Air Transport Services Group Inc (ATSG) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2006 ABX Air Incorporated earnings conference call. My name is Shamika, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Joe Hete, Chief Executive Officer. Please proceed, sir.

Thank you, Shamika. And good afternoon to all of you joining us for our first quarter 2006 conference call. Quint Turner, our CFO, is with me today.

Today's call is to discuss our financial results for the first quarter ended March 31st as well as to update you some issues that will affect our business throughout 2006. We expect to issue our first quarter 10-Q to Securities and Exchange Commission tomorrow. It will be available on our website at abxair.com. I also wanted to report to you the results of our annual shareholders' meeting, which was held this morning.

At the meeting, shareholders reelected Jeff Vorholt and me to new three-year terms on the Board, ratified the appointment of Deloitte & Touché as our auditors, and approved a proposal to expand the maximum size of our Board from five to nine. We expect to begin a process of searching for one or two independent members who can add depth and breadth to the four dedicated outside board members we have today.

Quint Turner will now go over our financial results for the first quarter. Following Quint's presentation, I'll cover our operations during the quarter and a few other matters. Finally, we will open the call to your questions. Quint?

Thanks Joe. I need to begin by advising everyone that we may make projections or other forward-looking statements during the course of this call. Such statements involve risks and uncertainties that our actual results and other future events may differ materially from those we may describe here.

I'd like you to refer to ABX Air's periodic reports that are filed from time to time with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31st 2005 and the Form 10-Q for the quarter ended March 31st 2006, which we will file tomorrow. These documents contain and identify important factors that could cause the actual results to differ materially from our projection.

In addition, during the course of the conference, we may described certain non-GAAP financial measures, which should be considered in addition to and not in place of the GAAP financial measures we included in our financial statements.

Now, for the financials. Revenues for the first quarter increased over the same period last year, while earnings were up on increased DHL-related expense, better incremental markup results, and higher net interest income.

Revenues for the first quarter increased 6.5%, to 369.2 million. Net earnings were up 14.3%, to 8.1 million, or $0.14 per diluted share. The revenue increase can be attributed primarily to our DHL business. DHL revenues were up 6.1%, to 360.8 million. They accounted for approximately 98% of total revenues for the quarter.

The increase in revenues was due to higher expenses subject to markup or reimbursement under the Hub Services and ACMI agreements. Most of the expense increase was for increased staffing and benefit costs to support DHL's expanded ground network and a consolidated central hub we operate in Wilmington, Ohio.

Hub Services and ACMI expenses increased 6.1% as compared to the first quarter of 2005. Our expenses allocated to the two agreements included $1 million of administrative expenses and costs that are not reimbursable by DHL.

Throughout the quarter, the Company worked closely with DHL to optimize line-haul operations and aircraft routing, while removing costs from the ground network. By successfully implementing our initiatives to improve productivity, we achieved 100% of our cost-related goals under our Hub and ACMI agreements.

Total incremental markups under the agreements more than doubled in the quarter, to 1.5 million from 641,000 for the first quarter of 2005. The incremental markup from our ACMI agreement was 748,000, up 33% over last year, as we flew greater than budgeted aircraft hours in the quarter, while experiencing lower than expected maintenance expenses.

Also, during the quarter, more pieces were processed than budgeted, while additional costs were held to a minimum. As a result, incremental markup under the Hub Services agreement rose nearly tenfold to 792,000 for the quarter.

Purchased line-haul expense decreased 8.2 million, or 11.3%, in the quarter. In the first quarter last year, this expense included $5.5 million for charter aircrafts serving smaller markets contracted by ABX for DHL. The administration of these charters and their related costs were transitioned to DHL during the third quarter of 2005.

The remaining decrease is due to lower piece volumes and initiatives to improve the utilization of aircrafts and contracted trucks. We announced in March that DHL would reduce the scope of services we provide under the Hub Services agreement in 2006, including management of the truck line-haul network, which they assumed on May 1st.

