Q3 2024 Chorus Aviation Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the third quarter of.
Speaker Change: This call is being recorded on Thursday, November 7, 2024. I would now like to turn the conference over to Mr. Tyrone Cotie. Please go ahead.
al: Thank you, Al. Hello and thank you for joining us today for our third quarter conference call and audio webcast. With me today from Chorus are Colin Copp, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer.
al: 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, I ask that you refer to the caution regarding forward-looking statements and information found in our MD&A.
This pertains specifically to the results and operations of KORUS Aviation, Inc. for the three months ended September 30, 2024, as well as the Outlook section and other sections of the MD&A where such statements appear.
As a result of the agreement to sell KORUS regional aviation leasing RAL segment, the RAL segment has been reclassified to discontinued operations. And our regional aviation services segment, together with corporate, is now referred to as continuing operations.
al: Assuming the closing of the rail sail, the course will have one reportable operating segment and will no longer disclose its results on a segmented basis.
Finally, some of the following discussion involves non-GAAP financial measures, including references to adjusted net income, adjusted EBT, adjusted EBITDA, leverage ratio, and free cash flow. This quarter, we have also provided certain of these measures on a pro forma basis to illustrate the financial impact of the disposition of the RAL segment.
Speaker Change: Please refer to our MD&A for further information relating to the use of such non-GAP measures and pro forma figures. I'll now turn the call over to Colin Copp.
Thank you, Tyrone, and good morning, everyone.
Colin Copp: Over the third quarter, we continue to execute on the plan, making significant progress towards the previously announced sale of our leasing segment.
Speaker Change: Last month, we were pleased to announce the fulfillment of all regulatory conditions for the completion of the transaction. The transaction remains on track and we expect it to close by the end of 2024.
Speaker Change: As a leasing transaction comes to a close, we're turning our focus to our share price, shareholder returns, and to strengthening our existing businesses.
Speaker Change: Just yesterday we announced a renewal of our normal course issuer bid and CIB for our shares. This reflects the fact that courses shares remain undervalued offering a strong return for shareholders and a good use of available funds.
Speaker Change: On the financial side, let me touch on a couple of key points before I pass it over to Gary to provide you the details.
Speaker Change: At the end of the third quarter, we continue to improve our leverage ratio to 3.0, which has come down from 3.3 at the beginning of the year.
Speaker Change: And we will see our leverage ratio continue to improve following the close of the transaction, positioning us well for the future with low debt levels and debt servicing costs.
Speaker Change: Additionally, we continue to execute well on the free cash flow side, generating over $32 million this quarter. Our adjusted EBITDA came in at almost $54 million for the quarter and $159 million year-to-date.
Speaker Change: Randall from the Jazz team continues to execute very well delivering consistent strong contracted earnings from the CPA with Air Canada and notable year-over- year improvements in almost all Q3 operational performance metrics.
Speaker Change: The strong performance is attributable to a combination of factors, which include the team's deep industry expertise and knowledge, capability and resource planning, and a strong focus on hub and network related performance.
Speaker Change: Our relationship with our key customer Air Canada has never been stronger, and I'm pleased to report that this quarter we've extended six of our Q400 CPA aircraft leases with Air Canada out to 2026, which were set to expire next year.
On the pilot recruitment side, things are progressing very nicely.
Speaker Change: with Jazz welcoming its first class of new hire pilots from our Airline Pilot Training Academy, Cygnet Aviation, in October.
Speaker Change: Adding capacity using Cygnet pilot training capabilities is yet another key milestone for us. Having the capabilities to train airline ready pilots from the ground up with the latest technologies, training simulators, and aircraft ensures a solid flow of airline ready first officers going forward.
Speaker Change: Finally, Jazz has recently been recognized as an Award of Excellence winner. It's eight consecutive years accepting an award as part of Canada's Safest Employers.
Speaker Change: Cory and the team at Voyager continue to execute very well with revenues increasing quarter over quarter, generating record part sales during the quarter, and demonstrating their success in pursuing and realizing emerging opportunities.
Speaker Change: Voyager continued the expansion of their air ambulance operations at Grand Mananda Island over the quarter as part of the Ambulance New Brunswick's Provincial Air Ambulance Program.
Speaker Change: and have now completed staffing and recruitment for the support of the fleet in Trenton.
Speaker Change: Lynn and the team at Cygnet are growing the business well with the launch of their six cohort of future airline pilots who started in August.
Speaker Change: They've also recently started an inaugural free agent program where graduating students will be referred to key partner airlines, providing them a broad set of options.
