Earnings Call: H2 2020

Mar 11, 2021

Ladies and gentlemen, welcome to BOC Aviation Limited Full Year 2020 Results Call. I will now hand the session to Mr. Timothy Ross to begin today's presentation. Mr. Timothy Ross, please begin. Thank you, Jess, and welcome everybody to BOC Aviation's earnings call to discuss our final results for the year end of December 31, 2020. With me today are our Managing Director and Chief Executive Officer, Robert Martin, our Deputy Managing Director and Chief Financial Officer, Steve Townend, and our Deputy Managing Director and Chief Operating Officer, David Walton. Please note that some of the information you will hear during our discussion today may consist of forward-looking statements, which are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. You should not place undue reliance on any forward-looking statements, and you should review our results announcements for full details. Please also note that all currency references in today's call are in USD only. A copy of our earnings announcement is available both via the Hong Kong Stock Exchange and in the investor section of our website at www.bocaviation.com. The conference call presentation is also available in the investor section of our website. This call is being recorded and will be available for replay from our website within the next 24 hours, as is a transcript of today's management presentation. I will now turn over the call to Robert Martin for his comments. Thanks, Tim, and good evening to everyone on the line. Thank you for joining us for our 2020 full year results earnings call. 2020 was the most challenging year in our 27-year history, and I must thank all of our colleagues for their hard work as we navigated it. The whole aviation industry had to rapidly adapt to a new environment when COVID arrived. This impacted airline customers, suppliers of aircraft and finance, and investors. It also affected their employees directly, as most of the industry had to switch to work from home and undergo painful furloughs and cuts. Governments played a much larger role than ever before as they supported the airlines and supply chains to protect jobs. They also introduced new health and safety regulations, including lockdowns, to protect people and their health generally, and impose cross-border entry and exit restrictions. This impacted our airline customers and the ability to deliver aircraft from manufacturers, which pushed deliveries into the fourth quarter. The good news is that in 2021, we can now see the arrival of vaccines, intergovernmental initiatives on cross-border health visas, and signs that lockdown restrictions will gradually be lifted. The speed of all of this will depend upon individual governments, and so it won't be uniform. Navigating through this will require careful research and identification of opportunities and risks, and then acting with agility as we did in 2020. Since establishment in 1993, we've built a company with resilience to weather storms such as this one by taking a long-term view and planning for downturns as part of our strategy. We were already planning for a downturn in 2020, but the magnitude of the first truly global aviation downturn was greater than those previously. We took additional steps during the year to enhance our capabilities, such as increasing the Bank of China debt facility and further diversifying our customer base. Over our history, we've committed to acquire 888 aircraft, have leased over 1,000 aircraft, raised over $34 billion in debt, and sold over 370 aircraft. In 2020, we passed the milestone of $2 billion in revenue for the first time and continued our 27-year record of unbroken profitability, delivering a net profit after tax of $510 million, equivalent to earnings per share of $0.73. During 2020, we increased both our cash flow and our liquidity, while at the same time investing more in aircraft than at any time during our history, as we identified long-term business opportunities to drive long-term earnings and finish the year with $23.6 billion in assets. We ended the year with over $5 billion of cash and undrawn committed credit facilities that reflected a 13% growth in operating cash flow net of interest paid compared with 2019. Our board has recommended a full-year dividend payout equivalent to 35% of our net profit after tax, consistent with the last three years. The board has recommended declaring a final dividend of $0.1173 per share, payable to shareholders of record on 11th of June, bringing the total dividend for 2020 to $0.2571 per share. The full-year dividend is equivalent to a dividend yield of 3% based on our stock price at the beginning of 2020. During the year in review, both S&P Global Ratings and Fitch Ratings reaffirmed our industry-leading corporate credit ratings of A-. During the year, we also celebrated the delivery of our 300th Boeing aircraft and just after year-end, our 400th Airbus aircraft. While COVID dominated headlines in 2020, manufacturer production issues exerted a significant influence on our deliveries and revenues. Whilst the 737 MAX program remained grounded for most of the year, I'm pleased to inform you that we have now taken delivery of 18 737 MAX from Boeing since deliveries recommenced in fourth quarter 2020, all of them on purchase and leasebacks. The progressive return to service of the 737 MAX from December sounded a positive note, with 73 aircraft