Chorus Aviation Inc
TSX:CHR
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Chorus Aviation Inc
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Ladies and gentlemen, thank you for standing by, and welcome to the Chorus Aviation Inc. Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the call over to Nathalie Megann, VP of Investor Relations. Please go ahead.
Thank you, operator. Hello, and thank you for joining us today for our second quarter 2020 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 discuss the impact of COVID-19 to our business 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 in our management discussion and analysis of the results and operations of Chorus Aviation Inc. for the period ended July 30, 2020, 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 our MD&A for a discussion relating to the use of such non-GAAP measures. I'll now turn the call over to Joe Randall.
Thank you, Natalie, and good morning, everyone. Given the state of the global airline industry, our results and continued profitability demonstrate the resilience of our business. Aviation around the world continues to be challenged by the effects of the COVID-19 pandemic. Our focus remains on ensuring the safety of our employees and passengers and maintaining ample liquidity. We are doing everything in our power to secure a future for when this crisis passed. We've dramatically reduced costs, curtailed capital investments and raise new funding. We now have approximately $228 million in liquidity, and we are well positioned to manage through an extended recovery period and to resume our growth plans when the time and conditions are right. This pandemic and the resulting provincial and federal government-imposed travel restrictions and border closures are having a devastating effect on passenger travel demand. And as time goes on, it will be increasingly more difficult for industry to recover. Our Air Canada Express operation is a fraction of what it was this time last year. To put this into perspective, in the second quarter of 2019, we operated over 56,000 flights and carried 2.7 million passengers under the CPA, compared to just 5,000 flights or 92,000 people this past quarter. We've reduced our workforce by over 65%, and I sincerely hope more employee reductions won't be necessary. The Canadian government needs to look to other G20 countries that have implemented safe, thoughtful, practical and science-based approaches to easing travel restrictions to strategically in order to enable business and economies to restart and succeed within this new normal. Unlike other countries, Canada has not provided direct support to the aviation industry. We continue to work closely with Air Canada on cost reductions, synergies and the efficient deployment of the schedule. Situation is very fluid. We are executing on our fleet modernization strategy, an important component of our cost reduction initiatives. All of the Dash 8-100s have been retired and we are looking to repurpose them. We've taken delivery of 3 new CRJ900s and 6 additional new aircraft are planned to be delivered later this year. The replacement of smaller and older aircraft by these larger, modern and efficient aircraft is key as Air Canada endeavors to effectively match capacity and costs with travel demand. At the end of the second quarter, Air Canada announced the discontinuation of 21 regional routes operated by Jazz and the closure of 8 Jazz-managed stations at regional airports. I understand the impact these service closures have on our employees, suppliers and the affected communities, many of which have lost their only link to Canada's domestic and global air service networks. These are unprecedented times and I appreciate these decisions are very difficult to make. Last week's federal announcement of new measures to support essential air services to remote communities is a first step in the right direction, but much more needs to be done. This new program is meant to assist our most remote communities, but it does not encompass smaller regional locations across Canada that also need reliable air transportation. It does nothing to assist Canada's primary commercial airlines. Canadian airlines are significant contributors to economic growth in Canada. Regional airlines are key to the provision of employment opportunities and our facilitators for travel and tourism contributing to the overall economic growth of the smaller communities to which they fly. Without this service, businesses, academia and tourism operators will struggle. In Canada, we have one of the highest levels of government-imposed costs in the world, and in the current COVID-19 environment, with one of the lowest levels of government support. As an example, we've recently learned that in response to this crisis, NAV Canada is increasing its charges to airlines by approximately 30% starting in September. This is not the kind of action this industry needs. We need to work decisively and quickly to bring the thousands of aviation employees back to work. At Chorus, we're doing everything we can to bring our 3,200 employees back and we need government to do its part. Now turning to Voyageur. Voyageur continues to provide overseas humanitarian flights and cargo services and the air ambulance operation in New Brunswick. Voyageur's