Q2 2022 Chorus Aviation Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the court.
Second quarter 2022 financial results conference call.
At this time all calls are in listen only mode.
Following the presentation, we will conduct a.
A question and answer session.
If at any time during the call you require to me that's the thing.
That started well for the operator.
This call is being recorded on Friday August F 'twenty to 'twenty two.
I'd now like to turn the conference element in the third paragraph Cody VP of Treasury and Investor Relations.
Please go ahead.
Thank you operator, Hello, and thank you for joining us today for our second quarter 2022 conference call and audio webcast with me today from chorus, or Joe Randell, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer, who will start by giving a brief overview of the results and then go onto questions from the analyst community.
Because some of these presentations call maybe 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's discussion and analysis of the results and operations of course Aviation Inc. For the three months ended June 32000.
And 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 and adjusted net income available to common shareholders.
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 Randall. Thank you Tyrone and good morning, everyone.
In the second quarter, we completed the acquisition of the Falko business well.
We're very pleased to see falko delivering the expected results and the integration of the business is growing slowly.
We have both complementary and a similar leadership styles and cultures.
We clearly see the Falko asset management platform, delivering more diversity and flexibility of course.
In June we announced the addition of 35 turboprop aircraft and a servicing capacity on behalf of a syndicate of banks further expanding our asset management business.
And demonstrating its ability to continue broadening its customer base.
With the Falko acquisition Corp is now a market leading regional aircraft asset manager and the world's largest aircraft lessor focused solely on the regional aircraft leasing space with an aircraft lease portfolio up 266 aircraft and a total fleet of 381.
Sure.
We have significantly advanced our growth and diversification strategy.
We are now expecting to derive approximately 50% of our 2020 annual adjusted EBITDA from the regional aviation leasing or routes segments of our business.
Finally fund III has been watched the data room and it's open.
Discussions have commenced and there is a robust level of activity.
There has been some general market volatility in the public equity and debt markets, which has caused a slight delay from the plant closing dates.
We continue to target a minimum of U S 500 million in capital commitments and we are planning on closing this fund raise in the fourth quarter of 2022 as market conditions stabilize.
Looking forward, we will continue to transition our leasing business to an asset light model opportunistically exploring asset sales so as to create additional shareholder value through paying down debt and generating incremental cash flows.
I thought it would be useful to provide some observations on the current aviation and regional aviation industry in particular.
As you know there are many parties that play an essential role in the air Transportation and Air Transportation system.
We are working closely with Air Canada Airport authorities and government agencies to address the issues the industry is facing.
We believe these issues to be temporary.
In addition, it is important to note that due to the nature of our CPA contract disruptions have not impacted our financial results.
In particular, our jazz operations are fully staffed for our CPA commitments and in line with pre Covid levels.
It is important to understand that we have been preparing ourselves for the issue of pilot scarcity since well before the pandemic began.
We created our pathways program.
Which is the premier education, and training pathway for pilots and Canada, providing industry, leading education and experience and a clear career path to employment on the larger aircraft with Air Canada for these pilots.
This program had been a differentiator for chorus and recruiting progress.
Over the years with our various programs and partnerships, we have proven to be an innovative leader in pilot recruitment and are currently working towards enhancing our capabilities in this regard.
We expect to have more to share in the coming weeks on our continuous efforts to improve pilot supply.
Looking at the global industry, our focus is on a regional aircraft, which are largely deployed in domestic markets.
These markets have proven themselves to be the most robust from a passenger demand standpoint, as evidenced by the bounce back in demand for fly and the U S, Brazil, India and European countries.
The regional sector continues to be resilient and indispensable component of the air transport industry and with the changing competitive landscape and with our scale, we are well positioned to capitalize on opportunities.
As seen in the past in a recessionary period, there is strong demand for regional aircraft.
For example, we have seen strong interest in the dash eight aircraft that recently came out with the jazz operation.
Before I turn it over to Gary I wanted to acknowledge that we did take a provision in relation to anticipated aircraft repossessions and lease restructuring on castle's aircraft portfolio.
We believe this addresses the last of the lessees that struggled significantly from the impact of the pandemic.
I'll now turn the call over to Gary to take you through some highlights of our second quarter financial results.
You, Joe and good morning.
