Chorus Aviation announces strong second quarter
Aug 11, 2016
Adjusted EBITDA1 of $57.8 million, excluding other items
HALIFAX, Aug. 11, 2016 /CNW Telbec/ - Chorus Aviation Inc. ('Chorus') (TSX: CHR) today announced strong second quarter 2016 earnings.
"I am pleased to report solid earnings and operational performance," said Joe Randell, President and Chief Executive Officer, Chorus. "Chorus' subsidiaries are performing well and within our expectations. The focus in the second quarter was centered on improving Jazz's cost competitiveness under the Capacity Purchase Agreement ('CPA') through initiatives such as the ongoing modernization of the Jazz fleet, the flow of Jazz pilots to Air Canada through the Pilot Mobility Program, the implementation of employee separation programs and other overhead cost reductions. Jazz's operational performance remained amongst the highest in the North American airline industry, generating $5.7 million, or 96.7% of the available performance incentive payments under the CPA. I commend the Jazz team for delivering great results. Air Canada's decision to consolidate the Air Canada Express Q400 aircraft operation in Jazz in early 2017 further demonstrates the strength of our relationship. Jazz's continuous improvement initiatives are making us a more formidable competitor in the regional airline sector."
Mr. Randell continued, "The quarter delivered adjusted EBITDA1, excluding employee separation program costs, of $57.8 million, representing an increase of $4.1 million over the second quarter of 2015. Aircraft leasing revenue under the CPA rose to $23.1 million, an increase of $7.2 million quarter-over-quarter. This leasing revenue was generated by 31 Bombardier Q400s and five engines; in September we will have the planned complement of 34 Bombardier Q400s leased into the CPA operation. Year-to-date aircraft leasing revenue has grown by over $14 million, or 45.0%. Cash flow remains strong and we remain committed to building additional shareholder value by strengthening our foundational business with Jazz, growing our aircraft leasing revenues, pursuing growth opportunities in the Voyageur operation and progressing towards further business diversification."
Q2 2016 HIGHLIGHTS
- Adjusted EBITDA1, excluding other items, of $57.8 million.
- Adjusted EBITDA1 of $54.3 million.
- Adjusted net income1, excluding other items, of $21.8 million.
- Adjusted net income1, excluding other items, per basic share of $0.18.
- Net income of $23.7 million.
- Net income per basic share of $0.19.
- Improved market competitiveness with ongoing fleet modernization and CPA Pilot Mobility Program.
- Invested $3.6 million in employee separation programs to change workforce demographic and reduce ongoing costs.
- Signed a firm purchase order for five CRJ900s with Bombardier.
- Consolidated stock ticker symbols to 'CHR' on the Toronto Stock Exchange.
- Acquired five new Q400s and one engine using Export Development Canada ('EDC') financing that generate leasing revenue under the CPA bringing the total leased under the CPA to 31 Q400s and five engines.
- Transitioned Jazz Technical Services to a separate division of Jazz; secured its first third-party maintenance contract.
- Advised by Air Canada that the Air Canada Express Q400 fleet will be consolidated into the Jazz operation beginning in early 2017.
- Secured EDC financing of $21.9 million for certain previously acquired aircraft.
In the second quarter of 2016, Chorus generated operating income of $34.4 million, a decrease of $3.6 million over the second quarter of 2015. This decrease was driven by a $1.9 million increase in employee separation program costs, fewer labour and maintenance costs being capitalized on owned aircraft for major maintenance overhauls of $2.0 million, increased depreciation of $2.3 million attributable to major maintenance overhauls and new finance leases and additional aircraft (excluding Q400s), increased expenses related to business development and financing activities of $1.1 million, and fleet modernization costs of $1.7 million. These decreases were offset by an increased contribution of $4.6 million generated from aircraft leasing under the CPA, and the Voyageur operation of $1.0 million.
