Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the course aviation Inc. fourth quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your speaker today, not only mcgann, Vice President Investor Relations and corporate affairs. Thank you. Please go ahead.

Thank you operator, Hello, and thank you for joining us today for fourth quarter and you're in 2019 conference call an audio webcast.

With me today from course, or Joe Randow, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer.

I'll start by giving a brief overview of the result, and then go onto questions from the analyst community because some of this 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 assumption.

That are included or referenced on page 55 ever management's discussion and analysis.

Results in operation is of course aviation Inc. for the period ended December 31st 2019, the outlook section and other sections of our Mdna research statements appear. In addition, some of the following discussion involve certain non-GAAP financial measures, including references to EBITDA adjusted EBITDA adjusted EPG energy.

Net income.

Please refer to section 18 ever Mdna for a discussion related to the uses such non-GAAP measures I'll now turn the call over to Joe Randall.

Thank you Natalie and good morning, everyone.

I'm tremendously pleased with our accomplishments it was a truly transformative year.

Total revenues of 1.4 billion, we generated adjusted EBITDA of 341 billion in 29 team an increase of 1.2 million over 2018.

We kicked off last year by establishing a stronger partnership with air Canada for an additional 17 years, providing a minimum of 2.5 billion in contracted revenues with opportunities to increase this business.

This was a critical development because it laid a strong and long term foundation from which we continue to grow and diversify.

Today, we operate about 80% of the Air Canada Express network, an increase of approximately 10 percentage points from the beginning or 29 team.

Safely deliver close to 11 million passengers and operated over 226000 flights.

I think the team for their professionalism and who are helping our partner manage its network challenges certainly posed by the grounding up to 737 Max fleet.

The implementation of the amended SCPA went well and included the transitioning of 24 aircraft in and out of the jazz fleet.

This activity will continue including the introduction of nine new Crj nine hundreds beginning in may which will generate a DC additional leasing revenue under the C.P.A.

[noise] voyagers performance spreads and year over year.

We also successfully one new international contracted flying missions with the United Nations and other clients and saw several contract extensions or.

Our specialized maintenance repair and overhaul facility in north they had a very good year and we've been hiring to keep up with the demand.

The launch of the Dash eight 100 package greater was positively received and we intend to actively market this product.

Well not her primary growth vehicle it doesn't really lend center synergies to support our growing leasing business.

In 29 team we acquired three aircraft for this assembly and parted out seven to date, we parted of 15 aircraft.

We see significant potential in parts and components sales and we were pleased to establish a parts sales people in Dubai further extending our reach into international markets.

I take or employees in North Bay and goes around the world for their operational integrity.

We've made significant advancements in growing our business, becoming a worldwide provider of regional aviation services.

We successfully raised 184 million in capital during the year, including our 86.3 million unsecured hybrid debenture and secured a 300 million U.S. warehouse facility to support our growth in regional aircraft leasing.

We now have committed portfolios of 64 attract attractive assets placed with 16 customers, 60% increase in the sleep over 2018.

Together with the aircraft we have leased under the SCPA. Our portfolio comprises of 135 aircraft with approximately 2.1 billion U.S. and future contracted lease revenue.

The growth in or leasing business drove a 27% increase in this segment's adjusted earnings before tax.

Over last year and now represents 22% of course is overall adjusted EBITA <unk>.

I'm very pleased with the positive momentum we gain in 2019 and with their continued maturation as the leasing company.

We completed our for sale of three leases that she 400 aircraft and extended our first leases with the renewal of three aeromexico connect Embraer one nowadays.

The addition of the highly sought after Airbus eight to 2300 aircraft to our portfolio wasn't important development in or evolution as we see growing demand for the state of the or fuel efficient aircraft.

These aircraft are being placed with her Baltic an existing him or old customer that we're pleased to welcome to our leasing portfolio.

The pipeline of potential transactions remain strong and we will not waiver from our investment principles to profitably build our leasing business.

Finally, we were very honored to be the recipient of several business and industry Awards.

Including being named amongst Canada, safest employers 29 team taking home goals in the transportation category I.

