Atlas Air Worldwide Holdings Inc (AAWW) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Atlas Air Worldwide Holdings first quarter 2007 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Monday, May 7, 2007. I would now like to turn the conference over to Bill Bradley, Vice President and Treasurer. Please go ahead, sir.

Good afternoon. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our first quarter 2007 earnings review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Mike Barna, our Senior VP and Chief Financial Officer. Before I turn things over to Bill, I would like to remind you that in discussing the Company's performance today, we have included some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations and involve unknown risks and uncertainties. Atlas Air Worldwide Holdings actual results or actions may differ materially from those projected in the forward-looking statements.

For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the Safe Harbor language in our recent press releases and to the risk factors set forth in our annual report on form 10-K filed with the SEC on March 15, 2007. In our discussion today, we also include some non-GAAP financial measures. You can find our presentation on the most directly comparable GAAP financial measures calculated in accordance with Generally Accepted Accounting Principles and our related reconciliation in our recent press releases, which are posted on our website at www.atlasair.com. You may access these releases by clicking on the link to financial news in the Investor Relations section of the website. At this point, I would like to turn the call over to Bill Flynn.

Thank you, Bill, and welcome, everyone. We are glad to have you with us today to discuss our first quarter results. We had an excellent first quarter. Our reported earnings and revenues set new records for first quarter results. This was in the face of generally softer market conditions for global air freight demand. We are benefiting from aggressive asset management and Continuous Improvement initiatives that are boosting margins, increasing operating efficiency, and enhancing our bottom-line. Our strategy for delivering compelling value to our customers and to our shareholders is producing measurable results. The seasonally slow first quarter market was exacerbated by particularly weak demand in Asian exports. In spite of these market conditions, we increased average daily utilization of our operating aircraft in Q1 2007 by 19% compared to first quarter results in 2006. We also increased EBITDA by 40% per aircraft on a total fleet basis. And we more than doubled our first quarter 2007 operating margin to 4.9% from 2.1%.

We benefit from the scale and scope of our operations and the ability to allocate capacity among our business segments and geographic markets in response to market conditions. These strengths enabled us to respond quickly to an increase in expansion business awarded by the U.S. military in the first quarter of 2007, which we see continuing through the second quarter. In Scheduled Service we are responding to improved demand in the South American and transatlantic trade lanes, which has offset moderation in Asian export markets. These are attractive growth markets. Average yield in these markets is lower than the Asian trades, commensurate with the shorter length of haul. However, high round trip utilization in these routes generate favorable revenue per ATM. This differential is reflected in our Scheduled Service yields compared with the first quarter of 2006. Our Continuous Improvement initiatives contributed more than $12 million of benefits in the first quarter.

These contributions principally came from maintenance, both through improved internal processes and lower pricing achieved through competitive bids, in fuel where efficiency initiatives have reduced consumption, in improved parts management, which significantly minimized loan/borrow, and finally through strategic procurement processes related to all other outside services. We expect that the annualized run rate of benefits from our Continuous Improvement initiatives will exceed $65 million by year-end with the balance of our $100 million to come in 2008. We also continue to identify and expect to achieve additional cost savings. The active management of our assets through sales and subleases of aircraft maximize our return on these assets and increase shareholder value. In the last quarter, we sold one of our older Classic aircraft for $6 million, generating a pretax gain of $1 million. With our latest transaction, our total fleet is now comprised of 20 747-400s and 17 Classics. We directly operate 32 aircraft, dry lease 3 aircraft to our U.K. affiliate, and dry lease 2 Classics to third parties.

We continue to benefit from our repayment of high-cost debt during 2006. That has reduced interest expense and improved our strategic and operating flexibility by eliminating restrictive loan covenants. We will sustain and build on our strengths going forward. We have improved our operating flexibility, we are better positioned to serve our customers and to prosper under ever-changing market conditions, and we are positioned for an exciting and winning future. Now for a recap of our first quarter highlights, I would like to turn it over to our CFO, Mike Barna. Mike?

