Chorus Aviation Inc. (OTC:CHRVF) Q1 2016 Earnings Conference Call May 13, 2016 11:00 AM ET
Nathalie Megann - VP, IR
Joe Randell - President & CEO
Jolene Mahody - CFO
Cameron Doerksen - National Bank Financial
Walter Spracklin - RBC Capital Markets
George Trapkov - Beacon Securities
Good morning, ladies and gentlemen. My name is Sally and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Aviation Inc. First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
I will now turn the call over to Nathalie Megann, Vice President, Investor Relations. Please go ahead.
Thank you, Sally. Hello and thank you for joining us today for our first quarter 2016 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'll direct your attention to the caution regarding forward-looking statements and information which are subject to various risks, uncertainties and assumptions that may be included on Page 3 of our management's discussion and analysis of the results and operations of Chorus Aviation Inc. for the period ended March 31, 2016, 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 17 of our MD&A for the 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 day everyone. And thank you all for joining our first quarter 2016 earnings call.
It's a beautiful day here in Halifax and we spent this morning at historic Pier 21 on the waterfront where we conducted our annual general meeting of shareholders. I'm pleased to report all orders of business addressed at the meeting were approved by our shareholders. And I thank our investors and our Board for their support.
We've had a positive start to this year and delivered solid earnings and operational performance in the first quarter. Quarter-over-quarter we generated increases in operating income and adjusted EBITDA of 69% and 62% respectively. And ended the quarter with net income per basic share of $0.45 or $0.12 per basic share on an adjusted basis.
Our capacity purchase agreement with Air Canada continues to provide strong cash flow. It also provides the leavers required to help lower our costs and focus on supporting our customer to improve network efficiencies and customer service. In the first quarter, we were pleased that Jazz's maintenance and engineering employees ratified a new long-term collective agreement that is in place until 2025. In addition to this agreement, we also have collective agreements with our pilots, flight attendants, and dispatchers that are consistent with the term of the CPA.
These collective agreements provide us with market competitive costs. While the current collective agreement with Jazz's Airport Services Group doesn't expire until 2017, preliminary discussions are underway as are discussions with crew schedulers. The standardization and modernization of the Jazz fleet continues. Last month we announced that we've signed a third purchase agreement to acquire five Bombardier CRJ900 regional jets with purchase rights for five additional aircraft. The five firm aircrafts are expected to operate under the Air Canada expressed brand under the CPA. These aircraft are expected to generate leasing revenue under the CPA with terms an economic similar to those of the Q400 aircraft currently generating leasing revenue under the CPA.
The CRJ900 is essentially the same aircraft as the CRJ705 currently operating within the fleet. As part of our fleet standardization plan, the existing CRJ705's will be reconfigured from 75 to 76 seats, thereby converting those aircraft as well to CRJ900. The new CRJ900s will be delivered with 76 seats and are planned to introduce that service in 2017.
Jazz also intends to reconfigure the 21 original Q400s currently operating under the CPA from 74 to 78 seats. The ongoing modernization of the Jazz fleet is strengthening cost competitiveness as the increased capacity lowers unit costs. The modification of both aircraft types will be conducted by Jazz with the assistance of Bombardier and is expected to be completed by year-end 2017. This initiative does not impact our CapEx guidance for 2016 as the costs associated are essentially treated as a pass-through cost to Air Canada.
Another important milestone in Jazz's objective to become a stronger competitor in the regional business was realized earlier this month with the announcement of the intention to transition the heavy maintenance business to a separate profit center under Jazz. The new division called Jazz Technical Services, will continue to operate other Halifax and has been awarded its first third-party heavy maintenance contract. The contracts term is five years. Beginning this summer, Jazz will conduct heavy maintenance work on Air Georgian's fleet of CRJ100 and CRJ200 regional jets.
While this contract is not material to the bottom-line, it does provide unit cost reductions that improved our cost competitiveness under the CPA. This agreement provides an opportunity to generate incremental revenue and to strengthen the bottom-line by reducing unit costs through organic growth. Jazz is well recognized in the industry as a high-quality maintenance operator with skilled technicians and unmatched experience with Bombardier regional aircraft. As evidenced by the three awards; one at Bombardier's annual airline reliability performance awards held last month in Dallas, Texas. Jazz has been the top recipient in terms of the number of awards won at this event for three consecutive years. Specifically, Jazz won the top North American awards for the Q400, the CRJ100, CRJ200, and the CRJ700, CRJ900, CRJ1000 aircraft programs for exceptional reliability performance in 2015.
