Air Transport Services Group Inc (ATSG) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Air Transport Services Group Quarter one 2009 earnings conference call. My name is Michelle, and I will your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today conference Mr. Joe Hete Chief Executive Officer of Air Transport Services Group.

Thank you, Michelle, and welcome to our first quarter conference call. I'm Joe Hete, President and Chief Executive Officer of Air Transport Services Group. Here with me are John Graber President of ABX Air, Quint Turner, our Chief Financial Officer, and Joe Payne, our Senior Vice-President and Corporate General Counsel.

The results released on Monday show we're off to a great start this year. It didn't take long for many of you to take notice. Our stock prices nearly doubled from where we were just last week, and closed yesterday above $1 for the first time since last summer.

It's not surprising to us that the market is responding, because everything we have done to generate great earnings and reduce our debt represent major steps to delivering the return that our shareholders expect and deserve.

In a moment, I'm going to describe how the work we've been doing since this time last year can generate even better results. But first Quint Turner will give you more background on our first quarter and review our financial position. Quint?

Thanks, Joe. Good morning, everyone.

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

These factors include, but are not limited to the successful and timely consummation of a definitive agreement between ABX Air and DHL with respect to those matters set out under the March 2009 memorandum of understanding associated with DHL's assumption of financial responsibility on capital leases with 767 aircraft.

Further reductions in the scope of services at ABX Air is performing under its commercial agreements with DHL and the rates at which those occur, ABX Air's ability to maintain cost and service level performance under its commercial agreements with DHL, further reductions in the scope of services that ATSG is providing to its other customers, ATSG's ability to sufficiently reduce its costs in order to compete for new business and generate reasonable returns, and the timely conversion and deployment of Boeing 767 aircraft.

Also, our ability to remain in compliance with the terms and conditions of our credit agreement and otherwise satisfy our lenders and other factors contained from time-to-time in our filings with the Securities and Exchange Commission including our first quarter Form 10-Q which we filed yesterday.

These forward-looking statements are based on information, plans, and estimates as of the date of this call, and Air Transport Services Group undertake no obligation to update any forward-looking statements to reflect changes in the underlying assumptions or factors, new information, future or other changes.

Our first quarter results clearly show that our business strategy revised in the wake of DHL's announcement last year is on course. We continue to reduce debt and strengthen the company's balance sheet in the quarter, while achieving substantial increases in pretax earnings and in all three of our business segments, as well as our other businesses.

We accomplished this despite one of the most challenging economic downturns in years, compounded by the shutdown of DHL's U.S. domestic business in January and diminished volumes.

First quarter revenues were off 27 percent at $280.6 million, compared to $382.1 million for the first quarter 2008. However, net earnings rose sharply for the quarter to $11.1 million, or $0.18 per common share, up from $3.8 million, or $0.06 per common share for the first quarter last year.

Net cash generated by operations for the first three months was $25.8 million, compared to $61.8 million for the first three months of 2008. The decrease in operating cash flow was caused by a lag in reimbursement from DHL for employee wages, severance, and benefits. Cash and cash equivalents at the end of the quarter were $124.0 million, compared to $96.5 million at the end of the first quarter 2008.

Fuel and other reimbursable costs covered under our DHL contracts decreased 44 percent over the past year to $56.7 million, from $101.5 million in the first quarter 2008. The decrease comes from a combination of fewer aircraft in service due to the DHL restructuring and a lower average price of fuel. The average price of a gallon of aviation fuel was 44 percent lower in the first quarter of 2009, compared to the same quarter in 2008.

As we said in our year-end conference call in March, ABX Air also consummated an agreement to restructure its $92.3 million unsecured promissory note with DHL. We have preserved its original 2028 maturity date while helping to strengthen our balance sheet by reducing the book principal amount of the note by $46.3 million. The agreement calls for ABX Air to pay $15 million of the principal balance concurrently with our receipt of aircraft put proceeds expected to occur in the second quarter. This will leave the remaining principal balance of the note at $31 million.

