Chorus Aviation Inc
TSX:CHR
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2
3.36
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Chorus Aviation Inc
Earnings Call Analysis
Summary
Q2-2024
Chorus Aviation's second quarter results were stable, with $51 million in adjusted EBITDA and $28.2 million in free cash flow. The sale of its Regional Aviation Leasing (RAL) segment is set to close by year-end, eliminating $1.7 billion in debt and significantly improving financial metrics. Post-sale, Chorus expects a pro forma leverage ratio of 1.5 and pro forma free cash flow of $32.4 million for Q2. The transaction simplifies the balance sheet and boosts financial flexibility, enabling future growth and shareholder returns. Voyageur Aviation, a key growth driver, targets $150 million in revenue by 2025, up from $100-$120 million.
You don't have any saved screeners yet
Good morning, ladies and gentlemen, and welcome to the Chorus Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Wednesday, August 14, 2024.
I would now like to turn the conference over to Tyrone Cotie, VP of Treasury, Investor Relations. Please go ahead.
Thank you, Joanna. Hello, and thank you for joining us today for our second quarter conference call and audio webcast.
With me today from Chorus are Colin Copp, President and Chief Executive Officer; and Gary Osborne, Chief Financial Officer. We will begin today's call with a brief summary of the results, followed by questions from the analyst community.
As there may be some forward-looking discussion during the call, I ask that you refer to the caution regarding forward-looking statements and information found in our MD&A. This pertains specifically to the results and operations of Chorus Aviation Inc. for the 3 months ended June 30, 2024, as well as the outlook section and other sections of our MD&A where such statements appear.
As a result of the agreement to sell the Chorus Regional Aviation Leasing segment, or RAL, the RAL segment has been reclassified to discontinued operations and our Regional Aviation Services segment, together with Corporate, is now referred to as continuing operations. Finally, some of the following discussion involves non-GAAP financial measures, including references to adjusted net income, adjusted EBT, adjusted EBITDA, leverage ratio and free cash flow. This quarter, we have also provided certain of these measures on a pro forma basis to illustrate the financial impact of the disposition of the RAL segment on our capital structure. Please refer to the MD&A for further information relating to the use of such non-GAAP measures and pro forma figures.
I'll now turn the call over to Colin Copp.
Thank you, Tyrone, and good morning, everyone.
As we just recently reported out on the RAL sale transaction, I'll keep my comments short today. I'm pleased to report that our second quarter results with revised comparative figures, as Tyrone mentioned, reflect a strong, steady and reliable business going forward, with our cash generation enabling us to further improve our leverage ratio. As we look forward, Jazz has approximately $1 billion in contracted revenue in the form of fixed fee and leasing revenue under its CPA for the term of the agreement. And Voyageur is steadily growing. This quarter, both Jazz and Voyageur delivered strong financial performance with a combined adjusted EBITDA of $51 million and $105 million year-to-date. Voyageur delivered a $4.8 million increase in revenue over Q2 of 2023, demonstrating their ability to seize new opportunities. They purchased a King Air 200 in the second quarter of 2024 in support of their contract with air ambulance, New Brunswick for the provision of fixed-wing air ambulance services. I'm pleased with our results and the progress we've made with improving the financial position of the business. Through the quarter, we also bought back 1.4 million common shares under our NCIB.
Turning for a moment to our recent announcement on the divestiture of Falko, and our regional aircraft leasing business. The process continues to progress well, with our Shareholder Meeting called to approve the transaction in just over a month scheduled on September 25. I'm very pleased with the feedback we've received so far from our shareholders and industry partners, which further reinforces the value creation of this transaction. We appreciate that it will take a few months for us to get through the various approvals and for the transaction to close, and that it will also take time for the true value of our business to be reflected in our share price.
It is well recognized that this transaction will enable us to significantly deleverage our capital structure, generate more predictable cash flow and provide us with the flexibility to grow and return capital to common shareholders going forward. Benefits of this transaction cannot be overstated when you consider the strength of our go-forward cash flow and liquidity in combination with the simplification and improved flexibility of our business.
