Air Transport Services Group Inc (ATSG) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 ABX Holdings Incorporated earnings conference call. My name is Carissa, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Joe Hete, Chief Executive Officer. Please proceed.

Thanks, Carissa. I want to welcome our shareholders and others to our first quarter 2008 conference call, which will be the last one for us under the name of ABX Holdings. As most of you know, we had our annual meeting yesterday and shareholders approved our proposal to change the name of our holding company to Air Transport Services Group or ATSG. We think it is more descriptive of what we're doing and where we're headed than ABX. It is also important for you to know that it is just a holding company change. All our subsidiaries, including ABX Air, are going to keep their own names, so our customers will continue to deal with the same companies and people that serve them today. Several members our management team are on the call with me today including John Graber, President of ABX Air, Peter Fox, our Chief Commercial Officer Joe Payne, our Corporate General Counsel and our CFO Quint Turner. Quint will begin as usual by covering our financial results for the quarter. I will follow with some operating highlights and comments on other topics and then we'll take your questions. Quint.

Thanks, Joe. As always, 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, and our actual results and other future events may differ materially from those we may describe here. I would like to refer you to ABX Air Holdings Inc. periodic reports we file from time to time with the Securities & Exchange Commission, including the form 10-Qs for the first quarter of 2008, which was filed Monday evening and our form 10-K for the year ended December 31st, 2007. Those reports contain and identify important factors that could cause the actual results to differ materially from our projections.

As we indicated in our press release, first quarter results reflect across the board growth and strong returns from our newly acquired CHI businesses, which contributed 80% of our year-over-year revenue growth. We are much more diversified than we were a year ago, with 26% of our revenues coming from customers other than DHL. We also have more services to offer them. As we have said before, our goal is to drive cash flow from each of our businesses and redeploy that cash into assets that give us real strategic advantages. Our first quarter results demonstrate the effectiveness of our strategy. Primarily due to the CHI acquisition, year-over-year first quarter operating cash flow increased by more than four times, from $11.7 million to $61.8 million and remains more than sufficient to support our debt and fund our continuing investments in wide body freighters. Our cash flow has allowed us to strengthen our balance sheet, paying down $26.5 million of our revolver during the first quarter as well as reducing other debt. Long-term debt dropped $39.2 million or 7% from $568 million to $528.8 million during the quarter.

Earnings before interest, taxes, depreciation, and amortization or EBITDA increased 78% to $36.8 million in the first quarter. Although this is a non-GAAP measure of financial performance, it is a metric we believe best reflects the cash generating strength of an asset intensive business like ours. We have a reconciliation of EBITDA to GAAP net income in our first quarter earnings release which was published Monday evening. Consolidated revenues in the first quarter increased by one third to $382.1 million, compared to first quarter 2007 consolidated revenues of $288.1 million. The acquisition of CHI on December 31st, '07, is the primary reason for the increase in revenues, with the CHI acquisition accounting for $75.4 million of the $94 million increase in revenues over the first quarter of 2007. Additional block hours from ABX Air charter business contributed $11 million in additional revenues over first quarter 2007, primarily from our ANA contracts in Asia.

Pre-tax earnings declined to $6.2 million in the first quarter from $6.9 million a year ago. The decline principally reflects a decline in margin for the ABX Air charter operation, partially offset by positive contributions from the former CHI operations which we acquired on December 31st. These former CHI operations contributed approximately $2.9 million in pre-tax earnings for the quarter. Net earnings for the first quarter were $3.8 million or $0.06 per diluted share, down $480,000 from 2007 first quarter net earnings of $4.3 million or $0.07 per diluted share. The CHI operations contributed approximately $1.7 million to our net earnings in the quarter after deducting interest expenses associated with the acquisition financing.

During our fourth quarter conference call, I told you that we would review our segment reporting structure to conform it to the way we look at our businesses internally. We have completed that process breaking the business down into three reportable segments. We continue to report the results from our ACMI and hub services agreements with DHL as a separate segment. Our former ABX Air charter segment is now a component of an ACMI services segment and includes the two CHI airlines we acquired, Air Transport International and Capital Cargo International Airlines as well as the ABX Air charter business, all of which are similar businesses for reporting purposes. In addition, we will report the leasing business we acquired through CHI, Cargo Aircraft Management or CAM separately because of its different reporting requirements. The Company's remaining operations will be reported under other activities consisting primarily of aircraft parts, sales, maintenance services, our postal sorting business, and certain corporate activities.

