SkyWest Inc (SKYW) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ExpressJet fourth-quarter and fiscal year 2009 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Miss Kristy Nicholas. Miss Nicholas, you may begin.

Thank you, Hilda. Good morning, everyone, and thank you for joining the ExpressJet Holdings fourth-quarter conference call. On the call we have Pat Kelly, Interim President and Chief Executive Officer; and Phung Burns, Chief Financial Officer.

Portions of this call may contain forward-looking statements not limited to historical facts but reflecting our current beliefs, expectations or intentions regarding future events. A number of factors could cause actual results to differ materially from those in the forward-looking statements.

Additional information concerning risk factors that could affect our actual results is described in our filings with the SEC including our 2008 10-K. During this call, certain non-GAAP financial disclosures may be made relating to our performance measures. In accordance with SEC rules, we will provide a reconciliation to our most directly comparable GAAP financial measures on our website at www.expressjet.com. Pat will cover the operating and financial results for the quarter, then we will take questions. Now I would like to introduce Pat Kelly.

Thanks, Kristy. This is Pat Kelly and I want to thank everybody for being on the call today. Just start by saying that I've been in the role here for seven weeks and I'm just having a great time. This is a fantastic management team and I'm really pleased to be here on an interim basis.

Before we get into the financial results, I wanted to just send a shout out, thank you. We have had some tough weather. The whole industry has for the first part of this year and we've got a lot of great employees out there in the field who are working very hard to do a great job for our customers and I just wanted to thank them for that.

So I'll turn now to the results. While we are pleased to report a profit, it's not associated with our operations. We reported a quarterly profit because of a $47.6 million income tax benefit that is comprised of two parts.

Now one part of this is cash related and I'll talk about that in a little bit. And the second part is non-cash. During the quarter, we recorded a $17.1 million receivable because of new tax legislation, allowing us to carry back losses for additional two years, back to five years versus three years prior. And we expect to receive that refund in the next month or so and we are of course pleased that this legislation allows us to recover more previously paid taxes.

And that added cash will greatly strengthen our balance sheet. So that's really good news. There's more information on the second half of the tax entry in the earnings release and that will be provided in more detail in the 10-K which we expect to file in the next week. So let me turn now under the operating performance for the quarter.

While utilization, block hours and revenues were up during the fourth quarter; our financial results on an operating basis were disappointing in that we lost $17 million. As we detailed in the earnings release tables, about $5 million of that was due to year-end accruals and structural changes within the organization that we don't think represents run rate performance. But despite that, the net of about $12 million loss on an operating basis is still an unsatisfactory result for the quarter.

The major contributors to our losses in the quarter included continued low utilization of our fleet and some unit cost increases that were not matched with unit revenues. And we will talk about that in a little bit more detail.

The utilization of our Continental fleet is actually marginally higher than last year but still quite low by historical standards. Now the schedule we've been given to fly for Continental this year in 2010 indicates another slight uptick in utilization which is of course good news. And those schedules are subject to change and as the economy continues to improve, our goal is to earn even more flying from Continental.

One of the positive elements of our CPA with Continental is that we have an incentive in place for them to give us more hours to fly. Under that program, we paid Continental $1.1 million in the fourth quarter as they awarded us more flying. And as we see more hours, that incentive will continue to be paid in 2010 until the maximum -- 2010 and 2011 -- until the maximum of $10 million in incentive payments is reached.

The other major driver of our losses in Q4 was increases in unit cost unmatched by unit revenues. So let's talk about the revenue side. Our unit revenue is largely governed by a CPI formula within the Continental CPA. Now of course inflation has been quite low and this year our unit revenue adjustment was 1.9%.

But at the same time, our unit labor costs have been rising at a faster rate which is specifically related to employee benefit programs and unusually low attrition. We'll talk about both of those things.

On the employee benefit programs, we saw a marked increase in the percentage of employees participating in our benefit program. Around 80% -- historically it's been around 80% participation. We saw that go to above 90% in 2009. And we attribute that to higher average seniority and the weakened economy.