On the debt side alone, we see a dramatic reduction in our pro forma leverage ratio to 1.5x. And post-closing, we expect to eliminate substantially all corporate debt, giving us strong financial flexibility going forward. This will create the right conditions to allow us to grow at a steady pace and capitalize on accretive opportunities in the aviation and aerospace sector.
I also recognize that our investors want to know more about the return of capital to shareholders. We appreciate your patience as we work towards the close of this transaction. Our priorities are on shareholder returns, measured growth and managing down corporate costs. Over the next few months, our focus will be on closing the RAL transaction, which is subject to shareholder approval, regulatory approvals and other customary closing conditions. We continue to expect the transaction to close before the end of the year.
As a final comment, I want to thank our employees for their hard work over the past several months and reiterate my confidence in our ability to grow at a steady pace going forward, and to thank our shareholders and Board of Directors for their support.
I'll now pass it over to Gary to take you through the financial highlights. Thank you.
Thank you, Colin, and good morning.
As mentioned at the opening, as a result of the announced RAL transaction, the RAL segment has been reclassified to discontinued operations, and our Regional Aviation Services segment, together with Corporate, is now referred to as continuing operations. First, we'll have one reportable operating segment and will no longer disclose its results on a segmented basis.
Our second quarter results for continuing operations were in line with our expectations, and the guidance provided for the Jazz CPA and capital expenditures remain in effect and are contained in the outlook section of our MD&A. As we look at the results from our continuing operations for Q2 2024, our adjusted EBITDA came in at $51 million, in line with our expectations. Our free cash flow was $28.2 million for the quarter, primarily derived from operating cash flows. Our leverage ratio was 3.0 at the end of the quarter, down from 3.3 at December 31, 2023. This has been accomplished primarily through long-term debt repayments of $79.7 million since December 31, 2023.
Our adjusted net income available to common shareholders from continuing operations was at $0.01, which includes the debt and preferred equity costs, which we intend to eliminate at the close of the RAL sale. We also allocated capital to retire 1.4 million shares in the quarter at a weighted average price of $2.15 per share. As Colin mentioned, after closing, the sale of RAL will allow us to eliminate $1.7 billion in financings, including all RAL segment aircraft-related debt, substantially all of Chorus' corporate debt and the USD 300 million preferred shares.
I'd like to also share some additional details on the benefits of the sale to shareholders. Post closing, the transaction is expected to significantly improve Chorus' key adjusted metrics. We look at this quarter and overlay those effects on a pro forma basis, as we show in Section 4 of our MD&A. We see pro forma adjusted net income available to common shareholders per common share from continuing operations of $0.08 and $0.17, with the 3 months and 6 months ended June 30, 2024. This would be more than a five-fold increase in our currently reported figures of $0.01 for the quarter and $0.03 year-to-date.
Our pro forma leverage ratio would be 1.5 at June 30, 2024, half of the 3.0 reported in this quarter, demonstrating the significant financial flexibility we will have moving forward. And pro forma free cash flow of $32.4 million and $67.3 million for the 3 months and 6 months ended June 30, 2024, up approximately 14% from the $28.2 million and the $58.9 million reported. This demonstrates our strong cash flow that will support future return of capital to shareholders and measured growth.
Sale of RAL will allow us to make changes to our capital structure that will result in a substantially strengthened and simplified balance sheet. Changes in capital structure will drive improved profitability, primarily driven from reduced debt servicing costs and by eliminating the preferred share dividends, which more than offset foregone earnings from the RAL sale. Our pro forma leverage level will be well below the target range for the company and that of our peer group, providing us with flexibility moving forward.
I would like to conclude by mentioning that we worked with our lenders led by the Bank of Nova Scotia to put in place significant flexibility in our capital structure with this transaction. Subject to closing of the sale of the RAL segment, we have amended our $50 million bilateral facility secured by the unencumbered aircraft leased under the CPA to be available for future growth opportunities and general corporate purposes. In addition, we are maintaining our $150 million secured operating revolver. This provides us $200 million in financing to support operations and the growth of the company.