The interest expense for the note will remain at 5 percent with DHL reimbursing that expense to ABX Air at least through the end of 2012.

DHL has agreed to cancel prepayment claims on the note and has allowed ATSG to provide greater cash returns to its shareholders by amending limitations on dividend payments and stock buybacks which are explain in our Form 10-Q.

Also mentioned during our last call, DHL has agreed to assume retroactive to January 31st, 2009, all of ABX Air's capital lease obligations for five Boeing 767-200 standard freighter in DHL service. In addition, the MOU provides for ATSG to grant DHL an option to lease up to four other 767 standard freighters for terms beginning August 2010 and expanding through 2015.

As of March 31, 2009, ATSG's balance sheet reflected $50.2 million of debt and $21.5 million of net book value related to the five leased aircraft. ATSG will account for DHL's assumption of the obligations and disposition of the aircraft to DHL when a definitive agreement is completed, which is expected to occur during the second quarter. DHL notified us yesterday that they have received parent company approval for our MOU, and we expect to complete it before the end of the second quarter after resolving a few minor items. Once completed, we project that the combined impact of the capital lease assumption DHL note settlement, and scheduled principal payments on our senior credit facility, will have reduced ATSG's outstanding debt by more than $120 million, just since year-end 2008.

Earnings before interest, taxes, depreciation, and amortization or EBITDA increased 28 percent to $47.0 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, and is a key to creating value for shareholders during these difficult times. We have a reconciliation of EBITDA to GAAP net income in our first quarter earnings released published Monday which is available on our website.

Cash payments for capital expenditures were $10 million in the first quarter of 2009, compared to $34.8 million in the first quarter of 2008. The company estimates that total capital spending for 2009 could be up to $126 million, depending upon how quickly we are able to get our 767s released from DHL and into mod. Much of our capital spending is aircraft modification cost that is discretionary and could be postponed if necessary.

Interest expense decreased $2.7 million to $7.6 million in the first quarter, compared with the same period a year ago due to reduced debt and lower variable interest rates. Interest income decreased $0.8 million during the first quarter 2009 from last year's first quarter due to lower short-term interest rates on our cash and cash equivalents.

And we expect our interest expense to decrease further due to the effect of the reduction in the DHL note and the pending capital lease transaction along with our strong EBITDA on the covenants in our senior credit facility.

For example, aggregate interest rates under that facility will decline by about 38 basis points for the second quarter because we have reduced the ratio of first-lean debt to EBITDA below 2.5, actually down to 2.38. That translates into a decrease in our net interest expense of approximately $0.8 million per year beginning with the second quarter of 2009.

We incurred $6.7 million in tax expense in the first quarter with all but about $100,000 being non-cash. The effective tax rate for the quarter was 37.5 percent. Last year federal income tax was$ 2.4 million non cash at a 39 percent effective rate. We do not expect to pay federal income tax until at least 2011, although we may be required to pay alternative minimum taxes and certain state and local income taxes. Deferred tax expense in 2009 should be at a rate of about 38 percent.

We paid $10.8 million into the defined benefit pension plans in the first quarter. We anticipate contributing at least $25.6 million more during the remainder of the year.

When DHL decided to suspend its domestic express business, we worked out a severance and retention agreement covering reimbursements for costs to wind-down our portion of the domestic network and negotiated a new system of fixed quarterly markups.

Under the new terms, our DHL segment had revenues of $182.9 million for the first quarter of 2009, down 34.9 percent for the first three months of 2008.

Revenues for 2009 included $5.6 million in agreed upon base and incremental markups, up 44 percent from $3.9 million in markup revenues a year ago. Specifically, the markups were $3.6 million in ACMI, and $2 million in Hub Services. DHL and ABX Air have agreed to continue the same level of markup compensation for the second quarter of 2009.

