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Ladies and gentlemen, thank you for standing by, and welcome to the Chorus Aviation Inc. Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nathalie Megann, Vice President, Investor Relations and Corporate Affairs. Thank you. Please go ahead.
Thank you, operator. Hello, and thank you for joining us today for our fourth quarter and year-end 2019 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer; and Gary Osborne, 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 this 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 Page 55 of our Management's Discussion and Analysis of the results of operations of Chorus Aviation Inc. for the period ended December 31, 2019, the Outlook section and other sections of our MD&A where such statements appear. In addition, some of the following discussion involves certain non-GAAP financial measures, including references to EBITDA, adjusted EBITDA, adjusted EBT and adjusted net income. Please refer to Section 18 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. I am tremendously pleased with our accomplishments. It was a truly transformative year. On total revenues of $1.4 billion, we generated adjusted EBITDA of $341 million in 2019, an increase of $1.2 million over 2018. We kicked off last year by establishing a stronger partnership with Air Canada for an additional 17 years, providing a minimum of $2.5 billion in contracted revenues with opportunities to increase this business. This was a critical development as it laid a strong and long-term foundation from which we continue to grow and diversify. Today, we operate about 80% of the Air Canada Express network, an increase of approximately 10 percentage points from the beginning of 2019. We safely delivered close to 11 million passengers and operated over 226,000 flights. I thank the team for their professionalism and for helping our partner manage its network challenges, certainly posed by the grounding of the 737 MAX fleet. The implementation of the amended CPA went well and included the transitioning of 24 aircraft in and out of the Jazz fleet. This activity will continue including the induction of 9 new CRJ900s beginning in May, which will generate additional leasing revenue under the CPA. Voyageur's performance strengthened year-over-year. We also successfully won new international contracted flying missions with the United Nations and other clients and saw several contract extensions. Our specialized maintenance, repair and overhaul facility in North Bay had a very good year and we've been hiring to keep up with the demand. The launch of the Dash 8-100 package freighter was positively received, and we intend to actively market this product. While not our primary growth vehicle, it does lead -- lend synergies to support our growing leasing business. In 2019, we acquired 3 aircraft for disassembly and parted out 7. To date, we parted out 15 aircraft. We see significant potential in parts and component sales, and we were pleased to establish a parts sales depot in Dubai, further extending our reach into the international markets. I thank our employees in North Bay and those around the world for their operational integrity. We've made significant advancements in growing our business, becoming a worldwide provider of regional aviation services. We successfully raised $184 million in capital during the year, including our $86.3 million unsecured hybrid debenture, and secured a USD 300 million warehouse facility to support our growth in Regional Aircraft Leasing. We now have a committed portfolio of 64 attractive assets placed with 16 customers, a 60% increase in the fleet over 2018. Together with the aircraft we have leased under the CPA, our portfolio comprises of 135 aircraft with approximately $2.1 billion in future contracted lease revenue. The growth in our leasing business drove a 27% increase in this segment's adjusted earnings before tax over last year and now represents 22% of Chorus' overall adjusted EBT. I'm very pleased with the positive momentum we gained in 2019 and with our continued maturation as a leasing company. We completed our first sale of 3 leased Dash 8-400 aircraft and extended our first leases with the renewal of 3 Aeromexico Connect Embraer 190s. The addition of the highly sought after Airbus A220-300 aircraft to our portfolio was an important development in our evolution as we see growing demand for this state-of-the-art, fuel-efficient aircraft. These aircraft are being placed with airBaltic, an existing MRO customer that we're pleased to welcome to our leasing portfolio. The pipeline of potential transactions remains strong, and we will not waver from our investment principles to profitably build our leasing business. Finally, we were very honored to be the recipient of several business and industry awards, including being named amongst Canada's Safest Employers 2019, taking home gold in the Transportation category. I thank the Chorus team for delivering a standout year. I look forward to our future accomplishments together. So thank you, and now I'll pass the line over to Gary to take you through the fourth quarter and the year-end financial results.
