Chorus Aviation Inc. (OTCPK:CHRRF) Q3 2022 Earnings Call Transcript November 10, 2022 9:00 AM ET
Company Participants
Tyrone Cotie – Vice President of Treasurer and Investor Relations
Joe Randell – President & Chief Executive Officer
Colin Copp – Chief Operating Officer, Chorus Aviation & President, Chorus Aviation Services
Gary Osborne – Chief Financial Officer
Conference Call Participants
Konark Gupta – Scotiabank
Renato Monzon – BMO Capital Markets
Operator
Good morning, ladies and gentlemen, and welcome to the Chorus Aviation Inc. Third Quarter 2022 Financial Results Conference Call. At this time, all lines are in a listen-only mode. And following the presentation, we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on November 10, 2022.
I would now like to turn the conference call over to Vice President Treasury, Investor Relations Mr. Tyrone Cotie. Please go ahead.
Tyrone Cotie
Thank you, Kelsey. Hello, and thank you for joining us today for our third quarter 2022 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer; Gary Osborne, Chief Financial Officer; and Colin Copp, Chief Operating Officer, Chorus Aviation and President, Chorus Aviation Services.
We’ll start by giving a brief overview of the results and then go on to questions from the analyst community. Because some of the discussion in this call may be forward-looking, I direct your attention to the caution regarding forward-looking statements and information, which are subject to various risks, uncertainties and assumptions that are included or referenced in our management discussion and analysis of the results and operations of Chorus Aviation Inc. for the three months ended September 30, 2022, the outlook section and other sections of our MD&A where such statements appear.
In addition, some of the following discussion involves certain non-GAAP financial measures, including references to EBITDA, adjusted EBITDA, adjusted EBT and adjusted net income. Please refer to our MD&A for a discussion relating to the use of such non-GAAP measures.
I’ll now turn the call over to Joe Randell.
Joe Randell
Thank you, Tyrone, and good morning, everyone. This past quarter marked our first full quarter since the Falko acquisition. I’m pleased to report the continued seamless integration of the Falko business into the Chorus group of companies and that our investment in Falko is delivering the expected financial performance. The Falko team continues to demonstrate its extensive track record of opportunistically selling aircraft, allowing the business to maximize the value of its owned assets and assets under management.
In August 2022, we announced the completion of agreements to sell eight fully-owned aircraft that had previously been on lease, enabling a significant reduction in our leverage level. As we continue to transition to an asset light leasing model these opportunistic asset sales will continue to reduce our leverage.
The Jazz operation has moved past the wider industry issues experienced in the second quarter and continues to deliver a world-class service, having recently been named one of Canada’s safest employers winning the public transportation category. And our Voyageur operations had a great quarter with increased part sales and the sale of 4 Dash 8-100s for a gain of $2.2 million.
One topic that is being discussed with greater frequency lately is pilots. So I thought, it would be useful to provide some context. Canadian aviation industry is expected to experience increasing demand for pilots. However, Jazz is well positioned to attract and retain pilots with its pilot flow agreement to Air Canada and with Jazz and Air Canada teams working together to ensure a coordinated and smooth pilot flow process. We believe these agreements and processes will continue to allow us to proactively and effectively manage pilot recruitment.
Looking at the regional aviation industry as a whole, the recovery is showing no signs of slowing down, with passenger numbers remaining strong, reflecting the pent-up demand in the market. Domestic operations in North America, Europe and Latin America are back to pre-pandemic levels, while the Middle East, Africa and Asia are at 80% to 90%.
With roughly 50% of world flights being less than 500 miles and 45% of all world airports serviced by regional aircraft only, the regional sector continues to be an indispensable component of the industry. Recent industry publications report that there’s been a recovery in the domestic market and demand has picked up. As a result, most regional assets have seen improvements in value and lease rates from mid-2021 and both are trending in the right direction.