Total first quarter revenues from DHL for wind-down operations were $40.8 million. Through March 31, 2009, ABX Air has terminated approximately 6,875 employees since DHL's restructuring began in mid 2008. Paid hours declined approximately 61 percent compared to the first quarter a year ago.

Expenses under the DHL agreement were approximately 39 percent lower than first quarter 2008. The lower expenses reflect aircraft reduction and lower employment count. In January, all of ABX Air's remaining DC-9 aircraft were removed from DHL service, DHL gave notice to ABX Air to remove five 767 aircraft in March. We intend to sell all of those aircraft to DHL under terms of the ACMI agreement.

Pre-tax earnings from ABX Air's two commercial agreement s were $5.6 million for the first quarter of 2009. Total pretax earnings from DHL also included $7.1 million of earnings related to the severance and retention agreement.

Our ACMI Services segment consists of our three airlines, ATI, CCIA and the non-DHL portion of our ABX Air business. First quarter revenues for the segment were $68.0 million, down 8 percent from the first quarter last year, but up 11 percent when excluding revenues from directly reimbursed costs, primarily fuel. Revenue generating block hours for the segment increased 7 percent over the same period a year ago. We added two Boeing 757 freighter aircraft, and three Boeing 767 freighter aircraft since mid-2008. Also included in these revenues was $2.4 million from 767s provided to DHL under supplemental agreements.

Pretax earnings for the ACMI Services segment increased to $1.9 million in the first quarter, up 72 percent from $1.1 million in the same period a year ago. A major reason for the gain was air transport for the U.S. military, under a contract which began in mid-2008.

Cargo Aircraft Management or CAM, our aircraft leasing business had pretax earnings of $4.8 million for the first quarter of 2009, up 10 percent from last year's first quarter earnings of $4.3 million. The subsidiary had revenues of $13.0 million, of which $11.0 million came from the leasing of aircraft to ATI, CCIA and ABX Air and $2.0 million from outside customers.

In February, CAM finalized a seven year lease with Amerijet International for two Boeing 767 aircraft. The term is expected to begin by the end of the second quarter pending certification. Amerijet has the option for three more 767's from CAM. In March CAM consummated an agreement to lease a Boeing 767 aircraft under a three-year term to First Air, a Canadian airline that is expanding its freight operations.

Revenues from other businesses increased 29 percent to $11.0 million, driven by growth in aircraft maintenance services and part sales, and sort center management services for the U.S. Postal Service.

Pretax earnings increased 65 percent to $0.7 million, compared to $0.4 million in the same period a year ago, attributable mainly to parts sales to external customers. Effective May 4th, 2009, ABX Air's aircraft maintenance and engineering business was transferred to ATSG's newly formed subsidiary Airborne Maintenance and Engineering Services, which will offer its service not only to ATSG subsidiaries, but also will increase its focus on sales to external customers.

Now I'll turn the call back to Joe Hete for his review. Joe.

Thanks, Quint.

I told you on our last call that ATSG is a more diverse, stronger, and more competitive company than it was a year ago when DHL announced its restructuring. I'm even more certain of that today than I was back in March, and much more positive about our outlook than I was a year ago.

That's not primarily because of the results we posted this quarter, although they are very solid, ask perhaps surprising to many of you. The earnings we booked on our DHL business are a direct consequence of our insistence and DHL's willingness to treat us equitable as we more than 6000 reformer employee in an entire Wilmington community for the brunt of the dramatic scale down of this operations here and in many other cities across the U.S.

That's not to diminish the contributions of our other businesses and especially the former CHI businesses, which despite a global recession continue to deliver revenue and margin growth in their second full year under the ATSG umbrella. Each of them are led by people determined to drive their business forward, and we expect their results to improve as conditions permit.

I wish we could tell you that our first quarter pace will continue. A lot depends on the economy and on DHL's success in executing its own plans.

In that regards, you have probably read that DHL has decided to move its U.S. hub operations from here in Wilmington to the Cincinnati region's airport in northern Kentucky. As anticipated, we received formal notice this morning that they will exercise their right to terminate the Hub Services agreement effective August 15th this year.

