Q2 2023 Chorus Aviation Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Chorus Aviation, Inc. Second quarter 2023 financial results Conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star.
Zero for the operator this call is being recorded on Friday August four 2023.
I'd now like to turn the conference over to Tyrone, Kochi, VP Treasury and Investor Relations. Please go ahead.
Thank you joelle.
Hello, and thank you for joining us today for our second quarter 2023 conference call and audio webcast with me today from chorus, or Colin Copp, our President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer.
We will begin today's call with a brief summary of the results followed by questions from the analyst community.
As there may be some forward looking discussion during the call and ask that you refer to the caution regarding forward looking statements and information found in our MD&A.
As it pertains specifically to the results and operations of course aviation for the three months ended June 30 of 2023 as well as the outlook section and other sections of our MD&A, where such statements appear.
In addition to some of the following discussion as well as non-GAAP financial measures, including references to adjusted net income adjusted EBT adjusted EBITDA leverage ratio and free cash flow. Please refer to our MDA for a discussion relating to the use of such non-GAAP measures I'll now turn the call over to call and call.
Thank you Tyrone and good morning, everyone I am pleased with courses performance in the quarter.
As we continue to execute on our plan delivering significant improvements in our leverage ratio and free cash flow.
First is free cash flow has more than doubled year over year to $73 million in Q2, and we further reduced our leverage ratio to three eight in the quarter moving us closer to our target range of two five to three and a half as we outlined during our Investor day in March.
We continue to advance discussions on the launch of funds III, where their existing lead investors in fund two and others.
With the market conditions over the past year several of the larger U S. Based investors have been limited from investing in certain investment strategies due to regulatory limits on the composition of their portfolios.
And we have recently been informed that certain states have increased their regulatory limits, which should further our discussions.
We continue to see good opportunities to deploy fundings in the regional aircraft leasing space, earning mid teen returns and we look forward to providing an update on fund III upon concluding discussions with our investors.
In general what we're seeing is.
The regional aviation market, continuing to show improvements with aircraft market values and lease rates showing signs of recovery from the pandemic Lowe's and.
And to this point during the quarter fell had 20 aircraft transactions within fund two and managed assets with nine distinct airline customers operating in Australia, Asia Africa, Europe , and North and South America, including a sale and leaseback, where its fifth E 190 <unk>.
<unk>.
As the strong industry wide demand for pilots continues our jazz operation like most other regional operators in North America is experiencing some capacity strengths constraints.
There is significant pilot movement in the industry today, while our pilot flow agreement with Air Canada is working as intended with over 300 pilots, having transferred to air Canada over the past year.
We are also seeing attrition to other mainline airlines.
However, at the same period or during the same period, we successfully recruited and trained over 300 pilots and continue to see a good supply of new hire pilots.
There is a gap between pilots exiting the organization and the time it takes to train new hire new hires for productive flying which temporarily constrained available flight aren't flying hours.
We are actively recruiting pilots and continue to grow our pipeline of future pilots, who are jazzed pathway program and our new flight training Academy Signet aviation.
The leadership team at jazz is very focused on collaborating with our partner in Canada to coordinate pilot flow and flying capacity.
While the production and annual block hours is temporarily constrained as the pilots are getting trained the reduction in flying does not have any impact on <unk> earnings.
It was recently announced that Voyager will expanded services for ambulance New Brunswick.
Whereas your op rates to King Air 200 aircraft for ambulance New Brunswick.
And the expansion allows for greater usage of the secondary aircraft for here for Air Ambulance services to Grand Banana Islands.
Finally, as we look forward, we're continuing our transition towards an asset light leasing model to reduce our leverage derisk the business and provide a higher quality of earnings as we execute on asset sales.
To allow us to grow and invest in our fund management business at VAALCO.
Provide future opportunities to invest in accretive transactions and adjacent and complementary business lines.
And ultimately provide an opportunity for us to improve shareholder returns and allow for return of capital to our shareholders.
Okay.
I'll now pass it to Gary to take you through the financials.
Thank you Colin and good morning, we.
We had a steady quarter and 2023.
We generated strong free cash flows over doubling last year and our leverage continue to improve moving from three to $3 eight from $4 four at the end of last year.
Our second quarter earnings were in line with our expectations with adjusted EBITDA at $110 7 million up $5 9 million from last year free cash flow was $70 3 million, an increase of $36 million or approximately 105%.
Net income of $20 3 million, increasing $60 7 million from last year.
Adjusted earnings available to common shareholders of $15 five reduced $6 2 million.
Adjusted earnings available to common shareholders of eight per common share down <unk> <unk> from last year.