In the second quarter of 2022 of course reported adjusted EBITDA of $104 9 million, an increase of $28 million over the second quarter of 2021 with the main reasons for the increase being the row segments increase and adjusted EBITDA of $25 4 million due to the inclusion of two months itself.
Adjusted EBITDA of $20 8 million and increased lease revenue from re leased aircraft and castles aircraft portfolio and.
And the <unk> segment's adjusted EBITDA, increasing by $2 6 million, primarily due to an increase in other revenue due to an increase in part sales in contract flying partially offset by a decrease in third party MRO activity and.
An increase in capitalization of major maintenance overhauls on owned aircrafts.
And an increase in aircraft leasing revenue under the CPA due to a higher U S. Dollar exchange rate offset by an increase in general administrative expenses.
Adjusted net income was $27 6 million, an increase of $16 2 million over the second quarter of 2021, largely due to the increase in adjusted EBITDA of $28 million just described it.
An increase in depreciation expense of $9 $3 million, primarily attributable to the telco business and an increase in net interest costs of $1 1 million primarily related to interest on long term debt assumed as part of the telco acquisition.
Adjusted net income available to common shareholders or adjusted net income less minority interest and preferred share dividends was $21 7 million or <unk> 11 per common share of <unk> increase over the same period in 2021.
Net loss was $40 4 million a quarter over quarter decrease in income of $61 9 million, primarily due to an anticipated aircraft repossessions and lease restructurings, resulting in provisions of $45 6 million on the castle aircraft portfolio.
It is important to know that all of our other remaining customers are operating in compliance with lease arrangements and this provision does not impact our positive long term outlook for the business.
In addition, the following items impacted the quarter non realized foreign exchange loss of $34 3 million in strategic advisory fees of $5 7 million offset by an increase in adjusted net income of $16 2 million.
Now turning to liquidity.
As of June 32022 sources liquidity was $148 6 million, including cash of $70 7 million and $77 9 million of available room on its operating facilities.
Our liquidity decreased in the quarter, primarily due to the investment related to the VAALCO acquisition offset partially by strong cash flows from operations.
In July .
By 2022 of course securitize, the beneficial interest in five aircraft to us and as a result was able to remove restrictions on $27 6 million U S.
Million of cash that had been held as security for a loan in the telco business.
We anticipate having total liquidity in excess of $100 million for the remainder of 2022. This will provide course with sufficient liquidity to fund ongoing operations planned capital expenditures and principal and interest payments related to long term borrowings.
And now on for our book.
Of course as forecast for the year ended December 31, 2022 has been updated from the first quarter 2020 to forecast for the impact of anticipated aircraft repossessions and lease restructurings and castle portfolio.
The initial closing of the new Telco managed fund moving from Q2 to Q4, 2022 and U S dollar to Canadian dollar exchange rate of 128.
With these changes of course expects that the 2022 adjusted net income available to common shareholders to be between 88 and $103 million and adjusted EPS available to common shareholders.
To be between $45 million 53.
We expect to see our net debt to adjusted EBITDA for the end of 2022 to be in the four 7% to five or 5.0 range as we continue to pay down or amortize the debt and rebuilt two eight months of earnings from Falko.
Other key elements of our guidance for 2022 are contained in the outlook section of the MD&A.
Before turning the call back to Joe I would like to acknowledge the dedication of our teams that Jan Voyager CEC cores and our newly acquired telco, we wouldn't have been able to do this without their tireless work and dedication so with that I'll turn the call back to Joe Thanks, Gary and finally again I'd just like to express.
Again this quarter my sincerest appreciation to our employees, who remain focused and committed to <unk>.
Safety first and operational integrity through this challenging time.
Especially our frontline people, who continue to put customers first overall, the entire or of course organization remains energized and excited about the opportunities. We see moving ahead and look forward to delivering additional value to all our stakeholders. So thank you for listening and operator, we can now open the call to questions.
Thank you, ladies and gentlemen, well now begin the question Rod.
So do you have a question. Please press star followed by the one on the attached telephone.
Here are three Tom from acknowledging your request and your question Paul.
So is it realistic occurring from our polling process.
Our buyback here.
Well my first question.
And your first question Karen is firm.
Cannot go too.
Please go ahead.
Thank you the money everybody.
So just have a couple of wanting a couple of questions here.
