Earnings Call: H1 2016

Aug 29, 2016

Ladies and gentlemen, welcome to BOC Aviation's first half 2016 earnings call. I will now hand the call over to Mr. Timothy Ross, Head of Investor Relations. Thank you. Please go ahead. Thank you operator, and welcome everyone to BOC Aviation's maiden earnings conference call to discuss our interim results for the six months ended 30th June 2016. With me today are our Managing Director and Chief Executive Officer, Robert Martin, our Deputy Managing Director and Chief Financial Officer, Phang Thim Fatt, and our 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 are in U.S. dollars 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. A conference call presentation is also available in the investors section of our website. This call is being recorded and will be available for replay. I will now turn the call over to Robert Martin. Thanks, Tim, and good evening to everyone on the line. Thank you for joining us for our 2016 interim earnings call. We achieved a number of significant milestones in the first half of 2016. The primary milestone being the successful completion of our initial public offering on the Hong Kong Stock Exchange, the largest aircraft operating leasing company IPO in history. We wish to thank our shareholders, business partners, and employees for their support in this successful transaction. We are delighted to report record earnings, a net profit after tax of $212 million for the first half of this year, up 24% on last year's first half, and equivalent to earnings per share of $0.31, based on the number of shares outstanding at 30th of June 2016. This was achieved on total revenues and other income of $579 million. That rose 8% compared to the first half of last year. In light of our strong performance, our board has decided to declare a dividend of $0.061 per share, which will be payable to shareholders who own shares on the 19th of September. We ended the half with total assets of $13.6 billion, which reflect, amongst other things, the $550 million in net primary equity proceeds raised from our successful initial public offering. This increase in our equity base lowered our gross debt-to-equity ratio to 2.9 times as at 3rd of June 2016, as compared to 3.7 times as at the end of 2015. Our cash and fixed deposits at the end of the period exceeded $1.7 billion. We have also additional committed liquidity in the form of $2.8 billion in undrawn and committed revolving credit facilities. This positions the company well to fund both our contracted investments in aircraft and to finance further growth in the portfolio. During the period, Standard & Poor's and Fitch Ratings have both reaffirmed our industry-leading corporate credit ratings of A-. We are pleased to announce that we have another half year with 100% portfolio utilization, and we ended the period with zero receivables. As at the end of the half year, the average appraised value of our fleet was $11 billion on a full life current market value basis, representing a 14% premium to the fleet's net book value of $9.7 billion. One of the goals we set ourselves for this year was to sell all of our pre-2007 vintage aircraft before the end of 2016. We achieved that milestone in the first half of the year, and we no longer have any aircraft in the owned fleet that are more than 10 years old. The weighted average age of our own portfolio now is 3.3 years, one of the youngest in the industry. Turning to the market backdrop, macro conditions remain supportive of the aircraft leasing industry, in our view. On the airline demand side, the industry continues to perform well and air travel demand remains strong. Airline passenger growth, as measured by IATA, rose 6% for the first six months, above the long-term trend of 5%. This saw IATA lift its earnings estimates for 2016 for the industry in June by 8.5% to $39.4 billion. Issues including political uncertainty, Brexit, the events in Turkey, recent terrorist incidents, and health concerns may have some near-term effects on pockets of regional demand for air travel. However, the fundamentals of our business remain robust overall. We are in the market on a daily basis talking to customers about leasing the most popular Airbus and Boeing single-aisle models, and we are seeing good demand for these aircraft. In the first half, we generated 55% of our lease revenues out of Asia Pacific, reflecting the more rapid rates of air traffic growth that this region is experiencing relative to more mature, slow growth economies. The Americas and Europe still account for around 17% and 22% of lease revenue, and recent transactions with new and existing customers such as JetBlue in the U.S. and Wizz Air in Europe underpin our confidence in our regional growth in these regions. U.S. dollar liquidity in the market remains high. This has partly driven the strong demand for purchase of aircraft with lease attached that we continue to see amongst investors. Growing demand has supported our aircraft sales program as more new investors continue to enter the market. Greater liquidity is also good for the funding side of our business. Long-term interest rates remain very low, and we took advantage of that in the first half of this year, closing a 10-year, $750 million bond deal. We have recently seen LIBOR rates begin to move up for our floating rate leases, with LIBOR movements obviously flowing through both sides of our profit and loss account. Our funding costs also increased, but the net impact on our core lease rental contributions will be neutral. On the supply side, we see growth largely in line with demand, especially for the narrow bodies that account for the majority of our fleet. Near-term production increases are planned for both the A320 and 737 aircraft models, but we see those matching the combination of demand for new