Adjusted EBITDA in the second quarter of 2016 was $54.3 million, a $2.2 million increase over the second quarter of 2015. This increase resulted from a quarter-over-quarter increase in depreciation and amortization expense, and the change in operating income (described above). This increase was attributable primarily to the purchase of aircraft during the last quarter of 2015 and the first half of 2016, and the Voyageur operation.
For reporting purposes, at each quarter end, Chorus converts its US dollar denominated aircraft debt into equivalent Canadian dollars based on the prevailing exchange rate. Chorus manages its exposure to currency risk on such long-term debt by billing related lease payments under the CPA with Air Canada in the underlying currency (US dollars) related to the aircraft debt. As a result of this conversion, in the second quarter of 2016, Chorus had an unrealized foreign exchange gain of $5.4 million versus an unrealized foreign exchange gain of $7.6 million in the same period of 2015.
Financial Performance – Second Quarter 2016 Compared to Second Quarter 2015
Operating revenue decreased from $400.1 million to $310.1 million, representing a decrease of $90.0 million, or 22.5%. As of November 1, 2015, Jazz no longer bills Air Canada for fuel which was a primary driver for the decrease in operating revenue.
Controllable revenue of $182.5 million decreased by $17.6 million or 8.8%. The controllable revenue reduction was primarily driven by rate reductions in controllable costs such as flight crew salaries, wages and benefits, and fleet modernization, which accounted for $7.8 million of the decrease. This reduction in controllable revenue is consistent with the increased focus on controllable cost reductions to improve market competitiveness under the CPA. A further decrease of approximately $12.5 million resulted from fewer billable block hours generated in the second quarter of 2016 compared to the same period in 2015. These decreases were offset by a change in the US dollar exchange rate that resulted in a $2.7 million increase in the quarter.
Aircraft leasing revenue under the CPA of $23.1 million increased by $7.2 million, or 45.3% quarter-over-quarter. Of this increase, $6.4 million was generated from the addition of 10 new Q400 aircraft to the CPA fleet, and $0.8 million was related to a change in the US dollar exchange rate. As of June 30, 2016, the CPA generated leasing revenue from 31 Q400 aircraft and five engines owned by Chorus, compared to 21 Q400 aircraft and four engines owned by Chorus a year earlier. Annually, these aircraft and engines currently generate a cash margin of approximately 20% after consideration of debt servicing charges.
Chorus' compensation under the CPA is based on fixed fees for the term of the agreement. The fixed fee compensation for the second quarter of 2016 was contractually set at $27.5 million. It is anticipated that when the five incremental Q400 and five incremental CRJ900 aircraft (announced September 28, 2015) are operating in the CPA fleet, the annual fixed fee compensation will increase to $111.7 million, or $27.9 million quarterly until the end of 2020 (after which time such compensation is set to decrease).
In the second quarter, Chorus earned $5.7 million in performance incentives, or 96.7% of the maximum incentive payment available under the CPA, compared to $5.6 million or 96.7% in the second quarter of 2015.
CPA pass-through revenue of $53.6 million decreased by $80.7 million or 60.1%. As of November 1, 2015, compensation for aircraft fuel is no longer billed under the CPA. Further, effective January 1, 2016, Air Canada entered into a new commercial agreement with the Vancouver International Airport Authority ('YVR') in connection with Jazz's CPA operations. YVR costs related to airport fees and certain terminal handling services, which were pass-through costs under the CPA, are now paid directly by Air Canada pursuant to this new agreement. These changes accounted for a $76.2 million decrease in CPA pass-through revenue.
Charter and other contract flying revenue of $11.6 million increased by $1.8 million or 18.7%.
Other revenue of $6.1 million decreased by $0.9 million, or 18.2%. Decreased sale of consignment inventory and ancillary revenue accounted for the majority of the change quarter-over-quarter.
Operating expenses decreased from $362.0 million to $275.7 million, a decrease of $86.3 million or 23.8%.