As we discussed before, the slowdown in the economy has also resulted in much lower attrition in our employee groups. Now the regional airline industry has historically been a feeder program for major carriers. However in the last two years, the majors themselves have froze hiring as they've reduced capacity and they've even had to furlough their own employees. So as a result, because they're not hiring, that as a result of much lower attrition for us and a more senior workforce.

As an example, in 2008 we had 304 pilots (inaudible) from the company and then in 2009, it was only 41. So you can see there was a dramatic drop-off in attrition for us which drives higher seniority and therefore higher labor costs. And these factors continue to be present in 2010 which is why for us, a continued focus on cost management is so important.

So turning now to the charter side of the business, we continue to make progress there. We're feeling good about that. We're in the process of re-allocating aircraft from charter to the United flying and what that is going to do is allow us to increase the productivity of the remaining aircraft in the charter business and that's going to be a key component to our ability to hit our plan in 2010.

That's also a nice segue into our new partner, United Airlines. This is a really big win for us and we're very excited to have the opportunity to deliver great service to another of the major carriers.

As I'm sure you all saw, we signed this final agreement with United last week. We will operate 22 aircraft for them and add an additional 10 aircraft from May through December 2010. In order to accomplish that flying, we've done several things.

We subleased eight airplanes from Continental and will move those into both our United Express and charter fleets. The United agreement has a multi-year term, three years for 11 aircraft and two years for the remainder.

Now United also has a renewal option on the 10 supplemental aircraft we will operate for them from May through December. And United will tell us by June 15 if they want to extend the first six aircraft and by August 15 for the remaining four aircraft.

On the financial front, the United agreement is very similar to our amended capacity purchase agreement with Continental. There are some differences.

Specifically under the United deal, we will get paid based on a combination of black hours, departures, passengers [and planed] and aircraft flying per month. We've set the revenue rates with United for the next five years and they adjust each year on May 1.

On the expense side, aircraft rent is reimbursed by the block hour rates as are other major variable components, including engine power by the hour expenses, heavy maintenance expenses, line maintenance expenses, catering, interrupted trip expenses and most labor costs. Now there are also included in the agreement direct pass-through costs to United.

The biggest of those is for fuel where we will actually pass those costs through to United, but also whole passenger liability and [more] risk insurance as well as property taxes. Those are all pass-through costs.

As we discussed in our last week's press release, we expect full-year block hours to increase between 10 and 15% as a result of this flying for United. We will probably get to sort of run rates from a P&L perspective during the third quarter of this year after all the airplanes are in place and the startup costs like paint and interior mods are complete.

And one last note on the United deal. As a part of the agreement, we issued them a warrant for the purchase of 2.7 million shares of common stock with an exercise price of $0.01 per share and that warrant was issued for February 17.

Turning now to the balance sheet, we continue to see the benefit of our focus on cash. We were essentially breakeven on cash flow from operations during the fourth quarter.

During the quarter, we also continued to sell or settle our auction rate securities. And our balance of auction rate securities now is at $11.1 million on a par basis.

We also worked with the trustee and we were granted a release of a large portion of the excess collateral for the 11.25% convertible notes. The notes now have a balance of $52.1 million at par value. The associated collateral for the notes is $75 million worth of assets and that leaves us with just under $100 million of unencumbered spare parts and spare engines.

So now I'd like to turn to our outlook for 2010. And as a starting point, I think it's useful to compare where we are today versus where we were last year at this time.

The stock price a year ago on February 23 closed at $1.19 which gave us a market cap of approximately $21 million. And clearly at that point in time, investors were unsure of whether ExpressJet would survive.

Now in comparison over the last month, our stock has been trading in the range of $4. So we have made progress here but we still have a market cap of about $80 million compared to a book value pf equity of nearly $200 million. So clearly we still have a ways to go there.

In terms of operating losses, we reduced them in 2009 from $116.5 million in 2008 to $47.2 million in 2009; so made a lot of progress there. In terms of cash flow losses from operations, we reduced those from $56.1 million in 2008 to $12.3 million of cash for losses from operations in 2009.