Thank you, Joe, and good morning. I would like to also thank and congratulate our team on our -- for our successes in 2019 and so far this year. Together, we've built a great foundation from which to further grow and strengthen our organization. With over 90% of our revenue secured through long-term contracts, our business is predictable and transparent. As such, our business delivered results that once again met our expectations. Here's how the fourth quarter compares to the same period last year. We reported adjusted EBITDA of $88.6 million, a decrease of $3.4 million or 3.7% relative to the fourth quarter of 2018. Regional Aircraft Leasing segment's adjusted EBITDA increased by $12.3 million, primarily related to the growth in aircraft with 11 closed transactions in the fourth quarter. As Joe mentioned earlier, we are proud to have completed our first sale during the quarter, generating net cash proceeds of USD 25 million and an internal rate of return in excess of 30%. The sale of these 3 aircraft produced an accounting loss upon the wind-up of the special purpose entities and resulted in a decrease in adjusted EBITDA and adjusted net income of $3.4 million and $1.3 million, respectively. Excluding the impact of the sale, the margin on the Regional Aircraft Leasing in the quarter was consistent with Q3 and our expectations. Again, in line with expectations, the Regional Aviation Services segment adjusted EBITDA decreased $15.8 million. The decrease reflects the 2019 CPA amendments, which moved the fixed margin and performance incentive revenue when Chorus moved to market-based compensation rates. Beyond the changes related to the 2019 CPA amendments, fourth quarter results were impacted by increased stock-based compensation of $6 million due to the appreciation in Chorus' share price relative to the comparable period, which was partly mitigated by the total return swap implemented in the fourth quarter of 2019, and decreased capitalization of major maintenance overhauls on owned CPA aircraft over the previous period for $1.2 million. Adjusted net income was $23.3 million for the quarter, a decrease of $12 million, due to the $3.4 million decrease in adjusted EBITDA previously described; an increase in depreciation of $6.6 million, primarily related to additional aircraft in the Regional Aircraft Leasing segment; an increase in net interest cost of $5.3 million, primarily related to additional aircraft debt in the Regional Aircraft Leasing segment; and an increase in nonoperating costs of $2.5 million, primarily related to the loss on disposal of an engine of $1.2 million; and a change in foreign exchange losses of $0.8 million, again, offset by a $5.7 million decrease in income tax expense resulting from lower adjusted EBT. Net income increased $34.3 million, primarily due to the change in net unrealized foreign exchange gains on long-term debt of $46.2 million, offset by the previously noted $12 million decrease in adjusted net income. For the 2019 year, Chorus reported an adjusted EBITDA of $341.7 million, an increase of $1.2 million over 2018. The regional aircraft leasing segment's adjusted EBITDA increased by $42.4 million, primarily due to the growth in aircraft earning leasing revenue. The leased fleet overdoubled, increasing to 60 at the end of 2019 from 29 at the end of 2018. In line with expectations, the Regional Aviation Services segment adjusted EBITDA decreased by $41.3 million, which reflects the 2019 CPA amendments and the reduced fixed margin and performance incentive revenue as Chorus moved to market-based compensation rates. These reductions were partially offset by the implementation of the controllable cost guardrail that helped mitigate some of the CPA margin shortfall resulting from reduced fees. Beyond the changes related to the 2019 CPA amendments, 2019 results were impacted by increased stock-based compensation of $15 million, due to the appreciation in Chorus' share price relative to the comparable period, which was partially mitigated by the total return swap implemented in the fourth quarter 2019, decreased capitalization of major overhauls of owned CPA aircraft of $1.9 million over the previous period, offset by increased leasing under the CPA. Adjusted net income of $96.2 million decreased over 2018 by $26.1 million due to an increase in depreciation of $18.5 million, primarily related to additional aircraft in the Regional Aircraft Leasing segment; an increase in net interest cost of $15.5 million, primarily related to additional aircraft debt in the Regional Aircraft Leasing segment; and an increase in nonoperating costs of $5.6 million, primarily