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Good morning. My name is Casey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Aviation Inc. fourth quarter and year-end earnings analyst call. [Operator Instructions] Thank you. Nathalie Megann, VP Investor Relations, you may begin your conference.
Thank you, Casey. Hello, and thank you for joining us today for our fourth quarter and year-end 2017 conference call 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 are subject to various risks, uncertainties and assumptions that are included or referenced on Pages 6 and 7 of our management's discussion and analysis of the results and operations of Chorus Aviation Inc. for the years ended December 31, 2017, and 2016, the outlook section and other sections of our MD&A where such statements appear. In addition, some of the discussion 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 relating to the use of non-GAAP measures.I'll now turn the call over to Joe Randell.
Thank you, Natalie, and good morning, everyone. Thank you for joining us. We're very pleased with our achievements and progress in 2017 towards our mission of delivering regional aviation to the world. The year was transformational for our organization as we're well on our way to becoming a strong competitor in the global regional aircraft leasing space. My comments this morning will focus on our performance in 2017, and Jolene will take you through the fourth quarter financial results.The year was primarily focused on building additional shareholder value by executing on our growth and diversification strategy and improving our cost competitiveness. We did this by leveraging the synergies and expertise inherent in our 3 lines of business being: regional aircraft leasing, contract line, and maintenance repair and overhaul. The successful launch of Chorus Aviation Capital and its growth trajectory since has exceeded our expectations to date. We have grown the value of Chorus' portfolio of leased aircraft to over $1 billion and that leasing arrangements with 8 well-established regional carriers in 8 countries located on 6 continents. We are now leasing a diversified fleet of 5 of the best regional aircraft types manufactured by ATR, Bombardier and Embraer. Our new third party leasing agreements have an average term of over 7 years and are producing the economics we had anticipated. The aircraft have an average age of less than 3 years.The acquisition of 21 regional aircraft over the past year has used approximately 70% of the capital raised with Fairfax Financial. We're currently evaluating options for our next financing to sustain the growth in our leasing business. I'm pleased with the speed we deployed these funds and with the returns they are generating. Our approach has been methodical and deliberate, selecting a good mix of assets, clients and geographic location. We've evaluated close to 500 leasing opportunities and have chosen those with the right balance of risk and reward.So far, we have assembled a strong team of 10 professionals at CAC possessing expertise in the leasing and commercial aircraft space. We continue to see significant potential for us in the regional leasing sector.Our contract line and MRO businesses delivered consistent, predictable performance and contributed to increases in all key financial metrics, including growth in adjusted EBITDA and adjusted net earnings of 15% and 12%, respectively, over 2016. I commend our employees for their hard work and for embracing the power of our vision.In 2017, Jazz operated over 230,000 Air Canada Express flights and carried just under 11 million passengers on behalf of Air Canada. [indiscernible] also began new contract flying missions in Sweden, Denmark and Aruba.From a maintenance, repair and overhaul perspective, our MRO facility in Halifax became an authorized service facility for Bombardier commercial aircraft and executed on several third-party maintenance programs.We're demonstrating to the market that we're experts in managing every facet of the regional operation, including every phase of a regional aircraft's life cycle from origination to life extension to disassembly. We have the ability to repurpose and market aircraft to meet customer demands using existing assets and, thereby, unlocking further value. Examples include the repurposing of our older Dash 8-100 aircraft and redeploying them on new contract flying missions for international customers, leasing them to other operators, reengineering them for conversion to package freighters or parting them out. We've also successfully completed the first -- world's first life extension program on Dash 8-300 aircraft, increasing their useful life by approximately 15 years and leasing them under the CPA.In addition, these broad capabilities provide us operating leverage that differentiates us from other players in the regional aircraft leasing sector. These capabilities create additional opportunities for us to strengthen our relationships with our leasing customers and capture a larger share of the economic value of an aircraft over its lifetime.While we are currently focused on growing our portfolio of leased aircraft, we see the interplay amongst our lines of business becoming more significant as we move forward.We've updated you on our accomplishments throughout the year, and the highlights are provided in our earnings release. We expect this momentum will continue to contribute to our future success. Our growth and diversification strategy, we see the strong endorsement at the end of 2017 when we were added to the S&P/TSX composite index. Looking ahead, we remain focused on creating additional long-term shareholder value by capitalizing on our industry relationships as we build our core competencies in regional aircraft leasing, contract line operations and MRO.I congratulate the Chorus team for delivering another standup year and look forward to our future accomplishments together.So now I'll turn the call over to Jolene, and she will take you through the financial results. Thank you.