In addition, DHL will assume responsibility for a new automated hub that if building in Allentown, Pennsylvania, when it comes online later this year, replacing the hub we manage there now. We estimate that truck line-haul and the Allentown hub accounted for 62.4 million of our first quarter revenue and $61 million of expense.

Together, they accounted for 1.4 million or 17.3% of our first quarter net earnings, with the truck line-haul by itself accounting for 16.1% of first quarter earnings. As we reported earlier, we will not earn a markup on line-haul expenses during the second quarter.

Our non-DHL business continued to grow during the quarter. Non-DHL revenues grew to 8.4 million, up 30% over the first quarter of 2005. This revenue increase was primarily the result of a greater number of block hours flown for ACMI charter services.

Charter revenues grew relative to first quarter 2005 by 78%, or 1.7 million, reflecting a strong demand for our two Boeing 767 Freighter aircraft. ACMI charter earnings increased approximately $100,000, despite the higher ownership cost component associated with the 767 aircraft utilized during the first quarter of '06, as compared to the DC-8 aircraft utilized last year.

Revenues for our other non-DHL businesses, including aircraft maintenance services for third-party airlines and sales of our other products and non-DHL sort services, increased 5.8%. Earnings in this segment declined slightly reflecting a change in product mix as well as increased staffing and other administrative costs necessary to support the continued expansion of our non-DHL business.

Net interest expense declined by 400,000 compared to last year, which reflects increased interest income on invested cash. You will see in our 10-Q that we entered into five interest rate hedging transactions during the first quarter that are designed to protect us from interest rate risk, as we arrange financing for our new 767s, due this year through 2008.

We expect to arrange sale leaseback transactions for eight of these aircrafts. These treasury-locked agreements are based on 10-year T-note rates and would counter the effect of changing interest rates on our anticipated lease transactions. They are timed to expire between June 2006 and June 2007, near the forecasted execution dates of the anticipated lease transaction.

Now, Joe Hete will review our operations for the quarter and our outlook for the rest of the year. Joe?

Thanks, Quint. As the numbers that Quint just provided to you indicate, our business has improved significantly across the board during the first quarter. On the DHL side, both our service and cost related performances were near or above record levels throughout the first quarter.

That translated into maximum quarterly incremental markup revenues for both our ACMI and Hub Services operations on cost-related measures. It also gives us a strong start against our cost and service goals for the year. We are very pleased with the level of performance, and we know DHL is as well.

We have worked very closely with them and other DHL contractors in the early part of the year to create more effective schedules of routes and practices to reduce costs and promote better service. We think we are making great progress and that there are opportunities for even more improvements ahead of us.

The DHL side of our business continued to be a strong cash generator. The integration of DHL's Northern Kentucky hub into our Wilmington hub last fall gave us a much larger base to sort operations in the first quarter this year than we had the year before. ACMI operations were up as well, somewhat offset by some route changes that we adopted during the quarter that make more effective use of our resources and DHL's.

That growth was offset by the transition of third-party air charter operations we turned back to DHL last year. As Quint said, DHL took back management of all of its line-haul trucking network at the beginning of May. We've worked very closely with DHL to make sure that the transition went smoothly, and everything we've heard indicates that it did.

The other shift in our DHL services will occur, when this new automated sort facility opens in Allentown, Pennsylvania, most likely in the third quarter of this year. Allentown is the largest of the regional hubs and services the entire New York Metro region and other parts of the Northeast.

That new facility will be state-of-the-art and represents a major strategic investment for DHL in North America. We expect to maintain excellent service at the current center, until they're ready to cut over it to the new one.

Finally, DHL is adding new automated sort equipment into its new building here, in Wilmington. When that investment is completed and the equipment fully tested later this year, it may have an impact on our Hub Services' expenses. We will know more about that, as the year progresses.