Thanks, Bill, and good afternoon, everyone. As you have seen in our press release of earlier today, we had a strong first quarter. We reported net income of $6.2 million or $0.29 per diluted share, our best first quarter results since emergence. We had record first quarter revenues of approximately $354 million. Our operating income totaled $17.5 million and our pretax income totaled $10.1 million. Both operating and pretax income included the $1 million gain on the disposal of an aircraft Bill mentioned a moment ago. Both our first quarter 2007 and 2006 results reflect the usual seasonally slower demand for air freight. However, what is striking is the improvement in our earnings and margins for first quarter '07 versus the prior year's period due to several factors. First, improved aircraft utilization driven by our active fleet management. Second, a 12.5% strategic reduction in non-crew headcount, which in part led to a 14% improvement in overhead costs per block hour. Third, Continuous Improvement initiative in all areas, but particularly in the areas of maintenance and fuel. Fourth, increased AMC charter demand, and lastly, lower interest expense.

We operated an average of 32.7 aircraft in first quarter '07 versus 39 aircraft in the 2006 period, as a result of our asset management initiatives. Nonetheless, we flew the same number of block hours and we achieved our objective of driving average utilization of our operating aircraft up by 19%. We also increased pretax earnings per aircraft by $415,000, including dry leased aircraft. In 2007, we are benefiting from improved pricing for both heavy checks and line maintenance due to our Continuous Improvement initiatives. For the year, we also expect maintenance expense to be generally comparable to what we saw in 2006, barring any unforeseen developments. with any bias slightly to the higher side. In the latest reporting period, maintenance totaled a little over $45 million compared with more than $40 million in the first quarter of 2006, or an increase of about $5 million. The increase was principally due to a larger number of engine overhauls during the quarter. Altogether, there were 15 overhauls in the latest quarter compared with 10 in last year's first quarter.

Some of the impact of the additional engine overhaul activity was offset by an insurance recovery of $1.8 million on repairs to damaged engines. Just as an aside, I would like to remind everyone that we expense all maintenance and repair costs on our aircraft and engines when they are inducted at the MRO facility where the maintenance and repair services are incurred. For certain of our engines, we are required by agreements to make scheduled cash payments towards the cost of the next overhaul on each applicable engine, which gives rise to a prepaid maintenance account on our balance sheet. When the actual engine shop visit takes place, the prepaid maintenance account is reduced and the cost of the event is expensed, flowing through the P&L for that period. The number of engine overhauls varies from one reporting period to the next, which can increase variability in the P&L. Further, the prepaid maintenance account will generally increase during periods when we have fewer engine overhaul events and it will decrease during periods when we have greater engine overhaul activity.

Now let me turn to fuel, which in the latest quarter totaled more than $112 million compared with about $101 million in first quarter 2006. Despite the $11 million or so increase in total fuel expense, driven by higher AMC flying, there are three important points to note about our fuel expenditures in the first quarter. First, we benefited from our ongoing initiatives we call FuelWise to improve fuel burn efficiency throughout our entire fleet. Fuel burn declined 3.8% per block hour, which generated a fuel savings of more than $4 million for first quarter 2007. Secondly, Aggregate Scheduled Service and Commercial Charter fuel costs declined by more than $5 million, reflecting a 6% decline in average price per gallon and a nearly 2% reduction in gallons consumed. Lastly, AMC fuel expense increased over $16 million or 49.5% on 52% increase in block hours. Earnings in the first quarter benefited from an increase in AMC charter activity, as well as an increase in AMC charter rates. Block hour rates for the quarter increased 3% compared with the year-ago period. Net of fuel, rates increased about 7%.

AMC block hour activity averaged approximately 2280 hours per month during the quarter compared with our view of more normalized activity in the 1450 to 1500 hours per month range. This increased AMC flying activity was mainly due to increased heavy-lift requirements and an increase in the relative amount of expansion business awarded to us.

