Q3 2020 Chorus Aviation Inc Earnings Call

At this time all participants are in a listen only mode. After the speakers presentation that there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.

Please be advised that todays conference is being recorded if you require further assistance. Please press star zero. Thank you I'd now like to hand, the conference over to your moderator for today, Natalie Magaro Vice.

Vice President Investor Relations and corporate Affairs. Please go ahead.

Thank you Jack Hello, and thank you for joining us today for our third quarter 2020 conference call an audio webcast.

With me today from quarter, Joe Brando, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer, well 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 information.

Statements, which are subject to various risks uncertainties and assumptions that are included or referenced in our management's discussion and analysis of the results and operations of course aviation Inc. for the period ended September Thirtyth 2020.

The outlook section and other sections of our empty a neighbor such statements appear.

In addition, some of the following discussion about certain non-GAAP financial measures, including references to EBITDA adjusted EBITDA adjusted EBITDA and adjusted net income.

Please refer to our M. DNA for a discussion relating to the use of such non-GAAP measures.

I'll turn the call over to joke Randall.

Thank you Natalie and good morning, everyone.

Our efforts continue to focus on ensuring a safe operations preserving our liquidity and working with air Canada and other customers to help them navigate through this ongoing pandemic.

We're also advocating for government support for the recovery of the Canadian aviation sector.

Gary will take you through our financial performance for the third quarter, which delivered earnings of 13 cents per basic share were seven cents on an adjusted basis.

Our liquidity now stands at 200, and then 18 million.

In the quarter, our CPGA flying increased from 10% to 23% over.

Over the second quarter of this year.

Our non C.P.A. lessees are showing moderate signs up more flying activity as evidenced by an increase from 28% in lease revenue collected in the second quarter to 50 per cent collected in the third quarter.

We were also pleased to see this trend continue further with.

With further improvement in October with the receipt of approximately 58% and build lease payments.

Unfortunately, COVID-19 continues to spread around the world, we're seeing signs of a corresponding stalling and the resumption of flying activity globally.

We are encouraged by the public statements made by the honorable Merck or know, Canada as minister of transport on November Eightth to begin immediate discussions with airlines on measures to protect Canadians from the impacts of COVID-19 on the air travel sector in Canada, and we are awaiting further details.

Canadian Airlines are significant contributors to economic growth in Canada.

Regional Airlines are key to the provision of employment opportunities in our facilitators for travel and tourism contributing to the overall economic growth of the smaller communities to which they fly.

Without that service communities businesses, academia and tourism operators will struggle.

We believe the aviation industry will eventually recover people will travel again, we still believe the regional sector is the most resilient of the industry with domestic travel being the first to Rick resume.

Demand for regional aircraft remains stronger than other aircraft types that we're seeing the Airbus to 20, leading the pack in fact, we delivered the third of five new eight to 23 hundreds to air Baltic of Latvia in September.

[noise] without knowing the length and depth of the damage, resulting from the virus, it's difficult to predict power industry and those entities that depend on it well manage.

Prolong pandemic will continue to challenge the passenger aviation industry.

We recognize the recovery of passenger traffic will be protracted sporadic and will extend well into 2021 and beyond.

We are taking all reasonable measures to protect and preserve our company.

Overall, our portfolio of leased aircraft is holding up relatively well in the current environment.

As previously reported Aeromexico filed for voluntary chapter 11 petitions in the United States on June Thirtyth in order to implement the financial restructuring.

We have three he wasn't ninetys on lease to aeromexico and whole security packages in respect of these aircraft.

The aircraft are currently active in Aeromexico's operation and we're hopeful that they will be retained by the carrier.

Voyager is performing well, we continue to bid on new flying contracts and have had some success including contract extensions.

This is really the norm in the specialized contract flying business, it's an ongoing cycle and our employees are experts in delivering the highly unique and customized services our customers require.

Well, our perks sales division as challenge due to the pandemic RMR all activity has increased after winning several new contracts in the second quarter.

It was a welcome piece of good news when jazz was named amongst Canada sales us employers 2020, winning gold in the public transportation category.

This is jazz is fourth consecutive year accepting awards at the Canada's safest employers event.

Last year Jazz received Gold award in the transportation category in 2018 jazz was awarded silver in the transportation and psychological safety categories and in 2017 jazz one gold in the transportation category.

My sincerest congratulations to the team it's a great bright spot to have these days.

As I as mentioned our Air Canada Express operation is now at 23%.

What it was in the same period last year.

We continue to work closely with air Canada to help support its network and to reduce costs.

Demand for Air service, we're only return when people are confident that when people have confidence that their health and safety are protected and when the requirement for corn team has reduced or eliminated.