I think the course team for delivering a stand out here.

Look forward to or future accomplishments together. So thank you and now I'll pass the line over to Gary to take you through the fourth quarter and the year incentives [laughter]. Thank you Joe good morning.

I would like to also thank and congratulate her team on or before our successes in 2019, and so far this year together, we've built a great foundation from which to further grow and strengthen our organization.

With over 90% of our revenue secured through long term contracts, our businesses predictable and transparent as touch or business delivered results that once again better met our expectations.

Here's how the fourth quarter compares to the same period last year.

We reported adjusted EBITDA of 88.6 million a decrease of 3.4 billion were 3.7% relative to the fourth quarter of 2080.

Regional aircraft leasing segment's adjusted EBITDA.

Increased by 12.3 million primarily related to the growth in aircraft with 11 flows transactions in the fourth quarter.

As Joe mentioned earlier, we are proud to have completed our first sale during the quarter generating net cash proceeds of $25 million U.S. and an internal rate of return in excess of 30%. The sale of these three aircraft produced an accounting loss upon the wind up of the special purpose entities and resulted in a decrease in adjusted EBITDA.

And adjusted net income of 3.4, and 1.3 million respectively.

Excluding the impact of the sale the margin on the on the regional aircraft leasing in the quarter was consistent with Q3 and our expectations.

Again inline with expectations. The regional Aviation services segment adjusted EBITDA decreased 15.8 million decrease reflects the 2019, SCPA amendments, which moved the fixed fee margin and performance incentive revenue when course moved to market based compensation rate.

[noise] beyond the changes related to the 2019 SCPA amendments fourth quarter results were impacted by increased stock based compensation of 6 million due to the appreciation in courses share price relative to comparable period.

Which was partly mitigated by the total return swap implemented in the fourth quarter of 2019.

And decrease capitalization of major maintenance overhauls on owned CP aircraft over the previous period for 1.2 million.

Adjusted net income was 23.3 million for the quarter, a decrease of $12 million due to the $3.4 million decrease in adjusted EBITDA. As previously described an increase in depreciation of 6.6 million primarily related to an addition to additional aircraft in the or regional aircraft leasing segment.

An increase in net interest costs of 5.3 million primarily related to additional aircraft debt in the regional aircraft leasing segment [noise].

And an increase in non operating costs of 2.5 million primarily related to the loss on disposal of an engine of 1.2 million in a change in foreign exchange losses, 0.8 billion again offset by thought a 5.7 million dollar decrease in income tax expense resultant resulting from lower adjusted EBIT.

<unk>.

Net income increased 34.3 million, primarily due to the change in net unrealized foreign exchange gains on long term debt, a 46.2 million offset by the previously noted $12 million decrease in adjusted net income.

For the 2019 year course reported an adjusted EBITDA of 341.7 billion, an increase of 1.2 million over 22.

The regional aircraft leasing segment adjusted EBITDA increased by 42.4 million, primarily due to the growth in aircraft, earning leasing revenue.

The lease fleet over doubled increasing to 60 at the end of 2019 from 29 at the end of 2018.

Inline with expectations. The regional Aviation services segment, adjusted EBITDA decreased by 41.3 million, which reflects the 2019 SCPA amendments in the reduced fixed margin and performance incentive revenue is course booth to market based compensation rigs.

These reductions were partially offset by the implementation of the controllable cost guard rail that helped mitigate some of the CP a merger shortfall, resulting from reduced fees.

[noise] beyond the changes related to the 2019 CPWM Evans 2019 results were impacted by increased stock based compensation, a 15 million due to the appreciation in courses share price relative to the comparable period, which was partially mitigated by the total return swap implemented in the fourth quarter 2000.

90.

Decrease capitalization of major overhauls and own CP aircraft, a 1.9 million over the previous period offset by increased leasing under this EPA.

Adjusted net income of 96.2 million decreased over 2018 by 26.1 million due to an increase in depreciation of 18.5 billion primarily related to additional aircraft in the regional aircraft leasing segment.

