Earnings Call: H1 2020

Aug 20, 2020

Ladies and gentlemen, welcome to BOC Aviation's first-half 2020 results investor call. We will begin with Mr. Timothy Ross. Please go ahead, sir. Thank you, operator, and welcome everybody to BOC Aviation's earnings call to discuss our interim results for the six months ending 30th of June 2020. Here are Managing Director and Chief Executive Officer, Robert Martin, our Deputy Managing Director and Chief Financial Officer, Phang Thim Fatt, 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 investors section of our website at www.bocaviation.com. A 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 hand over the call to Robert Martin for his comments. Thanks, Tim, and good evening to everyone online. Thank you for joining us for our 2020 half-year results earnings call. During this period, we achieved a number of major milestones that included signing our 1,000th lease and committing to purchase our 900th aircraft. We are pleased to report a net profit after tax of $323 million for the first half of 2020, up 1% on the same period last year, and equivalent to earnings per share of $0.47. This has been achieved in the most challenging operating environment that we and the wider aviation community have ever faced. The COVID-19 virus has sharply impacted demand for travel, and governments have restricted the ability to travel in the first half of 2020. In spite of these challenges, our total revenues and other income continued to grow, rising 11% to more than $1 billion for the first half. We ended first half 2020 with total assets of $22.6 billion. As we added longer-term leases during the first half, the weighted average remaining lease term of our fleet rose to 8.5 years, increasing the visibility of future earnings. We finished the first half with cash and committed liquidity of $4 billion and remained well-supported by capital markets and our major bank shareholder, Bank of China. In first half 2020, we raised $2.2 billion in the bond market and drew down $1.6 billion in term loans. We also drew a maximum of $700 million from the $2 billion standby line of credit provided by BOC during this period, but reduced this to $300 million by the end of June. Free cash flow after finance expenses was $555 million for the period, just 12% lower than last year, and we have agreed to defer rent equivalent to 2% of our available liquidity. Reflecting the stability of our financial performance in the first half of 2020, our board has declared an interim dividend of $0.3998 per share, payable to shareholders of record on the 6th of October. This represents a payout ratio for the half-year of 30% of net profit after tax and is consistent with previous interim distributions. The board's policy continues to be to pay up to 35% of full-year net profit after tax to shareholders in the form of dividends. The six months in the first half of this year were the most volatile that we've navigated our way through in our 26-year history. Our strategic planning is done on a five-year horizon and includes both base case and downturn scenarios. We had already prepared for an expected downturn in 2020 and had put additional liquidity in place during 2019. January was a regular month from a traffic perspective, but the impact of COVID began to hit our Chinese customers and those airlines who flew large numbers of Chinese passengers straight after the Chinese New Year holiday in February, with the main impacts on airlines generally starting in March and peaking in April as the virus went global. April was the worst month for passenger traffic, and gradually, flights began to recover in May and more so in June. The number of parked aircraft in the marketplace peaked in mid-April. During April, only 38% of aircraft globally were in service, and this has recovered to 74% of aircraft by August. The industry was rapid to respond with 1,000 older aircraft being a mixture of four-engined aircraft and other aircraft older than 15 years. Both major airframe manufacturers have reacted by significantly reducing future production of all types of aircraft by an average of a third. Governments moved rapidly to provide liquidity to the markets generally, particularly after the capital markets effectively closed for a fortnight in March. Thereafter, we've seen specific support for airlines in the form of grants from governments to cover labor costs and government-guaranteed loans to airlines. Very importantly, we've seen airlines raise money in the capital markets in order to rebuild their own liquidity. With more than $42 billion raised by airlines in the first half of 2020 in the form of both equity and debt, according to Dealogic. During this period, we've moved to support our customers with new purchase and leasebacks, as we have previously suggested to our investors in our downturn strategy, and David Walton will talk more on that, and have already closed three debt capital market issues this year, which Phang Thim Fatt will talk about. In addition, we've changed our investment profile to more focus on purchase and leasebacks. Clearly, the impact of COVID-19 has affected manufacturer supply chains, which in turn has delayed new aircraft deliveries. A number of airlines have reassessed their own capacity requirements for 2020 to 2023, and consequently, we have resculpted our own order profile to match the expected market conditions. The