having been delivered globally since the ungrounding order. Production, however, continues at low levels. We also face some delivery delays from Airbus related to travel restrictions and production issues. All of this combined to slow our delivery stream in 2020 and into first quarter of 2021. Our Chairman, Mr. Sun Yu, stepped down at the end of 2020, moving to another senior role within the Bank of China Group. We would like to thank Mr. Sun for his active stewardship whilst chairing our board, and we look forward to welcoming our new Chairman shortly. During the year, Mr. Steven Townend assumed the Chief Financial Officer role in October, replacing Mr. Phang Thim Fatt, who retired, to whom we also extend our thanks and best wishes. I will now hand the call over to Stephen, who will take over for a more detailed review of our profit and loss, balance sheet and cash flow, and then to David to speak to our operations and business development. With that, I will turn over to Stephen. Thanks, Robert. In 2020, we delivered 54 new aircraft to airline customers from our order book, including one where the customer exercised a purchase option at delivery, equating to a net addition of 53 aircraft to our own portfolio. Our total fleet stood at 553 aircraft at the end of 2020, comprising 358 owned and 40 managed aircraft and an order book of 155 aircraft. Our owned aircraft portfolio remains one of the youngest in the industry, with an average age of 3 and a half years. This fleet growth enabled us to end 2020 with total assets increasing 19% to $23.6 billion. Net book value of our aircraft grew over the year by 12% to $18.9 billion, with a weighted average remaining lease term of 8.6 years, which provides a solid base for future revenue growth. Our total revenues and other income rose 4% year-on-year to $2.1 billion. Our lease rental income increased 5% compared to 2019 as we grew the size of our fleet. Our core lease rental contribution was $715 million, which net of operating costs represented 72% of net profit before tax and exceptional items. Our net lease yield, which captures both the effects of interest rate fluctuations and the competitive lease rental environment, declined to 7.9% in 2020 from 8.4% in 2019. However, this also reflected the late delivery of many of our aircraft that eventually delivered in the fourth quarter. These contributed little revenue on account of their late arrival but were included in our aircraft net book value totals. Interest, fees, and other income amounted to $225 million, almost two-thirds more than 2019 levels, as we generated more fee income from predelivery payment financing and booked first-time contributions from six finance leased aircraft. These activities comprised 21% of our net profit before tax, after deduction of associated interest expense. Finance charges rose by only 6% or $27 million. Our borrowings rose as we invested in more aircraft, but this was partially offset by a decline in our average cost of funds, which fell to 3.2% in 2020 from 3.6% in 2019. Staff costs dropped 15% in 2020 to $68 million on lower performance-related bonus payments and represented approximately 3% of our total revenues and other income. This was down from 2019, when staff costs represented around 4% of the same measure. Profit before tax was $563 million, and net profit after tax was $510 million, both of which declined 27% from 2019. The key reasons for this reduction in profitability were, first, we recorded $109 million in aircraft impairments in 2020, focused mainly on wide-body aircraft. Second, we sold 12 aircraft from the owned fleet during 2020 compared to 28 aircraft sold in 2019, leading to a drop in net gain on aircraft sales to $44 million from $134 million in 2019. This reflected, in particular, the lack of an ABS market last year, either for our own transaction, as in 2019, or to support the buyers of our aircraft. Third, we recognized impairment costs related to financial assets of $43 million, compared with $25 million the previous year. These related to trade receivables that were past due and in excess of security deposits held under the leases to which those payments related. Finally, we registered a $79 million loss on investment in equity instruments, which relates to the sale of all the Norwegian shares held by the company prior to the year-end. After taking into account the rental revenue income recognized for Norwegian of $56 million, the net impact on profit before tax was a net loss of $23 million in 2020. In the balance sheet, there is an additional $21 million of deferred income to be recognized as income in the next 12 months and $25 million thereafter. Our average tax rate was stable at 9.4%. We brought our financial gearing back to the level targeted following our IPO, as our indebtedness increased by $3.3 billion to $16.8 billion at the end of 2020, with our gross debt to equity ending the year at 3.5 to one. We leveraged our industry-leading ratings of A-minus and robust investor demand to raise $5.5 billion in total debt during 2020. This borrowing activity included our successful bond offerings that raised a record $2.9 billion under our GMTN program, an increase in our revolving credit facility with Bank of China from $2 billion to $3.5 billion, with the balance raised from our more than 70-strong banking group. This investor support has continued into 2021, where we have already raised $500 