MRO and part sales operations experienced lower demand during the quarter due to the impact of COVID-19. However, MRO services demand has subsequently increased, necessitating the return of employees previously on temporary layoff. This is an encouraging development, and we're pleased to welcome them back as we continue to pursue new business opportunities. While the industry remains under significant stress, we are encouraged by some positive signs of a resurgence. As expected, regional aircraft have been affirmed as fundamentally important to most countries' domestic transportation networks with regional aviation generally resuming flying earlier and an quicker pace than long-haul travel. With the improving traffic trends, we are seeing a greater increase in the utilization of regional aircraft compared to narrow and wide-body aircraft. Approximately 50% of our third-party lease fleet is flying with the number of flight hours up from the low points of this past spring. Moreover, since demand remains weak, many carriers are now deploying lower trip cost regional jets in place of narrowed-body aircraft on parts of their network. During the second quarter, our Air Canada Express operation flew approximately 9% of the block hours flown in the same period last year. We expect this to increase to between 20% and 30% for the balance of this year compared to 2019. We believe the CRJ900s will play a vital role in the recovery phase. Overall, our portfolio of leased aircraft is holding up relatively well in the current environment. We have provided short-term rent reliefs to most of our lessees and these deferrals are typically between 3 and 12 months, with repayment over a subsequent period, usually between 12 and 24 months. Approximately 28% of lease revenue was collected in the second quarter and this subsequently increased to approximately 38% in July. Given the geographic diversification of our lease portfolio, we expect to see a variation in the ramp-up speed and financial stability of these airlines. Our approach with customers is to work with them to our mutual benefit. Consistent with market norms, our leases are for a fixed-term, contain absolute payment obligations on the part of the lessee and cannot be terminated for convenience. In today's environment, many airlines lack capital to fund new deliveries, creating new opportunities for sale leasebacks and the leasing of new deliveries. Several airlines are monetizing their unencumbered fleet through sale and leaseback transactions. We believe this could potentially become the dominant channel for financing new acquisitions by airlines. We'll look to take advantage of these as the economy improves. We recognize the revitalization of the regional sector will be protracted, sporadic and will extend well in 2021 and beyond. We are taking all reasonable measures to protect and preserve our company. I extend my gratitude to all our employees who have done tremendous work to ensure we weather this crisis. Their continued commitment, resilient -- resilience and focus on safety have been unparalleled. Thank you, and I'll pass the line over to Gary.
Thank you, Joe, and good morning. I echo Joe's sentiments on the resiliency and strength of our employees. We truly have an incredible team, and I am confident we'll get through this period together. Our second quarter adjusted EBITDA was $91 million, a $5.3 million increase over second quarter 2019. Adjusted net income was $21.6 million, a $2.5 million decrease over last year, which led to a decrease in adjusted EPS of $0.13 versus $0.15 last year.Here is how the second quarter of the year compares to 2019. The Regional Aircraft Leasing segment adjusted EBITDA increased by $8.2 million, primarily related to the growth in aircraft earning leasing revenue partially offset by a $1.1 million expected credit loss provision. Due to the impact of COVID-19, the noncash impairment charge of $9.5 million and $8 million for aircraft repossession costs, were added back to adjusted EBITDA. The Regional Aviation Services segment adjusted EBITDA decreased by $2.9 million. The results were impacted by a reduction in other revenue due to a decrease in third party maintenance, repair and overhaul activity, lower aircraft part sales and reduced contract line in Voyageur due to the economic impact of COVID-19. Decreased capitalization of major maintenance overhauls on owned aircraft operated under the CPA of $2.9 million, and expected credit loss and inventory provisions of $1.3 million in Voyageur, partially offset by decreased stock-based compensation, $2.6 million, increased aircraft leasing under the CPA and decreased general and administrative expenses. Adjusted net income was $21.6 million for quarter, a decrease of $3.5 million due to the increase in depreciation of $5.9 million, primarily related to additional aircraft in the Regional Aircraft Leasing segment, an increase in net interest cost of $3.2 million, primarily related to the 5.75% debenture or unsecured debentures, the unsecured revolving credit facility and additional aircraft debt in the Regional Aircraft Leasing segment. A decrease of $1.8 million due to a loss of $0.4 million versus a gain of $1.4 million on disposal of property and equipment, partially offset by a $5.3 million increase in adjusted EBITDA, as