Speaker Change: They're also working on an academy partnership with other Canadian airlines to continue to grow enrollment.
Speaker Change: In conclusion, as CORUS continues to execute on our plan, and we move towards closing the sale transaction, we're focused on a return of capital program for shareholders, strengthening our businesses, and prudently managing down our corporate costs.
Speaker Change: I'm very confident in the strong future for Chorus, one that will allow us to continue to build on our history as an industry leader.
Speaker Change: I'd like to close by thanking our employees across all our businesses for their dedication, focus and commitment to hard work.
Speaker Change: and to thank our shareholders and board of directors for their support.
Speaker Change: I'll now pass it over to Gary to take you through the numbers.
Thank you, Colin, and good morning.
Gary Osborne: Our third quarter results for our continuing operations were in line with our expectations.
Gary Osborne: and the guidance provided for the Jazz CPA and Capital Expenditures in the Outlook section of the MD&A. As we look at the results for our continuing operations for Q3 2024,
Gary Osborne: Our adjusted EBITDA came in at $54 million, in line with our expectations. Our pre-cash flow was $32 million for the quarter, primarily derived from operating cash flows.
Gary Osborne: Our leverage ratio was 3.0 at the end of the quarter, down from 3.3 at December 31, 2023.
Gary Osborne: This has been accomplished primarily through long-term debt repayments of $94 million since December 31, 2023.
Gary Osborne: Our adjusted earnings available to common shareholders per common share from continuing operations was six cents.
Gary Osborne: It's previously mentioned, after closing, which is expected before the end of the year, the sale of the RAL segment will allow us to eliminate $1.7 billion in financings, including all RAL aircraft-related debt.
Gary Osborne: Substantially all, of course, is corporate debt, and the $300 million U.S. in preferred shares, along with the MOEC, of $63.3 million U.S.
Gary Osborne: If we look at this quarter and overlay the effect of those on a pro-forma basis...
Gary Osborne: We see pro forma adjusted earnings available to common shareholders for a common share from continuing operations of 8 cents and 25 cents for the 3 and 9 months ended September 30, 2024.
Gary Osborne: This is a significant increase when compared to the current figures of $0.06 and $0.09 for the quarter and year to date, respectively.
Gary Osborne: Our pro forma leverage ratio is 1.5 at September 30, 2024, which is half of the current actual leverage of 3.0 and demonstrates the significant financial flexibility we will have moving forward.
Gary Osborne: In pro forma, free cash flow of $37 million and $104 million for the three and nine months ended September 30, 2024, up approximately 16% and 14% from the $32 and $91 million reported.
Gary Osborne: This demonstrates our strong cash flows that will support future return to capital shareholders and measured growth.
Gary Osborne: The sale of the RAL segment will allow us to make changes to our capital structure that will result in a substantially strengthened and simplified balance sheet. The changes in capital structure will drive improved profitability, primarily driven from the reduced debt servicing costs, and by eliminating preferred share dividends, which more than offset the earnings foregone from the RAL sale.
Gary Osborne: We have also provided information in our expected fleet of 80 aircraft in the JAS CPA to 2026, which shows that excluding the nine Q400s that are planned to exit, the current aircraft leased under the CPA are needed to fulfill the 80 aircraft minimum at this point.
Gary Osborne: We continue to see growth at Voyager with its revenue year-to-date of $90 million, up 16% from the $77 million last year, with Ividar margins remaining in the 23% to 25% range.
Gary Osborne: We are encouraged by this increase in Voyager's revenue, primarily attributed this quarter to growth in its park sales business.
Gary Osborne: We expect this trend line to continue through Q4 and into 2025, as we have discussed at our Prior Investor Day conference.
Gary Osborne: We recognize it will take some time for the true value of our business to be fully reflected in our share price and we take the recent movement in the share price as a positive indication.
Gary Osborne: With that in mind, we have renewed our normal course issuer bid, which will give us the ability to purchase or cancellation up to 14.8 million shares.
We are now ready to take your questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Should you have a question, please press the star followed by the number one on your touch tone phone. You will hear a prompt that your hand has been raised.
Speaker Change: Should you wish to decline from the polling process, please press the star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing any keys.
One moment, please, for your first question.
Your first question comes from...
Hillary Cacanando of Dochu Bank. Please go ahead.
Speaker Change: I have a question for Gary. In the third quarter, the aircraft maintenance materials supplies and services line seems, you know, it's down sequentially and it's been down, it's down compared to a couple of quarters. It's been trending down. I was wondering if there's like seasonality involved or if there's any like a reason for that number? Sorry, Hilary, can you repeat that question? We had a hard time hearing it.
