Earnings Call: H2 2021

Sep 30, 2021

Ladies and gentlemen, welcome to the Ovation CIC Financial Year 2021 Investor Update Conference Call. My name is Nathalie, and I will be the operator for today's call. I will now hand you over to Duncan Scott, Ovation's General Counsel. Please go ahead. Great. Thank you, and good morning and good afternoon, everyone. Today, 30th September, Ovation published its unaudited financial results for the financial year 2021. A copy of our earnings release is available on our website at www.ovation.net. This conference call is being webcast and recorded, and the webcast will be available for replay on our website. Please note that certain statements in this conference call, including answers to your questions, are forward looking statements, including the valuations deemed regarding our future operations and performance, revenues, operating expenses, other income and expense items. These statements and any projections as to the Company's future performance represent management's estimates of future results and speak only as of today, early September 2021. 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 Ovation's business included Ovation's publicity announcements from time to time, including its annual report and half year results announcements. Ovation assumes no obligation to update any forward looking statements or information in the light of new information or future events. Unauthorized recording of this conference call is not permitted. I will now hand over to Executive Chairman, Jeff Chatfield. Thank you, Duncan. Thank you for joining us for the report from the company for the Q1 financial year. Ovation is a commercial passenger aircraft leasing company. The business has existed for 4 to 15 years, and for 14 of those 15 years, the business has been profitable with high growth and strong investor returns. COVID has created the most difficult year for the aircraft leasing sector, the aviation sector and our business. The financial results reflect the difficulties of last year. The company has faced and resolved a number of threats, including significant debt disruption of the airline industry throughout the year, the failure of our business biggest customer Virgin Australia and the necessary extension of the company gun secured volumes from May 21 to October 26. We believe that the industry is now emerging from the period of COVID of the COVID driven disruption. Elevation's strategy is to preserve liquidity and cash flow, ensure survival and allow focus to be directed to the maintenance of the business, customers and leasing platform, which have been preserved as the impacts of the pandemic proceed and air travel returns. The aircraft leasing business has thrived in part because demand for popular aircraft has always outsized outstrip supply, which has driven up lease rates and enabled lessors to reposition aircraft with relative ease when an airline customer failed. This aircraft shortage dynamic broke down during COVID, which was less or vulnerable that we are now seeing a return to the normal operating environment with an expectation of increased demand for aircraft. Presentation is down in 3 sections. The first provides an overview of the Company. The second provides some of the results. And finally, we discuss the strategy we've implemented to deal with COVID over the last 18 months before taking a look at the pathway forward and then opening up the meeting for questions and answers. So Slide 1 is a snapshot of Ovation at 30 June 'twenty one. The year ended 30 June 'twenty one, including the most challenging in the company's history. The COVID pandemic persisted throughout the year, disrupting airlines, aircraft leasing and valuations. As of 3rd June 21, the company had 44 aircraft in the fleet, serving 19 different customers in 15 countries. Ovation IX manages and leases regional Paribody and Twin Isle aircraft. The fleet is split by 16%, 52%, 2% by value respectively between Twin Isle, narrow body and Turbopro. The aircraft fleet has a 4.8 weighted average age and a 6.4 weighted average remaining lease term. As our mid June fleet assets totaled $1,100,000,000 Elevation has $668,000,000 in unowned contracted revenue from existing operating leases and a further $50,000,000 in finance lease receivables. The company has maintained a full complement of commercial, legal, financial and technical personnel to ensure it has the skill set necessary to manage the lessor platform successfully in the post COVID-nineteen recovery plans. The challenges resulted from the pandemic created a significant workload, and I would like to thank Ocean's employees for their commitment, focus and diligence during the period. Next slide displays our portfolio. Ovation diversified 3 to 30 in June, was comprised of 44 aircrafts with a focus on regional and narrow body aircraft. It is least expected that the single class has returned to service as we emerge from the pandemic. 