SkyWest Inc (SKYW) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the SkyWest First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Rob Simmons, Chief Financial Officer. Please go ahead.

Thanks, everyone, for joining us on the call today. As the operator indicated, this is Rob Simmons, SkyWest's Chief Financial Officer. On the call with me today are Chip Childs, President and Chief Executive Officer; Wade Steel, Chief Commercial Officer; Eric Woodward, Chief Accounting Officer; and Mike Thompson, SkyWest Airlines Chief Operating Officer.

I'd like to start today by asking Eric to read the safe harbor, then I will turn the time over to Chip for some comments. Following Chip, I will take us through the financial results, then Wade will discuss the fleet and related flying arrangements. Following Wade, we will have the customary Q&A session with our sell-side analysts. Eric?

Today's discussion contains forward-looking statements that represent our current beliefs, expectations and assumptions regarding future events and are subject to risks and uncertainties. We assume no obligation to update any forward-looking statement. Actual results will likely vary and may vary materially from those anticipated, estimated or projected for a number of reasons. Some of the factors that may cause such differences are included in our 2018 Form 10-K and other reports and filings with the Securities and Exchange Commission.

With that, I'll turn the call over to Chip.

Thank you, Rob and Eric. Good afternoon, everyone, we appreciate your joining us on the call today. The first quarter represented a strong start to 2019 as we continue to experience the impact from our risk reduction fleet transition initiatives, thus moving forward as a single airline with a more efficient footprint. Our quarterly results are already showing, the benefits of closing on the ExpressJet sale as well as the early buyout of 52 aircraft from an expensive and inflexible leverage lease structure.

We're also very pleased to announce today the multiyear extension of another 38 aircraft with American along with 2 new contract airplanes. This announcement builds on the extension of 60 aircraft with United and 51 aircraft with Delta previously announced over the last 2 quarters.

The first quarter included challenging weather and operations across the SkyWest system and the winter storms that continued into this quarter as well. We also faced the unique challenge of a government shutdown during the quarter, which briefly disrupted our aircraft delivery and heavy maintenance schedules. Despite these challenges, in a network spanning 11 hubs nationwide, we understand there's still work to do across the operation. We're very focused on our operational planning to ensure we are a durable airline and continue to deliver the product our partners and passengers have come to expect from SkyWest. I want to thank our 14,000 aviation professionals for their teamwork and focus on providing an exceptional product this last quarter.

During Q1, we repurchased $25 million in stock, $21 million of it was purchased under our new $250 million program approved by the Board in February leaving us about $229 million authorization remaining under this program. As we discussed last quarter, we believe there is still good opportunity for earnings growth in 2019 and 2020 with smaller incremental flying agreements and a strong balance sheet that enables us to create innovative revenue alternatives within existing scope limitations. This includes non-flying and lease opportunities as we demonstrated this quarter.

To be clear, any leasing business we pursue will be within our current platform. And as the largest operator of these assets in the world, these are business lines SkyWest is uniquely positioned to develop. To that end, we are pleased to announce today that we have entered into a conditional agreement to lease 29 CRJ700 aircraft to a domestic third-party operator for a 10-year term. We expect this agreement to begin later in the year.

We intend to continue leveraging our position in the market to optimize the value of the assets within our operational scope. We also are in the fortunate position to be able to convert strong pilot availability into market opportunity and to respond quickly to our partners? needs. Pilot hiring and recruiting continues strong and is running more than 20% above last year's levels. This is another risk area we feel has been reduced meaningfully over the last year.

On January 22, the closing of the -- on the January 22 closing of ExpressJet sale combined with these latest fleet announcements and flying contract extensions reduces our overall enterprise risk and will help us drive a healthy balance of earnings growth and cash flow generation. We remain very focused on sustainable opportunities that position us well for long-term success. I, again, want to thank our nearly 14,000 aviation professionals for their excellent work during the first quarter. Rob?

Today, we reported net income of $88 million or $1.69 per share for the first quarter of 2019. Adjusted net income for the first quarter was $69 million or $1.33 per share compared to net income of $54 million or $1.03 per share in Q1 2018. Adjusted net income for the quarter excludes $25 million of pretax earnings comprised of the gain on the sale of ExpressJet of $47 million pretax and a $22 million special item pretax expense that included a noncash write-off primarily related to aircraft manufacturer part credits forfeited to settle future lease return obligations with the manufacturer and employee separation costs associated with the sale of ExpressJet.

Our effective tax rate in Q1 was 23%. We continue to expect our tax rate to be approximately 24% to 25% for 2019 as a whole.

Let me say a couple of things about our balance sheet, an important point of competitive differentiation for SkyWest. We ended the quarter with cash of $544 million, down from $689 million last quarter. Primary uses of cash in the quarter include the previously announced, immediately accretive $110 million leverage lease buyout of 52 CRJ aircraft, $90 million purchase of 16 CRJ700s and $25 million for share repurchase offset by $50 million in cash proceeds from the sale of ExpressJet.

Debt for the quarter ended at $3.1 billion, down from $3.2 billion last quarter. From where we are at the end of Q1, we would expect debt net of cash to be approximately $300 million lower by year-end. Just a reminder, that all of our debt is financing aircraft and the bulk of our $3.1 billion in debt is financing our fleet of 147 E175s that are under flying contracts largely coterminous with the related debt.