So clearly we've made progress but we still have much progress to make in the areas of profitability and cash flow. In 2010 we expect to be cash flow positive from operations but expect that we will continue to fall short of absolute profitability.

Now in our quest to return to profitability, we have a number of factors operating in our favor and we feel good about where we are. We have the best labor relations and employee teams in the industry which allow us to continue to deliver the best product and service.

We have a long-term and strong relationship with Continental Airlines where we've operated for many years. We have an exciting new relationship with a powerful carrier in United that will allow us to improve the utilization of all of our resources.

We reduced our charter fleet by two thirds and we have another year of experience in operating this business unit. We have a growing set of ancillary businesses, including charter, but also the combination of businesses we call aviation services that continue to show promise.

And we have a culture of operational excellence innovation. At the same time, we will continue to have cost pressures from a weak economy this year and we will have to maintain our focus to successfully execute our plan.

Turning now for just a moment to talk about the Board and Executive front. We're making good progress on our search for a long-term Chief Executive Officer.

During the last Board meeting, the selection committee met with a slate of quality candidates and is preparing to move forward to the next phase of the interview process. As I said from the beginning of my tenure here, I'll stay for as long as necessary for us to find the right candidate with a vision to move the Company forward while respecting the culture we're trying to create.

Thanks again for all of your attention this morning and I now want to open it up to questions.

(Operator Instructions) Bob McAdoo, Avondale Partners.

I've got a whole series of questions, I don't know how many people are on the thing, we'll see. When I looked at -- you have got in your footnote there at the back of your release, you talk about $4244 in fringe related accruals.

When I start looking at cost rates for flying hour or block hour, even after excluding those accruals, they still are up versus second quarter or third quarter even though you've got some new flying. I'm curious as to what's going on and what we should be thinking about there.

I think, Bob, on a detailed question like that, if you could follow up with Kristy afterwards, that would be great in terms of detailed interpretation of the numbers. I think as we talked about, as my initial comment said, that $4 million in that table there really reflects year-end accrual adjustments that we don't think are -- they belong in the full year but they don't belong entirely in the fourth quarter. And that's why we talked about the actual operating losses for the quarter on a run rate basis being less than the 17. But I think Kristy can give you some more detail on that question. What was your next question, Bob?

The things you talked about was that you disposed of the division that was in the composites business. Curious, are there more of those kinds of nonflying things to be disposed of or are we kind of done with that?

Well I think we are largely -- we did sell the composites business. There were some other things that we sold off in the last couple of years. I think we're largely through that. As we look at the -- what we call them, the aviation services businesses now, we've got plans to make good progress.

We are going to be somewhat opportunistic there if we have good opportunities to sell a business and bring in some cash that we think is better than what we think we could do with the business, obviously we will take a look at that. But I think most of the restructuring has been done.

Jon Evans, [Edmund Schweitz].

Can you talk a little bit about -- I guess first of all, you released I think $100 million you said for the spare parts and the trust and (multiple speakers)

We have remaining just under $100 million of unencumbered spare parts. We released a different number. I think the details are actually in the press release. We didn't release quite $100 million.

But the details are in the press release on that. I guess what we have now is we've got 75 that are tied up to collateralize the debt and then another $100 million that is unencumbered.

[Garrett King], Truffle Hound Capital.

Did United warrants have an exercise date?

They are able to exercise those as soon as they are issued.

Can they -- is there a date when they have to exercise them by work or can they hold them indefinitely?

Hang on just one second. Yes, through -- they can exercise them through the term of the CPA. (multiple speakers) they have several years called back several years okay.

Okay, which is (multiple speakers)

They have several years. Called back several years okay.

Several years, okay.

Yes.

And do you have an estimate of your cash balance at year end?

It's in the release (multiple speakers) what was it, 108?

108.

$108 million.

Is there any plan going forward to continue the stock buyback given this income tax receivable and the sizable cash balance relative to the market cap?

