Good afternoon, ladies and gentlemen, and welcome to Avation Half-Year Results Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Participants may ask a question by submitting written questions using the Ask a Question button on the Spark Live Webcast page. I would like to remind all participants that this call is being recorded. I will now hand over to Duncan Scott, Group Legal Counsel, to read out the legal disclaimers. Please go ahead.
Thanks, Millie. Please note that certain statements in this investor call, including certain answers to your questions, are forward-looking statements, including without limitation statements regarding our future operations and performance, revenues, operating expenses, 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, 25th February 2025. 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 are 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. Thank you, Millie. That's me, done.
I'll now hand over to management to begin the presentation.
Maybe next slide. Good afternoon, everybody. I'm Jeff Chatfield from Avation. I'd like to give you a snapshot of the company and the results as of the 31st of December 2024, for the half-year. As at that date, we had 32 aircraft, a split between wide body, narrow body, and turboprop by value. Principally, we're a narrow body lessor. The weighted average aircraft age is 7.9 years, which is quite good. We have 4.2 years remaining average lease term, $1.1 billion in total assets, and $365 million in unearned contracted receivables, which is the rent that airlines need to pay us for the aircraft. Next slide, please. The portfolio as of 31st of December, as I said, 55% of it's narrow body. We have a mixture of Airbus A321, A320, and A220 aircraft. That's the core of the fleet.
We also have an ATR order book, which is very important for growth opportunities, although by value it's small. We have 13 ATR 72-600s, 11 on order, and 24 purchase rights, which are options to buy the aircraft out for the next 10 years. We have a sort of an inbuilt growth opportunity with those. It's a very important sector. ATR is a subsidiary of Airbus and Leonardo, and it's the only manufacturer of that size aircraft in the world at the moment. Very important piece of business, and we're well positioned for it. Next slide. In terms of customers, we have 15 customers in 13 countries. We like to have a lot of diversity in our customer base, so we're not focused in one geography.
We have all over the world: easyJet, airBaltic, some in India with Alliance as a subsidiary of Air India, VietJet, Mandarin, a government-owned airline in Taiwan, EVA, Philippine Airlines, Cebu, Fiji, and others. We've announced today that we're in the process of buying our first plane with Etihad, which is a very important acquisition, and that's an A320, which will be a good acquisition for the fleet and good for credit. We're fairly diversified. Next slide, please. The order book and purchase rights: 11 ATR 72 on order for delivery between Q1 2025 and Q2 2028. The market value of those at December 31st, 2024, was around $23 million per aircraft. All of them have the latest technology engines and are SAF compatible, which is good.
We'd sold two of them, which were acquired from purchase rights for delivery in March, April 2025, and the net cash proceeds from each is about $5 million. The aircraft scheduled for delivery in October and November 2025 have been placed for lease, have been contracted for lease. In other words, at the moment, we're sold out and we're fully utilized. We have 24 purchase rights following that order book, which goes out to June 2034. Next slide, please. Next slide. Next slide. In summary, I'll quickly read this and then hand over to Iain Cawte, our CFO, to present the half-year results. The total income rose to $55.4 million for the half, which is a substantial increase. The EBITDA increased to $55.6 million. The operating profit, which is an important number in our business, increased to $18.8 million. The profit after tax was $0.87 million.
In our result, there's a lot of one-off big numbers that impact the results. The important numbers to look at are operating profit. Total assets $1.1 billion. The net debt was down to $606 million, and the NAV per share increased to GBP 2.94. Iain, do you want to take over from here?
Yeah, staying on this slide just to give a bit more detail on those numbers. You know, the six months ended 31st December this year are characterized by improving operating performance and strong cash generation, as evidenced in these numbers. Total income was up 19.8%, and EBITDA was up by 45.1% compared to the six months ended 31st December 2023. These results are a reflection of the fleet's 100% utilization throughout the period and include $9.3 million of maintenance reserve revenue. Operating profit increased by 7.2% compared to the first half of 2023. Operating profit includes a $15.4 million unrealized loss on the revaluation of aircraft purchase rights and deposits paid for aircraft, a $1.7 million gain on the sale of a new ATR 72-600 aircraft, and a $1.4 million reversal of previously recognized impairment charges. Net indebtedness has been reduced by $45.3 million since 30th of June.