We are now ready to take your questions.
[Operator Instructions] Your first question comes from Hillary Cacanando from Deutsche Bank.
So it looks like you're set up very well post the transaction, with more flexibility to increase shareholder value and for growth. And so with a fixed contract with Air Canada as your main business, I was wondering, what would be the biggest risk to your story or to your business going forward? Would it be global recession or geopolitical situation? Or would you say you're pretty insulated now with that as your main -- with a fixed contract as your main business? Or is there something else that could -- that you would consider a risk to your story?
Hillary, it's Colin. Yes, I think on the risk side, Voyageur and Jazz are very solid. There's almost -- we're extremely insulated there with both of them. Voyageur is very diversified in what they do, and Jazz is extremely solid with Air Canada with a long-term contract, as you know. So, we don't see any real apparent risks there at all. I think our focus is really in 3 areas, as we've kind of reiterated over this last few weeks here. It's really about evaluating as we get through the transaction, shareholder returns, looking at measured growth and managing down our corporate costs. Those are kind of our 3 areas of focus as we move forward.
Got it. Great. And then I just have a question on the Cygnet business. It doesn't look like we really have a pilot shortage situation anymore, I think. So are you still seeing the same type of, like, interest level among potential candidates? Or do you think perhaps maybe are we in a situation, maybe we have more candidates than the demand in the industry?
Yes. Absolutely. I think in the U.S., we are seeing a little bit of a slowdown on the pilot side. In Canada, we've not seen that. Cygnet continues to track very well. And as the demand, I guess, in the higher level regionals and the mainline operators slows down, there's still a big demand in Canada for pilots at the lower levels. So, we see Cygnet continuing to grow on track, on plan, and we have no problems attracting students, new hires or even finding placements. So, we see that continuing on for a long time and most specifically that it's a little bit of a differentiated product with its relationship with CAE.
The next question comes from James McGarragle from RBC Capital Markets.
I just have a longer-term type of question on the CPA. There's a step down in 2026 that you flag in your guidance. But those aircraft that come out of the CPA in that year, how do you expect to redeploy those? And when we think about this even longer term as aircraft come out of the CPA, is that cash flow neutral as these aircraft are potentially redeployed? If you can just provide any color there.
Sure, James. All the aircraft that are in the CPA, as they come out or come off that, all are basically unencumbered. I think Gary's talked about that quite a bit, and he can give you some view on kind of the financial side. Right now, our plans are to continue to work with Air Canada and renew those leases and we continue to make progress in that area. So the immediate plan is obviously to see those aircraft continuing within the Jazz CPA. And where they can't, they're basically unencumbered assets that we could either redeploy into different operations or we could sell, or we could do whatever we want with. But given that they're unencumbered, it gives us a great deal of flexibility with regards to those assets.
Yes. It's Gary here. Yes. So if you look at our disclosures, we have 9 aircraft in our disclosures that's coming off-lease. We continue to look for opportunities, whether it's with Air Canada or others, to release some of those aircraft. And if not, we can redeploy them, as Colin said, but they are unencumbered, they're debt free and we have opportunities to redeploy or to sell in some cases. So it does provide some flexibility at least moving forward.
Yes. I appreciate the color. And then on Voyageur, some of your peers have talked about some pretty good opportunities, surveillance, medevac. Anything that you're kind of working on there in the immediate term that you can flag? And then is the strategy discussed longer term there still appropriate? Or any updates that you might want to flag post the recent sale via the RAL business? And after that, I can turn the line over.
Yes. Absolutely, James. I think when you think of Voyageur, you look at the various disciplines that they're in and that they've been successful at growing in, which really relate back to kind of the specialty aviation, defense side of things and the USM side, the parts business. Those have been the 2 big kind of growth areas. We continue to see opportunity in those that are quite significant. We announced there, this quarter, the air ambulance, the growth in air ambulance. Before that, they had an additional King Air that went into Department of Defense into the MAISR program. Those are the kind of things that you're going to continue to see as we push forward with them. There's quite a bit of opportunity there. And we're pretty bullish on Voyageur and where it's headed for sure.
