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Chorus Aviation Inc
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Good morning, ladies and gentlemen, and welcome to the Chorus First Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, May 7, 2024.I would now like to turn the conference over to Tyrone Cotie, VP, Treasurer, Investor Relations. Please go ahead.
Thank you, Joanna. Hello, and thank you for joining us today for our first quarter 2024 conference call and audio webcast.With me today from Chorus are Colin Copp, 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, I ask that you refer to the caution regarding forward-looking statements and information found in the MD&A. This pertains specifically to the results and operations of Chorus Aviation Inc. for the 3 months ended March 31, 2024, as well as the outlook section and other sections of our MD&A where such statements appear.In addition, 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. Please refer to our MD&A for a discussion related to the use of such non-GAAP measures.I'll now turn the call over to Colin Copp.
Good morning, everyone, and thank you, Tyrone.This quarter was marked by solid progress on our plan and key metrics, leading to meaningful improvements on our deleveraging goals and generation of strong cash flows.Before I get into the first quarter highlights, I want to acknowledge that we are not satisfied where our share price is trading today, and we recognize that the transition of the leasing business to an asset-light model has been slower than we had planned. This is a top priority for us, and we're very focused on improving value for our shareholders. We're working hard to optimize returns while accelerating and monetizing assets in our Falko leasing business.I am happy to report that since the last quarter, the leasing business has continued to strengthen. Over the past few months, we've seen improvements in both lease renewal rates on key assets and an increase in asset sale opportunities. We remain very confident in the regional leasing space and in our ability to optimize the value of the over 100 owned or majority-owned assets under management by Falko.At the same time, we've been active with our NCIB and have canceled over 5% of our shares since its launch in 2022, including over 900,000 shares this last quarter, and we will continue with our NCIB.Now turning back to the first quarter results. Throughout the first quarter, we performed well and met most -- and met our financial targets. As I mentioned earlier, this led to solid outcomes on our debt reduction goals and generation of cash flows from operations and asset sales. Gary will speak to those details in his update. This continued progress of strengthening our balance sheet, reducing our debt servicing costs and generating solid free cash flows will position us for future growth and underscores our absolute determination to drive shareholder value.Throughout the quarter, all of our businesses rolled up their sleeves to contribute to these results. Jazz generated solid earnings and cash flows under its long-term capacity purchase agreement with Air Canada. Throughout the quarter, Jazz was -- throughout the quarter, Jazz saw pilot recruitment strengthen with the intake where its pilot class is full, several months in advance. Randolph and his team at Jazz have demonstrated exceptional operational performance in Q1 with notable year-over-year improvements in almost all metrics.Falko executed well on trading activity with Jeremy and the team concluding 23 aircraft transactions, including the sale of 3 aircraft and 2 engines in support of our asset-light strategy, and they executed on a sale and purchase agreement with Nordic Aviation Capital to acquire a portfolio of 24 Embraer aircraft on behalf of Fund II.Voyageur continue to execute on the growth plan with Cory and team pursuing several new business development opportunities, making strong progress in key areas of specialty flying, MRO and USM. Additionally, we're very pleased to announce that Voyageur purchased a King Air 350 in the first quarter and leased it into the Canadian Department of National Defense. This represents an expansion of Voyageur's existing in-service support contract for the manned airborne intelligence surveillance and reconnaissance program, MAISR.Given the strong performance of our operating business, today, I'm pleased to report that we are increasing our 2024 guidance for consolidated adjusted EBITDA and free cash flow as well as the majority of guidance for RAL, including net proceeds from asset sales.In conclusion, I'd like to reiterate the fundamentals of our business are strong and that we will continue to improve them. Chorus has the right elements and the right blend of capabilities to be an industry leader within the regional aviation space and to deliver great value to our shareholders. The Chorus team represents the best talent our industry has to offer, and I want to thank each one of them for their focus and contributions throughout the quarter.Finally, I want to express my thanks to our investors for their ongoing support as I reiterate our commitment to value creation and to building a resilient industry-leading business.Thank you. I'll now pass it over to Gary to take you through the financials.