The reduction was achieved with $36.7 million of loan repayments and $8.6 million added to unrestricted cash balances. Loan repayments in the period included $18.7 million repaid on the sale of two ATR 72-600 aircraft. Following the payment of a half pence final dividend and a net reduction of 4 million outstanding shares in the period, net asset value per share increased by 9 pence to GBP 2.94. Next slide, please. Looking at the company's debt structure, we note that total debt and net debt continue to decrease due to scheduled repayments of secured loans and the repayment of two loans related to aircraft sold in the period. Net debt now represents 56.1% of total assets. The average cost of debt has increased to 6.6%, and the average cost of secured debt has increased to 4.9% over the half-year.
This reflects the amortizing nature of secured loans, which are being paid down aggressively, while the more expensive unsecured notes are non-amortizing. Unsecured notes now represent nearly half of Avation's debt stack. Avation is substantially hedged against future interest rate changes. Next slide, please. Turning to key financial ratios, lease yield has improved to 11.4%, reflecting the fact that the fleet was fully utilized during the period. Admin expenses, excluding non-cash share warrants expense, amounting to $4.4 million, are well controlled and now represent 8.3% of revenue. Key credit ratios are showing material improvement due to the improvement in operating performance and continuing reduction in leverage. Net debt to EBITDA, a key indicator, is now at 5.7 x, and the ratio of EBITDA to interest expense is now above 2. Next slide, please. Liquidity has improved, with unrestricted cash balances up by $8.6 million to $32.2 million.
Total cash balances, including restricted cash and fixed deposits, improved by $7.7 million to $125.6 million. The decrease in finance lease receivables reflects the sales of two ATR 72-600 aircraft in the period, pursuant to the exercise of purchase options held by the lessee. Avation holds five unencumbered aircraft with a total book value of around $148 million, which may be refinanced, $13.1 million in trade receivables, and shares in Powell Holdings, which are valued on the balance sheet at $10.6 million. A recently signed $85 million financing facility is expected to provide additional liquidity and is expandable to allow for the financing of additional aircraft subject to lender approval. Next slide, please. The company's loan maturity profile is dominated by the $331 million face value of unsecured notes, which are due to mature in October 2026.
We are currently in dialogue with our investment banking partners, exploring alternatives to refinance this bond issue, and we'll report on this project in due course. A warehouse loan, which matures in September 2026, principally finances the company's Boeing 777-300ER aircraft. The lease for this aircraft has recently been extended by another four years to December 2029 due to the expiry of an early lease termination option. As such, we are confident that this loan can be refinanced. Next slide, please. There is only one lease expiry this year. The aircraft, an ATR 72-600, is currently undergoing final checks before transitioning to a new airline customer based in South America. Once transitioned, this aircraft will be Avation's first venture into this continent.
Lease expiries in 2026 include two older ATR 72-500s, which will be sold to the lessee on completion of their finance leases, and four ATR 72-600s, for which we are seeing strong interest in the market for follow-on leases. Two of those aircraft have already been placed with airlines, subject to the completion of lease agreements. I'll now hand you back to Jeff to take you through the market outlook and strategy section.
Thank you very much, Iain. If I can have the next slide. Clearly, there's a lot of growth in the air passenger market globally. The IATA statistics are very strong, and they demonstrate plenty of fundamental demand. Obviously, there's a lot of supply constraints for aircraft. Those existing aircraft are valued more. They're in demand. It's a very good time to own a lot of aircraft because the values of them are going up. Next slide. What we're doing is reducing our concentration risk and improving our credit quality. In other words, we're getting more customers, more spread out, and in some cases, better customers. You could argue that airlines that have survived COVID have had the ideal sort of credit test. If they've survived, they're probably good credit. Even so, we've been out looking for high-quality credits to lease aircraft to.
