Chorus Aviation Inc.

Thank you, operator. Hello and thank you for joining us today for our fourth quarter and year end 2021 conference call and audio webcast.

With me today from Chorus are Joe 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 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 or referenced in our Management’s Discussion and Analysis of the results and operations of Chorus Aviation Inc. for the three months and year ended December 31, 2021, 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. Please refer to our MD&A for a discussion relating to the use of such non-GAAP measures.

I’ll now turn the call over to Joe Randell.

Thank you, Natalie and good morning everyone. 2021 was a very productive year and I am pleased with our accomplishments, especially considering the prolonged pandemic.

We started the year by revising our capacity purchase agreement on our CPA with Air Canada that enhanced Jazz’s position as the exclusive Air Canada express operator of 70 to 78 seat regional capacity until the end of 2025 and we added 25 Embraer175s to the covered fleet. We are now the sole provider of Air Canada express services and the relationship has never been stronger.

A reminder, our CPA with Air Canada continues to 2035. We strategically managed our liquidity through successful capital raises and reduced our net debt by approximately $240 million to recharge our financial flexibility.

We continue to generate positive cash flow and have the resources required to focus on profitable growth. While airlines around the world are still challenged to return to pre-COVID profitability, our fourth quarter yielded positive returns of $0.06 in net earnings per basic share or $0.12 on an adjusted basis.

Our employees have shown tremendous resilience throughout this crisis and have provided safe and high quality services to our customers. I am deeply grateful for their perseverance and dedication.

Voyageur had a record year in 2021 having secured new contracts that expanded cargo operations with Purolator and developed new relationships with blue chip customers like Transport Canada, Canadian Armed Forces, and General Dynamics Missions Canada. The team is executing very well and the momentum they gained in the year will continue to positively impact earnings throughout 2022 and beyond.

Last month, Voyageur entered into an agreement with Sabena technics to provide onsite service support of Dash 8-400 aircraft through Voyageur’s EXCL program. This agreement extends our parts positioning business in the Europe, a key target market and we are very pleased to welcome Sabena to our roster of high quality customers.

I also extend my congratulations to the team at Jazz for being recognized again this year for being named one of the best places to work in 2022 by Glassdoor Employee’s Choice Award. This is an award that is based solely on the input of employees who elect to provide anonymous feedback about their job, work environment, and employer.

Given the challenges and stress many of our employees have injured over the last two years, this is an incredible testament to the positive and can do attitude of our people. The accolades don’t stop there.

Jazz was also recognized in January as one of Canada’s top employers for young people for the 10th consecutive year. Congratulations to the team.

The Chorus Aviation Capital team has done well in a very challenging environment to support our customers and in remarketing all 13 aircraft we’ve possessed in 2020. Quarter-over-quarter, we saw improvements in the overall utilization of our leased fleet and collected 83% of lease revenue recognized in the fourth quarter, up from 77% from the previous quarter.

We view this as a positive sign that air travel demand is rebounding, particularly in the domestic markets where most of the lessees operate. Restrictions are gradually being lifted worldwide as more people become vaccinated and cases of COVID decline.

The easing of travel and border measures announced earlier this week by the Federal Governmnet is a positive step for our industry. However, more needs to be done.

Thank you for listening and now I’ll turn the call over Gary.

Thank you, Joe, and good morning. Here's how the fourth quarter of this year compares to the fourth quarter of 2020.

We generated adjusted EBITDA of $90.5 million, an increase of $8.5 million over the prior year. Adjusted net income was $21.5 million in the quarter, an increase of $13.8 million to $0.12 per basic share.

The RAS segment’s adjusted EBITDA increased by $5.9 million due to additional aircraft earning lease revenue and a $3.6 million lower expected credit loss provision, partially offset by lower lease revenue related to negotiated lease commitments and decreased earnings due to a lower earnings US exchange rate. The RAS segment’s adjusted EBITDA increased by $2.6 million.

