Chorus Aviation Inc. (OTC:CHRVF) Q4 2015 Earnings Conference Call February 19, 2016 10:30 AM ET
Nathalie Megann - Vice President, Investor Relations
Joe Randell - President and CEO
Jolene Mahody - Chief Financial Officer
Turan Quettawala - Scotiabank
Cameron Doerksen - National Bank Financial
Derek Spronck - RBC Capital Markets.
George Trapkov - Beacon Securities
Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Aviation Inc. Fourth Quarter and Year End 2015 Earnings Analyst Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Ms. Nathalie Megann, Vice President, Investor Relations, you may begin your conference.
Thank you, Suzanne. Hello and thank you for joining us today for our fourth quarter and year end 2015 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer and Jolene Mahody, Executive Vice President and Chief Financial Officer. We will start by giving a brief overview of the results and then go on to questions from the analyst community.
Because some of the discussion in this call may be forward-looking, I direct your attention to the caution regarding forward-looking statements and information which are subject to various risks, uncertainties and assumptions that are included on Page 8 of our Management’s Discussion and Analysis of the results and operations of Chorus Aviation Inc. for the period ended December 31, 2015, 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 and adjusted net income. Please refer to Section 20 of our MD&A for the discussion relating to the use of such non-GAAP measures.
I will now turn the call over to Joe Randell.
Thank you, Nathalie and good morning everyone. Thank you for joining our fourth quarter and year-end 2015 earnings call.
I am certainly immensely proud of our accomplishments and performance in 2015. It was certainly a transformational year for Chorus. I thank the team for their hard work and dedication to strengthening our group of companies. Together we achieved significant milestones delivering increases in operating income and adjusted EBITDA of 8.4% and 2.6% respectively, as well as adjusted earnings per basic share of $0.79.
The key milestone in our transformation began with reaching an amended and restated capacity purchase agreement with Air Canada. The new agreement not only preserves but increases the value we had established for our stakeholders.
Our financial performance to date under the amended CPA has fully met our expectations. The cash flows derived from this agreement are anticipated to support the dividends for the term of the CPA through 2025 and provides stability to grow and diversify Chorus. I applaud Jazz employees for sharing our vision for Chorus is demonstrated by the competitive new labor agreements reached with our pilot, flight dispatchers and flight attendants that have terms expiring concurrently with the CPA.
I’d also like to recognize Jazz’s maintenance and engineering employees with whom we have a new tentative agreement and I am optimistic it will be ratified in the near future.
We have made significant progress toward improving our market competitiveness. These new labor agreements are important to our future success and I sincerely thank all those involved. We continue to simplify and modernize the Jazz fleet.
There are numerous aircraft changes in the fleet happening each month and the induction of new Q400s is progressing as planned. In the fourth quarter, we brought in five new Q400s which contributed an additional $5.2 million in leasing revenue under the CPA over 2014. By the end of this year, we anticipate having 34 Q400s in our CPA leasing portfolio and with the continued planned growth in this fleet type we have potential opportunity for more.
From an operations point of view, the Jazz team delivered, continued the trend of providing industry leading safety and operational performance and ended the year by generating $21.7 million or 93% of the maximum available performance incentives under the CPA.
I’d like to now turn to the Voyageur operation. Voyageur continues to meet our expectations and generates returns we anticipated. In the last eight months of 2015, Voyageur generated $29.6 million in contract flying revenue. Overall the Voyageur operation, which also includes the MRO business, contributed approximately $17.2 million in adjusted EBITDA. Voyageur is a specialized company and we see growth potential for its contract flying services outside of North America as well as the MRO business.
As the Dash 8-100s come into the Jazz fleet, opportunities for these aircraft to be deployed offshore within the Voyageur operation are actively being pursued. As an example, we removed the Dash 8-100s from the Jazz CPA operation and deployed it with Voyageur Airways to execute a new flying contract in Africa for an international customer.
Voyageur’s specialized engineering, maintenance, repair and overhaul or MRO division is another area where we see growth potential. Voyageur concluded an internal reorganization on January 1. Voyageur Aviation Corp. was formed as the parent company to both Voyageur Airways and the MRO division which has been established as a new separate company branded as Voyageur Aerotech. The Aerotech name will enable Voyageur to market its MRO services under our brand that better reflects the maintenance and engineering services that provides, thus better resonating with the international marketplace. The MRO division experienced growth in 2015 due to new contracts with a number of international customers.
