Good morning, ladies and gentlemen, and welcome to the Chorus Aviation Inc s econd Quarter 2022 Financial Results Conference Call. At this time, all calls are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 5th, 2022. I would now like to turn the conference over to Mr. Tyrone Cotie, VP of Treasury and Investor Relations. Please go ahead.
Thank you, operator. Hello, and thank you for joining us today for our second quarter 2022 conference call and audio webcast. With me today from Chorus are Joseph Randell, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer. We'll start by giving a brief overview of the results and then go on to questions from the analyst community. Because some of the presentation's call may be forward-looking, I direct your attention to the caution regarding forward-looking statements and information which are subject to various risks, uncertainties and assumptions that are included or referenced in our Management's Discussion and Analysis of the results of operations of Chorus Aviation Inc for the three months ended June 30, 2022, and the outlook section and other sections of our MD&A where such statements appear.
In addition, some of the following discussion involves certain non-GAAP financial measures, including references to EBITDA, adjusted EBITDA, adjusted EBT, and adjusted net income and adjusted net income available to common shareholders. Please refer to our MD&A for discussion relating to the use of such non-GAAP measures. I'll now turn the call over to Joseph Randell.
Thank you, Tyrone, and good morning, everyone. In the second quarter, we completed the acquisition of the Falko business. We're very pleased to see Falko delivering the expected results and the integration of the business is going smoothly. We have both complementary and similar leadership styles and cultures. We clearly see the Falko asset management platform delivering more diversity and flexibility to Chorus. In June, we announced the addition of 35 turboprop aircraft in a servicing capacity on behalf of a syndicate of banks, further expanding our asset management business and demonstrating Falko's ability to continue broadening its customer base. With the Falko acquisition, Chorus is now a market-leading regional aircraft asset manager and the world's largest aircraft lessor focused solely on the regional aircraft leasing space, with an aircraft lease portfolio of 266 aircraft and a total fleet of 381.
We have significantly advanced our growth and diversification strategy. We are now expecting to derive approximately 50% of our 2022 annual adjusted EBITDA from the regional aviation leasing or RAL segment of our business. Finally, Fund III has been launched. The data room is open, discussions have commenced, and there is a robust level of activity. There has been some general market volatility in the public equity and debt markets, which has caused a slight delay on the planned closing date. We continue to target a minimum of $500 million in capital commitments, and we are planning on closing this fundraise in the fourth quarter of 2022 as market conditions stabilize.
Looking forward, we will continue to transition our leasing business to an asset-light model, opportunistically exploring asset sales so as to create additional shareholder value through paying down debt and generating incremental cash flows. I thought it would be useful to provide some observations on the current aviation and regional aviation industry in particular. As you know, there are many parties that play an essential role in the air transportation system. We are working closely with Air Canada, airport authorities and government agencies to address the issues the industry is facing. We believe these issues to be temporary. In addition, it is important to note that due to the nature of our CPA contract, disruptions have not impacted our financial results. In particular, our Jazz operations are fully staffed for our CPA commitments and in line with pre-COVID levels.
It is important to understand that we have been preparing ourselves for the issue of pilot scarcity since well before the pandemic began. We created our Pathways program, which is the premier education and training pathway for pilots in Canada, providing industry leading education and experience and a clear career path to employment on the larger aircraft with Air Canada for these pilots. This program has been a differentiator for Chorus in recruiting pilots. Over the years, with our various programs and partnerships, we have proven to be an innovative leader in pilot recruitment and are currently working towards enhancing our capabilities in this regard. We expect to have more to share in the coming weeks on our continuous efforts to improve pilot supply. Looking at the global industry, our focus is on regional aircraft, which are largely deployed in domestic markets.
These markets have proven themselves to be the most robust from a passenger demand standpoint, as evidenced by the bounce back in demand for flying in the U.S., Brazil, India and European countries. The regional sector continues to be a resilient and indispensable component of the air transport industry, and with the changing competitive landscape and with our scale, we are well positioned to capitalize on opportunities. As seen in the past, in a recessionary period, there is strong demand for regional aircraft. For example, we have seen strong interest in the Dash 8 aircraft that recently came out of the Jazz operation. Before I turn it over to Gary, I wanted to acknowledge that we did take a provision in relation to anticipated aircraft repossessions and lease restructuring on Aircastle's aircraft portfolio. We believe this addresses the last of the lessees that struggled significantly from the impact of the pandemic.
