2015 First Quarter Earnings Call
Transcript
6 May, 2015
DÓMHNAL SLATTERY
ANDY CRONIN
JOHN HIGGINS
DÓNAL O’NEILL
Avolon | 2015 First Quarter Earnings Call Transcript
Operator: Good morning and welcome to the Avolon 2015 First Quarter Results. Throughout the call all
participants will be in a listen-only mode and afterwards there will be a question and answer session. Just
to remind you, this conference call is being recorded. And today I am pleased to present Dónal O’Neill.
Please begin your meeting, sir.
Dónal O’Neill: Good morning and good afternoon and thank you for joining us today to discuss Avolon’s
2015 first quarter results. Today’s call is being hosted by Avolon’s CEO, Dómhnal Slattery, President and
Chief Commercial Officer, John Higgins and Chief Financial Officer, Andy Cronin.
During the course of the prepared remarks or Q&A discussions may include forward-looking statements.
Such statements are subject to certain risks and uncertainties that could cause actual results to differ
materially from historical results or those estimated or anticipated. These statements reflect our opinions
only as of today’s date and we undertake no obligation to revise or publicly update them in light of new
information or future events.
Please refer to our SEC filing which also includes our earnings press release for the quarter ended March
31st 2015 and also includes a more detailed discussion of the risk factors that may affect our results.
Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. Also,
please note that certain financial measures we use in the presentation are expressed on a non-GAAP basis.
Our GAAP results and GAAP to non GAAP reconciliation can be found in our earnings press release and
slides associated with this presentation.
I will now turn the call over to Dómhnal.
Slide 2
Dómhnal Slattery: Good morning to everybody and welcome to our 2015 first quarter earnings call. We
last reported results on 3rd March when we issued our first set of results as a public company. We
reported a strong performance for both the 2014 fourth quarter and the full year. And that momentum
has continued into the first quarter of 2015.
This quarter we have delivered strong double-digit improvement against key financial and operating
metrics. We added $841 million of new commitments in the quarter driving our growth pipeline for 2016
and 2017. As we have consistently outlined, we have a balanced origination model and a proven track
record of sale and leaseback activity which drives strong growth at substantially lower risk. We also
sustained our trading activity in the quarter, capitalising on the significant embedded value in our fleet.
Slide 3
Now turning to slide 3 of the presentation, as mentioned, we delivered a strong performance for the first
quarter against all key financial and operating metrics, reflecting our low-risk, customer-focused growth
strategy. In the quarter adjusted net income increased by almost 34% to $62 million, while our net income
increased 36% to $49 million.
Aircraft commitments increased by 43% year-on-year to almost $7 billion and we continued to drive down
our cost of debt to fund this growth. As we’ve consistently emphasised, reducing our cost of funding is a
core focus as it is the single largest variable cost for our business. Our cost of funds in the quarter declined
by 52 basis points year-on-year to 3.73%. We also hedged our interest rate risk by match funding and
maintain a relatively conservative net debt to equity ratio of roughly 3:1.
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Avolon | 2015 First Quarter Earnings Call Transcript
At the end of the first quarter our average remaining lease term was 7.1 years and the weighted average
life of our debt was 5.4 years. This drives strong long-term stable cash flows for Avolon.
So in summary we delivered a strong Q1 performance and believe that the drivers of this performance will
sustain our growth in the years ahead with approximately $7 billion of committed growth, with a strong
balance sheet and a continually reducing cost of funds to finance that growth.
Slide 4
Turning to slide 4, this summarises the momentum of the business in the quarter. We enjoyed a very active
quarter and continue to grow our owned and managed fleets and delivered eight new aircraft with a net
book value of $434 million to five airlines in five different countries. We added a total of $841 million of
new commitments which equates to a total of 19 aircraft. These commitments which deliver in 2015, 2016
and 2017 highlight our ability to drive growth through the sale and leaseback channel and represent
significant progress on our 2016 targets. This channel is central to our model and accounts for more than
half of the 251 aircraft which are in our owned, managed and committed fleets today.
We are also pleased to have put in place a new $675 million secured debt facility at a margin of 1.65%
which closed in April. This is Avolon’s largest ever debt transaction and represents a milestone for our
business.
Slide 5
Turning to slide 5, this slide shows the growth of our owned fleet year-on-year. We ended the first quarter
of 2015 with an owned fleet of 132 aircrafts with a net book value of $5.8 billion. This represents net
growth of over $1.5 billion or 33% compared to the same quarter last year. We also own the youngest fleet
amongst our public peers at 2.6 years.
