Air Transport Services Group Inc (ATSG) 2015 Q1 法說會逐字稿

Welcome to the First Quarter 2015 Air Transport Services Group Inc. Earnings Conference Call. My name is Sylvia, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Joe Hete. Joe Hete, you may begin.

Thank you, Sylvia.

Good morning and welcome to our first quarter 2015 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Commercial Officer.

Yesterday, we issued our first quarter earnings release which you can find on our web site, atsginc.com. As we said in our release, 2015 is starting off with more of the same positive momentum we demonstrated in the fourth quarter. Our pretax earnings are up 40% and our adjusted-EBITDA increased 20% in the first quarter, compared with a year ago. There are still few headwinds, but 2015 is likely to be a better year than we forecasted back in March.

The quarter results was also full of other good news.

We told you in March about starting off the year by signing the new DHL agreements in January. They took effect in April, including long-term leases for two Boeing 767-300s as DHL upsized its fleet by replacing two 200s that operated under short-term arrangements.

In February, we exercised an option to purchase our 46th 767 freighter, a 300 series we had been leasing and operating for several months. We also executed another dry lease by placing a Boeing 767-300 with Cargojet.

And in March, we completed lease arrangements with West Atlantic, where we're 25% investor, for its first 767, and we delivered the second of two wet leased 767s to important new overseas customers. One of them was converted to a dry lease in April, and the other is expected to do so later in the year. Altogether, we now have 28 767s deployed under dry lease arrangements, which is eight more than we had at the end of the first quarter last year.

The upshot of those deals, and some pending arrangements with other customers, means that we are rapidly approaching full deployment. More growth opportunities are in our pipeline. I'll be updating you on how we intend to address that situation, while also allocating capital towards share repurchases, after Quint takes you through the key numbers for the quarter.

Quint?

Thanks Joe, and good morning everyone.

Let me begin by advising you that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These factors include, but aren't limited to:

- changes in market demand for our assets and services,

- the number and timing of deployments of our aircraft,

- our operating airline's ability to maintain on-time service and control costs,

- and other factors, as contained from time to time in our filings with the SEC, including the 2014 Form 10-K we filed in March and the Form 10-Q we will file later this week.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted EBITDA and adjusted pretax earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our web site.

2015 is already off to a very good start, as Joe said, and we're increasingly optimistic about the remainder of the year.

Our consolidated first-quarter revenues grew by $3.4 million to $147 million, and net income from continuing operations for the quarter increased by 36% to $8.9 million, or $0.14 per share. That's our strongest first quarter earnings performance since 2009.

The key to our improving outlook, and the driver of our first quarter gains, is a steady improvement in our freighter leasing business and the flexibility of our business model, which allows us to shift our aircraft between our leasing and airline businesses. We can offer the arrangements that our customers prefer, while also maximizing fleet utilization as those customer preferences change.

For the quarter, our adjusted pretax earnings increased $4.5 million to $14.5 million, and Adjusted EBITDA grew $7.7 million to $46.5 million, reflecting improved allocation of aircraft between ACMI and dry lease customer opportunities. That ability to quickly allocate our aircraft toward wet or dry opportunities to maximize return has been the key to our steadily improving performance over the last year. The adjusted pretax profit of $14.5 million equaled the contribution of CAM, as the gains from AMES, our maintenance MRO, and our other businesses effectively offset a smaller loss in our ACMI services segment.

Our airline operations continue to improve, as indicated by the $4.5 million reduction in its pretax deficit versus first quarter 2014. Even after the deployment of the two 767s in Europe and Asia that Joe mentioned, two other 767 200s currently utilized for ad-hoc opportunities are available for longer duration customer contracts.

CAM's earnings were flat, versus first quarter last year. Depreciation from the five aircraft we added since 2013,plus costs and loss of revenue from aircraft transitioning to new customers, offset the increase in revenues from additional external leases.

That won't be the case going forward. Starting in the second quarter, revenue growth for new external leases, net of DHL lease repricing, ramps up. That will include contributions from the deployments Joe mentioned a minute ago.

You may have noticed that we have revised the Aircraft-In-Service table at the end of our earnings release to show the allocation between internal and external customers on both a historical and prospective basis. The new format separates our aircraft into three groups. Those aircraft our external dry lease customers operate themselves, those we lease externally and operate on a CMI basis, and those we lease to our airlines for ACMI customers. We think investors will find this presentation helpful for tracking how our aircraft are allocated.