On the organic CSD business.
Seems like the revenue and EBITDA were down sequentially from Q1 I'm. Just wondering if there was any changes you pointed out on repossession.
Aircraft was there anything in the second quarter and that impacted the revenue.
It's just the previous quarter in Q1 or.
Is there like any other kind of benefits that you had in Q1, maybe that you didnt see in Q2.
Yeah, sorry, it's Gary here, there was nothing out of the ordinary in the quarter. We had as you recall if you go back through our disclosures, we renegotiated lease amendments over the course of time that would've been reflected but when you look at the quarter. There was nothing out of the ordinary or outside of the expected repossession.
Provision.
Okay. Thanks, Gary and then with respect to your outlook commentary and the guidance change I think one of the factors for our guidance a slight reduction in guidance is probably be anticipated.
Repossessions and the organic business I'm talking about a new site.
Where specifically are you seeing that repossession, a potential like which part of your customer growth.
Yeah, we do not comment on individual or specific customers Conor so.
We really can't share that with you at this time.
Okay. That's a good job of that I was just kind of curious as to.
Think of it.
Most of your customers have already either renegotiate it or they have.
Come to some sort of spiff for so I'm just kind of curious does this lots remaining.
Possession.
How meaningful is that something I guess, that's a U S crop youre talking here or are we talking about like maybe half of them or something.
Well there are a number of aircrafts.
And again, I can't be specific on which ones or which operator.
Generally speaking we did negotiate that have renegotiated a lot of the agreements that memories of castle portfolio and generally speaking customers are living to these revised terms and agreements and these are lingering issues that.
Have been struggling and we anticipate repossession repossessing certain aircraft.
Over the next little while but we can't we're not really free to say, which carriers are which aircraft at this time.
Okay. So just to be clear the repossession that do you anticipate that it's going to impact Q3, and Q4, it didn't impact Q2, yet.
Q2, it did not impact inside of the provisions.
Going forward, it's reflected in our guidance correct.
When do you expect to take them back here in the next number of weeks or months.
Okay. That's it for me I thought over thank you.
Okay.
And your next question comes from Matthew Bouley Cana clients.
Please go ahead.
Hi.
I was just hoping to get your opinion on the ability for <unk> to raise funds.
Current economic conditions, I know, you've kind of mentioned a slight change in appetite, but are you seeing any meaningful shifts on that front.
We've not seen any meaningful shift away.
Away from the interest in the fund obviously during the quarter there were significant stock market volatility as some of the investors rebalance their investments et cetera.
Which we see settling now so we see it as being just a delay.
Rather than.
It would be any real indication of a lack of of interest and that interest is coming from existing investors because those are the ones that you initially speak too so.
You know I think we're still optimistic it's just that this past few months from a market stock market point of view.
A lot of volatility in interest rates, we see some of the settling I don't know.
And I think that that is shared by others that view, so that will enable us to move forward.
Great color and then maybe in terms of imagine fee it looks like $3 7 million mechanized in the quarter.
If I do the math that translates to just over $22 million per year. If I think about talk about AUM is roughly $1 5 billion Canadian it seems like Thats, an annual management fee of around one 5% is that the right way to think about are there other kind of puts and takes that we should consider.
It's Gary here.
When you look at the Telcos management fee and we had $3 6 million in the quarter that would have been a little bit of a onetime fee with onboarding.
Of the.
35, aircrafts. So you can adjust a little bit out of it but it is a fair run rate for how we see that business moving ahead.
Yeah.
Okay, Great and just lastly, you know if I think about the new turboprops 35, new aircrafts.
Help me just understand the economics of that deal are you leasing those aircraft on behalf of the banks and collecting a fee or is there going to be.
Kind of beyond that.
Yes, those are aircrafts that we are managing for the bank.
The bank syndicate of banks and so we have no risk on those aircrafts et cetera, we're simply managing and helping them with that portfolio and recovery value. So that is the rule of falko as an asset manager with those airplanes.
Okay. Thanks, so much bye bye.
And your next question Carl.
<unk> from <unk> Securities. Please go ahead.
Okay. Good morning, Thanks very much.
I guess my first question just wanted to confirm kind of the mechanics of the impact from.
From the difference in timing of the launch of the fund.
