Atlas Air Worldwide Holdings Inc (AAWW) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Atlas Air Worldwide third quarter conference call. Today's call is being recorded. Now for opening remarks and introductions, I'd like to turn the call over to the Vice President and Treasurer of Atlas Air Worldwide, Mr. Bill Bradley. Please go ahead, sir.

Thank you, Operator, and thank you to all on the line. I'm here with Rick Shuyler, our Chief Executive Officer, and Doug Carty, our Chief Financial Officer. Before turning the call over to Rick and Doug for a review of the quarter and an update on our re-audit, let me begin by saying that some of our remarks today may be deemed to be forward-looking statements which are based on our current expectations and assumptions. These statements, by their very nature, involve a number of risks and uncertainties that could cause our actual results to differ materially from those projected in the forward-looking statements. We caution you not to place undue reliance on these statements, which speak only as of today. I would like to refer you to our annual report on Form 10-K for the year ended December 31, 2001, and our 10-Q report for the quarter ended June 30, 2002 and March 31, 2002, and to our Form 8-K filing today and those of October 16 and October 18 for a detailed discussion of the various factors that could cause our actual results and achievements to differ materially from those set forth in the forward-looking statements. We undertake no duty to update any of these forward-looking statements.

With that, I'll turn the call over to Rick.

Thank you, Bill, and my thanks to all of you for joining us on the call today. As I am sure you are aware, on October 16th we announced that we would be restating certain of our prior-period financials including the annual statements for the year 2000 and 2001, and the quarterly statements for the first two quarters of 2002.

Because our former auditors, Arthur Andersen, are no longer around to give consent on their audit opinion, the new SEC rules require that our current auditors, Ernst & Young, conduct a full audit of the prior-period financials as a result of the restatement. We are currently in the beginning stages of the re-audit process, which Doug will give you some more color on in a moment.

Again, in that we are still in the process of the re-audit, we will be unable to file a 10-Q today. However, as we committed to you in October, it is our intention to continue to provide you with updates on the operations here at Atlas, and at Polar, which we are now doing, and we will continue to do so through the filing of 8-K reports with the SEC and by issuing press releases.

In that regard, Doug will review for you certain financial and operating data for the quarter and then I'll make a few brief comments and then we will open up the call for a brief question-and-answer period. I'm sure that there will be many questions that at this time we either can't respond to or don't have answers for, but we're going to give it our best shot as we go forward.

So with that, I will now turn it over to Doug.

Thank you, Rick, and let me also add my welcome to all of you on the call. We do really appreciate you joining us this late in the afternoon. Let me start by updating you on the restatement. As Rick has said, we are currently working with Ernst & Young on the re-audit. We are working towards having the re-audit completed in time for our normal course audit of the 2002 financials in early 2003.

I've got to stress that we're early in this process and have no particular updates to give you in terms of the type or magnitude of the adjustments that will be required beyond what were outlined on the 16th of October. To reiterate, my comments at that point, those adjustments we have identified, are in three primary areas -- reserves for obsolete and excess inventory, maintenance expense, and the allowance for bad debt.

As we have said, the adjustments are exclusively non-cash in nature. They are expected to have the effect of reducing prior-period earnings while increasing year-to-date 2002 earnings. As Rick said, given that we are so early in this re-audit process, we will be unable to file our third quarter 10-Q on a timely basis, and I've so advised the SEC. We have filed an 8-K this afternoon and in that provided certain summary financial information to give you a sense of our third quarter activity and our outlook for the fourth quarter. This is detailed in a press release that's gone out as well.

In that filing and in the press release, we outlined revenue and statistical results for the third quarter, and to help you understand other metric supplied cash and long-term debt balances as of the quarter-end. So let me go to that.

On consolidated revenue for the -- our consolidated revenue for the third quarter was $290.8 million compared to $150.7 million for the third quarter of 2001. The biggest driver of the increase, obviously, was the inclusion of Polar this year. You'll recall Polar was acquired in early November of 2001. Excluding Polar, operating revenues were up almost $21 million year-over-year. The increase in revenue at Atlas was driven by hub and charter businesses where we had an additional 8,520 additional block hours this year compared to last year, offset by a little over 8,200 fewer ACMI block hours.

Our charter business benefited from increased demand leading up to the work stoppage of the West Coast ports the first week of October. As well, we had strong military demand, which accounted for almost 4,400 block hours, or 49 percent of our total charter block hours.