In our ACMI services segment, the outlook is for continued operating improvement and higher fleet utilization, but the factors we told you about in March will still make year-over-year comparisons challenging. A few non-cash items will also impact the segment. They include higher employee pension expense than in 2014, and no more revenue associated with the DHL note, which became fully amortized in March. On the maintenance side, we anticipate more heavy maintenance checks in subsequent quarters than we had in the first quarter. And the framework of the DHL agreement transfers more maintenance risk/reward to us for the DHL dedicated aircraft we operate.

We also noted in our earnings release that we are amending our credit facility with our bank group. The maturity of the facility extends by a year to 2020, and we are adding $50 million in capacity in our revolver commitment, to $325 million. We retained a $50 million accordion feature, and can now take on additional indebtedness of up to $150 million, an increase of $50 million. All other facility features and key covenants remain the same.

The revolver balance at the end of the quarter was $180 million, including draws to purchase a 767 in February. Our debt-to-EBITDA ratio ended the quarter at 1.8% times, which qualifies us for a sub-2% interest rate on a variable-rate debt.

As I mentioned a moment ago, our DHL promissory note was extinguished in March. That releases us from its covenants, including the obligation to pay DHL a portion of any capital we may return to shareholders.

Before I turn it back to Joe, I know that many of you are focused on our free cash flow dynamics, and the factors other than operating earnings that are driving those numbers this year. We said in March that our pension funding commitments remain the same as last year at about $6 million, and we will make scheduled debt principle payments of about $24 million this year.

Our CapEx and investments were projected to decline by $47 million this year, with CapEx alone down approximately $32 million to about $80 million. That's still our current budget, and we spent $43 million of the $80 million in the first quarter to acquire another 767 and fund our maintenance requirements. We may spend more if we elect to increase our fleet capacity as demand for the 767 and, in particular the 300 series, remains strong.

In summary, I want to echo Joe's confidence about an improving outlook for 2015, and about the cash flow we will generate to meet our commitments to grow the business and repurchase shares. Let me turn it back to him for his perspective on the quarter and our plans for the year.

Joe?

Thanks, Quint.

The first quarter was notable, not just for the good results we posted but also for the new business we signed that I mentioned at the outset.

The ACMI and dry lease business we have launched includes arrangements with two international customers, Raya Airways in Asia and Star Air in Europe. Star Air is the principal source of airlift for the UPS express network within Europe, and the largest ACMI operator of 767 freighters outside the U.S.

Raya is adding new, longer routes within its southeast Asia cargo network from its base in Malaysia, and upgrading its fleet of Boeing 727s to reach them.

The 767 lease we completed with West Atlantic gives them an important new capability to serve that very competitive European market. That aircraft is supporting TNT's network in Europe on an ACMI basis and West hopes to land other 767 business there as well.

The 767s replaced with Star and Raya begin as wet-to-dry arrangements, our unique product offering that anticipates a conversion to dry leases after we initiate service on a wet-lease basis via our airlines. In fact, Star already converted its wet lease to dry in April, and we expect the same with Raya in the coming months.

These deployments demonstrate the sustained appeal of our 767s to expanding regional network operators, who appreciate its fuel and operating costs advantages over older and smaller aircraft that many of them still operate.

The quarter also benefited from new operations for DHL including additional interim route coverage assignments in the U.S. and in Europe. Leases for the two 767-300s we operate for DHL in the U.S. also begin April 1st and extend through March of 2019.

The new business I just mentioned is very encouraging, but it was already in the works when we set our 2015 EBITDA outlook projection of $180 million. It's the discussions of even more new business this spring that give me greater optimism about 2015 than I had two months ago. The ability of Rich Corrado's team to turn prospects into customers convinces me that we will likely exceed the $180 million EBITDA estimates we gave you earlier.

Without signed agreements in hand, however, I am reluctant to stake us to a new EBITDA number for the year. As business develops, we will update you about the 2015 outlook on our next call in August.

At the rate Rich's team is going, we will soon run out of available aircraft to fulfill those commitments. That will require additional aircraft investments to be sure we have aircraft available when our customers need them. Our investments will still be based on our expectations of multi-year lease commitments that meet our rate of return hurdles. We have sourced conversion feedstock, and our principal conversion contractor has assured us that we could have another 767 ready to fly in four to five months after we acquire one.

Based on our continued strong cash flow generation, and along with the capacity we now have in our credit facility, we have the means to pursue growth in what remains a very positive climate for our industry. We also stand by our commitment to return capital under the share repurchase authorization that the Board approved last summer. The Board has approved our plan, and you can be assured that when we talk to you again in August, you will see the results.

