Q3 2022 Chorus Aviation Inc Earnings Call
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 wholly owned aircraft that had previously been on lease enabling a significant reduction in our leverage level as.
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 willing to public transportation category.
And our voice your operations had a great quarter with increased product sales and the sale of Florida, shaving 100 square gain of $2 2 million.
One topic that is being discussed with greater frequency lately as 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 80% to 90%.
With roughly 50% of world flights being less than 500 miles.
45% of all world airports serviced by regional aircraft only.
Our regional sector continues to be an indispensable components of the industry.
Recent industry publications report that there has been a recovery in the domestic market and demand has picked up as a result, most regional assets have seen improvements in values 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 Falcon had 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 eight 400 aircraft to the end of 2025 that had previously been scheduled for at lease expiry in 2023.
I'd like to provide.
An update on <unk> launch a fund three inter.
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 the 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 <unk>. We knew the timing of the launch of fund III asset sales were tied to market conditions, making it hard to determine the exact timing.
Industry market conditions are certainly improving while fund three maybe 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 to lever more quickly than originally planned.
Finally, we are confident that once market conditions settle we will launch fund III.
Two continues to provide good insight into <unk> proven and successful asset management practices.
And why investors are interested in why interest is high in fund III.
Fund II was launched in 2019 and currently holds 59 aircraft with an appraised value of over 750 million U S.
Of course owns 385% of fund two which is on track to meet its targeted rate of return. We believe funds fund two'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've mentioned before calling has been an integral member of course leadership team for over two decades and his depth of knowledge across all aspects of our business will serve him well as he heads and leads course through 2023 and beyond.
With Collins leadership, I am confident that.
Net.
We are very well positioned to execute on new growth opportunities that will deliver positive returns to our shareholders and fund investors and make course, and even more attractive company for customers partners and employees.
Now I will pass.
Calling to introduces.
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 course, and Falco and 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 of course group of companies and we are very well positioned for the future.
I will now turn the call over to Gary to take you through some of the highlights of our third quarter financial results.
Thank you Colin and good morning.
<unk> generated $109 million of cash during the third quarter of 2022, largely due to the proceeds on asset sales net of debt repayments and the release of security over previously restricted cash.
Of course 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 or $112 million of repayments on loans related to the ICH <unk> 900 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 at $19 million U S.
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.
Significantly to two to $5 one from $6 four at the end of Q2 2022.
Turning to earnings in the third quarter of 2022 of course reported adjusted EBITDA of $123 4 million, an increase of $45 3 million over the third quarter of 2021.
<unk> segment, adjusted EBITDA increased by $43 7 million due to the inclusion of telcos earnings recovered claims from the Virgin Australia bankruptcy.
On sale of aircraft as well as increased lease revenue from castles three leased aircraft.
<unk> segment, adjusted EBITDA increased by $1 6 million due to an increase in other revenue from the sale of four dash eight one hundreds and an increase in part sales in contract volume, 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 U S dollar exchange rate.
Offset by an increase in stock based compensation of $1 8 billion a decrease in capitalization of major maintenance overhauls on owned aircraft of $2 2 million and an increase in general 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.
We offset by an increase in depreciation expense of $12 5 million, primarily attributable to VAALCO and.
An increase of $2 7 million in income tax expense and an increase in net interest costs of $4 million primarily related to interest on long term debt assumed as part of the telco 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.
Decrease in net unrealized foreign exchange losses of $10 4 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 32022, our liquidity was $276 3 billion, 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 onto our outlook.
As you know we completed the <unk> 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.
245 to $4 nine range.
We expect our 2022 adjusted net income available to common shareholders to be between 80 and $103 million and adjusted EPS available to common shareholders to be between 45 and 53.
Other key elements of our guidance for 2022 are contained in the outlook section of the MD&A.
That I will now turn the call back to Joe.
Thank you Gary.