Yes, we still have just under $10 million authorized and we will be opportunistic about that on the debt and the equities side. We don't have any specific plans to disclose.

Okay, because I think that that still could pose pretty good value if you do expect to be cash flow positive and you now have the receivable end, all that cash which is roughly twice -- if not twice, but maybe 50% more than the market cap. So the stock appears to be pretty undervalued currently, if indeed you are cash flow positive.

Well at a good balance sheet, we've got to get -- we see this as an opportunity to progress in stages. Obviously from '08 to '09, we made a ton of progress but we are still not satisfied with where we are because we are still losing money. And as we go into 2010, we see an opportunity to go to cash flow from operations but still be unprofitable. Obviously we're not going to be satisfied until we get back to full profitability.

(Operator Instructions) Jon Evans.

I guess I got cut off but I was curious to talk to you about the convert. So last time when you had these, they were an overhang on the stock and they caused a lot of havoc. So you have $52 million left, you have $100 million in unencumbered assets and you have $107 million on your balance sheet.

How do you plan to potentially take care of them? Because they go current in August and I think that's probably one of the overhangs on your stock. So can you give us a sense of your plan or how you plan to extinguish the debt?

We don't have any specific plans to disclose there. I think it's August of 2011, right?

John, this is Phung. Yes, the next put date for the convert is August of 2011. And right now, you know we're continuing to just -- it's a work in progress for us and we're continuing to evaluate various opportunities to be able to -- whether we continue to repurchase at our discounted rate or to some type of fixed term refinancing. So we are evaluating our options.

I guess the point that I'm trying to make will you have it taken care of before they become current? They come current in August. So in other words, when you report the September quarter, I assume you don't want to have not a plan that takes care of that because that will make the market uneasy, I assume and at least it did the last time.

So can you give us any kind of reassurance that you will have that plan? I mean you have plenty of cash. So can you help us understand that?

John, again this is Phung. We will do everything we can in our power to make sure that we take care of that convert properly.

Okay so we're still working that. We don't have any particular plans to disclose at this point.

Ross Margolies, Stelliam Investments.

I got disconnected, so I missed like the last minute and a half. I'll ask my questions and hopefully they weren't answered in that gap. First I want clarify that the tax cash -- that your cash does not count the receivable due from the income taxes at $17 million.

That's correct.

Is 100% of that due to you or is there an offset to Continental on that?

No. That's all coming into our balance sheet.

And you expect to get that in the first half of this year?

Yes, actually (multiple speakers) this quarter, don't we?

That's good. What utilization metric do you need to get to operating profitability off of your current customer base, counting your charter business, counting United and counting Continental?

I'm not sure we have a specific metric for -- magical number for we hit this number, we hit profitability. I think we are -- we would love to be able to get back to sort of the 9.5 hour plus range which we have seen in strong economic times in the past and that will help us a lot. But I don't have a number we're ready to put out there as the magical number.

Do you expect utilization to increase steadily through this year or do you expect it to become more of a steady state?

I think it's going to move around a little bit with seasonality but are starting off at a reasonably -- sort of the same progressive uptick versus a year ago. I guess what we're really hopeful is that the economy comes on really strong and our customers ask us to do even more flying [that] they're telling us right now.

The last question is a follow-up on the collateral question. You have released collateral. Is that in anticipation of doing an incremental financing or is that just to clean things up?

Ross, this is Phung. It's basically just to give us maximum flexibility in all of our options.

So if you wanted to do a finance, you could use that collateral for financing now if you wanted to? Because you have the converts that are (inaudible) again next year.

Yes, we definitely can.

Between the income tax refund and the cash on your balance sheet excluding the auction rate securities that you have left, I know you've been monetizing them but you have enough cash to cover that put, right?

Yes.

That's all I had.

Okay, Hilda. I think that's it.

We show no further questions.

Thank you very much, everyone, for attending. We appreciate your time and will talk to you again after this quarter.

Thank you, ladies and gentlemen.

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