Atlas Air Worldwide Holdings Inc (AAWW) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Atlas Air Worldwide Holdings Incorporated 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). As a reminder, this conference is being recorded today, Thursday, May 8, 2008.

I would like to turn the conference over to Mr. Will Bradley, Vice President and Treasurer. Please go ahead, sir.

Thank you, good afternoon, everyone. I am Bill Bradley, Vice President and Treasurer of Atlas Air Worldwide Holdings. Welcome to our first quarter 2008 earnings review conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Jason Grant, our Senior VP and Chief Financial Officer.

I would also 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. Our actual results or actions may differ materially from those projected 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 February 28, 2008, for a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements.

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 reconciliation in our press releases, which are posted on our website at www.atlasair.com. You may access the 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. Welcome, everyone. We are well-positioned, operationally, financially, and strategically, to grow our business and improve our performance. We have significantly transformed our business model, our business fundamentals are solid, and we are building from strength. We are on-track to achieve our strategic and operating objectives over the course of 2008 and beyond.

Our first quarter results were a mix of positive and negative factors. Our ongoing asset optimization effort sustained the utilization of our aircraft. In addition, demand for our 747-400 Freighter capacity remained strong during the quarter, with all of our 400 capacity committed through 2008. Continuous improvement initiatives drove cost savings during the quarter. As of March 31, we have realized $86 million in annualized savings against an addressable 2005 cost base of about $800 million. We are well-on track to exceed our goal of $100 million of annualized savings in 2008.

Each of these positive factors help to mitigate the impact of record-high fuel prices on our scheduled service segment, and a return to more normalized AMC volumes compared with the first quarter of 2007, and the slower pace of air cargo demand usually seen in the first quarter of the year.

Fuel pricing was an adverse element during the quarter. Commercial fuel prices were at record levels, and were nearly 50% higher than they were in the first quarter of 2007. That had a substantial negative impact on our scheduled service segment, which is the principle business segment where we are directly exposed to the risk of fuel price volatility. Since we gave guidance on our last conference call in late February, jet fuel prices have surged another 20% plus.

Altogether the rise in fuel prices in 2008 has increased the net impact of fuel for the year by nearly $30 million, after giving affect to our expected surcharge recovery. Based on the current fuel environment, we now expect pretax earnings in 2008 to exceed $105 million. Our direct fuel price exposure goes away in October, when our Polar subsidiary begins flying under it's long term block space agreement with DHL Express. As a reminder, this $105 million excludes a $152 million pretax gain on the sale of a 49% interest in Polar to DHL. We expect to book this gain upon the commencement of the full BSA in the fourth quarter of 2008.

We have substantially derisked our business over the past few years, and our focus is on long-term contracts that improve our revenue and earnings stream visibility. About 85% of our expected capacity in 2009 will be under predictable long-term take or pay contracts. Taking into account our forecasted military charter business, about 92% of our capacity next year will be tied to fixed-price contracts. Based on our current initiatives and strategies, we reaffirm our expectation that pretax earnings will accelerate to a range of 165 to $175 million in 2009, which will be the first full year of our express network ACMI service for DHL.

In addition to the full startup of express ACMI services, we are executing on additional initiatives that will drive future revenues and earnings. The launch of our 747-8 Freighter service in 2010 and 2011, will benefit from the scarcity value of these assets, as well as their payload and fuel efficiency in our first to market and exclusive ACMI capability. We have a solid platform of growth opportunities. These include opportunities to grow our relationship with DHL and other customers, fleet expansion, dry leasing, expansions of our ACMI business, and potential business combinations and alliances.

Jason will now take you through our financials. Following Jason, I will provide additional some color about our outlooks for 2008 and for 2009. After that, we will go to your questions. Jason?

Thanks, Bill. Good afternoon, everyone. I would like to start by elaborating on Bill's comments regarding fuel. Since we last gave guidance, crude prices have increased by over 20%. The majority of that increase has occurred since we last spoke to the markets at our Investor Day in early April. As we previously said, we retain fuel exposure for our core scheduled service operations until October. The fundamentals of our business are unchanged, and other than the impact of fuel, we remain on-track for 2008 and beyond.

There were a few items I would like to draw your attention to in the quarter. The first is a $3.4 million minority interest booked, related to DHL Express's 49% ownership in Polar Air Cargo Worldwide. The amount reflects Polar Air Cargo Worldwide's allocated losses to DHL, prior to commencement of the BSA flying in October. We do not expect to book additional minority interest going forward.

Turning to our balance sheet, we ended the quarter with a cash balance of $538 million. Which represented a $60 million increase over year-end 2007, and debt in capital lease obligations totaling $449 million. The face value of our debt and capital lease obligations amounted to $523 million, compared with a face value balance of $469 million at December 31, 2007.