Hilary: Oh sure, I was just saying in the third quarter in the financials, the aircraft maintenance materials supplies and services number is down this quarter compared to last quarter and it's you know has been trending down. I was wondering if there's any kind of like read-through for that number or if there's seasonality?
Anything to read into that?
Gary Osborne: Yeah, sorry it's Gary here. Yeah, there's really I mean generally speaking it's been trending down just
Speaker Change: in general, but there's really nothing to report there. Those are the aircraft maintenance expenses we have under the CPA. They're driven by engines, heavy checks and whatnot. So I wouldn't say there's any seasonality into it, but generally speaking, those are the costs of the fleet covered under the CPA.
Speaker Change: Okay, got it. And then you mentioned the, you know, like the free agent program and the academy partnership program at the Cygnet unit. How is that different from, just a little more detailed I guess, how is that different from like the current, I guess the current path that the pilots have?
Colin Copp: Hi, Hilary, it's Colin. Yeah, the current path is really the cadet program style, which you really have a partner airline that signs up and the students are locked into that hiring program from day one. So they come into the program, they get screen selected.
Colin Copp: going into the program with already a plan and a commitment to go to a airline of choice. That's really the one design of the...
Colin Copp: which is kind of like a cadet program, and then this other one which is more of a free agent program is where
Colin Copp: individuals come in and they have a breadth of selection as to where they go with various airlines that have committed to to have a look at the students and basically
will place
Colin Copp: will place an individual based on the needs of those airlines. So it's kind of, it's a bit more flexible, but it also allows airlines to kind of manage the volumes that they need when they're looking at new hire.
students or new hire pilots coming in.
Got it, great. Thank you very much.
Your next question comes from David
Please go ahead.
Thanks. Good morning, everyone.
Morning.
Speaker Change: You guys touched a little bit on Voyager in your prepared remarks, but if we take a look at the growth, it is quite impressive. And I think the target that you guys laid out, you're investing $150 million in RAVs on a 25% EBITDA margin. I was hoping you could spend a little bit more time there, talk about where the growth is coming from, and if you see growth kind of continuing at the same run rate into 2026.
Yeah, hi David.
Speaker Change: Yeah, absolutely. You know, our plan, obviously we haven't given any guidance or anything on it, but our plan does show growth well beyond 2026 and going forward.
Speaker Change: You know, we've had a lot of success in repositioning Voyager in kind of two verticals that they're very good at and they have the internal strength and capability and knowledge and experience for and that's really the USM side of the business, the part side.
and the other kind of this...
Speaker Change: There's a large grouping of it, but it's kind of an in-service support slash maintenance specialty engineering.
for defense and specialty type.
Speaker Change: contracts and a lot of the work that's being done up there.
Speaker Change: is related to agencies in some way, whether it's, you know, the MASER program where we're in Trenton and we're supporting a fleet of special mission aircraft.
Speaker Change: or it's designing, building that kind of modifying, doing STCs for aircraft, whether it's a Transport Canada airplane or it's a...
Speaker Change: you know, an aerial surveillance aircraft, putting OEMs on, big camera systems on board aircraft. Integrating technologies is another big piece that they're doing up there.
Speaker Change: So a lot of the workflow has shifted in those areas, and that was our plan design, you know, a few years back as we came out of COVID there, to really focus in there on those areas, that fence in particular.
Colin Copp: That makes a lot of sense, Colin, but maybe you can touch on the capital intensity of that growth. Is it going to require much CapEx outside of what we've seen over the last few years?
Speaker Change: Yeah, Gary. Yeah, David, it's Gary here. We're not seeing a lot of CapEx required at this stage. If you look at the part sales and you go through the working capital, it's been fairly steady. There might be a little bit in there, but there's nothing of a big intensity that you should expect.
Speaker Change: Sounds like a pretty good return initiative then. My last one is just on the leasing business with Air Canada. You guys did lay out when things are expiring in greater detail and it was good to see the renewal of the Q400s out to 2026.
Speaker Change: I look at the aircraft that you guys own that are under the CPN and it does still feel fairly young. So I'm just curious how your discussions are with Air Canada right now in terms of other lease renewals and in the event that AC does go in a different direction.
Speaker Change: Would you guys still be willing to do third-party leases since you just got rid of that business?
Yeah, I mean, let me take a shot at that.
Speaker Change: Look, third party leasing is not in our portfolio. We're not in the business to do that.