84% of the nation's fleet is focused on regional and domestic travel, which has now recovered to 85% for 2019 pre COVID bills. During the year, Ovation rescheduled its ADR order book to reduce committed capital expenditure. The nation now holds orders for only 2 aircraft and purchase rights for 28 ATR-seven thousand three hundred aircraft, representing a material source of potential growth for the company long term. These represent a valuable asset as the purchase rights provide a physical pathway to growth. The next delivery date for new ATR aircraft is not until October 2022. Covation believes newer aircraft carry a lower risk of obsolescence and provide greater potential long term cash flow to service debt to long term leases. The next slide shows customers. Today, we have 19 customers in between countries. Ovation's customers include 7 flag carriers. While flag carriers are not excluded from impacts of COVID-nineteen associated travel restrictions, these airlines are more likely to receive permanent support due to the national importance of the carrier. These airlines typically also service domestic routes. As countries have moved beyond the peak of the pandemic, domestic travelers recovered faster than international air travel. It is important to note the nation's geographical spread of customers as the pandemic is at different stages around the world. Around 2 thirds of nation's customers by revenue are located in Asia, including airlines facing countries that have a less severe impact from the virus. We've also been fortunate in Europe, where our largest customer here at Baltic has been performing well and has a perceived government equity injection. As we've been able to conserve the majority of our customers' fleet and team and business model, we believe Patient's business has largely impact. Let me hand the call to Richard Berlanti, who will provide more detail on the financial results and key ratios. Thanks, Jed. The next few slides and presentation provide a summary of financial results. Further detail is included in today's stock exchange guidance, which is also available on the company's website. On to our financial year 2021 summary. During the financial period, the patient generated total income of $120,100,000 down 12% year on year, with revenue of $117,700,000 down 13%. This is primarily driven by the failure at Virgin Australia, which resulted in some of the freight being unutilized for the majority of the year. Operating loss totaled $62,700,000 This was impacted negatively and dominated by the prolonged impact of the pandemic, which has resulted in 87 $400,000 in impairments to the value of the fleet and $25,400,000 for expected credit losses. An end of the pandemic appears to be in sight with the rollout of global vaccination programs supporting the return to growth in passenger numbers. Our return of air travel to the COVID levels may result in an increase in the value of EBITDA that could reverse some of the impairments in future periods. This resulted in a total loss after tax of $84,900,000 for the year. Fleet assets declined 13% to $1,100,000,000 due to the impairment of the fleet, depreciation and the disposal of 4 aircraft during the period. At the onset of the pandemic, the company elected to close capital expenditures to preserve liquidity. The weighted average cost of total debt increased from 4.5% to 5.4% due to the added interest free cash component resulting from the senior notes extension and an increased margin on the company's warehouse facility in the second half of the year. The loss per share was US131 dollars per share for the year. On to the next slide, which provides an analysis of Ovation's debt. During the period, Ovation initiated a process to extend the date of maturity of the $342,600,000 outstanding Innovation Capital SA senior notes from May 2021 to October 2026. The extension provides sufficient financial flexibility for the continued development of the business. The exception for more than 5 years and the Company retains the option to refinance its core notes at any time. The extension of the maturity date and other revisions to the terms and conditions of the notes has been accounted for as a substantial modification of the terms of the debt instrument in accordance with IFRS 9. Under IFRS 9, the modifications to terms of the debt instrument is substantial. The existing liability is distinguished and a new liability is recognized at fair value. The fair value of the notes at the date of the extension test on the quoted open market price of the notes of $0.32 in the dollar was $281,000,000 Total fees and costs incurred in connection with the expansion are now now $11,000,000 and includes $3,500,000 for the fair value of the share warrants issued to the holders of the notes. The difference between the extinguish liability and the new liability less fees and costs incurred has been recognized as a gain of $50,300,000 in the trade and a profit or loss. And we mention this because that is the only way that we could account for that detention on the bond. Net indebtedness has declined by almost $114,000,000 over the past year. There was an increase in the weighted average cost of goods to Steward's debt facilities to 3.9%, up from 3.6% due to an increase in the margin applied to the company's warehouse facility since the December 2020. This and the increase in coupon timing expansion and duration of the notes resulted in the weighted average cost of debt to the company increasing to 5.4% to 4.5 percent, which was at 30 June 2020. At year end, 90.9% of total debt was fixed or hedged interest rates. Basinspace to assets ratio was 33.9%. This reduced on the 2020 figure of 35.7%. The chart shows the evolution of the current cost of debt over the past 8 years. On to