At quarter end, we had $74 million of unamortized discount, related to fair market value adjustments associated with fresh start accounting. The increase in our debt from year-end is a result of a $63 million outstanding borrowing under our new $270 million PDP financing facility, which we closed in February. Capital expenditures in the quarter totaled $48 million, which included $31 million in Boeing progress payments, related to our future 747-8F aircraft deliveries.

As I noted earlier, our cash balance in the quarter increased by $60 million, which included $38.6 million in investment proceeds from DHL, the final payment from DHL of $35 million plus interest is scheduled to be paid in November of this year. Separately, based on progress payments that we made to Boeing prior to the closing of our financing, we were able to true-up against our loan advance rate upon the facility closing. This resulted in a net refund to Atlas in the quarter of approximately $32 million. For the balance of the year, we have approximately $216 million in Boeing progress payments due on all 12 firm aircraft, of which $154 million will be satisfied by drawings under our existing PDP facility. As a reminder, our existing PDP facilities covers deliveries #1 through 5, but we anticipate securing PDP financing for the remaining deliveries later in this year.

I am pleased to announce subsequent to the quarter end, we closed on the purchase of our two incremental 747-400s, one of which will be in revenue service later this month, and the other, which is undergoing conversion, will be in service in September. We have elected to initially fund the purchases with cash on hand, and are actively pursuing a number of financing alternatives.

Finally, I wanted to apprise you of changes to our operating segment reporting that we implemented in the first quarter. These changes are intended to improve visibility to segment performance. The first change we have made is to add dry leasing as it's own reportable segment. This is in addition to the ACMI scheduled service, AMC Charter, and commercial charter segments we report today. This change recognizes the growing importance of dry leasing to our overall business model.

Second, we have also modified the manner in how we calculate our segment profitability. To-date segment reporting has been limited to Fully Allocated Contribution, or FAC. Fully Allocated Contribution was computed by allocating all operating and non-operating costs to segments with only taxes and other unusual items being excluded. The allocation of fixed costs led to significant swings in fully allocated contribution within the segments, with changes in aircraft utilization. We have moved to a direct contribution measure of segment profitability. Direct contribution reflects segment revenue, less direct operating costs and aircraft ownership costs.

Direct costs and aircraft ownership costs include crew costs, maintenance, fuel, ground operations, sales costs, aircraft rent, aircraft depreciation, and interest expense related to aircraft debt. Fixed and indirect costs are reported in the aggregate, separate from direct contribution, and are not allocated to the individual segments. We think this new approach will provide increased visibility into the performance of our segments. The methodology will be described in more detail in the 10-Q that we will file later today. We anticipate publicly providing the historic quarterly segment performance under our new methodology before our next 10-Q is filed.

With that, I would like to turn it back to Bill.

Thank you, Jason. We see an exciting and dynamic future for Atlas Air Worldwide Holdings. We have a solid financial platform, and other than the short-term effect of fuel prices in 2008, our outlook is unchanged. As I noted earlier, we expect pretax earnings to exceed $105 million this year. With direct exposure to fuel prices largely eliminated in late October. We also expect our pretax earnings to grow to a range of 165 to $175 million in 2009.

Favorable supply and demand trends in the global Freighter market, and the continuing shift in aircraft ownership from airlines to lessors, have created a significant opportunity to expand our leasing operations, both wet and dry. We see continued strong demand for our 747-400 Freighters, especially given the increase in fuel and maintenance burden on older 747 classics, and the 11s and DC 10s. Our 747-400 capacity is sold out.

In-line with our plans to grow earnings, we seized the opportunity recently to acquire scarce 747-400 GE-powered assets, and increase our 400 fleet by 10%, to a total of 22 aircraft. These new aircraft enabled us to successfully expand our relationship with DHL Express, commencing service for them on March 30. Our service for DHL has had a smooth startup, and our performance exceeded our customers' expectations.

Including these two additional aircrafts, we will deploy a total of eight 747-400 in trans-Pacific operations for DHL, when Polar begins full network service in support of it's agreement in October. Our business is well-positioned for growth. We are focused on execution. We have the assets, services, experience, and intellectual capital, to deliver on our expanding opportunities. Our performance is on-track with our objectives.

With that, I think it is a good time to take questions. Operator, may we have the first question please?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Bob Labick from CJS Securities. Please go ahead.

Good afternoon.

Good afternoon, Bob.