The fourth quarter results were impacted by an increase in other revenues due to an increase of third-party MRO activity, part sales and contract flying, an increase in capitalization of major maintenance overhauls on old aircraft of $2.8 billion, and an increase in aircraft leasing revenue under the CPA offset by decrease in fixed margin of $2.4 million in accordance with the CPA and an increase in general administrative expenses attributable to increased operations. Adjusted net income of $21.5 million for the quarter, an increase of $13.8 million due to a 5 or sorry – a $8.5 million increase in adjusted EBITDA as previously described, a decrease of $5 million primarily due to a decrease of unrealized and realized foreign exchange losses, a decrease in depreciation expense of $3.5 million, and an increase of $1.7 million related to gains on property and equipment and asset-backed commercial paper, offset by a $3.8 million increase in adjusted income tax expense and an increase in net interest cost of $1.1 million.

Net income increased $1 million over the prior period, primarily due to the previously noted increase in adjusted net income of $13.8 billion, a decrease in impairment provisions of $27 million, offset by a decrease in net unrealized foreign exchange gains, primarily on long-term debt of $35.4 million, and a decrease in income tax recoveries on adjusted items of $3.2 million. Now turning to liquidity.

As of December 31, 2021, Chorus’ liquidity was $188.5 million including cash of $123.6 million and $64.9 million of available room on its operating credit facility. Liquidity decreased from the third quarter of 2021 by $69.6 million, primarily due to the redemption of $85 million principal amount of the 6% debentures, which was partially offset by reduction in restricted cash.

During the quarter, Chorus generated cash flow from operations of $48.9 million, other key liquidity changes during the quarter include, items that increase cash flow are as follows: an increase in secured deposits and maintenance reserves of $20.1 million, a decrease in restricted cash of $14.9 million. Items that decreased cash flows are as follows: scheduled debt repayments of $50.2 million, repayment of the prior facility of $30 million, capital expenditures of $18.4 million and an increase in working capital of $17.4 million driven by an increase in receivable from Air Canada offset by accounts payable.

As of December 31, 2021, the controllable cost per bureau receivable was $44.9 million. The amount was paid in Q1 in accordance with the 2021 CPA amendment.

As of December 31, 2021, CACs gross lease receivable was $84 million. The gross receivable may increase to approximately $90 million by the end of 2022 due to rent relief arrangements and potential delays in payments.

Leverage decreased year-over-year due to an overall reduction in net debt of approximately $240 million, partially offset by lower adjusted EBITDA of $18 million. Adjusted net debt to adjusted EBITDA ratio went from 5.8 at the end of 2020 to 5.4 at the end of December 31, 2021.

Before opening the call for questions from the analyst community, I would like to acknowledge the continued outstanding efforts of our team during 2021 in a challenging and evolving operating environment. That concludes my commentary.

Thank you for listening. Operator, we can open the call to questions.

Thanks and good morning, everyone. So, my first question is, good morning, my first question is on your ability to reprice any leading contracts, I mean, perhaps, annually or in the short-term as interest rates increase and the market condition improves.

So, can you speak about the kind of the terms – or the pricing terms that you can renegotiate or we need to offset plans?

Hi. It’s Gary here.

On the aircraft leases, they are generally locked in once you sign the lease and as you can note in our disclosure, about 98% of our debt is fixed overall. So it was all locked in works together.

So once you’ve signed a lease, so it is locked in for the term and continues. We do expect with – in an increased interest rate environment that lease rates will rise accordingly.

So, generally speaking, it’s certainly a correlation between lease rates and interest rates.

Makes sense. Thank you.

And then, you talked about gross lease receivables increasing again this year as a relief measure is kind of still continued. I am just wondering if you can provide any visibility as to when do you think that lease receivable will peak?

Will that be the end of this year and what’s your visibility or when do you expect that receivable to be collected and what timeframe?

Yes. So, it’s Gary here.

Yes, from the receivables you will see a disclosure on that. We still have some deferrals run into next year and that’s why you are seeing that guidance.

On the – the value will come down over time. It will take several years to extinguish.

There is no question about that. But we are locking in the longer term guidance other than this year and then it will take several years to extinguish the receivable.

Okay. That’s all my questions.

Thank you.