At the Chorus level, we strengthened our Board of Directors with the appointment of Steve Hannahs who has great experience and expertise in the aircraft leasing business. As announced earlier this week, we welcomed Marie-Lucie Morin to our Board of Directors who has significant experience in formulations and recently served as an advisor for the Canada Transportation Act Review.
The fundamentals of our business are strong. The developments of 2015 have provided us a solid platform to profitably grow and diversify. We continue to be strategic and opportunistic at the same time. We are evaluating potential future prospects and well positioned to take advantage of new opportunities as we work to increase shareholder returns.
I’ll now turn the call over to Jolene to take you through the fourth quarter results.
Thank you, Joe and good morning everyone. The Chorus group of companies generated strong financial results in the fourth quarter. Here’s the breakdown of the fourth quarter financial performance that delivered adjusted net earnings per basic share of $0.26 compared to $0.20 in the same period of 2014.
Operating revenue decreased by $43.9 million to just over $357.4 million. The decrease in revenue was driven primarily by the amended CPA terms, whereby our compensation structure has changed and more importantly, certain costs are no longer billed to Air Canada. I will explain this further as I take you through the results.
Controllable revenue decreased by $13.2 million or 6.1%. Controllable revenue refers to the reimbursement by Air Canada of certain controllable costs to Chorus under the CPA. The majority of these costs with the exception of accrued cost, depreciation and aircraft rent and their associated rates are set annually and include items such as general overheads, non-crew labor and aircraft maintenance materials and supplies. Certain items provided to Chorus by Air Canada such as ground-handling at the major hubs are no longer billed and certain other costs have been reclassified as pass-through.
The controllable revenue reduction related to these changes was $24.3 million. Rate decreases under the CPA resulted in a $1.3 million decrease in the quarter and decreased CPA billable block hours accounted for 100,000 decline controllable revenue. These decreases were offset by a change in the US dollar exchange rate that resulted in a $12.5 million increase in the quarter.
Aircraft leasing revenue under the CPA in 2015 was generated from 26 Q400 aircraft, and four Q400 engines owned by Chorus. It increased by $5.2 million to $19.9 million in the quarter. The increase was related to a change in the U.S. dollar exchange rate of $2.6 million and $2.6 million generated from the addition of 5 new Q400 aircraft to the CPA covered fleet. Annually, these aircraft and engines generate a cash margin of approximately 20% after consideration of debt servicing charges.
Further, under the CPA, Chorus is compensated by fixed fees which is in line with the industry standards. They are referred to as the fixed margin and infrastructure fees per covered aircraft and provide the minimum level of compensation for the term of the CPA, regardless of the block hours supplying activity. Combined, the fixed fee compensation for 2015 was contractually set at $109.7 million or $27.4 million per quarter.
In the fourth quarter, Chorus earned $5.6 million in performance incentives or 96.7% of the maximum incentive payments available under the CPA. Performance incentives are earned by achieving established performance targets for controllable on-time performance, controllable flight completion, baggage delivery and customer satisfaction. The maximum available performance incentive payment for 2015 was $23.4 million of which we earned just under $22 million. This is great performance by the Jazz team.
CPA pass-through revenue refers to certain costs that are passed to Air Canada and reimbursed to Chorus dollar per dollar. These include costs such as airports, navigation and terminal handling fees. CPA pass-through revenue decreased by $48.7 million or 36.5% from $133.4 million to $84.7 million.
Aircraft fuel effective November 1, 2015 as well as deicing and certain other costs provided to Chorus by Air Canada are no longer billed. Other costs such as third party ground handling services have been reclassified as pass-through costs and removed from controllable costs. These changes decreased pass-through revenue in the quarter by $42.6 million. In addition, a decline in jet fuel prices prior to the November 1 transition decreased pass-through revenue by $7.9 million. These decreases were offset by a change in the U.S. dollar exchange rate contributing to $1.5 million increase.
Charter and other contract flying revenue decreased by $8.7 million. New flight revenue from the Voyageur operation accounted for $9.4 million, offset by a decrease in Jazz charter revenue of $0.7 million. And other revenue increased by $5.1 million, primarily related to new revenue from the Voyageur operation which includes leasing and maintenance, repair and overhaul.