jets and replacement of older aircraft. We also see some supply chain issues, possibly limiting short-term production ramp up as some pressures have emerged in some areas such as seats and engines. Manufacturers are responsibly addressing concerns about wide body oversupply at the moment, with both Boeing and Airbus cutting production rates for certain types. Given the strength of our balance sheet, the visibility of our future income stream, the popularity of the aircraft in our portfolio, and the record performance of our first half, we remain positive regarding the future of our business and our ability to execute our strategy over the balance of this year and beyond. With that, I will hand over the call to David to speak a little about our operations and business development, and then Tim Fatt will take over with a more detailed review of our P&L and balance sheet. David? Thank you, Robert, and let me add my thanks to you all for joining us this evening. In the first half of 2016, we delivered 27 new aircraft from our order book to airline customers, including six where the customer exercised purchase options at delivery, giving us 21 new aircraft added to our owned aircraft portfolio. This compared with 17 new aircraft added to the owned portfolio in the six months ended 30 June 2015. Our core lease rental contribution is defined as lease revenue less interest and depreciation and amortization of debt issuance and lease transaction closing costs. This continues to be the principal component of our pre-tax earnings. This rose over 8% in the first half of the year and made up around three-quarters of our pre-tax profits. This represents a sustainable long-term income stream that recurs across the cycle, which is highly visible given our remaining average lease life of over seven years, and which should grow in line with our balance sheet. We have over $10 billion in contracted future lease revenues that we are confident of collecting from committed leases based on airline cash flows that today are at record highs and have been resilient through the cycle. During the first half, we signed 41 leases with airline customers, and we have placed all of our 2016 deliveries. We had also placed around 70% of scheduled deliveries in 2017 while maintaining our average remaining lease term at 7.2 years, all as at 30 June 2016. This provides us with a strong near-term pipeline of core lease rental contributions. Since the beginning of July, the team has signed a number of letters of intent for lease placements, which will leave us only five of our 60 aircraft scheduled for delivery by the end of 2017 still to place. The leases on these deliveries from our order book will be the backbone of our future earnings growth. We sold 22 aircraft from the owned fleet during the first half of 2016, compared to 11 aircraft sold in the first half of 2015. As Robert Martin mentioned, in the first six months of this year, we sold all eight of the aircraft that predated our acquisition by Bank of China in 2006. Gains on sale of aircraft accounted for more than 15% of pre-tax earnings, consistent with our long-term average and marginally ahead of the first half of last year. We sell aircraft generally with leases attached across the cycle, although the volume of transactions typically increases during such high periods of U.S. dollar liquidity as we are seeing right now. Our fleet at 30 June stood at 226 owned and 39 managed aircraft, with an order book of 218 aircraft delivering at an average of 40 per year over each of the next five and a half years. Committed capital expenditure of $1.1 billion in the second half of 2016 will fund the 35 aircraft due for delivery, of which only five are subject to airline customer purchase options. The second half of this year will be our most active in terms of order book deliveries in the company's history, and we see a good number of opportunities to increase our aircraft investments. We have only four wide body aircraft in our order book, all placed on long-term lease and due for delivery in 2017. We have no scheduled lease expirations for wide body passenger aircraft from our owned fleet until 2020. With that, I will turn it over to Tim Fatt. Thank you, David. Our reported net profit after tax of $212 million for the six months ended 30th June 2016 rose 24% compared to the same period last year, despite the inclusion of $3 million in IPO related costs. The principal driver of the growth in earnings were an 8% increase in total revenues and other income, that feature growth across all major income line items, as well as a very stable cost base. This drove our core lease rental contribution up by over 8% to $220 million, representing over 73% of net profit before tax. Our lease rental income grew 6% compared to the first half of 2015, as higher interest rates lifted our floating rate lease revenues, and as new leases signed on higher fixed rates also contributed to the increase. This was partially offset by the reduction of rental from aircraft sold with leases attached. Pre-tax gain on aircraft sales rose 35% from the same period last year, as we were very active sellers of aircraft. Interest and fee related income rose 62% compared to the same period last year, on account of an increase in fee for advancing aircraft progress payment and additional fee for managing our larger pool of managed aircraft. Our total cost and expenses rose just over 1% for the six months of 2016 compared to the same period last year. Depreciation was down 3.7% in the first half of 2016 compared to the first half of 2015 because of our active sales program and because we no longer had any aircraft older than 12 years on accelerated depreciation. We intentionally sold down our remaining older aircraft in the first half of this year and had no aircraft impairment charges for