impact of COVID-19 has changed since February, with now the U.S.A., Brazil, and India bearing the brunt of new cases. For those countries that successfully navigated the first wave, the second wave has been city-specific rather than country-specific, with more targeted measures being taken by governments, as we've seen in Vietnam, South Korea, and the U.K. Clearly, the role of governments in determining the speed and direction of the traffic recovery is bigger than ever before. China was the first large country to have positive GDP growth in the second quarter. Given this is a health-driven crisis, governments have taken a center stage role in determining who can fly cross-border and when and who gets government financial support. Those large domestic markets such as China, the U.S., and the European Union are leading the traffic recovery. We remain positioned as a global aircraft operating leasing company with a well-diversified portfolio of airline customers. We've placed all of our new aircraft delivering for 2023 and maintain ample backstop liquidity. Consequently, we're well-positioned to navigate this downturn. On the senior management side, we are pleased to announce David Walton's promotion to Deputy Managing Director, in addition to his title as Chief Operating Officer, and we welcome Paul Kent, who joined us in London as Chief Commercial Officer for the Europe, Americas, and Africa on the first of June to replace Steven Townend, who will move to Singapore as Chief Financial Officer on the first of October. I'll now hand the call over to David Walton to speak to our operations and business development, and then Phang Thim Fatt will take over for a more detailed review of our P&L and balance sheet. Thank you, Robert, and let me add my thanks to everyone on the call for joining us today. In the first half of 2020, we delivered 23 aircraft to airline customers, of which three new aircraft were from our OEM direct orders, one of which was purchased by the customer at delivery, and the remaining 20 aircraft were purchase and leasebacks. Our total fleet stood at 571 aircraft at the end of June, comprising 334 owned and 40 managed aircraft, with an order book of 197 aircraft. In the first half, our commitments to new investment featured 100% latest technology aircraft that included 26 Airbus A320neo family aircraft, 26 Boeing 737 MAX aircraft, and 28 Boeing 787 Dreamliners. These were mostly placed on 12 to 16-year lease terms with customers in Europe, Asia, and the Americas. The 20 aircraft that we delivered during the first half as a consequence of these transactions are all placed with well-established airlines and are generating 100% on-time collections. In fact, this new purchase and leaseback business has already contributed $20 million in pre-tax earnings in the first half, a number that will grow in the second half as these deals contribute for the full period and as we take more deliveries. In addition, after period end, we signed a purchase and leaseback commitment with TUI Travel for five Boeing 737 MAX 8 aircraft, which are expected to deliver in 2021. We demonstrated our agility with the actions taken to resculpt our order book, both in order to address the changes in the market in terms of customer demand and manufacturer delivery schedules, and to deploy our capital for better returns. This is a testament to our robust global customer and manufacturer relationships and the speed with which we can deploy large amounts of capital for the right opportunity. We continue to pipeline good long-term business with the 76 lease commitments that we signed with airline customers in the first half of 2020. Our net lease yield of 8.2% for the first half of this year remains in the previously indicated 8%-8.5% range and reflects the amount of new business that we put on the books towards the end of the period. For the first half of 2020, we reported portfolio utilization of 99.8%. The weighted average age of our owned portfolio was 3.5 years at the end of June, which positions us well in this environment. With that, I will hand it over to Phang Thim Fatt. Thank you, David. Our post-tax earning was $0.47 per share, up 1% over first half of 2019. Net asset per share, meanwhile, rose by a similar percentage to $6.69 from 31st December 2019. The principal driver of the growth in earnings was an 11% increase in total revenues and other income. This included an improved core lease rental contribution, which remains the principal component of our pre-tax earning. This was 7% in first half 2020 to $366 million. It represents a sustainable long-term income stream that recur across the cycle, and which net of cost represented 69% of profit before tax. We sold five aircraft from owned fleet during the first half of 2020 compared to nine aircraft sold in the first half of 2019. Gain on aircraft sale to $26 million and accounted for 7% of pre-tax earning ahead of last year as we achieve greater profit per aircraft. Interest and fee income amounted to $75 million, 32% ahead of first half 2019 level as we generated more fee income from pre-delivery payment transaction and included contribution from six aircraft that we classify as finance leases due to their long-term lease terms. After deducting apportioned interest expenses, this item comprised 11% of our profit before tax. Depreciation, our largest expense item, increased by 10% relative