Regional Aircraft Leasing segment grows 76% representing 22% of overall adjusted EBT
Q3 2019 Financial Highlights and Recent Accomplishments
• Net income of $24.2 million, or $0.15 per basic Share, a period-over-period decrease of $0.6 million excluding $18.9 million in net unrealized foreign exchange losses.
• Adjusted net income1 of $29.2 million, or $0.18 per basic Share, a decrease of $1.6 million.
• Adjusted EBITDA1 of $92.6 million, an increase of $5.8 million due to growth in the Regional Aircraft Leasing segment offset by planned reductions resulting from the 2019 CPA Agreement ('CPA') amendments.
• Increased adjusted EBT1 in the Regional Aircraft Leasing segment by 76% over the same period in 2018 and delivered or acquired 17 aircraft since the second quarter.
• Added Malindo Air, a member of the Lion Air Group, to the leasing portfolio expanding Chorus’ reach into the growing Southeast Asia market.
• Completed the first sale of leased assets; three Dash 8-400s* on lease since 2017, for net proceeds of approximately US $25.0 million after debt repayment.
• Grew Regional Aircraft Leasing segment’s fleet commitments to 55** aircraft valued at US $1.1 billion with future contracted leasing revenue of approximately US $740.0 million***
• Completed the Extended Service Program ('ESP') on two additional Dash 8-300s, bringing the total to 10 ESP aircraft generating leasing revenue under the CPA.
Halifax, November 14, 2019 - Chorus Aviation Inc. (‘Chorus’) (TSX: CHR) today announced third quarter 2019 financial results.
“I’m very pleased with our performance in the third quarter,” said Joe Randell, President and Chief Executive Officer, Chorus. “We delivered or acquired 17 aircraft since the second quarter. This was a tremendous accomplishment by our technical team – truly an indication of the expertise we have at Chorus. Our revenues are starting to reflect the new leases we’ve added to our portfolio so far this year, as evidenced by the 22% contribution to the overall adjusted EBT.”
“The growth momentum in our leasing business continued when we welcomed a new customer, Malindo Air, a member of the Lion Air Group, for the lease of two new ATR72-600s, and the acquisition of two existing ATR72-600s already on lease from another lessor. These aircraft further extend our reach into the rapidly growing Southeast Asia market. We have a healthy pipeline and expect to have news of additional lease transactions soon,” continued Mr. Randell.
“We further demonstrated the capabilities of our maturing aircraft leasing business when we completed our first sale of leased assets with the divestiture of three Dash 8-400s that had been on lease since July of 2017. We’re very pleased with this transaction as it not only provided a positive return on our investment, it generated capital to reinvest in future aircraft acquisitions - a solid indication of our disciplined approach to maximize returns. As relayed in our last quarter report-out, we also have the capacity to grow our leasing arm by up to 20 aircraft per year through a combination of new debt and internally generated cash flows to fund the equity portion of future aircraft acquisitions.”
“In conclusion, I extend congratulations to team at Voyageur for winning the Business of the Year award from the North Bay Chamber of Commerce, and to the Jazz team for being named among Canada’s Safest Employers 2019, taking gold in the Transportation category. These are great accomplishments. Many thanks to the Chorus team for delivering another solid quarter,” stated Mr. Randell.
*The sale of the three Dash 8-400s was completed on October 25, 2019.
**As of November 13, 2019, there was one transaction pending for one ATR72-600 for lease to the Lion Air Group out of the 55 committed aircraft in the Regional Aircraft Leasing segment. Between September 30, 2019 and November 13, 2019, there were six pending transactions (excluding the three Dash 8-400s sold) of which five aircraft were received prior to November 13, 2019. All pending transactions and lease commitments are subject to the satisfaction of customary conditions precedent to closing.
***The Regional Aircraft Leasing segment's estimates are based on agreed lease rates and assumes no default by lessees.
Third Quarter Summary
In the third quarter, Chorus reported adjusted EBITDA of $92.6 million, an increase of $5.8 million or 6.7% relative to the third quarter of 2018.
The Regional Aircraft Leasing segment's adjusted EBITDA increased by $13.2 million related to the growth in aircraft earning leasing revenue.
The Regional Aviation Services segment's adjusted EBITDA decreased $7.4 million, partially offsetting the previously described increase. The Regional Aviation Services segment's results were in-line with expectations and reflect the 2019 CPA Amendments which reduced the Fixed Margin and Performance Incentive revenue when Chorus moved to market-based compensation rates. These reductions were partially offset by the implementation of the Controllable Cost Guardrail that mitigated the expected third quarter CPA margin shortfall related to reduced fees. Beyond the changes related to the amended CPA, the third quarter results were impacted by:
• decreased stock-based compensation of $2.1 million due to the change in the Share price; and
• increased aircraft leasing under the CPA.
Adjusted net income was $29.2 million for the quarter, a decrease from 2018 of $1.6 million or 5.2% due to:
• an increase in depreciation of $4.6 million primarily related to additional aircraft in the Regional Aircraft Leasing segment;
• an increase in net interest costs of $3.8 million primarily related to additional aircraft debt in the Regional Aircraft Leasing segment; and
• an increase in non-operating costs of $0.2 million related to a loss on disposal of property and equipment; offset by foreign exchange losses on working capital; offset by
• the $5.8 million increase in adjusted EBITDA previously described; and
• a $1.2 million decrease in income tax expense related to lower adjusted EBT.
Net income was $24.2 million, a decrease of $0.6 million over the 2018 period excluding the quarter-over-quarter change in net unrealized foreign exchange losses on long-term debt of $18.9 million. The decrease was due to the previously noted $1.6 million decrease in adjusted net income, offset by decreased employee separation program costs of $1.0 million.