the first half of this year. Finance charges increased by $90 million, driven primarily by an increase in LIBOR rates. The same LIBOR rate increase that positively impact our floating rate lease revenue. Our long-term funding strategy, under which we increased the proportion of fixed-rate debt during the first half, also contributed to the increase, lifting our average cost of funds to 2.3% in the first half of 2016 from 2% in the same period last year. Staff costs represented approximately 5.5% of our total revenue and other income in the first half of 2016, slightly up from 5.3% in the first half of 2015, and driven mainly by provision for performance-related bonuses given the company's strong performance. Other operating costs increased 7% from first half 2015 to $20 million, primarily because of the inclusion of $3 million in expenses relating to our IPO. Our average tax rate fell to 11.4% in the first half of 2016 from 13.9% for the same period last year. This was mainly due to a reversal of a $5 million tax provision relating to deferred income tax previously provided for. Our earnings per share was $0.31 per share for first half 2016, increasing from $0.29 in first half 2015. Net asset per share, meanwhile, rose 11%, adjusted for the full effect of the share issue to $4.61 per share at 30th June 2016 from $4.14 per share as at end of last year. At the end of this half year, our total asset had increased 9% or over $1.1 billion to $13.6 billion from the end of 2015. The rise reflected our capital markets and aircraft sales activities and included net proceeds of $550 million from our IPO and a successful $750 million bond raised under our GMTN program. For the first half of this year, we had CapEx of $934 million related to our aircraft delivery, and as at June 30, we had committed CapEx of $1.1 billion for the second half of this year. Our loans and borrowing and finance lease payable also increased, rising 4% to $9.1 billion as at June 30, 2016, reflecting the borrowing activity previously discussed, partially offset by the payment of approximately $1.1 billion in debt during the same period. BOC Aviation has never before earned as much profit in any half year period, employ a better fleet, or enjoy greater liquidity than we have reported today, and this provide an excellent platform from which to drive the business forward. This wrap up my review of the company's financial for the period, and I'll pass the call back to Timothy. Thanks, Tuen Fat. This concludes management's formal commentary. We'll now turn to Q&A and request that each participant restrict themselves to one question and one follow-up, unless time permits for additional queries. I'd now like to hand the call back to the operator for Q&A. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Please note there may be a short pause as the questions are being collated. We thank you for your patience. Your first question comes from the line of Mr. Michael Beer of Citi. Please ask your question. Hey, good evening, guys. Thanks so much. You talked about the second half being around $1.1 billion in committed CapEx. I wonder if you could just also split that between aircraft that are going to be delivered from the OEMs and those that you'll opportunistically step into the purchase leaseback market. Maybe give some color around whether you're seeing some significant opportunities, whether they're in Asia, within the LCC space, or where you're seeing some of these purchase leaseback opportunities. Okay. It's Robert speaking. Thanks, Michael. Just to address that, the second half of this year, nearly all of those deliveries are under our commitments from the manufacturers, under our direct manufacturer contracts. Since we closed the IPO, we've obviously been looking then to what to supplement that with, and I think you'll find two types of transaction. One is purchase and leasebacks, and we look at both single-aisle and wide bodies there, mid-size wide bodies. In addition then, we may supplement with a small number of additional aircraft directly from the manufacturer, because one or two airlines are moving order books around at the moment. I see. I know you've only got a handful of wide bodies. Increasing your exposure to the A330s or 787s, are you seeing depressed prices in the market today? We're seeing more interesting looking prices today than we've seen over the last couple of years. Got it. Thanks. Okay. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from the line of Weiqing Pang from the Bank of China. Please ask your question. Hi. Thank you, management team. Firstly, want to congratulate on the brilliant earnings result in the first half of 2016. I have one question regarding our rental rates. We have noticed that in the first half of 2016, we calculate that the lease yield of our portfolio has come up to 10.6%, which is a higher increase than the funding cost. The spread has increased by 40 bps to 8.4%. Can the management team share how can we achieve an increase in the lease spread? Also, what's the outlook for the lease spread looking forward? Thank you. Okay. It's Robert. Thanks, Weiqing. Basically, there are two reasons that I'd point to. The first one is, if you look at our mix of business this year, I would say there's more fixed rate leases been added to the book. That's driving up the lease yield relative to floating rates. A number of those deals we would have done fixed before fixed rates came down. Second thing is that on the funding side, we've only been able to finance them with lower fixed rates than we anticipated when we put the deal originally in place. It's those two things combining to give you the better yield. Okay. Thank you, Robert. We have seen an increased expectation from the U.S. Fed increase, raise their interest rates. Last time we have a sensitivity analysis