In Canada, we need a national COVID-19 testing regime that use a scientifically based procedures to help facilitate the safe movement of passengers.

This will allow and improve application of any quarantine restrictions.

I applaud your candidates efforts in working with Mcmaster Health Labs, and the greater Toronto Airport authority to demonstrate the validity of testing as a means to ease travel restrictions and quarantine requirements and we'll be watching for developments in this regard as well at Calgary.

Airport.

Well the poet pilot programs underway in Calgary, and Toronto to safely testing alternative to the two week quarantine for international travelers are positive steps much more such programs are needed, especially with the Atlantic bubble.

Again, we urge government to act swiftly to implement current science based approaches to COVID-19 testing of passengers to help support the recovery of passenger demand.

In addition to feeling safe passengers need affordable Air transportation.

In Canada, the multiple layers of fees and charges levied on passengers and airlines by various levels of government have greatly increased over the years and have had a disproportionately negative impact on regional services.

Since the pandemic snap, Canada has increased fees by 30% and many airport authorities are cross Canada have also increased their charges.

Similar amounts, adding to higher ticket prices for travelers.

In the short term the government of Canada needs to urgently consider assisting these service providers and rolling back these fee increases to help encourage travel demand, thereby helping the economy and the transportation sector recover.

I'll conclude my comments first by thanking our employees, including those who are currently on an active status for supporting our company in these difficult times.

I sincerely look forward to the day, when we're all litter posts and resuming the meaningful work, we've done to grow and diversify our business.

Secondly, I will not be providing any comment on the preliminary non binding acquisition proposal. We received last month, except to emphasize that the disclosure was made at the request of Iraq.

We do not have anything further to say on this matter at this time.

Thank you very much and now I'll pass the line over to Gary. Thank you, Joe and good morning.

Our third quarter adjusted EBITDA was 85.9 million, a 6.8 billion decrease over third quarter 2019.

Adjusted net income was 10.9 million, an $18.2 million decrease over last year, which led to a decrease in adjusted EPS at seven cents versus 18 cents last year.

Here's how the third quarter of this year compared to 2019.

The regional aircraft leasing segments, adjusted EBITDA decreased by $4 million, primarily due to a $4.1 million expected credit loss provision related to management's assessment courses lessee credit risk and lower margins due to the loss of revenue, resulting from the reposition of 13 aircraft from Threeq.

Fees, partially offset by growth in aircraft, earning leasing revenue.

Due to the impact of COVID-19, the noncash general aircraft impairment provision of $11.2 million and zero point $7 million for lease repossession costs were added back to adjusted EBITDA.

The regional Aviation services segment, adjusted EBITDA decreased by $2.8 million.

The results were primarily impacted by decreased capitalization of major maintenance overhaul on owned aircraft operated under the CPGA of 2.7 million.

And a reduction in other revenue due to a decrease in third party maintenance repair and overhaul activity and reduce contract line due to the economic impact of cold in 19.

Set by decreased stock based compensation of 1.7 million increased aircraft leasing under the CBVA and decreased general and administrative expenses.

Adjusted net income was 10.9 million for the quarter, a decrease of 18.2 million due to a 6.8 million dollar decrease in adjusted EBITDA. As previously described an increase in depreciation at 4.5 million primarily related to additional aircraft in the air for regional aircraft leasing segment.

An increase in net interest costs, and 7.6 million primarily related to the 5.75% unsecured debentures, the unsecured revolving credit facility and additional aircraft debt in the regional aircraft leasing segment.

And an increase of $3 million in realized foreign exchange in unrealized foreign exchange losses on working capital offset by a 3 million dollar decrease in adjusted income tax expense.

Net income decreased 3.7 million due to the previously noted 18.2 million decrease in adjusted net income 11.2 million general impairment provision and zero point $7 million in lease repossession costs.

Offset by the change in net unrealized foreign exchange on long term debt of 24.9 billion and tax recovery on adjusted items of 1.5 million.

Liquidity improved in the third quarter by approximately $30 million with $218 million in liquidity, including $35 million of available room on our committed revolving debt facility. This.

This improvement was primarily due to positive operating cash flows working capital improvements resulted resulting from increased flight operations and the financing of previously unencumbered aircraft.

As mentioned above working capital improved in the quarter, primarily related to increased accounts payable due to increased airline operations over the second quarter. In addition to increased interest accruals related to the timing of the venture interest payments.

And interest associated with the loan deferral program, partially offset by an increase in air Canada receivables NCC lease deferral receivables.