An increase in net interest costs of 15.5 billion, primarily related to additional aircraft debt and the regional aircraft leasing segment and an increase in non operating costs of 5.6 million primarily related to foreign exchange losses of 4.2 billion. In addition to a loss on disposal property and equipment 0.5 million, partially offset by.

1.2 million dollar increase when adjusted EBITDA previously described.

And a decrease in income tax expense of 12.2 million, resulting from lower adjusted PBT.

Net income increased 65 points increased 65.7 million over 2018 due to the change in net unrealized foreign exchange gains on long term debt of 90.8 billion and decreased employee separation costs of 3.1 billion offset by the previously noted decrease of 26.1 billion in adjusted net income.

An increase starting bonuses of 2 million related to the jazz pilot collective agreement.

We ended the year with a solid cash position of 87 million as mentioned, we raised gross proceeds of over 86 million in the quarter and cash finance the indigo in Croatian airline deliveries, we expect that we expect the debt financing of approximately 46 million U.S. on these aircraft to be in place by the by the first half of this year.

We're maintaining or intention to grow our regional aircraft leasing segment by up to 20 aircraft per year as we have the capacity to make this investment through comedy some new jet new debt and internally generated cash flow.

The timing of these future transactions will not occur on a consistent basis. However, we expect the majority will be executed in the second half of this year. We will also use these resources to fund the delivery of nine Crj nine Hundreders this year and five remaining ease piece to be completed before the end of 2022.

As dinner practice, we manage costs against the objectives.

Remaining within market acceptable ranges of leverage and maintaining adequate financial flexibility.

With the addition of the aircraft under both the regional aircraft leasing segment in the aircraft leasing revenue under the SCPA courses estimated future contract at least revenue is approximately 2.1 billion us when the CP a fixed Merck and revenue a 0.6 billion U.S. is included with the future contracted revenue.

New courses future revenue approximately 2.7 billion us.

Capital expenditures for 2020, including capitalized major maintenance overhauls, but excluding expenditures for the acquisition of aircraft and the SP are expected to be between 38 and 44 million.

Aircraft related acquisitions, and the ERP capital expenditures in 2020 are expected to be between 442, and 452 million related to previously announced transactions.

[noise] for additional information sporting or look for the balance of the year I'll refer you to section for the 2020 overall section of our Mdna for the period ended December 30, Onest 2019.

That concludes my commentary. Thank you for listing operator, we can open the call to questions from the analyst community when you already [noise].

Thank you as a reminder to asking a question you will need to press star one on your telephone to withdraw your question press the pound or house, Keith Please standby well be compiled the culinary roster.

Okay.

Your first question comes from Doug Taylor with Canaccord Genuity. Your line is L. fan.

Yeah. Thank you and good morning, with respect to at least yeah. Thanks.

With respect to leasing activity you suggested its going to be backend loaded with.

For commitments Thats, a similar kind of seasonality or cadence to last year is it fair to assume that that is going to be the regular seasonality for commitments and deployments going forward and future years is there some or is there some kind of intentional pause right now to digest some of the reason.

Activity.

And then perhaps related to that do you notice airlines pausing their decision, making and with respect to their fleets in response to the Max where krona virus or any other factors.

There.

So first of all Theres no intentional pause on our part here. It really is looking at the transactions that are in the pipeline for this year and looking at the expected dates.

Which they will come to a conclusion and because we look at it.

We see a thing more in the last half of the year.

So that's generally the business is a little lumpy.

And you know so if we're just sort of giving some outlook for the year in terms of when we see the transactions actually happening.

I don't think.

Necessary that's the same.

Trend would be there every single year it depends on you know who's though.

Where the opportunities are et cetera, a lot of people of course like to get deals close by year end and that's generally something that focus is folks perhaps more so it from a customer point of view and then that sort of thing.

And I guess your question on you know have we seen any changes as a result of the overhang that exists right now because of the Corona virus.

We've not seen anything like that at all in our business.

We've not seen any change in the pipeline and the outlook et cetera. So at this point, we haven't seen any effect and Doug its area here is about.

Pardon me same goes for the Max and I'm not impact.

Yeah, I've only last impact is more on jobs, where we are flying.