On the non-DHL side, our ACMI charter operations have ramped up aggressively, especially in March -- thanks, mainly, to the new 767 aircraft our disposal. Those gains grow to an overall 30% gain in non-DHL revenues for the quarter.

Earnings in that business were flat, mainly because the mix of first quarter revenues in that segment this year included smaller contribution from some of our higher margin products, such as parts and technical services. In April, we took delivery of one of the 11 additional aircraft we are buying from Delta.

Another one of the five 767s we will get in 2006 is expected to arrive next month. As the new 767s arrive, we will be shifting the two we acquired last year back into the DHL fleet. The first of one -- the first one went into DHL back in April. The other is expected to transition in June.

We told you on our fourth quarter conference call that we have agreed to talk to DHL about other possible changes in our ACMI and Hub Services agreement. We described the focus of those discussions in our 10-K. We said that we could not predict when or if we would reach agreement on any of the concepts we are discussing.

But I don't want to dwell too much on that issue, because it's entirely possible that we will agree not to change anything and just continue to operate under the agreements we have today.

But I want to emphasize again that while we are willing to talk to DHL about a wide range of contract issues, we have not and will not agree to any changes that would reduce our ability to generate what we consider to be acceptable returns to our shareholders from that relationship.

I also said in March that I'm confident that we can recruit more than half of the net income we stand to lose in DHL business this year with new profitable business from other customers. We're in discussions with several other charter companies about new and expanded business relationships based on the flexibility and cost advantages of our 767s.

We are also getting on a number of potential hub management and sorting opportunities, including several with the US Post Office. And we are seeing strong interest in our contract maintenance services, in flat panel display technology, and several other products and services.

While our greatest growth opportunity is with these new customers, we remain dedicated to being the best of all the many services providers that constitute DHL's US operations. Service quality will always be paramount, but we are convinced that with good cooperation among all the DHL support providers, there are significant opportunities for additional cost savings and significant reward potential that we can achieve in.

Now, moderator, we are ready to take some questions.

Thank you. [OPERATOR INSTRUCTIONS]

Your first question comes from the line of Ian Zaffino of Oppenheimer. Please proceed.

Hi. Good afternoon. Good quarter. Couple of questions here. The first one would be on the Post Office business. How many hubs are they looking at bidding out and what are your prospects there and can you give us any idea of what the financial impact would be to you and the likelihood of you actually getting some of those hubs? Thanks.

The US Postal Services right now tentatively has a plan to bid out eight HASP facilities this year. Of that eight, one of them is the current Indianapolis facility that we operate for them today. The other locations would be Salt Lake City; Denver; Dallas; Memphis; Atlanta; Binghamton, New York; and Orlando, Florida.

We do believe we have a great shot at getting a portion of those postal facilities under contract with ABX. Now we were a little disappointed to learn that the bid for the Salt Lake City facility was awarded yesterday to someone other than ourselves. And certainly, we'll take a look where we fell short on the bid process and look to make sure that we sure that up going forward for the rest of the year.

From a contribution standpoint, and as we said on the previous call, each one of those facilities are slightly different. But the range that we believe the revenue would be, would be somewhere between $3 million and $3.5 million in gross revenue per year with a net margin on each one of somewhere between 250,000 to 0.5 million.

Okay. And then is there any potential of winning any of the other hubs for any of the other package carriers or what are your thoughts on that going forward for longer term?

I think there hasn't been, I should say, bid put out that we're aware of for operating any facilities for any other carriers out there. Certainly, the two primary competitors of DHL are FedEx and UPS. And to my knowledge, everything they do, they do with their own people.

And the other operators out there are on a much smaller scale. So most of our attention to-date has been focused on the US Postal Services being a key opportunity.

Okay. And then I know you had talked about a lot of different opportunities in third-party. On a -- let's call it a steady state comp basis-- if you were to look at, what you do as far as the Delta planes that you're going to bring in, what portion of what you say the net income of third-party will be related to these Delta planes versus all those other ancillary work that you're doing?

