceled 20% of the stock with no impact on stock price." Well, I guess there has been more than 20% of the stock for sale, is the answer, I guess.

It has had an impact on EPS, Joe.

It has. Yeah, of course. It has been great for the remaining shareholders. The NAV has increased and the EPS per share has increased, which has been a good thing. The next question, Brandon is congratulating us on a good year, talking about the NAV. Lease rates for A220s. Tony, do you want to talk about the A220 market? I see they are $40 million aircraft these days. Tony, do you want to talk about lease rates in general? Or you can think about-

Yeah.

Or you can think about-

As the market tightens, I think we're going to see an uptick in lease rates on the A220 as they become more and more popular, even as Airbus continues to deliver them. Definitely looking at an uptick in the lease rates going forward.

I think I've covered most of the questions. Is there anything Ashley, have I missed any main questions there?

Not that I can see, but I think the general trend is, obviously interest rates have been rising, and that feeds through to lease rates. We have seen that sort of feeding through gradually. But apart from that, I think most of it's covered.

Yeah. We can compete with the bigger lessors because we have a blended mixture of bonds as well as asset-backed lending, whereas a lot of the lessors, the big lessors, only issue bonds. So we're competitive in the sense that we can do business at the same yield. All right. I think that covers it. I'll hand back to the operator now. Thank you very much.

Thank you. Well, this concludes today's call. Thank you and have a nice day.