On Voyageur front, we continue to be pleased with the progress being made. In the quarter Voyageur contributed $14.4 million in operating revenue and $4.5 million to adjusted EBITDA. In the first quarter Voyageur acquired a second King Air, 200 aircraft, and completed modifications in April. These aircraft are operating under contract to ambulance New Brunswick and the two King Air 100 aircraft previously used under this contract have been sold. Also in the quarter Voyageur using our former Jazz-8100 won a contract with an international humanitarian organization. Voyager modified the aircraft before its deployment to Africa. Voyageur continues to actively market the 8100s to customers as it seeks to grow this aircraft in its international contracted flying operations.
Voyageur also concluded in internal reorganization whereby it's established Voyageur aviation core as a parent company to Voyageur Airways, which is the contract flying division and establish Voyageur Aerotech as a separate MRO owned-company. The Aerotech name enables Voyageur to market its MRO services under our brand that better reflects the specialized and customized design, engineering and maintenance services it provides to international blue-chip customers.
Building shareholder value is a constant focus. Last night we announced our intention to consolidate Chorus's ticker symbols to CHR. We anticipate this to become effective May 24 and undertook this initiative in response to market feedback. We're hopeful the consolidation of the ticker symbols will improve the liquidity of the shares. With the fundamentals of our core business is firmly in place, we have a solid platform to profitably grow in the pursuit [ph].
Given our experience in the regional business, the scope of our operations and the infrastructure we have in terms of maintenance, engineering, training, dispatch, airports and personnel; we have the ability to contract a full suite of support services to customers. These trends are behind our decision to fully explore and to continue to work on a new sector for the Chorus business regional aircraft leasing. Although we are essentially, already in the aircraft leasing business, when you consider that by the end of 2018, we expect to have a minimum of 58 aircraft leased under the CPA and there is potential for more.
In the segment where we operate, regional aircraft leasing is an emerging form with very few relevant providers but substantial and growing demands. Although by no means as large or as liquid as the narrow body, wide body sector, regional aircraft are an essential component of air transport. In fact, the regional aircraft produced approximately 20% to 25% of them are leased while approximately 50% of narrow body aircraft produced are leased. The regional aircraft leasing space is not crowded and we see opportunity for it to grow. It's a $10 billion a year worldwide business as airlines tend to have considerable appetite and increasing appetite for operating leases. We view this as an appealing business proposition, and this is where we're focusing our attention at this time.
So thank you for listening and now I'll turn the call over to Jolene to take you through the first quarter results.
Thank you, Joe and good morning. The Chorus Group of Companies generated strong financial results in the first quarter and delivered adjusted net earnings per basic share of $0.12 compared to $0.07 in the same period of 2015.
Here is the breakdown of the first quarter financial performance as compared to the same period of 2015. Operating revenue decreased by $54.6 million to just over $320,000. 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. And I'll explain this further as I take you through the results.
Controllable revenue decreased by $8.4 million or 4.2%. Controllable revenue refers to the compensation paid by Air Canada on certain controllable costs to Chorus under the CPA. This reduction was primarily driven by rate decreases under the CPA related to aircraft lease returns and other reductions in controllable costs such as flight and cabin crew, which accounted for $8.7 million of the decrease. A further decrease of approximately $6.5 million resulted from 4,729 fewer sellable block hours generated in the first quarter compared to the same period last year. These decreases were offset by a change in the U.S. dollar exchange rate that resulted in a $6.8 million increase in the quarter.
As discussed in the past, the majority of our controllable costs are set on an annual basis and negotiated with Air Canada on a rolling basis. The annual rate reset enables cost to be reviewed in a timely manner. And to reflect the realities of the current environment. Controllable revenue rates are established based on annual forecasted block hour demand.
With that said, in certain quarters there will be some unit rate compression imperious with less than average block hour activity. Typically, we've experienced this unit rate compression in the first and fourth quarters. While in the second and third quarters, we've experienced higher block hour or activity which resulted in increased controllable revenue. The rate setting process is designed to be cost neutral. With the objective being to simply compensate Chorus for its estimated controllable costs.
Aircraft leasing revenue under the CPA in the first quarter was generated from 28 Q400 aircraft and force Q400 engines owned by Chorus. It increased by $7.2 million to $23.2 million in the quarter. $5.6 million of the increase was generated from the addition of new Q400 aircraft to the CPA covered fleet and $1.6 million was related to a change in the U.S. dollar exchange rates. Annually, these aircraft and engines generated cash margin of approximately 20% after consideration of servicing charges.