So with our voting shares trading at historically low prices, we've announced a normal course issuer bid for up to $15 $9 million of our voting shares representing 10% of the public float.
This reflects our belief that the market price of our voting shares during the beta 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 in an appropriate use of corporate funds in light of potential benefits to remaining shareholders.
Purchases may commence on November 14, 2022, and we'll conclude on the earlier to date, which of course has purchased the maximum number of shares permitted under the NCIC and November 13th 2023.
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.
Really can't be understated, what a great team can achieve.
Need everyone to step up over time in aviation that hasnt been easy and the way in which our people have responded is remarkable looking ahead. The entire course organization remains energized and excited about the future and look forward to delivering additional value to all our stakeholders. So thank you for listening operator and.
We can now open the call to questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
You will then hear three pronged acknowledging your request and your questions will be pulled in the order that the RBC should you wish to decline from the polling process. Please press the star followed by the Q.
And if you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
And your first question comes from Walter <unk> from RBC capital markets. Please go ahead.
Hi, This is Angela answer Walter how are you guys doing today.
Alright, thank you.
Thanks.
Got it.
My question is further delaying of the fund launched in 2023, any incremental risk and achieving guidance.
It's Gary here no it does not.
Impact our guidance at all for 2022.
Okay. Thank you and Mike just a follow up do you sustain higher fuel prices increase the carriers from sensors to reduce channel capacity given the regional aircraft sorry last quick question.
So it's a matter of fact that regional airplanes are operating full affairs.
Certainly are accommodating the increased fuel prices et cetera, et cetera. The demand remains very high there is a.
Demand for all equipment.
As as you know when the market increases as well as increased demands of the regional markets, which cannot sustain the larger aircrafts. So.
We don't see the.
The impact being at all material on the on the demand for our regional aviation and regional aircraft.
Okay. Thank you that's all the questions I had I'll turn the line over.
Thank you and your next question comes from <unk> Gupta from Scotiabank. Please go ahead.
Hello, Good morning.
Hello.
Yes, I wanted to ask about the leverage ratio.
What's driving the improvement.
It's Gary here, what's driving the improvement is the increased earnings from VAALCO. If you recall, we had two months of <unk>.
Q4 earnings from Telco in Q2, we put a full three months plus what we've also been able to achieve as some strong asset sales as noted in our MD&A with the sale of eight aircraft for about 55 million U S. So that's those two things have combined to reduce our leverage and as we continue forward we expected to.
To pursue opportunistic asset sales that hopefully will continue that trend.
Thank you don't have any other questions.
Okay.
Thank you.
Your next question comes from Adam Mcmahon from Cormack Securities Inc. Please go ahead.
Hi, there good morning can you hear me.
Yes, good morning.
Perfect.
My first question is on the $45 $6 million provision you booked last quarter that was for an expected repossession is there any update on this.
Got it.
There has not been really a repossession and we're working through still with the effective parties to find a resolution.
Okay perfect that's helpful.
Secondly, maybe can you comment on your appetite for new regional aircraft leases into spread larger or smaller given the higher interest rate environment.
So generally speaking, although there is 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 acquire aircrafts through lease or repurchases. The asset is still affected by the higher interest rates.
No.
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.
We're not seeing the manufacturer of any new dash eight equipment ATR manufacturing.
Manufacturing rates have been lowered.
As a result of the pandemic, but they're up and going and the demand is strong.
While for new aircraft to get back into production.
Of course the.
The crts are not being manufactured anymore, but we are seeing increased demand for embraer.
<unk>, which is which is good.
<unk> <unk> hundred 20 switch.
And our portfolio is wells, Matt 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 benefit.
Manufacturers' levels that are coming out of our new equipment. That's being produced is actually having a good effect on the demand for used equipment.
Through the end of it.
A lot of used equipment that was taken out and we're seeing good demand for getting this equipment back up, especially with the with the reduced production levels that exist for new aircrafts.
The older equipment are as efficient broadly is the.