Mainly, what's going to be driving third-party business? Is it going to be your Delta planes? And if so, how larger that business is it going to be? Thanks.

Certainly, the greatest near-term opportunity is with the additional 767s, as they come on board. As I mentioned in the opening remarks, the first two aircrafts from Delta will merely replace the aircraft that we had deferred placing into the DHL network last year. So the first real growth opportunity we'll see in terms of expanding the number of aircraft will be with the aircraft that's tentatively scheduled to go into service in the month of July.

That said, if you look at the metrics we've talked about in the past, you can expect to see from a revenue standpoint $6 million to $7 million per aircraft revenue generating capability. So if you roll that out for the 10 that are the additions to the two that we currently operate, you're looking at another potential $60 million to $70 million in revenue.

From a margin standpoint, a lot of that's going to be based on whether the aircraft is one that we've purchased outright or whether do a sale leaseback in order to finance the aircraft.

If it's an outright purchase, our anticipation is it would be able to generate a net margin of 10 to 15% based on a $17-million purchase price. And if it's a leased aircraft, then obviously, it's going to impact the margin to a certain degree based on the financing cost associated with that aircraft.

Okay. Great. Thank you.

Your next question comes from the line of Monica Logani of Foresight Research. Please proceed.

First of all, congratulations on a very solid quarter. I was very happy to see the performance goals that you achieved during the quarter. And I was wondering if you could just anecdotally tell us, what was different this quarter, as we've seen a 100% markup on hub side at the beginning of '04? So if you could just kind of tell us anecdotally, how you're able to achieve that?

Well, the key to all that is improving the performance and efficiency of the people within the sort operations. And that's not possible and you can't make it nearly as greater games in an environment where there is constant change.

We went through a tough September and into the first part of the fourth quarter, in terms of bringing the new hub operation online here in Wilmington. But once we got past it, that October timeframe, things balanced out pretty quickly. We were able to get a better handle on what exactly the resources were that will be required in the various areas of that sort operation.

In addition to that, some of the changes that we made, kind of, on the fly in the facility itself in terms of volume being flowed through the buildings was balanced out with, what we call, a routing guide change at the beginning of the year, which allows you to better balance the flows, which in turn translates into significant improvements in the inefficiency, because you are not overloading certain areas and trying to chase the freight down to make sure you kick out the door on a timely basis.

So essentially, it's the ability to have some time with the facility and start to tweak it and by no stretch of the imagination that we finished with the opportunities for improve -- to continue the improvement of those efficiencies, as we've progressed through 2006.

Okay. And then, on the -- you alluded to the fact that you have your first plane that came into service in April. Could you just try to provide a little bit of color? I know, in your press release, you talked about very strong demand, but just in terms of what you've seen in the last month for that first aircraft.

We've had any number of calls, as I said, I think, on the last quarterly conference call that if I had all 12 aircraft today, I could probably put all of them to work immediately.

But the range in terms of what the demand is runs the gambit for both domestic within the US itself down into the markets that we currently operate in, in the Central, South American and the Caribbean, and we've got groundswell of interest in having the aircraft operate between the US and Europe.

And the other -- you said another plane is coming in, in July. And then, if I'm not mistaken, the another one comes in right at the end of the year. Is that correct?

There is two more in the fourth quarter around November-December timeframe.

Okay. But the conversion schedule has not changed since the last conference call. Correct?

Yes.

Okay. So really we'll see this April plane -- we'll start to see a little bit of contribution in the second quarter, but really kind of more in the third quarter?

You'll see in the second quarter for the first aircraft only, because it's an aircraft that went into service with an estimated book value of about $17 million, and it's replacing an aircraft that was in on the books for 29 million. So you'll seen an immediate contribution from that aircraft.