As you know, aircraft leasing is a relationship-driven business and we maintain a total of more than 150
airline relationships globally. We are pleased to announce that we are pleased to continue to add new
airline customers to our business and we now serve 51 customers in 29 countries.
Slide 6
Moving to slide 6 and trading gains. Aircraft trading is core to our business model and, as we have
consistently said, helps reduce portfolio concentration, managed asset and counterparty risk and drive
returns. We also believe it provides us more flexibility to optimise growth by dynamically allocating capital
while being nimble and reactive to market conditions through the cycle.
In the first quarter we sold aircraft with a net book value of $145 million for a gain of $14.6 million or a 10%
premium above our net book value. In addition to this sales volume at 31st March, we have signed letters
of intent for a further $372 million of sales which brings our committed sales volume for the year to $517
million. We maintain our full year target of $700 million of sales volume and an average gain of 8% above
our net book value. With 74% of this sales volume identified by the end of the first quarter we remain
confident with our 2015 guidance.
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Avolon | 2015 First Quarter Earnings Call Transcript
Slide 7
Now turning to slide 7 and our active liability management. We’re pleased to have closed our $675 million
debt facility just after the end of the quarter with an eight year term and a margin of 1.65%. During the
process we increased the facility size from an initial target of $500 million reflecting the demand we
experienced in the bank market and the consistent progressive improvement in our credit profile.
This facility offers significant flexibility including an availability period of up to 15 months, blind capacity to
finance aircraft that are not yet identified and importantly substitution rights to facilitate aircraft trading.
The positive balance sheet impact is worth illuminating. The transaction supports our delivery pipeline and
refinances all of our 2016 maturities. It extends our weighted average life of our debt and will deliver
ongoing interest savings. And we incurred minimal refinancing costs and we will continue our matched
hedging policy. As we have consistently said, our focus is to continue to diversify our source of funds and
reduce the cost of that funds to finance our growing fleet.
I will now hand over to Andy who will walk you through our financials in more detail.
Slide 9
Andy Cronin: Thanks Dómhnal. As mentioned, we sustained strong momentum in the business in the first
quarter.
Slide 9 highlights some of the moving parts of the quarter. As Dómhnal already stated, we sold aircraft in
the quarter and achieved a net gain of $14.6 million or 10% premium. We also signed early termination
agreements in Q1 for two aircraft. This resulted in $1.9 million in additional lease revenue termination fees
and $4.3 million in maintenance reserve income recognition. The first of these aircraft was redelivered to a
new lessee in March with the second due to redeliver in May. Both aircraft with zero time off-lease.
As mentioned at the time of our 2014 fourth quarter results, in December we proactively executed the
consensual early lease termination of one aircraft which was on lease to SpiceJet. We delivered this
aircraft to the subsequent lessee with effect from 1st April. The proactive early and consensual termination
and simultaneous placement is clear evidence of our robust risk management systems and global platform.
This aircraft was off-lease for Q1. However you will recall $1.3 million additional revenue booked as
termination fee in the fourth quarter.
In terms of the delivery activity we delivered eight aircraft in the period, of which four were delivered in
February and four in March. Finally, the fair value mark to market on interest rate caps was an unrealised
expense of $5.9 million at the end of the quarter.
Slide 10
Slide 10 summarises the strong sustained growth of the business in Q1. Our net book value increased by
33% to $5.8 billion compared to a value of $4.4 billion in Q1 2014.
We also delivered significant revenue growth of 29% year-on-year for the quarter. Despite the increased
volume interest expense increased by only 14% reflecting reduced borrowing costs. As a result our net
income and adjusted net income increased at a higher rate than revenue at 36% and 34% respectively. This
reflects our year-on-year increase in lease yields and decline in debt costs.
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Avolon | 2015 First Quarter Earnings Call Transcript
Slide 11
Looking at slide 11 now, which details the increase in our return on equity. At the end of the first quarter
our adjusted ROE increased by 20% to a strong 16.6%. Diluted earnings per share increased by $0.15 or
33% to $0.61 in Q1. Adjusted earnings per share increased 34% to $0.75 for the same period. Again noting
that the average shares outstanding under GAAP is in part reflective of our pre IPO capital structure.
Slide 12
Slide 12 illustrates how the business is well-positioned in a rising interest rate environment. Specifically
lease and loan interest rate exposures are matched either by fixed rate financing or floating rate financing
and interest rate caps.