Cash as of September 30, 2002, we had $204.1 million and included in that number was almost $181 million of Atlas Air. A long-term debt balance, including current maturities stood at $958 million on a consolidated basis, of which $934 million was at Atlas Air.

Many of you have asked about the status of our bank covenants and how the restatement affects our covenants in general -- I can tell you that we have been in discussions with our Asian bank of late and are currently talking to them about seeking a waiver of certain covenants through the year-end. I've got to caution that we haven't met with the bank group at large, but we look forward to doing so shortly. In previous calls we've outlined, prior to the restatement news that we would have to be back talking with the banks about covenant levels again, regardless. Clearly, the restatement does not make this process any easier, but we believe that our creditors -- or we hope that our creditors will continue to work with the company to find a solution that works for us both, as they have done a number of times in the past.

Rick, that covers the quarter and what we've covered in the press release and the 8-K and an update of the brief on the re-audit. I know you've got some comments about the current marketplace and so I'm going to toss it back to you, and both of us will be happy to answer questions afterwards.

Thanks, Doug. Yeah, as opposed to most, if not all, in aviation today we at Atlas are actually in the middle of what will be a record block hour and revenue quarter at both Atlas Air and on a consolidated basis at the holding company.

The slowdown and congestion at the West Coast ports, in fact, has led to about $50 million in commercial charter revenue at Atlas and Polar for the month of October alone. This demand has been in addition to our normal fourth quarter peak demand and has led to charters being booked all the way into the new year. In response to this demand, we have actually reactivated every available aircraft and, as we noted in our release, only one of the six Atlas aircraft that were parked at the end of the second quarter remain so today.

On top of that, Atlas's participation in CRAF, the Civil Reserve Air Fleet program, which began on October 1st, will bolster what has already been strong demand for military charters this year. In fact, when we closed the books on the year, we expect to have operated over 16,000 block hours for military charters in 2002, which will represent over $200 million in revenue. And as you will recall, Atlas and Polar now represent 48 percent of the wide-body cargo lift for the new CRAF fiscal year, which just began on October 1st, which is up from the 18-percent entitlement that we had prior to October, which should obviously served to further increase our military revenues going into 2003.

On the ACMI front, we were very pleased to sign a wet-lease agreement with China Southern in October, which continues our relationship with the largest of China's three main airlines, and as we noted in our release, we will also be adding an additional two aircraft on wet lease to China Southern in the fourth quarter.

So while we are clearly not immune to the underlying economic weakness that has impacted so many other carriers over the past 18 months, our diversified revenue base, including Polar's scheduled service and our CRAF participation now for Atlas, have provided an incremental bridge that serves to improve our prospects when economic growth does return.

Finally, as I've said before, we're not happy to have to restate our earnings, but we are determined to get the re-audit completed and move on, and I can assure you that none of that will distract us from our operations in what has proved to be an exceptionally busy season.

So with that, Operator, I'll ask you open up the lines for a brief question-and-answer period.

Okay, thank you. Our question-and-answer period today will be conducted electronically. If you'd like to ask a question, simply press the star key followed by the digit 1 on your touchtone phone. Again, that's star, 1 to ask a question, and we'll go first to [Adam Zerkin] with RBC Capital Markets.

Hi, guys, thanks for the update. How are you?

Very good, Adam, how are you?

Hangin' in there. Quick thing -- just first talk about the cash number in the quarter -- looking at the number of 180, was there any sort of one-time expense items that went in there that wouldn't be, sort of, the recurring thing to think about on a quarter-to-quarter basis?

No, there really weren't, Adam. As you know, we were pretty lumpy in ownership payments in the quarter. You know, when I think about cash ownership and pretty modest amount of capital expenditures -- probably about $120 million went for those two items alone.

Right, I'm just thinking in terms, Doug, like, maintenance, for example. I know that C checks were needed on three of six planes, and Ds were need on the other two, right?

Yeah, it will be a little rough to go through expenses in the income statement for obvious reasons, but we were lumpier this quarter on C checks, and I want to say we had nine, I think, in the group, done, and so they would have served -- I'm being a bit cautious, Adam, is because you know we've announced this change in maintenance accounting, but that would be sort of the one unusual one in our operation.

Was there anything regarding pilot training? Also, what about the fuel price expense?

We would have had additional pilot training associated on the Polar side, primarily, associated with bringing back some pilots that had previously been furloughed on that side of the business and, obviously, fuel expense, you know, was a more significant expense than it has been in the past for Atlas Air, certainly.