related to foreign exchange losses of $4.2 million, in addition to a loss on disposal of property and equipment of $0.5 million, partially offset by the $1.2 million increase in adjusted EBITDA previously described and a decrease in income tax expense of $12.2 million resulting from lower adjusted EBT. Net income increased $65.7 million over 2018, due to the change in net unrealized foreign exchange gains on long-term debt of $90.8 million and decreased employee separation costs of $3.1 million, offset by the previously noted decrease of $26.1 million in adjusted net income and increased signing bonuses of $2 million related to the Jazz pilot collective agreement. We ended the year with a solid cash position of $87 million. As mentioned, we raised gross proceeds of over $86 million in the quarter and cash financed the IndiGo and Croatian airline deliveries. We expect the debt financing of approximately USD 46 million on these aircraft to be in place by the first half of this year. We're maintaining our intention to grow our Regional Aircraft Leasing segment by up to 20 aircraft per year as we have the capacity to make this investment through a combination of new debt and internally generated cash flow. The timing of these future transactions will not occur on a consistent basis. However, we expect the majority will be executed in the second half of this year. We will also use these resources to fund the delivery of 9 CRJ900s this year and 5 remaining ESPs to be completed before the end of 2022. As been our practice, we manage costs against the objectives of remaining within market-acceptable ranges of leverage and maintaining adequate financial flexibility. With the addition of the aircraft under both the Regional Aircraft Leasing segment and the aircraft leasing revenue under the CPA, Chorus' estimated future contracted lease revenue is approximately USD 2.1 billion. When the CPA fixed margin revenue of USD 0.6 billion is included with the future contracted revenue, Chorus' future revenue approximates USD 2.7 billion. Capital expenditures for 2020, including capitalized major maintenance overhauls but excluding expenditures for the acquisition of aircraft and the ESP, are expected to be between $38 million and $44 million. Aircraft-related acquisitions and the ESP capital expenditures in 2020 are expected to be between $442 million and $452 million related to previously announced transactions. For additional information supporting our outlook for the balance of the year, I'll refer you to Section 4, the 2020 Outlook section of our MD&A for the period ended December 31, 2019. That concludes my commentary. Thank you for listening. Operator, we can open the call to questions from the analyst community when you are ready.
[Operator Instructions] Your first question comes from Doug Taylor with Canaccord Genuity.
With respect to the leasing activity, you suggested it's going to be back-end loaded with -- for commitments. That's a similar kind of seasonality or cadence to last year. Is it fair to assume that, that is going to be the regular seasonality for commitments and deployments going forward in future years? Is there some -- or is there some kind of intentional pause right now to digest some of the recent activity? And then perhaps related to that, do you notice airlines pausing their decision-making with respect to their fleets in response to either the MAX or coronavirus or any other factors?
So first of all, there's no intentional pause on our part here. It really is looking at the transactions that are in the pipeline for this year and looking at the expected dates, which they will come to a conclusion. And as we look at it, we see it being more in the last half of the year. So that's -- generally, the business is a little lumpy, and so we're just sort of giving some outlook for the year in terms of when we see the transactions actually happening. I don't think it's necessary that the same trend would be there every single year. It depends who's out, where the opportunities are, et cetera. A lot of people, of course, like to get deals closed by year-end, and that's generally something that focuses folks, perhaps more so from a customer point of view and that sort of thing. And I guess your question on have we seen any changes as a result of the overhang that exists right now because of the coronavirus. We've not seen anything like that at all in our business. We've not seen any change in the pipeline and the outlook, et cetera. So at this point, we haven't seen any effect.
And Doug, it's Gary here...
And same goes for the MAX?
Pardon me?
Same goes for the MAX and that impact?