Under our DHL segment, year-over-year revenues from the two commercial agreements increased 3% in the first quarter to $280.8 million compared to $273 million for first quarter 2007. Pre-tax earnings from the two commercial agreements increased to $4 million from $3.8 million in the first quarter of last year. The nearly $200,000 increase in incremental markup revenues was earned through an improved overall performance against cost related goals in both the ACMI and hub services operation. We earned a $693,000 markup under DHL's ACMI agreement for 100% of the maximum cost related incremental markup possible. We also earned 100% of the maximum cost related incremental markup possible under the ACMI agreement during last year's first quarter. Under the hub service agreement we earned $150,000 or 39% of the maximum cost related incremental markup. No incremental markup was realized from hub services in the first quarter of 2007.

Base markup revenues were lower than those of the first quarter '07, as markup eligible DHL expenses declined approximately 10% compared to first quarter last year. The expense reduction reflects the transfer of the Riverside and South Bend hubs to DHL management during 2007, removal of seven aircraft from the ACMI agreement in '07 and the transfer of the Columbus area logistics services operations in January of '08. First quarter 2007 pre-tax earnings included approximately $200,000 from the Riverside, South Bend and Columbus operations. Revenues for our ACMI services segment, including the charter operations of ABX Air, ATI and CCIA, were $63.1 million compared to $7 million for the first quarter 2007. That total excludes $30.2 million of reimbursable expenses, which were primarily for fuel for ACMI customers. Charter operations of ABX Air generated $18 million or approximately 20% of ACMI service revenues for the quarter. Year-over-year ABX Air's charter revenues grew $11 million. ABX has deployed five additional Boeing 767 freighters into charter service since March 31st, 2007, with 11 in service during the first quarter 2008.

The two former CHI airlines, CCIA and ATI, generated the remaining $45.1 million in revenues for the segment, operating 30 aircraft during the quarter mostly under ACMI service contracts for customers including such names as BAX Global, the U.S. military and for DHL into Latin America. Pre-tax earnings for the segment were $1.1 million for the first quarter of '08 compared to $1 million for the first quarter of '07. Those earnings were impacted by several factors. First, ABX Air incurred significant planned maintenance checks for its 767 which are expensed as incurred. Also, flight crew wages were higher than we projected. ABX Air was forced to assign crews to extra flights at higher costs when crews opted not to bid for extra flying, as was customary until recently. Added flight crew costs associated with ABX Air's Asian operations also drove ACMI services expenses during the quarter, as we completed the setup of a domicile for flight crews and maintenance employees in Osaka, Japan.

Cargo aircraft management or CAM became a separate segment effective with the second quarter of 2008. CAM had 30 aircraft under lease during the first quarter to the airline subsidiaries of the company. We expect CAM to start serving customers outside the Company soon. It will add four Boeing 767-200 extended range aircraft during 2008, including two expected to be placed in service during the second quarter. The segment generated $4.3 million of pre-tax earnings during the quarter. Under other activities, revenues were $8.5 million in the first quarter, up from $8.1 million in the first quarter of 2007. The increase in revenue was generated primarily from additional maintenance business and increased sales of aircraft parts. Pre-tax earnings for the segment were $100,000, down from $1.1 million for the same period last year, primarily due to increased corporate administrative costs due to the CHI acquisition, as well as other expenses to support business development and growth.

We incurred deferred noncash income tax expense of $2.4 million or $0.03 per share in the first quarter 2008 at an approximate 39% effective tax rate. Our effective tax rate for the first quarter '07 was 38% as we incurred deferred noncash income tax expense of $2.6 million or $0.04 per diluted share. Again, I want to emphasize that our reported income tax liability is noncash and fully offset by utilization of our deferred tax asset. The remaining tax loss carry forwards are expected to offset our federal income tax liability into 2011 or beyond, although we may be required to pay alternative minimum taxes and certain state and local taxes before then. Cash payments for capital expenditures were $34.8 million in the first quarter of 2008 compared to $48.3 million in the first quarter of '07. Capital expenditures this quarter were primarily for modification costs for eight different aircraft. We estimate the total level of capital spending for all of 2008 will be approximately $130 million compared to $160.2 million in 2007. Now I will turn the call over to Joe Hete for his review of our operations and some other matters. Joe.