We are pleased with our third quarter leasing activity, which supports the demand the sector is seeing overall. During the quarter, Falko has 28 transactions including additions, sales and lease extensions broadly across all regional aircraft types with most increased volume with regional jet products. In addition, under the CPA with Air Canada, we recently extended leases on three Dash 8-400 aircraft to the end of 2025 that had previously been scheduled for lease expiry in 2023.
I’d like to provide an update on Falko’s launch of Fund III. Interest in Fund III has been robust and we continue to hold discussions with several significant anchor investors including investors in existing funds and we continue to make progress. Given the current market volatility and the proximity to the end of the year, we now anticipate subject to market conditions and initial closing of Fund III in the first half of 2023.
Furthermore to help put this in context, it’s important to understand that when we invested in Falko, we knew the timing of the launch of Fund III and asset sales were tied to market conditions making it hard to determine the exact timing. Industry market conditions are certainly improving. While Fund III may be slightly delayed, we are very pleased with the pace of asset sales, which are ahead of our expectations in terms of timing and allowing us to generate a substantial amount of cash in a relatively short period of time and delever more quickly than originally planned.
Finally, we are confident that once market conditions settled, we will launch Fund III. Fund II continues, it provides good insight into Falko’s proven and successful asset management practices and why investors are interested and why interest is high in Fund III. Fund II was launched in 2019 and currently holds 59 aircraft with an appraised value of over USD 750 million. Chorus owns 3.85% of Fund II, which is on track to meet its targeted rate of return. We believe Fund II’s performance continues to drive interest in Fund III.
In September, I announced my planned retirement that will take place in the first quarter of 2023. Joining us on today’s call is Colin Copp our incoming President and Chief Executive Officer. As I mentioned before, Colin has been an integral member of the Chorus leadership team for over two decades and his depth of knowledge across all aspects of our business will serve him well as he hits and leads Chorus through 2023 and beyond. With Colin’s leadership, I am confident that we are very well positioned to execute our new growth opportunities that will deliver positive returns to our shareholders and fund investors and make Chorus an even more attractive company for customers partners and employees.
Now I will pass — ask Colin to introduce himself.
Colin Copp
Thank you, Joe. It’s a pleasure to be here on the call today. Joe and I have been working closely together to ensure a smooth transition of responsibilities. And since the announcement I’ve had an opportunity to meet with many of the stakeholders and analysts, and I look forward to meeting more of you over the coming months.
As Joe mentioned earlier, we’ve been working hard to reposition Chorus and Falko in its new role as an asset-light company with stronger cash flows, lower leverage and resulting lower balance sheet risk. We have an incredible team at Chorus group of companies and we are very well-positioned for the future.
I’ll now turn the call over to Gary to take you through some of the highlights of our third quarter financial results.
Gary Osborne
Thank you, Colin and good morning. Chorus generated $100.9 million of cash during the third quarter of 2022, largely due to proceeds on asset sales, net of debt repayments and the release of security over previously restricted cash.
Chorus had cash flows from operations of $91.3 million in the third quarter, an increase of $8.5 million over the third quarter 2021. We repaid $219.7 million of debt in the third quarter of 2022, which included scheduled repayments of $81.1 million, $112 million of repayments on loans related to the eight CRJ900s sold and a $26.6 million discretionary payment on the operating credit facility.
Just after quarter end, we also repaid the remaining balance on our operating credit facility of US$ 19 million. As a result of increased earnings and significantly lower debt balances, our leverage ratio of net debt to the trailing 12 months adjusted EBITDA improved significantly to 5.1 from 6.4 at the end of Q2 2022.
Turning to earnings. In the third quarter of 2022, Chorus reported adjusted EBITDA of $123.4 million, an increase of $45.3 million over the third quarter of 2021. The RAL segment’s adjusted EBITDA increased by $43.7 million due to the inclusion of Falko’s earnings, recovered claims from the Virgin Australia bankruptcy, a gain on sale of aircraft as well as increased lease revenue from CACIL’s re-leased aircraft.
