Chorus Aviation Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Chorus Aviation Inc. 3rd Quarter 2023 Financial Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Tyrone Cody.

Operator

Please go ahead.

Speaker 1

Thank you, Colin. Hello, and thank you

Speaker 2

for joining us today for our Q3 2023 conference call and audio webcast. With me today from Chorus are Colin Kopp, President and Chief Executive Officer and Gary Osborne, Chief Financial Officer. We will begin today's call with a brief summary of the results, followed by questions from the analyst community. As there may be some forward looking information during the call, I ask that you refer to the caution regarding forward looking statements and information found in our MD and A. This pertains specifically to the results and operations of Chorus Aviation Inc.

Speaker 2

For the 3 months ended September 30, 2023 as well as the outlook section and other sections of our MD and A where such statements appear. In addition, some of the following discussion involves non GAAP financial measures, including references relating to the use of such non GAAP measures. I'll now turn the call over to Colin Kupp.

Speaker 1

Good morning, everyone, and thank you, Tyrone. This is my 3rd quarter reporting out as CEO, and I'm pleased with our team's steady progress over the past few months. This quarter, we continue to execute on our plan, making solid improvements in our balance sheet flexibility and progress on our deleveraging objectives. As our team works diligently to respond to the ongoing macroeconomic challenges affecting our industry, We remain focused on improving our core business fundamentals. That includes improving our free cash flow and working to bring our leverage ratio within our long term target of 2.5% to 3.5%.

Speaker 1

To that end, I'm pleased to report that Corus generated $113,700,000 in free cash flow this quarter as we improved our leverage ratio from 4.4 at the end of 2022 to 3.6 this quarter, while continuing to generate reliable and solid earnings. As we prepare our business for long term growth and profitability, I'm pleased to report that after a year and a half with following the Felco acquisition, we see the industry recovering nicely with a growing market demand and we remain very confident about the regional aircraft leasing sector. We see ourselves as well placed in this space with Falco taking a leading market position. We recognize that Fund III is on the minds of our shareholders and analysts today, but we can't comment on Specific timing around the launch of Fund III, I can say the discussions with investors continue to be positive. It's also important to appreciate that we're not alone in the uncertainty related to the timing of fundraising.

Speaker 1

The fundamentals of the regional aircraft leasing space remain strong and we're confident in the future of the regional leasing business. Generally, airline market conditions have recovered well with strong Q3 earnings reported by subwooperators as the industry sees good demand across Additionally, we continue to see industry constraints on MRO capacity and pressure on the supply chain impacting new aircraft deliveries, which has created an imbalance in aircraft supply versus demand, all of which supports that in general lease rates are improving across almost all regional jet types and previously idle aircraft are being put back to work. Let me share some highlights related to Felco's performance facts that support potential for long term value for our shareholders from this transaction. Jeremy has an incredible aircraft commercial team at Falko with deep industry experience. In the Q3 alone, they've successfully closed on 17 aircraft transactions, including purchases of aircraft with leases attached and placement of idle aircraft on lease and lease extensions.

Speaker 1

These transactions took place with 9 distinct airline customers across and are making excellent progress to conclude those transactions in the coming months. Felco successfully continues to deploy capital from Fund 2 in support of these activities, and Fund II remains on track to hit target returns for investors in the mid teens. Furthermore, Falko has generated net proceeds from wholly owned asset sales of approximately US102 million dollars so far, and we expect to transact further aircraft sales in the Q4 that Gary will speak to shortly. In conclusion, Felco is executing very well and we are optimistic in Felco's growth opportunities. On the Regional Aviation Services side of the business, we've seen consistent solid performance.