For mixed reasons, right?

Yeah, and primarily for mixed reasons, as the mix changes more towards charters, military activities, scheduled service, hub operations, and so forth, you end up having a greater impact on the fuel side of the business. But having said that, you obviously see correspondingly higher revenues associated with all those activities as well.

In terms of the West Coast business, how did a lot of that split up between Inc and Holdings?

I will tell you what we have done is that we've tried to make sure that we have a sort of a coordinated, centralized charter function that books charters and then figures out where the aircraft can come from. Some of the charter activity gets done at Polar on what we called an "extra section" basis for Polar, and on the Atlas side, it would be a pure charter, but it is wherever we have available aircraft, and the nice thing about this particular activity that we're seeing in the fourth quarter is that when we're doing it on top of the usual peak period, that really means that you've got to scramble to find aircraft, but we obviously did that.

In the efforts to put together sort of a centralized operation between Polar and Inc is that the reason that Polar is dry-leasing an additional three planes this quarter from Inc?

Yeah, that is exactly right. We're trying to make sure that the aircraft are aware the activity is going, number one; but, number two, keep in mind, Adam, that we retired the last two remaining 747-100s at Polar during the quarter as well. So they needed to be replaced.

Right. With the new contracts with China Southern, can you give us a little more color as to the length and what sort of planes might be in the two additional ones you announced in the press release?

Yeah, they will be 747-400 aircraft, and they will be long-term leases.

What is long term?

But we can't -- long-term in the analyst vernacular is anything over a year, and there are days that I would say anything over six months, but historically anything over a year we consider long term.

So is then that to say that China's -- of the 14 474-100s that you have right now, China Southern is going to have three of them at the end of the year?

Well, at this point they're trying to decide whether they're going to make all three 400s or whether one of the three will end up being a 200, and it's going to depend upon where they ultimately decide to utilize the aircraft. One of the uses that they were initially considering for the aircraft would be a better 200 route than a 400 route. So they're still trying to decide which way they want to go?

Okay, and the final question, guys, unencumbered assets. What do you have?

You know, I don't think we have a list here, but it sure ain't a lot, I'll tell you that.

You mean, there are a couple of engines and then the spare parts, right?

[indiscernible] inventory and some spare engines.

If it's possible to find out what the book value of those are, that would be very helpful.

You've got to have a balance sheet first. That's kind of a problem at the moment.

Can you at least tell me how many engines?

I don't know. I don't think we know here, sitting in this room.

That's okay, no problem. Thanks, I'll get back in the queue if I have anything else.

Thanks.

And we'll take our next question from [Tom Wadowicz] with Bear Stearns.

Hi, Tom.

Yeah, hi, Doug. Hi, Rick. Let's see, I guess a question along the lines -- I'm not sure how you can respond to this or give us any sense, but when you look at the Atlas Air business and when you look at the Polar business, was your sense that you made money in one of them or in both of them in the quarter?

Tom, unfortunately, we just can't go there. Until we, obviously, go on through the entire re-audit process, we really cannot comment on financial results at all. We did put some information in the 8-K with respect to revenues, but that's as far as our accountants will allow us to go.

Okay, can you say anything in terms of relative to second quarter, whether the general trend in expense at Polar or at Atlas was, you know, big changes, up or down, or, roughly, similar-type run rate?

Again, unfortunately, we're just being told that until the re-audit is done, we just can't comment on any of the expense items. Sorry.

Okay, that's fair. Can you give us, I guess, a sense of what the cash payments were in terms of the lease payments in the third quarter on cash side and then what it is in fourth quarter? I know it tends to be lumpy in first and third.

Yeah, the first and third are the big ones, and then it comes down substantially in the fourth and then, correspondingly, is light in the second quarter of the year.

Tom, as I said a moment ago, almost $115 million in total cash went to the consolidated ownership payments. My binder here doesn't have it split by interest, rent, or principal, but it's quite lumpy on rent this quarter because of double [ETCs].

Do you have any sense what that number would be in fourth quarter then?

A little bit more than half of it. Some remain 65 and 70, Tom.

Okay, great. Last question --

That is the cash -- just so we're clear -- that's the cash amounts of all three.

Yeah, asking about the cash -- and is there any kind of an update of where things are with the bank covenants and kind of where they were previously? Previously you needed the old covenants that would go back to required 200 million cash at Atlas Air, Inc. Is that where it would revert back to?

