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Good morning, ladies and gentlemen, and welcome to the Chorus Aviation Inc. Fourth Quarter 2021 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, February 17, 2022. I would now like to turn the conference over to Nathalie Megann, Vice President, Investor Relations. Please go ahead.
Thank you, operator. Hello, and thank you for joining us today for our fourth quarter and year-end 2021 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 the 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 in our management's discussion and analysis of the results and operations of Chorus Aviation Inc. for the 3 months and year ended December 31, 2021, 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 measures, including references to EBITDA, adjusted EBITDA, adjusted EBT and adjusted net income. Please refer to our MD&A for a discussion relating 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. 2021 was a very productive year, and I'm pleased with our accomplishments especially considering the prolonged pandemic. We started the year by revising our capacity purchase agreement or CPA with Air Canada that enhanced Jazz's position as the exclusive Air Canada Express operator of 70- to 78-seat regional capacity until the end of 2025 and we added 25 Embraer 175s to the covered fleet. We are now the sole provider of Air Canada Express Services and the relationship has never been stronger. A reminder, our CPA with Air Canada continues to 2035. We strategically managed our liquidity through successful capital raises and reduced our net debt by approximately $240 million to recharge our financial flexibility. We continue to generate positive cash flow and have the resources required to focus on profitable growth. While airlines around the world are still challenged to return to pre-COVID profitability, our fourth quarter yielded positive returns of $0.06 in net earnings per basic share or $0.12 on an adjusted basis. Our employees have shown tremendous resilience throughout this crisis and have provided safe and high-quality services to our customers. I'm deeply grateful for their perseverance and dedication. Voyageur had a record year in 2021, having secured new contracts that expanded cargo operations with Purolator and develop new relationships with blue chip customers like Transport Canada, the Canadian Armed Forces and General Dynamics Missions Canada. The team is executing very well and the momentum they gained in the year will continue to positively impact earnings throughout 2022 and beyond. Last month, Voyageur entered into an agreement with Sabena Technics to provide on-site service support of Dash 8-400 aircraft through the Voyageur's EXCL program. This agreement extends our parts provisioning business into Europe, a key target market, and we're very pleased to welcome Sabena to our roster of high-quality customers. I also extend my congratulations to the team at Jazz for being recognized again this year for being named one of the Best Places to Work in 2022 by Glassdoor Employees' Choice Award. This is an award that is based solely on the input of employees who elect to provide anonymous feedback about their job, work environment and employer. Given the challenges and stress, many of our employees have endured over the last 2 years, this is an incredible testament to the positive and can-do attitude of our people. The accolades don't stop there. Jazz was also recognized in January as 1 of Canada's top employers for young people for the tenth consecutive year. Congratulations to the team. The Chorus Aviation Capital team has done well in a very challenging environment to support our customers and in remarketing all 13 aircraft we possessed in 2020. Quarter-over-quarter, we saw improvements in the overall utilization of our lease fleet and collected 83% of lease revenue recognized in the fourth quarter up from 77% from the previous quarter. We view this as a positive sign that air travel demand is rebounding, particularly in the domestic markets where most of the lessees operate. Restrictions are gradually being lifted worldwide as more people become vaccinated and cases of COVID decline. The easing of travel and border measures announced earlier this week by the federal government is a positive step for our industry. However, more needs to be done. Thank you for listening. And now I'll turn the call over to Gary.