I'll now turn the call over to Gary to take you through some highlights of our second quarter financial results.
Thank you, Joe, and good morning.
In the second quarter of 2022, Chorus reported adjusted EBITDA of CAD 104.9 million, an increase of CAD 28 million over the second quarter of 2021, with the main reasons for the increase being the RAL segment's increase in adjusted EBITDA of CAD 25.4 million due to the inclusion of two months of Falko's adjusted EBITDA of CAD 20.8 million, an increased lease revenue from re-leased aircraft in Aircastle's aircraft portfolio, and the RAS segment's adjusted EBITDA increasing by CAD 2.6 million, primarily due to an increase in other revenue due to an increase in part sales and contract flying, partially offset by a decrease in third-party MRO activity, an increase in capitalization of major maintenance overhauls on owned aircraft, and an increase in aircraft leasing revenue under the CPA due to a higher U.S. dollar exchange rate, offset by an increase in general administrative expenses.
Adjusted Net Income was CAD 27.6 million, an increase of CAD 16.2 million over the second quarter of 2021, largely due to the increase in Adjusted EBITDA of CAD 28 million just described, an increase in depreciation expense of CAD 9.3 million primarily attributable to the Falko business, and an increase in net interest cost of CAD 1.1 million primarily related to interest on long-term debt assumed as part of the Falko acquisition. Adjusted Net Income available to common shareholders or Adjusted Net Income less minority interest and preferred share dividends was CAD 21.7 million or CAD 0.11 per common share, a CAD 0.05 increase over the same period in 2021.
Net loss was CAD 40.4 million, a quarter-over-quarter decrease in income of CAD 61.9 million, primarily due to an anticipated aircraft repossessions and lease restructurings, resulting in provisions of CAD 45.6 million on the Aircastle aircraft portfolio. It is important to note that all our other remaining customers are operating in compliance with lease arrangements, and this provision does not impact our positive long-term outlook for the business. In addition, the following items impacted the quarter, an unrealized foreign exchange loss of CAD 34.3 million and strategic advisory fees of CAD 5.7 million, offset by an increase in adjusted net income of CAD 16.2 million. Now turning to liquidity. As of June 30, 2022, Chorus's liquidity was CAD 148.6 million, including cash of CAD 70.7 million and CAD 77.9 million of available room on its operating facilities.
Our liquidity decreased in the quarter primarily due to the investment related to the Falko acquisition, offset partially by strong cash flows from operations. In July 2022, Chorus securitized the beneficial interest in five aircraft trusts and as a result, was able to remove restrictions on $27.6 million of cash that had been held as security for a loan in the Falko business. We anticipate having total liquidity in excess of CAD 100 million for the remainder of 2022. This will provide Chorus with sufficient liquidity to fund ongoing operations, planned capital expenditures, and principal and interest payments related to long-term borrowings. Now on to our outlook.
Chorus's forecast for the year ended December 31st, 2022 has been updated from the first quarter 2022 forecast for the impact of anticipated aircraft repossessions and lease restructurings in the Aircastle portfolio, the initial closing of the new Falko Managed Fund moving from Q2 to Q4 2022, and U.S. dollar to Canadian dollar exchange rate of 1.28. With these changes, Chorus expects that the 2022 adjusted net income available to common shareholders to be between CAD 88 million and CAD 103 million, and adjusted EPS available to common shareholders to be between CAD 0.45 and CAD 0.53. We expect to see our net debt to adjusted EBITDA for the end of 2022 to be in the 4.7%-5.0% range as we continue to pay down our amortizing debt and we build to eight months of earnings from Falko.
Other key elements of our guidance for 2022 are contained in the Outlook section of the MD&A. Before turning the call back to Joe, I would like to acknowledge the dedication of our teams at Jazz, Voyageur, CAC, Chorus, and our newly acquired Falko. We wouldn't have had been able to do this without their tireless work and dedication. With that, I'll turn the call back to Joe.
Thanks, Gary, and finally, again, I'd just like to express again this quarter my sincerest appreciation to our employees who remain focused and committed to safety first and operational integrity through this challenging time. Especially our frontline people who continue to put customers first. Overall, the entire Chorus organization remains energized and excited about the opportunities we see moving ahead, and look forward to delivering additional value to all our stakeholders. Thank you for listening, and operator, we can now open the call for questions.