Further, under the CPA Chorus is compensated by 6 P's that provides the minimum level of compensation for the term, the CPA regardless of the block hours supplying activity. Combined compensation from the fixed margin and infrastructure fees for aircraft, was contractually set for the first quarter of 2016 at $27.4 million. In the first quarter, Chorus $5.7 million in performance incentives or 96.7% of the map incentive payment available under the CPA for meeting or exceeding certain targets. This is great performance by the Jazz team.
CPA passed revenue refers to certain cost their pass-through to Air Canada and reimburse to Chorus dollar-for-dollar. CPA pass-through revenue decreased by $66.5 million to $56.9 million. Aircraft fuel, effective November 1, 2015, the icing and certain other costs provided to Chorus by Air Canada are no longer billed.
Effective January 1, 2016, Air Canada entered into a new commercial agreement with the Vancouver Airport Authority in connection with Jazz's CPA operations. Cost of this airport related to airport fees and certain terminal handling services are now paid directly by Air Canada. This change accounted for a $4.8 million decrease in CPA customer revenue. Charter and other contract flying revenue increased by $10.1 million to $11.2 million. Contract flight revenue from the Voyageur operation accounted for $9.9 million of the increase.
Other revenue increased $2.9 million to $6.5 million. Revenue from the Voyageur operations which includes maintenance, repair and overhaul, and leasing accounted for $5.3 million and this was offset by decreased ancillary revenue and decreased sale an consignment inventory of $2.4 million.
I'll now turn to the expenses; operating expenses decreased by $65.5 million to $293.8 million. Salaries, wages and benefits decreased by $2.1 million to $116 million. Adjusted salaries, wages and benefits increased $4.3 million, primarily as a result of the addition of the Voyageur operation. As part of the newly ratified collective agreement with Jazz maintenance and engineering employees, Chorus incurred $5.5 million one-time signing bonus in 2016. While in the first quarter of 2015, Chorus incurred a $10 million one-time signing bonus with Jazz pilot as part of their newly ratified collective agreement. The accounted for a net decrease of $4.5 million in the quarter.
Stock-based compensation decreased primarily as a result of fluctuations in Chorus's share price. Aircraft maintenance expense decreased by $3.1 million to $47 million, compared to the first quarter 2015 fewer block hours, and engine overhaul events accounted for $1.9 million and $1.2 million decreases respectively. Other maintenance cost decreased by $3 million. And decreased cost of sales a consignment inventory, accounted for $0.80 million. These decreases were offset by a change in the U.S. dollar exchange rate on certain maintenance material purchases which accounted for $2.2 million increase and the Voyageur operation accounted for $1.6 million increase.
Other expenses increased by $3.9 million to $33.6 million. This increase was generated by $3.1 million from the addition Voyageur and $1 million from crew costs related to training and travel associated with the flow of pilots to Canada. These increases were offset by general overhead decreases of $0.2 million. Non-operating expenses decreased by $70.9 million from an expense of $37.2 million in the first quarter of 2015 to a non-operating income of $33.8 million.
Net interest expense increased by $1.7 million. Interest expense related to long-term debt increased by $1.4 million as a result of the change in the U.S. dollar exchange rate. New Q400 long-term debt, $0.3 million related to interest on consideration payable. The strengthening of the Canadian dollar in the quarter contributed to a foreign exchange gain of $38.8 million compared to a foreign exchange loss of $33.9 million in the previous year.
This brings us to an operating income of $26.8 million, and adjusted EBITDA of $5.4 million. Increases of $10.9 million and $7.4 million respectively. Adjusted net income for the quarter, for the first quarter of 2016 was $14.8 million or $0.12 per basic share compared to $8.9 million or $0.07 per basic share for the same period 2015.
Net income in the quarter was $55.4 million or $0.45 per basic share compared to 2015s net loss of $24.8 million or a $0.21 loss per basic share. While available 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 2015-2016 which are scheduled, the summer 2016 schedule, an updated planning assumptions from Air Canada were projecting 2016 billable block hours to range between 345,000 and 355,000 hours. This is based on 116 covered aircraft as of December 31, 2916.
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 norms for the acquisition of finance leases, aircraft acquisitions, and the extended service program on the Dash 8-300 and including capitalized heavy checks are expected to be between $35 million and $41 million. The increase in 2016 reflects additional spends for Voyageur and lower anticipated major maintenance overhauls.
For additional information supporting our projected guidance for the balance of this year, I'll refer you to section 15 of the 2016 outlook section of our MD&A for the period ended March 31, 2016.
And now I'll turn the call back to Joe for some final comments.