in our prospectus that is based on the end of 2015 data, if there is 100 bps increase in interest rate, the net profit would decline by 4.5%. Is there an update to the sensitivity analysis? Yes, there is. Let me give a bit of background for everyone's benefit first. We are now more hedged than we were at the end of last year. On the number of fixed rate leases that we have a mismatch on, we've increased the hedging to 80% roughly now at the half year. What that means is basically if there is a 10 basis points movement in interest rates, for a whole year, that would impact our NPAT by $1 million, which is a smaller number than we showed you basically at the end of last year. Okay. $1 million for a full year. $1 million for the full year. Yep. Yeah. That's small. Yeah. Thank you. Your next question comes from the line of Mr. Edward Xu of Morgan Stanley. Please ask your question. Hi. Thank you. Actually, I've got a question regarding your funding and the debt, because I noticed on your slide 10, the proportion of the fixed rate debt increased to 35.5% versus 19.5% last year. I just want to know whether this will be a trend for future for us to see further increase of the fixed rate debt or what will be the long-term sustainable mix of the debt? Secondly, on the second, on 11 slide, we see this unsecured debt ratio also increased to almost 57% from 47% increase last year. What is the reason and what's the implication here? Thank you. Okay. Thanks, Edward. The first thing is, the starting point for our hedging policy is always what are we doing on the leasing side. If you look at our lease book, which is on the left-hand side of slide 10, you will see that we've seen a gradual increase in the proportion of fixed rate. In today's market, a lot of airline customers are pushing for fixed rate with such a flat yield curve. Then when we come to the hedging side of that, what we are doing then basically is where we're seeing long-term leases, we raised the 10-year fixed rate debt of $750 million earlier in the year, and that shows the increase from 19.5% to 35.5%. So we'll always relate whatever we're doing on the debt hedging side to what's going on the leasing side of the business. Okay. That's the explanation for that. For the balance, where it looks if we have a mismatch between the 35.5% and the 48%, we have 80% of that then hedged from floating rate into fixed rate. Okay. Which brings you to the sort of adjustment of only 10 for every 10 basis points, $1 million impact on the profitability side. Just moving to the second point you raised on secured versus unsecured debt. It's been the sort of policy within the company to move our overall corporate debt more and more to unsecured debt over time. We've continued to do that in the first half of this year. There are two ways that's going on. Number one is as we sell off older aircraft in the portfolio, they tend to be on secured debt from when the deal was originally put in place. To the extent we're putting new deals on the books, we're tending to fund those with unsecured debt or unsecured bonds. Okay. Thank you. Okay. Your next question comes from the line of Mr. Paul Yong of DBS. Please ask your question. Hi. Congratulations on a strong set of results. In terms of your revenue exposure, I think that grew to about 55% for Asia Pacific in the first half of 2016. With a substantial amount of aircraft placed out for the rest of this year and 2017, do we expect that proportion to change? What is the sort of a medium-term mix that you expect for that going ahead? Okay. Thanks, Paul. Basically, if you look at the way the overall portfolio is moving, demographics and GDP growth is more skewed towards Asia Pacific, whether we like it or not. I think realistically, we're going to see Asia Pacific staying just above 50% of the portfolio in the foreseeable future. This is where the significant growth in the market is taking place. However, we still see opportunities in Europe and North America, particularly when it comes to replacing older aircraft. But the overall market growth is less in those markets at the moment. What sort of level will we be looking, in terms of diversify aircraft, if it crosses a certain threshold? If we pass 60%, do we then look to sell some of these aircraft that are leased Yeah. Every half year, we review what we're intending to trade out of the book, and geographic and individual customer concentrations are one of the things we take into account when we're doing that. Okay, great. Thanks. Yep. Your next question comes from the line of Mr. James Teo of BNP Paribas. Please ask your question. Hi. Congratulations as well to a fantastic set of results. My question is on dividends. If my calculations are correct, it seems like there's a dividend payout ratio of about 20% based on the half year mark. Could you give a little bit more guidance on the full year? Are we expecting something similar like 20% or it could be even higher? Maybe something that you can share, the thinking or the policy that you might have come up with in the recent board meeting, please? Thank you. Okay, no problem. Thanks, James. The first thing is, yes, your calculator works. It is 20% of the first half year's NPAT. We can confirm that. In terms of the overall policy, our policy has not changed from what we told you in the IPO process. Our policy is to pay up to 30% of the previous four years' NPAT during the year. Our confidence is such, having got to this point of the year, that we felt it is possible to pay out this dividend. This is a unanimous decision of both the board and the management. Obviously, we will review that when we get to the full year. But the policy remains the same. Just a follow-up question, please. I noticed or I understand that some of your peers in the U.S. may not pay any dividends at all. By doing so