As we look to performance.
The <unk> segment's adjusted EBITDA was $57 3 million, an increase of $6 8 million, primarily due to three months of <unk> earnings in the second quarter of 2023 versus two months in the second quarter of 2022, partially offset by decreased revenue related to the sale of wholly owned aircraft in the second half of 2022.
The <unk> segment's adjusted EBITDA at $61 8 million was in line with the second quarter of 2022.
Our liquidity ended the quarter at $145 million down $19 4 million from the prior quarter, which reflects our strong free cash flow debt reduction and investment in working capital.
As we move through the rest of the year, we expect our free cash flows to continue to support our debt reductions in working capital capital to remain relatively flat by the end of the year with improvements in Q3, 2023, being partially offset by Q4 2020, Q4 2023 investments.
We are maintaining our full year guidance for 2023 is contained in the outlook section of the MD&A, including asset sales in the back half of this year somewhere between 50 and $100 million.
We are now ready to take questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the wondering you.
Touchtone phone, you'll hear three Tom prompt acknowledging you're requesting your questions will be pulled in the order they are received.
To decline from the polling process. Please press star two if you are using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Walter <unk> with RBC capital.
Okay.
So my first question here is for Colin you mentioned.
Some.
Some of your.
Funds are the the investors that you were targeting.
For fund III had some restrictions that perhaps didn't allow them to.
To invest do you view that as is this just kind of a temporary in the environment. We're in and you expect that to two.
To alleviate.
And really where I'm going at is what is the closing date youre now expecting for foundry.
Okay.
Hi, Walter.
Look we don't have an exact date.
As you can tell.
Things are a little fluid, but we certainly see good progression.
This was one of the one of the things that we had heard from a few folks there was a bit of a barrier as they move forward and was kind of slowing things down, but we've seen good progression with them discussions are ongoing.
Very active.
With the investors as well as others beyond fund.
Beyond the current fund to investors. So we're we're seeing at closing hopefully in the in the months ahead could be at any point in time as we look forward in the next several months.
Okay, that's great and then turning to <unk> transactions I think 'twenty in the quarter, how many of those were new placements versus lease extensions.
Yes, I will try to be too and most of them are just lease extensions and release of what they had so yes.
Okay.
Are you seeing more demand from startups in Canada, I know you placed four E jets with Porter.
Are you seeing that pick up at all here in the Canadian marketplace. We've noticed a lot of new orders from from smaller carriers and Youre seeing if youre seeing evidence is that an opportunity for you as well.
It's Gary here, Walter I think the Canadian marketplace is picking up I think worldwide everything is picking up and if you look at that will go and where our aircraft are their worldwide but.
Canada is certainly improvement in North America, but the overall global outlook is improving too.
Yes, I would add to Gary's point that we.
We are seeing a lot of interest there, especially for through Fel pro but we're also.
Seeing a lot of secondary market interests and.
We've done quite well with the re leasing on secondary markets on the older Dash eights theres been a lot of movement there.
That market can take a bit of time, because quite often you are having to reconfigure the aircraft and correctly from a maintenance perspective. So it can be a little slow, but we're seeing tons of interest and activity on that side right now as well.
Okay last question here is on the pilot, obviously, a tight tight labor market on the pilot side.
How is that at all if at all affecting your ability to grow capacity I know you mentioned you.
You had some pilot last two attrition to other airlines.
Curious, where theyre going and whether whether thats constraining you at all.
To grow or even just sort of on your service level I know air Canada, and Joseph had some cancellations spiked here on service just curious if this is all related to the the pilot shortage and do you see it at all alleviating perhaps if if we do go into a bit of a soft spot here as the economy continues to play itself out.
Yes, certainly if we see a bit of a soft soft landing on the economy and things slow down a little bit.
<unk> will come off without question.
Right now what we have today, what we are dealing with today is a lot of movement a lot of activity a lot of growth.
And the other mainline operators or low cost operators, however, you want to position them.
So we are kind of the primary we are the primary regional operator in Canada that has every everybody.
Everybody wants our pilots, let's put it that way so.
There's lots of opportunities for movement and the one thing we're very good at is training pilots. We have jazz has got their own in house training.
Certification so they do all the certification for the pilots in house, it's not outsource the big advantage to the organization.
And they are good at doing this we've done this all of our careers. The last 30 years, something we're very experienced at.
So we're very comfortable with it it's just that right now there is a lot of movement. We've been moving a lot of pilots. So there is a bit of a constraint, but it will recover here shortly as we move forward into next year and later this year, we're going to see some I would suspect.