the next slide where we have provided a range of key ratios on a comparative basis. Net asset value per share fell to £1.64 compared to £2.86 was at 30 June 2020. Billings were suspended as part of a response to COVID-nineteen, and that we hope will be a temporary suspension. Administrative expenses on a cash basis, excluding the warrant expense defined by $1,000,000 or 9% over the past year, and meeting our commitment to reduce cash and administrative expenses in response to the virus. Debt to EBITDA has improved to 7.7 times from 8.4. Operating cash flows were impacted by the increase in coke headers from the COVID-nineteen support automation provided to its airline customers. Funds from operations could take effect during the period of EBITDA as a function of interest expense dropped by a small margin. On to the next slide, which provides an update on Ovation's cash and liquidity position, which has been the focus of our NERC assets over the past year. Total cash has improved over the past year and we have 3 earnings from the debt as at the end of the year. Loan maturities are typically aligned with lease terms and with a long average lease duration of 6.4 years associated with fleet, most of the Ovation's senior debt has significant duration. We've been successful in obtaining labor screening of the covenant issues at that 30 June 2021. The other 2 agreements which now have additional interest component on top of the original 6.5 percent coupon of either 2.5 percent PIK, which came in time, or 1.75% cash at the maturity date of 31 October 2026 and is tolerable earning time. Ovation also accessed the equity capital markets in March with a $10,000,000 share issue and expects to sell further underutilized aircraft according to the year, which will also enhance liquidity further. Liquidity is expected to improve over the next two quarters. We've already announced the sale of an 18/20 that will release under 10,000,000 of liquidity, but we also expect to sell a majority of the 6 remaining ex Virgin HCR aircraft that combined are expected to release approximately $50,000,000 that can be used to pay down debt and fund future growth. Add to this is a significant collection in the 1,000,000 of dollars from the administrations of Virgin Australia and Comtech Airlines, and you see how our liquidity position will improve. This supports the return to growth that we are looking for in the coming years. I will now hand the call back to Jed for an update on the company's COVID-nineteen strategy and the pathway forward for the company. Thank you, Richard. The next slide is our COVID-nineteen liquidity strategy. The major Ovation's COVID-nineteen strategy is focused on maintaining liquidity and cash flow. Ovation took a pragmatic approach as airline customers suffered from major disruptions. Ovation was the 1st mover in working with airline customers to help them through this difficult period. That's important to allow the improvement of the proportion of the monthly rent. This is not a rent decrease or holidays. It was a loan. But airlines need to and indeed have begun to repay the deferred rent. Balance this reduction in cash, innovation implemented 3 key strategies to preserve cash flow. The first is to adjust the Enerpacion senior loans associated with the fleet of key lending banks. The second was to reduce cash expenses. The third step is to reduce capital outflows. This includes moratorium on capital expenditures. So that has seen no new deliveries of aircraft into the fleet on a temporary basis as well as a temporary suspension of dividends. There are 2 ATRA classes scheduled to be delivered in late 2022. And when positioned with a customer, these will represent only small equity commitments for each aircraft, given that we've paid 3,500,000 in free delivery payments for each aircraft and expect to be able to finance most of the remainder of acquisition costs. By carefully managing cash flow, Ovation has been able to navigate through COVID-nineteen positioning itself. So opportunities post pandemic, and as Richard just explained, we expect our liquidity position to be quite strong. So the outcome, I hope you can stretch out the next slide. The next slide provides a summary of the outcome. The patient has successfully delivered. On with customers and lenders to deal with the pandemic. We entered into a range of deferral agreements with 14 of our 19 customers. Airlines were required to maintain major reserves as part of deferral agreements. The total rent deferred by airlines is 25,900,000 dollars Innovation has successfully mitigated the impact of lower rents on cash flow by agreeing to reach the end of $35,200,000 in loan amortization. Other Ovation's most important achievement during the year was the extension of maturity date of the $342,000,000 outstanding notes from May 21 to October 26. This extension provides stability to the company's capital structure and will assist the company in successfully navigating the remainder of the COVID-nineteen pandemic. Elevation lowered cash administration expenses by 9% compared with the year end 30 June 2020. In terms of customers, next slide. Air travels continuing to recover towards levels of existence prior to the pandemic according to Ihabit's monthly passenger traffic. For July 21, domestic travel is now at 80 4% and international travel is at 26% at pre COVID levels. Internationally, travel is expected to increase over the next 6 months as companies adopt vaccine and testing requirements for their inbound travelers. Globally, this regime has recently been adopted by the U. S, EU and the UK travelers, which will open up some of the busiest international air routes. With many Western Asian countries now approaching and exceeding 7 percent vaccination rates, there is an expectation of an opening up of major European, U. S. And Australasian routes in the coming months. 