That's unfortunate for Wilmington and the hundreds of remaining jobs we will likely lose when that happens. But returns under our Hubs Services agreement were going to be much less than we had earned in the past no matter where the hub was based, simply because an international-only package business requires only a fraction of the people and space that a full-scale domestic network requires.

What's perfectly clear is that in the second half the year, we will be relying more heavily on our customers other than DHL, and our ability to further control overhead costs to generate substantial amounts of EBITDA.

That's exactly why just as DHL is exploring its options last summer and fall, we were exploring ours. We realized how fortunate we were to have added the CHI companies to our portfolio. And we saw that we had a lot of options to apply our knowledge and intellectual capital, as well as our aircraft assets to new markets. What resulted from that analysis is just beginning to emerge now.

We quickly determined that many of the 24 nonstandard 767s we were flying for DHL would only be marketable and could be redeployed to other customers if we upgraded them with standard cargo doors.

We put IAI to work designed a modification program and locked up the schedule slots that we would need to complete that work within a couple of years. The prototype aircraft for that program which entered mod last fall has been completed and is awaiting FAA certification. It should go into service soon, and we expect more to follow starting this summer.

We also recognized that our new CAM subsidiary offered us more deployment options for our fleet so we moved many of our freighters there. That step allows us to use them in different ways depending on the customer's preference for a lease or ACMI agreement. The nonstandard 767s in DHL service that we plan to convert will be moved to CAM as well. This means that the majority of our fleet will soon be owned by CAM and leased either to our own airlines or other operators.

That ratio of lease versus ACMI ultimately depends on many factors, some of which, such as interest rates and customer preference are out of our control. We have made substantial progress on some of the ACMI cost factors that we can influence such as maintenance and overhead costs. But we need to do much more on others such as contracts with our pilot groups. Our flight crew members know exactly what type of contracts we need to retain ACMI service as a competitive option and protect their jobs. It's just matter of getting it done, and we're meeting with them regularly to work out the terms.

Still, whether we fly them ACMI or our customers do under dry leases, we believe that our aircraft mix and service options will be attractive to a wide range of government and commercial customer as the economy recovers.

And finally, we recognize that our nearly 30 years of maintenance experience in keeping aircraft at industry leading levels of dispatch reliability was a skill- set we could market to other operators. We have always wanted to take on more of that third-party business including servicing the aircraft we acquired with CHI. But prior to parking the DC-9 fleet, we could never commit enough hanger space to be a reliable partner.

But now, with this reduction in our DHL fleet we have both the capacity and the talent to maintain and service other aircraft operators, including those with sizable fleets and specialized requirements. So on May 4th, we put that commitment into action by forming Airborne Maintenance and Engineers Services (AMES), which already has a 757 from a third-party customer in the hangar undergoing maintenance and it is scouring the market for more new business.

With AMES we are fulfilling one of the goals we set for ourselves when we launched our diversification program five years ago.

You can expect to see us do more in that regard in the future. Even with all our planning and business development activity, we haven't forgotten that DHL is still our largest customer, and it is still our job to keep DHL's U.S. air network on track. We met our on-time commitments and did our best to keep costs under control as volumes declined. We also continue to reassure the new customers we acquired via CHI that we remain fully committed to serving them as well. We are determined not to let the widespread media attention about our DHL business distract us from being a good partners to others. And by all accounts, we haven't.

As Quint told you, amending our promissory note and reducing the principal amount by about $61 million is a huge achievement for us. The fact that the term continues to run through 2028, and our interest expense continues to be reimbursed at least through 2012, removes a large risk factor. Quint told you that our credit facility covenants still restrict us from dividends or buybacks, but I can envision our Board being able to consider such options within a year or two.

Underlying the restructured promissory note and our pending MOU with DHL on leases for some of our 767 freighters is the fact that DHL remains very interested in our 767s, and has indicated it would like more of them in its worldwide network. Subject to appropriate terms, and a long-term commitment, we want to work with them and have made that clear in a number ongoing discussions with executives of DHL and its parent company Deutsche Post.