Thank you, Colin, and good morning.Our first quarter results are in line with our targets. As Colin mentioned, we are increasing our guidance for the remainder of 2024, primarily reflecting our strengthening asset sales pipeline.As we look at our results for Q1 2024, our adjusted EBITDA came in at $109.1 million with our Jazz and Voyageur businesses combining to deliver adjusted EBITDA of $62.4 million and Falko delivering $55 million. Our free cash flow was $102.1 million during the quarter, primarily derived from strong operating cash flows and net proceeds of $38 million, primarily related to the sale of two A220s. Our leverage ratio was 3.4 at the end of the quarter, down from 3.6 at December 31, 2023, and down a full turn from 4.4 at the end of December 31, 2022. This has been accomplished largely through long-term debt reduction, including approximately $594 million of long-term debt repayments in the past 18 months. We also allocated capital to retire about 10.5 million shares since Q4 2022 for approximately $33 million.As mentioned last quarter, we are pleased to continue positive change or we see continuing positive changes in the airline credit environment. During the quarter, we signed an agreement with Azul, which restructured their aircraft lease arrangements to provide for the recovery of all contracted amounts owed.Looking to the remainder of 2024, we have increased our consolidated guidance as follows: increased adjusted EBITDA guidance by $10 million to $360 million to $410 million; increased free cash flow guidance by $10 million to $300 million to $350 million; increased expected net proceeds from asset sales guidance by $30 million to $60 million to $80 million. Segment guidance for both RAS and RAL have been updated to support these changes.With respect to Fund III, we continue to anticipate closing it by the end of 2024. Finally, we remain active in our NCIB, purchasing 938,000 shares in the quarter. At our current market price, we intend to continue to be active in our NCIB throughout the balance of the year. As Colin noted, with continued improvement in our key metrics and an increase in our financial targets, we are demonstrating progress both in strengthening our balance sheet and putting us on a path to value creation.We are now ready to take your questions.
[Operator Instructions] First question comes from James McGarragle from RBC.
Congrats on a good quarter.
Thank you.
Thanks.
Yes. So I just wanted to get a little bit more color on what's driving the acceleration in asset sales. You mentioned that the market is picking up in terms of rates, aircraft values. Can you just provide a little bit more color there and how you see the market evolving during the remainder of the year?
Yes. I can give you my perspective, James, and Gary may jump in with his as well. But look, what we've seen in the last little while is a lot more interest in trading activity and more specifically on the sales side at reasonable values. So we're pretty excited about that. These types of things take a long time, and they're never super quick. So there's kind of always a bit of a tail to this stuff, but we've certainly seen a good improvement the last several months as we kind of come out of the -- I guess, come out of the last year there, where it was a little bit sluggish. So we're pretty encouraged by all that, and we're encouraged by some of the lease rates we're seeing on key assets improving. So generally seeing an incline or an improvement in all aspects.
Yes. And I think Colin hit it, we see a good pipeline moving ahead. We've got a lot of interest in asset sales. We have a trading desk over at Falko that is very active in the market. So we're feeling very confident in that. And back to Colin's point, the lease rates that we've been renewing aircraft at have been better or slightly better than planned.
I appreciate the color. And I wanted to ask another question on the Brookfield and the Castlelake acquisition. Have you spoken to the Brookfield at all on that? Just trying to get any color on the impact that might have on your relationship with them? And any potential impact on Fund III?
Well, I can talk just very high level to the fact that, look, Brookfield is very close to us. This did not come as a surprise to us, and there's absolutely no impact to us in any way. So we're not in any way affected by this. This is a transaction that has really nothing to do on the -- with us on the aviation side. And Brookfield, as you know, is on our Board, fully supportive. They talk to us about this. So there's absolutely no issues there at all. It's not really tied in any way to anything for us.
Next question comes from Kevin Chiang at CIBC.