13 of our 90 customers have been charged normal rates at this time. 3 of our airline customers have entered into formal and informal restructuring process as a result of the pandemic, including Virgin Australia, Philippine Airlines and Brussels. Bratons has now completed its administration process and survived as a customer. In relation to Vision Australia, the Patient had 13 aircraft returned and has successfully repositioned 7 of these aircraft over the past year. During worst of the pandemic, either bought selling them or entering into new leases with new customers. Ovation has reduced its debt associated with the remaining 6 aircraft, which was around $30,000,000 at the time of this conversion of failure to just $6,000,000 today. Ovation expects to sell the lease most of the remaining 6 aircraft by the end of this calendar year. This will boost Ovation's cash position and improve operational efficiency. All of the fleet will then be income producing. In addition, we expect to receive the payout from the creditors trust of a minimum of $9,500,000 in early 'twenty two. At this point, the Virgin Administration will almost be fully resolved. The 3rd airline is Philippine Airlines, which won't be filed for voluntary additional relief and the Chapter 11 in the United States. In order to complete a prearranged restructuring process, Ovation and Powell have agreed terms of Powell's retained the use of Boeing 7 77-300DR on lease from Ovation. Going forward, a successful restructuring will ensure that Ovation will commence collecting rents on the aircraft for the first time since early 2020. Under the restructuring, innovation will also be able to receive payments relating to utilization since the 1st September 2020 on a power by the hour basis, along with a discretionary note from a portion of rent outstanding for the period prior to 20 1 September, September. The aircraft will revert to fixed rate lease for the remainder of the duration of the lease from March 22. These 3 airlines' digital restructuring arrangements make up a majority of the impairment credit losses recognized in the profit and loss for the year ended 30 June 'twenty 1. Conclusion. The Inclusion invasion continues to navigate its way through the most challenging period in the year at King's history as well as the history of aircraft leasing, but we believe we're through the worst of the impact from the pandemic. The disruption created by COVID-nineteen is expected to receive completion of global vaccination programs that support a return to increased levels of air travel. This trend is already evidenced in regional domestic travel and we expect to be caught by recovery international travel as we move through the remainder of the 20 22 financial year. The fundamentals of the business model, remaining tax. The recent Chapter 11, filing for the voluntary restructuring by Philippine Airlines should lead to a resolution of 1 of the last remaining lease defaults resulting from the pandemic. Innovation is set to emerge from the pandemic with a slightly smaller fleet with higher levels of utilization and a long time frame for repayment of unsecured notes following the potential of their maturity to October 2026. Ovation's cash and liquidity position is expected to improve in the coming months through the effective sale of underutilized aircraft, receipt of distributions from creditors from Virgin Australia as well as Philippine Airlines. This will have the combined impact of improving operational efficiency, increasing liquidity, which can then be used to pay down debt and fund the fleet growth expansion of late 'twenty two. The company believes that airlines will require a significant number of leased aircraft in the post pandemic phase due to a large number of older aircraft that have been retired and the impact of the pandemic on airline balance sheets, reducing their ability to finance the purchase of aircraft directly. As a result of the pandemic related financial turmoil, there's likely to be opportunities to buy aircraft from airlines unless those looking to adjust or reduce their portfolios, which Ovation is positioning itself to take advantage of. Ovation is optimistic about the long term opportunity for airline travel, particularly in the regional and narrow body aircraft sectors. We recently completed a small share placement earlier this year, which the directors and senior management, including myself, described to 10% of the pricing. So we continue to support, believe in and are aligned with the company and its investors. I'll now commence the Q and A session. The first question is from the line of John Cummins from WH Highlands. Just a couple for me, if I may. Firstly, just as far as you said that, obviously, you may have the potential to reverse those impairments if aircraft values do increase. So I'll just put it in private. So