to the first half 2019, reflecting the 9% rise in the net book value of our fleet over the last year. Finance expenses increased only 3% to $220 million as an increase in our borrowing to fund investment in more aircraft was offset by lower interest rates. Our average cost of funds improved to 3.2% per annum in the first half of 2020 from 3.6% per annum, both for the first half and full year of 2019. During the first half, we also recorded a $12 million asset impairment related to the carrying value of five Boeing 737 MAX 8 aircraft delivered in prior year, and we provided for doubtful debt of $47 million, representing receivable that exceeded security deposit held for a certain airline customer. We had capital expenditure of $3 billion in the first half of 2020, primarily related to our aircraft delivery and pre-delivery payment. We had committed CapEx of $1.9 billion for the second half as at June 30 and would expect total aircraft CapEx for 2020 of up to $6 billion. This increase in CapEx can be funded from our cash and committed liquidity of $4 billion. During the period, S&P Global Ratings and Fitch Ratings reaffirmed our industry leading A- credit rating as we tapped the debt capital markets despite the difficult circumstances associated with COVID. We ended the financial year with indebtedness rising 19% to $16 billion at June 30 compared with end 2019. We raised $400 million, $1 billion in April, and another $750 million in June, being the first in the aircraft operating leasing industry after the outbreak of COVID to access the debt capital markets in April. This connection to a strong investor base has ensured that we were able to effectively raise new debt in the first half, and our strong free cash flow have allowed us to repay $1.2 billion in debt maturities, leaving us only half a billion dollars to repay in second half of 2020. Our debt to equity as at June 30 was 3.5 to 1. Now back to Robert for his final comment. Thanks, Phang Thim Fatt. During the first half of 2020, we have been able to support our airline customers whilst continuing to grow our company. The result that our company has produced reflects the tenacity of our employees, who have delivered these earnings working mostly from home, and I want to thank them for their hard work in achieving this. On a personal note, I would also like to add, this is Phang Thim Fatt's last earnings call with investors. I would like to thank him for all of his achievements at BOC Aviation. Since our acquisition by BOC back in December 2006, this has included raising over $31 billion in debt and averaging a return on equity of 15%. This concludes our review of the industry, our company's financials, and our outlook, and I will pass the call back to Tim. Thanks, Robert. This wraps up management's formal commentary. Before we break for Q&A, I would like to remind you that on the basis of today's consensus estimates, as a company, we are trading on a forward dividend yield of 5.7%. This compares with the Hong Kong market average of 3.7%. We now have time for question and answer. Out of fairness to others, request that each participant restrict themselves to one question and one follow-up, unless time permits for additional queries. I will hand the call back now to the operator for the Q&A session. Thank you very much. Now we will begin the question and answer session. Participants with questions to pose, please press 01 on your telephone keypad and you will be placed in the queue. To cancel, press 02. Once again, that is 01 on your telephone keypad now. Please just hang on for a little while as we wait for those calls to begin percolating. Right, ladies and gentlemen, we are about to begin with our first question. The first question comes in from Ben Hartwright of Goldman Sachs. Please go ahead. Hi. Good evening. Thanks very much for doing the call and update tonight. I wondered if I could just ask you about your customer strength and performance at the moment, and particularly with respect to the outlook for deferrals and where you are now, what customers are asking you for, and your expectation for the collections into the second half. Thanks very much. Ed, hi, it's Robert. Thanks for the question. What is interesting about this downturn is the evolution of it. As you would imagine, the early discussions we had were here in China and Asia in terms of customers. Interestingly, those ones we resolved pretty quickly, and now they're in repayment mode generally. As the virus spread around the globe, then we began to see other countries. I would say, if you want the back end of the queue in terms of those coming and discussing with us, have been the emerging markets, places like Brazil, India. They've been at the back. To a certain extent, it's tracked how the virus has moved. In terms of your question on collection is an interesting one because we've got two things going at once. On one hand, we've got repayments going on of the early ones. In terms of the second wave, I'm sure someone's going to ask me that soon, so I might as well just deal with it here and now. Interestingly, not a lot of second wave requests at this point. We've just had a couple that we've had to deal with, and those involve very short-term extensions. Okay, great. Then some of the, in terms of those receivables that you had to write down in the half, those- We haven't written any down. We've just provided