Our aircraft a lot more hours and trying to support air Canada as its missing you know a substantial amount of its fleet and managing through this process. So.

We've been very busy with utilization high crude utilization et cetera, what's most important to of course is we do it safely and that's what are focuses on and.

Continue to support or Canada in that regard and just as a as a matter commented our new arrangement with air Canada mixed thus far easier as well because with the cost guard rails that are there.

We're totally aligned with their Canada in terms of just providing them with what they need to support their network. So.

You know I think that's a major benefits of our new arrangement with Air Canada is we're not spending a lot of time.

Negotiating it's just a matter of say hey, we're here to help and we'll do whatever we can to to help you through this difficult period.

Doug It's higher here story on the deliveries if you look at last year, we were about one third of the first part of the year and then two thirds in the second half its probably going to be similar in around that same this year at least from what we can see.

Yeah.

Thank you and that brings me. The next question the timing of the 220 remaining entries in the fleet. This year I think the last.

[noise] guidance you gave was kind of the end of Q3 is that still.

Accurate.

[noise], Yeah, I don't think we've seen any change in our expected deliveries from what we had previously provided no none of this season.

And it's an exciting addition of the portfolio as you mentioned, it's it's also a little larger aircraft flow closer to a narrow body, which has been more competitive end of the market.

This is also relatively new platform. So as a couple of considerations there with respect to.

The lease factor is relative to the existing portfolio can you provide any comment on that.

Well, good certainly very competitive.

The lease rate factors are generally a little lower the larger the aircraft frankly, but the returns are still very very good and we are very heavily turboprop oriented which as we like that and but we have a you know a lot of the top names in the industry and that sort of thing our FFO.

Focus right now going forward will be more I think on the larger regional jets will continue to focus on turboprops, but.

So the eight to 20 is proving to be a greater aircraft. We're also carefully looking at the developments at Embraer and the twos, which is again, a new technology more fuel efficient aircraft. So we see that is being.

Either a bit in our sweet spot as well. So yes, we are we still see good returns here and.

So we're we're able to be competitive I think it as was demonstrated in the case of the though the air Baltic.

Acquisition.

Perhaps I'll sneak one more question here.

The loss related to the special purpose any can you walk us through the gain the positive by our 30% you mentioned you get a loss and also is this a unique situation with these aircrafts specifically or is this something that may occur this kind of.

Machination, when you do dispose of aircraft.

Well it you know I think depends in terms of one of the aircraft or dispose but.

Aircraft trading is an integral part of the business and you know for leasing company to sell assets off at any one time is not unusual and it all depends on the deal itself and you know we make decisions based on the attractiveness of the deal and I think as Gary said in his comments there with respect to the cash that risk.

Produced in the returns that we saw and our ability to reinvest this an additional fleet.

We manage more for the overall business return and making the right business decision.

Even though there was an accounting loss as a result of this in terms of the structure that was there.

I think we've really achieved a better return with the combination of the sale and us looking to reinvest the proceeds. So I think it was the best decision for the business and it is as I say trading business. So from time to time as you do this there can be some I guess accounting adjustments required yep.

So if you look at that that transaction is pretty complicated and as you can see overall not a material number but as we work through the these items you can see that.

It takes you know theres a lot of lives that hits and when we take the funds and we look at the IR. It's over 30% IR and then we can reinvest those funds and acquire another four or five aircraft in replacement. So we viewed it as a very positive transaction, even though the accounting in this quarter only produce that issue yeah, and I think when you look at the.

But the cash results here, we could have ended the year. We didnt do this transaction was 67 aircraft, but no by producing 25 million and the term total and the normal transaction that we have here that gives us the ability actually to do for aircraft and so you know were guided more by making the right.

Investment decisions rather than being held on any one particular a metric.

I don't think anyone's going to complain with 30% plus IR site. So thank you I'll pass the line.

Okay.

Your next question comes from David Old Calpol from Cormark Securities. Your line is open.

Hi, good morning.

Good morning feedback on Doug's Firs question. There can you kind of walk us through the typical timeline of the leasing transaction just trying to get us something the discussions you're having today give me the confidence that you'll close on two thirds of the deliveries and Ht Tony.