Earnings in first quarter 2007 also benefited from lower interest expense as a result of our prepayment of approximately $141 million of higher-cost debt in the third quarter of 2006. That lowered first quarter 2007 net interest expense by $6.6 million or 48.5% compared with the first quarter of 2006. At March 31st, our balance sheet debt and capital lease obligations totaled $413.4 million, including current maturities of $22 million. The face value of this on-balance sheet debt and capital lease obligations totaled $494.7 million, which includes $81.3 million of unamortized discounts related to fair market value adjustments recorded against our debt as a result of the application of fresh start accounting. This compares with a face value of $501.5 million on December 31, 2006. We generated healthy cash flow during the first quarter.

Free cash flow, defined as cash from operations, less capital expenditures, totaled more than $27 million. Cash from operating activities totaled approximately $43 million and CapEx, including Boeing progress payments, amounted to $16 million. These figures exclude $6 million of aircraft sale proceeds. Net cash used in financing activities totaled about $3 million, principally reflecting $7 million of debt payments offset by nearly $3 million in proceeds from stock option exercises. As a result, we ended the quarter with a cash balance of $261.8 million compared with $231.8 million at year-end 2006. For the year we continue to expect that capital expenditures will total approximately $95 million to $100 million. This includes about $32 million in predelivery payments, or progress payments, related to our new aircraft order, including about $6 million paid in the first quarter. With that I would like to turn it back to Bill.

Thank you, Mike. We are off to a strong start in 2007. We are well-positioned with solid opportunities to grow our business and improve our performance. Overall, we are pleased by what we have seen so far in 2007 and we are confident that we will drive further earnings growth and margin enhancement. We are focused on completing our transaction with DHL and we look forward to closing as soon as we have the remaining necessary regulatory approvals. We have strengthened our long-term strategic partnerships with our customers through improved service reliability, increased value creation and through our commitment to new leading edge technology in the Boeing 747-8F order.

Before going to your questions, I would like to discuss several other recent developments. In late March, we reached a settlement with the SEC regarding an investigation that began in late 2002 and that focused on accounting and reporting matters that arose when the Company was under different management from 1999 to 2002. We are pleased to have this matter behind us. None of the present Board of Directors or members of senior management was a focus of the investigation.

The order did not impose any civil penalties or fines on us and it did not include any allegations of fraud. We fully cooperated with the SEC in its investigation. With the SEC settlement behind us, we look forward to resolving the $7.7 million of Atlas general unsecured claims that remain pending, which would allow us to distribute the remaining shares of common stock reserved for holders of allowed claims. We expect to bring the administration of the Company's chapter 11 proceedings to an official close in the near future. As required by our plan of reorganization, we entered into a registration rights agreement that led to the filing of a shelf registration statement with the SEC in mid-April that provides entities associated with our largest stockholder, HMC, with freely tradable securities. Our registration statement, on behalf of the HMC entities, is now effective. Our focus is always on serving our customer and we're proud to report that Atlas Air Worldwide Holdings received important customer recognition at the 21st Annual Asian Freight and Supply Chain conference held on April 25th in Macao.

Atlas Air, Inc. was honored as the industry's best air charter ACMI operator. And Polar Air Cargo also received recognition for its services to and from North America. Winning top recognition like this reflects the judgment and recognition of our customers and other industry professionals. It also reflects the hard work and success of our employees, with whom we have built a stronger, more competitive Company, one that is better positioned to grow our business, extend our industry leadership, and create value for our customers and for our stockholders.

With that, Operator, I think it's a good time to take some questions. May we have the first question, please?

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Bob Labick with CJS Securities. Please go ahead.

Good afternoon, congratulations on a good quarter.

Thanks, Bob.

I had a couple questions. First question, just wanted to ask on a broader scale, recently saw some news that ABX and Nippon Airway had an ACMI deal for intra-Asia cargo. Could you talk about that deal, the implications for you, and did you bid on that contract?

That contract involves, Bob, 767s, which we currently do not operate and do not have the crew nor the supporting operations and maintenance in place to support. So I don't think it has a direct implication for us in that context.

Okay, got it. In that spirit, is there an opportunity for you to change your fleet? Is there -- you also mentioned that the Latin American routes could potentially -- are shorter and could potentially benefit maybe from smaller plans as well. Is there an opportunity or any potential thoughts to enhance your fleet with smaller planes in the future?

