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Good day. My name is Steve, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Chorus Aviation Inc. third quarter results conference call. [Operator Instructions] Thank you. Nathalie Megann, Vice President, Investor Relations, please go ahead.
Thank you, Steve. Hello, and thank you for joining us today for our third quarter 2018 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer; and Jolene Mahody, Executive Vice President and Chief Financial Officer. We'll start by giving a brief overview of the results, and then go on to questions from the analyst community.Because some of the discussion in this call may be forward looking, I direct your attention to the caution regarding forward-looking statements and information, which is subject to various risks, uncertainties and assumptions that are included or referenced on Page 38 of our Management's Discussion and Analysis of the results and operations of Chorus Aviation for the period ended September 30, 2018, the Outlook section and other sections of our MD&A where such statements appear. In addition, some of the following discussions involve certain non-GAAP measures, including references to EBITDA, adjusted EBITDA and adjusted net income. Please refer to Section 17 of our MD&A for a discussion related to the use of such non-GAAP measures. I'll now turn the call over to Joe Randell.
Thank you, Nathalie, and good morning, everyone. Thank you for joining us. In the third quarter, we generated over $87 million in adjusted EBITDA, up $3.4 million or 4% over the same period last year. Adjusted EBITDA came in below our expectations due to added CPA cost related to increased component repair maintenance, primarily on the classic Dash 8 fleet and CPA on-time performance challenges. Historically, the third quarter is the most challenging from an operations perspective due to high passenger demand, weather, construction, tight flight schedules and congested airports. This makes it difficult to turn aircraft quickly, causing flight delays that persist throughout the day due to the inability to recover operations effectively.Rate performance varies from quarter-to-quarter depending upon a number of changing operational factors. From a year-to-date perspective, our rate performance on controllable costs is consistent with the same period of 2017. While progress in completing leasing transactions slowed in the second and third quarter, we regained momentum with the recent announcement of several multi-aircraft transaction agreements and have grown our fleet of leased aircraft to 80. The fourth quarter will start to reflect additional lease income associated with these aircraft placements while others will start to generate profits in 2019 as the lease arrangements take effect.We are very pleased to welcome Philippine Airlines, the Lion Air Group and JamboJet Airlines to our expanded customer portfolio of leading regional operators. These mark our first transactions in Southeast Asia, a market we believe has good potential for future aircraft placements. Once these recently announced transactions are completed, we will have acquired aircraft valued at approximately USD 730 million to date, excluding the CPA aircraft and secured additional long-term lease revenue streams with average lease rate terms of approximately 8 years.To date, we have commitments for placing 33 aircraft with 12 customers, operating in 12 countries on 6 continents. We are regularly engaging with current and prospective customers on new opportunities and remain confident in the growth prospects of our leasing business.That said, we are not wavering from our conservative and prudent approach to building this business and will not grow for the sake of growth. As I've said before, this growth is going to be lumpy and some transactions will take longer to finalize than others. Given the breadth of our experience and capabilities in regional aviation, we remain confident the balance of this capital will be committed by mid-2019.The addition of Q400 spare parts to our supply chain sales inventory is another step in this direction. This is our first part-out of an in-production aircraft and is an aircraft type, of course, that is highly utilized around the world. Our ability to provide this service to operators is a synergy we can leverage with our lessees. This, in addition with our ability to now conduct heavy maintenance on Embraer 135 and 145 series regional jets expands our range of services.In the quarter, we also secured a new contract with airBaltic of Latvia to conduct airframe heavy maintenance on 12 Q400s. The first aircraft has been completed and the second is now in the hangar. Our Extended Service Program on Dash 8-300s is progressing as scheduled with the completion of 2 more since our last report out, bringing the total [ 50 ] now generating leasing revenue under the CPA.We have extensive experience in managing every facet of an aircraft's life from origination to disassembly and part-out and every stage in between. This is where our strengths differentiate us from our competitors.I'd like to take this opportunity to congratulate our Jazz employees for being recognized again this year for outstanding achievement in employment equity and receiving the Sector distinction award from Employment and Social Development Canada. Jazz also received the Silver award in the Transportation Category of Canada's Safest Employers. There's been a great deal of productive activity and solid milestones achieved. I sincerely commend and thank the Chorus team for their hard work and dedication to our vision. I'll now turn the call over to Jolene, and she will take you through the financial results. Thank you.