Now I will go through the expenses. Operating expenses decreased from $368.3 million to $310.9 million, a decrease of $57.4 million. Salaries, wages and benefits were increased to $107.2 million. Adjusted salaries, wages and benefits increased $9.1 million. This is primarily as a result of the addition of the Voyageur operation and increased pension costs.
Stock-based compensation decreased primarily as a result of fluctuations in Chorus’ share price. Employee separation program costs incurred during the fourth quarter were $1.6 million compared to $1.3 million in the same period of 2014. Salaries and wages were also affected by more labor costs being capitalized on owned aircraft for major maintenance overhauls and this was $1.6 million quarter-over-quarter.
Aircraft maintenance expense decreased by $1.6 million from $45 million to $43.4 million. The Voyageur operation accounted for $3.3 million decrease. This included 6.1 million related to the return of previously expensed maintenance reserve deposits associated with the purchase of five CRJ200s that were formerly under operating leases. In addition, other maintenance costs decreased by $4.3 million and since more maintenance costs were capitalized as a result of increased major maintenance overhauls, this accounted for a further decrease of $1.1 million. These decreases were offset by a $5.5 million change in the US dollar exchange rate on certain maintenance material purchases and increased engine overhaul of $1.6 million.
Other expenses increased by $5.2 million to $33.9 million. This increase was generated by $3.5 million from the addition of the Voyageur operation, $2.4 million in increased crew costs related to training and travel and $2 million in general overhead. Costs for certain services to Chorus provided by Air Canada are no longer billed. These Air Canada costs were nil in the fourth quarter as compared to $2.7 million in the same period last year.
Non-operating expenses increased by $9.2 million to $22.8 million. Net interest expense increased by $1.4 million. Interest expense related to long-term debt increased by $0.9 million as a result of change in the U.S. dollar exchange rate and $0.3 million related to interest on consideration payable. The weakening of the Canadian dollar in the quarter contributed to a foreign exchange loss of $18.6 million compared to a foreign exchange loss of $10.6 million in the previous year.
This brings us to an operating income of $46.5 million and adjusted EBITDA of $64.1 million, increases of $13.5 million and $14.3 million, respectively. Adjusted net income for the fourth quarter 2015 was $32.1 million or $0.26 per basic share compared to $23.7 million or $0.20 per basic share for the same period 2014. Net income in the quarter was $12.5 million or $0.10 per basic share compared to 2014 net income of $11.3 million or $0.09 per basic share.
While billable block hours no longer directly affect our compensation, they are relevant to the rate-setting process on controllable costs and in determining controllable revenue. Based on the 2015 and 2016 winter schedule, the summer 2016 schedule and updated planning assumptions from Air Canada, we are projecting 2016 billable block hours to range between 349,000 hours and 358,000 hours. This is based on 116 covered aircraft as at December 31 2015. The actual number of billable block hours for 2016 may vary from this anticipated range due to a number of factors.
Capital expenditures for 2016, excluding those for the acquisition of finance leases, aircraft and the extended service program on the Dash 8-300s and including capitalized heavy checks are expected to be between $35 million and $41 million. This increase in 2016 reflects additional spend for Voyageur and lower anticipated major maintenance overhaul. For additional information supporting our projected guidance for the balance of this year, I will refer you to Section 18, the 2016 outlook section of our MD&A for the fourth quarter and year ended December 31 2015.
And this concludes my commentary. Thank you listening and operator, we can open the call to questions from the analyst community. Thank you.
[Operator Instructions] Your first question comes from the line of Turan Quettawala of Scotiabank.
Jolene, is it possible to provide a quick sort of sensitivity I guess for our purposes on what the EBITDA impact, or maybe the EPS impact would be for like this sustaining the Canadian dollar, because of all the movement that’s been going on, on the business?
Sure. For the quarter, we’ve appeared to impact in aircraft leasing of the US dollar change which is 2.6 million. So of the 5.2 million that we saw in increased aircraft leasing revenue, haft of that increase is related to the US dollar exchange rate. As you know, the cost that we incur in US dollars, be billed Air Canada correspondingly in US dollars for that. So we don’t see any other impact related to the exchange rate on the Jazz operation. And for the Voyageur operation, it would be much, much lower given the size of that operation compared to ours. They do, Voyageur does earn most of its revenue in US dollars and incurs expenses in combination of both US and Canadian. So the impacts are picked up from the exchange rate and their stock would be minimal.