Maybe if I just look at it simplistically, I know a lot of moving parts here. And as you sell assets and transition to your asset-light model and you're still getting Fund III ready to go here, there's a little bit of noise in earnings. But I guess if I look at it simplistically, if I look at the midpoint of your full year guide and I back out what you did in Q1, it implies a decent sequential decline in the run rate EBITDA from like $109 million to $92 million. Maybe just -- if you could just maybe provide some color as to the cadence of EBITDA through the year. Is there -- do you think you're kind of tracking towards the upper end of that range, just given how you performed in Q1 and there's some conservatism in your guidance? Are there other puts and takes we should be thinking about just given the asset sales and the impact that has on the P&L?
Yes, Kevin, it's Gary here. I think on the EBITDA, it's going to be fairly straight through the balance of the year. We do have some lease renewals, but there's not a lot of those coming up, but there are a few. As far as the range goes, we have the range there where we're tracking within it, obviously. But it's going to be a pretty steady year, we would hope. And on the Falko side, the renewals are coming in at or slightly better than planned. So we're comfortable with where we're at on the guidance. But as you renew aircraft, they do come down a bit in the revenue, as we talked about in the last call, and that's reflective in the ranges we gave you.
Okay. And then just in terms of some of the commentary around increased transactions and it sounds like lease rates are coming a little bit better for the aircraft that you traffic in, which is primarily regional jets. Just wondering, just given some of the issues in the broader narrow-body space, whether it's the 737 or some of the engine issues with the 321, is that driving some of the increased activity you're seeing in the regional jet market just is taking longer for airlines to maybe replace their fleet or routes that airlines thought they would high-grade maybe to a larger aircraft, they're now looking at maintaining -- using a regional jet, just given some of the issues in the narrow-body space? Just wondering if you're seeing any of that play out, given some of the activity you saw in the first quarter here.
Kevin, yes, it's Colin. Yes, I think you're probably seeing some impact from that. There's no question about that. There's -- that space is tight, and they do have several issues there. So there's probably some residual impact. But we're also seeing good renewals with existing operators on aircraft as well, which, as Gary said, we're seeing good improved lease rates, let's put it that way. So I think it's probably a combination certainly, but there's obviously going to be some impact from the fact that they're tight on narrow-body, sure.
Okay. And maybe just last one for me. It sounds like the pilot situation or cadet situation has gone a little bit better here. I guess how much of this might be due to Link shutting down and maybe that creating supply or maybe a slowdown on the demand side is maybe helping rebalance the pilot shortage issue? Just any color there would be helpful.
I think in the U.S., the main lines have seen kind of a bit of a surplus. I wouldn't call it a surplus, but certainly some extra pilots sitting there on the mainline side due to the recent changes in the industry. So that's going to take some of the pressure off the regionals across everywhere, right? So we are seeing -- as a result of several of those things, we're seeing good improvements on the pilot side. We're getting better -- higher-time candidates. Our classes are all full, 3 months in advance. So there is absolutely no issues with us from a hiring perspective. We've got lots of throughput, and it's just a matter now of starting to regrow and get things back to a little bit larger size than we were this last year.
The next question comes from Hillary Cacanando at Deutsche Bank.
You mentioned some business -- new business development opportunity on the Voyageur side with MRO. I was wondering if you could just provide a little more color there. Given the huge demand for MRO and engine, I guess, maintenance work these days. I was wondering if you have any plans to kind of expand the Voyageur side of the business even more. But any additional color would be appreciated.
Sure. Hillary, it's Colin. The Voyageur book of business, I think we've talked about a little bit that they basically have a growth plan that we've built into our business plan going forward, and they've been hitting that. They've been successfully hitting that the last year and this year. They're very much on track. They're hitting some decent growth year-over-year again. The areas of growth that they've seen this last little while has really been those core areas we focused them on as they exited -- as we came out of COVID or the pandemic period, and that's really on the USM side and on the maintenance and in-service support side. So they've had some growth with MAISR. As we said, they've added another aircraft there, which was pretty exciting for us that was quite meaningful. And they've had a lot of maintenance growth, specialty maintenance-type stuff that they've been working on new projects.So we're pretty encouraged by them and where they're headed. And we will, as we move forward, think about how do we continue to push that growth and can we supercharge it with small investments of any kind. So we're excited for them for sure. They're doing well, tracking well, and I fully anticipate that they will continue to produce year-over-year growth for the next several years.