Over time, our concentration risk has diminished, and therefore, our credit quality has gone up. Next slide, please. Asia Pacific's fastest-growing regional market is an important market to us. I mean, we're based in Singapore, so it's easy to get around the region. We will continue to place the ATR aircraft from our order book as well as the aircraft coming off lease. We notice a lot of demand in the secondary market for ATRs, but as the supply of secondhand aircraft dries up, then new will become more and more valuable. There are opportunities in the secondary market for narrowbody aircraft. Clearly, we've announced today that we're in the process of acquiring an Airbus A320 with Etihad. That's a fantastic opportunity for the company because it's a very high credit, good aircraft, new location.
Once you lease an aircraft to airlines in general, you get to see more deal flow from them. By doing that, we reduce our revenue concentration and boost our fleet credit quality. Having better clients gives you more access to the debt and bank markets for refinancing on improved terms. Next slide, please. In conclusion, there is a strong air travel market, especially around where we're based. Our fleet is currently fully utilized and in demand. We are fortunate to have an order book and excellent access to the secondary market. We're continuing to reduce our revenue concentrations. We're boosting our—well, we're lowering our credit risk. We're boosting our profile on credit. We have demonstrated strong cash flow generation, growth, growth in revenue, and we're substantially reducing leverage. Next slide. I'll now pass to Millie for the Q&A section.
Ladies and gentlemen, we will now begin the question-and-answer session. Participants may ask a question by submitting written questions using the Ask a Question button on the Spark Live Webcast page. I will now hand over to the team to read out the written questions.
Thank you. I'll deal with these. I see there's a few questions on the website. The first one is from Nandip. Congratulations on the result. Could you please describe the ideal JB partner to get involved in future ATR orders? Do we have a preference for a purely financial partner or a partner with an operational strategic interest? Does ATR need to approve any partnership? You know, we have a number of people come in, a number of, especially, if you like, new money entrants to the business from time to time that are interested in the growth opportunities that the ATR order book presents. It is possible we may take a partner, which would be good in the sense it would make it easy to finance, easy for the order book to grow. A good financial partner or even strategic partner could help.
It's not mandatory, but it's something we're looking at given there's inbound interest in it. We've literally received a number of people that are interested in getting involved and will examine the opportunities that they represent in due course. That's the same question that Brandon's asked. There's a question from Matt Harnett. How does the lease yield on the new plane with Etihad compare to the current fleet? It's actually exactly the same. The yield is the income from the aircraft versus its value. Surprise, surprise, it's actually exactly the same as our normal stuff. It compares well with the current fleet, and it'll just provide growth in revenue as well as asset base. Next one's from Brandon. The company seems to be doing a lot right with all the metrics looked at.
Why do you think the share price isn't reacting well? Time will tell. I mean, clearly, we're doing a lot more in investor relations at the moment. You know, there's been a bit of a turmoil in the London Stock Exchange in terms of, well, the environment of the London Stock Exchange. We're considering lifting the shares to the top tier of the London Stock Exchange, the Equity Shares Commercial Segment, whatever it's called, which is the highest sort of segment on the London Stock Exchange and allows you to be in, although we'd only be a very small part of them, allows us to be in the indices and all the rest of it. Clearly, we're doing what we can to improve the shares. You know, we've demonstrated we can buy back shares. We paid a dividend. You know, we're certainly doing what we can.
I hope that's answered your question. Next one's from Syd. Are there still some pending unpaid lease payments from airlines from the COVID days? Have you written them off? This is a good question for Iain.
Hi, Syd. We've actually been very successful in recovering, you know, the debts that were accrued during the COVID pandemic. Obviously, you know, there were some airline restructurings, and we had to take write-offs, you know, when airlines, you know, went through Chapter 11 or other bankruptcy restructuring processes. We've been pretty successful in recovering the rump of the receivables that built up during that period. In fact, I think we're down to about $13 million as of 31st December, and we're pretty confident that we can recover all of those receivables.
Next question is from Jeroen about capital. Given the current share price with NAV, why not buy back some more shares as an alternative for buying another aircraft? Are there current limitations? We demonstrated we can buy back shares, and we're willing to do so and may from time to time do so. You know, there are real—obviously, we're in the business of being a lessor, and Etihad is a fantastic credit. Ultimately, what drives our profitability and our ability to buy back shares is the cost of money, the cost of capital, and, you know, the cost of debt. In terms of raising our credit rating, we lower the cost of debt and therefore can generate more cash and therefore can ultimately buy back more shares. It is very virtuous for the company to generate more positive cash flow.