I spoke about in the last conference call. There are the four financial covenants. Most of them require financial statements to calculate. What we can tell you is that it's clear, because we know what our cash level is. That's the one we passed most clearly. I really can't comment on the other ones, because I need financial statements to calculate. Whatever they will be, as I said in my opening comments, Tom, is we're going to go and talk with our banks and hopefully find a waiver associated with that.

Okay.

But this is an issue, Tom, as most listeners know, we've been -- we're scheduling to go and talk to our banks in any event -- at this time of year, in any event.

Okay, thank you.

Thanks, Tom.

Our next question will come from [Helene Becker] with Buckingham Research Group.

Thank you very much, Operator. Hi, gentlemen. Rick, this is my question -- you are forecasting here at 45 to 47,000 in block hours, I think, for fourth quarter. Is that right?

That's correct.

Correct, on a consolidated basis.

Right, okay, so can you break that out to what's charter, what's military, what's hub flying?

Let me give you a sense of that, if I can. I'll be probably broad and speak about percentages in the mix, if you don't mind.

That's fine.

In the third quarter, give or take 36,000 consolidated block hours, right, we have signaled here 45 to 47,000 block hours. In the 36,000 block hours, you can do the math off our table, that our contract services, if you'll remember, is ACMI and hub, that work out to about a little over 50 percent -- about 52 percent. You can do the math and see that charters are 21 percent of the sked is 25 percent. If you take the fourth quarter call that we've made here, I think what you'll see as schedule about the same relative proportion of those 46,000 by 25 percent. We would guess, given the strength of the charter business that Rick has so clearly laid out here, that charters would grow probably to 25, 26 percent with the remainder being ACMI. So ACMI or our contract services, let me put that more clearly, should fall a little below 50 percent simply because of the huge growth in the commercial charter business, and we're seeing almost a double, I think, in the commercial charter business in terms of block hours. Does that help?

Right, okay. And then, Doug, are you able to get on that charter business, premium pricing?

Certainly in the month of October. Typically, I don't know, look at these guys, 10 or 11,000 a block hour would have been sort of commercial on average for a year. We're seeing, sort of, 12 to 15,000 with some numbers off higher, even, than that. We'll be in that kind of a range, I would guess, on average, for the quarter.

There were prices in the marketplace certainly during the peak of the work disruption out on the West Coast that were at 7 bucks a kilo when, you know, you might be normally getting 3 bucks a kilo for freight. So that gives you some idea of the kind of pricing that we --

-- very, very high in the first couple of weeks, but we'll see our charter unit revenue for the quarter being quite a bit higher than our traditional unit revenue for charter, given that real oomph in October and carrying on into November.

Okay, and then, Rick, I think you said that you're booking charters, then, into the first quarter because of the demand. Then would you be implying that you are booking this at the similar higher rates?

It's not as high as it was at the peak, certainly, but it's still higher than it would normally be for what we would think of as a normal peak season, and that's just simply because people are still hedging their bets, as you can imagine. The 60-day presidential - or Taft-Hartley or whatever it is - ends at end of the year, and the shippers could be facing a very similar type of slowdown situation immediately after that. So I would guess that some good number of shippers are seeking to ensure that they have lift available to them in that eventuality.

Okay, and then I think you have 50 or 51 aircraft, depending on which table I'm looking at here - so are they all in service? Are you operating with any spares? And then I saw - somewhere it said three of six were coming back? I'm kind of confused about what's flying.

Virtually everything is flying.

Everything is flying but one aircraft. That's the short answer for you.

All right, well, that's very helpful. And then, with respect to these numbers that we're looking at, are these subject to re-auditing as well?

Well, they've never been audited, so, no, they're not. I mean, they will end up being included in the full year-end audit, but they've not - let me put it -

-- we have no reason to believe there's a revenue restatement issue that 2001 is going to be re-audited, but we have no reason and no suspicion as yet that revenue in these quarters is being restated.

Okay, and then on another -

Let me put it a different way for you - if the auditors didn't feel comfortable that these numbers didn't need to be rescrubbed, we wouldn't be talking about them.

Okay, and then the other question I had for you was with respect to this SEC investigation - is that all part of the re-auditing? Or can you give us an update on what is going on there?