Got it. And then just one follow-up. Falko purchased a portfolio of Embraer aircraft from NAC with the [ Fund II ], yes, I was just wondering if you can kind of -- if you're seeing a lot of opportunity for additional portfolio acquisition this year. And just kind of like the competitive landscape with NAC selling off their aircraft, are you seeing any new players coming into the regional space? Or are you seeing more lessors just getting out of those regional space? Just kind of what you're seeing there in terms of competitive landscape?
Hillary, it's Gary here. I think there are certainly opportunities to transact out there. I think the aircraft that Falko picked up for Fund II kind of demonstrate that. So there's certainly activity out there. As far as the aircraft leasing space, I think Nordic has its plans, and I think it's well known where they're focused. So they haven't really been that active in the market, except for selling. And as far as the landscape goes, it's been fairly stable, generally speaking. So we haven't really seen any real dramatic changes or significant changes within it. So it's pretty stable.
The next question comes from Cameron Doerksen at National Bank Financial.
Just a question on, I guess, the Fund III. It sounds like you're still feeling confident about getting something closed by the end of the year here. Just given what you sort of described earlier as, I guess, a more positive environment as far as lease rate renewals and things like that and more trading activity, has the, I guess, the nature of the conversations with potential investors in Fund III changed? Is it things getting more serious? Just any update on what you're seeing out there?
Yes. I can give you my views, Cameron. I don't think anything has really significantly changed from the investors that we've been talking to. We're -- it's still the same key people that we've been communicating and working with. And it's like anything, we remain pretty confident that we will get Fund III there with a bit of time. Unfortunately, it's been a little bit slower than we had originally planned, given kind of the environment we've been in. But we're seeing, not only in the leasing side, but in all sides, really an improving trend there, which in the long run kind of puts focus on. At some point, we're going to get this done here fairly soon. So it's still in the hopper, still moving ahead, not a lot of changes really with who we're talking to.
Okay. No, that's helpful. And maybe just second question. Just trying to understand, I guess, the -- I guess, the accounts receivable line item and the potential cash being generated from that. I mean you've got this Azul restructuring. Maybe you can just go into a little bit of detail on how you can -- or how the -- I guess, the timing of how that turns into cash for you ultimately and then as well as the other, I guess, cash collections from accounts receivable. Just trying to understand what the potential positive cash impact might be in 2024 and heading into 2025.
No, that's a good question, Cam. We have -- the receivables have certain time frames associated with them, obviously. So if you look at Azul, there's been a restructuring there that they've gone through. And what you're seeing is essentially, we've got 2 elements. One is a longer-term note, one is a shorter-term piece. And basically, that will get collected over the next 2 to 3 years, conceptually, maybe a bit longer than that, I think with the timing of one of the instruments. So it will come in gradually over the course of time. Our other receivables have different dates associated with them, some shorter-term, some longer-term. So there's certainly some upside as we see it in the cash going forward as we collect those receivables, but the timing is -- it takes a little bit to mature through the statements.
Next question comes from Tim James at TD Cowen.
I just want to turn back to the lease rate environment for a moment in RAL. So in the first quarter, the decrease in lease revenue was primarily due to lower market rates on re-leased aircraft. So am I correct that, that is a reflection of simply older aircraft, obviously, they've aged from the original contract term and because they're older now, you're securing or contracting at lower lease rates, and that's not a function of the market per se?
Yes. Tim, it's Gary here. So 2 things happened in the quarter. One is, you did have -- we did have some asset sales. So you had the two A220s and another aircraft. So those did reflect in the revenue during the quarter. But back to your point, as they renew in the second lease phase, they come down in value, but yes, they're still producing. So that's what you'll start to see moving ahead in there. But that -- when you look at the quarter, those are 2 fairly significant items, bringing out the A220s and the [indiscernible] aircraft.