[laughter] well each deal is different some happened faster than others.

And it really depends upon primarily as a customer and the rate at which the customer moves.

A quite often they put out our peace and they make decisions they could differ decisions et cetera. So it's very difficult to give you a specific.

Timeline with respect to a transaction because each one is different.

And your expectations of when deals closed, though at any one time is a function of your expectation of when the customers ultimately going to make that decision.

So when we talk about having most of the transactions in the second half of this year. It's really it's as a result of are looking at what we have right now and it could happen potentially where we may have something happened earlier something comes off et cetera.

But that's where this business is lumpy and we tend to look at it from a sort of a yearly annual point of view. We've said we have the ability to fund 20 aircraft a year et cetera, but it will vary throughout the year and it's.

It's not going to be so many a month, it's going to be a function of again the customer. So so it's very difficult to do that other than really primarily on an annual basis, and then giving I think a bit about an outlook in terms of when what we have before us we expect that too.

To close yes, David It also depends on if it's a new customer an existing or new customers take longer there's much more due diligence and other things that go round. It sifting customers, it's a little easier to put the paperwork in place too because you've already negotiated it so back to your point on timing you to Joe's point, there's rps and.

But you could it be anywhere from two to six months, depending on where things are what the customer is and how complicated the transactions those kind of difficult put an exact timing on everything and in some cases, even longer yes, even longer in somebody's.

Yeah that makes sense and last for me here your leverage ratio continues to growing higher I know, it's still sits below reveal the leasing comps trade out.

But do you see this grinding up much higher for me. This point Oh, I think it's I think now.

Yeah, I think as we continue to invest in the leasing area. It is critical off a bit it's not going to get to you know into the leasing stratosphere I think at this point given were a hybrid company, but it will go up a bit more as we invest and again because you know as you know the returns are in arrears. So.

Takes 12 months to accumulate so I think you'll see it grow it before but certainly state will manageable.

That's great and Colomer.

Good.

Your next question comes from Cameron Doerksen with National Bank Financial Your line is open.

Yeah. Thanks, just question on I guess additional leasing opportunities are you still seeing potential opportunities for acquiring larger portfolios of aircraft I'm. Just wondering if anything is kind of changed on that front.

We are.

We continue to evaluate those and you know there's a number of considerations when we look at.

These in terms of fit.

In terms of our strategy in terms of customer concentration equipment type etcetera. So we are tamarins seeing as an ongoing ongoing opportunity not bigger.

Would you ever acquire a you know a portfolio aircraft and maybe had some aircraft that are outside of your.

Regional focus maybe narrow bodies and then you will subsequently divest those I mean is that something you would look at doing or would you prefer just not to not to do that.

No I think that's something that clearly can be looked at I.

I think if we look at a portfolio there maybe some aircraft that are little outside of what we would normally do but we wouldn't have plans then with respect to how we were going to deal with those assets for sure.

It is not our plan to get into.

No larger narrow body wide body aircraft and all but you know, we we're flexible and I think as we've grown scale with respect to this business.

Our ability to look at some of these things increases.

I think we as well and we've talked about before as we mature the upward the ability and opportunities to do skyline purchases or things of that nature as well and in some cases, if we purchase of portfolio. It maybe beyond our current fleet concentration.

Targets, which again, we would have plans to deal with that so that we maintain a well balanced.

You know risk managed portfolio of assets.

Okay. That's good.

Just a just quickly just wonder if you can update us on when you extended the timing of the Crj 970 to moving into the CP operation just how they kind of come in by quarter.

Okay. They start to basically one of them money the introduced into the CPGA in may.

I do want to months starting may okay.

[noise] and they'll get all the in place by year end correct. Yeah. There are expected to be in place all by yearend.

Okay. Okay, that's great thanks very much.

[noise] as a reminder, if he would like to ask a question you will need to press star one on your telephone.

Next question comes from Tim James with TD Securities. Your line is open.

Thank you good morning.

Morning.

I'm just thinking long term strategically here that the leasing business is now certainly well on track to provide some nice diversification in terms of earnings and cash flow.