Versus the closing maybe if you can kind of walk us through that and the timing of kind of.
Revenue in and are in various other puts and takes there from an it from an accounting perspective.
Right.
Of course.
Part of the arrangement and the process and watching a fun is to put it out there for people to consider in terms of its structure its goals.
Et cetera, which has been done in the past year.
With the funds that are there on an existing basis than these funds have to be evaluated by investors in terms of their interests.
And you know you generally go through in order and of course, you offer folks that have previously invested sort of first opportunity etcetera, and so there's a there's a broad list of potentials after that and.
And then the the funds we're looking to close as is as I said in the fourth quarter and the goal is 500 million in U S and at that time, we plan on having.
And then of course itself are you know when we.
He said that we would invest up to 15% in these funds ourselves so.
No.
That's that's that's the process.
And Dave It's Gary here, just on the accounting for it until the fund closes and you have the commitments of investments there.
There would be no fees earned but as soon as you start to close the funds you can start the fees to get hurt.
And so into the feeds kind of hit the ground running on the fees or is there some sort of a ramp up time frame or how does how does that work from sort of day one on words.
Without getting into specifics there are some fees associated with the fund itself as you close and then from there as you can ramp up as that fund gets bigger.
Yeah generally there are fees related to the committed capital and there are also a transactional fees as well.
Upon certain transactions.
In terms of things like acquisition is of a portfolio or a number of aircrafts.
Yeah.
Okay I see thank you.
Questions have been answered so thank you very much.
Thanks, Tim.
Okay.
Question.
I come from National Bank Financial Please go ahead.
Yes. Thanks.
Good morning, just to follow up on Tim's question just on the on the New fund.
What's the kind of timeline for deploying the capital main presumably.
Close would there like sort of the aircraft.
Kraft in the fund very shortly after close or is this just something you can take.
A number of quarters to fully deploy the capital.
It's really difficult to predict.
Could have a large transaction of a number of aircraft.
In the past when funds have been a large fi falko. There has been a large portfolio that was actually required.
In the fund.
This was specifically a few years ago, a number of years ago, the Avalon portfolio.
So you could have a small number of airplanes with us like certain operators or nuclear having a portfolio.
So it is difficult difficult to say.
There are opportunities out there in both regards.
You know I think you said.
Scene, where M. A C is focusing on narrow body aircraft.
Aercap has the G class regional portfolio, which is not core to their business et cetera. So there are opportunities for portfolios. There are also opportunities to do deals with operators. So.
In terms of the the rate and the size of the deployment it could be variable.
Yeah, sorry, it's Gary here.
You look at the the funds themselves usually over two to three year period, the capital gets deployed or committed so that's what you could expect.
Okay.
And on the management fees.
I'm just wondering what the biggest profitability here.
Guess, what services are you providing.
Trying to get a sense of whether that's very high.
Profit margins on the fees. So just anything you can sort of describe around I guess, the maybe it's the cost to you on those management fees for those aircraft that you're managing.
Yeah. So it's Gary here again, when you look at the.
The service fees, we have those are.
Those are onto the revenue line and what we have against it is our SG&A, which is the general administration expenses anything thats.
Direct to the aircraft goes into the fund and we're left with the the general administrative piece. So when you look at the way the fees play out, particularly in our current situation. We have SG&A in place today that can handle it and fund. So this new fund is essentially.
The revenue less some reasonable amount of fees or costs will make its way to courses Baldwin.
What is the I guess the airline that's that's paying.
Paying you for the matter if you get in return like what why would why would they outsource that to you.
Do it in house.
So it isn't the airlines that pays a fee.
It is really the it comes out of the funds that had been raised amongst the investors, including the Lps.
So it's.
It's the investors for which we are managing this portfolio that pay the fees. So.
This is this does not affect us.
Any any lessee.
We're leasing these aircraft from a button just like they've literally starting from any other lessor.
Canvas Gary here. So if you look at the fund model.
The reason you paid a fee is to hit a targeted rate of return and that's part of what.
Jeremy in the South Dow team did they achieve that and then hopefully better. So part of it is for that expected return that they received in the case of the 35 aircrafts I think Joe alluded to earlier, that's a little bit different thats for managing the assets on behalf of somebody so it's different but when you look at the fund three or this new fund that we're trying to kick out here.