Thank you, Joe, and good morning. 2017 was a pivotal year, and I'd also like to express my gratitude to our team for embracing our vision.We made very good progress in diversifying and growing our non-CPA revenue as evidenced by a 16% increase in charter and other contract flying revenue and a 200% increase in other revenue, which is mainly comprised of non-CPA aircraft leasing and MRO.As expected, CPA pass-through revenue decreased due to several costs being borne by Air Canada and controllable revenue increased by less than 3%.CPA pass-through and controllable revenue served to compensate us for the cost of operating under the CPA. CPA pass-through revenue is a direct reimbursement for pass-through costs incurred. CPA controllable revenue is a reimbursement based on negotiated cost rates. If you exclude these 2 items from operating revenue, in 2017, Chorus generated approximately 34% of revenue from the CPA fixed infrastructure and operational performance fees and approximately 66% from aircraft leasing, other contract flying and MRO. This illustrates the momentum we are building in diversifying and growing our regional aircraft leasing business.Now turning to the fourth quarter of 2017. Here's how it compares to the same period 2016. Adjusted EBITDA came in at $82.6 million versus $69.3 million in 2016, an increase of $13.2 million or 19%. The $13.2 million increase in adjusted EBITDA was primarily driven by: a $10.3 million increase related to incremental margin, mainly attributed to non-CPA aircraft leasing and maintenance repair and overhaul; increased aircraft leasing under the CPA of $2.7 million; the absence of fleet transition cost of $1.7 million, which occurred in 2016; and decreased operating costs related to a $2.6 million increase in capitalized labor and maintenance costs on owned aircraft for major maintenance overhauls. These increases were partially offset by a decline of $0.8 million in CPA performance incentive revenue and an increase of $3.3 million in other expenses.Adjusted net income was $23.4 million, a decrease from the fourth quarter of 2016 of $7.8 million or 25.1%. The change was a result of the $13.2 million increase in adjusted EBITDA previously described, partially offset by a $7.2 million increase in interest costs related to aircraft debt and convertible units; a $1.3 million increase in income taxes; $9.9 million of additional depreciation primarily related to new aircraft; and a $2.6 million increase in foreign exchange losses related to working capital.Net income was $19.7 million, an increase of $7.1 million from the fourth quarter of 2016. And this increase was primarily due to a $10.2 million reduction in unrealized foreign exchange losses on long-term debt, a $1 million decrease in employee separation program costs and the absence of strategic advisory fee of $3.7 million incurred in 2016, all offset by the previously noted $7.8 million decrease in adjusted net income.The quarter generated earnings per basic share of $0.16 or $0.19 on an adjusted basis. As Joe mentioned, we have invested approximately 70% of the capital from our convertible debt raise with Fairfax Financial. We intend to deploy the balance by mid-2018, leveraging that capital with a further debt financing at a ratio ranging between 3 and 4:1 to acquire new to mid-life regional aircraft for lease to high-quality operators.Chorus is examining auctions for future financing arrangements to sustain the growth in the leasing business.Earlier this month, we implemented a dividend reinvestment plan to help support the growth in our aircraft leasing business. The plan currently offers a discount of 4% from the average market price per shares purchased under the plan, and details can be found on our website and on the AST Canada website.And looking ahead to the balance of this year, based on scheduling information from Air Canada, billable block hours for 2018 are expected to be between 350,000 and 375,000 hours, based on 116 covered aircraft as at December 31, 2018. The actual number of billable block hours through 2018 may vary from this anticipated range due to many factors, which you can see in Section 9 of the risk factors.The CPA fleet transition to larger aircraft will generate approximately 3% more available seat miles in fiscal 2018 over the same period in 2017. Capital expenditure for 2018, excluding those for the acquisition of aircraft and the ESP but including capitalized major maintenance overhauls, are expected to be between $44 million and $50 million. For additional information supporting our projected guidance for the balance of this year, I'll refer you to Section 8 of the 2018 outlook section of our MD&A for the period ended December 31, 2017.And that concludes my commentary. Thank you for listening. Operator, we can now open the call for questions from the analyst community when you're ready.
[Operator Instructions] And your first question here comes from Cameron Doerksen from NBF.
I just have a question on the leasing side of the business, maybe just my impression, but maybe, I guess, the pace of announced deals is going to be slowed down a bit here. I know you haven't changed any of your expectations as far as deploying the capital. But are you seeing any change at all in the opportunity list that you have out there for new lease originations?