The second one, which comes online sometime in the month of June, you'll see very little contribution from that one. And that one, based on our current plan, will be a part of a financing transaction where we sell and lease it back.

Okay. And so we'll see more of that in the third quarter? Or I guess that's July, so probably more in the fourth quarter. Is that correct?

No. You'll see that probably in July. So you'd get at least two months out of the third quarter.

Third quarter. Okay. All right. And then, on the flat panel side, just was wondering if you could just provide a little bit of color of how that demand situation is firming up?

Well, we're just now in the beginning stages of being able to go out and market that as an option. The initial certification for installation of the flat panel in the 767 occurred with the first of those Delta aircrafts that we put into service. So it came out with that modification. And, of course, then we had to go through the proving runs with the FAA. It was signed off about mid-April.

So we're just now in a position, where we can actually say there is a valid certificate for modifying your aircraft -- 767 aircraft with a flat panel display. But in terms of the market opportunity today, based on the last count that we had, there is about 906 767s out there in the marketplace and over 1,000 757s. And the flat panel STC for the 76 should be easily transportable to the 757.

So we see there is a huge market potential out there for the installation of the flat panel, and we do have the exclusive from the standpoint of marketing it for the 75 and 76.

And am I correct in saying that this is not a question of if it will be upgraded, but just when?

I think for the most part, it's really going to depend on the operator, because every operator's characteristics are different. For example, we did the -- we plan to install a flat panel on all of the aircrafts we acquire from Delta, based on the fact that we would have to do some cockpit modifications to begin with.

But as it stands today, based on the lower utilization that we get on the 767s within the DHL network, it's extremely difficult for us to come up with a bona fide cost justification to be able to do the retrofit for aircrafts that are currently in service. So depending upon the amount of flying an operator do or does will be a key indices.

And is there something you'll see more -- I mean, when do we start -- could we expect to see some contribution from this business?

It's a little early, right now. But I wouldn't expect to see anything until the latter part of the year.

Okay. And what kind of margins are we talking about?

We haven't given any guidance in that regard as yet.

Okay. All right. Thank you so much.

Sure.

The next question comes from Matt Missault of First Capital Alliance. Please proceed.

Yes. Congratulations on a good quarter. We are pleased to hear that there is going to be some relaxation of the covenants to allow us to purchase some stock back, which will -- and that it would be accretive, since we have a lot of cash. But we are wondering, what is the -- exactly what we will be allowed to repurchase and when can that actually start?

This is Henry. Right.

Yes.

Henry, it's will depend upon when we circle back with DHL and have discussions as to the specifics in terms of the annual limits of the stock repurchase potential.

As you will recall, the agreement that we had with them documented that date. They were in agreement with the concept of us buying back or having the ability to buy back stock and relaxing the covenants. But the specifics in terms of an annual limit had to be specified.

We have not had those discussions, yet, and we certainly would anticipate doing that at some point in the relatively near future. But to this point, there has been no further clarification of the specifics. So we would not really have anything else to add on that, I guess, until we have that talk.

But what are the talks contingent upon in order to have those discussions?

Well, it's not -- this whole little idea of relaxing the covenants to allow us that flexibility is not the same as a buyback program. And at this point, what we are trying to do is to just get the flexibility from DHL. It's not contingent upon anything else. It's just that we have not had the discussion yet. And so we don't have any new information on that as compared to the end of last quarter. It's still something we have to do.

There are no further questions in the queue at this time. I would like to turn the call back over to Mr. Joe Hete.

Thank you, Shamika. Thank you very much for joining us on this conference call. I also want to thank all the shareholders that attended our annual meeting, today. It's great to have your support and equally valuable for those of us in Wilmington to hear what's on your mind.

We certainly share your desire to see more of our good results and even better potential reflected in our stock price. To that end, we are expanding our investor relations program with some visits to investors in New York and Boston later this month. Hopefully, by that time or by the time we hold our next call in August, there will be more good news to talk about on that front as well. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.