Thank you, Jolene. I'm sure we've all seen the visuals of the devastation in Fort McMurray due to the wildfires. Our thoughts are with all of those as they recover from this tragedy. Fort McMurray is served by Jazz and its employees. Our employees have come together in a number of ways to support those who have been evacuated from their homes. Operational personnel have worked tirelessly to organize and operate relief flights. Today Jazz has completed 19 round charter trips from the nearby airdromes at the Oil Sands and Firebag located in northern Alberta to assist in the evacuation. In times of crisis, Canadians are undoubtedly amongst the most generous people in the world and our employees are no exception.
Coordinated fund raising efforts amongst employee unions and at Jazz have generated significant donations to financially support our Jazz colleagues in Fort McMurray who have been personally impacted by the wildfires. Thankfully, all 41 Jazz employees who work at the airport there, and their families were evacuated safely. We continue to actively manage our response to best support for those affected.
That concludes my commentary. Thank you for listening and operator, we can open the call to questions from the analyst community. Thank you.
Certainly. [Operator Instructions] And your first question comes from the line of Cameron Doerksen with National Bank Financial. Your line is open.
Yes, thanks, good morning. I guess maybe my first question is just on the third-party maintenance operation that you're establishing. I guess maybe the first part of question is, how much room do you have to grow that business? And I guess secondly, historically you're doing heavier permits, it's not necessarily greatest margins in the world. So it's a real value here for you guys, really the ability to absorb more of the overhead costs of the operation?
Thank you for that question Cameron. Essentially, Chorus has two different types of MRO operations. Firstly, it's the one operated by Blue [ph] which is more specialized, more heavily along the designed aircraft modification side, etcetera. Jazz is also has been doing heavy maintenance, its aircraft for years and has continued to improve its efficiency - and with the recent agreement that we've made with Unifor [ph], it really establishes a different base and cost base going forward for the growth of Jazz operations. Bringing in the Air Georgian aircraft is the first step, and I think in my commentary I mentioned while it doesn't meaningfully provide margin in any material way, what we're doing is through economies of scale as we're lowering costs and in fact that will help lower the cost to Air Canada, and we will also be doing the reconfigurations of the aircraft here in Halifax.
We do have within our existing facility space to expand in terms of that business. We are becoming a lot better very efficient, we're at 24 hours operation, we turned aircraft very quickly, and the type of work that Jazz does which is your normal routine MRO, the new view are correct, in terms of that industry itself it is competitive, margins are not great but we see ourselves now coming out of this with a cost and potentially an efficiency advantage there we're able to lever both in terms of reducing the cost of our existing operation but also in bringing an additional merger.
Ok. Now that's pretty good explanation. I guess maybe just question, the new CRJ900 is coming in, it looks like you're incurring pretty much all the CapEx for those aircraft this year but maybe you can just sort of tell us when you expect those aircraft to be in operation out the CPA, it's going to Q1 2017?
Cameron, it's Jolene here. And we're planning to bring them all in by the end of this year and as you can see in our CapEx outlook disclosure. For inter-service by the end of Q2 of next year, all five of those aircrafts will be into service.
Okay. And maybe just final question just related to that - you're taking on some more debt here on balance sheet to pay for these aircraft. What's your degree of comfort to add additional aircraft on balance sheet? Do you still think you have some pretty good financial room to do that or do you have a comfort level that there is a point at which you become uncomfortable with the amount of aircraft you're bringing on balance sheet?
We'll - we sensed it as we look at these different opportunities to bring on aircraft and lease them productively under the CPA. I think we're comfortable with where we are, we're comfortable adding more and with all the debt is EBC-backed as you pointed out and it's all over the flying productive aircraft assets into the CPA that earning has a good return. So we still have some good head room there and are comfortable with our plan.
For us it is very productive.
Right. Okay, very good. Thanks very much.
Your next question comes from the line of Walter Spracklin with RBC Capital Markets. Your line is open.
Yes, thank you very much operator, good morning everyone. So I guess my first question is on the leasing strategy Joe, you touched in on the market opportunity, obviously very attractive one worldwide, not limited to Canada and this is MOC talking about beyond the cash purchase agreement with Air Canada for leasing opportunities. Can you talk about when we might start seeing some announcements there with regards to two new customers? When is it - what's your strategy to get those customers and when will you be able to implementing that strategy? And again, I guess that relates back to when we might see some announcements related to it right.