No, Cameron. Actually I think we have a fairly robust list of possibilities. As I mentioned in my comments, we've gone through quite a number of opportunities. We have a number there still in the pipeline. And as a matter of fact, we're seeing, perhaps, even with some of the larger lessors that there may be a good stream of regional aircraft become available potentially there as well. So we remain confident and optimistic and really see no change from what we've seen over this past year.
Okay. And in terms of number of aircraft, you mentioned that you deployed 70% of the available capital. But I recall correctly sort of that estimated number of aircraft you might have in the third-party leasing portfolio was around 34 planes by midyear, is that still kind of the target?
Yes, it's going to be roughly that. It depends on which assets they are, et cetera. But I'd say that's what we're estimating, and we haven't changed from that.
Okay. Maybe just secondly, I don't know how significant this is, but you announced, I guess, some investment in the Voyageur facilities, I guess, maybe last week. I'm just wondering if you can talk about what the expansion is for and what opportunities you're seeing to grow that business further.
Right. Well, we've actually been investing in those facilities now for some time. I think we've -- there was an announcement on Friday of an arrangement with a Northern Ontario investment firm. So we -- those hangers are rather old, really coming from the second world war, roughly that era. And so we've been upgrading these facilities. And we did take back one of the hangers that was rented out from Bombardier, I guess, over a year ago, now, 2 years ago. And so we're seeing a reasonably good demand there, and we'll be pursuing growing that business going forward. So that's why we made that investment.
Okay. Maybe just one last quick one. I mean, I know you've talked about pilot sourcing in past conference calls. I'm just wondering if you can give me an update on what you're seeing out there. It seems as though there are some -- certainly some stories out there that maybe the ability to source new pilots is maybe becoming more of a challenge for Canadian airlines, but I'm just wondering what you're seeing.
Well, I think overall, it's challenge for the industry. But we've been very fortunate with the relationships that we have with all these aviation colleges and institutions and the flow program to Air Canada and the reputation in the market. We're seeing a good pipeline of new very good candidates. So we're not anticipating any issues on our side with respect to resourcing our business.
Your next question comes from Doug Taylor with Canaccord Genuity.
First question, obviously, the prospect of higher interest rate is something that's increasingly on people's mind these days. Can you talk to how or if you're seeing that change the behavior of the airlines as they approach the leasing mix in their portfolio and whether that has been built in at all to the lease factors that you're quoting?
We have not really seen anything specific, perhaps, from the airlines. Of course, everyone is watching what's happening to interest rates. And of course, interest rates are a potential expense to all parties, whether you own an asset or you lease an asset. And generally speaking, the leasings reflect the interest rate at the time when the leases are tied and the financing is tied with the turnover leases, et cetera. So I think, overall, the greater concern would probably be the impact that high interest costs could have on the economy, et cetera. But I don't think we're seeing any specific indicators at this time from airlines with respect to that.
Okay. And just to be clear, you talked about a 7-year term, average term for your lease with your -- the debt related to those aircraft to be approximately of the same term, just to confirm that it matched pretty effectively.
Yes, pretty much, Doug. That's our objective to have everything coterminous. Doug, now we could work it out, but predominantly, that's the case. And I'll just add on to that, right now, if you look at our debt profile, about 95% of our debt is fixed. The interest rates are fixed, either fixed in the contract itself or interest swaps.
And in a rising interest rate environment, given that they're fixed at lower rates, even if the term is slightly beyond the term of the lease, then I could lease, let's say, at a lower rate.
Right. Okay. Obviously, as you continue to shift the mix of your business towards leasing, I think earnings as opposed to EBITDA is going to be-- have more of a focus. So I just wanted to focus last couple of questions about some below-the-line items. First of all, your effective tax rate as an organization has been pretty volatile at least on a quarterly basis, even on an annual basis. Can you help us think about the effective tax rate that we should expect for the overall business in 2018 and beyond as the mix rolls out as you expect it?
So yes, this quarter -- what ends up impacting taxes a little bit artificially in the P&L is our foreign exchange swings, right? So that certainly, kind of, would have had an impact this quarter if you look for about, I think, 31% effective rate. About 4 percentage points of that is really driven by the foreign exchange impact. So if you strip that out, we're at a 26%, 27% effective tax rate. So that's for the overall business. And the -- as you know, the leasing portion from the new leasing activity that we have with CAC is a 12.5% tax rate. So as the leasing business grows, you're right, our effective tax rate overall will be declining. So as you kind of model it out kind of looking at it in 2 separate distinct categories, carving out the new leasing and applying a 12.5% tax rate to that and then with respect to the rest of the operation, 26% tax rate would be most appropriate. So you can see that that'll decline as the leasing, third-party leasing becomes more of a percentage of our business.