The RAS segment’s adjusted EBITDA increased by $1.6 million due to an increase in other revenue from the sale of four Dash 8 100 and an increase in part sales and contract flying partially offset by a decrease in third-party MRO activity.
And an increase in aircraft leasing revenue under the CPA of $1.2 million primarily due to a higher US dollar exchange rate offset by; an increase in stock-based compensation of $1.8 million; a decrease in capitalization of major maintenance overhauls on owned aircraft of $2.2 million; and an increase in general and administrative expenses attributable to increased operations.
Adjusted net income was $41.7 million for the quarter, an increase of $26.4 million over the third quarter of 2021 due to a $45.3 million increase in adjusted EBITDA as previously described partially offset by an increase in depreciation expense of $12.5 million primarily attributable to Falko, an increase of $2.7 million in income tax expense and an increase in net interest cost of $4 million primarily related to interest on long-term debt assumed as part of the Falko acquisition.
Net income increased $37.6 million over the third quarter of 2021 due to the previously noted adjusted net income of $26.4 million, a decrease in net unrealized foreign exchange losses of $24 million and a decrease in impairment provision of $6.3 million, partially offset by an increase in lease repossession costs of $4.9 million.
Now turning to liquidity. As of September 30, 2022, our liquidity was $276.3 million including cash of $171.6 million and $104.7 million of available credit facilities. Liquidity increased from the second quarter of 2022 by $127.7 million due to the strong cash flow from operations, asset sales and the release of restricted cash.
And now on to outlook. As you know we completed the Falko acquisition in the second quarter of 2022, which has created new opportunities for growth through increased access to third-party growth capital and a differentiated business model to maximize return on aircraft assets. Our annual 2022 forecast is unchanged with the exception of an improvement in our expected leverage ratio to 4.5 to the 4.9 range. We expect our 2022 adjusted net income available to common shareholders to be between $88 million and $103 million and adjusted EPS available to common shareholders to between $0.45 and $0.53. Other key elements of our guidance for 2022 are contained in the outlook section of the MD&A.
With that I’ll now turn the call back to Joe.
Joe Randell
Thank you, Gary. So with our voting shares trading at historically low prices we’ve announced the normal course issuer bid for up to $15.9 million of our voting shares, representing 10% of the public vote. This reflects our belief that the market price of our voting shares during the mid period may not from time to time fully reflect their value. As such, purchasing our shares for cancellation may be in the best interest of course and an appropriate use of corporate funds in light of potential benefits to remaining shareholders.
Purchases made commence on November 14, 2022 and will conclude on the earlier to date on which Chorus has purchased the maximum number of shares permitted under the NCIB and November 13, 2023. We refer you to our press release for further details.
Finally, as always, I’d like to take the time to thank our employees for their tireless efforts. It really can’t be understated what a great team can achieve. We needed everyone to step up over time in aviation that hasn’t been easy and the way in which our people have responded is remarkable. Looking ahead, the entire Chorus organization remains energized and excited about the future and look forward to delivering additional value to our stakeholders.
So thank you for listening operator and we can now open the call to questions.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] And your first question comes from Walter Spracklin from RBC Capital Markets. Please go ahead.
Unidentified Analyst
HI. This is Angela on for Walter. How are you guys doing today?
Joe Randell
Thank you. How are you?
Unidentified Analyst
Good. So my question is does further delaying of the Fund launch to 2023 add any incremental risk in achieving guidance?
Gary Osborne
It’s Gary here. No it does not impact our guidance at all for 2022.
Unidentified Analyst
Okay. Thank you. And just a follow-up do sustain higher fuel prices increased the barriers incentives to reduce regional capacity given the regional aircraft are less efficient?
Joe Randell
No. As a matter of fact the regional airplanes are operating full with fares certainly are accommodating the increased fuel prices, et cetera, the demand remains very high. There’s a demand for all equipment. As you know when the market increases as well there’s increased demand out of regional markets which cannot sustain the larger aircraft. So we don’t see the impact being at all material on the demand for regional aviation and regional aircraft.