million in five-year notes at the lowest coupon in our company's history. With that, I will now hand the call over to David to speak to our operations and business development. Thank you, Stephen. In 2020, employee health and safety and business continuity were our top priorities, with most of our employees in lockdown for large parts of the year. Before the pandemic, we already adopted a business continuity strategy based on remote working and online collaboration, and that turned out to be a wise decision heading into 2020, as everyone in the company already had the IT equipment and training to work from home. We changed our way of working to enhance communication and collaboration during the year. For example, with every single department in the company doing daily video calls and with more all-company town hall meetings or business briefing sessions. I am really proud of what our team accomplished last year. With all of our aircraft deliveries, leases signed, aircraft sold, and transitions completed, we closed more than 165 aircraft transactions in 2020, mostly working remotely. From the outset of COVID, we began working with the manufacturers and our airline customers to resculpt our order book, as we pivoted to support our customers, switching investments from our own aircraft orders to purchase and leasebacks. During the year, we canceled 52 aircraft orders, mostly scheduled for delivery in 2020 to 2022, deferred more than 30 deliveries into 2023 and beyond, and we replaced this CapEx with 77 purchase and leasebacks scheduled for delivery mainly in 2020 and 2021. These aircraft are all placed on long-term leases with well-established airlines, have been paying 100% on time, and provide a base for long-term sustainable earnings going forward. Highlights included the largest purchase and leaseback transaction in our history of 22 787s to be leased to American Airlines, a purchase and leaseback with Southwest Airlines for ten 737 MAX aircraft, a purchase and leaseback with United Airlines for 16 737 MAX and six 787 aircraft, a purchase and leaseback of six A321neo aircraft with Wizz Air, and a purchase and leaseback with IndiGo Airlines for four A321neo aircraft. We ended the year with a weighted average remaining lease term for our own portfolio of 8.6 years and with committed future lease rentals of nearly $19 billion. In addition to providing liquidity to airlines through purchase and leaseback transactions, we developed solutions for our customers through payment deferral programs, documenting 40 deferral agreements covering roughly half the fleet. Deferred rent payments amounted to $104 million at the end of 2020, or around 2% of our total available liquidity. Our collection rate for 2020 was 94% and has averaged 99% over the last 13 years. During 2020, we repossessed two aircraft in our own portfolio from an airline in the Americas and successfully put the aircraft back on lease to a customer in China, with one delivery in December and the other in the first few days of January 2021. As a reminder, we started 2020 with no scheduled lease expiries in the owned portfolio, which put us in a good position going into the downturn. For 2021, we have six scheduled lease expirations remaining in the owned portfolio. Portfolio utilization was unchanged in 2020 at 99.6%, close to our 13-year average of 99.8%. Our management level ESG committee and the board risk committee had an active year for environmental, social, and governance development in 2020. We made a positive impact on our communities with corporate and employee donations to global and local organizations, including Airlink, a nonprofit that connects charities and aviation logistics partners to transport relief supplies in a crisis. Where social distancing permitted, our team also participated in food packing for Food from the Heart and waterway cleanups with Waterways Watch Society, both here in Singapore. On the governance side, we stepped up our stakeholder engagement with more than 1,300 investor and analyst calls and virtual meetings. We also surveyed our investors on ESG matters, reported the results to the board, and we adjusted our efforts and our disclosures to address the comments we received. We surveyed our top suppliers for their ESG compliance, and that will now be an annual process going forward and will influence our procurement decisions. We have a diverse group of colleagues, with women making up more than half of our employee base. Our senior management team is made up of three different nationalities, and our board also comprises a diverse group with a broad range of experience. We have two female board directors, one of whom is the Vice Chairman. Our business is run very efficiently, and we have low direct carbon footprint, but we know we can still do more. Therefore, in 2020, we set goals to reduce absolute direct carbon emissions, electricity consumption, and waste production by 5%-10% over the next three years, and we are well on our way to exceeding those goals. We also became 100% carbon neutral for our direct emissions through offsets, purchasing carbon credits from two accredited projects, a wind farm in China, and a reforestation project in Cambodia. We are accelerating our digital transformation, both to reduce our carbon footprint and to make our business more agile and efficient. Projects in 2020 included a new lease contract management system with increased