Okay. Just 1 side question there. The Q400s that you have, I guess, all the aircraft leased to Air Canada is part of the CPA. Are they not at this point owned by your entity in Ireland? Is that an opportunity going forward?
Well, from a tax perspective given that those assets are earning income in Canada, they continue to be taxed at a Canadian rate regardless of where they sit. Because they're being -- they're deployed under a Canadian -- they're earning income in Canada.
Okay. And then the other question below line, you mentioned it already, the foreign currency swings. Now I noticed some -- I don't want to get too much into this, but what you add back to your adjusted net income doesn't always match the expense. Can you just help me think about why those wouldn't match up exactly? They have tended to in previous quarters. It does play some -- it does impact your adjusted net income, and I just want to be able to communicate that why is it that you've made the adjustments you have?
Sure. So in our definition of adjusted EBITDA, we add back the foreign exchange swings related fairly to the balance sheet debt itself if that's being carried on the balance sheet at a point in time. And the other below the line stuff that we're not adding back really is foreign exchange, realized and unrealized losses related to the -- mainly working capital, right? So that's just a distinction that we draw on our definition.
Okay. But that was a negative impact then-- which we could think of as onetime or outside the course of business?
Absolutely, yes. It's going to depend on the exchange rate swings and kind of what we have on the balance sheet at the time.
Your next question comes from David Tyerman with Cormark Securities.
My first question is just looking at the change in adjusted EBITDA versus the change in interest and depreciation costs. I'm just trying to understand the leasing business here. So the adjusted EBITDA from the third-party leasing and MRO was up $10.3 million. Interest costs are up $7.2 million and D&A up $9.9 million of which $7.6 million is the regional leasing. So if I do the math, it looks like the interest costs and the DNA leasing related to leasing aircraft is higher than the EBITDA change. Am I understanding that correctly?
Yes, so not a 100% of what's in that line, I guess, on the aircraft leasing other revenue line, is that what you're trying to reconcile to?
I'm trying to reconcile the adjusted EBITDA number, the $10.3 million increase, which is third-party leasing and MRO. So there's, obviously, some MRO in there too. With the change in interest costs and the change in DNA, my assumption is that most of the interest cost increase and the DNA cost increases related to the third party leasing, maybe?
Yes. It's not all third-party leasing. The increase in interest costs and depreciation, we have other aircraft, obviously, and their related aircraft leasing that's not in the third-party leasing. We also have in the interest cost the convertible debt, a unit subscribing a big portion of that. So I don't think the math doesn't purely line up just to look at it all related to the CAC portion. And there's also, obviously, depreciation being driven by other asset's growth, whether it be specifically very related to the airline in [indiscernible], et cetera.
Okay, okay. Maybe I'll follow up with you on that. My second question is on the leasing environment. It seems like there's some changes going on out there in the leasing world. I think Avalon's parent has some problems. What GE's doing these days, is there a better or changed environment at all from these changes at this point?
No, I think we have seen a lot of funds flow in to the leasing market, but generally, it's been targeted more on the narrow-body, wide-body side. We've not seen a particular increase on the regional side. You mentioned Avalon, and there are some instances where, I guess, taking our regional assets would be of interest to some of these larger lessors. I think we've mentioned one there potentially. So for us, those sorts of issues are actually opportunities. And the lease rate factors have come down quite substantially in the narrow-body side. We're not seeing that in the regional side. We've been bidding on several opportunities. And we're not seeing a wide range of bidders like we see in the narrow-body side. So it's still a fairly small group of bidders and people that are really interested in these assets. And we're going to continue to work along with those opportunities, and we are being very selective. I think I've given you an indication as to how many we've looked at here. And so we're -- we've not really seen any type of the downturn or big influx of capital that's driving down yields in the regional side to this point.
Is there any scuttlebutt about GE doing anything on the RDA side because they have a large portfolio, I think.