Thank you, Joe, and good morning. Here's how the fourth quarter of this year compares to the fourth quarter of 2020. We generated adjusted EBITDA of $90.5 million, an increase of $8.5 million over the prior year. Adjusted net income was $21.5 million in the quarter, an increase of $13.8 million to $0.12 per basic share.The RAL segment's adjusted EBITDA increased by $5.9 million due to additional aircraft earning lease revenue and a $3.6 million lower expected credit loss provision partially offset by lower lease revenue related to negotiated lease amendments and decreased earnings due to a lower U.S. exchange rate. The RAS segment's adjusted EBITDA increased by $2.6 million. The fourth quarter results were impacted by an increase in other revenue due to an increase in third-party MRO activities, card sales and contract flying, an increase in capitalization of major maintenance overhauls on owned aircraft $2.8 billion and an increase in aircraft leasing revenue under the CPA, offset by a decrease in fixed margin of $2.4 million in accordance with the CPA and an increase in general and administrative expenses attributable to increased operations. Adjusted net income of $21.5 million for the quarter, an increase of $13.8 million due to a -- sorry, $8.5 million increase in adjusted EBITDA, as previously described, a decrease of $5 million, primarily due to a decrease in unrealized and realized foreign exchange losses, a decrease in depreciation expense of $3.5 million an increase of $1.7 million related to gains on property and equipment and asset-backed commercial paper, offset by a $3.8 million increase in adjusted income tax expense and an increase in net interest cost of $1.1 million. Net income increased $1 million over the prior period, primarily due to the previously noted increase in adjusted net income of $13.8 million, a decrease in impairment provisions of $27 million, offset by a decrease in net unrealized foreign exchange gains, primarily on long-term debt of $35.4 million and a decrease in income tax recoveries on adjusted items of $3.2 million. Now turning to liquidity. As of December 31, 2021, Chorus' liquidity was $188.5 million, including cash of $123.6 million and $64.9 million of available room on its operating credit facility. Liquidity decreased from the third quarter of 2021 by $69.6 million primarily due to the redemption of $85 million principal amount of the 6% debentures, which was partially offset by a reduction in restricted cash. During the quarter, Chorus generated cash flow from operations of $48.9 million. Other key liquidity changes during the quarter include, items that increased cash flow are as follows: an increase in security deposits and maintenance reserves of $20.1 million, a decrease in restricted cash of $14.9 million. Items that decreased cash flows are as follows: scheduled debt repayments of $50.2 million, repayment of the prior facility of $30 million, capital expenditures of $18.4 million and an increase in working capital of $17.4 million, driven by an increase in receivable from Air Canada offset by accounts payable. As of December 31, 2021, the Controllable Cost Guardrail receivable was $44.9 million. The amount was paid in Q1 in accordance with the 2021 CPA amendment. As of December 31, 2021, CAC's gross lease receivable was $84 million. The gross receivable may increase to approximately $90 million by the end of 2022 due to rent relief arrangements and potential delays in payments. Leverage decreased year-over-year due to an overall reduction in net debt of approximately $240 million, partially offset by lower adjusted EBITDA of $18 million. Adjusted net debt to adjusted EBITDA ratio went from 5.8% at the end of 2020 to 5.4% at the end of December 31, 2021. Before opening the call to questions from the analyst community, I would like to acknowledge the continued outstanding efforts of our team during 2021 in a challenging and evolving operating environment. That concludes my commentary. Thank you for listening. Operator, we can open the call to questions.
[Operator Instructions] This question comes from Konark Gupta with Scotia Capital.
My first question is on your ability to reprice any leasing contracts, perhaps annually or in the short-term, as interest rates increase and the market conditions improved. So can you speak about the kind of the terms -- or the pricing terms you can renegotiate or [ re-talk ] with clients.
It's Gary here. On the aircraft leases, they're generally locked in once you sign the lease. And as you can note in our disclosure, about 98% of our debt is fixed overall. So it's all locked and works together. So once you sign the lease, though, it is locked in for the term essentially.
We do expect with an increased interest rate environment that lease rates will rise accordingly. So generally speaking, there's certainly a correlation between lease rates and interest rates.
Makes sense. And then you talked about gross lease receivables increasing again this year as relief measures kind of still continue. I'm just wondering if you can provide any visibility as to when do you think that lease receivable will peak? Will that be the end of this year? And what's your visibility for when do you expect that receivable to be collected? In what time frame?
Yes. So it's Gary here. Yes, on the receivables, you can see our disclosure on that. We still have some deferral agreements that run into next year a little bit, and that's why you're seeing that guidance. On the value will come down over time. It will take several years to distinguish. There's no question about that. But we're not giving the longer-term guidance other than this year, and then it will take several years to distinguish the receivables.