Okay. And then you commented earlier that lease rates are perking up a little stronger than expected. Does this mean you're actually seeing them increase on a year-over-year basis? Or are they just not as weak or appear stronger than expected? And again, I'm thinking now -- I want to think kind of sort of an apples-to-apples, so a given aircraft at a given age, I just want to think common comparison...
So what we're -- Tim, what we're looking at there is when we look at our aircraft lease renewals, the ones that are coming up, they're coming in slightly better than where we planned. So -- which is good news from that. So we've seen a bit of an uptick in some of the lease rates. It's modest, but it's certainly a little bit better.
And do you feel, then to pick any given aircraft, is the lease rate that can be secured today higher than the lease rate that could be secured 12 months ago?
I'd say generally, yes, the market has been improving. I think you can look at a lot of the industry publications, Ishka and others. The rates have been coming up in general. We're starting to see that in some of the renewals. And yes, I mean, I think, generally speaking, the market is getting better. I think there was a question earlier about the tightness in the market. There's no question that the manufacturing effects at Airbus -- or sorry, at Boeing and others on the narrow-body side has had an impact in the sense that our airlines out there are trying to secure lift. We're trying to secure lift with aircraft that are coming up for lease renewals, including the E190s and others. So you're seeing some demand there, and that's having a bit of an impact on the lease rates.
A lot of the demand is being tightened up by the fact that these aircraft that were sitting as we came out of the pandemic are being picked up, right? So they are getting picked up and bought up. So the surpluses are drying up, especially if you start to look at the Q400, and we're seeing some improvements there, for sure, there's no question about that, and if you look at light aircraft, same time frame renewals. So it's really -- it's -- as we've come out of this last year or so, we're really seeing things start to tighten slowly.
Okay. And then my last question, just the -- there was a significant improvement or step-up in the revenue build that was collected in the first quarter versus Q4. Was there a particular driver of that? I think it went up 10 percentage points, if I'm not mistaken, or roughly that, from Q4 to Q1. Is that just sort of the normal recovery and the other factors that we've been talking about? Or was there a particular driver of that improvement?
The particular driver was signing the Azul agreement in February and been flicked over, and that's where most of that difference was, yes.
Next question comes from Konark Gupta at Scotiabank.
I echo my congratulations for the quarter. [ Fixing ] to ask you on the RAL segment first. The gain on asset sales, do you expect that line item to continue producing revenue for the remaining 3 quarters? It was I think $3 million in Q1.
Yes, it's Gary here. I'm not predicting that at this stage. Those things do come and go. But right now, we're predicting 0, basically breakeven. And hopefully, we'll see something from it.
But it's not in the plan basically right?
No. No, it isn't. And if you look at the disclosure in the outlook section, Konark, we said, when you go back to last year, we didn't put anything in that particular line. So it's upside.
Okay. Makes sense. And then the asset management fee line item, it seems a little bit volatile quarter-to-quarter. So Q1 was down from last year's Q1 a little bit and then also down slightly from Q4 last year. What's the -- like, how should we model it before the Fund III comes up?
Yes. I would model it very -- for the rest of the quarters, very similar to what you see in Q1. What you're seeing there, Konark, is really -- I think the majority of it relates to Fund II. It's now moving to capital deployed versus committed capital. It's now at the 5-year mark. That's when it tips over and that's what you're seeing. It's just a simple function of how the math works.
I see. Okay. Perfect. And then Fund III will obviously have an impact on this line item as we go forward.
That's right. And once Fund III gets solved and we get that across the line, then you'll see the fees come in for that.
Great. Excellent. Okay. And then moving onto the CPA side, so can you remind us why in your outlook for 2025 and '26, the leasing revenue under CPA is going down in '26 versus '25; however, the number of aircraft on the lease is same at, I think, 39?
So it's Gary here again. So in 2026, we have a group of 12 aircraft that are extended under the CPA with different lease rates starting in 2026. That's what you're seeing. So there's a tranche of 12 Q400s. And that's what you're seeing the step-down for.
I see. Okay. And I think you probably noted before historically that even with these new lease rates or decline in lease rates, the ROIC on these things are still same, similar or better maybe because you're paying down debt.