functionality and a mobile aircraft inspection app that allows us to upload information about the condition of our aircraft more quickly. The winner of our annual innovation challenge was a project to collect and use global aircraft operational information in our business, including the specific movements of aircraft in our portfolio using satellite data. We have already rolled that functionality out and are using the data regularly. During the year, we invested more than $2.5 million in digital transformation projects to make our business more efficient and more resilient. Looking ahead, we are currently scheduled to deliver 68 aircraft to customers in 2021. As Robert mentioned, while we expect there to be some manufacturing delays, we also anticipate more purchase and leaseback opportunities. We are working to add good additional balance sheet, and since the beginning of 2021, we have announced an eight A320neo purchase and leaseback with IndiGo Airlines. I will hand back to Robert for his final comments. 2020 presented our company, our industry, and our colleagues with challenges of a scale never encountered before. The effects of COVID will last longer than originally anticipated, and the unraveling of government restrictions will be uneven and take time. However, we have no unplaced new aircraft scheduled for delivery before 2023, only $1.8 billion of debt maturing in 2021, and retain over $5 billion in cash and undrawn credit lines, which position us well for this year. The strategic and proactive management of our order book, combined with high levels of liquidity, mean that we are well positioned for the recovery when it comes. Finally, my thanks go to our stakeholders, directors, and colleagues whose diligence and flexibility have helped our company remain resilient and forward-looking throughout these most demanding of times. With industry-leading credit ratings and substantial available liquidity, we are well positioned to build profitably on our current portfolio and earnings growth targets. This concludes our review of the industry, our company's financials, and our outlook, and I'll pass the call back to Tim. Thanks, Robert. This wraps up management's formal commentary. We now have time for Q&A and request that each participant restrict themselves to one question and one follow-up, unless time permits for additional queries. I'll hand the call back now to the operator to start the Q&A session. We will now begin the question and answer session. All the participants who questions to pose, please press zero on your telephone keypad, and you will be placed in a queue. To cancel the queue, please press zero too. Once again, zero on your telephone keypad now. We have Jason from BBF. Jason, your question, please. Hi. Good evening, everyone. Thank you for taking my question. The first question I have is, could you provide an update on your purchase and leaseback timeline? Just to follow up, could we get a sense of how the terms are on those purchase and leaseback transactions in comparison to direct operating leases? Thank you. Okay, Jason. It's Robert. Since the start of last year, we've committed to over $6 billion of purchase and leasebacks. Roughly half of that was delivered last year. Most of the balance then will come in this year. If you see the investor presentation on page 21, we break that out. Our CapEx for 2021 is presently $3.5 billion. We expect to build on that, maybe another $1 billion on top of that this year. In terms of terms, basically, whenever you get into a downturn, you will get better returns on your purchase and leaseback than you will on placing during a downturn because obviously you're financing aircraft that the airline already wants because they're in their order book. I would say at the moment, we see at least 20%-30% higher rates, basically in our purchase and leaseback market compared to the placement market. Placement market, rather. Yeah. Thank you for answering the question. If you would like to ask a question, please press 01 on your telephone keypad, and you will be placed in the queue. To cancel the queue, please press 02. Once again, 01 on your telephone keypad now. Next we have Calvin from Daiwa Capital. Calvin, your question please. Thank you, management, for taking a question. I have two questions. First question is that, can you maybe give us some, maybe your views, in case AerCap and GECAS will combine to be one entity, what do you think about the competition landscape, or would there be any impact in the industry? How do you look at it? Okay. Calvin, I was waiting for that question. The second one, we get it. If you look at the market, we've run some numbers to see how big a share would they have of the leasing market? If you go back to 2015, the two largest lessors at that stage had about 28% of the lease market. By 2020, that number is down to 16%, 16%. The two of them merging, as far as I'm concerned, is good for us. It takes out one of the big two competitors. We are able to compete with them in terms of cost of funding, in terms of credit rating. I think net-net, our view of this is this consolidation is good for the market. Those are sort of the big picture views. Obviously, when the two largest leasing companies in the world merge, they've got large incumbent fleets, which has a much older average age than our fleet. I think we're well-positioned in this. We expected some consolidation to