Your next question comes from Matthew Lee with Canaccord.
Congrats on the quarter. I'd like to first ask about the options you've got to expand the leasing portfolio. Specifically, do you have a preference between acquiring assets, signing individual agreements or maybe buying competitor in the space?
Yes. Generally speaking, we've been focused more on new sale leaseback type of opportunities. But we're certainly not totally focused on that. We look at all opportunities, including midlife aircraft and in some cases, older assets as we do have options as they come to end of life with our diversified business, et cetera. So we continue to talk with airlines, other leasing companies in terms of sourcing potential opportunities there where they're looking to diversify or to divest a part of their portfolio, et cetera. So we have a broad spectrum and so -- and we'll continue to do that.
That's great. And then maybe can you unpack the opportunities you're seeing in cargo? Obviously, the Purolator contract is a great start, but do you see that becoming a more meaningful part of the business going into 2022 and beyond?
Yes. We certainly look to -- for that to be a growing part of the business. I think we're very pleased with our relationship with Purolator. It's been going very well. So we see that as an exciting opportunity for us. We have converted some of our older [ Dash 8 ] passenger aircraft into freighters, and we do have a number of them available to do so. But again, it's related to the demand that we see. But we do see it as a growing part of our business and certainly opportunity there. And we're making good progress. It's not a huge part of our business, but we'll continue to pursue it as a growth opportunity.
Your next question comes from David Ocampo with Cormac Securities.
On your future leasing revenue, I was kind of assuming no new assets here. Should we see growth in the upcoming quarters as repossessed aircraft are redeployed? Or is this going to be offset by the leases that you renegotiated specifically Aeromexico comes to mind?
It's Gary here, David. I think you'll see it be pretty steady, maybe a modest increase. It should be pretty steady most of the aircraft are back out now. As you know, they were remarketed during the course of the year. So there's a little bit of a time lag that you will see throughout there. In Aeromexico has now emerged from bankruptcy or very close to it, and we should see a small uptick there. So [indiscernible] small uptick.
Okay. And you guys noted the bankruptcy of Philippine Airlines coming out of Chapter 11. Kind of when you look at your remaining customers, are you aware of any other airlines that maybe on the brink are -- or in financial hardship right now?
No, I think the whole environment has improved frankly, around the world with respect to carriers. We've redone agreements with most of them and those agreements are sticking. There are still a couple of areas of the world which are struggling a little, but we certainly believe that the worst is behind us. And so -- and of course, we've taken some provisions, as you know, in our financials, et cetera, which we think very well cover us in terms of where we are.
Okay. And then my last one here is for Gary. When I take a look at the leasing businesses operating expenses after you strip out those onetime costs, it looks like it only came in at around $2 million in the quarter, and that's lower than basically anything that you guys have done over the last 8 or 10 quarters or so. I was just curious, if there's any onetime benefits in there? Or is this a new number that we should expect going forward?
There's nothing that sticks out. I think when you look at the quarter, you're starting to see the benefits of getting the aircraft back on lease and whatnot. So when you look at the overall results, I think the quarter is not that taken on spot, particularly with the revenue and whatnot. So.
And I guess in the past, Gary, you guys have mentioned that you target like an SG&A percentage of revenue, I forgot what the number was it was 7% or 10%. Is that still the right number going forward?
Well, I think if you look at where the SG&A is year-to-date, it's going to be higher as a percentage just as refleet -- as we repositioned our fleet. And then as we grow, we would want to get below 10% for short in the next number of quarters. But it's going to take time to grow into that. The fee infrastructure is still there. It's -- if you go back and look, we've taken some hits on the revenue when we've adjusted now for that. And moving forward, as we grow, we'll get back to something more abnormal.
Your next question comes from Tim James with TD Securities.
A quick question on the Air Canada trade receivable was real it fluctuates around quarter-to-quarter. It was up a fair bit more than it was at the end of 2020. Is there a particular reason for that?
The guardrail is -- it's Gary here. The guardrail was pretty significant there in the quarter, as you saw in our disclosure. So as you know, it's a $20 million cap. So grew a fair bit in the quarter, and that's what the bulk of that would be that you saw. And then, of course, that was paid here in Q1. And so we set itself to 0.