previously described, a $2.5 million decrease in income tax expense and a decrease of $0.6 million in realized foreign exchange and unrealized foreign exchange losses on working capital. Net income decreased $9.8 million due to the previously noted $2.5 million decrease in adjusted net income, $9.5 million on impairment provisions, and $8 million on repossession costs, offset by the change in net unrealized foreign exchange on long-term debt of $6.3 million, tax recovery on adjusted items of $2.5 million and decreased employee separation costs of $1.4 million.We ended the quarter with $189 million in liquidity. Subsequent to quarter end, liquidity increased to $228 million due to the recent financings of 2 unencumbered aircraft, the sale of the DASH 8-300 and the completion of lessee rent deferral arrangements. In terms of cash flow, in the quarter, we generated $63.3 million from operations before changes in noncash working capital balances, which was slightly down by $3.2 million versus the same period last year. Our noncash balances related to operations reduced our cash flow by $91.5 million, an increase of $82 million versus the same period last year. The primary drivers of the working capital draw relate to the increased receivables driven by the increase in Controllable Cost Guardrail, lease rent deferrals and lower trade payables caused by the reductions in our CPA operations. Given our CPA operations are projected to improve to between 20% and 30% of last year, and the fact that lessees are beginning to pay a higher percentage of their aircraft rent, we expect working capital to stabilize or improve. As we look ahead, we have seen our rental revenue received in the Regional Aircraft Leasing division, increased to 38% in July, and we expect this to continue to improve over the next quarters as travel restrictions ease and airlines are able to increase the revenue-generating capacity. We have also executed on loan -- sorry, we've also executed on loan repayment deferrals with our largest lender, EDC. This allows us to defer our payments of principal and interest to the end of the year, providing us the ability to match our debt payments with lessees deferral arrangements and effectively avoid significant cash draws on the related loans. Looking at our capital expenditure forecast. We see maintenance capital expenditures and heavy checks remaining within the previously planned range of $23 million to $29 million for the year. On the aircraft related expenditures, we have added 3 additional A220 aircraft with airBaltic to our forecast for 2020. We expect our capital expenditures to be financed through a combination of cash from operations and bilateral debt for the aircraft growth transactions in the Regional Aircraft Leasing segment. These deliveries remain subject to core securing financing on acceptable terms. That concludes my commentary. Thank you for listening. Operator, we are -- we can open the call to questions from the analyst community, when you are ready.
[Operator Instructions] Your first question comes from David Ocampo with Cormark Securities.
I just wanted to circle back on sort of your future deliveries and your third-party leasing business. Is this the case where you're going to make deliveries and then subsequent after that, your -- the lessees are going to ask for deferrals? Or how are the discussions shaping up with your future deliveries?
While the future deliveries, first of all, there are 2 airBaltic later this year that are subject to financing. AirBaltic is operating a large part of its operation and is financially doing reasonably well, for sure. The Latvian government has just provided EUR 250 million investment in the airline, very solid support from the Latvian government. And so we don't anticipate that at this time. And as I say, it's subject to financing. And of course, the financing and whoever we do the financing with, we'll look to the financial strength of airBaltic at the time of delivery as well. So that's our view at this time.
And David, the way it works also they have to be current on their rentals for us to give them delivery. So...
And we have 2 aircraft with them now.
Yes.
And maybe you guys could talk a little bit about the repossession costs. What that entails? And what you're seeing in the current leasing environment or rate down so significantly that you guys are going to have hard time releasing of those around 16 planes that you may be getting back from administration?
So the repossession costs that we had there, as you know, we had the Flybe event back in January, February, fairly early on, and then COVID hit. And of course, that made securing the airplanes that were spread really over the U.K. into Ireland, et cetera, challenging in order to get our people in there, in order to get access to records, and to actually ensure that the appropriate engines were matched up with the airplanes, et cetera. So certainly more complex and costly in a COVID environment. Certainly more complex and costly than normal. We now have those aircraft secured. We are actively marketing those aircraft. It is a tough environment. There's no question about it. But we do not anticipate the depth of repossession costs on the other aircraft that are coming out just in the same manner in which we experience with Flybe.