Yes. Well, the MAX impact is more on Jazz, where we are flying our aircraft a lot more hours and trying to support Air Canada as it's missing a substantial amount of its fleet and managing through this process. So we've been very busy with utilization, high crude utilization, et cetera. But what's most important, of course, is we do it safely, and that's what our focus is on. And we'll continue to support Air Canada in that regard. And just as an added comment, our new arrangement with Air Canada makes this far easier as well because with the cost guardrails that are there, we're totally aligned with Air Canada in terms of just providing them with what they need to support their network. So I think that's a major benefit of our new arrangement with Air Canada, is we're not spending a lot of time negotiating. It's just a matter of saying, "Hey, we're here to help and we'll do whatever we can to help you through this difficult period."
And Doug, it's Gary here. Sorry. On the deliveries, if you look at last year, we were about 1/3 in the first part of the year and then 2/3 in the second half. It's probably going to be similar and around that theme this year, at least from what we can see.
Yes. And that brings me to the next question, the timing of the A220 remaining entries in the fleet this year. I think the last guidance you gave was kind of the end of Q3. Is that still accurate?
Yes. I don't think we've seen any change in our expected deliveries from what we had previously provided.
No, not at this stage.
And it's an exciting addition to the portfolio, as you mentioned. It's also a little larger aircraft, a little closer to a narrow-body, which has been a more competitive end of the market. This is also a relatively new platform. So there's a couple of considerations there with respect to the lease factors relative to the existing portfolio. Can you provide any comment on that?
Well, it's certainly very competitive. The lease rate factors are generally a little lower, the larger the aircraft, frankly. But the returns are still very, very good, and we are very heavily turboprop-oriented, which is we like that. And -- but we have a lot of the top names in the industry and that sort of thing. Our focus right now, going forward, will be more, I think, on the larger regional jets. We'll continue to focus on turboprops. But -- so the A220 is proving to be a great aircraft. We're also carefully looking at the developments at Embraer and E2s, which is, again, new technology, more fuel-efficient aircraft. So we see that as being in our -- a bit in our sweet spot as well. So yes, we're -- we still see good returns here, and so we're able to be competitive, I think, as was demonstrated in the case of the airBaltic acquisition.
Perhaps I'll sneak one more question in here. The loss related to the special purpose entity. Can you walk us through how you get the gain, the positive IRR, 30% you mentioned, you get a loss. And also, is this a unique situation with these aircraft specifically? Or is this something that may recur, this kind of machination when you do dispose of aircraft?
Well, it -- I think it depends in terms of when the aircraft are disposed. But aircraft trading is an integral part of the business. And for a leasing company to sell assets off at any one time is not unusual, and it all depends on the deal itself. And we make decisions based on the attractiveness of the deal. And I think, as Gary said in his comments there, with respect to the cash that was produced and the return that we saw, and our ability to reinvest this in additional fleet, we manage more for the overall business return and making the right business decision. Even though there was an accounting loss as a result of this in terms of the structure that was there, I think we've really achieved a better return, with the combination of the sale and us looking to reinvest the proceeds. So I think it was the best decision for the business. And it is, as I say, a trading business. So from time to time, as you do this, there can be some, I guess, accounting adjustments required.
Yes. So if you look at that transaction, it's pretty complicated, and as you can see, overall, not a material number. But as we work through these items, you can see that it -- there's a lot of lines it hits. And when we take the funds and we look at the IRR, it's over a 30% IRR, and then we can reinvest those funds and acquire another 4 or 5 aircraft in replacement. So we viewed it as a very positive transaction even though the accounting in this quarter only produced that issue.
Yes. And I think when you look at the cash results here, we could have ended the year if we didn't do this transaction with 67 aircraft. But by producing $25 million, and the total and the normal transaction that we have here, that gives us the ability actually to do 4 aircraft. And so we're guided more by making the right investment decisions, rather than being held on any one particular metric.
Yes. I don't think anyone is going to complain with 30%-plus IRRs.
Your next question comes from David Ocampo from Cormark Securities.