Thanks, Quint. When I told you in March that 2007 had been a transition year, I know a lot of you were wondering where the transition was leading. The results we announced on Monday clearly answer that question. We are, more than ever before, a rapidly growing family of businesses focused on the air cargo market with truly remarkable cash generating potential. One of the things we committed to when we announced our plan to buy CHI was growth and not just in revenues. As I began talking with Peter Fox a year ago about how our companies might fit together, it quickly became apparent to both of us that combining our current businesses plus the growth in our pipeline added up to a lot of potential cash flow if we were one company. By supporting our major customers and jointly pursuing new ACMI or leased aircraft opportunities with the world's largest collection of 767-200 freighters, we saw great things ahead.

The first quarter numbers that Quint just shared with you give you a small taste of what we envisioned back then. Our EBITDA for the first quarter increased 78% to $36.8 million as depreciation flowing from our aircraft investments ramped up rapidly from a year ago. And that's just the beginning. Four more 767s are still in modification and will be arriving this year. Two of them are already spoken for by another airline that will lease them, and we have strong prospects for the remainder. In the meantime, our remaining fleet of 767s are accumulating block hours and attracting interest from around the globe as well as from our principle customer here in the U.S. While choosing the right placement, getting the necessary approvals and assigning crews has taken -- sometimes taken longer than we expected, I remain confident we can generate the returns we envisioned when both ABX and CHI made commitments several years ago to rebuild their fleets around converted 767s.

While I am proud of what we have accomplish to do date this year, I know that cash flow alone isn't the whole story. Our debt and overhead expenses must be factored in as we aim for bottom line growth. But in this early stage of our development as one of the world's top 10 independent air freight companies, we're very enthused about what the future can bring. Once again, success comes from great work by good people and we had a lot of both. I told on you our last call about how we managed to do keep our Wilmington hub operating and air routes served during some rough weather here in early March, as snow and fog grounded other carriers and even disrupted some ground operations. What I didn't mention then is we obtain only delivered great service during those times, we also kept control of our costs. For the first time since the fourth quarter of 2006, we earned a cost related incremental markup in both ACMI and hub services during the first quarter, which contributed to positive earnings growth for DHL businesses even as our share of their operations declined.

This spring service quality for DHL remains good, although we're still working to do better and reduce costs even further. Further reductions will be dependant in a large part on DHL's decision about its U.S. network, which we now expect by the end of this month. I am obviously not going to say much about those discussions now, but I can at least say we're pleased they recognize a strategic importance of the U.S. market and that they know they need efficient, reliable and dedicated partners to be successful. We know that it will take time for DHL to get its U.S. operations on solid financial footing. We also know that their restructuring, goal combined with a prolonged economic slowdown in the U.S., could bring challenges for both of us. But I am significantly more optimistic than I was a few months ago about our future with DHL and eager for all of our companies to play a part in making them more successful in the U.S. and elsewhere. We got an early indication of their determination to succeed here when they approached us last fall for two of our 76s to plug their gaps in the their U.S. network through 2008. We agreed to help because we are a reliable partner and because we believe that our newer aircraft are kind of game-changing force that impresses their key customers. I am pleased to say that more 767s and 757s are on the way and we'll be keeping an eye out for others when the market prices settle down.

Our CHI acquisition brought with it a pipeline of four more 767s and one 757 that are emerging from conversion this year. Those aircraft, plus the 30 cash generating cargo and multi-mode aircraft that CHI's two operating airlines share, have provided us with a new source of geographic and customer diversification such that DHL now represents less than three quarters of our total revenues, down from 95% a year ago and less than half of our cash flow. After almost three months of working together with the CHI companies, I am even more convinced about how solid a fit they are with ABX Air and how much potential we have together. We have 11 767s and one 757 in service today, all with full cargo doors and upgraded technology. CAM will take on several additional aircraft to deploy which may include leases to sister airlines or to third parties. I am pleased to add that our second largest customer, BAX Schenker has affirmed its support for our relationship by extending their exclusive agreement with ATI and CCIA for another year. We look forward to exploring new ways we can help them achieve their objectives in the U.S. market and to the development of a neutral gateway in Toledo that can further leverage the investment that BAX has made there with freight forwarders and seek alternatives to the express carriers.