Thank you. 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, and your question will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. One moment please for your first question. Your first question comes from Konark Gupta from Scotiabank. Please go ahead.
Thank you. Good morning, everyone. A couple of questions here. First, on the organic CAC business, seems like the revenue and EBITDA were down sequentially from Q1. I'm just wondering if there was any changes you pointed out on repossession of aircraft. Was there anything in that second quarter that impacted the revenue versus the previous quarter in Q1? Or, is there like any other kind of, you know, benefits that you had in Q1 maybe that you didn't see in Q2?
Yeah. Sorry, it's Gary here. There was nothing out of the ordinary in the quarter. We had, as you recall, if you go back through our disclosures, we renegotiated lease amendments over the course of time that would have been reflected. You know, when you look at the quarter, there was nothing out of the ordinary outside of the expected repossession provision.
Okay, thanks, Gary.
Yeah.
With respect to your outlook commentary and the guidance change, I think one of the factors for guidance, slight reduction in guidance is probably the anticipated aircraft repossessions in the organic business, third-party leasing side. Where specifically are you seeing that repossession potential? Like, which part of your customer group?
Yeah, we do not comment on individual or specific customers, Konark. We really can't share that with you at this time.
Okay. No, that's a good job. I was just kinda curious as to, you know, like I think most of your customers have already either renegotiated or they have, you know, come to some sort of terms before. I'm just kind of curious this last remaining repossession how meaningful is this? Like I said, like a few aircraft you're talking here, or are we talking about like maybe half a dozen or something?
Well, there are a number of aircraft. Again, I can't be specific on which ones or which operator. You know, generally speaking, we did negotiate and have renegotiated a lot of the agreements that were in the Aircastle portfolio. Generally speaking, customers are living up to these revised terms and agreements. These are lingering issues that have been struggling and we anticipate repossessing certain aircraft over the next little while, but we're not really free to say which carriers or which aircraft at this time.
Okay. Just to be clear, the repossession that you anticipated, it's gonna impact Q3 and Q4. It didn't impact Q2 yet.
Q2, it did not impact outside the provisions. Going forward, it's reflected in our guidance, Konark. We do expect to take them back here, in the next number of weeks or months.
Okay. That's it for me. I don't know. Thank you.
Thank you.
Thank you. Your next question comes from Matthew Lee, Canaccord Genuity. Please go ahead.
Guys, I was just hoping to get your opinion on the ability for Falko to raise funds, you know, in the current economic conditions. I know you kind of mentioned a slight change in appetite, but are you seeing any meaningful shifts on that front?
We've not seen any meaningful shift away from and the interest in the fund. Obviously, during the quarter, there was significant stock market volatility as some of the investors rebalanced their investments, et cetera, which, you know, we see settling now. We see it as being just a delay rather than, you know, it being any real indication of a lack of interest. You know, and that interest comes from existing investors because those are the ones that you initially speak to. You know, I think we're still optimistic. It's just that this past few months from a stock market point of view, it's a lot of volatility and interest rates. We see some of this settling out now. I think that that is shared by others, that view.
That will enable us to move forward.
Great color. Maybe in terms of management fee, it looks like CAD 3.7 million recognized in the quarter. You know, if I do the math, that translates to just over CAD 22 million per year. If I think about Falko's AUM is roughly CAD 1.5 billion Canadian, you know, it seems like that's an annual management fee of around 1.5%. Is that the right way to think about it? Are there other kind of puts and takes that we should consider?
Hi, it's Gary here. When you look at Falko's management fee, I mean, we had CAD 3.6 million in the quarter. There would have been a little bit of one-time fee with onboarding of the 35 aircraft. You could adjust a little bit out of it. It is a fair run rate for how we see that business moving ahead.
Okay, great. Just lastly, you know, if I think about the new turboprops, the 35 new aircraft, can you help me just understand the economics of that deal? Are you leasing those aircraft on behalf of the banks and collecting a fee or are they being kind of beyond that?
Well, those are aircraft that we are managing for the bank, for the bank syndicate, the banks. You know, we have no risk on those aircraft, et cetera. We're simply managing it and helping them with that portfolio in recovering value. That is the role of Falko as an asset manager with those airplanes.
Okay. Thanks so much. Bye-bye.