And I just have one more question on the leasing business. I know you have been investing quite a bit in that from a manpower perspective. Can you talk a little bit about what kind of traction you are getting, how many deals you think you could find over the next sort of 12 to 18 months on that leasing operation, I am talking ex Air Canada, and maybe even would do consider buying any aircraft from the spec bases on that leasing business.
Well, Turan, in terms of the added staff, we brought on, as you know, Steve Ridolfi and who has quite a bit of experience and knowledge in area as well Bruce Peddle. So other than adding strengths in our planning side in the executive level, we’ve built the organization at this time beyond that. We continue to bring in aircraft under the agreement with Air Canada, even as we speak, new $400 up until the middle of this year. So we’ll continue to induct those airplanes. With respect to the growth, or how we approach to a leasing opportunity. Rick and his team are hard at work and we’re very optimistic about this and we see some very good opportunity. But were not as at a point at this time to share exactly which direction we’ll be taking in that regard other than, as we progress I think we’ve become even more convinced that there are some very good opportunities for Chorus in that area.
And your next question comes from the line of Cameron Doerksen of National Bank Financial.
I guess I just wanted to follow up on the foreign exchange impact. The number of aircraft leasing into the CPA, they are in US dollar, revenue is obviously going to increase and so there may be there more volatility quarter to quarter? I am just wondering if you can talk about anything you can do there a hedging perspective to maybe smooth out volatility.
So, Cameron, we do have a perfect match here under our leasing agreement with Air Canada because all of our revenue that we would earn from Air Canada isn’t – sure US dollar is not to be expensed. So the upsize for us is really the margin increase comes from strengthening US currency.
There would be really no benefit in hedging, the cost side, on this we are protected on the revenue side.
Second question, just on I guess maybe an accounting presentation question going forward, obviously fuel is basically down to 0, your release under the CPA, some sort of residual fuel that’s in the Voyageur operation. Is that a line item that is going to disappear from your financial statement?
Yes, it’s going to be really immaterial going forward. The Voyageur kit, so you will have some small charter fuel expense going forward. But likely less than 2% of what we have been seeing on an annual rate of fuel costs for the entire operation. So not really looked at that yet, it’s something that we may choose to put into the other expense category given that’s so all.
Probably still have the carrier forward as a comparative anyway.
So we should assume that it’s going to be very minimal for the full year 2015.
Very very minimal and just on any exposure there we have there is really next to none as well because Voyageur operationally is very similar to the Jazz charter operation where we would not take the risk on fuel.
Third question just on the – maybe on incentive payments. I mean I know that Air Canada has made some schedule changes and move some fuel routes around. I am just wondering if you can maybe talk about the changes that might affect you this year that may help or hinder your ability to generate the same kind of level of incentive payments this year versus last year.
At this point we really don’t see anything that’s going to dramatically affect that at all. A very highly increased utilization may put a little pressure but then in this Yahoo! That. So we feel very confident about with our operations and our ability to continue to provide very good results under the incentives.
And just final question from me, just on the Voyageur I believe are still a payment to be made for that acquisition. Is that something that happens this year?
Yes, there’s payment to be made, the compensation consideration is over three year period. So there is a payment to be made this year, I believe, in the third quarter this year and then another next year.
Is there anyway you can size that for us or I guess there is a --
Yes, so if you look to our numbers we had a $30 million payment over a 36 month period. So you can roughly divide that 5 by 3.
Voyageur is actually performing flat, so we’re very pleased with the Voyageur results.
There is a small earn-out portion to that payment but the majority of that is fixed.
So it would be roughly $10 million in Q3 and another 10 million and 27 million.
It’s actually more like 12 million in Cameron in 2016 and then the remainder in 2017.
Your next question comes from the line of Derek Spronck of RBC Capital Markets.
Just on the leasing opportunities, as the Dash 8-100s come off the CPA, are you seeing enough demand that you feel relatively confident that you can start leasing 100 with a fairly quick turnaround time? And for that matter how do you see the leasing rates look for these aircraft in the current marketplaces?
While we do have a number of airplanes coming out, as I mentioned in my comments we already have work for one airplane in the Voyageur operation that is about to deployed in Africa, and we have a number of other offers out in terms of that aircraft. And this is the new type or size of aircraft for Voyageur to offer in this operations overseas. As you know they operate RJ300s but this is – this has an additional appeal. We also took one of our Dash 8-100s as a partner aircraft and it was because we had good demand, are sold work for some of the parts and components but we’re also and of course Voyageur has a parts business in North Bay that we are looking to grow and expand upon. So that was the second aircraft and we’re pursuing other opportunities and in some cases other roles. And we are developing an FTC through Voyageur for the conversion of Dash 8-100s into a freighter configuration and we see actually good potential for that aircraft in that role as well.