And just so I understand correctly, the Guardrail receivable is included in that disclosure that you have on the total, I guess, total Air Canada trade receivable. Is that right?
I believe so. If you're looking at the financial statements from the back.
Yes, yes. Just the number, I think it was -- I mean, it was certainly, it must include more, I believe and then the Guardrail receivable, but I'm just wondering.
It should be included.
That significant change in it from year-end to year-end would be related to the guardrail component specifically?
That certainly built up in the end of the quarter. The other thing is the normal receivables that make their way through there, whatever they may be. So related to the operation, but the guardrail is a significant component of it.
Okay. Okay. My next question is just on your new aircraft acquisition plans for 2022, and you've indicated kind of $300 million to $400 million. I'm just wondering, if you can comment at all on any particular aircraft types that you think look particularly attractive this year or where there may be opportunities, whether it's by OEM or by Jet versus turboprop size, any kind of defining characteristics that you see as you look out to the balance of the year?
Right. Well, I think we've been saying all along that we find the larger regional jets to be particularly attractive and sort of a crossover aircraft, which are in the age of 20s. I think the E2s in particular. The turboprops are taking a while to pick up the surplus that's in the market, although you may have seen recently that ATR is going to be upping its production and actually moving more into the freighter side as well, which is interesting. So -- and of course, the 75-seat jets are generally still in good demand, especially in the U.S., et cetera. But of course, those would be primarily used assets, et cetera. But I think what's particularly interesting are the new generation regional jets on the larger side, over 100 seats.
Maybe if I can just follow on to that. Just in particular, the A220, there's been more activity in demand for new aircraft. Recently, Chorus dipped their toe in the water there with a few aircraft. Do you think that is something that continues to grow in proportion or have an increasing contribution to lease revenue for Chorus? Or is it a bit of a more competitive market? Or is there any dynamic that maybe makes it less attractive?
Well, it's certainly a competitive market, and there's no question about it, but I do see it becoming a larger part going forward. And you have these midrange airlines that are operating and looking to move to these new technology, larger regional jets. And those would be, in particular, in our target group When you look at huge buys from large carriers, quite often, that's the ground of the larger leasing companies plan. in this particular market, I think we'll be more of a niche player, but there are clearly carriers that are moving in that direction that would fit the type of carrier profile that we would target. As you can see, we have 5 airplanes with Air Baltic there. And Air Baltic is a great example of a niche player that's been very successful, very supportive in its home market, et cetera. So and there are other opportunities such as those that we would pursue.
Your next question comes from Walter Spracklin with RBC Capital Markets.
And congratulations on those recognitions. I know in the airline industry, it's a tough one through COVID to get recognized that way. So congratulations.Moving on to the questions. And really, I have 2 and they're core to kind of our view on your company. And the first one is that as we go through what I hope is the tail end of COVID, we are going to see a pickup in activity, and it's going to be first and foremost in the short-haul regional friend and family. On your results, the fourth quarter suggested that, but now your guidance on Q1, obviously down due to Omicron. My sense is, and I hope that Omicron is kind of just a temporary aspect in your financials and that the second quarter and forward, in fact, come back along the lines of what we're seeing last fall. When you look at your booking curve, is that supportive or contradictory to that view, is my question?
Okay. That's a very good question, Walter. And our equivalent to a booking curve is the number of block hours we fly because we don't have -- as you know, Air Canada has the commercial side of the business in terms of load factors and bookings, et cetera. And that all translates to us in terms of block hours long. And I think I do have some numbers that I can share with you that I think clearly demonstrates pretty much what you're talking about. In the fourth quarter last year, when you compare it to pre-pandemic in 2019, we operated about 75% of the block hours we did pre-pandemic. So it was definitely up. The fourth quarter was going well, et cetera. And then Omicron struck. And it looks as though from what we've actually shown, and we're starting to see some pickup numbers even in March that the first quarter now, we will be at about 60% of where we were pre-pandemic. So obviously, it had fallen. And when we look at our numbers, that was the impact of the pandemic of the Omicron, I should say. And then though, when we look at the second quarter of this year, we're looking at actually the hours that we're planning on right now are about 87% of pre-pandemic. So you can see that while there is a drop in the first quarter as a result of Omicron, I think there's reason to believe that now things are going to pick back up, and we're going to get to where we were pre-Omicron and plus. So I think those numbers will give you some indication that in terms of our overlooking first quarter, not so great because of the block hours, but definitely recovery. And the other thing to remind people of as well is that we're paid a fix amount, and it really doesn't matter how many block hours. And of course, while we watch this carefully because it's sort of a bellwether of how the industry is going, it doesn't necessarily all manifest itself in our results, which are generally fixed.