As outlined on the slide, 69% of debt is fixed with a weighted average life of 4.7 years. 21.4% of debt is
associated with floating rate leases, with revenues referenced to Libor. And 12.2% of our debt is hedged by
interest rate derivatives. The average strike rate on our interest rate caps is 3.05% with an average term of
5.37 years. This rigorous, consistent practice contributes to the stability and quality of our cash flows.
Slide 13
Turning finally to slide 13 and our outlook. We reiterate our previous full year guidance for deliveries of
$1.6 billion in 2015. To provide additional specifics, we delivered $434 million in Q1 and expect
approximately $711 million of deliveries profiled towards the second half of Q2. Given the pace of growth
in Q2 we expect our net debt to equity will rise slightly above our 3:1 target range for the second quarter.
But this reflects a timing issue, rather than any fundamental shift in our targeted leverage range. Through
yearend 2015 our total commitments including Q1 are for $1.67 billion of aircraft. However, we expect
that approximately $80 million may be acquired by Avolon Capital Partners, our joint venture with Wells
Fargo.
We expect to incur refinancing costs in Q2 of approximately $4-5 million, all of which will be offset by
future interest rate cost savings in future quarters.
At the end of Q1 we had closed $145 million in trading volume and have a further $372 million under letter
of intent. We remain on track for our full year target of an 8% gain on an expected sales volume of
approximately $700 million. There is no change in guidance for SG&A, share-based payments or our
effective tax rate.
The combination of 2015 aircraft deliveries and trading gains assuming no impact of interest rate caps is
expected to deliver a substantial year-on-year increase in ROE and adjusted ROE. Our expected ROE range
for 2015 is 12.8% to 13.1% and our adjusted ROE is expected to be in a range of approximately 14.7% to
15%. This equates to a 2015 full year net income of $210 million to $215 million excluding the impact of
interest rate caps and adjusted net income of $241 million to $246 million.
I’ll now hand you back to Dómhnal.
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Avolon | 2015 First Quarter Earnings Call Transcript
Slide 14
Dómhnal Slattery: So thank you for your participation this morning. We are pleased to have delivered
another strong quarter and to expand our pipeline of future growth. Our total fleet is now 251 aircraft and
we have locked in growth of almost $7 billion. We’ve added substantial new debt capacity in the quarter at
a materially low margin which will continue to drive that growth.
We remain confident in the outlook for the business and indeed the industry as a whole. We believe our
balanced business model underpinned by our best-in-class risk management system and prudent balance
sheet will continue to deliver strong growth and drive returns for our shareholders.
Finally, we will host our inaugural Investor Day on 26th May and we invite you to attend. Hosted at the
American Irish Historical Society here in New York it will include presentations from our Senior
Management Team and will also include our Head of Strategy, our Head of Aircraft Trading and our Head of
Asia Pacific. We look forward to the opportunity to meet with you there and provide you with a deeper
understanding of the Avolon platform and our prospects.
So, thank you for your attention and we would now be happy to take your questions.
Operator: Thank you sir. Ladies and gentlemen, if you wish to ask a question please press 0 followed by
the 1 on your telephone keypad. If you wish to withdraw your request you may do so by pressing 0 and
then 2 to cancel. Once again, to ask a question please press 01.
There will now be a brief pause whilst your questions are being registered. The first question comes from
the line of Andrew Light from Citigroup. Please go ahead; your line is now open.
Andrew Light: Hi, good morning. Got a question on the new commitments – you’ve generated 841 in the
quarter. How does that compare historically in terms of, you know, a quarter’s worth of business? And
would you expect it to continue at that rate?
Dómhnal Slattery: Andrew, good morning, it’s Dómhnal. And I’ll certainly invite John in here on this. You
know, the $841 million was a pretty stellar performance. The underwrites were for aircraft in 2015, 2016
and 2017 with the majority of those aircraft in the 2016 timeframe. And if you look at page F17 on our
press release you’ll see the breakdown of commitments. Now we’re nearly $1 billion of pipeline for 2016
as the focus of the business is very much on building that pipeline. In terms of how we’re feeling about the
pace of that growth, John, do you want to comment on that please?
John Higgins: Happy to. To address your question Andrew, I think, you know, nearly $1 billion of
underwrite in the quarter is probably slightly more than we would do on a normal run basis. But, you
know, transactions can be a little bit – a little bit lumpy. As we look out at the opportunities in the market I
would say the pipeline of opportunities to deploy our capital, it’s stronger now than it has been at any point
in Avolon’s history. And that’s to deploy capital deals that are both financially accretive and strategically
accretive. So acquiring new customers, obviously hitting or exceeding our financial returns, we see very,
very strong deal flow and, as Dómhnal just referenced, we have almost $1 billion of 2016 growth already
committed and locked in.