Bigger is better is your answer. That's, you know, we can also and may and probably will, if they stay down at these levels, buy back more shares. There's a question from Tim James around the valuation, the purchase rights. This is a good question for Iain.
Yeah. Hi, Tim. I mean, we're using a Black-Scholes option pricing model for the purchase rights. Without sort of getting too lost in the details of that model, I mean, there are several inputs that, you know, changing those inputs can lead to a change in the valuation. The principal changes will be time to expiry, the market value of the asset, our contract price, and then risk-free interest rates. Just to answer your question, I mean, we haven't changed the market value that we used in that assessment between 30th of June and 31st December. The principal factors that have generated that decrease are the, you know, the change in time to expire of the options and a reduction in the risk-free interest rates.
The next one is from Tim Jack. Thank you for the opportunity to ask questions. Could you give more info on the options for people not familiar with the industry? When do you have to make prepayments and decide to buy them? Are these rights to buy planes at a specific price? Who takes the inflation risk? You're basically their options with a, if you like, the right to acquire an aircraft at a price. Historically, I mean, it's a matter of public record that the price that we pay for those aircraft has been below inflation because in our original, when the original order with ATR was entered into between Avation, it was a very valuable order. We negotiated very hard on the escalation rate, and we made sure that the escalation rate was below the inflation rate.
Over time, that's worked out extremely well for us in a recently high inflation environment. A lot of the equity in the company has been built up by effectively exercising purchase rights, ideally leasing and then selling aircraft. That's a way we've made substantial profits over the years, and it's worked really well. The reasons for that are the price is lower than inflation. In terms of the prepayments, yeah, we make modest prepayments, you know, 12 months, 6 months, 18 months out from delivery. The balance of the aircraft's paid on delivery, and it's usually the proceeds of financing one way or another. It's not as aggressive as narrowbody aircraft, if you like, the prepayment schedule, and it's quite manageable. The next question is from Tim James. ATR announced its first ATR placement in Canada in November 2024.
Yesterday, the Exchange Income Corporation Canada announced the acquisition of a Canadian airline that operates ATR 72-600s in the Canadian Arctic, saying the ATRs are an excellent fit for tough weather and short runways. Is there an opportunity for Avation to place ATR 72-600s in North America, or are you focused on EMEA? Really good question, really interesting one. Theoretically, there is a massive opportunity to place ATRs in the United States. Since the year 2000, something like 1,000 routes in the United States have been—airline routes have been lost because principally they do not have enough equipment. The sort of the small jets that flew them are no longer produced. There is, in theory, a massive opportunity in the United States.
The issue with the United States is airlines need—well, there's a couple of issues, but one of the issues is aircraft need to have a front door so that people can get on and off the aircraft from an air bridge to the front of the aircraft. ATRs, in that great French tradition, typically have a back door. People have to walk on outside the aircraft on a tarmac to get to the back door and load that way. Now, that's not a great thing in cold weather. It doesn't really work in the U.S. Our order book allows for front doors, so we can order ATRs with a front door. In theory, ATR have now developed a front door because they have a customer that's ordered front doors. In theory, the United States is potentially an interesting market. Clearly, there's a market position there.
There's a market opportunity. They fit within the scope clauses. The U.S. has got scope clauses around the size of aircraft and the union rules. It's the only real growth opportunity for an airline in the U.S. inside the scope rules, actually using ATRs. ATR have appointed a salesperson in the United States, and that person's running around marketing the aircraft, and we will see where that goes to. The theoretical number, if you're into those things, the theoretical number of aircraft that the United States would need is 240 aircraft, which is really a lot of aircraft. We will see where that happens, where it goes. The next question is from Mr. Arfan regarding the value of the mid-life. Is it not—it's not mid-life yet, but regarding the Boeing 777-300ER, the valuation's gone up. Is that reflected in book value?