Okay. That is excellent information. I think exactly what I was looking for. So thank you for that, Joe. That's perfect. On the second part of our view, and again, I'll kind of frame the question the same way. It's our view that stretched balance sheets among airlines will not allow them to go out and kind of buy up aircraft left, right and center and perhaps leasing will be an opportunity they use in perhaps and likely in the early, early months and quarters and years to ramp up quickly and to be able to ramp up at all, quite frankly, given their stretched balance sheet. Obviously, you've got to get your collections back first and the trend there is good, what we've seen in the last 3 quarters. You've highlighted a few wins here. But I guess my question is the same thing is when you look at your sales channel in that segment, are we getting to a point where you can look down the road and say, "Hey, that is true. Airlines are going to be leasing a lot and perhaps and likely more than they did pre-pandemic. And is there any visibility that you have that could confirm or deny that kind of view?
Yes. I think what you're saying is very true. I think more airlines will do this with their damaged balance sheets, et cetera. A lot of them have been pretty cautious in terms of adding new aircraft or capacity, et cetera. And there's some aircraft to absorb in the marketplace that were grounded as a result of the pandemic. I think what we're seeing, though, is we've seen more or less, especially in the regional side, maybe not totally in the narrow-body, wide-body, but in the regional side, there's been, I think, a little bit of a shoring up over this last little while on some of the lease rates that we're seeing out there. And some of the reports that we're seeing shows that it has, in fact, bottomed out. So I think we're going to see the increase. And this is barring any unforeseen another variant or a world crisis or something like that. But there will be that uptake -- or uptick. And we are getting inbound inquiries from airlines now, looking to do more leasing business, et cetera. So very good signs of recovery in the market.
Your next question comes from Cameron Doerksen with National Bank.
Obviously, there's been some press reports out there regarding potential M&A. I appreciate that you're not going to comment specifically on those reports, but maybe a bigger picture question for you, just with regards to what -- if you were to pursue the M&A route to grow your portfolio, what potential synergies do you see or strategic advantage would there be for your leasing business to have that greater scale? Maybe just comment on sort of the -- more generically on what the potential upside could be to the business if you were to pursue that route?
Yes. Like we said, we're not going to respond to speculation. And that sort of thing. However, I think it makes sense that more scale brings advantages in terms of a larger leasing platform with manufacturers, with financing, larger orders, things of that nature. There's been [ this location ] in the market for sure with some of the larger lessors. There's still a lot of assets out there that we picked up. And there's no shortage of rumors and speculation. And we're certainly keeping our eye on all these things and looking for opportunities that make sense for Chorus, and we'll continue to do that. But -- and through that, we would bring -- and look to bring in some of the advantages that could come from any possibility. So we continue to look at it, no comment at this point because there's a lot of speculation, but we'll just keep it at that.
And do you think it matters to an airline who they're leasing from? I mean is it -- do they prefer to deal with a bigger lessor versus maybe a smaller player? Or does it make any difference to them?
I don't think it makes a lot of difference. Obviously, larger lessors can do bigger deals. In some cases, larger airlines don't want to do a whole bunch of small deals but we have leases with large airlines as well. So a lot of it is relationship based. It's who you know in the industry and getting in there and getting in the competitive process. And so a lot of it is driven by that. But we're -- our focus has been primarily not on the very, very large carriers but on the mid to smaller side and we're quite comfortable in that niche.
