Chorus Aviation : Q1 2024 Analyst Call Transcript

FINAL TRANSCRIPT

Chorus Aviation Inc.

First Quarter 2024 Financial Results

Event Date/Time: May 7, 2024 - 9:00 a.m. E.T.

Length: 37 minutes

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CORPORATE PARTICIPANTS

Tyrone Cotie

Chorus Aviation Inc. - Vice President, Treasury and Investor Relations

Colin Copp

Chorus Aviation Inc. - President and Chief Executive Officer

Gary Osborne

Chorus Aviation Inc. - Chief Financial Officer

CONFERENCE CALL PARTICIPANTS

James McGarragle

RBC Capital Markets - Analyst

Kevin Chiang

CIBC - Analyst

Hillary Cacanando

Deutsche Bank- Analyst

Cameron Doerksen

National Bank Financial - Analyst

Tim James

D Powen - Analyst

Konark Gupta

Scotiabank - Analyst

Betty Yang

Canaccord Genuity - Analyst

David Ocampo

Cormark Securities - Analyst

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PRESENTATION

Operator

Good morning, ladies and gentlemen, and welcome to the Chorus First Quarter 2024 Financial Results Conference Call.

At this time, all lines are on listen only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you need assistance, please press star zero for the Operator. This call is being recorded on Tuesday May 7, 2024.

I would now like to turn the conference over to Tyrone Cotie VP Treasury and Investor Relations. Please, go ahead.

Tyrone Cotie - Vice President, Treasury and Investor Relations, Chorus Aviation Inc.

Thank you, Joanna.

Hello, and thank you for joining us today for our first quarter 2024 conference call and audio webcast.

With me today from Chorus are Colin Copp, our 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.

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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 the MD&A. This pertains specifically to the results and operations of Chorus Aviation Inc. for the three months ended March 31, 2024, as well as the outlook section and other sections of our MD&A Day where such statements appear.

In addition, 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. Please, refer to our MD&A for discussion related to the use of such non-GAAP measures. I'll now turn the call over to Colin Copp.

Colin Copp - President and Chief Executive Officer, Chorus Aviation Inc.

Good morning, everyone, and thank you, Tyrone.

This quarter was marked by solid progress on our plan and key metrics, leading to meaningful improvements on our deleveraging goals and generation of strong cash flows.

Before I get into the first quarter highlights, I want to acknowledge that we are not satisfied where our share price is trading today, and we recognize that the transition of the leasing business to an asset light model has been slower than we had planned. This is a top priority for us and we're very focused on improving value for our shareholders. We're working hard to optimize returns while accelerating and monetizing assets in our Falko leasing business.

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I am happy to report that since the last quarter, the leasing business has continued to strengthen. Over the past few months, we've seen improvements in both lease renewal rates on key assets and an increase in asset sale opportunities. We remain very confident in the regional leasing space and in our ability to optimize the value of the over 100 owned or majority owned assets under management by Falko.

At the same time, we've been active with our NCIB and have cancelled over 5 percent of our shares since its launch in 2022, including over 900,000 shares this last quarter, and we will continue with our NCIB.

Now turning back to the first quarter results. Throughout the first quarter, we performed well and met our financial targets. As I mentioned earlier this led to solid outcomes on our debt reduction goals and generation of cash flows from operations and asset sales. Gary will speak to those details in his update.

This continued progress of strengthening our balance sheet, reducing our debt servicing costs, and generating solid free cash flows will position us for future growth and underscores our absolute determination to drive shareholder value.

Throughout the quarter, all of our businesses rolled up their sleeves to contribute to these results. Jazz generated solid earnings and cash flows under its long-term capacity purchase agreement with Air Canada. Throughout the quarter, Jazz saw pilot recruitment strengthen with the intake for its pilot classes several months in advance. Randolph and his team at Jazz have demonstrated exceptional operational performance in Q1 with notable year-over-year improvements in almost all metrics.

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Falko executed well on trading activity with Jeremy and the team concluding 23 aircraft transactions, including the sale of three aircrafts and two engines in support of our asset light strategy, and they executed on a sale and purchase agreement with Nordic Aviation Capital to acquire a portfolio of 24 Embraer aircraft on behalf of Fund II.

Voyageur continued to execute on the growth plan with Corey and team pursuing several new business development opportunities, making strong progress in key areas of specialty flying, MRL and USM.

Additionally, we're very pleased to announce that Voyageur purchased the King Air 350 in the first quarter and leased it to the Canadian Department of National Defense. This represents an expansion of Voyageur's existing in-service support contract for the manned airborne intelligence surveillance and reconnaissance program (MAISR).

Given the strong performance of our operating business, today, I'm pleased to report that we are increasing our 2024 guidance for consolidated Adjusted EBITDA and free cash flow, as well as the majority of guidance for RAL, including net proceeds from asset sales.