Iain, do you want to do this one?
Yeah. The simple answer is yes. I mean, we did revalue the 777 at 31st December based on the additional four years of lease revenue that we'll see because of the expiry of the early termination option on the lease. We obviously used the new residual value in that calculation as well, which reflects the current, you know, current market for those types of aircraft.
The next one's from Damien Brewer of Canaccord. Thank you, Damien. I've read your research. It's great job. Thank you very much. Can we talk a little bit about the Etihad A320 and the yield and the bond and the bond refinance? Okay. In order, we're a lessor, so we get to see lots of secondary opportunities to buy aircraft. You know, every week from other lessors, we would see a deal flow appearing because there's a lot of—there's $160 billion worth of secondary trading goes on between lessors, as I understand it, each year. There's a lot of buying and selling goes on. We see a lot of deal flow.
Our view was that that aircraft, you know, given the yield is similar to our fleet, it's the same as our fleet, and it's a great credit and good aircraft and would help our credit profile. It was a very, very, very strong, compelling case to buy it. In the bond, yeah, there are choices around the bond because, I mean, at the moment, it's not really refinanceable until close to the end of this year because there's a 4% prepayment penalty. It's callable at 104% until October of this year. We're not going to pay 4% to call it early.
We can either issue a new bond or we can do a term loan with banks because clearly we did one a couple of weeks ago that was a great success that was, you know, substantially—the coupon's substantially lower than what we'd ever get in terms of the bond market. We have choices there, and we're going to evaluate those choices carefully. We're going to do some work with the credit rating agencies to see how our credits improve because clearly it has our total debts come down. We've got, you know, $148 million worth of unencumbered aircraft, you know, clearly we're in quite a good place. We can see what the credit trajectory is. We will talk to a number of—at the right time, we'll talk to investors, you know, the bond investors, and see what their views are.
We will also talk to banks to see where we get to with the term loan market because clearly in our business, coupon is everything, and it drives the yield and drives the cash flow and drives the profitability of the company. I think that's the complete answer. Goodness me, there's a question from Ken Bywater, which is about seven questions. The first part is if ATR values increase significantly. We haven't done a JV, you know, we're contemplating it. You know, we've had expressions of interest from people, so we wouldn't give away any upside. The concept of pooling maintenance reserves implies the excess reserves be accessed earlier. You can access reserves whenever you do a refinancing or a financing. You know, the concept of, you know, it all belongs to the company. All the money belongs to the company.
One way or another, you can do whatever you want with it. Next question is, Avation has been holders of Philippine Airlines' equity for some time. We're in the process of starting the process to sell those. We've only recently got them freely tradable. We've already got a toe in the water in terms of selling them to prove that we can sell them. You know, in a sensible and measured way, we will be exiting that investment. To Ken's question, we have a strong management team. You know, we only see four of them on this call, but we have lessors and marketers and lawyers and engineers and a strong, you know, very strong team. There are two executive directors. You know, we've got a sensible team there. Strong demand for ATR 72-600 leases, similar trends for other aircraft types.
Narrowbody commercial aircraft are the most in-demand thing in the world. If you have a 737 or an A320 available, you would—easy to place. The last of these questions is, we posted a tweet about we got 100% shareholder approval regarding dividend. Has this led to greater emphasis on dividends as a return to shareholders? I think, you know, we've demonstrated that we're willing to look after our shareholders if they are the owners of the company. You know, we've bought back shares. We've paid a small dividend. We are growing the revenue, growing the profits. You know, we're doing what we need to do for shareholders. We do not just emphasize one thing over another. Right. I think that's most of the questions. Is it more? There's a few more from the top, Jeff. All right. Okay. I'll share them around.
Brandon Barrett, we hear a lot about private credit. Is this active in the aircraft leasing area? Ashley would know this.
Yes, Jeff. There is private credit available, but the whole debt market for aviation is quite competitive. Where we find the best margins and the, you know, the lowest pricing tends to be more in the sort of commercial bank and, you know, the sort of more public markets. The private markets are there, but they do tend to be a little more expensive. There is plenty of debt and credit around. As you said earlier, we do tend to go looking for the cheapest for our shareholders.