Andrew Light: Okay, thanks. And a kind of follow-up question, the gains on sale with 10% in the quarter,
which exceeded both the historical average of 8.7% in the last two years and your guidance for 8% for the
full year. Has there been any significant changes in aircraft values or was that just a kind of one-off gain in
the – in the quarter?
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Avolon | 2015 First Quarter Earnings Call Transcript
Dómhnal Slattery: Well, Andrew, we’re still very comfortable with our guidance for the year at 8% above
our net book value. And as we’ve said, you know, the individual performance in quarter may change and
vary. We’re pleased to have delivered a 10% for the quarter. In terms of market values, they continue to
improve for all of the aircraft that we’re – we’re invested in at this point. But our guidance for the year
remains firm at the 8% level.
Andrew Light: Okay, great, thanks very much for that.
Operator: The next question comes from the line of Nathan Hong from Morgan Stanley. Please go ahead,
sir; your line is now open.
Nathan Hong: Hey, good morning guys. I’m just curious to hear your thoughts on basically the cycle. I
know Avolon is a pretty young company in terms of being a public company but I can definitely appreciate
the fact that the management team has, you know, been around for multiple cycles. So as we kind of look
ahead, I know this business is kind of related to GDP but I’m curious to hear what metrics or trends you
guys most focus on that will kind of tell you guys that the cycle might be turning and, I guess, for the worse
at this point.
Dómhnal Slattery: Yes. So we follow many specific metrics in the cycle, both on the supply side and the
demand side. And we published research on this and continue to do so. Our perspective at this point in
time is with a very bullish outlook on the – on the market in general. And what’s driving that perspective is
continued growth. IATA released their March numbers this morning at 6.1, reiterated their 7% target for
the year. Aircraft are flying full on a global basis; load factors are close to 80%. And on the supply side, you
know, there are just simply no aircraft available on the narrow body side for the next five years. And then
you couple that with the number of airlines that fly 737 and A320 current generation who’ve actually not
placed an order for a replacement – I think it’s close to 70%. So all of those variables configure to a pretty
balanced supply-demand perspective.
Oil prices obviously have increased, you know, 30% or so from their mid-January lows but that just reemphasises our position that, you know, the best hedge that airlines can put on remains to operate the
youngest fleet and we’ve been very consistent with that theme over the last number of months. So right
now we’re seeing no real headwinds that would make us concerned about the cycle for the foreseeable
future.
Nathan Hong: Great. And, and just a quick follow-up on the new sale leaseback opportunities that you
guys, you know, place for 2016–2017, I’m just wondering if you could give us some colour as to where
some of this demand is coming from, particularly in which regions are you seeing some strength in?
John Higgins: Happy to do that, Nathan. Actually, we’re seeing good deal flow across the region so AsiaPacific, EMEA, and in the Americas. I would, I suppose just carve out the North American market; there’s
probably less sale leaseback – classic sale leaseback opportunity given the availability of capital market
financing, having said that I expect us to continue to underwrite new business in North America this year.
But, outside of that, there’s no particular region where if you like there’s limited opportunity. We see good
opportunity in Latin America, good opportunity in EMEA, good opportunity in the Asian Pacific. And also
we see opportunities across the regions to selectively buy airplanes and redeploy them so where you get
small pockets of airlines, who are looking to reshape their fleet. That creates an opportunity to – to buy
those airplanes and redeploy them elsewhere and we’re – we’ve been very successful at doing that.
Nathan Hong: Great, thanks for the time.
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Avolon | 2015 First Quarter Earnings Call Transcript
John Higgins: Thanks, Nathan.
Operator: Once again, ladies and gentlemen, as a reminder, if you wish to ask a question, please press 0
followed by the 1 on your telephone keypad now. There will now be a further pause whilst your questions
are being registered. The next question comes from the line of Gary Liebowitz from Wells Fargo Securities.
Please go ahead, your line is now open sir.
Gary Liebowitz: Thank you, operator. Good morning, gentlemen.
John Higgins: Morning, Gary.
Gary Liebowitz: John you mentioned that the pipeline is really strong. Is that strictly for sale leaseback
channel or are you also perhaps looking at OEM orders – I saw they were a couple of lessor orders for
current generation aircraft that were placed during the quarter? And, also, are there any large portfolios of
aircraft that are available that you might be interested in?