I think that's a great question, Bob. When you look at where we are with Atlas, we have built our operating platform on the 747 and obviously reaffirmed that in the recent order that we've put for the 747-8, because we believe that wide-body long-haul freighter is going to serve the markets where the majority of global air freight flows are. And I think the one that will allow us to be best positioned for our ACMI offering. That said, there are other markets, the intra-Asia market, which you underscored with your first question. Perhaps the Latin American market, Middle East-Europe, Middle East-Europe-Africa markets, you can think about different flows over a five to seven-hour stage length. And it could well be that another gauge aircraft, whether it's a '67 or a 330 or another gauge as we think about it, could be a very viable growth opportunity for Atlas into the different platform. And we are in the process of evaluating what those opportunities could be.

Great. Thank you very much.

Our next question comes from Adam [Zirkin] with Libertas Partners. Please go ahead.

Hi, gentleman. Thanks for taking the question.

Hi, Adam.

Just a couple of quick housekeeping things and then a little bit of detailed questioning on the Scheduled Service side. With the DHL agreement, do you still anticipate closing that this quarter?

Yes, we do.

And if I remember right, Bill, the first $75 million hits your balance sheet at closing, right? And the next $75 million at start-up; right?

Correct in the first instance, the $75 million will hit our balance sheet at closing. The second $75 million, the way the deal is structured, comes in two tranches. In January of 2008, we would get $37.5 million and in November of 2008, we would get the subsequent $37.5 million. That presupposes that the BSA starts on October 31, 2008 as is per contract. If the BSA were to be accelerated, at DHL's election, then the funds would accelerate as well.

Do you have any -- can you gauge the possibility of that happening for us at this point?

Well, I can't speak for DHL or speculate. A couple points, one, this was a provision that DHL wanted in the agreement, so we can infer from that that there is the likelihood. But beyond that, it's really the discussions between Northwest and DHL, at this point, if they're going to choose to accelerate it.

Got you. With respect to the CapEx guidance you gave for the year, I misheard, was that inclusive of delivery deposits on the -8s?

Yes, it was.

Okay. And then with respect just to the 30,000 foot view and then we could get a little more granular, I would like, Bill, if you could speak a little bit to the Asia markets and then to the Latin American and the transatlantic markets, which is to say, has the sluggishness in Asia persisted? Has the strength in the other markets persisted? Is there anything about the recent sluggishness in Asia that suggests to you that might be a long-term trend? Any color you can give on that front would be helpful.

Okay. Let me start and comment on that from the Polar perspective. As you know, Polar's route network is in and out of North America. So Asia to and from North America, Latin America to and from North America and transatlantic. I think there's been quite a bit of analysis in the trade press and other journals about the first quarter, at least the first couple of months of the first quarter, coming out of Asia, both to North America and to Europe. And January and February were slow by historic standards and at least as involved the U.S. trades, Asia eastbound, Asia exports to North America actually declined on a year-over-year basis. And that normalizes or, I think, takes out the affect of lunar new year when you combine the two months together. We've seen, however, some strengthening over the last several weeks in the Asian exports, both in terms of volume and in our ability to increase prices, because prices had come down as well during that period. So we're starting to see an improvement in demand, so we're getting better utilization and better pricing as a result.

And that's the Asian trades at the high-level view. We think that's sustainable. I was just out in San Diego last week at the CNS conference, which is a major industry conference, and I met with ten or eleven of the major global freight-forwarders and all of the forwarders that I spoke to had kind of a shared common view that the market's strengthening and they expect year-over-year to grow, obviously, at a slightly different pace than what they had grown in 2005 and 2006. The Latin American trades continue very strong, in both north and southbound directions. Now there is some seasonality to the northbound.

As you know, in our first quarter, it's summer in southern South America and Chile and Peru and Brazil, but that said, the demand is good in both directions, not only out of North America, but demand for freight to and from Europe and freight in particularly from Asia. So we see that strong and continuing and in spite of the strength of the euro and the strength of the pound, the transatlantic trades are growing, albeit not at the same rate that Latin America is, but it's a larger base. And, again, in spite of these kind of difficult currency conversions, at least for U.S. imports, the market is moving well and pricing is sustained.