But it's going to depend on as you said the what happens in the business Big picture Wise, if things slow down a little bit then well recovered really quickly.
If the demand continues and we see more growth.
And the mainline side, we're going to we're going to continue to produce.
Lots of new pilots that's for sure.
Okay is there I just wanted to.
Just clarify you said it will recover kind of in either scenario is it because you've got a.
Do you have some bulk.
Bubble of pilots.
That you're training that will we will hit soon or or do you just see it resolving itself as you.
Under normal course of course of business.
Yes, it is going to recover no matter what for sure. It's just a question of timing and demand. So if the flow continues if we see continued movement going to take a little bit longer.
We don't see that and things start to slow down in the industry over the next year or so then.
I think it will recover pretty quick.
Fantastic, Okay, I really appreciate the color. Thanks.
You bet. Thanks Walter.
Your next question comes from Kevin Chiang with CIBC. Please go ahead.
Thanks for taking my question just on the fund III.
Delay shares it sounds like it.
The visibility is tough, but it could be months.
Fully.
But of the $500 million I think you were looking to raise are you able to quantify maybe how much of this.
This.
This is an issue of that total amount it sounds like it's a little bit of a regulatory.
Or maybe just.
Bit of a paperwork issue.
Just how much of that 500 million might be tied up here related to this issue that hopefully gets rectified.
In due course.
Kevin It's Gary here at $500 million is still a good number what typically happens in these instances is youre looking for your lead investor or investors to come in.
The telco team has got great relationships, they've had a lot of ongoing discussions on it.
It's all been positive and in the background they've been working with some of these U S pension funds and others just as they work through the market.
Turmoil and things like that that are on the go on that piece of that and they've now got their capital allocations are starting to put their capital allocations in place. So when we look at this piece it will the $500 million is a good number youre looking for your lead investor.
That's what the proper teams working with and things are looking good and some of them have changed their allocation. So we're feeling very positive on it. We just don't know the timing back to wear Collins alluded to so we've said look we're not sure if it will happen in the 2023 timeframe, but certainly we do expect it to happen.
Yes.
The $50 million to $100 million of dispositions I know you've been indicating basically for now just eight months that this would be very good.
Back end loaded, but there's been minimal at least from what I can tell the cash flow statement minimal minimal asset sales.
Just the visibility you have on the $50 million to $100 million are these essentially.
Good to go and it's just the timing of the execution or are you still.
Are you still looking to negotiate with people or various parties on the on the sale of these assets yes.
Kevin This is Gary again without getting into the SaaS piece, what we have a trading desk that actively monitors market.
We put aircraft to the market all the time so.
And they are working through that process, we still feel at this point comfortable with the $50 million to $100 million towards the end of the year here.
But when you look at the process, we're going through that process today.
We feel comfortable with where we're at.
And maybe just last one for me.
Sure.
I guess the past couple of calls now we've talked about.
Tight labor market, especially on the pilot side I guess, the one thing that strikes me is like you still just employee separation program costs that flows through.
I know why you're doing it before when you're restructuring the business, but now just given the labor market the labor market you're facing.
The need to.
Bringing pilots just what's in that program I suspect is not pilots or maybe I'm wrong.
It's Gary here, sorry, there is a small program that.
One of the the <unk>.
Labor deals at Jazzed about five six years ago I think it was.
A small amount FERC some for some senior pilots, but it's okay.
It's not really large amount okay. It's still part of that is still part of that program.
I guess I'll call it way back when okay. So kind of like the program is still continuing here.
That's correct yes.
Okay. Okay. That's helpful. That's it for me thank you.
Your next question comes from <unk> Gupta with Scotiabank. Please go ahead.
Thanks, operator, and good morning, everybody.
So morning.
Good morning, Good morning, guys just wanted to stop.
Stuff I'll dig into the <unk> segment guidance. So it seems like you guys have moved up the revenue guidance for the full year, but that segment, but the EBITDA and EBIT guidance have not changed can you explain like what's the disconnect between that revenue in.
Got it.
No the revenue in the <unk> section, we've just tweaked it to reflect what the on the go within there we've got a bit.
The walk on the U S dollar here in the first part.
Certainly.
The way, it's trending and but as far as the bottom line EBITDA, maybe the adjusted EBT, we see them as coming in within the range. There so really nothing more than that.
Makes sense. Thanks.
Frankly, I understand like it's delayed a little bit here or there.
Fine.
But it seems like it's not contributing in 2023 at this point from a lending standpoint, so what's really keeping the overall guidance intact, it's not changing but currency is delayed so what's really offsetting that.