But as I also indicated at our annual meeting yesterday every relationship must be based on the expectation of a reasonable return for our shareholders. You can expect us to build that in every deal we do and every contract we sign.

And now operator we are ready to take

(Operator Instructions) Your first question comes from the line of

Helane Becker of Jesup and Lamont Securities. Please proceed.

Thank you very much, operator. Hi Gentleman. Thank you for taking my question. I have two questions. One is, where does DHL fly those 767s? and the second question is, can you update us on your labor situation with your pilots?

As far as where they fly them Helane, right now the 767s are dedicated to the U.S. air network and of course we have 14 of them that are currently scheduled in their operation with four of them that are operating as backups in that U.S. network. Were you looking for specific cities?

No, no, I think I was looking for, you know, just general what you just told me.

And as far as our pilot negotiations, you know, obviously we have three different pilot groups with CCIA, ATI, and ABX and all three of them are in active negotiations at this point in time. But we're making progress on all fronts, all be its slower than what we would like to see. As we stand today, certain CCIA and ATI have contracts that are much more competitive in the ACMI arena in which we compete today, put the one where we need to make significant progress is in the ABX pilot contract. To that end I'll let John Graber comment, since he is with us here as well.

Helane, good morning. Specifically at ABX Air, our pilot group and the company have been in negotiation for a couple of years now, and we've been in front of a federal mediator for almost six is months. We're making pretty good progress. I think it's fair to say, on many of the issues, but there are still some structural substantive issues where things aren't going as fast as we would like them to.

Okay. Is there any movement among those pilot groups to merge their seniority lists?

Nothing official that we're aware of. I mean, that question has been raised by them from time to time, but there's no activity that we're aware of to push us in that direction.

And it's important to point out, this is John again, there are three separate certificates for these carrier and I don't know in of a situation in the world where an emerge seniority list operates on more than one certificate.

Yes, I don't either. Okay. Thank you very much.

You're welcome.

(Operator Instructions). And your next question comes from the line of Adam Ritzer of CRT Capital. Please proceed.

Hey, guys, how are you?

Good Adam, How are you?

I am doing okay. Glad to see things are moving along. Appreciate the work you guys are putting into the whole thing. I guess there are so many planes moving around, just so I understand exactly what we have here, you said there's 24 nonstandard planes with DHL, looks like your going to modify up to 14 of them.

Correct.

And then you said I guess there's five of them you're putting for $24 million?

There's -- out of that 24, the 14 that are good modification candidates are ones that are GE -- have GE engines hanging on them, and then the other five or Pratt powered, and the last five are ones that are part of the capital lease agreement. So with the capital lease DHL assuming that obligation and the five Pratt Whitney ones that we're going to put to them, that leaves of us a net of 14.

Okay. So that is how you get to the 14, the five that you put back, the five they're assuming under the leases, which removes that lease obligation from the balance sheet and that gets you to 14.

Right.

And could you remind me what the cost is on the 14 to modify them?

Depending on what configuration we put them in, whether to make them heavy weight freighters or lighter weight freighters, it's going to run, between $11 million to $12.5 million a copy.

$11 to $12.5 million per aircraft. And I know you've mentioned this before, but could you talk about the lease terms with Amerijet and First Air again?

I don't know that we've disclosed the absolute terms on that, but they're very good rates in terms of the leases. They're 7 years in term. Lease obviously includes reserves for heavy maintenance visits. The engines on the aircraft which are usually one of the primarily considerations are covered under our powered by the hour arrangement we have, with Delta airline and that power by the hour arrangement is one that will be used by Amerijet as well

Maybe if I phrase it differently. If you're locking to modify 14 planes, $11 to $12.5 million per plane, what do you think, the demand and the lease rates you can get, just kind of looking at your return on capital to modify them? Does that make sense?