Just to get back on Doug's first question there. Can you kind of walk us through the typical time line of a leasing transaction? Just trying to get a sense that the discussions you're having today give you the confidence that you'll close on 2/3 of the deliveries in H2 '20.
Well, each deal is different. Some happen faster than others. And it really depends upon primarily the customer and the rate at which the customer moves. But quite often, they put out RFPs and they make decisions, they could defer decisions, et cetera. So it's very difficult to give you a specific time line with respect to a transaction because each one is different. And your expectations of when deals close, though, at any one time is a function of your expectation of when the customer is ultimately going to make that decision. So when we talk about having most of the transactions in the second half of this year, it's really as a result of our looking at what we have right now. And it could happen potentially where we may have something happen earlier, something comes off, et cetera. But that's where this business is lumpy. And we tend to look at it from a sort of a yearly annual point of view. We've said we have the ability to fund 20 aircraft a year, et cetera. But it will vary throughout the year. And it's not going to be so many a month, it's going to be a function of, again, the customers. So it's very difficult to do that other than really primarily on an annual basis and then giving, I think, a bit of an outlook in terms of when -- what we have before us, we expect it to close.
And David, it also depends on if it's a new customer or an existing customer. New customers taking longer. There's much more due diligence and other things that go around it. Existing customers, it's a little easier to put the paperwork in place because you've already negotiated it. So back to your point on timing, to Joe's point, there's RFPs in that, but you could be anywhere from 2 to 6 months, depending on where things are and what the customer is and how complicated the transaction, so it's kind of difficult to put an exact timing on everything.
Yes. And in some cases, even longer.
Yes, and even longer in some cases.
Yes, that makes sense. And last one for me here. Your leverage ratio continues to grind higher. I know it still sits below where the leasing comps trade at. But do you see this grinding up much higher from this point at -- I think it's 5x right now.
I think -- yes, I think as we continue to invest in the leasing area, it is going to go up a bit. It's not going to get into the leasing stratosphere, I think, at this point given we're a hybrid company, but it will go up a bit more as we invest. And again because as you know, the returns are in arrears, so it takes 12 months to accumulate. So I think you'll see it grow a bit more, but certainly stay well manageable.
Your next question comes from Cameron Doerksen with National Bank Financial.
Just a question on, I guess, additional leasing opportunities. Are you still seeing potential opportunities for acquiring larger portfolios of aircraft? I'm just wondering if anything has kind of changed on that front.
We are. We continue to evaluate those. And there are a number of considerations when we look at these in terms of the fit, in terms of our strategy, in terms of customer concentration, equipment type, et cetera. So we are, Cameron, seeing an ongoing opportunity in that regard.
Would you ever acquire a portfolio of aircraft that maybe had some aircraft that are outside of your regional focus, maybe narrow-bodies, and then subsequently divest those? I mean is that something you would look at doing? Or do you prefer just not to do that?
No, I think that's something that clearly can be looked at. I think if we look at a portfolio, there may be some aircraft that are a little outside of what we would normally do. But we would have plans then with respect to how we were going to deal with those assets, for sure. It is not our plan to get into larger narrow-body, wide-body aircraft at all. But we're flexible. And I think as we've grown scale with respect to this business, our ability to look at some of these things increases. I think we as well -- and we've talked about before, as we mature the ability and opportunities to do skyline purchases or things of that nature as well. And in some cases, if we purchase a portfolio, it may be beyond our current fleet concentration targets, which, again, we would have plans to deal with that, so that we maintain a well-balanced, risk-managed portfolio of assets.
Okay. No, that's good. Just quickly, I'm just wondering if you can update us on when you -- the timing of the CRJ900s, are you going to be moving into the CPA operation, just how they kind of come in by quarter?
Okay. This starts basically one month introduced into the CPA in May.
So one month starting May. Okay.
Yes.
And they'll all be in place by year-end, correct?
Yes, they're expected to be in place all by year-end, yes.
[Operator Instructions] Your next question comes from Tim James with TD Securities.