for them. Right. The way to look at it is, our general cash flow, I would say, bottomed in the month of April. What we do is we track every month our operating cost net of interest. April was the bottom month, and from there, basically it has tracked upwards. Our general cash flow has got better as the second quarter went on. But obviously, in accounting terms, you only provide for those specific airlines where basically their overdues exceed the security deposits. Right. Understood. Are you expecting them to be able to repay, or are there any sort of trouble spots where those airlines that haven't been able to pay, that you've had to provide for- Yeah. -still in trouble? The number of ones where we think there is serious issues, I think, is single digits. We've got it down to that. We've already gone through an agreed number of carriers deferrals. I think as well, if you want to think of it geographically, I would say pretty much North Asia's in good shape now. North America's in good shape. I would say those emerging markets where governments haven't stepped up to support airlines are probably the weakest. Okay, great. Thanks very much for the color. No problem. Thank you very much. Our next question comes in from Ivan Joe of BOCI. Please go ahead. Okay. Thank you. Congratulations on the stable earnings anyway, in this difficult time. My question is about the net lease yield. I see you're down a little bit from last year, but actually, the cost of debt is also down. Does it mean our new lease is kind of guiding down? What's our guidance for the second half of this year and next year of the net lease yield? I think realistically, Pang, and David and I spend a lot of time discussing this. I think if we say around 8%, that's probably in the right region. The reason for this, Ivan, is in the second half, we have a lot of deliveries grouped into the last two months of the year. So basically the contribution of those is going to be very limited this year. Okay, I see. Thank you. I guess a lot of question about the 737 MAX. I see you have some impairment on your five 737 MAX aircraft. But we also have around 50 to 60 to be delivered in the future. Is there any kind of risk associated undelivered 737 MAX? Because the lease yield may be lower. Also, any other kind of, or can we negotiate with Boeing and also our airline customers about the lease and also the aircraft price? Okay. In terms of First of all, let's deal with delivered. There are 16 delivered MAXes. Five of them is where we've had weak customers. So we just took a decision there to be prudent. The next 10 that we added, of course, are purchase and leasebacks with Southwest, which were on dramatically different terms, to where we would have acquired aircraft two years ago. You remember I said that we've changed our investment strategy during this period. What we've been doing is basically removing direct aircraft deliveries between now and 2023, and replacing them with purchase and leasebacks. Obviously we can determine the terms of the purchase and leaseback based on today's market conditions. Right. But also these PLBs. How is this leasing yield of these PLB deals? I do not go in too much detail. I do not share too much with my competitors, but let's just say it's much better. Okay. Sure. Thank you. Thank you very much. Okay. No problem. Thanks, Ivan. Our next question comes in from Evan. Evan, if you could please clarify with your full name, please, of Fosun Asset Management. Please go ahead. Hi, this is Evan Liu from Fosun Asset Management, and congratulations on your good earnings in this particular half year. My question is regarding the Norwegian Air Shuttle. Do you mind maybe giving us a little more update on the situation? Because it accounts for about 5% of the asset value, which is kind of a large amount. I do not know if you can share some of your information on the cash flow impact. Thanks. Okay. Basically, the Norwegian transaction is in a power-by-the-hour period at the moment. As you are aware, Norwegian is not flying the 787, so we only recognize revenue to the extent we receive it. Thanks. What about cash flow? Because, and also, they are on the power-by-the-hour mode. I wonder if you can share some of your information on the cash flow you receive from the lease. Well, obviously you only get paid to the extent they fly the aircraft. That is what power-by-the-hour means. Okay. Thanks. Our next question comes in from Tolu Alamutu from Gramercy. Please go ahead. Good afternoon, evening, and thank you for hosting the call today. I just wanted to clarify something. Some of the Chinese banks are reportedly putting measures in place to potentially deal with the effect of possible U.S. sanctions and obviously also trying to comply with the sanctions that have already been put into place. Is this something that you as a subsidiary of one of them is concerned about at all, or is that not something that you think that investors should care about just at the moment? Thanks. Okay. The key thing to remember is we are a Singaporean company. We are not a Chinese company. That is the first point. Okay. Second point is, we have contingency plans for all sorts of eventualities, and this is one that we have contingency plans for just in case. Okay. That's helpful. Linked to that is funding. Thank you for the information that you provided in terms of what you've secured so far this