Here it is for managing the assets by producing a rate of return for your investors that they're able to to achieve so that's why which generally has a targeted rate of return and if you do better than that then there's a carrier you guys associated with the funds as well.
But that isn't official incentives to makes it fun as productive as possible.
Okay, no that makes sense and if your rate of return ends up being below what's promised how what's the I guess the risk corridors.
There is no penalty, but of course, it's not something that we would strive to do it because we see this fund and asset management business as being core to US moving ahead in the leasing side. So obviously performance is very important but there would be no financial penalty per cent.
Okay.
Helpful. Okay that was all I had thanks very much.
Yeah.
Yes.
Oh, I'm, sorry, I didn't get any of them.
Questions.
Oh and by the one time attached Hawthorne.
Your next question comes from tenants.
Please go ahead.
Thanks for taking my question I apologize I jumped on late here so.
If you answered these earlier.
I do apologize again.
Just looking at your guidance revision, but the Ral.
Well to split.
What percentage of the revision or how you would bucket the revision between I guess some of the repossession.
Cost initiatives and the castle portfolio versus the delay in the <unk>.
Falko in managed funds.
Yes, Kevin it's Gary here I would I would say the primary reason for the revision is more of a delay in the funds back to the comment I made earlier you know those fees, we have the SG&A in place listen reasonable amount of transactional costs are.
Revenues that will float essentially to the bottom line. So that's the biggest piece of it and then obviously the expected lease repossessions, but the primary would be done.
Okay that makes sense.
I guess, just a follow up on that I appreciate kind of the timeline to deploy capital is.
It's tough to predict but it doesn't sound like you're making some sort of big assumption. This year within your guidance just given the fact that the fund.
If it plays out with the launch of our Q4 okay.
No significant part.
The important part the important things to the important thing to US got it is that you.
What's the go forward business, which we think we're on the right track as the industry recovers like we're seeing robust demand out there. Despite the fact that there were a couple of there were some airlines that were damaged almost irreparably through through Covid, but you know, we're seeing a very strong recovery.
No lack of demand in the world and we're very excited about the segments and believes that this asset light approach.
<unk> is a is the right one no question about it.
And I think during this whole pandemic is clearly demonstrated that the regional business and regional aircraft are very resilient.
And you know.
So we're very pleased and it's unfortunate this quarter.
We have something we now have to deal with but our optimism remains.
Very hot so we're excited about the future.
Okay.
That makes a ton of sense.
Maybe just on you talked about the target of return.
As you manage these funds are thoughtful manage these funds.
I guess does that change as it.
As we move into this higher rate environment I know historically, you've talked about from an asset perspective wanted to get you know, 15% or mid teens Roe.
That.
Does that type of return profile make sense no.
When the tenure is.
That three or when inflation is at current levels.
That 15% need to move up as well.
Hi, it's Gary here in the mid teens is certainly still the target remains the target we haven't moved off at an order if our telco.
Division so it still remains the target and as far as the returns go right.
Right now a little early but we haven't seen any real change.
Feel that the interest rate tide raises all oh related.
Items so.
We certainly still targeting the same returns in our leasing segment.
Okay that makes sense and just last one for me I see you're at least recovering in rates.
About 90% now.
I guess year to date.
Do you think you kind of just hover around here until we get full recovery and in aviation is kind of where youre stuck out until.
Until we're back to kind of pre pandemic flying or or or.
Discontinued I know took a step back this quarter, but do you think that's going to grind higher in this current environment.
It's possible Kevin one thing that I would note there is as a percentage of revenue recognized.
Recognized in the quarter. So we are billing arrangements that are a little bit different in behind and it was meant to give some consistency for the for the analyst community. So they knew how much cash, but roughly it was coming off of that revenue number. So even so it will it could grind a little bit higher but did meet ever achieved 100 in that particular measure, but yet we will have.
Our unless he said executing on there are there are agreements and then as time goes on in Eagle above $100.
Okay. That's it for me thank you very much.
Yeah.
At that time, we have no further questions principle that color in my life.
Okay.
Okay.
Okay, well. Thank you well. Thank you all well that will conclude the call now.
Hello, Ladies and gentlemen that concludes your conference call for today.
Perfect.
That's your line Goodbye.
Okay.