Speaker 1

In August, Randolph and the Jazz team were successful in working with our pilot union, ALPA, to ratify a significant modification to pilot collective agreement, Securing a new industry competitive compensation structure. Jazz and Elpa have a proven history of working together collaboratively, to define creative solutions and this is yet another great example. This agreement will be instrumental in addressing Jazz has a long demonstrated partnership with Air Canada and was able to reach an agreement with Air Canada on the changes consistent with the terms of the capacity purchase agreement. Our pilot training academy Signet led by Lynn continues It's gross with its 3rd cohort of students having started in August of this year. Through its partnership With CAE, Signet is delivering a first of its kind direct entry cadet program by innovating flight training with the best in class Corey and the team at Voyager are making excellent progress and continue to execute on their growth plans in the special mission, defense and parts space.

Speaker 1

There are many opportunities to build on there, including the Government of Canada contract in support of Canada's Manned Airborne Intelligence Surveillance and Reconnaissance Program known as Mazor. This quarter Voyager added the ATR aircraft to its product offering, further diversifying the the business and building on their capabilities. And in July, Borger also announced an amendment to its contract with Air Ambulance New Brunswick providing new capacity. Yesterday, we announced that Corus is renewing its normal Corus issuer bid. Under the renewed bid, which takes effect on November 14, we will have the ability to purchase for cancellation up 15,100,000 of our common shares.

Speaker 1

And last year, we took the opportunity to repurchase and cancel 9,100,000 shares. In conclusion, I'd like to say that we are executing on our plan, generating strong free cash flow to delever and de risk the business. Overall, we're making important improvements Our balance sheet flexibility following an unprecedented time in our sector. When you combine the strategic progress With our stable earnings, positive news related to our subsidiaries' activities and implementation of the long term measures like the recent pilot agreement, we are making solid progress. I'd like to conclude by thanking our employees and our leadership team We're central to both the delivery of our services as well as the execution of our strategy.

Speaker 1

Together, our talented team is helping lead Corus into the next phase of its success and growth to rebuild value for our shareholders. Thank you. I will I'll now pass it over to Gary to take you through the financials. Thank you, Colin, and good morning. Our Q3 2023 results We're mostly in line with our expectations and we remain on track to meet our guidance for the 2023 year.

Speaker 1

We are currently tracking to be at the higher end of our guidance for revenue, adjusted EBITDA, free cash flow and leverage and at the lower end for adjusted EBT. As Colin mentioned, we continue to make steady progress on our and objective to deleverage and increase our balance sheet flexibility. Our leverage ratio at quarter end was 3.6, a decrease from the 2022 year end of 4.4, largely due to the year to date long term debt reduction of 259,800,000 This placed our Q3 2023 leverage close to the top end of our Investor Day target range of 2.5 to 3.5. Our cash flow generation remains strong. We generated solid free cash flow of $113,700,000 and while lower than the prior period, The reduction is due to the net proceeds from Q3 2022 asset sales offset by stronger cash flow from operations, including the non recurring defined benefit pension revenue of $29,900,000 The DB pension revenue reflects our agreement with Air Canada to compensate us for the impact of the new pilot wage rate scales on the defined pension benefit liability.

Speaker 1

This receivable will be collected over 60 months and matches the expected past service funding to the plan over the same period. On a year to date basis, our free cash flow increased from $233,000,000 in 2022 to $257,000,000 which reflects our strong cash from operations As I said earlier, our Q3 earnings were largely in line with our expectations. The RAS segment continued to perform well with an adjusted EBITDA of $62,300,000 in line with the Q3 of 2022. The RAL segment's adjusted EBITDA was $56,100,000 a decrease of $13,700,000 over the Q3 of 2022, mainly attributable to lower lease revenue of $8,600,000 which includes the impact of the 2022 asset sales, which decreased lease revenue, recovered claims in the Virgin Australia bankruptcy in 2022, partially offset by increased lease revenue from re leased aircraft, the recognition of end of lease compensation and a higher U. S.