We do not intend to dramatically lever up to take on a much bigger program than the Board authorized. We will maintain a balanced approach between investing in the growth that has rewarded our long-term shareholders, and the accretive cash returns that share repurchases can generate. The investments we have made to date have positioned our company to generate more than enough cash flow to do both.

That concludes our prepared remarks. Sylvia. We're ready to take the first question.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Jack Atkins from Stephens.

So, I guess, just to start off with, and it sounds like certainly an improved airfreight market is improving the outlook for your business for the remainder of the year and beyond perhaps. And could you maybe talk about, as you're in discussions with customers and they want 767 assets to lease and clearly it's a limited market out there. What sort of leverage are you guys sort of getting in terms of being able to drive better lease rates both for just the asset under dry lease but also perhaps better ACMI lease rates as well. Is there sort of a pendulum swinging back in your favor if you will?

I think, Jack, in terms of the ACMI, is probably where the pendulum is swinging more back in our direction more so than the dry lease portion of the business that's fairly steady from a lease rate standpoint. On the ACMI side, obviously with fuel prices being down where they have been, the flexibility to pass along cost increases that we've incurred over time certainly is a little easier to push passed to a customer, because the fuel component which there a 100% is less of burden than it has been in the past.

But when you look at the dry lease market, there is not a lot of ups and downs in terms of lease rates relative to the asset. The 767-200, we're kind of the only game in town from a 200 perspective. I mean you don't see anybody else that has them out there. There is some competition, I guess, in the 300 segment, but there is not just a lot of assets available right now.

Okay, Joe, that makes sense. And so I guess if I'm thinking about it then, outside of your agreement with DHL, could you maybe help us think about, sort of the average length of the remaining ACMI leases just to get a sense for -- if there is an opportunity to maybe step those rates up over the course of this year. I guess what I'm trying to think about as it -- could you get that ACMI segment back to profitability in 2015?

Keep in mind that our deployments come from two basic areas: growth, where airlines - whether it is an integrator or regional airline seeing growth in their market, and also replacement. On the replacement side, it may be for a 727, which we've seen lately. And in those markets, keep in mind because airlines generally own those planes, and they're paying a lot lower for them. So for them to step up into a 767 is a considerable additional expense, and they will get a more efficient aircraft from both the reliability and the cost standpoint as long as they can fill it.

So from that perspective you still have to be competitive and fit into a budget that they want to get into the aircraft for. Our wet-to-dry program, which has been very successful over the past 6 months to a year, has been significant in that these airlines are able to test-drive the aircraft and make sure that they're able to drive that type of a market. And from a pricing standpoint on the wet portion of it, we price it to be profitable. And then once the airline has experienced the aircraft, the dry lease is at a competitive rate as well from a market perspective. So our ability to leverage up the rates is not necessarily a function of overall demand in the market. Because the individual regional airlines have their own demand profiles that we have to adapt to.

Jack, as far as the overall ACMI segment, in terms of getting that profitable, I mean as you saw the fourth quarter, it's all about utilization of the assets. And as Quint noted in his comments, we do have two aircraft, for example, that are underutilized in the ACMI segment. So the airline is carrying the burden of the cost of the lease of the aircraft plus the maintenance amortizations of heavy maintenance visits, et cetera. So as soon as they get those deployed it has a marked impact in improving the profitability of the ACMI segment.

Okay, so you would expect the ACMI segment to be profitable once those two aircraft are deployed?

Our target is to get there.

Okay. And then just a couple of last items here. Quint, could you may be help us think about the sequential sort of movement on the EBITDA line. I know there are some puts and takes there with the DHL note amortizing down, but also you have some new aircraft deployments. Just so we can think about how that should flow sequentially?

Well, Jack I think it's fair to say this year, our expectations probably -- we had a very robust peak in the fourth quarter of '14. And I think from -- because we are pretty well deployed at this point with not a lot of assets available. Most -- a lot of our EBITDA of course, is driven by the deployment of additional assets. And so I would -- I really think that variability wise there won't be, while we expect improving EBITDA sequentially that it won't be as volatile perhaps as what we have seen in some prior years.

Okay.

Our assets are already out there for the most part.

So, we should be thinking about improved EBITDA sequentially even though you have a headwind from the new DHL arrangement?

I think so, yes.

And the next question comes from Seth Crystall from R.W. Pressprich.