Other key liquidity movements in the quarter include payments on long term borrowings of 31.6 million and investments in property and equipment net of financing of 13.2 million.

Cash increased in the quarter, primarily due to the increase in loan repayment deferrals of 13.5 million or approximately 10 million U.S. with our largest lender LDC.

These deferrals allow us to defer payments of principal and interest to the ended the year, providing us the ability to better match or debt payments with the least deferral arrangements.

In the fourth quarter, we expect or liquidity to be relatively constant as we continue with measures to prefer preserve liquidity given the uncertainty related to the duration and impact of cold in 19.

As we look ahead, we have seen or revenue or rental revenue received in the regional aircraft leasing division increased to 58% in October and we expect this will continue to improve over the next quarters to travel restrictions. These airlines are able to increase their revenue generating capacity.

We've reduced our capital expenditure forecast by $6 billion since our second report owed and forecast maintenance capital expenditures and heavy checks to be within the plan range of $17 million to $23 million for the year.

Aircraft related acquisitions are expected to be to be between 417, and $426 million down $64 million from previous disclosure as a result in two aircraft for an undisclosed customer be moved to 2021 and a decrease in foreign exchange rate.

We estimate our cash outlay for the remaining growth capex expenditures to be approximately 10 million net of anticipated financing arrangements.

The remaining deliveries are subject to financing and certain closing terms.

That concludes my commentary. Thank you for listening operator, we're open to call. We open the call to questions from the analyst community. When you are ready.

Certainly at this time, if you'd like to ask a question. Please press star one at your telephone keypad, we'll pause for a moment to compile the <unk> roster again that is star one on your telephone keypad.

On a group, though with Scotiabank Your line is open.

Mr. Gupta your line is open.

Hello can you hear me.

Hello.

Hello, Hello, Yes.

Yes. This is a I mean, a Cornish associates I do have a question on liquidity you expect liquidity to remain relatively stable in Q4 with extension of the CE CE CE loan default and discuss your financing of the six C.R.J. 99, hundreds how should we think about funding the two.

<unk> eight 2000, twentys for the Baltic cash flow operations on working capital in Q4.

So we gear here, we expect to remain relatively constant quarter in around the 200 million that we talked about in Q2 as far as liquidity goes as far as the Twentys. If you look at the disclosure we put in around 10 million Canadian is be the net amount of financing net of financing amount that will be the draw related to those so thats how you come on.

That will lead to Twentys.

Okay. Thank you and all the questions.

[noise], Doug Taylor with Canaccord Genuity Your line is open.

Yes, I'd like to follow that up first of all good morning, now I would like to follow up with another cut.

A couple of questions about liquidity I mean are you planning any other and liquidity in enhancement measures outside of your your general cash flow.

For Q4 to help keep it at that.

$200 million level.

No. We are not Doug that is based on the current status and continuing as we are.

And then in terms of the drain on your liquidity caused by commitments that you made perhaps prior to cove in with respect to the leasing fleet would you see Q4 now is being kind of the you know the last remaining major kind of hurdle or drain and then as we look into next year with the capital commitments that you.

Have you expect.

The pressure on your liquidity from those commitments to you is that the right way to think about it.

By and large I think if you look at what we've got we got two week to 20 is coming in for roughly 10 million Canadian we still have to an undisclosed customer sometime next year. The timing of that is quite fluid and we don't know exactly where it's going to happen, but that is it for their the 'cause current commitments Missy arrays will be delivered by the end in the.

Other side to go to back to our disclosure we did pay all the equity requirements on all the Crj nine hundreds in Q3, so that remains here Jay nine hundreds that come in will not draw any cash because the financing will cover the remainder for those aircraft.

Okay. Maybe last question about liquidity I mean, just to be clear the receivable related to the guard rail with Air Canada that is has been building up on your balance sheet can you just confirm for us the timing of the expected collection of that.

It is Q1 next year.

So I mean stepping back and looking at the.

The lease portfolio in Q1.

Would you say Q3 with all of the <unk>.

You know the.

Aircraft that are now being remarketed in them come out of the lease portfolio is a good baseline in terms of the revenue and profitability of that business and then these in these additions in terms of the Baltic Sea to Twentys I mean should be additive to the earnings power of that port folio going forward.

<unk>.

In generally or qualitatively is that the right way to think about it.

I think you can look at Q3 is having the sum of all the events that we've seen to date. So you go to 13 aircraft essentially have by and large a you've got the 50 or sort of 50% to his first revenue collected so I think it's a good base moving forward, Doug and then as far as you know layering things in you know we have.

A couple of more into Twentys to come in we continue to monitor or lessees.