Adjusted salaries, wages and benefits decreased by $0.9 million primarily as a result of decreased flight crew costs. Stock-based compensation decreased mainly as a result of fluctuations in Chorus' share price. Employee separation program costs incurred in the second quarter of 2016 were $3.6 million compared to $1.6 million in the same period of 2015. Salaries and wages were also affected by fewer labour costs being capitalized on owned aircraft for major maintenance overhauls of $1.2 million.
Depreciation and amortization expense increased by $5.8 million to $19.8 million. Depreciation expense related to Voyageur was $1.5 million, and the purchase of additional aircraft during the second half of 2015 and the first quarter of 2016 accounted for $2.6 million. Further, depreciation associated with capitalized major maintenance overhauls increased depreciation expense by $1.0 million, and new finance leases accounted for $0.7 million.
Aircraft maintenance expense decreased by $8.0 million to $43.0 million. Compared to second quarter 2015, fewer block hours and fewer engine overhaul events accounted for $4.8 million and $2.8 million decreases respectively. Cost of sales of consignment inventory decreased by $0.9 million, other maintenance costs decreased by $0.7 million, and the Voyageur operation contributed a decrease of $0.4 million. Decreasing maintenance costs in the Jazz operation is consistent with the fleet modernization initiative. These decreases were offset by a change in the US dollar exchange rate on certain maintenance material purchases which accounted for a $1.6 million increase.
Aircraft rent decreased by $3.2 million to $22.1 million. This is consistent with Chorus' planned fleet modernization initiative. The decrease was mainly due to the return of five CRJ200s in the second half of 2015, and seven CRJ200s in the first half of 2016, and was partially offset by a change in the US dollar exchange rate.
Non-operating expenses increased by $5.7 million from an income of $2.8 million in the second quarter of 2015 to a non-operating expense of $2.8 million. Net interest expense increased by $1.8 million. Interest expense related to long-term debt increased by $1.5 million as a result of a change in the US dollar exchange rate and new Q400 long-term debt, $0.1 million related to interest on consideration payable, and decreased interest revenue of $0.2 million. The strengthening of the Canadian dollar in the quarter contributed to a foreign exchange gain of $1.8 million, compared to a foreign exchange gain of $5.7 million in the same period of the previous year.
Adjusted net income for the second quarter 2016 was $18.2 million or $0.15 per basic share compared to $23.8 million or $0.20 per basic share for the same period 2015. Net income in the quarter was $23.7 million or $0.19 per basic share compared to 2015 net income of $31.4 million or $0.26 per basic share.
A reconciliation of these non-GAAP measures to their nearest GAAP measure is provided in Management's Discussion and Analysis ('MD&A') dated August 10, 2016.
Investor Conference Call / Audio Webcast
Chorus will hold an analyst call at 9:30 a.m. ET on Thursday, August 11, 2016 to discuss the second quarter of 2016. The call may be accessed by dialing 1-888-231-8191. The call will be simultaneously audio webcast via:
This is a listen-in only audio webcast. Media Player or Real Player is required to listen to the broadcast; please download well in advance of the call.
The conference call webcast will be archived on Chorus' website at www.chorusaviation.ca under Reports > Executive Management Presentations. A playback of the call can also be accessed until midnight ET, August 19, 2016 by dialing toll-free 1-855-859-2056, and passcode 39154031#.
1 Non-GAAP Financial Measures
EBITDA and Adjusted EBITDA
EBITDA is defined as earnings before net interest expense, income taxes, and depreciation and amortization and is a non-GAAP financial measure. Adjusted EBITDA (net income before net interest expense, income taxes, depreciation and amortization and other items such as asset impairment and foreign exchange gains or losses) is a non-GAAP financial measure used by Chorus, and commonly by other regional airlines in the industry, as a supplemental financial measure of operational performance. Management believes Adjusted EBITDA assists investors in comparing Chorus' performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods and factors such as historical cost. Adjusted EBITDA should not be used as an exclusive measure of cash flow because it does not account for the impact of working capital growth, capital expenditures, debt repayments and other sources and uses of cash, which are disclosed in the statement of cash flows, forming part of Chorus' financial statements. The signing bonuses, CPA advisory fees and employee separation costs have been included within our definition of Adjusted EBITDA. Adjusted EBITDA, excluding other items, excludes signing bonuses, CPA advisory fees and employee separation program costs.