Morning and congrats on the quarter. I’d like to first ask about the options you’ve got to expand the leasing portfolio.

Specifically, do you have a preference with acquiring assets signing individual agreements or maybe buying competitor in the space?

Yes. Generally speaking, we’ve been focused more on new sale leaseback type of opportunities.

But we are certainly not totally focused on that. We look at all opportunities including mid-life aircraft and in some cases older assets as we do have options as we come to end of life with our diversified business et cetera.

So, we continue to talk with airlines, other leasing companies in terms of sourcing potential opportunities there where they are looking to diversify or to digest the part of their portfolio, et cetera. So, we have a broad spectrum and so, and we will continue to do that.

That’s great. Then, maybe could you unpack the opportunities you are seeing in cargo?

Obviously, the Purolator contract is a great start, but do you see that becoming a more meaningful part of the business going into 2022 and beyond?

Yes. We certainly look to – for that to be a growing part of the business.

I think we are very pleased with our relationship with Purolator. It’s been going very well.

So, we see that as an exciting opportunity for us. We have converted some of our older Dash 8 passenger aircraft into freighters and we do have a number of them available to do so.

But again, it’s related to the demand that we see. But we do see it as a growing part of our business and certainly opportunity there.

And we are making good progress. It’s not a huge part of our business.

But we will continue to pursue it as a growth opportunity.

Alright. Thanks.

Thanks. Good morning, everyone.

Good morning.

Good morning.

On your future leasing revenue, I was kind of assuming no new assets here. Should we see growth in the upcoming quarters as we repossess the aircraft or redeploy it or is this going to be offset by the leases that you renegotiated specifically Aeroméxico comes to mind?

It’s Gary here David. I think you will see it be pretty steady, maybe a modest increase.

But it should be pretty steady. Most of the aircraft are back out now.

As you know they were remarketed during the course of the year. So there is a little bit of a time lag that you will see throughout there.

Aeroméxico is now [Indiscernible] or very close to and they should see a smaller uptick there. So, they need to be smaller.

Okay. And you guys noted the bankruptcy of Philippine Airlines then coming out of top 10, 11.

Kind of when you look at your remaining customers. Are you aware of any other airlines that maybe on the front or in financial hardship right now?

No, I think the whole environment has improved frankly around the world with respect to carriers of – and we’ve done agreements with most of them and those agreements are sticking. There are still a couple of areas of the world which are struggling a little.

But we certainly believe that the worst is behind us. And so, - and of course, we’ve taken some provisions, as you know in our financials et cetera, which we think very well cover us in terms of where we are.

Okay. Then, my last one here for Gary.

When I take a look at your leasing business’ operating expenses, can you strip out those one-time cost? It looks like it only came in that around $2 million in the quarter and that’s lower than basically anything that you guys have done over the last eight or ten quarters or so.

I was just curious if there is any one-time benefits now – the number that we should expect going forward?

There is nothing that’s sticks out. I think when you look at the quarter you are starting to see the benefits of getting the aircraft on lease and what not so, when you look at the overall results I think the quarter is not a bad taking off stock, particularly with the revenue and what not so.

And I guess, in the past, Gary, you guys have mentioned that you target like an SG&A percentage of revenue. I forgot what the number was.

It was, 7% or 10%. Is that’s still the right number going forward?

Well, I think if you look at where the SG&A is year-to-date, it’s going to be higher as a percentage that we repositioned our fleet. And then as we grow, we would want to get to low 10% pure over the next number of quarters.

But it’s going to take time to grow into that. The fee structure is still there.

It’s it, if you go back and we’ve taken some – get of the revenues and we’ve adjusted now for that and we report as we grow, we will get back to something that was more of a normal.

Okay. That’s it for me.

Thanks so much.

Good morning, everyone. Question on the Air Canada trade receivable was, I realize it fluctuates around quarter-to-quarter.

Is that’s a fewer bit more than what was at the end of 2020. Is there a particular reason for that?

The guardrail that – it’s Gary here, the guardrail was pretty significant there over the quarters just on their disclosure. So, as you know, it’s a $20 million capital group, a fair bit in the quarter and that’s what the bulk of that would be that you saw and then of course that was paid here in Q1.