Any further questions, James?
No, that's it for me.
Next question comes from Fadi Chamoun from BMO Capital Markets.
Yes. Maybe one question from me on the areas of focus, Colin, you mentioned kind of as you get past the closing of this transaction and you have a strong balance sheet, you have a strong free cash flow that is generated by the remaining operation. How are you thinking about the framework for capital going forward? Like in terms of M&A and opportunities for growth, what type of assets, and maybe what is the targeted return on capital framework that you expect to deploy capital towards? Like, what are you targeting in these potential growth opportunities, whether it's M&A or organic? Is it 15%, 20%? Just kind of to get an idea how you're thinking about that free cash flow redeployment as we get past the closing of this transaction.
Fadi, yes, absolutely. Look, I think Gary said a few times and so have I, we're focused on mid-teen returns. There's no question about that. And that's whether we're looking at organic growth or we're looking at acquisition. On the acquisition side, we're very much focused on kind of this paced, gradual growth, not big, huge, massive transactions, stuff that's going to move us over time nicely. And so that could be anything that's in aviation or aerospace. We're looking quite broadly at the opportunities right now. So, you'll see us definitely in that area, in that zone, smaller opportunities that make sense, that we understand well. Those are kind of the acquisition side.
And on the organic side, I think I've said a few times, most of that opportunity probably lies today within Voyageur. And we've been successful at moving them along quite well. I think there's lots of growth still there. And we see that area, especially the defense and the surveillance side as a growing business. There's no question we're seeing more and more download of that type of work from government into industry. And so those opportunities are the areas that we are focused on.
Next question comes from Konark Gupta at Scotiabank.
I just want to understand, like, in terms of your continuing operations. So, there's obviously really 3 things that you're focusing on; CPA, Jazz essentially and Voyageur, plus Cygnet maybe. Obviously, Voyageur seems like it's growing nicely. Here, we saw in Q2. So on CPA, maybe if I can ask you, in terms of -- to James' question as well a little bit, you have these minimum covered aircraft, which are obviously changing over time. You have the fixed fee or fixed margin that's kind of -- it's a step-down function through 2026. And then I think it's a probably flat line after that. But the leasing revenue is the one where I think it's -- based on your Investor Day presentation, seems like it's coming down at least for now through the end of the contract. So, you said you are looking to renew some of the leasing agreements with Air Canada. In terms of, like, what's the discussion like with them? Like, why have they not sort of signed these agreements for long term? Why are they retiring them as per the plan today? Like is there something that Air Canada is contemplating to do with the aircraft on their own? Or is it just that typically how these contracts work, they don't sign these long-term leases through the end of the contract?
Konark, look, I'm just trying to capture what you said. It was a little hard to hear you, but I think I've got it. Look, the leases, the Dash, it's mainly the Qs right now that you're looking at, if you look at the leases that come open over a period of time here. Those are the ones that, obviously, we would be engaged with and working with Air Canada to renew and extend within the CPA. That's really been our focus at Jazz. So, those are the ones. I think Gary can give you a little bit of visibility as far as what we have in the MD&A and so on. So, I'll let pass it over to him.
Yes. Konark, it's Gary. So we have -- if you look at the MD&A there, we have 9 aircraft that come off officially leased with Air Canada at the end of 2025. They're towards the end of '25. So typically, this is the time you'd start to consider your options around those aircraft. So, I wouldn't read anything into it other than just natural timing. So from that perspective, we're looking at those aircraft. We'll see what we can do with Air Canada. We also have the option to redeploy, and we also have the option for those that don't get redeployed or whatever to sell them. So, we've got some flexibility there. But I wouldn't read anything into it more than we're always in discussions with Air Canada, and we continue to try and see if they need some of these aircraft for a bit.