So Tanaka Gary again, so when we put our guidance. It would obviously it is a range and we did do some sensitivity around that so.
Our results generally speaking have been good in the <unk> section and others and.
This piece within fund.
<unk> three was a portion of our earnings but it wasn't a significant contribute contributor this year. So thats why youre seeing the range of stay where they're at.
Okay. It makes sense. Thank you.
So the asset sales.
Building on Kevin's question here.
One of these assets the ones you are looking to sell and which is why both sides. So rich part of the business that makes sense.
So the assets, we're looking to sell or on balance sheet, if it's been fun to or is not consolidated.
Could be transactions in there that would be healthy for fund investors, but that's not included in what we're talking about is <unk>.
On balance sheet, including fund one.
So <unk> right yes.
And two is not consolidated it is excluded from that we're looking for consolidated.
Aircraft on the balance sheet that generate cash for us.
Thanks, and last one from me.
On the pilot side.
So.
Do you have any major upcoming labor negotiations coming up either on the pilot side or some other unions.
And how is this all done with situation like.
Create difficulty for your customers and how does it impact your relationship with customers.
Okay.
Hi corner, it's fallen so.
We won't ever comment on pilot negotiations or discussions obviously in any significant way, but we have a pretty long history of.
And a track record of always finding solutions and working well with our union. So.
Can only expect that in this environment, where we have lots of activity we have.
A lot of flow.
We're obviously talking to our to our unions about certain things and engaged with them. So.
We will see we'll see how things progress over the over the coming coming months, but.
Our unions in us or vendor management team are typically in discussions continuously.
Especially in an environment like this for sure.
Okay. That's great color. Thanks, so much I appreciate the time thanks.
Thanks Connor.
Your next question comes from Tim James with TD Cowen. Please go ahead.
Thanks, very much good morning, everyone.
Good morning, I was wondering if you can.
If you could talk about the nature of the 2000 transactions that occurred in the quarter.
Were those all just re leasing transactions commitments for future purposes, just what was the nature of those 20 transactions. Please.
It was generally re leasing transactions, Tim at the Balco unit there so.
They werent new placements necessarily.
Rollovers and extensions.
Any one.
In June two E 190, <unk> there as.
As well yeah.
And were there any particular aircraft that you mentioned older Dash eights does that mean, a lot of those re leasing or that was sort of.
A fairly significant portion of the 20 transactions, where there any sort of characteristics jets turboprops regions of the world or was it fairly diversified.
Sorry the.
They felt that the 20 that are mentioned.
Tim are really related to Falco those are specific to alco portfolio.
The comments I.
I was making relates to dash eight classics, which really is our our inventory that we have at Voyager we've been placing a lot of those aircraft here, there's lots of little while those are incremental to the 20.
Re leases.
That we mentioned in the in the press release.
So again in my previous comments, so Tim it's Gary here. It was nine different airline customers operating basically throughout the World, Australia Asia Africa, Europe , and both North and South America. So it was a pretty diverse group that no one in particular.
One item I would focus in on.
Okay.
Just a follow up to that could you characterize the duration of the new contracts at all with these.
What sort of time frame, you're entering into whether it's an average or a range.
Maturities.
Yes, I don't have that with us they would just be typical lease extensions, probably we can get you that information.
Okay. Okay.
Yeah.
I guess the second question just.
Looking at the capital expenditures overall your guidance for the year is unchanged. It looks like there's a little bit of movement, though within the components a bit of an increase to.
To capitalize maintenance overhauls.
Aircraft acquisitions improvements could you just sort of outline what the moving parts were there and what the reason behind that was.
There's really no no big reason is just more of a classification.
As to where it goes and basically the overall numbers are both the same so.
There's really not much to read into it too.
Okay.
Alright, Thank you very much and it was all the questions I had.
Thank you. Thank you.
Your next question comes from David Ocampo with <unk> Securities. Please go ahead.
Thanks, Good morning, everyone.
Good morning, I, just wanted to touch on the pilot shortage.
Asked a bunch of questions there, but I was hoping you guys can walk us through how the flow through agreement with air Canada, or it's in a little bit more detail I guess Im just really curious.
The pilots are contractually obligated to move or to AC.
There are agreements or not.
Hi, David its call.
No there is no obligation for.
For an individual to have to go.
It's a process whereby the individual comes into the organization and Theyre, given an opportunity to transition by going through a process. They put their name on a list and so on.
It's an automated process and air Canada, then does a.
A review of those individuals and so many vacancies Oliver here's why.
Sure.
Got it I guess.
Sorry, Colin I guess, if you take a look at the list over the last year or so just given the shortage.