at this point in time and what you see, you don't see any requirements at all for any further impairments across the fleet assets? I'll answer that question. No, not at the moment. We believe that aircraft valuations are actually going up as evidenced by the transaction that we're completing at the moment. And we're confident that with some enough impairments for the moment, we don't see any more right now. Thank you, Jeff. And another one for a follow on for yourself probably. I mean, can you get any what is it at what point do you feel do you think you'll feel comfortable with acquiring, making further aircraft acquisitions? And then if there are any particular aircraft categories, types that you think are providing very good value as you see the market at this point in time? That's a good question. The answer is we've had sort of a global experiment on what types of aircraft are valuable and recommends the quickest. And it's quite interesting in the sense that regional and narrow body, short duration aircrafts or aircrafts with a short mission seem to be recovering the fastest. Well, they are. Statistically, they are. So things like the A220, the Airbus A220 aircraft that are increasing in value and very popular and we can sell them all day. The ATRs are also going well. We've demonstrated we can deal in a lot of ATRs in a short time, which is great. So it's the financial the answer to your question is it's the financial population. We have the opportunity to acquire aircraft when it presents itself with the right returns, provided that they're profitable and will make this money over the long term is what we're looking for. So I'm confident we'll we've demonstrated a great ability to trade aircraft in 15 year history, so we're confident that, that will continue. So it's profitability and will drive it. The next question is from the line of Ross Harvey from Davy. Two questions for me. First one is on the ATRs. Just in regards to the tools that are delivering next year, you might make a comment on how the progress is going there on that marketing front, whether that's in place or are you for target? Just in regards to the options, what your thoughts are on those, on potentially selling those? I've got a second question to follow, but I might skip out that first. Well, I'll take part of that. I mean, we see demand for the ATRA parts around the world. And we are it's the situation that one of our competitors or the major competitor in that sector has some financial difficulties. So clearly, we've got a pretty strong opportunity in the sector and there certainly will be demand without question. We're seeing it now. I mean, we wouldn't be able to sell all those aircraft, but we sold them or placed them were that not the case. And in regards to the It's at the end of next year, so you have plenty of time to place them. And in regards to those purchase rates, Jeff, what's the kind of the latest thoughts on those, on executing them or selling them? It's a good pathway to growth. I mean, the that the regional travel sector has statistically rebounded fastest, and there's plenty of demand developing. And consequently, the Q2 competitor, the Q400s are not made anymore. So there's certainly going to be lots of demand for those aircraft in the coming years. And it is a long way down the track in terms of time. So we've got plenty of time to decide. There's no decision yet on phasing or selling. But I think it's likely that we'll face them. Yes. Perfect. One that might be more for Iain and Richard then is just on the cash protection side. So I know you updated us on that metric earlier in the year. I think it was 71% in Q1. You've been mid-60s in the second half last year. Can you give any update on that $1,000,000 in Q2 and financial Q3? I think Ian's got 2 answers to that question. Ian's team puts the Ian, Jean, put the CFO, take a look. Yes. Hi, Ross. The average over the year is just over 70%. So it's kind of fair and consistent with earlier in the year. And obviously, we anticipate that, that will improve quite dramatically in the coming year as we put aircraft back onto leases and also take collections of arrears that have built up with some of the airlines. So in theory, that range should be about 100% if we execute on our plans. Great. And I'm just honest on that. Obviously, with the Powell situation and Powell recommencing the payment of rent, cash collections will increase dramatically. Yes. That will help. One separate one, perhaps more again free. On the leverage front, I'm just wondering, is there a certain target you have in mind for kind of steady state leverage moving forward post pandemic? I mean, clearly, it will take a bit of time before the air traffic systems, backup and roaming, cash collections coming in where you'd like. But how would you like to figure in mind where you'd like to reach a certain leverage level before you initiate most in the business? Or are all these moving parts that you don't really think about in kind of numbers terms that you're targeting? Well, we don't have evidence. We need to get the credit rating up, which requires reduction in leverage, which probably requires growth. I don't know that you can shrink too much and get your credit rating up enough to lower the cost of tonnes. So I think growth will be important. Sorry, Ian, I cut you off with your apologies. You