As Quint mentioned, we continue to work through issues with our ABX Air pilots that have hurt ABX Air's charter margins. The establishment of a domicile in Osaka for crews that do our flying for ANA has addressed a part of the problem, although these costs had a significant impact on our first quarter results. Unfortunately, the pilots union leadership continues to resist changes that are inevitable in the air cargo business, even though they are among the best paid pilots in the industry. It is simply impossible for us to provide all our flight crews with the domicile assignments and schedules they would like, while meeting the changing demands of customers. We have repeatedly advised them that under any plausible scenario, DHL would likely require fewer aircraft and fewer pilots from all of the carriers to support its network including ABX Air. As a result, for ABX Air to grow its ACMI business and provide opportunities for pilots, it must adapt to the needs of other customers including those with less predictable schedules from less appealing locations. Without that flexibility our only profitable means of capturing new business may be to dry lease more of our aircraft to operators that can provide their own crews, sometimes the pay scale is much lower than what our ABX pilots earn now.

Our strategy will continue to be to grow by supporting the business goals and objectives of air freight customers with services that best meet their needs. We want to be part of DHL's new operating platform in the United States as well as its growth plans in the rest of the Americas. But we will not accommodate either DHL or our pilots in way that would compromise our returns for shareholders or harm our relationship with other customers. As you know, ABX Air is in the middle of an arbitration with DHL over overhead allocation and remains at odds with DHL over its claims for accelerated free payment of the promissory note. A ruling on the overhead allocation matter is due in June, and we expect it to be in our favor. We don't expect any change in the repayment demand, which was triggered by what we maintain as a misinterpretation of our CHI deal and ACMI agreement change in control provisions.

In my remarks at the shareholders meeting yesterday, I acknowledged that my own -- I acknowledged my own extreme disappointment that our share price is less than half of what it was a year ago and to the point of view of many shareholders who wish we responded more positively to the indication of interest we received last June. To them and to you, I can say that from our vantage point a year ago with the prospect of a transforming acquisition that would shift our diversification program into high gear, a strong economy, and no evidence that DHL might rethink its U.S. strategy, the price that was suggested seemed substantially less attractive than what it might be if investors understood the potential that CHI offered us. From these first quarter results, you're beginning to get a picture of the cash flow potential we were modeling back then. Soon, all of us will have a full picture of DHL's U.S. strategy. When that information is fully assessed by the market, we think that reasonable investors will conclude that there is dramatically more value creating potential in our Company than there was at this time a year ago when we were trading between $6 and $7 per share. With your support, coupled with our continued good performance, we believe that shareholders will conclude that our decision last summer was the right one for our Company and for our shareholders in the long run. Now we are ready to take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of [Charles Jack] of Wall Street Access. Please proceed.

Good morning, guys.

Good morning, Charles.

Looking at the expenses that is hit the third party business this quarter, I understand we're past the expenses related to the Japanese domicile. But with the higher maintenance costs and the flight crew issues, can you break out what the expense impact was this quarter and then kind of are these kind of last year are they one-time issues or do you think these kind of maintenance in the further flight crew issues are going to linger throughout the year?

Good morning. This is John Graber. I'm the President of ABX Air.

Hi, John.

The increased pilot costs are in the neighborhood of $0.01 a share, and they're the result of a disagreement we're having with the union, as Joe mentioned. And we don't know how long those costs will continue, though we're taking step to say moderate those costs and drive them down as fast as possible, and I think we're going to see some success in that almost immediately. The maintenance costs that will tail off rapidly, those are costs associated with personnel in Japan required by the Japanese civil aeronautics board and we're going to work through those arrangements to either get part of the costs covered by our vendor -- by our customer, I mean, or because of the ability to remove some of those people, but the largest part of those costs come from C checks, scheduled maintenance, and those are a timing issue more than anything else.

Are those things that -- kind of seems like we've had them for a couple of quarters. Are those the kinds of things we're going to see throughout the year or is that something maybe that happens more in the first quarter and then tails off throughout the year?

Which things are you talking about, Charles, the C checks?

Yes.

The C checks basically on our current maintenance program I think on the 767 is about every 20 months, so once an aircraft comes out of modification twenty months hence it will have to go through a heavy check. As it was, I think we incurred two in the first quarter. The average on a go-forward basis with the number of aircraft in service will be between one and one-and-a-half on average. So you will see a reduction going forward.

Just because, as you guys kind of talked to in the fourth quarter conference call, and I am looking for 10 to 15% EBIT margins out of the total third party ACMI business. Is this something that is achievable in the second quarter and later on or is it something that could be achievable later this year or should these expectations kind of be tempered, given kind of maybe a little bit higher cost levels than we've seen before?

I think going through the second quarter, Charles, we have -- through April we still were incurring some of those costs, although down from where they were in the first quarter. You'll see a little bit of impact in the second quarter, but by the time we transition to third quarter, everything should be on a pretty steady platform at that point in time, and those margins we're looking for somewhere in that 10, 12, 13% range.