Speaker 1

Dollar rate. We also saw a decrease in the net gain on sale of assets of $2,700,000 and an increase in general and administrative expenses. Corporate adjusted EBITDA was a negative 5,300,000 improved from Q3 2022 by $3,200,000 due to a decrease in stock based compensation and general administrative expenses. Adjusted earnings available to common shareholders was $0.06 per share. Earnings while lower than 20.22

Speaker 3

by $0.09 per share are supported

Speaker 1

by strong free cash flows, lower leverage levels and our assets that are supported by our underlying contracts. During the quarter, we also recorded impairments of $25,700,000 which represents less than 1% of our consolidated assets. In accordance with IFRS, we assess our aircraft for impairment at least on an annual basis or in circumstances indicating impairment may be required. Our impairment assessment includes many factors, including the weighted average cost of capital, lease cash flows, maintenance return conditions, current aircraft market values and residual values. For the quarter, we ended with our liquidity ended at 210,600,000 Liquidity increased from the Q2 of 2023 by $65,600,000 primarily due to a prepayment in September for October's controllable cost revenue of $47,800,000 and strong cash flows from operations.

Speaker 1

On November 1, 2023, we entered into 2 new facilities to add flexibility to our capital structure by adding a 1 year $30,000,000 unsecured facility and a $50,000,000 secured facility that goes to the end of 2025 providing us with flexibility with regards to the repayment of our Series A debentures that mature in in December 2024. Turning to asset sales, we continue to opportunistically trade for our wholly owned or majority owned aircraft. We are currently in discussions on sales opportunities that we expect to close before year end, which will place us at the lower end of our guidance for asset sales and net proceeds. We've also just renewed the NCIB until November 2024, under which we can purchase up to another 15,000,000 shares. Under the prior NCIB, we purchased is a total of 9,100,000 shares.

Speaker 1

As I mentioned earlier, we are maintaining our overall guidance for 2023 as contained in the outlook section of our MD and A. We are now ready for your questions.

Operator

Thank you. Ladies and gentlemen, we'll now begin the question and answer If you're using a speaker phone, please lift the handset before joining the call. We'll now turn Your first question comes from Hillary Cacanando. Hillary, please go ahead.

Speaker 3

Hi. Thank you for taking my questions. I know you said you can't comment on the timing of the Fund III, but I was wondering if you kind of share Some of the feedback that you've gotten from investors, is the delay just kind of purely Macroeconomic driven or is there like any like is there hesitation like what's Causing it or what's the cause of the delay? It seems like it's macro driven, but I was wondering if you could kind of share some of the feedback you've gotten from the investors.

Speaker 2

Hi, Hillary, it's Colin. Yes, Gary can probably add a bit to this, but look, we

Speaker 1

don't have a heck of a lot more than what I commented on In my script there is it's the macroeconomics that we see is kind of the bigger issue here. I think the opportunity is still there. There's lots of discussion going on, and it's really more of a matter of timing, Which is very hard for us to really predict as far as things go forward. Yes, Hillary, it's Gary. Just to reiterate what Colin said, The feedback is good.

Speaker 1

People still like the asset class, the regional aviation space. They like the team at Falco and how they manage the assets. Like the targeted rate of returns. It is more market driven at this stage.

Speaker 3

Okay. Got it. And then previously, you had mentioned that you were looking to make some

Speaker 1

Yes. So as we move ahead, I mean, we continue to delever. Our free cash flows are good. So it's going to provide us some opportunities as time goes on for Some type of growth opportunities that you're speaking to, particularly on the RAD side of the equation. So we're certainly continuing to look, but It's a positioning in the balance sheet that will certainly help that.

Speaker 3

Got it. Thank you very much.

Speaker 1

Thank you. Thank you.

Operator

Your next question comes from Kevin Chiang from CIBC. Kevin, please go ahead.

Speaker 4

Thanks for taking my question. Maybe just a clarification question on the impairment provision you took in the quarters. Just Anything to call out there? Any additional color you can provide on the $26,000,000 you booked in Q3?