Yeah, I can. It's actually not an SEC investigation, so let me make sure that is clear. What the SEC announced, as is their practice anytime, anyone indicates the need for a restatement of prior-period financials, is that they have initiated what they call in informal inquiry, and what that amounts to is just putting us on notice that, depending upon what happens as a result of the re-audit and so forth, they may have more questions, and that's literally as far as it goes. Our counsel and other members of senior management met with the SEC, went through exactly what we knew to be the case, what we had found, what we had told our auditors about, disclosed to them, and so forth, and told them that we had, indeed, pointed an independent committee of the board to look into the restatement, to make sure that all the necessary processes and procedures and policies are in place to make sure that mistakes don't happen again, and the SEC basically said, fine, now let us know how it all comes out.

Okay, and then can you just update us on how many - and this is the last question, I promise - how many pilots you have on furlough now, after all these planes come into service now?

There are no pilots on furlough on the Polar side, and there might still be a handful, you know, maybe 10 or 15, at most, on the Atlas side, I would guess.

-- come back on that.

It would only be those that did not come back from the original furlough, I think. I think everybody else has been re-offered a spot, either at Atlas or Polar.

Okay, all right, great. Well, thanks very much for your help. If I have another question, I'll get back in the queue.

Okay, thanks, Helene.

We'll go now to [Hillel Olshin] with Deutsche Bank.

Hi, good afternoon, gentlemen. How ya doin'?

Good, thanks.

Just in terms of cash, you know, you guys spoke back in August that you saw cash, at the end of the year, at or above the 278 that you had at June 30. Is that still your thinking?

We'd be a little lighter than that. I think, [Hillel], we're going to be real cautious on this number. We're targeting a quarter of a billion dollars now.

Okay, and also did I hear you correctly that charter revenues per block hour is about 12 to 15,000 in the fourth quarter?

I think by the time we lock it all up, it will be in that range, [Hillel].

Okay, great. Thank you, Doug.

Okay.

We'll go next to [Jean Mink] with Stanfield Capital.

Hi. I'm wondering if you can explain to me how the cash goes from Inc to AFL3 to pay amendment fees?

Basically, the arrangement is AFL3 is basically a subsidiary. The arrangement between Atlas and AFL3 is Atlas leases aircraft from AFL3, who are the owners of the airplanes. Those lease payments then get used to make bank payments, whether it's interest, principal, or occasional fees. So the arrangement between Atlas and AFL3 is a lease arrangement.

Mm-hm. So what you're saying, then, is the - but what about, like, for example, if you have a waiver - there was the 17 million that was paid a few months ago - that was part of the lease payment?

Yeah, the lease tracks -

-- the prepayment is what she's referring to.

The 17 million was a revolver.

Yeah, that's right, some of it, Jean is with respect to the revolver. I think that particular one you're referring to is a revolver - is an obligation of Atlas itself, but in the even that they are payments by AFL3 to the bank group, those are really funneled through the operating lease agreement between Atlas and AFL3.

Okay, thank you.

For our next question, we'll go to [Brad Noel] with [Nesna and Smith].

Hello.

Hi.

I'm going to try and pin you down a little bit harder on that cash.

You can try.

I'm going to try, I know. It said, you know, 287 or so at the end of the year. You just backed off that number, but yet we're having record operating results in an environment with raised fees. That doesn't seem to make sense.

We're just going to be wildly conservative here - that's what I'm going to say at this point. We obviously haven't produced a cash statement here, and this is our call right now.

Okay, so the lawyers are breathing down your next to just be extra cautious.

It's -

Okay, the main concern was what the cash level was going to be at the end of the first quarter of 2003, where you expect that you may have to renegotiate that waiver that requires you to have 200 million. Is that still the expectation that you'll have to renegotiate that waiver, that specific waiver, for the end of the Q1 cash balance?

Yes, that remains the case. It always has been the case of restatement, and current expectations don't change that.

Okay, thank you.

Okay, thanks.

Ladies and gentlemen, that does conclude our question-and-answer period for today. I'll turn the conference back to our speakers for any closing remarks they may have.

All right, again, we thank all of you for being on the call. We wanted to make sure that we gave you as much information as we are able to under the circumstances and hope that this has helped give you an idea of sort of where we stand these days at Atlas and certainly give you some good idea of our outlook for the fourth quarter.

So we will continue to have periodic updates with you, and as we are able to do that, we will notify you, going forward. Thanks, all of you, for being on the line today.

Thanks very much.

Thanks, Operator.

That does conclude our conference call for today. We do appreciate your participation. You may disconnect at this time.