So we have a number of different acquisitions. The miss rates themselves are generally okay. They are not at the highest level but neither are they at the lowest level. And so we’re actively pursuing this and we are right in the process now of transferring some of this aircraft out of the Jazz operation, and we’re really optimistic that we will be placing them but it could be in a variety of roles.
Are you looking to stick with the regional aircraft, recent space and could you potentially move into your larger type of aircraft and presumably the CS300 that Canada is planning to buy, will be folded into the main line operations but at some point in the futurewouldyou ever consider the C series or say the 737s?
We are very focused on the regional aircraft side and generally focused on airplanes that are under C. The C series is, the 300 in particular that Air Canada [ph] is simply larger than that. So we are more focused on in-production aircraft, now – whether that’s Bombardier which of course we are very familiar with Bombardier product, very happy with it and feel very good about it. The Embraer product is also addressing and the ATR product and in particular, the turboprops and these are the segments that we see have the greatest opportunity for us and in pursuing this business we would be focused specifically in that area.
Just moving on quickly to the Voyageur acquisition, you’ve had it now for most of 2015. Any surprises, either positive or negative at this point?
No, certainly no negative surprises. As a matter of fact, the more we work with Voyageur and the folks there, and we see the quality of what they do, and the quality of the relationships that they have, whether it’s with customers and the community, with the colleagues there, et cetera, with Bombardier, because they have had strong relationships of course with Bombardier and generally focused on a lot of specialty maintenance for Bombardier products. All of those have been very positive, all the top people are very engaged and from what I see, very excited about the prospects and really working together, Jazz, Voyageur and what we are looking at in Chorus in terms of opportunities, we see a real good mix there. So no negative surprises, very pleased with the quality of the operations and also the results. And as I said earlier, they continue to renew contracts for contract flying overseas which is great to see, continue to grow the MRO business and developing new FTCs, new capabilities and they have room to grow, and we are looking to capitalize on that.
Just on the growth of Voyageur, are there tuck-ins that you see would complement or are you really looking to grow it organically at this point?
We are primarily looking at organic growth at this point, yes.
[Operator Instructions] Your next question comes from the line of George Trapkov of Beacon Securities.
Quick question on the maintenance expense, what should we be looking for, let’s say, 2016 run rate?
George, as Jolene is looking through that, I just want to welcome you as a new analyst covering us. So we haven’t had the opportunity to meet you personally but welcome.
Perfect. So since I have you on the online, a quick question on your acquisition strategies, can you expand of what are you looking, where do you want to take to the next level, or at the same time there is more airlines first of all in Canada?
Well, we’re focused really on three areas. We are focused on contract flying which is Chorus, Jazz and Voyageur are heavily involved with, although in different segments of the market. In the MRO side, Voyageur has a specialty maintenance, repair and overhaul organization with special capabilities in North Bay whereas Jazz is very focused on the Air Canada product and Air Canada related products, and does a very good on the MRO side there and improving all the time, which is great. And then the third one that we talked about is the leasing side, which of course we are more or less in that business now with the leases that we have with Air Canada but we look to grow and expand that. So those are generally the three areas with the predominant focus on regional aircraft. So we are working on those and how we do this and how we grow, as I said in my comments, will be both strategically and opportunistically because it isn’t a huge industry even within the world to some extent on the regional side, and certainly within Canada. So we are working hard, we do know how important it is to our shareholders to diversify our revenue base and our business, and to get additional share value in that regard. And so we will look at anything that sort of comes in that space and certainly give a full consideration.
So George, just on your original question there on aircraft maintenance cost, there is a lot of things happening I think this year with our slip movement in stock, we have lot of new aircraft coming in, older aircraft transitioning out, and as well, a lot of our maintenance costs are in US currency as well. So I think the best approach for estimating that for your modeling would be to look at it based on block hours. So use – in 2015 actually and history as a bit of a proxy, running to overcome block hours and use our billable guidance to estimate ’16.
End of Q&A
There are no further questions in the queue. I’ll turn the call back over to the presenters.
Thank you very much, operator and thank you all for being on the call. And we wish you a great day.
And this concludes today’s conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!