Adjusted Net Income
Adjusted net income and adjusted net income per share are used by Chorus to assess performance without the effects of unrealized foreign exchange gains or losses on long-term debt and finance leases related to aircraft. Chorus manages its exposure to currency risk on such long-term debt by billing the lease payments within the CPA in the underlying currency (US dollars) related to the aircraft debt. These items are excluded because they affect the comparability of our financial results, period-over-period, and could potentially distort the analysis of trends in business performance. Excluding these items does not imply they are non-recurring due to ongoing currency fluctuations between the Canadian and US dollar. The signing bonuses, CPA advisory fees, and employee separation program costs have been included within our definition of adjusted net income. Adjusted net income, excluding other items, excludes signing bonuses, CPA advisory fees and employee separation program costs.
This news release should be read in conjunction with Chorus' unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2016 and MD&A dated August 10, 2016 filed with Canadian Securities Administrators (available at www.sedar.com).
This news release may contain 'forward-looking information' as defined under applicable Canadian securities legislation. Forward-looking information typically contains words such as "anticipate", "believe", "could", "should", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar words and phrases, including references to assumptions. Such information may involve but is not limited to comments with respect to strategies, expectations, planned operations or future actions.
Forward-looking information related to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and other uncertain events. Forward-looking information, by its nature, is based on assumptions, including those described below, and is subject to important risks and uncertainties. Any forecasts or forward-looking predictions or statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements to differ materially from those expressed in the forward-looking statements. Results indicated in forward-looking information may differ materially from actual results for a number of reasons, including without limitation, risks relating to Chorus' economic dependence on and relationship with Air Canada, the airline industry including international operation of airlines in developing countries and areas of unrest, airline leasing, energy prices, general industry, market, credit, and economic conditions, (including a severe and prolonged economic downturn which could result in reduced payments under the amended CPA), competition affecting Chorus and/or Air Canada, insurance issues and costs, supply issues and costs, the risk of war, terrorist attacks, aircraft incidents and accidents, epidemic diseases, environmental factors, acts of God, changes in demand due to the seasonal nature of the business, the ability of Chorus to reduce operating costs and employee counts, the ability of Chorus to secure financing, the ability of Chorus to remain in good standing under and to renew and/or replace the CPA and other important contracts, employee relations, labour negotiations or disputes, pension issues, currency exchange and interest rates, leverage and restructure covenants in future indebtedness, uncertainty of dividend payments, managing growth, changes in laws, adverse regulatory developments or proceedings in countries in which Chorus and its subsidiaries operate or will operate, pending and future litigation and actions by third parties. For a discussion of certain risks, please refer to Section 20 – Risk Factors in the second quarter 2016 MD&A. The statements containing forward-looking information in this discussion represent Chorus' expectations as of August 10, 2016, and are subject to change after such date. However, Chorus disclaims any intention or obligation to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities regulations.
Chorus is traded on the Toronto Stock Exchange under the trading symbol CHR.
Headquartered in Halifax, Nova Scotia, Chorus was incorporated on September 27, 2010 and is a dividend-paying holding company with various aviation interests including Jazz Aviation LP and Voyageur Aviation Corp.
SOURCE Chorus Aviation Inc.
For further information: Chorus Media Contacts: Manon Stuart, Halifax, Nova Scotia, (902) 873-5054, email@example.com; Debra Williams, Toronto, Ontario, (905) 671-7769, firstname.lastname@example.org; Analyst Contact: Nathalie Megann, Halifax, Nova Scotia, (902) 873-5094, email@example.com