Right. Next one's from Arfan. What's the intention with the Powell Holdings? The intention is to sell it and use the money on other things. The next question is from Mr. R. Larkin. Has Avation considered narrowbody freighters or freighter conversions or the portfolio such as the A321? We tend to like modern, newish commercial aircraft is what we're interested in. Freighters are sort of, in our view, a niche market, and they're more ideally suited to older aircraft. It's not really our—or mid-life aircraft. It's not really our area, although people do well out of freighters because, in general, they have very long leases. It's not really our business. Although, you know, we've considered it, it's not really our business. Next one's from Adam. Does value of order increase or decrease as the time to exercise purchase right goes closer?
The answer is it can do either, depending on interest rates, the market value of aircraft. The time value does diminish, obviously, but if there's a high inflation rate or high interest rate, then they'll go up. It is a volatile number, unfortunately. And you've also got money. The money—I mean, you've got money in there. The money doesn't change, but the value of money changes with interest rates and so on. The next one's someone called OP. What's the plan for the bond? The plan is to investigate the bond market in parallel with looking at the credit ratings and looking at the actual bond market as well as the bank market at the right time. We've started that process already. We're, you know, probably six months early, but we've already started to look at it. The next one is from Colin.
Congrats on the turnaround. Strong cash positions. Share price still attractive. How are the lease rate trends for ATRs and A320s? They are going up. I mean, clearly, you know, in this industry, rents have gone up. Next one is from Tim. What is the target IRR converting the purchase rights? If you look at the research from your brokers, you will see that we have quite a—you know, we are a leveraged business. We have 11% unlevered income, if you like, and a 20% profit margin. You know, we make sure that we maintain a reasonable IRR. I mean, do you want to—Iain, you want to jump in here? I mean, you know, it is a combination of credit, cost of money for that credit, as well as aircraft.
Yeah. I mean, we have to tailor the IRR expectation to the credit that we're leasing the aircraft to. You know, so if you're dealing with smaller regional airlines in, you know, certain difficult jurisdictions, then you're going to demand a higher return from the lease than if you're leasing to, you know, a huge state-backed airline. You know, we wouldn't get a very good IRR leasing to Singapore Airlines, but we can generate much better IRRs leasing to smaller regional airlines, which is part of the attraction of the ATR market for us.
Okay. Keeping going. We'll do a few more, three or four more. This is from Matt. How to expect the capital allocation split between debt, growing the asset base, returns to shareholders in 2025 compared to 2024. Iain, do you want to tackle this one again?
I mean, at a high level, there'll be more focus on growing the asset base simply because, you know, we've got aircraft deliveries that we need to take this year. You know, you'll have seen that we've just announced the Etihad aircraft purchase as well. You know, over the last few years, you've seen us deleverage quite aggressively. I mean, the focus will now be more towards growing the asset base.
The next one's from Reno Bianchi in New York. What accounts for the change in restricted cash balance? $40 million restricted cash, a further decrease in the near-term horizon. I think that's due because the money was on fixed deposit of greater than duration, wasn't it, Iain? Do you want to jump in?
Yeah, that's right. I mean, we moved about $40 million into fixed-term deposits. That is part of the restricted cash balance.
I mean, they're not forever. They're like three months, less than six months, aren't they? I mean, anything over three months, it's not cash.
Correct. It's just an accounting classification. Some of those fixed deposits have an initial term of more than three months, and therefore they get classified as fixed deposits rather than cash.
Next one's Matt. It's from Matt. Maintenance reserves, revenues higher than recent periods. I think it will be steady. I don't think it should be—I mean, a lot of lessors consider all of maintenance rent. They call it rent, and they consider it to be revenue, but we only sort of recognize 10% of it. I think that that's going to be consistent. Next one's Reno. Talking about long-term strategy. The long-term strategy is to continue to generate cash, manage the business, grow the portfolio, and in an organic way. That, I think, is all of the questions. That's all the questions, I believe. That's it. All right. Thank you. I'll hand back now to Millie. Thank you very much.
Thank you very much. That concludes today's call. Thank you and have a nice day.