Speaker 1

No, there's really not much, Kevin. I think it's just a general review that we do annually around the fleet and it just reflects everything I've talked about. Future cash flow is WACC, the weighted average cost of capital, etcetera. So really nothing to really report there out of the ordinary.

Speaker 4

Okay. And then maybe I'll approach the Fund III question differently. Do you think that limits some of the other initiatives you've laid out and you have laid or you did lay out back at your Investor Day, growth within Voyager, Maybe how aggressive you want to be on returning cash to shareholders. Does the limit what you can do there until Fund 3 Closes or the capital that you'll deploy into Fund 3 that's essentially been set aside and any other kind of non Falco related growth initiatives you can continue to pursue that regardless of the timing around Fund 3?

Speaker 1

Yes. It's Gary here, Kevin. Yes, I think Fund III, we're continuing to Get positive feedback, but market timing is what it is. It doesn't preclude us from still investing in the other sides of the business. There are other And right back to it, we're continuing to deleverage and that's going to give us the opportunities to do that and we continue to look at them.

Speaker 1

But yes, The Fund 3 piece is separate from these other investments.

Speaker 4

And I know you've set a percentage amount that you'd invest in Brian, would you increase your percentage, whatever the right amount would be, an extra 5%, 6%, whatever, To get the fund across the line or do you have a is it a hard line? I think it was like 15% of the fund. Like is that a hard Glass ceiling for you in terms of not wanting to invest more than that amount? Or would you be open to moving that up a little bit just The funds have a certain size and to get it closed sooner.

Speaker 1

Yes. Kevin, I think $15,000,000 would be the limit that we would look at. And part of that is,

Speaker 4

We still want to be

Speaker 1

able to invest in all parts of our business. And also, once you start getting above that, that's You start to essentially you get into position where you may have to consolidate the earnings and we're not doing that.

Speaker 4

I'll leave it there. Thank you very much.

Operator

Your next question comes from Konark Gupta from Scotiabank. Please go ahead.

Speaker 5

Thanks, operator. Good morning, everyone. Just first question maybe, Gary, for the Q3, the gap Between EBITDA and net income seemed pretty wide. It seems like the tax rate on adjusted basis was about 34%, much higher than last year and a little bit higher than Q2. Any reason for the tax rate to be higher than Q3?

Speaker 1

Yes. No, thanks, Conor. So if you look at the where the earnings are coming from, they're in the RAS section and also in the corporate, which has Higher rate statutory rate. And then when you look at the RAL side, it's really a function of Where some of those losses or gains or revenues are or income and it's just the way it plays out through the statements. And when you look at That it's certainly it's at a the rate is disproportionate probably to the earnings just in the short term.

Speaker 1

If you look over the long term, 20% to 25% is the range that we would expect to see as far as that against adjusted EBT as far as the income tax.

Speaker 5

Great. Thanks. It seems like in the MD and A you guys disclosed the pilot contract and Air Canada's contribution toward that. Can you share any high level You know, dumps about the funded contracts, we have seen anywhere from like 20%, 25% to 40% increases across the industry in U. S.

Speaker 5

And Canada. Any sense on your contract?

Speaker 1

Hi, Konark, it's Colin. Look, we've been pretty, I think, transparent on that to the best of our ability. We've been able to find a solution that really is industry competitive and that's kind of where we stuck with it. There's a lot of variables that go into that. And really all I can give you is that it's an industry competitive place on the overall compensation is where we ended up.

Speaker 5

That's fair, Colin. Thanks. And last one for me. On the asset sales, I think

Speaker 1

I heard you guys saying

Speaker 5

that you are expecting to close some in Q4, but you'll be coming in at the low end of the time range for the full year. Is there any, like is it more about timing why the asset Sales did not happen as much as you probably would have thought initially or is it just the industry conditions where you want to utilize the assets more before you sell

Speaker 1

Konark, it's Gary here. It's more just timing. If you recall, we've always said it's in the back half of the year. It just happens that it will be in the back half of the back Half the year in this case. So it's really just timing.