I had a couple of questions, really more about the increase in the revolver. It doesn't seem like you really needed all that extra availability at this point in time. But at the same point you say you're not going to lever up the company to maybe do a buyback. So I'm just -- it just seems strange to me that at this point in time to increase the facility by so much with not enacting a larger kind of buyback plan, and just staying within the $50 million. Can you help me out with that -- why you did it at this point in time?

The extra flexibility comes at a very inexpensive price, adding dollars to the revolver really does not generate much in the way of additional interest cost or unused fee, and it certainly preserves the most optionality we can get in terms of our capital allocation strategy going forward. So we'd like to take advantage of that when we can get it, and as you know with a strategy that is likely to include both investments in growth as well as share repurchases, cheap capital, it's always good to lock that up when you have the opportunity.

I understand and I agree, and I think those are probably two dual strategies to go after. Now what concerns me a little bit is that the end of the year call, you said stay tuned for the first quarter call to hear about buybacks, and you really just said now, I mean Joe said now, Stay tuned in August for the next call to hear about it, and that just seems to me just kicking the can down the road, whereas it seems to me that especially with now the authorization in place for more availability on the revolver. You could actually go and do something especially since in the past you've said that it's difficult finding 767s, so might you in terms of allocating or looking for more capital look at planes that are not 767s, but expand the fleet to different types of models?

Well, a couple of things. First off, I think that our message last quarter was that we were looking at second quarter as the likely time when we would be kicking off the buybacks. I don't think that's really different, and that the message point really hasn't changed. In terms of the aircraft that we might look at, it's not impossible that we would look -- CAM based upon customer preferences may look at other options besides the 767, certainly the 737, the 757 are also aircraft that fit well with a lot of our existing customers and also a lot of the demand we're seeing in the market.

In terms of the extra revolver flexibility, keep in mind that has an -- that amendment hasn't actually been executed as yet, and we expect that to happen later this week.

Just one last question. I guess last quarter we talked about the post office contract. We said that it's operating under extensions now. You thought it would -- might run through the end of the year. Is that still the case today or is anything changed there?

The postal contracts were extended through the end of September, and then we will go after -- rebid again at that point in time, once postal service -- assuming they get to a point to where they can determine which direction they want to head. So right now we're good through September.

And the next question comes from Matthew Jacobson from Waveny Capital.

You guys mentioned sequential EBITDA improvement. You continued to highlight your strong free cash flow, and less volatility in your earnings. I mean, is that right for an increase in the size of the share buyback program?

Well, I think again we haven't committed and nor do we in advance disclose what exactly our level of purchasing will be, but we've certainly been up-front that we have the program in place and we expect to be executing on that strategy this quarter. So I don't want to, I guess, go farther than that at this point, Matt. It really just depends upon how the opportunities unfold, but we certainly expect to be allocating capital towards share repurchase.

And the next question comes from Charles Frischer from LF Partners.

My question is more generic. Can you talk about the strength of the 767 market for freight, versus potential new capacity in daily freight from the larger planes like the larger Boeing and the Airbus planes?

I'll let Rich handle that one. Rich?

Yes, Charles, the 767 is a regional freighter, and so that its strike zone is really flying for integrators and the hub-and-spoke network, or for example for Cargojet up in Canada that flys for UPS and flys for the mail. In those markets, those networks run off a hub network where it requires entry and exit of aircraft based on a sort. And although belly space is used a little bit for the major lanes, you really need a freighter. It needs to fly at night after pickups are made during the day -- deliveries are made during the day, and that doesn't necessarily match up with belly freight.

If you talk about belly freight, if you look at the new aircraft that are coming into the market, the Boeing 787 and the 777 with the large bellies, their average stage length is 5 hours to 6 hours, and that's where that belly space is flying. The average stage length globally of a 767 freighter is a little over three hours, and the average stage length for 767-200 is around 2 hours. So, we're not flying in those lanes where the competitive belly space and lower pricing you would find for that belly space is competitive. So the customers are different, and the lane segments are different from the 767s that we buy.

And the next question comes from Helane Becker from Cowen.

I appreciate the time, guys. Just a question with respect -- and I don't know if this really affects you. Do your customers notice a benefit during the quarter from the ports slowdown in the West Coast?

No Helene, we really didn't see anything that we could directly point you to that said it was beneficial to us or our customers. There may have been some additional volume, domestically, with DHL that may have increased the total payload on a given lane but nothing that drove extra flights.

Okay, and on your ACMI business, are you noticing your customers flying more than minimum guarantees?