John Higgins: Yeah, Gary, so when I talk about, if you like, the pipeline I’m specifically referring to
opportunities to deploy capital in the sale and leaseback channel, so that is a very strong pipeline across
the regions as we’ve, as we’ve just discussed. In relation to the manufacturers, you know, we’re in
constant dialogue with the manufacturers about, you know, airplanes that they’re currently building and
indeed airplanes that they may choose to build in the future, which is, you know, Boeing’s middle of the
market airplane. I think one of the great attributes of our business is that we’re very nimble and we can
respond to opportunity with the manufacturers where we see it. The best place to be is in an opportunity
to act quickly where you see value but not feel obliged to order airplanes so we’re currently in dialogue
with both Boeing and Airbus. If I was giving my gut sense right now, I don’t expect that we’ll be announcing
anything at the Paris Air Show but I will say that we’re at least six weeks away from that event and these
dialogues and these dynamics tend to, tend to move quickly if you can get into the right sort of a trading
zone. So I wouldn’t say it won’t happen but I’d say my gut feeling at the moment is that it’s unlikely.
In relation to portfolios, we trade with all the other lessors, buying and selling in that secondary market.
We continue to look at opportunities there but there’s nothing specifically that we’re looking at on a sort of
a large scale at the moment that we should – that we’ve got the intention to upgrade.
Gary Liebowitz: Thanks John. And Dómhnal, just on the trading activity, has there been any slowdown in
the aircraft that you’ve put up for sale and without naming names, who’s buying these planes?
Dómhnal Slattery: What I would say as a general comment, Gary, the list of investors interested in
acquiring aircraft from us is probably as long and strong as we’ve seen it in several years. That’s for the first
– we think the bids that they’re making are very close to CMV which is a good signal. Three, these investors
are able to secure good liquidity – debt liquidity – to support their bids, which is good. Three, the profile of
these investors range from emerging lessors through to tax-based acquirers in jurisdictions of the world
where they can derive value from the assets and the cash flows from Japan, for – to be specific, and, you
know, across quite a wide sector. But, traditionally, we’ve focused in on the emerging lessors –that’s a core
target market for us.
Gary Liebowitz: Great. Thank you very much.
Dómhnal Slattery: Thanks Gary.
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Avolon | 2015 First Quarter Earnings Call Transcript
Operator: The next question comes from the line of Jamie Baker from J.P. Morgan. Please go ahead, your
line is now open.
Jamie Baker: Good morning everybody, a couple of questions for Dómhnal. During the quarter you
completed the 2016 placements obviously; last quarter you were booked only through 2015, as I recall. I’m
curious how lease terms on the ‘16 placements, you know, compare to what you had already, you know,
accomplished for ’15 at this point 90 days ago.
Dómhnal Slattery: So we had one aircraft from our direct order stream available in 2016 during our Q4
presentation: it was a 737-800. That aircraft is, as I say, is now placed – is placed in China. Terms and
conditions in line with what we would have expected. There’s very limited supply from the lessor channel
in 2016 so that market feels good. I think if we’d more aircraft, we could place them but we’re now done in
terms of our current generation placement of aircraft and, as you know, the focus has moved to the next –
next generation: A330neo, 787-9 and our Max and Neo portfolios.
Jamie Baker: Okay, a question on credit. I mean, given how low your borrowing costs already are, you
know, does it even make sense from here to try and achieve, you know, credit rating or, you know, be able
to access the public capital markets on an unsecured basis. I mean, it seems that if you can borrow this
low, there’s, there’s simply no real, real rush or pressure on the company – any thoughts on this?
Andy Cronin: Yeah, Jamie, it’s Andy. I’ll take that. We’ve always been clear that it’s important for a
business like ours to have investment grade cost of funds either through a secured channel or through the
unsecured channel. We think we’ve been able to achieve a very good cost of funds, as evidenced by the
recent facility we did. There is very strong demand for the paper, as evidenced by the upsize of that
facility. We will continue to run our liability structure in a very prudent and conservative way, both from a
debt equity perspective and from a tenure of funding perspective and from an interest rate hedging
perspective as well. Diversification of our capital structure through multiple forms – as you know we
accessed the capital markets in 2013 with our ABS. We will continue to diversify our capital structure.
However, and as you say, currently the bank market is offering very, very attractive terms, which we expect
to see continuing over the near term.
Jamie Baker: Okay, excellent. And if I could just sneak in a third sort of housekeeping issue, you know, at
yearend the appraised value, you know, of the fleet was – I think it was about 540 million above, above
book. You did deals in the first quarter at 10% premium. You’re guiding to 8% premiums going forward.
How often though do you intend to reappraise that owned fleet?