First question, you just were discussing the expansion of your relationship with DHL, with the two new planes that went into service at the end of March. Could you clarify are those two now going to be under the similar multi-year, 20-year block sharing agreement, and are the economic similar to the other six, or is there a distinction between the two planes and the six planes?

Okay, Bob. This is Bill. A couple of points. The two aircraft enter service for DHL in an ACMI relationship. Similar to the other six, they will perform and be contracted in under ACMI terms, which is a block rate per hour, and a minimum number of hours per month, and per year. The term though, for the two incremental is not the 20-year term for the original six, it is a shorter term.

Okay. Great. And then you probably have been either hinting or saying directly about the expansion opportunities. One of the ways to expand is certainly to take advantage of the, I guess, options for the additional 14-8s. What would you need to do to utilize those options, and when would you have to make the commitment for that?

We are evaluating those options, Bob. And we think there is certainly real value in those options. The question is really the timing of when to commit to them. While we have good pricing on that. There are other conditions that we are in the process of discussing with Boeing and negotiating with Boeing, and so we certainly would look to take aircraft in 2012, 2013, possibly 2014. If we are going to execute those options, we would need to do that over the next 18 months or so.

Great. And then looking at the, you have discussed that you are already sold out for the ACMI capacity for 400s through '08. Given the dynamics with the rising fuel and increased value of the 400s, versus a lot of the 200s that are getting retired, what does the renewable environment look like for '09, or how is that shaping up?

We have a few aircraft to renew in 2009. We don't believe we will have a problem placing that aircraft.

Is there any opportunity, I guess generally you have small increases in pricing, and you have long-term relationships with your customers. In terms of pricing, I guess I can see both sides, the fuel goes up and hurts the customer, but also the scarcity value of your 400s are going up. How is that dynamic looking?

That is exactly the dynamic, and the third element of course, is obtaining a longer-term contract. There is term, there is price, then there is the market pressure on the customers' economics. As we come to renew the aircraft, and/or place the aircraft, if we bring on additional customers, we will be pushing the maximize the block hour rate that we will get.

Okay, great. I will ask one more, and get back in queue. Just in terms of the 200s out there not necessarily just in your fleet, but overall in the market, given the fuel environment, it seems that there is measure pressure for retirement of the 200s, at least from ACMI. Are you seeing any of those moving into commercial charter, or how will that play out when they do get retired, and obviously, you are growing your commercial charter. What are your competitive advantages towards growing that?

I think there are a couple. Let's answer the first part of the question. The 200s in ACMI and in scheduled service for any operator under stress, given where fuel is today. There is no doubt about that. We have been able to grow our commercial charter business, and certainly one of the advantages that I believe we have is the size of the fleet. Because the fleet allows us to flexibly place the aircraft between military demand, as well as to place it into the commercial charter market. Having an appropriate sized fleet and having availability, gives us the opportunity to respond flexibly to the customer, and meet often what are short timelines for them.

Great. Thank you very much. I will get back in queue.

Our next question comes from the line of Alex Brand from Stephens. Please go ahead.

Thanks, good afternoon, guys.

Good afternoon, Alex.

I just want to make sure I am clear on the 400s that are coming on. The two that just went into service for DHL, those were reallocated aircraft, and then we have got these two incremental aircraft. Is that accurate?

So in our fleet of 400s, Alex, we have 20 aircraft. One we use throughout the year as a maintenance cover. So the two that went into service now for DHL at the end of March, one of them was the maintenance cover, because we had a window in our scheduled maintenance activities where we could put that aircraft to work for DHL, and not upset maintenance schedules that we had in place.

The other aircraft was an aircraft that came back off of an ACMI placement, a planned return from another customer, and that is the second aircraft that went into service for DHL. The two that are coming on, one will be coming on later in May, that will be the maintenance cover, if you want to think of it in those terms. And then the second aircraft comes in around the end of the third quarter, and then that will go into revenue service as well.

Okay.

We don't actually get to 22 aircraft until the end of the third quarter.

Okay. So that makes sense, do you have work for the one in Q3 already, or is that something you are looking to sign up?

We have demand for that aircraft.

Okay. And in your press release you talked about some block hour reductions for political conditions. I just want to understand, what is your customers' flexibility to fly less, based on what is going on out in the world?

It is the difference between minimums and above minimum flying for the most part, Alex. So our customers will certainly meet their contractual commitments this year, and as in prior years, they will fly above minimums. The two markets specifically affected, there was the political instability in Pakistan at the beginning of the year, and there was political unrest in Kenya around the elections there, and those were the two specific markets, which are normalized now, if you will. We are operating in and out of on behalf of our customers. Our customers do need to meet their minimum commitments. What they can take are some holidays, or some cancellations, at given months in the year, and that is what the customer did here, but they would still have to meet their minimums at the year-end, and they will and that customer will be flying over minimums as well.