Thanks, Joe, and good morning, everyone. In the quarter, we generated total revenue of $367 million versus $344 million in the same period of 2017, an increase of $23 million or 7%.Adjusted EBITDA came in at $87 million, an increase of $3.4 million over third quarter of 2017. There were a few onetime adjustments impacting our financial performance this quarter relative to the third quarter 2017. They are detailed in our disclosure documents, but here's a quick summary of what transpired.We had a $1.5 million reduction in the other cost category in the third quarter of 2017 for a contingent consideration payable. We had a $1.2 million adjustment to our supplemental defined benefit pension plan occurring in this quarter, and we also had a change in tax rate for the first 9 months of 2017 that has the effect of increasing adjusted net income in the third quarter of last year by $12.6 million.When the first 2 items I mentioned are removed -- sorry, when the first 2 items are removed, third quarter 2018 adjusted EBITDA was up $6.1 million over the same period last year. This was due to an $8.6 million increase related to the growth in third-party regional aircraft leasing and increased aircraft leasing earnings under the CPA of $2.5 million, offset by increased CPA cost of $5 million, which resulted from increased component repair cost of $3 million, primarily on the classic Dash 8 fleet, and $2 million in additional costs associated with CPA on-time performance challenges.Adjusted net income was $31 million for the quarter, a decrease from 2017 of $18 million, mainly because of the change in tax rates I mentioned earlier and foreign exchange losses on debt and working capital, which amounted to $3.3 million. When you exclude these 2 items, adjusted net income declined by $2 million quarter-over-quarter due to an additional $2.8 million in depreciation, primarily related to new aircraft and an increase in interest cost of $2.4 million related to additional aircraft debt, offset by the $3.4 million increase in adjusted EBITDA previously described.Net income was $43.7 million for the period, a decrease of $35.6 million or 45% from the same period of 2017. The decrease was primarily due to a quarter-over-quarter change in foreign exchange of $17.1 million related to loss -- unrealized losses on U.S.-denominated debt, previously noted $18 million decrease in the adjusted net income and also increased employee separation program cost of $0.5 million.Looking ahead to the balance of this year, capital expenditures for 2018, excluding those for the acquisition of aircraft and the ESP and including capitalized major maintenance overhauls, are expected to be between $41 million and $48 million. Capital expenditures for ESP and aircraft acquisitions are expected to be between $217 million and $220 million in 2018. This does not include capital for future to-be-announced aircraft acquisition.Based on scheduling information from Air Canada, billable block hours for 2018 are expected to be between 364,000 and 370,000 hours, and this is based on 116 covered aircraft as at December 31, 2018. The actual number of billable block hours for 2018 may vary from this anticipated range due to a number of factors, and you can see Section 10 Risk Factors in our disclosure. For additional information supporting our projected guidance for the balance of this year, I'll refer you to Section 4, the 2018 Outlook section of our MD&A for the period ended September 30, 2018.We are very near to being able to roll out segmented earnings to the market. We are finalizing internal procedures and plan to provide a comprehensive information package to help the market understand our new method of reporting very soon. We will issue an advisory with conference call details and directions to download the information. And this concludes my commentary. Thank you for listening. And operator, we can now open the call to questions from the analyst community.
[Operator Instructions] And your first question comes from Cameron Doerksen with National Bank Financial.
Just a couple of questions for me. Just wondering if you can -- you talked a bit about the on-time performance in Q3 is always a more challenging period. Is there anything as we look ahead kind of to next summer where you potentially would face the same kind of tight scheduling, that you would do differently? Or anything you're sort of expecting that you might fix as we look ahead to next year?
Yes, sure. I can speak to that. I think what we've seen -- third quarter, as Joe indicated in his remarks, is our most challenging quarter for sure given all the reasons he outlined. And much of that is I think outside of our control. We can work to improve where we can, but I think when you look at the performance incentives and modeling kind of what the performance incentives are going to look like on a go-forward basis, given the tightness of the schedule, much higher utilization, high passenger loads, we're expecting from a performance incentive side probably to be in the range of achieving 60% to 65% of our available attainment kind of on a go-forward basis.