And so, it reset itself to zero.

And so, Gary, just to understand correctly, the guardrail receivable is included in that disclosure that you have on the total, I guess, total Air Canada trade receivable. Is that right?

I believe so. If you look in that financial statements in the back.

Yes, yes, just the number I think it was, I mean, it was certainly, it include more I believe than the guardrail receivable, but I am just wondering that…

It should be included in here.

So that’s significant change in it from year end to year end would be related to the guardrail component specifically.

That’s certainly built up in the quarter. The other thing is normal receivables that make their way through there, whatever they maybe.

So, but within the operations the guardrail is a significant component of it.

Okay. Okay.

My next question just on the – your new aircraft acquisition plans for 2022 and you’ve indicated kind of $300 million to $400 million. I am just wondering if you can comment at all on any particular aircraft types that you think look particularly attractive this year or where there maybe opportunities?

Whether it’s by OEM or by jet versus turbo prop size, any kind of defining characteristics that you see as you look out to the balance of the year?

Well, I think we’ve been saying all along that we find the larger regional jets to be particularly attractive and sort of across over aircraft which are at the A220s, I think the A2s in particular. The turbo props are taking a while to pick up the surplus that’s in the market although you may have seen recently that ATR is going to be upping its production and that’s really moving more into the freighter side as well which is interesting.

So, and of course, the 75 seat jets are generally still in good demand, especially in the U.S. et cetera.

So, but of course those would be primarily used assets et cetera. But I think what’s particularly interesting are the new generation regional jets, the larger side over a 100 seats.

Maybe just follow-on to that, just in particular, the A220 there has been more activity or demand for new aircraft recently, of course tipped their toe in the water there with a few aircrafts. Do you think that is something that continues to grow in proportion or it have an increase in contribution to lease revenue per quarter?

So is it a bit of a more competitive market or is there any dynamic that maybe makes it less attractive?

Well, it’s certainly a competitive market. There is no question about it.

But I do see it becoming a larger part going forward. And you have these mid-range airlines that are operating and looking to move to these new technology, larger regional jets.

And those would be, in particular in our target group. When you look at huge buys from the large carriers, quite often that’s the ground that the larger leasing companies play in.

But in this particular market, I think we will be more of a niche player, but there are clearly carriers that are moving in that direction that would fit the type of carrier profile that we would target. As you can see, we have five airplanes with Air Baltic there.

And Air Baltic is a great example of a niche player that’s the very successful, very supportive in its home market et cetera. So, there are other opportunities such as those that we would pursue.

Great. Thank you very much.

Okay. Thanks, Tim.

Yes. Thanks very much.

Good morning everyone and congratulations on those recognitions. I know in the airline industry it’s a tough one through COVID to get recognized that way.

So, congratulations. Two questions and really I have two and they are core to kind of our view on your company and the first one is that, as we go through the – what I hope is the tail end of COVID, we are going to see a pickup in activity and it’s going to be first and foremost in the short haul regional friend and family.

On your results the fourth quarter suggested that, but now your guidance on Q1 obviously down due to omicron. My sense is and when I hope that omicron is kind of just a temporary aspect in your financials and that the second quarter and forward in fact come back along the lines of what we are seeing last fall.

When you look at your booking curve, is that supportive or contradictory to that deal is my question?

Okay. That’s a very good question, Walter and our equivalent to the booking curve is the number of block hours we fly, because we don’t have there as you know, Air Canada has the commercial side of the business in terms of load factors and bookings, et cetera and that all translates towards in terms of block hours flown.

And I think I do have some numbers that I can share with you that I think currently demonstrates pretty much what you are talking about. In the fourth quarter last year, when you compare it to pre-pandemic in 2019, we operated about 75% of the block hours we did pre-pandemic.

So it was definitely up. The fourth quarter was going well, et cetera and then omicron struck.