Unidentified Analyst
Okay. That’s all the questions I had. I’ll turn the line over. Thank you.
Operator
Thank you. And your next question comes from Konark Gupta from Scotiabank. Please go ahead.
Konark Gupta
Hello, can you hear me.
Joe Randell
Hello.
Konark Gupta
Yes. I wanted to ask about the leverage ratio. What’s driving the improvement?
Gary Osborne
It’s Gary here. What’s driving the improvement is the increased earnings from Falko. If you recall we had two months of active – or earnings from Falko in Q2. We’ve had a full three months plus what we’ve also been able to achieve with some strong asset sales as noted in our MD&A with the sale of eight aircraft for about US55 million. So that’s – those two things have combined to reduce our leverage. And as we continue forward we expect to pursue opportunistic asset sales but hopefully we’ll continue that trend.
Konark Gupta
Thank you. don’t have any other questions.
Operator
Thank you. And your next question comes from Adam [indiscernible] from Cormark Securities Inc. Please go ahead.
Unidentified Analyst
Hi there. Good morning. Can you hear me?
Joe Randell
Yes. Good morning.
Unidentified Analyst
Perfect. My first question is on the $45.6 million provision you booked last quarter. I think that was for an expected repossession. Is there any update on this?
Joe Randell
No. We there has not been really a repossession and we’re working through still with the effective parties to find a resolution.
Unidentified Analyst
Okay, perfect. That’s helpful. Secondly, maybe can you comment on your appetite for new regional aircraft leases? Is the spread larger or smaller given the higher interest rate environment?
Joe Randell
So, generally speaking although there’s a bit of a lag as interest rates go up lease rates go up because it’s part of the cost of the financing and it doesn’t matter whether the carrier acquires the aircraft through lease or repurchases the asset, it’s still affected by the higher interest rates. So, we see — and believe that there will be a continued appetite for new aircraft, but existing aircraft as well.
In terms of new aircraft — in terms of the regional base, we’re not seeing the manufacture of any new Dash 8 equipment. ATR manufacturing rates have been lowered as a result of the pandemic, but they’re up and going and demand is strong, but it’s taking a while for new aircraft to get back into production.
Of course the CRJs are not being manufactured anymore. But we are seeing increased demand for Embraer B2s, which is good. The A220s which we have in our portfolio as well demand is very strong. But again there are limitations in terms of the number of aircraft being manufactured in the near-term. But just to say though that these lower — new manufacturing levels that are coming out or new equipment that’s being produced is actually having a good effect on the demand for used equipment.
And through the pandemic, there was a lot of the used equipment that was taken out and we’re seeing good demand for getting this equipment back up, especially with the reduced production levels that exists for new aircraft.
And the older equipment are as efficient broadly as the newer equipment in terms of turboprops in particular and turboprops remain amongst the most fuel-efficient aircraft in the air these days. So, I think that’s a more broad — that’s a broader answer to your question. but it’s really reflective of the market conditions that we see right now.
Unidentified Analyst
Perfect. That’s very helpful. Last one for me here. Has there been any change in your ability to tap debt markets for aircraft leases?
Gary Osborne
Sorry, it’s Gary here. I think the debt markets have been fluid, but they’re available. And I think that’s the way to look at them. And we continue to be able to market and our Falko folks with their fundraising and debt raising activities have been talking to a lot of those folks but it’s still available.
Unidentified Analyst
Okay. perfect. That’s it from me. Thank you very much for answering my questions. I’ll hand it back over to the operator.
Gary Osborne
Thank you/.
Operator
Thank you. [Operator Instructions] And your next question comes from Renato Monzon from BMO Capital Markets. Please go ahead.
Renato Monzon
Good morning everyone. Thank you for taking my question. I think my first question is around diesel recovery related to Virgin Australia recorded in the quarter. I was wondering if you could provide maybe some color on the recovery if you could quantify the amount as well?