come. It's just a matter of which of the top 10 lessors started the ball rolling, and we're delighted that it's AerCap and GECAS. Okay. Thank you. I have a follow-up on this one. In case they merge together after a very large fleet, would there be a chance that they probably would not intake too much, and you may have more opportunity out there? This one thing. Second is that, would the airlines consider, because in the past they might use AerCap and then to diversify, they might use GECAS, and now they become one. Would airlines be tend to seeking another party in the future to diversify their portfolio? Would it make sense? Yeah. Calvin, my view on that is absolutely, airlines will always want different alternatives. This effectively takes what were the top five, including us, to a top four and positions us very well. I think, we've proven the test of time over 27 years, and clearly having a large shareholder like Bank of China brings additional benefits to the table where we can do other types of cross-selling business from the rest of the group to our airline customers. Yes, we think it's good. One difference, though, between us and AerCap and GECAS is, if you remember from previous presentations, there are roughly 800 airlines in the world. We tend to keep ourselves to the 160 odd of those that have better credits and larger fleets. When you become the size of a merged AerCap and GECAS, you're not able to sort of just limit yourselves to a smaller number of airlines. You have to deal with the whole market. Okay. Thank you, Robert, for our explanation. Yeah. Thank you, Calvin. Next on the line, we have Jacob from JK Capital. Jacob, your question. Yes. Hello, good evening. Thank you for taking my question. I understand that you did not have to write down the value of your planes, simply because the accounting standards don't require that. I recently read a report from IBA saying that the value of planes, the market value, had dropped anywhere from 7%-20% for your type of planes, the ones you have, over the past 12 months. What do you believe today would be the write-down if you had to write down the assets to their market value today? Where would we be today? Okay, Jacob. Steven will take that question, the CFO. Okay. Thank you. Firstly, Jacob, we did take impairments on our aircraft values to the tune of $109 million, as I covered in my presentation. What we do each half year, in line with our half year reporting, is to do impairment testing on our fleet. We get appraisals from five different companies. We take the average of those, we compare those to our net book values. We have a very detailed formula that we go through with our audit committee. You'll see that we took a small impairment at the half year for 2020 and then a larger impairment as at the full year. Right. The impairment, according to my calculation, was 0.6% of the book value of your planes. Do you think that fairly reflects the drop, if any, of the market value of the planes over the past 12 months? Okay. Jacob, when you look at an impairment test, you have to look at two things. Number one is, what price did you buy the aircraft for in the first place? Not all leasing companies are equal. You will see variations of up to 20% in purchase prices across the market at what people buy the planes for. The second thing then is obviously the appraiser's views of the market. IBA is actually one of our appraisers. As Steven said, we do those on a semi-annual basis. It's not a matter of looking at the percentage of the fleet. We look at each individual aircraft in our portfolio every six months. Thank you. If you would like to ask a question, please press 01 on your telephone keypad. Next on the line, we have James Till from Bloomberg. James, your question, please. Hi. Good evening. Thanks for the question. Mine is on the lease rental yield for finance leases. I noticed that it is somewhat lower than the operating lease rental yield. May I know if it is comparable, or how should we understand that it is? I think it's 6%, 7% versus 10% for the operating lease rental yield. If you could elaborate on that would be great. Thank you. Okay, Steven will take that, James. I think if I understand your question, James, you were asking about the reduction that we've seen in our net lease yield. Is that correct? No, I'm comparing the lease rental yield on the finance lease receivables versus the operating lease rate, which is, I think, 10%. So there's a lower rate, I believe. Is it 6% or 7%? Sorry, I don't have the number offhand. Yeah. Yeah. James, the two are calculated in different ways. On the finance leases, it's very simply what do we pay versus what are we receiving from our lessee. There's no depreciation element in that. Yeah. No, no. My watch. Okay, James, did you catch that? Okay. Thank you. Okay. Thanks. Thank you. If you would like to ask a question, please press 01 on your telephone keypad now. Okay. Thank you, operator. Yes, Abunam. Sorry. I think we are going to draw a line under it now. We would like to say thank you very much to everyone who dialed in today. If you have any further questions, please direct them to myself or Kelly Kang. You can call me directly or email me on timothy.ross@bocaviation.com. We look forward to speaking to you over the next six months or after our interim results in August. Thank you very much. Thanks. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.