Okay. Just on the leasing business. We've had some -- I guess, some news on Bombardier last week just regarding the divestiture of their Q400 program. And also has probably some increased uncertainty over the CRJ program at Bombardier. Just wondering if you can maybe comment on what you think the impact might be on the leasing market for those aircraft, both today and maybe in the future? And whether you see there's any potential impact on the values of the aircraft that you're operating?
Yes, that's something that we're certainly looking at and considering here, Cameron. And it is very early in the transaction. So it's early to tell what the impact of this may be. From what we understand, Longview is taking a business-as-usual approach and committed to a seamless transition with no interruption in the production schedule until, I think, 2021. And Longview has had a successful track record of revitalizing the market demand for legacy aircraft, such as the Twin Otter and Canadair water bomber series, and there may be potential for the Dash 8 aircraft production as well here. And I think Longview have certain advantages in marketplace in terms of their overhead levels and the focus that they can provide on that type of equipment. So I don't think it's necessarily at all bad news. I think Bombardier, obviously, has had some struggles with the Q400 program, et cetera, and we really believe in the asset itself and its potential and its application and the fact that the aircraft is very much a niche airplane in marketplace. So like I said, it's really early on and we're watching it closely, as we are with the CRJ program as well, because these are very important assets that are unique and we see these assets -- a demand for them continuing. So steady as it goes. We've not seen any violent reaction in the marketplace from operators or lessors that I've seen so far. And I think as Longview takes hold here of the program and looks to relocate some aspects of the program, I believe that they will make some progress with respect to reducing the costs associated with the Q400. And the costs have been, I think, an issue here. So I think there's an opportunity to address it and to make the assets stronger even in the marketplace. But like I said, it's really too early to tell at this point.
And your next question comes from Doug Taylor with -- from Canaccord Genuity.
I think we've all seen the deployment of capital announcements pick up of late, as you mentioned. Anything to point to about what made these transactions more attractive or get them across the line? Was there any change or movement in the market or pricing that contributed to the reacceleration of capital commitment?
Other than -- these were commitments that I think we couldn't refer to by name in past quarters as being term sheets and close to being arranged. But each of these has its own negotiation, and delivery time frames are -- vary as well. And quite often, what really drives the finalization of the deals is the delivery of the aircraft is going to be very imminent. And I think that's what we've seen here because where these airplanes are being -- the early ones are being delivered sort of as we speak. So I feel in leasebacks like this, that's the nature of the transaction, whereas, of course, portfolio transaction is a little different approach in terms of buying the assets from another lessor. So nothing unique. We still see the market in the same way as we have with respect to the opportunities that are out there. There's certainly, with the world economy and various currencies, some volatility with that. We're watching that very closely as well. But it's -- I think we've said it's going to be a little lumpy, Doug, and we can anticipate that. But overall, the demand of the business is I think conducting itself as we have expected.
Okay. Then is it fair to say that given the outlook you just provided, the current debt market and the returns on equity you're achieving, at least modeling on the assets that you're bringing into your portfolio here are still hitting the -- you talked about mid-teens kind of hurdle that you'd originally targeted?
We've not changed any of our targets, and we're not making any adjustments in terms of our expectations. We're still very much focused on what we've said before.
Okay. You mentioned several positive announcements related to the MRO operation. Can you just remind us whether there is a capacity for meaningful revenue expansion there with the existing infrastructure you have? Or should we look at these -- some of these announcements as more extending and diversifying the current revenue profile for that business?
Yes, I think -- you're right, some of those are more an extension of the current profile. I think where we see are kind of more significant, and that's all relative, but our larger growth opportunity on the MRO side is in the parts business. So that's -- that would be incremental. But the contracts that we have here in Halifax for airframe, some of those that we had last year came to an end, and we've replaced that with the airBaltic, expanding our capability certainly to Embraer, but it's more of extension on a go-forward basis than a real lift. As far as trying to kind of get a sense of what it looks like, I'd say, from an overall perspective, we're likely looking at -- would be fair to say 10% to 12% growth on that line on a revenue basis.