Speaker 1

It seems that things seem to culminate in the back half of the year. We're hoping that that trend will Kind of changed next year and we'll have a little more even spread, but it's just actual market timing for the most part.

Speaker 5

And I appreciate the color. Thanks guys.

Operator

Yes. Your next question comes from Walter Sparklin from RBC Capital Markets. Walter, please go ahead.

Speaker 6

Thanks very much, operator. Good morning, everyone. Want to follow-up here on the pilot side. You sent 300 pilots up to Air Canada, training 300 over the last year. That's quite an accomplishment.

Speaker 6

I think Air Canada must be very happy with that pilot flow given How in demand pilots are right now. I'm a little worried about your organization though, if that many pilots are leaving And you're training so many. Are you concerned at all that this puts a strain on your organization, your cost structure, on your operating performance? I'm Here's how you're dealing with that kind of let's call it turnover. It's not really turnover, but turnover in your pilot base, both from a cost structure and operating performance.

Speaker 1

Hi, Walter. Yes, it's Paul. Yes, it's good question. Look, the one thing Jazz is, I think, very good at as an industry leader in Canada, not even maybe to mention In North America is their ability to train pilots. We have our own internal training program.

Speaker 1

We run our own Check As. We have our own Transport Canada And we've done that for many, many years. That's an area that we're really, really, really strong in. We're not like most other operators that use CAE training pilots to do simulated training. We do our own simulator training.

Speaker 1

So We have a fairly large contingent of training pilots in our program. And we've been at it for many, many years, as you know. So we're pretty comfortable in that area. Yes, there's been a significant amount of movement. There's no question In the industry you've seen that Jazz is the perfect place to for large operators to find pilots.

Speaker 1

There's no question about that. I think most of the large operators in Canada have been looking to hire our pilots where they could. But that really hasn't impacted us that much in the Air Canada flow is kind of something that I think we work together with Air Canada on That's what we're kind of managing through that. Yes, the hours are a little constrained. There's no question about that given all this activity.

Speaker 1

But we're pretty comfortable where we are. We've got this new collective agreement in place. It's very competitive. We think that's While we don't think we know that's attracting really good talent coming in the door, we've seen all kinds of improvements here in the last little while as we put that in play. Our pilot training classes, every single one is full.

Speaker 1

So we have no problems There's a bit of a it's like anything, there's a bit of challenge in making sure that you can get all the throughput done and you can get all the training accomplished for the right kind of seasonal peaks.

Speaker 5

But that's all stuff

Speaker 1

we work with Air Canada on to work through. And as far as kind of the stress on the organization, I think there's probably nobody better in Canada to manage this volume of pilots and transition than ourselves.

Speaker 6

That's great. That's a great answer. You kind of answered my second question, but I just want to make sure getting pilots, I know you said your training classes are full Because getting pilots sounds like at least in the U. S. To be a fairly difficult thing.

Speaker 6

We're seeing some of the U. S. Regionals taking some fairly aggressive tactics to poach Pilots from UPS and FedEx, I'm sure you've seen that news. You're not feeling the need to look at unconventional ways to get pilots in your classroom. Is that right, Colin?

Speaker 1

No, no. We have no problems attracting quality people. So we're very happy with where we are right now. And I think quite frankly, as we work closely with Air Canada, I think they're pretty happy with what we'll be able to provide them. So it's a good opportunity.

Speaker 1

If you're a pilot in the industry today and you're prepared to work hard and study and do all those things, it's

Speaker 6

Yes, that actually leads to my third question about Airchen. I mean, they must be very happy. When you Did this agreement, I think it was kind of new at the time or not new, but formalized very nicely at the time. But the conditions now have changed that I think the value of that agreement is much higher than what it was perhaps when you signed it. Are you Is the terms of that subject to renewal anytime soon?