And it looks as though from what we’ve actually flown and we are starting to see some pickup numbers even in March that the first quarter now, we will be at about 60% of where we were at pre-pandemic. So, obviously, it has flown, and when we look at our numbers that was the impact of the pandemic of the omicron, I should say.

And then, when we look at the second quarter of this year, we are looking at actually the hours that we are planning on right now are about 87% of pre-pandemic. So you can see that while there is a drop in the first quarter as a result of omicron, I think there is reason to believe that now things are going to pick back up and we are going to get to where were pre-omicron and plus.

So, I think those numbers will give you some indication that in terms of our outlook, yes, first quarter not so great, because of these block hours but definitely recovery. And the other thing to remind people of as well is that we are paying the fixed amount and it really doesn’t matter how many block hours and of course while we watch this carefully because it’s sort of the dull weather of how the industry is going.

It doesn’t necessarily all then manifests itself in our results, which are generally fixed.

Okay. That is excellent information I think exactly what I was looking for.

So, thank you for that Joe. That’s perfect.

On the second part of our view and again, I’ll kind of frame the question in the same way, it’s our view that stretch balance sheets among airlines will not allow them to go out and kind of buy up aircraft left, right and center and perhaps leasing will be an opportunity they use in perhaps, and likely in their early months and quarters and years to ramp up quickly and to be able to ramp up at all quite frankly given their stretch balance sheet. Obviously, you got to get your collections back first and the trend there is good.

What we’ve seen over the last three quarters, you’ve highlighted a few wins here, but I guess, my question is the same thing is, when you look at your sales channel in that segment, are we getting to a point where you can look down the road and say, hey that is true. Airlines are going to be leasing a lot and perhaps and likely more than they did pre-pandemic and is there any visibility that you have that could confirm or deny that kind of view?

Yes. I think what you are saying is very true.

I think more airlines will do this with their balance sheets, et cetera. A lot of them have been pretty conscious in terms of adding new aircraft or capacity et cetera.

And there is some aircraft to absorb in the marketplace that were grounded as a result of the pandemic. I think what we are seeing though is we’ve seen more or less especially in the regional side maybe not totally in the narrow body, wide body, but in the regional side, there has been, I think a little bit of a shoring up over this last little while on some of the lease rates that we are seeing out there.

And some of the reports that we are seeing shows that it has in fact bottomed out. So, I think we are going to see the increase and this is barring any unforeseen another variant or a world crisis or something like that.

But there will be that uptake or uptick and we are getting inbound enquiries from airlines now looking to do more leasing business et cetera. So, very good signs of recovery in the market.

Okay. That’s great information, Joe.

I really appreciate the time.

No problem. Thank you.

Thanks very much and good morning. Obviously, there has been some press reports out there regarding potential M&A.

I appreciate that you are not going to comment specifically on those reports. But maybe a bigger picture question for you just with regards to, what if you were to pursue the M&A route to grow your portfolio, what potential synergies do you see or strategic advantage would there be for your leasing business to have that greater scale?

Maybe just comment on sort of the – more generically on what the potential upside could be to the business if you were to pursue that route.

Yes. Like we said, we are not going to respond and speculation and that’s what I think however, I think it makes sense more scale brings as an addition in terms of a larger leasing platform with manufacturers, with financing, larger orders things of that nature.

There has been dislocation in the market for sure with some of the larger lessors. There is still lot of assets out there to be picked up and there is no shortage of rumors and speculation.

But – and we are certainly keeping our eye on all these things and looking for opportunities that makes sense for Chorus and we will continue to do that. But and through that we would bring and look to bring in some of the advantages that could come from any possibilities.

So, we continue to look at it. No comment at this point, because there is a lot of speculation but we will just keep it at that.

But do you think it matters to an airline who they are leasing from? I mean, is it do they prefer to deal with a bigger lessor versus maybe a smaller player or does it make any difference to them?

I would think it makes a lot of difference, obviously, larger lessors can do bigger deals and in some cases larger airlines that want to do a whole bunch of small deals. But we have leases with large airlines, as well.

So, a lot of it is relationship based that’s who you know in the industry and getting in there and getting in the competitive process and so, a lot of it is driven by that. But our focus has been primarily not on the very, very large carriers, but on the mid to smaller size and we are quite comfortable in that niche.