That's great. And maybe shifting gears here to Air Canada. They're taking on the CRJ900. They took on 3 this quarter and another 6 at the end of the year. Is this the case that you guys are just going to fly those aircraft because it's more efficient and kind of taper off on the smaller aircraft? I know that was part of the plan originally. I don't know if that's expedited on this under these circumstances?
I think it's expedited under the circumstances. Air Canada desires to fly larger aircraft on some of these regional routes. And actually, they are larger airplanes. But compared to narrow bodies, they're not. And the regional jets, the CRJ900s right now are deployed on a number of routes that are normally flown by Air Canada and narrow-body aircraft. So it -- there are certainly more economical on routes where you do not need the capacity, and of course, that exists in a number of markets in Canada right now.
And last one for me here. How are the discussions with Air Canada? Is everything current? Are they asking for any sort of temporary relief? I know the fixed fee is small relative with the overall pie. I'm just trying to get a sense on that.
Well Air Care Canada is current. And we have ongoing discussions with them. We are working closely with them. I think the pressure that Air Canada feels with respect to the marketplace, although it does not directly impact our bottom line. As time goes on, there's -- there will be growing concern about the impact of regional routes and markets and when they come back. We've seen some route cancellations. But again, the contract that we have with Air Canada is unaffected by that. But nevertheless, it is concerning to us. Because, obviously, we need to see that Air Canada is able to effectively deploy the fleet that we have and that they are good demand. And that's why we are supportive of really ensuring that the government restrictions are really fact based, that there is a desire to open things up more as other countries have done. And so we're watching that very closely. And we operate and are operating a number of flights now safely. And I've flown myself a number of times. And I can tell you the experience is different, but I certainly felt safe during the whole experience.
[Operator Instructions] Your next question comes from Walter Spracklin with RBC Capital Markets.
It's Derek Spronck calling in for Walter Spracklin. I just wanted to touch quickly on the liquidity outlook that you mentioned in the MD&A. You noted that you expected to be a relatively constant in the second half. I just wanted to confirm if that assumes no additional financings, need to be completed. And if there is a need for further finance, and what avenues are you currently exploring, the potential pull through liquidity near term?
Yes. So the only financing that's assumed in there is the aircraft related as we take deliveries. So all of our Aircraft Leasing segment deliveries are subject to financing. So that's the only thing that's in there. So -- and usually, they're around 80% loan-to-value. Other than that, we expect our liquidity to remained constant or very good to the end of the year in around $200 million.
Okay. Okay, awesome. That's helpful. And then just in the working capital, assuming a significant headwind on cash in the quarter, but you see it stabilizing or improving in the back half. I just wanted to get into the fact, that is inclusive of the anticipated $60 million increase in receivables from leasing customers?
Yes. It includes everything we've mentioned in the outlook. We also do expect our working capital to improve, and particularly in the payable side. If you look at the operation in the first part of the year, it was around 10% or 12% of block hours phone in the first quarter, and we're going between 20% and 30%. That naturally, just when you do aged payables and things like that helps the flow. So we've already seen $5 million or $10 million pickup just since the end of June based on the increased volume. So we expect good stability out of that number and then making its way through liquidity.
Okay. Okay. That's great. And then one last one for me. So has the current unencumbered asset pool now been exhausted with the 2 financings at the end of July? Or is there additional flexibility there?
So in the quarter, we completed -- what we did is we completed financing on 2 aircraft that were with Indigo that we had taken at the end of last year, so that was the $18 million. And when you look through, we also moved some financing. We have 5 Flybe, [ X ] Flybe Q400s. They were fully encumbered. What we did is we moved 3. We took the loans off of 3 and transferred them to 2 other performing aircraft. So we still have now 3 Q400s that are unencumbered under that. So it was a bit of a swap we did during the quarter. So we did some things there to really help free up that fleet and make it a little easier to remarket.
[Operator Instructions] And we have no further questions queued up at this time. I'll turn the call back over to the presenters.
Thank you very much, operator, and thank you, everyone, for taking the time with us this morning. We'll now conclude the call.
This concludes today's conference call. You may now disconnect.