Andy Cronin: Jamie, it’s Andy again. So, what we have said is we will update that analysis on an annual
basis and the other point I would make around that is our fleet is very homogenous i.e. we’re not dealing
with a barbelled fleet, which – some of which is very old and some of which is very young. All of our fleet is
broadly very liquid, very investor-friendly, very young aircraft. And that embedded value is dispersed
broadly, equally across our fleet. Obviously there are some aircraft which, like, nuances up or down, either
way. But, broadly speaking, it’s a very homogenous embedded value across the fleet.
Jamie Baker: Thanks for letting me sneak that in. I appreciate the colour. Take care, Dómhnal and Andy.
Dómhnal Slattery: Thanks Jamie.
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Operator: The next question comes from the line of Paul Yong from DBS. Please go ahead, your line is now
open.
Paul Yong: Heh, good morning guys. Congratulations on a good set of results. I notice that in terms of the
new customers that Avolon has added during the quarter, quite a number of them actually come from Asia
and actually South East Asia specifically. Now, my question is really with regard to how important is Asia to
you in terms of growth and – not just in total demand but also fund-raising as well. And could you perhaps
provide a little bit more colour in terms of, of where the demand is coming from: is it from India, is it from
China, or is it pretty broad-ranged?
Dómhnal Slattery: Okay, I’ll perhaps give you a maybe strategic overview and John can give you some
specific market assessment. So we – we’ve consistently said over the last five years that Asian Pacific is
going to be, and indeed is, the power house of demand for aircraft financing over the next 20 years. And,
you know, the demographic stats speak for themselves: a hundred million new passengers every year in
emerging Asia. And, whilst there are, you know, individual countries with challenges from time to time, the
general long-term theme is extremely positive, and the growth rates as a percentage – sorry, as a multiple
of GDP are much higher than the Western world. So, China – sorry, Asia remains strategically core and very
relevant to us. We have offices in Singapore and we have an office in Shanghai and we cover India from
our Dubai office, so we’ve got people on the ground close to the market. In terms of the capital flows,
availability of debt capital from the region, that continues to improve. We’ve seen quite a lot of capital
come from Australia, as broadly defined Asia-Pacific, and the Australian banks are, are still highly
supportive of us. In terms of Japan, we have obviously welcomed BTMU into our recent facility and HSBC
into our recent facility. So we continue to penetrate some of the large capital providers in the region. In
terms then of the countries and sort of the individual demand that we’re seeing on the country level, do
you want to touch on that John?
John Higgins: Happy to do that. I think, a lot of these names will be obvious ones but it’s really when you
dive down into the detail, you see what’s going on in these economies. You really get an appreciation for
the, the huge opportunities that are presented. So, you know, we continue to see a lot of opportunity in
Indonesia and Vietnam, in China, in India, countries – emerging countries – like Myanmar, so there’s just –
the demographics and the level of penetration of air travel, just speak to huge predictable growth
opportunities in those markets. And if you just look at Indonesia, for example, the population is 250
million; it’s a very young demographic: 6,000 inhabited islands, 200 airports and an economy that’s growing
at 6%. That feeds into a huge air travel market and we continue to, to see significant opportunity there,
and we maintain our sort of rigorous approach to underwriting business in that region.
Paul Yang: Great, that provides some colour, thanks.
Dómhnal Slattery: Thank you Paul.
Operator: The next question comes from the line of Vincent Caintic from Macquarie. Please go ahead, your
line is now open.
Vincent Caintic: Hi, good morning guys. We’ve been hearing, I guess industry-wide, about the available
capital and liquidity in the market and it seems to have benefited you guys in terms of cost of funds as well
as your, your great credit performance. I guess, first off, how much more do you think, credit or funding
cost improvement could we see? And then, secondly, has this, you know, available liquidity had an effect
in terms of competition or what you’re seeing on the lease rate side? Thanks.
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Dómhnal Slattery: Yeah, thanks Vince. So I’ll take perhaps the lease rate piece and Andy can comment on
our perspective on, you know, cost of funds. So, in terms of, you know, the competitive nature of the
market, I would – I would sort of describe 2015 year-to-date as the competition level has not intensified
from what we saw in 2014. 2013 and 2014 was a very competitive environment: a lot of new capital
coming in, a lot of it from lessors that were effectively started with no net – with not necessarily a great
deal of industry experience. That intensity has definitely placated. There’s no question about that. And
what we’re seeing is that our net spread continues to improve, our headline yield remains pretty static.
The cost of funds is coming down, as you know, and therefore our net spread is increasing and, really,
that’s what we care about. In terms of – Andy, do you want touch on where we see the, the spread’s
going?