Okay. No, great. Maybe just a quick second question. You've got a number of aircraft there that will be available for part out. Just wondering what you're seeing in the part-out market? I mean, obviously, airlines around the world are turning to fly a little more. I mean, is there some acceleration of demand for part-out opportunities here? .
Yes. There has been some acceleration of demand, and we continue to part out aircraft. So we're very pleased with that business. And we see it as a good part of our business going forward. And it really helps when we look at the whole life cycle of the aircraft, which is what we've been talking about for a while, we do have a number of older airplanes sitting there, and we look at each as a part-out opportunity. And we have done a number, and we'll continue to do it. So there's good demand in that area, and we see that recovering as well.
Your next question comes from Kevin Chiang with CIBC.
Just looking at some -- I guess, some of the growth spend you're looking at within your leasing business. I guess how much of this is you looking at more sustainable recovery in the aviation space versus maybe taking advantage from a market that seems to be a little bit more advantageous for you. So I look like Nordic Aviation seems to be facing significant issues. Is it like a market share grab opportunity here that this window is opened and that's driving maybe more aggressive, a more aggressive stance for you to take advantage of maybe where your competitors sit today?
Yes. Well, market share for us is secondary. What we do is we look at each deal in terms of the financial aspects of the deal, the creditworthiness of the customer. And of course, what we've been balancing that all against is our own liquidity as we move through here in our own balance sheet, et cetera. So while market share is nice to have, we've seen some large lessors with major [indiscernible] market shares that have not been successful. So we're being very prudent and very careful. That's the way I can describe it, I think.
And is it -- maybe for lack of a better word, -- is this a buyer's market for you? For example, like Nordics, I think they wrote down like 1/3 of their asset portfolio, I think they're going to look to sell planes, which I suspect they're not in a great negotiating position. So as a buyer of these aircraft, are you finding that to be more compelling from an economic perspective, so that even though lease rates might be a little bit challenged here, you're still getting that ROE that you typically target?
Yes. Well, whenever there are buying opportunities, you have to look at the asset -- had to look at the deployment of the asset because if you buy these assets and you don't have a home for them then it ties up a lot of cash and there are a lot of surplus assets out there right now. So in each case, you also have to look at if you're coming with leases attached, how long the lease is, quality of the carrier gain. And there are some credits that are out there that have very much struggled and continue to do so. So we need to be very, very careful. And while they are buy opportunities, what we don't want to do is take on some of these opportunities and then they become problems. We want to make sure whenever we act on something like this that we have a plan.
And maybe just last one for me. When you think of growing the portfolio and I think of -- maybe your strategy pre-pandemic, it was trying to be diverse across geographies, across aircraft type, across customers. And obviously, that makes sense in your building portfolio. But I think there's going to be an [indiscernible] obvious. There's going to be uneven recovery in the aviation market when you look at region by region, does that kind of shape how you want your portfolio to be? Like do you try to limit aircraft or your exposure to maybe Asia Pacific, which is expected to lag in the recovery? Is your preference to put more planes into the say, North America and Europe where the recovery might be faster? Just is a little bit more thoughtfulness -- I'll say thoughtfulness, but is there maybe a little bit more focused on maybe what geographies you want in your portfolio as the overall market recovery.
Yes. Generally speaking, it's great. Diversification is wonderful, all things being equal. But all things are not necessarily equal in terms of geographies and carriers. So we're cautious if something is struggling, and it looks as though it's going to take some time, then we'll look at that extra carefully. But of course, if it's a geography or a carrier that is robust and has come back pretty quickly, we'll look at that opportunity more favorably. So in the short-term, as the world has an uneven recovery and carriers are uneven we'll tend to go more to where the real -- the floor is there, and we're comfortable with the investment. So -- and as I said, some of these continue to struggle. So we're not parts of the world. We're certainly not out of that yet. I don't think the world is, but it's headed in the right direction.
[Operator Instructions]
Okay. Operator, it seems there are no questions. So we will conclude the call. Thank you, everyone, for joining us today, and we look forward to speaking with you again soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.