Thank you. Your next question comes from Tim James from TD Securities. Please go ahead.
Okay. Good morning. Thanks very much. I guess my first question, just wanna confirm kind of the mechanics of the impact from the difference in timing of the launch of the fund versus the closing. Maybe if you can kinda walk us through that and the timing of kind of revenue and various other puts and takes there from an accounting perspective.
Right. Well, of course, you know, the first part of the arrangement and the process in launching a fund is to put it out there for people to consider in terms of its structure, its goals, et cetera, which has been done in the past with the funds that are there on an existing basis. These funds have to be evaluated by investors in terms of their interests. You know, you generally go through an order. Of course, you offer folks that have previously invested sort of first opportunity, et cetera. There's a broad list of potentials after that. You know, the funds we're looking to close as I said, in the fourth quarter, and the goal is $500 million.
At that time, we plan on having, you know, folks. Chorus itself, you know, we've said that we would invest up to 15% in these funds ourselves. That's the process.
Tim, it's Gary here just on the accounting for it. Until the fund closes and you have commitments and investments, there would be no fees earned, but as soon as you start to close the fund, you can start the fees to get earned.
Do you hit the ground running on the fees, or is there some sort of a ramp-up timeframe, or how does that work from sort of day one onwards?
Without getting into specifics, there are some fees associated with the fund itself as you close. Then from there, it can ramp up as the fund gets bigger.
Yeah. Generally, there are fees related to the committed capital, and there are also transactional fees as well, upon certain transactions, you know, in terms of things like acquisition of a portfolio or a number of aircraft.
Okay. I see. Thank you. You know what? My other questions have been answered, so thank you very much.
Thanks, Tim.
Thanks, Tim.
Thank you. Your question comes from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning. Just to follow up on Tim's question, just on the new fund. I mean, what's the kinda timeline for deploying the capital? I mean, presumably, you know, at close, would there like sort of be aircraft in the fund very shortly after close, or is this, you know, is this something that's gonna take, you know, a number of quarters to fully deploy the capital?
It's really difficult to predict. You could have a large transaction of a number of aircraft. In the past, when funds have been launched by Falko, there has been a large portfolio that was actually acquired in the fund, and this was specifically a few years ago, a number of years ago, the Avolon portfolio. You know, you could have small number of airplanes with, like, certain operators, or you could have a portfolio. It is difficult to say. There are opportunities out there in both regards. You know, I think you've seen where NAC is focusing on narrow body aircraft. You know, AerCap has the GECAS regional portfolio, which is not core to their business, et cetera. There are opportunities for portfolios.
There are also opportunities to do deals with operators. In terms of the rate and the size of the deployment, it could be variable.
Yeah, sorry, it's Gary here. You look at the funds themselves, usually over a two-three-year period, the capital gets deployed or committed. You know, that's what you could expect.
Okay, and on the management fees, I'm just wondering what the, I guess, the profitability here. I mean, I guess what services are you providing? I mean, I'm just trying to get a sense of, you know, whether that's, you know, very high profit margins on the fees. Just anything you can sort of describe around, I guess, maybe the cost to you on those management fees for those aircraft that you're managing.
Yeah. It's Gary here again. When you look at the service fees, you know, we have those, you know, those come right onto the revenue line. What we have against it is our SG&A, which is the general and administrative expenses. Anything that's you know, direct to the aircraft goes into the fund and we're left with the general and administrative piece. When you look at the way the fees play out, particularly in our current situation, we have SG&A in place today that can handle a new fund. This new fund is essentially you know, the revenue less some you know, reasonable amount of fees or costs will make its way to Chorus's bottom line.
What is the, I guess, the airline that's you know paying you for the management fee get in return? Like, why would they outsource that to you if they could do it in-house?
It isn't the airline that pays the fee. It comes out of the funds that have been raised amongst the investors, including the LPs. It's the investors for which we are managing this portfolio that pay the fees. This does not affect any lessee if they're leasing these aircraft from a fund, just like they would lease them from any other lessor.
Cameron, it's Gary here. If you look at the fund model, the reason you're paying a fee is to hit a targeted rate of return, and that's part of what Jeremy and the Falko team do. They achieve that and then hopefully better. Part of the fee is for that expected return that they receive. In the case of the 35 aircraft I think Joe alluded to earlier, that's a little bit different. That's for managing the assets on behalf of somebody, so it's different. When you look at the Fund III or this new fund that we're trying to kick off here, it is for managing the assets, but producing a rate of return for your investors that they're able to achieve. That's why.