It is a dynamic situation in the marketplace. So it's hard to really give you a while to guidance around that we were hoping that rental revenue will increase it was 58% in October and we're you know we're cautiously optimistic around that but we continue to evaluate let's see so those bumps in the <unk> and things like that to be associated with that are very different.

Bold to predict but I think you could I think you can look at where we're at today in Q3, and it's a it's a lot of bad launching off point for your modeling and where we're going to move from go forward.

That's helpful and just to be clear I mean going from 50% to 58% in the degree of collections does not have bearing on the earnings power. It's more that's more of a balance sheet item you got it yes, yes, you're right.

A couple of just a couple of.

Credit questions first of all I mean air Baltic are they among the members of your legacy that are current with their payments.

Yes. They are we have no issues with your Baltic under their payment terms.

Okay, and then last one for me the 4.1 million a reduction in earnings related to the credit provision youve taken is that related to a single entity or is that multiple airlines that you've taken some provisions on is across all the fees, we evaluate them for expected credit loss or risk associated with the with the.

Receivable and we booked a provision related to all of them.

Okay.

Probably asked enough questions I'll pass the line.

David Ocampo with Cormark Securities. Your line is open.

Hi, Thanks, I just wanted to follow up on Doug's question related to the Coast Guard rail I'm, just trying to get a sense of the accounting treatment behind that was the.

Was the the payments recognized in the income statement for for each respective quarter or is that something that's going to all appear in Q1.

So what happens is we recognize the revenue as we go through each quarter.

Related to the controllable costs paragraph and what ends up happening is you'll see you'll see the receivable build it will be in the accounts receivable balance obviously, reducing our cash and then in Q1 next year, we'll collect that and I'll go back into cash.

Okay that makes sense Gary.

And this is a bit of a longer term question. So I appreciate if you can't answer it but.

When we look at the the 2026 to 2035 period for your SCPA agreement. There is a noticeable step down and we we are like I always assumed that this we got back filled somehow with with some sort of leasing revenue, but maybe you can comment on on your discussions with air Canada, and perhaps it should we think of.

About this as a more permanent stepdown that given the state of the industry.

Well, we're we're obviously speaking with air Canada frequently and considering the ever changing market dynamics, there's a there's still a lot of on loans.

We're for now we're continuing to focus on reducing the reduction of costs and as well, helping air Canada preserved and plan on how it's going to recover its network here. So we're we're having those discussions and you know the fleet commitment remains in place and the CP.

But of course as we look forward, we look at various scenarios and working closely with air Canada to to find ways that we can assist and work together to improve their outlook on both sides.

I'm sorry, Joe and then last one for me just on the aircraft that had been repossessed how much leniency do you guys have with the remarketing term I know some of them are short as six months before.

Before you may have to make that those bullet payments on the debt structures. So if you. If you looked at the aircraft that have been repossessed, all but three or all all but a two or three have a remarketing periods that are 24 months.

Through Edcs and.

We're working with the lender on that remaining amount is around 10 million U.S. that could potentially come do if it's.

Circumstances warrant in Q1, but we are prepared around that piece from up to over were not worried at all about that a phone call.

That's great that's it for me guys. Thanks.

Again, if youd like to ask a question. Please press star one on your telephone keypad.

I also rude with RBC capital markets. Your line is open.

Hi, good morning, its its rock longing for Vulcan.

Just a quick lead time to start off here.

Going to be able to unpack some of the detail on the working capital trends expected during Q4, and perhaps even Q1 as well it sounds as though receivable headwinds and leasing are expected to be partially offset by.

So the security packaging. So so just trying to wrap my head around it is fair to assume a modest working capital had beginning in Q4.

Yeah, I think you could you could assume a modest one Q.

Q4 is always you know if you look at even the CDH division in passenger traffic in general it's always a slower period and I think you know the covenant Bourbons, probably little more than normal so they'll be a little bit of a draw in that range. But then you don't want to turn around and say look you know we also are still generating positive cash from operations our receipts from the regional.

Aircraft leasing side or are coming in a little bit above what we saw in Q3. So I think it's a volatile overall you know based on the guidance. We've given you the CB eight guard rails in the lease receivables in the deferrals can you can get a pretty good idea, there's a little bit of a draw there.

Okay. Okay. That's helpful. That's it for me too I'll pass the line. Thanks.

Again, if youd like to ask a question. Please press star one on telephone keypad.

[noise] [noise] [noise] there are no further questions at this time its now my pleasure to turn the call back over to course aviation for closing remarks.

Thank you very much Jack Lee will now can queue conclude the call and thank everyone for dialing in have a great day.

This concludes today's call. We thank you for your participation you may now disconnect.