year and what you have coming up. Can you maybe give us an idea of what else you plan to do potentially maybe in the Eurobond market or through funding from the parent? You also mentioned the $2 billion facility from the parent company, which I guess you said is now down to only 300 that's been used? No, let me clarify that straight away. We have only used- Oh, okay. 300, so there is $1.7 billion Yeah available as of June 3. Correct. Yeah, that is my understanding. I just wanted to know whether that $2 billion, well, the $1.7 basically, was still available, and what your other funding plans might be through the course of the rest of the year, like Eurobond market loans and so on. Thank you. The balance of the $2 billion, since that we raised $300 million, $1.7 billion is available. Given that we have a CapEx for the remaining half of $2.5 billion-$2.7 billion, we would expect to tap the debt capital market, given that there is liquidity. Even then, we have raised $2.15 billion during the first half, and spread has compressed since then. It is likely that we will go into the debt capital market for up to $1.2 billion and also keep our available RCF available for CapEx expected for first half of next year. That is very helpful. Thank you. Yes. To just be clear, what we do is, we just effectively use our RCFs to fund ongoing aircraft deliveries, as Pang Thim Fatt correctly says, then we would do large debt capital market issues, which then means your RCF is available again. But remember, we hold a total of over $4 billion of RCFs. It is not just Bank of China. We are also actively using our third-party ones as well. We have got 70 banks in the bank group, so we will also tap into some banking facilities as well as we go through the second half. That is also helpful. Thank you. Gives good context. Okay. There are currently no questions in the queue. If you would like to ask a question, please press 01 on your telephone keypad now. Once again, if you would like to ask a question, please press 01 on your keypad now. We have questions coming in. Our next call is in from Chen Pu of CICC. Please go ahead. Hi, management. This is Chen Pu from CICC, and I have two questions. The first one is about the newly added finance lease receivables. Could you have more color on the finance lease deals? This is the first one. Okay. This is Robert. I can easily handle that. This pertains to six 777-300ERs that we did on long-term leases to Cathay Pacific back in, I think it was March this year. The reason why they have to be booked as finance leases is because of their length. Under accounting standards, once you reach a certain length of lease, you have to classify it as a finance lease. Thank you. I have another question about our expansion strategies. We see some other U.S. lease aircraft companies are cutting their CapEx for 2020 and 2021. But we see we are still increasing our CapEx on the lease and the leaseback deals. May I ask, how do we see the different strategies of the aircraft industry? Yeah. I think what it comes down to is your ability to access capital at all times during the cycle. The way that Pang, Dave, and I have always set this company up is to ensure that we can tap the debt capital markets at all points of the cycle. We are actually able to do new purchase and leasebacks. As I mentioned right at the start in my presentation, we built into our planning a downturn plan. We don't just plan for good times. The other thing is, we've been also changing the nature of our future investments with the cancellation and deferral of the MAXes and replacing those with purchase and leasebacks. Okay, got it. Thanks very much. We continue with our next call from DBS. We have Paul Yong on the line. Please go ahead. Hi. Good evening. I've got two questions. One is, can you please talk about the plans for the two aircraft that are off lease? My second question is with regards to the trading of aircraft in the second half. Do we have any sort of plans or guidance for that? Thanks. Okay. Thanks, Paul. In terms of the two aircraft that are on the ground, we are actively marketing at the moment to our customers all over the world and intend to get them back up on lease and earning revenue as quickly as possible. The aircraft are in good condition. We are just doing some minor maintenance so we can easily transition them between lessees. Our aim is then to get them back on lease. In terms of trade condition, good question, Paul. Basically, this year, clearly the liquidity in the secondhand market is significantly less than last year. We have gone through probably a five-year period of extremely high liquidity, which meant you saw the difference in debt pricing between a lot of smaller investors, even ABS transactions narrowing with people like ourselves. After March this year, those margins have widened out, and a number of players have stopped playing in that market. We see relatively less people buying. We are still seeing aircraft sales in the pipeline, and I estimate today probably we will finish the year with somewhere around 15 sales done. Great. Thanks very much, Robert. Hey, operator. I think at this stage we have run out of time at our end. We are going to wrap the call up. We would just like to thank everyone for participating today, and we look forward to talking to you over the next six months. Thank you very much, and good night. Okay, thanks.