Okay. And Jason on the maintenance expenses, I think that was pretty clearly explained in the release as to what happened in Q1. Can you help us understand what that might look like going forward?

Yes, Alex. When you think about the year, I think history is not a bad indicator based on your activity levels going forward, I think there is not any unusual activity planned this year. If anything, our 200 heavy maintenance has decreased slightly as retired 200 aircraft, as they come up to their significant heavy decheck events, so I think as you look for the year, and you think of sort of an activity-driven trend on that, I think that is a reasonable basis.

The only thing I will flag on that, Alex, is that there is induction costs related to the two new aircraft, so the two new aircraft that come in to service require a sea check and conformity work to be put onto our maintenance program. There will be some incremental expense for that, but measured in the $1 million range, and not materially above that. Again, if you think of the trend line on maintenance expense as a good basis for forecasting, that is a reasonable basis to do that.

Is it fair to say in the first quarter of '09, is this a step-function thing? It seems to me like it wouldn't step-up that much because you are not adding that many aircraft in '08?

Yes, and I think a couple of things. One is we did have some heavy maintenance timing. Most of the heavy maintenance done is done in the first six months of the year, we did have some additional expense for heavy maintenance in the quarter.

The other thing I would point out is that we had costs, to initiate our express network services, so one of the factors we had to deal in the quarter was our original operating plan was to gear up for express services in October of 2008. We were fortunate to accelerate the flying to start at the end of March. What that meant was an additional investment in maintenance and aircraft, to spool up for that that did drive some incremental costs in the quarter. Those will not be repeated in the quarters going forward.

Okay, great. Great color. Appreciate the time, guys.

Thank you.

Thank you.

Our next question comes from the line of [Christina Whitehead from Thompson Davis]. Please go ahead.

Hello, good afternoon.

Good afternoon.

How do you see business shaping up so far in April, and particularly in the Asia-Pacific regions?

Well, we have had good demand in Asia Pacific since the beginning of the year. The most recent IATA reports that came out for the first quarter showed year-to-year growth, which we certainly see as a good sign. Last year in the first quarter of 2007, the market was actually contracting year-over-year versus 2006. So demand has actually been good in the trans-Pacific market, and we expect that to continue.

Okay, great. Thank you.

I just may add to that. The two new aircraft to fly that we started for DHL at the end of March, DHL uses a good percentage of the aircraft, but doesn't fill the aircraft, and we have been able to put commercial freight on, incremental new commercial freight on that aircraft, to fill the planes out from Hong Kong into North America.

Okay, great. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up question from the line of Bob Labick from CJS Securities. Please go ahead.

Hi, thank you. I was hoping Jason maybe you could expand upon the minority interest charter in the quarter as it relates to DHL, and I guess, why we wouldn't expect to see anymore the next few quarters and how it will be treated next year?

Sure. I will. The nature of that really, it relates to the transaction back in June of last year for DHL's acquisition, the 49% interest in Polar. The nature of the transaction limits DHL's exposure to any losses at Polar, to the $3.4 million that we booked in the first quarter. So pre-BSA, pre-October of this year, their exposure to any minority losses is limited to that 3.4 amount which we booked in the first quarter. Going forward, the nature of the relationship is such that it won't generate, and is not expected to generate pretax losses or gains for which there would be any minority interest. So going forward, that number is expected to be zero.

Okay. Great and shifting gears, in terms of, I know you reiterated your '09 guidance, previously you had discussed AMC revenues in the $200 million range. Obviously with the step-up of the AMC fuel, your revenue for block hours up materially. It is a pass-through, I know. Would the revenues then be higher in your '09 guidance, or have you reduced your block expectations for '09, or how should we think about that?

We are consistent in our block hour expectations for AMC. The same basic assumption we made when we gave the 165 to 175 range back in February, Bob.

Okay, great. I think I calculated roughly 11,000 or 12,000 of block hours for AMC back on those terms. You are saying that would be the same -- .

Yes, absolutely. We have not increased or decreased the level of AMC flying, as we have reaffirmed guidance here today on '09.

Okay. Thank you very much.

There are no further questions. I will turn the call back over to you for any closing remarks.

Thank you, operator. Again on behalf of the management team, we would like to thank all of you for participating in our conference call today, and thank you for your questions.

Ladies and gentlemen, this concludes the Atlas Air Worldwide Holdings Incorporated first quarter conference call. If you would like to listen for a replay of today's conference, please dial 1-800-405-2236 and access code 11113844. ACT would like to thank you for your participation. You may now disconnect.