Yes. So those aircraft have no debt on them.
Right. Okay. Makes sense. And last one for me before I turn over. On the debt side, I think you have some $400 million plus of debt coming due in the next 12 months or so. Any sense on how you plan to repay? Like, you have some cash generation that's pretty good here, solid obviously, but is there any refinancing opportunity you see as well?
Yes. I think the biggest piece within there, if you look at it, Konark, is really the Series A debentures that come due at the end of the year, they're current, and that's what you're picking up. So we have a $50 million facility with the Bank of Nova Scotia that will enable us to pay $50 million of the $86 million and then the remainder, we'll pay out of cash by the end of the year. So those -- that's the big piece that you're seeing within that current portion. The rest of it is generally amortizing debt.
Next question comes from Betty Yang at Canaccord Genuity.
This is Betty on the call for Matt Lee. So just in terms of the aircraft that are coming out of the CPA in 2025, what would be the plan for those? Are they expected to be moved into a Falko fund or leased to other customers at the parent co.? Just trying to get an understanding of the expectation around that.
Yes, it's Gary here. Right now, we're working through the expectations around those. They could be sold. They could be released. We could move them into some other type of activity. We're still working through that. It's about 1.5 years out, that's when we start to work on it. But conceptually, we'll do something with the asset, yes.
And other question I have is on the guidance. Just wanted to consider the EBITDA and free cash flow guidance raised in unison. It sounds like you're looking at selling more aircraft in the [ year ], but also perhaps showing higher EBITDA. Can you walk us through how that works?
So when we sell the aircraft, generally speaking, you would reduce your revenue or your EBITDA moving ahead, but you get the free cash flow after proceeds. So that's what you're seeing reflective. One is our revenues or the EBITDA is coming in a bit stronger than we expected. And secondly, we're expecting $60 million to $80 million in net proceeds going through the free cash flow line this year versus what we had published earlier. So those are the 2 factors that are making their way through.
[Operator Instructions] Next question comes from David Ocampo at Cormark Securities.
Just a couple of follow-up questions. The first one is on Kevin's line of questioning about the cadence of profitability for 2024. But I did want to focus a little bit more on the EPS line since there is a bunch of moving parts there. How should we expect that as a sequential step down as we move through the years? Or does the debt reduction from lower interest payments offset the decline in EBITDA?
So as you go through the course of the year, I think we're -- as I said earlier, once you take out the one-timers, and that we're pretty flat, I think that's probably how you should look at it. Generally speaking, David, it's pretty flat through the rest of the year.
I'm sorry, that's flat versus the Q1?
Yes, that's right. Yes, similar, I guess.
Okay. And when we think about the improvement in lease rates on the renewals that you guys are seeing, are you guys thinking about that as levels consistent with hitting your IRR targets? I think it was mid, low-teens type return that you guys were targeting.
Yes. I think everything has been as we expected. I mean the rates have gone up on the leases. So we're seeing some improvements there. If you look at the funds, in particular, those 2 pieces, Fund I was a pre-COVID fund. So it's a bit different. It's more of a small return in the IRR side, as we've talked about before, but Fund II right now is still hitting its return targets. So I'd say, generally speaking, everything is lining up for these lease renewals as expected.
Yes. Perfect. And then last one for me. I take a look at Fund I, there's still around I think, USD 375 million of aircraft on the books and the fund's 10-year target date is 2025. So should we expect all these aircraft to be sold by 2025? Or is there an ability for the fund to be extended beyond 2025?
So the fund has the option for two 1-year extension. So that's possible depending on where it's at. We're still targeting to wind it up in 2025. The other side, too, is there are E-notes within the ABS structure or the Fund I structure, which are basically the equity instruments, and those are an opportunity to sell too. So there's a couple of different ways you can sell aircraft, and you can also sell the E-notes, that's another way to do it.
Does extending Fund I have any impact on your ability to close on III?
No. No, they're independent.
We have no further questions. I will turn the call back over for closing comments.
Thank you, Joanna, and thank you all for taking part in today's call. Have a good day.
Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.