Your next question comes from Kevin Chiang with CIBC.
Maybe just going back to your leasing growth opportunity. When you look to mid-2019, which isn't too far away, and you're still committed to having the current capital you've raised deployed, how should we think about the next phase of growth here? Do you need to raise additional capital to grow the fleet beyond what you'll deploy by 2019 or mid-2019? Or will the internally generated free cash flow be enough to support continued investment into your lease portfolio here?
Yes. I mean, we -- firstly, I guess, I'd say the additional funds that we have, we see being committed by mid-next year, as you said. We do have some of those deliveries that are taking place later on -- already announced deliveries taking place later on in the back half of next year. But as to kind of future capital raises, kind of remains to be seen, at this stage, how we go about the growth with the business. You're right that we are generating added cash flow kind of with the current business and with the new leasing business will in itself generate added cash flow that we can deploy into leasing. So I would say, we're still to be determined, I guess, with respect to how we grow after we spend this current raise. But you're right, Kevin, there is internal generation there that is spinning off and we intend to deploy into growing the leasing business.
And correct me if I'm wrong, I think some of -- in the early years or months of Chorus Aviation Capital, your ability to get into a data room or to speak with potential sellers or airlines was maybe impacted by the lack of initial capital. And I guess, you hadn't built out the reputation you built out now. Given where you sit today, is that still an impediment in the sense that, do you need to have a capital in place ahead of time before having these negotiations moving forward? Or are you big enough today that you can effectively have transactions lined up and then have -- and then determine your funding method post these deals getting further down the line?
Well, as you grow the business, you obviously get a lot more traction in the market, and we're seeing that in terms of the opportunities that are there and some of the portfolio acquisition opportunities we have, et cetera. And as we move forward, we look at our different financing options, including a lot of leasing company issues, warehouses and things of that nature. So the flexibility that we will have going forward in making -- in terms of making commitments, I think, will be greater as time goes on as we mature. And so I think we're in a far better place than where we started out. And as well, a lot of the banks, and especially, European banks and others are -- we've been talking to are very familiar with this segment and this industry, the leasing industry. We've had a lot of really good discussions there, and so we're making progress in a lot of areas. So I think we are going to have more flexibility. I think that our aperture will increase as time goes on. But as Jolene said, in terms of raising capital in terms of the equity that we put in this business, it's always under consideration in terms of what we do and there are a lot of considerations for it in terms of our GAAP levels, the price of our -- cost of our equity, et cetera. So it's really work in progress. But I think generally, certainly, more opportunities, more known, more flexibility than we have in the initial time period.
That's excellent. And just a clarification question for me, last one, is, I think you said 60% to 65% available attainment of the performance fees, Jolene, were you talking about specifically just in the third quarter given the challenges? Or is that something we should be contemplating for full year?
Yes, I think if you kind of look at the trends this year, I think the third quarter was certainly not good for all the reasons we outlined. But if you look kind of overall how we've been performing on the performance incentives relative to past years, there were years there where we had a very attainment rate, something kind of the 80% plus attainment, which as we move forward, I don't believe that's kind of realistic for your modeling any longer just given we're in a lot higher gauge equipment now than we were then and tighter schedules. So I think somewhere in the 65% range is probably more realistic, not only for current quarter but on a go-forward basis.
We had historically a fair bit of white space in the schedule for pickup if airplanes were late, et cetera. But in particular, for the larger aircraft and, for instance, for the CRJ900s, utilization is amongst the highest in the industry right now. So we're doing a lot of long-haul flying into the U.S. for Canada into U.S. hub airports, and that's having an impact as well. And I think while that's been going well from a demand perspective and I think the performance generally has been good, it does stress the operation in terms of on-time performance.
The other thing, Kevin, is just, as a reminder, we do have an employee incentive program in place, so a lot of those performance incentives do end up being paid out from an employee perspective. So as that got goes down, the expense goes down as well, so it's not all kind of flow-through impact on a bottom line basis at all.
[Operator Instructions] And our next question comes from David Tyerman with Cormark Securities Inc.