Andy Cronin: Yeah, absolutely. So, the good news is that we are still some way off cyclical troughs in terms
of spread, so we think that there is potentially more to go. We have obviously seen a trend continuing over
the past couple of years of reducing margins. That is driven by very strong liquidity in the bank market. We
think the ultimate floor to how low can pricing go is likely to be driven by regulatory capital requirements
rather than inter-bank funding liquidity costs. But what we are seeing is that more banks are coming into
the sector and, of those banks, more banks are choosing to finance the operating lessor model rather than
financing airlines directly. So there is a structural shift in the market, which is now beginning to recognise
the credit enhancement and portfolio diversification of financing an operating lessor, relative to a standalone bilateral transaction with an airline. That benefit isn’t widely available to every lessor. Banks are
being quite selective around who they support. However, for the higher calibre lessors and the larger scale
lessors, there is more than adequate banking capacity in the market as we see it today. The other point to
note is: what we have seen in the market overall and wider airline financing is a reduction in the amount of
export credit financing. And that is definitely having an impact on the availability of financing directly to
airlines and airlines’ demands for sale leaseback financing.
Vincent Caintic: That’s very helpful. Thanks for the colour. I’d just like to follow up on that on the, the
strong amount of commitments that you’ve generated this quarter for the next couple of years: how’s the
underwriting and margin for those compared to your commitments that were made from the prior years?
Andy Cronin: Yeah, so I would describe that the transactions that we put on in the first quarter, the 841
million, are accretive to our overall P&L. So we’re very comfortable with the underwriting terms and
conditions. We’re definitely keeping our shape and, you know, that net spread trajectory feels, feels good
and is heading in the right direction.
Vincent Caintic: Great, thanks very much.
Andy Cronin: Thanks Vince.
Operator: The next question comes from the line of Kristine Liwag from Bank of America Merrill Lynch.
Please go ahead, your line is now open.
Kristine Liwag: Hi, good morning. So, non-US Airlines generate their income in local currencies, and leases
are generally priced in US dollars. And, so far, from what we’ve heard, headwind from Australia’s dollar has
been offset by cheap oil. But if the US dollar continues to remain strong and oil prices pick up, can you talk
about how you expect the demand environment to play out and maybe can you provide a commentary on
on a regional basis?
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Dómhnal Slattery: So, I think there’s probably several questions in that, Kristine. So, let’s perhaps deal with
the FX impact on our airlines in non-dollar-denominated environments, okay? And we, we follow that very
closely. We sensitise their FX volatility and monitor and watch it as part of our credit risk management
system, which is both, you know, current and forward-looking. But, you know, one of the lessons I’ve
learned over the last 25 years is that airlines tend to be very nimble and their ability to deal with these
headwinds – you know, they’re, they’re quite constructive. So, for example, when we look at Indonesia,
where, you know, you’ve effectively a non-dollar-denominated environment for Lion Air, a great deal of
Lion Air’s bookings come in T-minus three, T-minus four days, so they’re able to actually adjust their
underlying rupiah at fare level to reflect what’s going on in the FX environment and have adapted quite
well to that and their numbers remain very strong. So, we monitor it, we monitor very closely – our credit
teams spend 50% of their time in market with the airlines, keeping very close to the piece.
In terms of how that then translates to demand – and this might seem counter-intuitive but if you think it
through – When our airline clients, through the cycle, actually find themselves in environments where they
are a bit challenged because of cash flow or any related, you know, FX matters, what actually it does, it
promotes their appetite for more sale and leasebacks, because they want to preserve their underlying
equity capital and make sure that they’re in a defensive position if things get tougher. So, the – in a
challenged environment, it actually creates more opportunity for an aircraft lessor like Avolon.
Kristine Liwag: Okay, great. And then is that just Indonesia specifically or can you provide any more details
for different regions?
Dómhnal Slattery: Well, I think Asia, you know, specifically is probably the outlier when it comes to FX. In
the rest of the world, the European airlines are, you know, you know, obviously operating on a euro basis.
We’re not seeing any particular issues around FX that’s changing the demand environment. In fact the
general credit quality in Europe, and particularly in the low cost carriers in Europe, continues to improve.
South America – Brazil specifically because clearly that’s the bellwether economy – how we’ve seen the
airlines react there over the last 12 to 24 months is being very prudent on capacity management. And so
we’ve seen our clients in that part of the world – you know, in terms of their underlying credit metric –
continue to improve in – where the backdrop in GDP is actually more challenging.