Okay. No, that's very helpful, Gary and Colin. Just to follow-up on that. So it seems like the fixed margin is a fixed margin, but leasing revenue is an opportunity for you, where it may not decline to the level that people think it might actually be flat or it can actually go up depending on how the discussion progress with Air Canada, right?
So on the fixed fee, I think, Konark, the fixed fee is the fixed fee. So, I would take what you have there and that would be a good number on the leasing. There's potential for upside. There's no question about it. We got 9 aircraft there. Maybe a potential to have some of those go back in or release them somewhere else. And as time goes on, it's the same thing you'll see as the years go on and there's a few aircraft that come out. There's opportunities with those, too. So...
Great. Okay. And maybe last one for me before turning over. Voyageur, good growth in Q2. You talked about the opportunities there for the long term. How should we think about growth in that business over the next couple of years? I think you had probably a target for that business at about $150 million-ish in revenue. It seems like it's doing about $100 million to $120 million a year right now. Do you have the visibility to get to $150 million by 2025? Or it's more of a long-term story?
Konark, it's Gary. I think we're still on pace for that $150 million for 2025. You see the growth that you're seeing here this year and hopefully, you'll continue. And based on the things that Colin talked about like under the MAISR contract and a few other things like that, we're starting to see growth and it takes hold in it. And with Voyageur in those particular businesses, it's a little bit of a step growth because once the contract comes online, it takes a little bit and then you start to see the full weight of it. So, we feel like we can still get there.
Yes. I think the big thing for them is, if you continue to see growth in the contracts, not so much the financial, as Gary says, there's always a little bit of give and take in all of these different contracts and they are pretty meaningful to their finances. So, you'll see some give and take. But the big thing is looking for that continual contract growth, and they've been doing a great job of that. They have lots in the pipeline. So, we're pretty bullish, as I said, on them.
Right. And so the step function you mentioned, is that step function ending '25 based on the contracts you have today? Or should we see a further ramp up beyond '25?
I think you just -- the point is you're going to continue to see the revenue go up, but it can go up in chunks as they bring in new contracts. So, a good example is MAISR really came in last year, so that's starting to take effect. That's the type of thing you're going to see.
[Operator Instructions] Next question comes from David Ocampo at Cormark Securities.
I just had one, and I apologize if those already asked because I actually missed a few minutes of the call this morning. But when I look at your contract with Air Canada, I know post-2026, you guys have 80 covered aircraft compared to, call it, 105 today. When we think about that step-down in fleet count, is AC looking to bring on other partners to bridge that gap? Or are you guys thinking that you could bid on that '25 extra fleet count as it relates to your fixed fee with Air Canada?
Yes. It's Colin. As far as the CPA goes, we are very focused on opportunities with Air Canada. So, any opportunities that come up, you will see us working with Air Canada on and bidding on. We've been quite successful at getting our cost structure right and being able to really position things well with Air Canada. And if you just go back in history, in the last 5 whatever years, you can see kind of where we sit in relation to our relationship and partners. So, we're going to continue that. We're very comfortable and bullish and supportive of Air Canada and the work we do there for them. And any opportunities that come up for growth, just like we talked about here a few seconds ago on the Dash 8s, we're working with them to see where those opportunities are and to see if we can make things work. So, I think Jazz is -- it has a minimum fleet there, but that doesn't mean that's necessarily the fleet that we're going to be at, for sure.
And I guess, how early with your discussions are you with Air Canada for that post-2026 fleet? I suspect you might need to do some pilot training if the fleet changes in a material way. So, just curious where that stands today since we're edging closer to 2026 now?
Well, I think it's Gary here, David. If you look at the 80 aircraft of 70-plus seats, they're currently in the fleet. So from that perspective, nothing really needs to change for the fleet in '25 or in 2026. So from that perspective, it is in place. It's just a question of whether it's above the 80 or what the fleet plans are, but it currently exists.
Thank you. We have no further questions. I will turn the call back to Tyrone Cotie for closing comments.
Thank you, Joanna. And thank you, everyone, for taking part in today's call. Nice day.
Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.