Okay. Also, and you mentioned this in the press release, certainly some of the airlines in Asia are increasing their cargo capacity, Cathay is one example.

Cathay is one and the Chinese National Airlines as well.

Is there anything --

Now capac -- That's a good point, Adam. It wasn't only a sluggishness of demand, but there was a fair amount of new capacity introduction. So the combination of those two, I think, created some of the softness in the market that all of us saw.

Obviously, Bill, some of those airlines are Atlas customers on the ACMI side. Is there any concern that you might have regarding the ACMI business in light of that new capacity?

That's a good question, Adam. We look at it closely and it's part of the analysis that I was doing on Atlas internally, that we did internally on, excuse me, on Polar, was to compare lift with our ACMI customers. I don't see a substantial impact on the demand for ACMI hours, including incremental flying hours above contract minimums, through 2007.

Is there any -- are there any implications to the fact that now Northwest Airlines will have a fair amount of capacity that it will lose as a result of DHL flying on your aircraft?

Well, that's transpacific. Our key transpacific customers are Air New Zealand and Qantas. If you look at who we serve and who's flying where, I think they're in pretty good positions in their markets and the route they have that. The incremental 200 capacity that gets freed up by Northwest I don't believe will have a material impact on our ACMI customers that have deployed capacity in that route.

Then just finally, on the maintenance side, I know you guys just went through lengths to explain how the balance sheet versus P&L accounting would look. Can you explain or give some sort of guidance as to the number of overhauls coming over the next few quarters so we can do our best to accurately project the P&L?

I think we said last call that our maintenance activity in 2007 would be equivalent to, roughly equivalent to 2006 or maybe a couple of events above, but I think the number or at least the volume of activity is about the same.

Okay. And then finally, and then I'll get back in queue, number one, out of curiosity, how many aircraft now are deployed in Polar, as best you could number that? And second of all, on the DHL side, I know you've spoken about -- you've spoken to the block space agreement in terms of revenue numbers and in terms of number of aircraft. Can you equate those revenue numbers to a particular load factor that's assumed on those six points?

Let me take the first question and then clarify the second question, Adam.

Okay.

We have six 400s serving Polar today, 5 in the transatlantic -- excuse me, transpacific and one in the South American routes. And then we have the equivalent of two Classics serving Polar with, I guess you would think of it as feeder capacity in the intra-Asia market to feed the hub and spoke network that we operate and the other capacity basically transatlantic. We do have a one-way AMC flying, which substitutes that and provides incremental lift. And on any given day, given the market opportunity, we can squeeze in an extra flight in a given OD pair over the weekend, for example, to provide incremental lift in the Scheduled Service where and when we need it.

Right.

I guess the second question had to -- could you just restate the second part of the question?

Yes. I'm wondering, you've talked about a $3.5 billion block space agreement over 20 years, on six aircraft, the Polar that DHL initially takes from Polar. I'm wondering what sort of load factor on those aircraft is assumed in those numbers.

We've talked about this, I think, in a couple of meetings and several calls. Once the (Inaudible) comes into affect, and that's really when the values we're talking about come into affect, we effectively transform the relationship from a Scheduled Service relationship with P&L in that accruing at Atlas to where the majority of the P&L risk accrues to DHL. What we operate is a ACMI-like agreement. So our revenues and our earnings and margins are ACMI-like and come from the provision of services by Atlas to Polar.

Understood.

So DHL's utilization of that aircraft for their own express business is probably somewhere around 30% to 35% -- it may not be that high in the first year -- and growing over time. That said, the balance of the aircraft will be marketed to our existing freight forwarding customers. Polar remains as a common carrier. But the P&L risk goes in different directions once that BSA starts.

But if anything, I was trying to understand the upside risk -- the upside potential of those aircraft beyond what DHL might initially be taking, so that -- (multiple speakers).

Well, from our point of view, I think if you look at what we've reported and you look at the kind of margins and earnings that exist on the 400s that are in ACMI, those are the kind of incremental earnings we would expect to get on the six 400s that are deployed in their service.