Kristine Liwag: And, I guess, as a final follow-up, so that’s the FX portion, and the other part of my question
was with oil. And if oil prices kind of pick up, how do you expect that to change the backdrop?
Dómhnal Slattery: Well, oil is up, as you know, sort of 25–30% from its lows in mid-January and, you know,
the question de jour three months ago was: low oil is bad for lessors. And, and our consistent message at
the time was the absolute best hedge that an airline can put on is to operate the youngest fleet of airplanes
and, number two, airline fleet planners have not changed the planning horizon when making long-term
decisions and it’s typically around ten years. So, oil is now, you know, up 30% from its lows. I have no idea
how high it’s going to go but the demand, the demand situation from the airline client base, has not
changed whatsoever and the focus, I think, for a lot of our clients now is moving to the, the integration of
their new technology equipment. And, indeed, a lot of our clients have under-ordered, or actually not
ordered at all, from current generation airplanes. As I said earlier, 70% of all A320 and 737 operators do
not have a replacement order for the Neo or the Max at this time, and so therefore lessors like ourselves
with real estate from the OEMs in that timeframe, i.e. the next five to six years – that’s becoming more and
more and more valuable.
Kristine Liwag: Great, thank you very much.
Dómhnal Slattery: Thanks Kristine.
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Avolon | 2015 First Quarter Earnings Call Transcript
Operator: Ladies and gentlemen, we have time for a couple more questions only now. The next question
comes from the line of Helane Becker from Cowen & Co. Please go ahead, your line is now open.
Helane Becker: Thanks very much, operator. Hi guys, thank you very much for the time. You may have
said this and I missed it, why is return on equity declining in the second quarter?
Andy Cronin: Helane, compared to your own model?
Helane Becker: Compared to the first quarter.
Andy Cronin: So, sorry, in terms of the full year – we haven’t given a guidance on ROE number for the
second quarter. We have given guidance for a full-year ROE of net income and adjusted net income and
equates – equivalent ROEs. The reason that they would be slightly lower than the ROE for the first quarter
is in part due to the benefit of the lease terminations, which occurred in the first quarter and then,
secondly, effectively just mathematically, the shareholder buck equity at yearend makes a slightly higher
denominator for our year-end ROE.
Helane Becker: For yearend 2015?
Andy Cronin: Yes.
Helane Becker: Yeah, gotcha. Okay, great. Yeah, so obviously you can tell I was confused. And all my
other questions have been asked and answered so I appreciate your time. Thank you.
Operator: We will now take our last question, which comes from the line of Vincent Caintic from
Macquarie. Please go ahead, your line is now open.
Vincent Caintic: Thanks. I just had one more. For your trading gains and your, your strong result and what
you’re calling for over 2015, is there anything that you can call out in terms of investor and airline appetite
for aircraft and, you know, any specific trends for, like, what you’re seeing in terms of the geographies,
demand for certain types of aircraft, that you could give us colour on? That would be appreciated, thanks.
John Higgins: Vince, it’s John. I think, as Dómhnal said earlier on, you know, we’re seeing, you know, very
consistent and growing demand from the investor community – existing lessors, new entrant lessors, tax
markets, you know – who want to get invested in airplanes because of the – you know, the quality and the
stability of the returns. So that picture – we don’t see that picture changing.
One thing, I suppose, that is relevant as you look at our trading activity to date, and I think we’ve just done
11 quarters now of trading aircraft profitably quarter-on-quarter, is that, looking at our book – Andy
referred to this earlier on – the value that’s embedded in our book is pretty much dispersed right across the
book, so we have sold 777s, A330s, A320 family airplanes, 737s. We’ve sold airplanes that we ordered
directly from the manufacturers. We’ve sold airplanes that we’ve acquired through sale and leaseback and
portfolio acquisitions. All have been sold at a profit. So the quality of the book is very strong. The market
demand to get invested in that book is strong. And our job now is just to, you know, navigate that market
and pick the best opportunities to – to meet our portfolio objectives, which include profitability but also
include managing counter party and asset exposures.
Vincent Caintic: That’s very helpful. Thanks again.
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Avolon | 2015 First Quarter Earnings Call Transcript
Dómhnal Slattery: Well, once again, we just want to thank everybody for joining the call this morning, and
we look forward to seeing some of you later in the day. And I would just reiterate our invite to our Investor
Day – inaugural Investor Day on 26th May. Details are on our website and we intend to showcase the
senior management team and some of our senior executives from around the world so investors can get a
deeper flavour and better understanding of how the Avolon franchise works. With that, thank you very
much.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you all for attending. You
may now disconnect your lines.
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