Which generally has a targeted rate of return. If you do better than that, then there's a carry that's associated with the fund as well, that is an additional incentive to make the fund as productive as possible.
Okay. No, that makes sense. If your rate of return ends up being below what's promised, what's the, I guess, the risk to Chorus?
There is no penalty, but of course, it's not something that we would strive to do because, you know, we see this fund and this asset management business as being core to us moving ahead in the leasing side. So obviously, performance is very important, but there would be no financial penalty per se.
Okay. No, that's helpful. Okay, that was all I had. Thanks very much.
Ladies and gentlemen, just as a friendly reminder, if you do have a question, please press star followed by the one on your touch-tone phone. Your next question comes from Kevin Chiang at CIBC. Please go ahead.
Thanks for taking my question. I apologize. I jumped on late here, so if you answered these earlier, I do apologize again. Just looking at your guidance revision within RAL, are you able to split, you know, what percentage of the revision or, you know, how you would bucket the revision between, I guess, some of the repossession costs and issues in the Aircastle portfolio versus the delay in the Falko Managed Fund?
Yes. Kevin, it's Gary here. I would say the primary reason for the revision is more of a delay in the fund. Back to the comment I made earlier, you know, those fees, we have the SG&A in place, less some, you know, reasonable amount of transactional costs are revenues that will flow essentially to the bottom line. So that's the biggest piece of it, and then obviously the expected lease repossessions, but the primary would be that.
Okay. That makes sense. I guess just to follow up on that, I appreciate kind of the timeline to deploy capital is tough to predict, but it doesn't sound like you're making some sort of big assumption this year within your guidance, just given the fact that the fund.
It plays no significant part.
I guess, is just launching for Q4. Okay.
Yeah. It plays no significant part.
Okay. You talked-
The important thing to us, Kevin, is that, you know, with the go-forward business, which we think we're on the right track as the industry recovers, like we're seeing robust demand out there despite the fact that there were a couple of, you know, some airlines that were damaged almost irreparably through COVID. You know, we're seeing a very strong recovery, no lack of demand in the world. You know, we're very excited about the segment and believe that this asset-light approach, you know, is the right one, no question about it. I think during this whole pandemic, it was clearly demonstrated that the regional business and regional aircraft are very resilient. You know, so we're very pleased.
It's unfortunate this quarter, we, you know, have something that we now have to deal with, but our optimism remains very, very high. We're excited about the future.
Okay. No, that makes a ton of sense. Maybe just on, you talked about the targeted return, you know, as you manage these funds or as you and Falko manage these funds. I guess, does that change as we move into this higher rate environment? You know, I know historically you've talked about, you know, from an asset perspective, wanting to get, you know, 15% or mid-teens ROE. Does that type of return profile make sense, you know, when the ten-year is at 3 or when inflation's at current levels? Or does that 15% need to move up as well?
Hi, it's Gary here. The mid-teens is certainly still the target and remains the target. We haven't moved off it nor have our Falko division. You know, it still remains the target. You know, as far as the returns go, right now, you know, a little early, but we haven't seen any real change.
You know, we feel that the interest rate tide raises all related items. We certainly still target the same returns in the leasing segment.
Okay. That makes sense. Just last one for me. I see, you know, your lease recovery rate, you know, it's been hovering around 90% now, I guess year to date. Do you think you kind of just hover around here until we, I guess, we get a full recovery in aviation? Is this kind of where you're stuck at until we're back to kind of pre-pandemic flying or, you know, can this continue to. I know it took a step back this quarter, but do you think this can grind higher in this current environment?
It's possible, Kevin. One thing that you know I'd note there is it's a percentage of revenue recognized in the quarter, so we have billing arrangements that are a little bit different in the hide, and it was meant to give some consistency for the analyst community, so they knew how much cash roughly was coming off of that revenue number. It will grind, it could grind a little bit higher, but it may not ever achieve 100% in that particular measure. Yet we'll have our lessees executing on their agreements. As time goes on, it may go above 100%.
Okay. That's it for me. Thank you very much.
Yep.
At this time, we have no further questions. Please proceed with closing remarks.