Speaker Change: There's no question we do a bit of it in Voyager and it's more around the specialty side of things, but our focus really is on growing of that regional business. We're staying very focused in kind of the two business segments.
Speaker Change: I guess three, if you want to call flight training one, but it's a pretty small piece for sure. But the two big ones, which are the regional flying segment and looking at opportunities there, how we continue to grow that out with time.
Speaker Change: It may be, you know, different forms. It may come in different forms. It doesn't always have to be just at the CPA level. But the Regional Flying Book of Business and then the Voyager Book of Business and that's really been where we've been core.
Speaker Change: But I think Gary would say, I put words in his mouth, you know, we're always looking to do the best absolute thing we can financially from the perspective of athlete. As it comes out, if it does come out, we're going to make the best financial decision.
Speaker Change: I wouldn't say definitively we won't ever lease another airplane, but that's not in the plan. So, David, it's Gary here. So, our preference is to sell the aircraft, obviously, but, you know, back to Colin's point.
Speaker Change: You know, I wouldn't rule out a lease or two here or there just to migrate them to sell them, but our plans are to sell them.
Speaker Change: Okay, do you guys have a sense on the book value of that aircraft, because there is quite a bit that's expiring here under your leases with Air Canada.
What was that question, David? Sorry.
Speaker Change: Just the book value, and if you could expect to get book, if it came to someone, yeah. Their expectation is book value, for sure, and, yeah, we've been, you know, if you remember, too, we've had these aircraft for
Speaker Change: essentially 12 plus years under the leases. So they've been with us for a while.
Speaker Change: Okay, sounds good. Thanks a lot, guys. We appreciate it. Thank you.
Your next question comes from
Tim James of Diddy Colvin. Please go ahead.
Tim James: Thanks very much and good morning. I'm just wondering, Colin, if you could explore a little more, provide some
Tim James: some detail on the nature of the contract durations in Voyager. What is the profile? I realize we're talking about sort of different businesses. So I'm sure there's a variety, but can you just kind of give us a bit of a sense for how much are really almost like short-term purchase orders versus multi-year contracts and how we should think about that?
Sorry, this is Tim.
Yes.
Tim James: Yeah, sorry just having a little hard to hear you. You're just asking about the Mazer contract and kind of more details around it is what I picked up. Well it's to really have a sense for the duration of the contracts and I'm just trying to get at a sense for the visibility in that business over the longer term.
I mean, it's, look...
Speaker Change: I'm not a hundred percent sure. I got to go back and look and see what we put in the press release I mean the challenge with dealing with some of this is that you know Typically, we're not we're not in a position to disclose a lot of information around it. It is a long-term contract I can clearly say that to you
with firm commitments.
Speaker Change: You know, it would be what you would see in any kind of, you know, most typical government defense contract. So long term, quite sticky.
Speaker Change: you know, very much focused on execution and making sure that, you know, the, that we as a provider are executing strong. And in those cases.
Speaker Change: Where you're doing that, you see growth in those contracts quite often. We did add an additional aircraft, as we said just a little while ago, we announced that.
Speaker Change: and put that in there. So we built out a training program for them as well with that airplane.
You know, we've just recently, as I said in my
Speaker Change: speech there, my update. We've just recently finished the full kind of recruitment for everybody in there, so we've got a full complement of employees. It's really starting to spool up now and really start to move. The aircraft are there, so we're seeing, we're going to see some
Speaker Change: Some some good growth there from that contract for sure and like I said, it's several years
Speaker Change: Okay, great, thank you. My second question, I'm just wondering if you could expand, Colin, you mentioned, you know, exploring regional flying in, I believe you said different forms. Could you give us a bit of a sense on what you mean by that? Or some examples of what might be different forms?
Speaker Change: Yeah, that's from my earlier comment, I guess, and look, the reality is, look, we're focused on that segment, the regional aviation flying segment in Canada, and we're going to continue to focus on that in every way we need to.
Speaker Change: You know, we just recently renewed these aircraft with Air Canada, pushed them out another year, which is great, and we're going to continue to do that. So right now, it's really about focusing on our existing businesses and strengthening them in every way we can.
Speaker Change: And I don't I don't think there's any real limitations to to that as far as scope goes, you know, it's For us it's very much about building out that business
Great. Thanks very much, Colin.
Okay, thank you.
Speaker Change: There are no further questions at this time. Please continue, Mr. Tyrone Cotie.
Speaker Change: Okay, thank you, Al, and thank you, everyone, for taking part in this morning's call. Have a good day.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.