Just thinking long-term strategically here, the leasing business is now certainly well on track to provide some nice diversification in terms of earnings and cash flow. Do you see a need, I mean, at this point, as you think forward for additional diversification opportunities? Or do you think the leasing business now, at maturity, will provide a satisfactory business mix for the long term?
Well, I think it really relates to who we are and our strategy. And we do really 3 things overall. We fly contract flying, which I think we are doing very successfully with our CPA. We do it very successfully with Voyageur. And although very similar assets within the regional space, contract flying and other types of contracts flying would definitely be of interest to us, because there's also a leasing component to that and a support component, and we're modifying older Dash 8s, et cetera, into other purposes. So contract flying provides, I think, a business that is consistent with our business model, which is predictable, generally stable and synergistic. And then we have, of course, our leasing side, which is our -- now our growth vehicle, as you say. But then we have the support side of our business. And this is where, I think I mentioned in my comments here, where parts and components, for instance, is a really interesting business for us. We've parted out a lot of aircraft. The returns are very good. It isn't huge. It isn't -- at this point, it's not -- doesn't really materially affect results. But again, it's very supportive, and we really look at these aircraft over the life cycle of the aircraft in various roles, different purposes, et cetera. And this is why we are not a pure-play leasing company. We think we are stronger as a result of being able to operate them, redeploy them, et cetera. And I'll give an example of this, where we just recently had a Q400 come off-lease with a carrier. And we are actually going to be operating that aircraft under contracts with Voyageur. So that aircraft now is being transformed and will be on special mission contracts with Voyageur. So it really gives us the ability to look at whether we part the airplanes out, whether we operate them for special missions, whether we modify them, et cetera. So we don't see leasing as being our pure and only growth vehicle. And I think by looking at it from a broader perspective, that will help us further diversify and grow the company. Because the amount of revenue that we will receive, as you know, under the CPA, for the fixed fee, is decreasing. And we're -- you look at the rest of the business and the leasing revenue that's there, and now to augment it with others, I think it would make the company very much stronger and build up on its reputation in all segments of the business.
Okay. That's great. That's very helpful. So it sounds like you feel you've got the foundation for the necessary diversification as time goes on as opposed to feeling the need to branch out into any other area of aviation. You've kind of got the groundwork laid there.
Well, I think we've been in the business a long time. We know a lot about the business. We know a lot about the assets. And we're growing -- we've grown our team. We've grown our expertise. And I think we're now starting to show additional milestones even within the leasing business in terms of extending leases, selling assets, redeploying them, et cetera. So we don't see the requirement to really reach out to unrelated businesses or anything of that nature. We see great opportunities within the areas in which we have expertise.
Your next question comes from Amina Djirdeh with Scotiabank.
I'm Konark Gupta's associate. In your previous question, you did mention about -- a little bit about Voyageur. Could you provide a little more details on where do you see growth opportunities for Voyageur coming for the next few years?
Yes, Voyageur had a very good year last year, a lot of improvement over the year before. Contract flying opportunities are still there, for sure. The MRO side, we've hired a lot of staff in North Bay, and we are doing a lot of specialty aviation work there. It's a very solid business. The primary growth area for Voyageur is really this parts business that I mentioned earlier. And it's still relatively new. Margins are good, though, and it's a business that we are able to feed with older assets. And as well, there are attractive older assets that are available for purchase out there. So we see Voyageur playing a supporting role. I think it will be growing and improving. But again, it's a long way from our flying business and our leasing business in terms of the size of the segment, but it is very critical in terms of how we knit this whole business together.
Okay. Are you seeing any incremental interest in the A220 leasing after signing your first customer?
Yes, we are. We're seeing good interest in -- we believe there are good opportunities in the larger regional jet space, including the A220 and including the Embraer E2s. And those are aircraft that are definitely attractive to us and I believe will be great assets.
[Operator Instructions] There are no further questions at this time. I will now turn the call back over to the presenters.
Thank you very much, and thank you all for participating on the call. And we'll talk to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.