Okay. Great.

Maybe just a quick second question. You got a number of aircraft there that will be available for partout.

Just wondering what you are seeing in the partout market? I mean, obviously, airlines around the world are trying to fly a little more.

I mean, is there some acceleration of demand for partout opportunities here?

Yes, there has been some acceleration of demand and we continue to partout aircraft. So, we are very pleased with that business.

And we see it as a good part of our business going forward and it really helps when we look at the whole lifecycle of the aircraft which is what we’ve been talking about for a while. And we do have a number of older airplanes sitting there and we look at each part of opportunity.

And we have done a number and we will continue to do it. So, there is good demand in that area and we see that recovering, as well.

Okay. Perfect.

Thanks very much.

Thanks for taking my question. Just looking at I guess, some of the gross spend in looking at within your leasing business.

I guess, how much of this is you looking at more of a general recovery in the aviation space versus maybe taking advantage from a market that seems to be a little bit more advantageous for you. So it looks like that aviation seems to be facing significant issues.

Is it like a market share grab opportunity here that that this window was opened and that’s driving maybe more aggressive chance for you to take advantage of maybe what your competitors today?

Yes, well, market share for us is secondary. What we do is we look at each deal in terms of the financial aspects of the deal.

The credit worthiness of the customer and of course, what we’ve been balancing that all against is our own liquidity as we move through here in our own balance sheet, et cetera. So, while market share is nice to have, we’ve seen some large lessors with major left market share that have not been successful.

So, we are being very prudent and very careful that’s the best I can describe it I think.

And is it a – for lack of a better word, is it a buyer’s market for you? For example, like Nordic, I think they wrote down like a third of their asset portfolio.

I think they are going to look at how it plays which I suspect they are not on a great negotiating position. So, as a buyer of these aircraft, are you finding that to be more compelling from an economic perspective?

So that even though lease rates might be a little bit count share, you are still getting that ROE that you typically target?

Yes, well, whenever there are buying opportunities you have to look at the assets, you have to look at the deployment of the assets, because, if you buy these assets and you don’t have a home for them then it ties up a lot of cash. And there are lot of surplus assets out there right now.

So in each case you also have to look at that are coming with leases attached. How long the lease is, quality of the carrier again, and there are some credit et cetera that has very much struggled and continued to do so.

So, we need to be very, very careful and while there are buy opportunities, what we don’t want to do is take on some of these opportunities and then they become problems. We want to make sure whenever we act on something like this that we have, we have a plan.

And maybe just last one for me. When you think of growing the portfolio, and I think of maybe a strategy pre-pandemic it was trying to be diverse across geographies, across aircraft type, across customers and obviously that makes building the portfolio, but I think there is going to be the obvious, there is going to be recovery in the aviation market when you look at region-by-region, does that kind of shape how you want your portfolio to be like, do you got a limit aircraft of your exposure to maybe Asia Pacific which is expected to lag in the recovery as you prefer to put more planes into say, North America, Europe where the recovery might be faster.

Is there a little bit more thoughtfulness, - thoughtful, but is there may be a little bit more focus on maybe what geography do you want in your portfolio as the overall market recovers?

Yes, generally speaking, diversification is wonderful, all things being equal, but all things are not necessarily equal in terms of geographies and carriers. And so, we are cautious is something that’s struggling and it looks as so it’s going to take some time and then we will look at that extra carefully.

But of course, if it’s a geography or a carrier that is robust from this come back pretty quickly. We will look at that opportunity more favorably.

So, in the short-term and the world has an uneven recovery, and carriers are uneven, we will held it go more where the real the floor is there and we are comfortable with the investment. So, and as I said, some of these continue to struggle.

So, we are not parts of the world, there is certainly not other than yet, I don’t think the world is, but it’s headed in the right direction.

That’s very helpful for me. Thank you very much for taking my question.

Okay, operator, it seems there are no questions. So, we will conclude the call.

Thank you everyone for joining us today and we look forward to speaking with you again soon.