Is are the pilots getting a fulfill their transfer over to AAC.
100 people put their name on the list 100 people have moved over the last year.
Sorry, if there's some background noise there but.
Can you can you ask that again sorry.
Yes, so I guess, if there's 100 people that put their name on the list to move over to AC.
And the last year or so I have all 100 moved over one.
100% fill rate move over to AC just given the shortage that you're seeing in the industry right now.
So the fill rate is based on what the demand air Canada, So whatever whatever demand Air Canada decides.
Yeah like we've given you the numbers basically there thats been 300 captains there we've moved in the past 12 months.
That demand is really set by air Canada. So we don't we don't have any connection to that in any way. Our job is really just to prepare these individuals and to support the flow.
And what it does for us in turn as it provides a great opportunity its a leverage point for us when it comes to hiring in the industry.
But yes, there has been no there's been no real constraint on individuals'.
Individuals' being able to go.
It's been more the other way, where we've been providing a lot of pilots to the industry.
It's put some pressure on our ability to execute on hours. So we've been working really hard to get that caught up for sure.
Got it and then just sticking with the same theme here I mean, you guys talked about.
Lower capacity that you are providing <unk> just because of the shortage.
And it does look like AC has left bell spectrum capacity at least for the time being do you guys think this is a short lived phenomenon and if we fast forward call. It two years or three years from now.
Once again these are.
Seoul regional supplier for AC and you can grow that CPA income again.
Yeah.
Look we still have exclusivity there is no question about that and air Canada agrees that we came to an agreement for this.
Bit of extra lift that they had they had asked for which.
<unk> made sense for the Red team when you look at the bigger picture.
So we had we worked through that with with Air Canada and everybody. So we don't really see this as a loss of exclusivity in any way. We continue to have that and have a strong relationship with air Canada, and we don't see.
We don't see anything really significantly changing as we move forward things will change in the industry as far as needs go air Canada's needs and what do they need for capacity lift on the regional markets all of that type of stuff and we will always be there to to support that for sure.
Perfect Thats all the questions I have for you guys.
Thanks, David.
Your next question comes from Renato <unk> with BMO capital markets. Please go ahead.
Yes. Thank you good morning, everyone.
I guess my first question.
What's the what are the implications of that delay launching three.
Turning to the guidance.
Hi, guys without delay.
Thanks.
To some extent be otherwise see.
<unk>.
All of that company.
So I mean, so what are the implications of these pipes.
In term of mid term objective beyond three.
Does this impact your leverage targets into for example.
Okay.
Hi, it's Gary here.
If you look through the yogurt section in that we haven't changed your guidance, obviously, when we put a region. We have some sensitivity around it fund III. It wasn't a major part of our guidance within 2023, hence why we're able to maintain it.
You look at the funding to go back to our Investor day.
When you look at the fund of $500 million of commit.
Capital once that's in place.
Generally somewhere between one and one 5% of the management fee. So thats kind of the piece that you would be looking at as far as the modeling dose you can figure it out from there the carry and other pieces like that happen. Much later, so that's really the application of it and back to the point. We made earlier were were confident in the fund it's just a matter of when it close when we can get.
It closed.
Okay. That's great. Thank you for the color.
My next question please.
Given the strong recovery of the entire aviation ecosystem.
Do you see more interest as well.
The investment community compared to maybe three months ago, how would you guys characterize the interim.
Thanks, Tom.
Things are getting better at this stage.
Compared to Q1.
It's Gary here.
I assume you are asking what the funds we.
We still see good investor.
Interest Jeremy.
Jeremy in the VAALCO team has continued to have good discussions this really.
The bit of delays that we're seeing is really market driven than capital allocation driven in our opinion and.
There is no lack of interest in the space.
Okay. Okay, that's great.
My last question.
Pilots.
Given the training activities are all your holidays.
All forward by adult side, given the high level of fluctuation to Eric on the Dol.
Thanks.
What are the cost implications for Kohl's.
Do you expect the margins.
So the so back to the theory here again on the CPA piece, we have a fixed margin in place with air Canada that does not vary regardless of flooring and if you look at our overall protection.
Reminding everybody of that so.
From a from an economic perspective as far as the fixed fee and that there is no impact associated with the reduced flying and backfill Collins.
Talked about earlier, we coordinate very well with air Canada on the pilot Resourcing and scheduling and the other side. So this is something we work very hard with them to make sure that it is coordinated.
Okay. Okay.
Thank you.
Okay.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
There are no further questions at this time. Please proceed.
Thank you Joelle and thank you everyone for taking part in today's call have a nice day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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