in your policy, would it mean that you require equity financing a bit earlier than your peers, perhaps? Or what is your thought behind this? No, our return on equity is also higher. Don't worry, we have factored this into our calculations, and we are confident we will have no requirement for equity in the near term. Okay. Thank you. Your next question comes from the line of K. Ajith of UOB. Please ask your question. Yeah. Hi, everybody. Thanks for taking the call. My question relates to gearing. I noticed your gross debt on equity was 2.9 times. Do you have any comfortable or target debt to equity that you're gunning for over the next few years? Thank you. Yeah. Okay. Well, thank you, Chief. Yes, we do. During the IPO process, we indicated to people you can expect our debt to equity to come down because of the impact of the primary proceeds coming into the company in June this year, and then we will gradually relever up to somewhere between 3.5 and 4 times, which is where we have comfort in maintaining our credit ratings from Standard & Poor's and Fitch. Okay. My second question is regarding the proportion of fixed versus floating leases. I noticed it's 52% and 48%, so is that a target or ideal level going forward? We don't necessarily target an ideal level. What we do is, this is obviously something we discuss with our airline customers. What we tend to find is, the more sophisticated airlines, who have very large treasury operations, they sometimes have a preference for floating rate, then they will go off and hedge it in the same way that they'd hedge their floating rate debt. We tend to find those airlines that have smaller treasury operations, or they don't have the ability to access unsecured hedging lines, they tend to want fixed rates. At the moment, I think it's symptomatic of the U.S. dollar yield curve. Okay. Thank you. Okay. Welcome. There are no further questions at this time. Please continue. It looks like we still have another question from the line of Weiqing Pang from Bank of China. Please ask your question. Thank you. May I ask another question? Please, go ahead. Yeah, sure. Thank you. We have noticed that the company has been an active seller in the market in the first half, and also some of the aircraft that come from the order book has been acquired by our airline delivery upon the delivery. So it seems that our forecast of the fleet size growth is actually higher than the reality. So when Robert Martin said that we are guiding to 3.5 to 4 times debt to equity ratio, I would imagine this leverage is depending on the expansion of our fleet size. So it seems a little bit contradicted to me. So can you tell us more about, or give us more guidance about the fleet size growth looking forward, and how are we going to buy aircraft, like an order book or the PLBs and all less selling in the future? Thank you. Okay. No problem. Okay. So just to give you all some sort of comfort. First of all, let's put things in context. The IPO only completed on the 1st of June, so we only had one month, 29 days to be exact, between closing the IPO and the end of the half year. So obviously, it was unrealistic to expect that we'd put the money to work during that one-month period. However, since then, we've been working hard, and we would expect to, in addition to the $1.1 billion that Tim Fatt talked about for CapEx in the second half of this year, we intend to put to work at least the $550 million of proceeds, okay, by year-end. Okay. In addition, then, during the IPO process, we had said it would take us, in our view, 10 quarters from 30th of June this year, so that takes us to the end of 2018, to basically put all of the IPO proceeds to work and releverage it back up to our standard leverage of about 4 to 1. So we are aiming to get that done by 2018. So that gives you some short-term guidance, and it gives you some idea of where we are planning to go in the long term. Yes. Thank you, Robert. You just mentioned that, is that 5.5 million or 55 million? No, 550 million, which was the IPO proceeds. It is our intention to do more than that in terms of additional investment in aircraft during the second half of this year, on top of the $1.1 billion that is already committed. Sure. But the actual number we are intending to put in to buy aircraft is still cannot tell us right now. Yeah. Not at this point. We will announce that as they go ahead. Once we sign transactions, then we will announce them, as required by the stock exchange. Yes, thanks. We also noticed that the company has not placed any new orders, year to date now. We also noticed that coming to 2018, the number of aircraft delivering from the order book has declined to like 37. So, how do we view the deliveries beyond 2017? Would that increase this year? Yes. What you can expect is, we already had, at the start of this year, 240 aircraft due to deliver. We have obviously taken a number of delivery of a number of those, and the number still remaining to be delivered at the half year is 218. Yes. You will see us in the next six months adding to that number of aircraft on order. I would expect whatever we add to that order book, if it is purchase leasebacks, it is going to be over the next 2.5 years. If we are to consider doing another order, then base it may be spread across the periods 2020, 2021. Okay. Thank you. Okay. Thank you. Good. There are no further questions at this time. Please continue. Okay. Operator, if there are no further questions, then we'd like to just thank everyone for dialing in. Obviously, if you have any follow-ups that you would like to take offline, I'm very happy to handle them personally or flow them through to management where appropriate. Thank you. Thanks, everyone, for joining for our maiden earnings call. We appreciate it. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.