Year-to-date Summary
Chorus reported adjusted EBITDA of $253.1 million, an increase of $4.6 million over the 2018 period.
The Regional Aircraft Leasing segment's adjusted EBITDA increased by $30.1 million due to the growth in aircraft earning leasing revenue.
The Regional Aviation Services segment's adjusted EBITDA decreased by $25.5 million, partially offsetting the previously described increase. The Regional Aviation Services segment's results were in-line with expectations and reflect the 2019 CPA Amendments which reduced the Fixed Margin and Performance Incentive revenue when Chorus moved to market-based compensation rates. These reductions were offset by the implementation of the Controllable Cost Guardrail that mitigated the expected CPA margin shortfall related to reduced fees. Beyond the changes related to the amended CPA, the year-to-date results were impacted by:
• increased stock-based compensation of $9.0 million due to the change in the Share price;
• decreased capitalization of major maintenance overhauls on owned CPA aircraft over the previous period; offset by
• increased aircraft leasing under the CPA.
Adjusted net income was $72.9 million year to date, a decrease from 2018 of $14.1 million or 16.2% due to:
• an increase in depreciation of $11.9 million primarily related to additional aircraft in the Regional Aircraft Leasing segment;
• an increase in net interest costs of $10.2 million primarily related to additional aircraft debt in the Regional Aircraft Leasing segment; and
• an increase in non-operating costs of $3.1 million related to foreign exchange losses on working capital; offset by a gain on disposal of property and equipment; partially offset by
• the $4.6 million increase in adjusted EBITDA previously described; and
• a decrease in income tax expense of $6.5 million related to lower adjusted EBT.
Net income was $96.6 million year-to-date, a decrease of $13.2 million over the 2018 period, excluding the year-over-year change in net unrealized foreign exchange gains on long-term debt of $44.6 million. The decrease was due to the previously noted $14.1 million decrease in adjusted net income and signing bonuses of $2.0 million related to the Jazz pilot collective agreement, offset by decreased employee separation program costs of $2.9 million.
Consolidated Financial Analysis
(1) On January 1, 2019, Chorus adopted IFRS 16 Leases using the retrospective transition approach with
restatement to comparative periods.
(2) Other includes gain/loss on disposal of property and equipment.
(3) These are non-GAAP financial measures.
OUTLOOK
(See cautionary statement regarding forward-looking information below)
On February 4, 2019, the 2019 CPA Amendments became effective on a retroactive basis to January 1, 2019. Further information concerning the 2019 CPA Amendments and the Air Canada Investment is contained in the Corporation's Material Change Reports dated January 24, 2019 and February 13, 2019, which are available on SEDAR atwww.sedar.com. The 2019 CPA Amendments result in a near term reduction in fixed fees starting in 2019, as Chorus accelerated its transition to market-based rates. The reduction was implemented by eliminating the Infrastructure Fee per Covered Aircraft and the Fixed Margin per Covered Aircraft which were replaced with a single Fixed Margin. As a result, fixed fee revenue in each of 2019 and 2020 is anticipated to be $75.3 million per year as compared to $111.3 million in 2018. In addition, the maximum future available Performance Incentives reduce from $23.4 million in 2019 and 2020 to an annual average maximum available amount of $3.4 million for the full term of the CPA. The near-term reductions are more than offset over the term of the CPA by incremental contracted revenue secured with the extension of the agreement including fixed fees and aircraft leasing.
Aircraft leasing revenue under the CPA, which is included in the Regional Aviation Services segment, is expected to grow with the delivery of nine committed CRJ900s in 2020 and eight ESPs to be completed between the remainder of 2019 and 2022.
The Regional Aircraft Leasing segment's future revenue is expected to grow with the 17 aircraft delivered since the second quarter of 2019, inclusive of the 12 completed transactions, and the five aircraft delivered prior to November 13, 2019.
With the addition of the aircraft under both the Regional Aircraft Leasing segment and the Aircraft leasing revenue under the CPA, Chorus' estimated future contracted lease revenue is approximately US $1.9 billion. When the CPA fixed margin revenue of US $0.6 million is included with the total future contracted revenue, Chorus’ future revenue approximates US $2.5 billion**. (see footnote 4 in the following table)
Capital expenditures for 2019, including capitalized major maintenance overhauls but excluding expenditures for the acquisition of aircraft and the ESP are expected to be between $41.0 million and $47.0 million. Aircraft related acquisitions and the ESP capital expenditures in 2019 are expected to be between $660.0 million and $670.0 million. As a result of fleet changes associated with the 2019 CPA Amendments and the loss of a Dash 8-300 in the second quarter due to ground damage, the eight ESPs planned for 2019 were reduced to four and the remaining six ESPs will be completed by 2022. As a result, the total number of ESPs have been reduced from 19 to 18 Dash 8-300s.
Chorus has equity price risk exposure to shares that it issues under its various share-based compensation programs. This means that Chorus’ earnings are affected when outstanding units under those programs are revalued at each reporting period. In order to mitigate the economic volatility, Chorus has entered into an equity derivative contract known as a total return swap (‘TRS’). Chorus anticipates the TRS will be fully implemented by December 31, 2019, after which time Chorus will apply hedge accounting to offset the variability in its equity compensation expense resulting from changes in its share price.
Capitalized terms used but not defined in the Outlook section have the meanings given to them in Management’s Discussion and Analysis (the ‘MD&A’) dated November 13, 2019, which is available on Chorus’ website (www.chorusaviation.com) and SEDAR (www.sedar.com).