Thank you very much, gentleman. I appreciate it.

Thanks, Adam.

Our next question comes from David Campbell with Thompson Davis & Co. Please go ahead.

Thank you. I was wondering, you mentioned the impact of the Asia-Pacific slowdown in the first quarter on Scheduled business. What about on your -- in your Commercial Charter activity? Was that also a factor there?

No. Just to be clear, there was a sluggishness as we reported in the Asia-Pacific markets. I think the other points we did make was that we were able to redeploy capacity and take advantage in the Scheduled Service market business of Latin America trades and transatlantic trades. You'll see that improvement when we issue the Q tomorrow, in fact, on the Scheduled Service business segment. When you look at our chartered business unit, we have two components. We have the military and we have Commercial Charter. And we're actually operating fewer aircraft on a year-over-year basis. Because of the demand that we experience in AMC, we made the conscious choice to put the majority of our charter capacity to work for the U.S. military and benefited from that.

On a year-over-year basis, revenue and rate are down in charter business. The revenue is principally affected by our decision to move aircraft to serve the military. There is, though, some effect in the rate that you see in the chartered business, Commercial side of the chartered business. The sluggish market did have some affect and so the kind of rates that were available to us for the aircraft that we deploy in the charter business reflected that and that's why we have the year-over-year decline in relative rate on the charter business unit.

The second quarter last year had substantially better charter business than the first quarter. That represents a problem in this year's second quarter, trying to match that?

No, I don't think so. As we said earlier to Adam's question, the market is strengthening in the second quarter. What we haven't said -- or I did say in my comments that the stronger AMC demand that we've seen we expect to continue through the second quarter. So I think out of our pool of available aircraft, we will have the preponderance still deployed serving the U.S. military. We should see some strengthening in the charter rates because of the fact that the markets improves both seasonally, Q2 over Q1, in any event and we've seen strengthening in that market on a Q2 '07 versus Q1 '07 time frame.

My last question is related to the same thing in a way. The Asia/Pacific market was weak, you mentioned January and February are weaker. But it was also a very late Easter this year. Chinese New Year was very late. Do you think any of this improving trend in April has something to do with sort of catching up from that late Easter/Chinese New Year?

I think that -- yes, I think there's certainly some catch-up and more of a balance coming out of the market after Chinese's New Year than we have seen, both in volume, demand. that is, and then the ability to price to that.

Okay. Thank you very much.

Thank you.

Our next question comes from [Matt Zerit] with First Capital Life. Please go ahead.

Hi, congratulations on the quarter.

Thank you.

I've got a couple questions. Maybe thinking a little bit out of the box here, but given DHL has their hands in both ABX Air and Polar air cargo, is there any way to consolidate or strike some kind of agreement to leverage this relationship?

Well, certainly our expectation is that we have very good growth opportunities beyond what we have contracted for in the transaction with DHL. Whether that's in U.S. domestic markets or growth in the international markets that DHL has remains to be seen. I would expect that the nearest opportunities are incremental or growth with DHL in the international trade lanes. Beyond that, it's difficult at this point to comment on DHL's domestic strategy in North America. It's different gauge, it's different aircraft, and I think they've got several plays in the market and I suspect they're looking at the domestic distribution network as we speak and at some point it would be certainly good for us and prudent for us to have a discussion with DHL on domestic U.S. opportunities.

Is it conceivable that Atlas Air could potentially acquire ABX Air, or is this something that's really out of the question?

Well, I think -- to be honest, I think ABX is pretty richly valued right now. I don't know.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) At this time, I am showing no additional questions in the queue. I would like to turn the call back over to management for any concluding remarks they may have.

Thank you, operator. First of all, we would like to thank everyone for taking the time to join the call and we thank you for your interest in our Company, and for the opportunity to continue our dialogue. We look forward to meeting with you again when we release our second quarter earnings later this summer. Until then, thanks again.

Ladies and gentlemen, this does conclude the Atlas Air Worldwide Holdings first quarter 2007 results conference call. You may now disconnect, and we thank you for using AT&T teleconferencing.