Well, I think there's been news about GE period in the number of areas and that sort of thing. GE does have a very large portfolio of aircraft and a large portfolio of regional aircraft. As a matter of fact, we've acquired some of these aircraft from [indiscernible]. So again, there's an opportunity there. From what I understand they won't be building their portfolio further on the regional aircraft side. So again, we are very opportunistic. We looked at opportunities where they are orphan portfolios or just don't fit with the larger lessors. And for us, that provides a very good pipeline along with the other opportunities that are sale leasebacks. We work with these airlines, with the OEMs, et cetera. So we're really tied in with these parties as well, and the combination of these things that keep our pipeline full.
Great. That's very helpful. Thank you, Joe. And the last question I just had on the leasing again. Any insights into trying to sell other services other than the straight leases at this point, whether its training or maintenance or...
Well, we're -- those are opportunities going forward for us as we build our relationships, et cetera. We do lease transitions for other lessors, and we've done some of those in North Bay actually at [indiscernible]. And so we're always looking for opportunities to cross-sell. And I think as the portfolio grows and we get deeper into the market, those are areas where I think we'll be mining more than right now. Our focus has been just getting the traction, getting the relationships, getting the leases done and to really keep this momentum going. And as I said in the comments, we're really moving ahead. The market is noticing us, and we are becoming one of the larger regional aircraft lessors in the world. And we're just going to keep doing that. And as we've said, we're looking now as to how we finance the growth and looking at these opportunities, and we're actively doing that. We've said that the capital will bring us to the middle of the year, but we're looking beyond the middle of the year, obviously. So it's a focus for us, and this is where our greatest growth and diversification opportunities are. And the relationships that we establish with these other operators enable us to look at how we can leverage the other businesses that we operate in.
[Operator Instructions] Your next question comes from Kevin Chiang with CIBC.
Just a quick one from me. It seems like the pipeline for -- you continue to mention that the pipeline for your leasing opportunities remains pretty robust here. I'm just wondering as you think about deploying whatever the future financing decision you make is, how you think about the risks you're willing to take on? I know you've been pretty conservative as you've deployed the first $200 million of equity here. But when you think of deploying, I guess, the next round, thoughts around skyline deals, thoughts around not necessarily having to fully amortize your debt or the exact term of the lease, just wondering how you think about deploying any future capital and maybe some additional risk you're willing to take on?
Well, we're going to continue to be very methodical in terms of the leases that we take non, the operator risk, in particular. I think we talked about skyline deals in the past. But again, the skyline deal is influenced by your -- the lease in terms of the market for the aircraft and your ability to place those aircraft, et cetera. Now it is true that those deals generally bring a greater level of return but it is at a higher level of risk. But as we move forward and diversify even further, I think the ability to look at these things, to have a very varied portfolio across all these operators, geographies, equipment type, gives you the ability to potentially take a little more risk in some areas with that lease that there is an offsetting increase in return. So we do know these operators, we do know these assets, so we're going to be very prudent in terms of how we move ahead.
And I guess, Kevin, just to add to that. The second part of your question, yes, I mean, to date, you're right, we've been really financing the debt portion of these aircraft with bilateral type of arrangements with very high amortization of debt. I think we paid close to $100 million in debt this year. But that's been intentional. And as we move forward, we're very aware that there's other debt sources available to lessors. And our focus has been really on growing the initial part of the business and getting relationships formed in place with some of those other financiers. So as we move forward, we'll look to and explore what other options are available for sure.
And we do see some very good options out there. We're having a lot of discussions with financial institutions that may be interested and have possibilities with respect to the debt side. And we're seeing a lot of interest in terms of regional aircraft market, et cetera. So things are looking good from that perspective as well.
Maybe just 1 additional question. I picked up, I guess, in your prepared remarks your focus on the amount of true leasing revenue you're generating versus what's coming under the CPA as you look at it from an economic perspective, I guess. I think in the past, you have talked about trying to maybe change some of your reporting format to highlight the growth in your leasing business. Is that something that's still in the works, that's still something you're thinking about to a kind of -- because right now, you report like an airline, generally speaking. Just thoughts on your reporting format. I'm trying to bring that out a little bit further.
Yes, very much so. We recognize that as the business continues to grow. The leasing portion, that will need to be in tune with kind of changing the way we report and move into a segmented type of earnings. So absolutely, we'll be -- that's on our list, and we'll be bringing that forward at the appropriate time.
And you have no further questions that are in the queue at this time. I will turn the call back over to Natalie Megann for closing remarks.
Thank you very much, Casey, and thank you all for joining us on this call. And we wish you a pleasant end of the week. Thank you.
And ladies and gentlemen, this concludes today's conference call. You may now disconnect.