And my second question is more related to the closing of Fund III. If you guys could provide some color on the existing interest from investors as of today given the market conditions?
Probably my third and last question is related to the Fund as well as whether you foresee any type of further postponement in the closing of the Fund if market conditions persist going forward? Thank you.
Gary Osborne
Sorry, it’s Gary here. I’ll talk about the merger of Australian bankruptcy. So, as part of any bankruptcy there’s claims that arise from those bankruptcies and what you’ve seen is the settlement of those claims. And if you look at our MD&A, we had in total just under $8 million. I think it’s around $7.9 million between the two entities that were affected CACIL and Falko. So, it’s just a claim against them for future earnings and whatnot.
So, that’s what you saw come through there and I’ll let Joe speak in a minute on Fund III, but we’re very confident in that closing. We don’t expect any further delays as with our guidance there. And the market is just it’s — it is what it is. It’s let’s say volatile, but we’re fully expecting the Fund III and the activity to culminate here in the new year.
Joe Randell
Yes. I think the only color that I can add is that, all investors these days are generally focused perhaps more on liquidity given the volatility in the market, et cetera, and looking for things to settle out a little bit in terms of that area. And as the market settles, I think people will be more aggressive with respect to finding value in the market, as the market recovers. The good news is that, this market – this aviation market is recovering very, very well. There’s a lot of demand. Aircraft are getting back up in the air.
Regional aircraft our segment is very resilient anyway. And the fact is that, Falko now – and we have a track record in terms of producing the expected returns on the various funds. And we know that, Fund II existed even over the pandemic period. So we’re seeing a lot of interest from investors that have – or already invested in Fund.
The discussions have gone extremely well. We’re very optimistic that, they will be re-upping. And also, we are having discussions with new investors. So, we do not anticipate significant issues at all, with respect to the launch of the Fund, it is more a matter of exactly when the timing settles, where you’re going to – this increased interest and liquidity starts to turn into more of a solid interest in terms of investing. And we think that, we’re going to be leading in that regard given the aviation segment as I’ve said.
So always hard to predict and now we are moving into the Christmas period, et cetera, and year-end, and we were hopeful that we would have gotten it done, but it’s really a delay that is not concerning us though in terms of the achievability of getting Fund III launch. It is really just a matter of a slight delay in our view.
Renato Monzon
Okay. Great. Thank you for the color.
Joe Randell
Thank you.
Operator
Thank you. And your last question comes from Kevin Chiang from CIBC World Markets. Please go ahead.
Unidentified Analyst
Good morning, everyone. This is Jessica filling in for Kevin. Good morning, everyone. Just wanted to get a sense of free cash flow priorities? I know you announced that NCIB. Is there any appetite – and I know you’re deleveraging further is there any appetite for maybe looking at a dividend possibly in the future? Thank you.
Joe Randell
Yeah. Well, clearly, all of these uses of capital are in their scope. I think we are not looking out too far here. We’re basically saying, what is achievable now what is in the best interest of shareholders. And we believe an NCIB is clearly of interest given where our share price is – has been trading. I think we do have certain debt obligations that we have to look at and our focus will continue to be on deleveraging for sure, because I think that adds value in terms of eliminating risk et cetera, and helps facilitate our movement into a new business model. But as we do this then of course, how this is returned to shareholders and shareholder – shareholders receive value. It’s certainly on the list. We know it’s important and can be a great use of capital.
So I can’t say any more than that, because our focus right now is a little more on the nearer term in terms of the use of this cash that we’ve developed and we’re producing as a result of some of the trading activity that’s happened at — in our leasing business.
Unidentified Analyst
Perfect. Thank you for the color.
Operator
Thank you. And there are no further questions at this time. Mr. Cotie, you may proceed.
Tyrone Cotie
Well, thank you, Kelsey and thank you everyone for taking part in today’s call. Have a good day.
Question-and-Answer Session
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.
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