Okay. Great. Can you talk a little about how you utilized the CAM sub this quarter versus how you think you kind of use that division in the future and how that will perform?

I think from CAM's perspective today, all of the leases CAM has are internal. That's the way the Company was set up by CHI when they formed their holding company, so the assets they had today were -- at least through the first quarter results, were on lease to both CCIA and ATI. On a go-forward basis as we add newer aircraft into the network -- into CAM's portfolio, 767s and the 757, two of those aircraft are already under a lease agreement to an external customer as opposed to an internal, and I think Quint mentioned it yesterday in our shareholder meeting, it is a company in Canada called Cargo Jet. Outside of that, it will assess as the aircraft come in to complete their modifications and are available for service, they will assess on an aircraft by aircraft basis what presents the highest and best use for that particular air frame. It could be to an internal customer, whether it is for 767, for example, ATI will be adding the 767 to its operating certificate sometime late second, early third quarter of this year, so a 767 could go to ABX, could go to ATI or could go to an external customer.

The 757 is on lease to CCIA. It is under an ACMI arrangement with DHL Latin America. We have an agreement with them to add a second aircraft under an ACMI arrangement and then we also have a letter of intent with DHL Latin America for up to four more 757s. The difficulty with the 757 is their prices are at an all time peak and they're really difficult to come by. So we don't want to overpay for an asset right now just to meet a short-term requirement, but we'll assess each one as they come up and the market softens a bit.

Understood. And I know you were kind of exploring the possibility of further Asian expansion. Is there anything new on that front this quarter?

We're still continuing to look at an opportunity to expand the Asian operation. As we mentioned in our shareholder meeting yesterday, ANA is looking to open up their own air express network sometime in the third quarter of 2009. They've already indicated they want us to participate in that network, and we're talking to a couple other Asian customers about expanding into new customers out of the Osaka domicile that we have set up today and anticipate hopefully maybe one more aircraft out there this year.

Got you. And on the military demand side, I saw Atlas Air kind of reported lower military demand versus -- they saw a surge the first quarter '07. I was wondering how 00 you guys are more of a niche business there, I was wondering how the military business looked this quarter.

It is actually more of a niche business, especially when the majority of what ATI has with the AMC is related to the combis, although there is freighter opportunities as well. Pleased to report that we got notification from the AMC the other day that they will be adding another combi into their air network that we hadn't planned for this year. We anticipate that that may add somewhere in the vicinity of about $12 million in additional revenue that wasn't planned for starting in the third quarter of this year, and a lot of it is born based and the feedback we got is that the internal military assets can't provide the same level of service so they're looking back externally again.

Great. I guess just finally, a lot of the shareholders I talked to, they talk about the cash flow generation ability of the Company, and how it is at odds with where the stock is trading now and one of the reasons that's often cited is kind of the lack of the Company to be able to buy back its own stock down here at obviously kind of attractive or depressed levels. Can you talk to how you're going to approach the DHL note negotiations later this year? Will you be looking, even in the event you're able to keep the note financing, to be able to peel back kind of anti-buyback provision that's in there.

I will let our General Counsel, Joe Payne, address the issue in regards to the note. Joe.

Currently the note restricts our ability to buy back our own stock. As you know, we are in discussions with DHL over whether the note may be callable. We don't believe that's the case at all from the -- related to the CHI acquisition, and we're continuing to honor the terms of the note at this time. However, we have had discussions with DHL about the possibility of amending the note to permit us to purchase stock, and we continue to have that interest.

Okay. Great. Thanks, guys.

Thanks, Charles.

(OPERATOR INSTRUCTIONS) There are no further questions at this. At this time I would like to turn the call back over to Mr. Hete for closing remarks.

Thanks, Carissa. As mentioned at the outset, our shareholders approved a new name for the Company, Air Transport Services Group. The change does not require any action on your part. Stock certificates remain valid and will be replaced eventually over time as they are traded. When I said the new name symbolizes our future, I meant to indicate we at ATSG will be making decisions about the proper allocation of our assets across all of our businesses, without favoring any one unit over the other. In every decision our guiding principle will be what represents the highest and best use of that asset or where we can get the best return on it for the shareholder. By following that principle and with the greater appreciation among some in our workforce about the realities of the competitive air cargo marketplace, I believe that at ATSG our future looks bright indeed. Thank you.

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