Yes I mean, Adam, this is Quint, I think the lease rates for 767s, again, in part depends upon the term, which the customer is taking the aircraft, the guarantees to that are associated with the lease, et cetera, but I think you can generally assume that, that aircraft lease for anywhere from -- $260,000 to $300,000 a month, and that can vary depending upon other factors that you want to take into account, but that's essentially what you -- what you would, in today's market, expect to achieve.

Okay. Perfect. so basically what you're saying is, look, I could spend, you know between $11, and $12.5 million on a mod, get $3 million-plus on the lease, that's a good deal for shareholders.

Yes, sir.

Okay. I'm just making sure we're looking at it the same way.

The other option that we have in that light, Adam, unlike your standard leasing company, we have the ability to bring other services to bear, such as that power by the hour arrangement to keep those lessees cost down. Our newly reformed subsidiary does heavy maintenance work for that, which is another opportunity for ATSG as well.

Right, right just one last question --last question, could you reflect a little bit on the market right now, and demand for 767s, and kind of update us on what's going on there?

Well, as we've said on previous calls, we have to have a number of opportunities in work for both with wet lease and dry lease operations, back in January, we started a trans-Atlantic flight with the TNT being our primary custom are on that flight, connecting up New York with their hub in Belgium. We have a couple of dry lease opportunities that we're still in the negotiations stage of the peep lease documents, and we continue to look for other opportunities not just outside of DHL, but also with DHL for deployment of aircraft in an ACMI operation.

Okay. So the trend of air companies, air freight companies getting rid of the older planes, looking at the 767 type planes, you still see the demand for that in today's market place?

Certainly. If you go back to last summer when fuel prices were pushing $4 a gallon, it changed the viability of some of the older generation aircraft, such as the A300 B4 of which there's probably roughly 70 of those aircraft operating around the globe today as freighters, fuel prices have trended down, which took some of that pressure off, but as we've seen over the last couple of weeks, the price of oil starting to go back up, and our fuel prices, so we expect to see along with the higher fuel prices and what appears to be some bottoming out of the current economic situation a renewed heavy demand for the aircraft.

Does anything else out there have a number of 767s like you guys do?

No, sir.

Okay.

We would expect that the five capital lease planes that go back to DHL, three of those, I think they've indicated, they intend to modify, so they will -- ultimately they will be an owner three 767 freighters, I expect. In fact, we've agreed to insert them, as you probably know, into the IAI mod line, which depending upon the timing could lower our cap-ex spent for the year. Also, the five 767 aircraft that we're putting to DHL, they're fine candidates for conversion, it's just that that engine type is different than the majority of the 767s we have. All the rest of them are our GE engines, and so that's why we focused on putting those five aircraft to DHL. We are not sure if they'll elect to convert those or sell them to someone else for conversion after the put, we don't know.

Okay. Are they -- the GE engines, is that better to have for some reason or another?

Not -- not really. It's just -- we bought the majority of our aircraft from ANA If you go back and look where our planes came from, I think what Joe-24 of them came from ANA, and they were just -- they all happened to be GE powered, and so, when we look at anything else, what we are retaining and we would like to keep it as similar and not have different engine times, if possible.

Okay. I appreciate it, guys. I'll get back in the call.

(Operator Instructions) You appear to have no further questions at this time, sir.

Okay. I know it will take more than one or two good quarters to win back substantial amounts of investor capital to our value proposition, but the sizable pretax earnings and EBITDA gains we achieved in the first quarter when coupled with more than $112 million in debt reduction that we were expecting from our DHL, no amendments, capital lease transactions have truly put us on a much more positive trajectory than just a fine months ago. We have substantially more cushion against credit facility defaults, lower interest expense, a big reduction in costs in our MRO operations and good prospects for placing a number of our aircraft with customers under multi-year leases. You're not going to find too many places where you can get all of that more about a dollar a share. I appreciate your interest and look forward to talking to you again in early August when we hope to have even more good news to share. Have a quality day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.