In conclusion, I'd like to reiterate the fundamentals of our business are strong, and that we will continue to improve them. Chorus has the right elements and the right blend of capabilities to be an industry leader within the regional aviation space and to deliver great value to our shareholders. The Chorus team represents the best talent our industry has to offer, and I want to thank each one of them for their focus and contributions throughout the quarter.

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Finally, I want to express my thanks to our investors for their ongoing support as I reiterate our commitment to value creation and to building a resilient industry-leading business. Thank you.

I'll now pass it over to Gary to take you through the financials.

Gary Osborne - Chief Financial Officer, Chorus Aviation Inc.

Thank you, Colin, and good morning.

Our first quarter results are in line with our targets. As Colin mentioned, we are increasing our guidance for the remainder of 2024, primarily reflecting our strengthening asset sales pipeline. As we look at our results for Q1 2024, our Adjusted EBITDA came in at $109.2 million with our Jazz and Voyageur businesses combining to deliver Adjusted EBITDA of $62.4 million and Falko delivering $55 million.

Our free cash flow was $102.1 million during the quarter primarily derived from strong operating cash flows and net proceeds of $38 million primarily related to the sale of two A220s. Our leverage ratio was 3.4 at the end of the order down from 3.6 at December 31, 2023, and down a full turn from 4.4 at the end of December 31, 2022.

This has been accomplished largely through long-term debt reduction, including approximately $594 million of long-term debt repayments in the past 18 months. We also allocated capital to retire about $10.5 million shares since Q4 2022 for approximately $33 million.

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As mentioned last quarter, we are pleased to continue positive change, or we see continuing positive changes in the airline credit environment. During the quarter, we signed an agreement with Azul which restructured their aircraft lease arrangements to provide for the recovery of all contracted amounts owed.

Looking to the remainder of 2024, we have increased our consolidated guidance as follows. Increased Adjusted EBITDA guidance by $10 million to $360 million to $410 million; increased free cash flow guidance by 10 million to $300 million to $350 million; increased expected net proceeds from asset sales guidance by $30 million to $60 million to $80 million. Segment guidance for both RAS and RAL have been updated to support these changes.

With respect to Fund III, we continue to anticipate closing it by the end of 2024. Finally, we remain active in our NCIB, purchasing 938,000 shares in the quarter. At our current market price, we intend to continue to be active in our NCIB throughout the balance of the year.

As Colin noted, with continued improvement in our key metrics and an increase in our financial targets, we are demonstrating progress, both in strengthening our balance sheet and putting us on a path to value creation.

We are now ready to take your questions.

Operator

Thank you.

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Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speaker phone, please lift the handset before pressing any keys. One moment please for your first question.

First question comes from James McGarragle from RBC. Please, go ahead.

James McGarragle - Analyst, RBC Capital Market.

Hey, thanks for taking my question and congrats on a good quarter.

Colin Copp - President and Chief Executive Officer, Chorus Aviation Inc.

Thank you.

Gary Osborne - Chief Financial Officer, Chorus Aviation Inc.

Thanks.

James McGarragle - Analyst, RBC Capital Market.

I just wanted to get a little bit more color on what's driving the acceleration in asset sales. You mentioned that the market's picking up in terms of rates, aircraft values. I need you to provide a little bit more color there and how you see the market evolving during the remainder of the year.

Colin Copp - President and Chief Executive Officer, Chorus Aviation Inc.

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Yes. I can give you, my perspective. James and Gary may jump in with his as well but what we've seen in the last a while is a lot more interest in trading activity and most specifically on the sales side at reasonable values. We're pretty excited about that. These type of things take a long time and they're never super quick. There's kind of always a bit of a tail to this stuff but we've certainly seen a good improvement the last several months, as we come out of the last year there where it was a little bit sluggish, we're pretty encouraged by all that and we're encouraged by some of the lease rates we're seeing on key assets improving. Generally seeing an incline out, an improvement in all aspects.

Gary Osborne - Chief Financial Officer, Chorus Aviation Inc.

Yeah. I think Colin hit it. We see a good pipeline moving ahead. We've got a lot of an interest in asset sales. We have a trading desk over at Falko that is very active in the market. We're feeling very confident in that. Back to Colin's point, the rates that we've been renewing aircraft at have been slightly better than planned.

James McGarragle - Analyst, RBC Capital Market.

I appreciate the color and wanted to ask another question on the Brookfield and the Castle Lake acquisition. Have you spoken to Brookfield at all on that? Just trying to get any color on the impact that might have on your relationship with them and any potential impact on Fund III.

Gary Osborne - Chief Financial Officer, Chorus Aviation Inc.

I can talk just very high level to the fact that Brookfield's very close to us. This did not come as a surprise to us and there's absolutely no impact to us in any way. We're not in any way affected by this.

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