A lot of our ACMI business, even though it's called ACMI, when you're flying for network operators like TNT, for example, or even when we throw up extra airplanes for DHL, it's on a specific route. So unlike the larger aircraft like the 747 or the 777s, where you've got opportunities for additional flights around the globe, we just don't have that kind of demand in our sector. I mean there is a little bit, obviously, during peak seasons, but nothing during the regular course of the year.

Okay, and then you may have said this, and I may have missed it. I'm sorry about that, but on maintenance where the fleet is there, it was down on a year-on-year basis, which is good unless there was maintenance that was pushed off. So, is there anything we should be aware of in terms of timing events in that line item?

I think Helane, kind of what we would expect to see certainly is -- this was, as we commented, a quarter that was a little better on the maintenance side. We would expect the run rate on a quarterly basis for our maintenance line item to be higher. As we move through the year although not -- not real significantly higher, not all that different from what the year-over-year numbers with last year's numbers developed as.

Okay. Perfect. And then I got all the other numbers. So, I appreciate your help. Thank you very much.

And the next question comes from Jack Atkins from Stephens.

Great guys. I just kind wanted to walk through the cash flow side for a moment if we could. Quint, I know you kind of went through these numbers in your prepared remarks, but let's just say you generated $180 million dollars in EBITDA. Could you walk us through sort of the cash items? You're not paying cash taxes. What is your cash interest expense? I think you said $80 million a year in CapEx. Could you -- what's your cash pension? Just sort of, we can -- so we can kind of nail down how much cash is available for either further investment or for a buyback.

Jack, it's in terms of the -- and again keeping in mind some of these uses of cash are discretionary.

Of course.

Certainly on the CapEx side, you've got a mixture on the growth and the maintenance. But we're guiding to $80 million of CapEx spend. We've got cash interest, if you just annualize the quarter run rate you are about $12 million to $13 million of cash interest expense. On the pension side again, the net, we had an increase and this was one of the P&L headwinds that we had. You had an increase in the pension expense, a little over $4 million and then we have $6 million of cash, which we will put into defined benefit plans. And then you've got scheduled principal payments on our debt, our term loan, our asset backed loans, et cetera, of about $24 million. I think those are the big items.

Okay, okay. So that's going to leave you, granted you said you are trending above that $180 million level, but call it at least roughly $60 million in availability to buy back stock or invest in further growth. So what the plan B I mean...

And the key thing too, Jack, is our balance sheet is, as the case has been made by many, it's very likely levered. And so if the capital allocation opportunities present themselves, as I think we had an earlier question on, for example, expanding our revolver capacity we have plenty of liquidity in the balance sheet.

Makes sense. And so I guess when you are thinking about allocating capital between growth, paying down debt, and then buying back stock. I mean, is there a certain share price that you're targeting more, or is it just a function that you want to invest the certain portion of your cash flow into the buyback. I mean, granted, I know you guys don't want to give a lot of specific details around that at this point, but help us understand from your perspective. How you break that down going forward?

Well, I think like other companies, I think when good growth opportunities present themselves, and we've sort of defined that as when we are comfortable that we've got a commitment from a customer that signs up for an asset. We have a little bias there, if that commitment is there certainly. But we also see as a very accretive option for capital allocation, buying back our shares. And of course the Board authorized $50 million, they didn't put a time limit on it. And we think in our remarks earlier we said the Board has approved plans, which we expect to be implementing this quarter, to begin availing ourselves of the option to repurchase shares.

And so you can, certainly the Board decides the authorization was $50 million. Of course that gets throughly revisited as needed, but if you're looking to put some brackets around the size, that is certainly what's been authorized.

Jack, we also have, when you look at our credit facility, we have a $50 million limit, and of course and there is a 2.5 times after giving effect from a leverage standpoint, that's in the credit facility as well. But we're not, obviously, we don't want to characterize ourselves as market timers, but we do have in place a 10b-5 program. So we'll be in the market on a regular basis under that program. And then we do have flexibility with the 10b-18 program as the Board authorized.

And we have no further questions at this time.

Thank you, Sylvia. I hope it's clear to all of you, as it is to us, that our growing cash flow and our expanded debt capacity can fund both growth investments in freighter aircraft our customers want and will pay for, as well as the return of capital that shareholders want and your Board has approved.

Many of you obviously support what we're doing, as indicated by the fact that our stock is up more than 50% in the last two years, beating the Russell 2000 that many of you use as a benchmark.

Thanks to all of you for dialing in to discuss ATSG's business results and our capital allocation plans. And don't forget, this Sunday is Mother's Day. Make it a great day for all the moms you know. Thanks, and have a quality day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.