So I want to pick up on your last point, Jolene, I think is an important thing. So did the CPA on-time hit at $2 million actually have an EBITDA impact on Q2 -- or Q3, sorry?
So the performance incentive hit actually was consistent with last year's performance incentive levels, right? So we didn't perform any better last year on the performance incentives than we did this year achieving kind of the same revenue level. We did, as you know, have some additional CPA costs in the quarter related to aging -- some aging aircraft and incremental component repair costs that we didn't expect as well as with the operational challenges kind of being at the level that they were. We did see incremental costs related to direct labor, mainly overtime driven, kind of when you get off schedule, when you have crew and aircraft out of place, it drives overtime for maintenance employees, drives overtime for crew, et cetera, so that was the big hit. When we kind of look forward to Q4, I would say, given we're on a year-to-date -- on a year-to-date basis, those CPA cost differentials wash even to last year. And when we look forward to Q4, we don't expect to see kind of any significant differences or any surprises. We believe we'll be at or better than last year's performance on the CPA cost rate side.
Okay. So all right, I just want to clarify, did you just say like all these things, like the maintenance issue and op challenges, the overtime, et cetera, they are a wash relative to last year, so there's really not a profit hit year-over-year from this?
Yes. On a quarterly basis, they are. But when you look at our year-to-date numbers, we're fairly consistent with last year 2017 year-to-date. So we would have had earlier benefits relative to rates in the earlier quarters of the year.
Okay, so just to make sure I understand, if I maybe misunderstanding your wording, Q3 it was a hit, but Q1 and Q2 might have been a benefit net-net. Over the first 9 months, you're kind of on track?
You got it. Yes.
Okay, perfect. And then Q4, you kind of expect more like last year?
Yes.
Okay, that's very helpful. And then on the MRO, the 10% to 12% growth that you mentioned, is that in revenue EBITDA? And what are the basis on this -- like, is this material or...
That's on revenue. And I would say, overall, not significant numbers. It goes into the other revenue line, as you know, on our P&L, right? So if you look at that other revenue line, it's split between -- we have MRO and third-party leasing in there. Let's say, about 2/3 is third-party leasing and the remainder would be MRO, so if you want to use that for your base.
Okay, helpful. Okay, and then just going back to the question on the Q400 and over to Longview. Do you have any examples, maybe Joe, of other aircraft that have -- they haven't obviously gone out of service yet, but where there's been a major change and what that's done to the values of the aircraft, maybe something like the BAe RJ100 or something like that?
On those situations, generally, the aircraft line will shut down, like in the case of 146 or even Fokker airplanes. But I think the best example is probably Viking itself when it took the Twin Otter and continued to invest in the aircraft, upgraded the cockpit and the aircraft is still in production today. And it first started production years and years ago, has a niche in the market still there, and they seemed to have been successful in doing that and hopeful that something like that will be replicated in this situation because, as a product line, it's a great product. But as well, each product line needs to have continued investment in terms of upgrades and looking at different markets, et cetera. And I think there's opportunities for Q400 with that. I don't want to speak for Longview in terms of what they see here. But this is what we're hopeful of. So we certainly -- while we're concerned and watching it closely, we're not really at this point feeling that it's going to have a significant impact one way or the other. It's really too early to tell.
Okay, good. And then last question for me, just going back to the normalized result. So can you provide any insight into what normalized Q3 would be like? And I guess, maybe related is the Q -- the first 9 months' figure, kind of a normalized number for both years, like, does that give us an idea of what the run rate should be?
So you -- I think we've laid it out pretty well in kind of our disclosure with respect to onetime adjustments and then the CPA differences. So we had a $5 million difference related to the CPA cost that I just outlined. And we would have had a $1.2 million onetime adjustment related to a pension expense. And our 2017 Q3 results would have been -- the adjusted EBITDA level would have been $1.2 million higher than expected because of a contingent consideration payable amount. So what's that, like, almost $8 million? That help?
Yes, yes. No, that's fine. So if I take those into account, that gives me the normalized kind of run rate.
Yes.
[Operator Instructions] And there are no further questions at this time. I will turn the call back over to the presenters.
Thank you very much, Steve, and thank you all for dialing in today.
This concludes today's conference call. You may now disconnect.