can jump in. That's quite alright. I think you've answered the question. Okay. Great. One final one, if I can. I know I'm going to hog the line here for a bit. But just on the impairment side, I just wondered, is there a kind of a proportion of the figure this year that could have been related to the restructuring and perhaps the percentage that would have been related to your generic value assumption or the effect 1 versus the other? Any commentary would be helpful in that sense. That's a question for Ian. Yes. Hi, Lois. So I mean, the biggest single impairment was on the 777 that was on lease 2 or is on lease 15 airlines. So that takes up about onethree of the overall balance. And then on the DX Virgin ATRs, there's about another 32% of the total. So those are the 2 major components of the impairment charge this year. And then there's obviously general softening in residual values because of COVID. And that's kind of been across the board. And that kind of makes up the balance. The next question is from the line of Brian Charles from R. W. Prestige. Baird. Congratulations on maybe a very difficult environment in terms of cash flow and liquidity. In terms of market outlook, I want to make sure am I reading something correctly on the income statement? The aircraft purchase rights were $150,000 charge for the full year, but I think that's coming off of the $7,900,000 charge through the 1st 6 months. Was that $7,900,000 largely offset in the second 6 months in terms of the value like the reversal of the charge of those value making rates? And that's a question for Ian. Yes. Hi, Brian. Yes. When we rescheduled our supply contract with ATR, we gained an additional 3 purchase rights. So when you're looking at December, we had 25,000,000 and that number is now 28,000,000. So that accounts for part of the reversal of that $7,000,000 reduction that we saw in the half year accounts. And the other factor is that we also adjusted the pricing of the contract with SDR when we rescheduled the order book. And that has had an impact as well. And Brian, our Our pricing the ATR improved, which means over time, those purchase rights or options will actually improve significantly in value because this is a very cheap exercise. And which would make us we're exercising. We'll be the largest vessel customer that ATR has, I believe, which will be a good position to be in, in a recovering market. Fair enough. It sounds like a good step to navigate a difficult environment, take advantage of lower aircraft prices. Okay. Thank you. Away from that, I don't know, do you have any color or anything you can talk about in terms of maybe upcoming lease maturities? I know you have something coming up with your France. We have an upcoming maturity with aircraft, but we have also we don't like to announce LOIs, but we've actually signed placed that aircraft today with an LOI with another airline. So that will transition to another airline. We may need to make an announcement on that in due course. We don't normally announce LOIs, but since you've asked a question, that's the situation. So that claim won't be stored for any material amount of time. We'll just transition. The next question is from the line of James Chen from Caraballo Asset Management. Can you try that again or perhaps email the question? I think that's better. Is it better? Yes. I just wanted to get an update on near term lease securities beyond the one with Air France, the 2 ATRs with La Lumiere and 737 with Peru? That's the first question. Nash, follow-up. Yes. Well, the aircraft on as I've just announced, has been transitioned to another airline. The Garuda aircraft we are repositioning because the Garudos look like going through a restructuring and we're not particularly happy with that. So we're taking the aircraft back and we'll place it or sell it, but we'll probably place it somewhere. The aircraft, that's not really a problem for us because we it's an unencumbered aircraft and it's only 1 with that credit. And the 2 Logan Aries will be transitioned to other airlines when we market them. So that won't be a long term problem. So in reality, our inventory level is not that high. And what was your second question? Do you have any updates on releasing the fixed export in Australia, if you are on triple top? I think Rob would like to answer this question. Yes, we actually have got, we had 11 in total HR conversion of which we only have, we've also signed an LOI for 3 of those. And we have placed, we sold 1 and we've placed another 3. So we only have 3 assets that's in place. Great. And just one more, if I may. Have you begun receiving cash from revenues from the power by the hour, how long are the costs? I'll answer that one. Not yet. We it's soon to be it's agreed. So the process has started. But not yet, but we will soon. There are no further questions at this time. So I hand back to Jeff Jetty for closing comments. Well, thank you very much for your time today or this morning and this afternoon, seeing where you are. Clearly, it's a difficult year, and the company is well placed to grow us in in the future and just get its way through the COVID situation. We'll take down cameras. We've managed the business, and it's all been about survival. So thank you very much for your time and support. And if you've got any questions, please contact us at any time. Thank you.