Well, we really started working in greater detail on this towards the end of last year. And we spend the last week six or seven months, we've added expertise within our organization and our plans are developing and they are actually well developed and the analysis that we've done has been very comprehensive. There are a number of alternative ways of approaching this in terms of how we go at this from a Chorus point-of-view. But we are really - I think within the next few months, we'll be working very diligently to bring the plan to market. I won't give you an exact date because for us it's more important to do it well than to do it quickly or just to meet a date for the sake of doing that. But this is near term than further term for us and we see this as single greatest opportunity we have now and discussions, exploration work is underway.
It's great. Thank you for that color. Next would be just on the pilot agreement have with Air Canada in terms of migrating the pilots up into Air Canada. Obviously that was a key component of your new agreement with them. It was - but very much that just part of an agreement now that you've had some time for to play out, can you give us an assessment as to how that's gone relative to plan? And if you've had any feedback from the pilots in terms of what they think of the new arrangement?
It's going very well, as a matter of fact it's going better than we had originally thought and planned for. So last year we had 100 of our senior pilots that actually flown to Air Canada. This year we anticipate between 150 and 180. We see good going forward of Pilot demand from Air Canada given its fleet plans, given its new routes, and Air Canada success which we're very, very happy to see and of course Air Canada from what we understand is very pleased with the quality of the pool of pilots that has gone there. We know that these and I know several of them personally, they are very happy. And to-date we've hired approximately 225 new pilots under the new collective agreements. And so we - this is a cost competitive collective agreement that this is part of our change. And we've developed some very successful programs with the colleges in terms of ensuring the pipeline is full and we are very, very pleased with the quality of the candidates that we're getting and how the slower agreement is working with Air Canada and with our pilots.
I'll just add that, what we're seeing - financially we're seeing, a gain in the cost competitive just from that because part of the reasoning around the decline in our controllable revenue as was pointed out was really the flight crews. So we're seeing the new entries coming in at the new entry rates that are turning around into the numbers.
And I guess not only on the new entry rates but it doesn't sound like a one-for-one replacement either, so you're able to take advantage of some attrition there, is that right?
Yes, that's right because we would have also a decline in block hours like you've seen.
I'd reiterate again that with our maintenance agreement now, our goal is to have all of our agreements with our employees, really reaching out to the term of the CPA. And that's a focus for us, and I'll have to say that generally morale seems to be very high within the company and we're very pleased with the way things are going.
That's fantastic. Last question here, this might be an obscure one, and I want to secure in the way it was announced. It must have [ph] indicated that there is an announcement coming out on a charter opportunity, not sure if you have any other further insight on that but just really is there any risk that you see to your business emanating from this, just based on what might - what it might be that they're referring to? I know that's a tough question to answer.
Yes, I'm not sure what they're referring to, to tell you the truth but you know we're feeling very, very good in terms of our competitiveness. And with west encore, so I guess we'll see what happens there. As I mentioned, we've been doing some work on west and that sort of thing, generally there has been a bit of a decline year-over-year in the charter business because of course the changes in the oil industry, we've seen a little bit of the decline there. But we're not seeing anything other than that of significance at this point. So I'm not really - I'm not clear at this point what they'd be referring to.
Okay, all right, that's all my question. Thank you very much for the color.
[Operator Instructions] Your next question comes from the line of George Trapkov with Beacon Securities. Your line is open.
Good morning and congrats on the quarter. Couple of quick question on the. Voyageurs, you headed - for a while we're probably looking at all the deployments. What are you seeing in terms of bidding for new business and deploying some of your existing fleet or potentially them acquiring additional airplanes and servicing new customers?
We're very encouraged by what we see. As a matter of fact, Voyageur itself has many proposals out there, utilizing some of the - one hundred center coming out of the genesis league. We see an ongoing strong demand for the type of operation that's just going - we're seeing an ongoing strong demand in the MRO side of the business and we see Voyageur as being a very good growth vehicle for us. And it's been a year now and we see really starting to move ahead with traction here. We have parted out one of our Dash 8-100s, as well as Voyageur itself is growing parts business in North Bay. So we see some really good synergistic opportunities there and I think we feel more positive about Voyageurs prospects than we did when we acquired the company a year ago.
Okay. And the second one on the Dash 8-100. Any further update on other planes being redeployed?
We have a number of different proposals and opportunities out there that - I won't get into now for competitive reasons. But we're certainly optimistic that these assets will provide good cash flow in the future for Chorus.
Okay. Thank you.
Thank you. [Operator Instructions] And there are no further questions at this time. I'll turn the call back over to Nathalie Megann.
Thank you, Sally. And thank you everyone for being present on the call. We wish you a pleasant weekend.
Thank you, ladies and gentlemen, for your participation. This concludes today's conference call. You may now disconnect.
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