Do you see in need me at this point as you think forward for additional diversification opportunities or do you think that the leasing business now at maturity will provide a satisfy a satisfactory business mix for the long term.

Well I think.

It really relates to who we are in our strategy and you know we do I really three things overall, we fly contract flying which I think we are doing very successfully with her SCPA, we do a very successfully with Voyager and although very similar assets within the the region.

We'll space.

You know contract flying and other types of contract flying would definitely be of interest to us because there's also a leasing component to that and support component and you know, we're modifying older dash eights et cetera into other purposes. So.

Contract flying provides I think.

A business that is consistent with our business model, which is predictable generally stable and a synergistic and then we have of course, our leasing side, which is are now our growth vehicle as you say, but then we have the support side of our business and this is where.

I think I mentioned in my comments here, where parts and components for instance is really interesting business for us we parted out a lot of aircraft. The returns a very good it isn't huge isn't at this point that you know not doesn't really materially affect results, but again, it's very supportive and we.

Really look at these aircraft over the lifecycle of the aircraft in various roles different purposes et cetera, and this is why we are not a pure play leasing company. We think we're stronger as a result of being able to operate them redeploy them et cetera and.

I will give an example of this where we just recently had a Q4 hundred come off lease.

With a carrier and we are actually going to be operating that aircraft under contracts with Voyager. So that aircraft now is being transformed and will be on special mission contracts with boys are so it really gives us the ability to look at you know, whether we part the airplanes out where.

Further we operate them for special missions, whether we modify them et cetera. So we don't see leasing is being our pure and only growth vehicle and I think by looking at it from a broader perspective that will help us further diversify and grow.

Growing the company because the you know the amount of revenue that we will receive as you know under the SCPA for the fixed fee is decreasing and you know where you look at the rest of the business and the leasing revenue that's there and now to augmented with others I think it makes the company is very much strong.

Longer and build upon its reputation and all segments of the business.

Okay. That's great that's very helpful. So.

It sounds like you feel you got the foundation for the necessary diversification as time goes on as opposed to.

Feeling we need to branch out into any other area of aviation you you've kind of gone are the groundwork late there.

Well I think we've been in the business along time, we know a lot of book of business, We know a lot about the assets and.

You know we're growing as we've grown our team we've grown our expertise and I think we're now starting to show.

Additional milestones even within the leasing business in terms of extending leases selling assets redeploying them et cetera. So you know we don't see the requirement to really read show two on related businesses or anything of that nature, we see great opportunities within the areas in which we.

We have expertise.

Great. Thank you very much.

Yes.

Your next question comes from I mean, a shared that with Scotiabank. Your line is open.

Hi, I'm corn on the <unk> associates.

Previous question, you didn't mention about little bit about wager can you provide a little more details on where do you see growth opportunities.

Wage are coming for the next few years.

Yeah voice or had a very good year last year, you know a lot of improvement over the year before.

Contract flying opportunities are still there for sure.

MRO side, we've hired a lot of staff in North Bay, and we are doing a lot of specialty aviation workfare, It's a very solid business. The primary growth area for Voyager is really this parts business that I mentioned earlier.

And it's still relatively new margins are good, though and it's a business that we're able to feed with older assets and as well there are attractive older assets that are available for purchase. So fair. So you know we see boys are playing a supporting role I think it will be growing and improve.

Moving but again.

It's it's a long way from our flying business and our leasing business in terms of the size of the segment, but it is very critical in terms of how we mid this whole business together.

Okay are you seeing any incremental interest and 80 20 leasing after signing your first customer.

Yes, we are we're seeing good interest in.

We believe there are good opportunities and the larger regional jets space, including the eight to 20, including the temporary twos and those are aircraft that were definitely attractive to us and I believe will be great assets.

Yeah, I don't have any more questions.

[laughter].

Again as a reminder, it is star one on your telephone keypad, if he would like to ask a question.

There are no further questions at this time I will now turn the call back over to the presenters.

Thank you very much we thank you all for participating on the call.

And we'll talk to again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

[noise] [noise].

[music].