Speaker 6

Are you looking at Crystalizing the value, the new value that that agreement has created, just curious how you're framing your approach To this relationship or this part of the agreement with Air Canada?

Speaker 1

Yes. The way I look at Air Canada is, We're a committed partner. They're a committed partner. We've had great relationships. We've always been able to reinvent Things as the years have transpired, the industry changes, there's a need for change and whether it's Air Canada asking for that or it's us.

Speaker 1

We've ever we've always been able to find a solution. So things will evolve. We're pretty happy with where they are right now. I think generally, we've got a solid collective agreement in place. We've got happy pilots.

Speaker 1

We are hiring like crazy. The organization is full of energy. Air Canada is happy with the flow that we've been able We want to provide that flow. Some of the attractiveness of and the importance of being able to attract talent into us, into Jazz Is the fact that those opportunities exist at the mainline and that there's some mechanism to kind of flow you through and move your So there's a huge advantage to that for us as well. So yes, look, It's working well right now.

Speaker 1

We had a couple of things we had to sort out and we got them sorted out as we always do. And I'm sure there'll be more changes in the future as things evolve.

Speaker 6

Okay. That's great color. I really appreciate it. Thanks. Thanks, everyone.

Speaker 2

You betcha.

Operator

Your next question comes from Tim James from TD Cowen. Tim, please go ahead.

Speaker 7

Thanks very much. Good morning. First question, Yuri, the step up in depreciation expense sequentially in RAL. Just wondering if you could talk a little bit about that. It sounds like there was an increase in depreciation rates and just kind of what drove that or the need for that change?

Speaker 1

Yes. So Tim, it's Gary here. So yes, when you look at how we approach things, We continue to look at our depreciation and it is up a little bit, but it just reflects really where we expect the fleet to be, where it needs to be in the future as As depreciation goes, so it's just an annual exercise we do and it's just a little bit higher for sure than the prior quarter, but it's just reflecting where we expect the assets to be at the end of their lease in residual values.

Speaker 7

Okay. Thank you. My second question, looking at the return on equity, it has dropped sequentially and I think your expectation is for that to move higher again from the 10.5%, I think it was on a trailing full quarter basis. Could you just talk through The drivers of moving that return on equity higher here over the next couple of years and I say drivers in terms of kind of pricing, cost factors, just any of those kind of drivers that we should think about as to how it can increase?

Speaker 1

Yes, fair enough. So Tim, as far as ROE goes, as we reduce our earnings here in the short term, it certainly will come down a bit. But in the long run, as we reinvest back in the business and we Allocate our capital appropriately, it's going to go back up. So that's where the investments in RAS and other places like that will come in and also in the asset management platform within Falco. So that will start to bring it back up.

Speaker 1

But in the short term, as the earnings come down, as you know, This year, 2023 and into 2024 is a bit of a repositioning. There'll be you'll see some decrease, but it'll start to grow from there as we start to allocate our capital to accretive

Operator

There are no further questions at this time. I'll turn it back to Tyrone for closing remarks.

Speaker 1

Thank you, Colin, And thank you everyone for taking part in today's call. Have a good day.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Key Takeaways

  • Chorus generated US$113.7 million in free cash flow in Q3 and improved its leverage ratio to 3.6× (from 4.4×), nearing the 2.5–3.5× long-term target.
  • Falko closed 17 aircraft transactions in Q3 across nine airline customers, kept Fund II on track for mid-teen returns, and realized US$102 million in net proceeds from asset sales.
  • Investor feedback on launching Fund III remains positive, but fundraising timing is delayed by broader macroeconomic uncertainty.
  • Jazz ratified a new pilot collective agreement securing industry-competitive compensation and continues to supply trained pilots to Air Canada through its Signet cadet program.
  • Chorus renewed its normal course issuer bid to repurchase up to 15.1 million common shares through November 2024, after cancelling 9.1 million shares last year.
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Earnings Conference Call
Chorus Aviation Q3 2023
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