The newer and newer equipment in terms of October processing in particular and turboprops remain.
Amongst the most fuel efficient aircraft in the air.
These days.
No.
I think that's a more broad such a broader answer to your question, but it's really reflective of the market conditions that we see right now.
Oh 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.
Sorry, it's Gary here I think the debt markets have been delayed but they are available and I think thats the way to look at them.
And we continue to be able to market and our telco.
With their fund raising and debt.
<unk> activities have been.
Talking to a lot of those folks.
It's still available.
Okay, Okay perfect.
It for me. Thank you very much for answering my questions I'll hand, it back over to the operator.
Okay.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the lines.
Your next question comes from Renato <unk> from BMO capital markets. Please go ahead.
Good morning, everyone and thank you for taking my question.
I think my first question is around.
These are recovery related to Virgin Australia.
Recorded in the quarter I was wondering if you could provide maybe some color on this.
Recovery, if you could quantify the amount was one.
And my second question is more related to that.
Closing will fund three.
If you guys could provide some.
Color on the.
Existing interest from investors.
Asaf today, given the market conditions.
Yes.
And my third question related to the phone does one is whether.
You.
Foresee any type of further postpone with Goldman.
Closing on the phone.
If market conditions persist.
Going forward.
Thank you.
So sorry, it's Gary here I'll talk about.
The.
Virgin Australia bankruptcy so.
As part of any bankruptcy Theres 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.
<unk> totaled just under $8 million I think it's around $7 9 million.
The two entities that were affected castle and telco. So it's just the a claim against them for future earnings and whatnot. So that's what you saw come through there and I'll, let Joe speak an amendment three but we're very confident in that closing we don't expect any further delays with our guidance there.
The market is.
<unk>.
But it is a bit volatile, but we're fully expecting.
The fund trading activity to culminate here in the new year.
I think the only color that I can add is that all investors. These days are generally focused perhaps more on liquidity.
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 is a lot of demand aircraft forgetting backup in the year Regional aircraft segment is very resilient anyway, and the fact is is that Falko now.
Track record in terms of producing the expected returns on the various funds and we know that fund two existed even over the pandemic period. So we're seeing a lot of interest from investors that have are already invested in funds. The discussions have gone extremely well, we're very optimistic.
They will be re upping and also we are having discussions with new investors.
<unk>.
We do not anticipate significant issues at all with respect to the loss of the fund it is more a matter of exactly when the timing settled where youre going to.
This set of increased interest in 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 have said so.
Always hard to predict and now we are moving into the.
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 know in terms of the achieve ability of getting funds III launch. It is really just a matter of a slight delay in our view.
Okay, great. Thank you for some color.
Okay.
Thank you.
Your last question comes from Kevin Chiang from CIBC World markets. Please go ahead.
Good morning, everyone. This is jessica filling in for Kevin.
Good morning, just wanted to get a sense of.
Free cash flow.
Priorities I know you announced it and CIB is there any is there any appetite and I know you're deleveraging further.
The appetite for maybe looking at a dividend, possibly in the future.
Thank you.
Yes, well clearly all of these uses of capital and our scope.
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 in NCI B is clearly.
Of interest given where our share price has been trading.
I think we do have certain debt obligations that we have to look at and our focus will be continue to be on.
Deleveraging for sure because I think that adds value in terms of eliminating risks et cetera.
It helps facilitate our movement into a new business model, but as we do this then of course.
This is returned to shareholders and shareholder.
Shareholders received value and certainly on the list we know it.
It is important and.
Can be a great use of capital so.
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 has happened.
And our leasing business.
Perfect. Thank you for the color.
A good one.
Thank you and there are no further questions at this time Mr. Cody you May proceed.
Well, thank you Kelsey and thank you everyone for taking part in today's call have a good day.
Ladies and gentlemen, this concludes your conference call for today, we thank you very much for participating and ask you. Please disconnect your lines.