This quarter, we adopted the new lease accounting standard. To give you some color on the lease standards impact to our balance sheet, our March 31 balance sheet includes a new $342 million long-term right-of-use lease asset and a $348 million operating lease liability of which $73 million is classified as current. I'd also like to point out, at the end of 2018, we had $216 million in total prepaid lease assets on our balance sheet of which $87 million was a current asset. Following the early lease buyout of the 52 CRJ aircraft, our prepaid lease asset is now $35 million at March 31 and is included in our long-term right-of-use asset.

The combination of the new lease standard and the early lease buyout impacts the comparability of our current ratio from year-end to March 31. Let's turn for a minute to capital expenditures. As you recall, the last few years we have invested heavily in growth aircraft for our fleet. In 2018, we spent $1.1 billion in CapEx driven primarily by the acquisition of 39 new E175's. In 2019, we expect to deploy only half of the 2018 CapEx number, $200 million of which is for the 68 used CRJ aircraft I just mentioned from Q1 and $120 million for 5 new E175's throughout 2019.

Gross CapEx for Q1 was $252 million including normal non-aircraft acquisition capital spending of $28 million in the quarter. This non-aircraft CapEx should run in the $30 million to $50 million per quarter range for the rest of the year driven by incremental engine acquisitions later this year. With the delivery of 9 new E175's expected to be spread over 2019 and 2020, we plan to invest $40 million of our own capital and raise approximately $180 million in new term debt by the middle for 2020 for these planes.

We expect that by the end of 2019 our debt will be around $2.9 billion, down from where we are now because of the close to $350 million in normal annual principal payments embedded in our fully amortized in term debt, offset by approximately $100 million in new debt for the schedule 2019 E175 deliveries. Absent any additional aircraft orders, the $3.1 billion in debt where we are right now is likely a peak. We expect that in 2019 and 2020, we will continue to de-lever our balance sheet by paying down debt in the neighborhood of $300 million to $400 million per year.

We expect strong cash generation over the next couple of years that will allow us to maintain strong liquidity, de-lever our balance sheet and maintain the agility to respond quickly to any incremental market opportunities. We feel good about how we've started the year. Last quarter, we discussed that with the accretion from the leveraged lease buyout completed this quarter and other leasing and contract opportunities that the earnings per share base of $5.30 in 2018, we've previously anticipated low double-digit growth of annual EPS in 2019 but we expected 2019 EPS to have a 5 in front of it. Well, we still expect the low double-digit growth in 2019, but considering our strong Q1 results, we can now remove the 5-handled caveat. Our visibility to future cash flow gives us the confidence to continue to make disciplined investments to create shareholder value.

When and if new investment opportunities come, we will be ready with a strong and liquid balance sheet. This future capital deployment could include organic growth opportunities in contract flying, prorate flying or leasing as well as opportunities to buy our way out of other inflexible and expensive leasing or debt structures prior to maturity. In addition to organic growth opportunities, of course we will also continue to look at returning capital to shareholders via share repurchase and dividends. As Chip mentioned, we are striving to drive a healthy balance between earnings growth and cash flow.

Wade will now give you some color on the fleet movements and other commercial opportunities and initiatives. Wade?

Thank you, Rob. I'll review our latest agreement and fleet updates that occurred during the first quarter and then discuss the implementation of these changes as well as additional opportunities. We are pleased to have secured a multiyear extension on 38 CRJ700 aircraft with American Airlines. These aircraft were previously scheduled for contract maturities later this year. Also during the first quarter, we entered into a long -- into a new long-term agreement to add 2 used CRJ700s to our American agreement with service expected to launch in May. Shifting to our Delta partnership, we have received the first of our 9 new E175's as part of the 9-year agreement we announced last quarter with 4 more expected this year and 4 in 2020. As a reminder, these aircraft will replace used CRJ900's in our Delta contract, 4 of those CRJ900's will be returned to the leasor while the remaining 5 will be leased to Air Canada.

Continuing our dual-class deliveries we've received 8 of 20 new CRJ900's under our long-term Delta agreement. We expect delivery of the remaining 12 CRJ900's later this year and next. Additionally, you may recall that we had a number of CRJ aircraft under our Delta contract set to expire this year. Last quarter we were able to extend 32 aircraft including 15 CRJ900's, 3 CRJ700's, 14 CRJ200's from this legacy Delta contract. We also extended the term on the first 19 E175's under contract with Delta from 9 to 11 years.

Separately, we were able to extend 60 CRJ 200's with United for an additional 3 years last quarter. All of these extensions covered the majority of the tell risk across our fleet. We also continue to leverage opportunities in our leasing business. Today we announced an agreement to lease 29 CRJ700 aircraft to a domestic third party for a 10-year term subject to the finalization of their flying contract. We anticipate the aircraft will be placed under leases and increments from the middle of this year to the mid-2020. The majority of the aircraft will be sourced from the 30 CRJ700's from our previous ExpressJet operation.

As part of this 6-year lease agreement with Air Canada I discussed earlier, those 5 CRJ900's are expected to transition to Air Canada this quarter and next. We have also leased 16 CRJ200's to ExpressJet.

Finally, we entered into a joint venture with Regional One during the first quarter allowing us to utilize their distribution reach to lease spare engine and airframes to third parties. SkyWest anticipates initiating transactions including the transfer of 14 engines through Regional One beginning this quarter. Of course, any leasing business will be within our existing platform as a significant and well-positioned operator of these assets.

We continue to utilize our flexible fleet and platform for profitable opportunities leveraging the unique position we've built over the past several years to enhance our model and minimize risk. We anticipate ongoing execution of these agreements will help ensure we're best positioned for the remainder of 2019 and beyond.

Okay. Operator, we're ready for our Q&A now.

(Operator Instructions) The first question will come from Savi Syth of Raymond James.

I -- sorry, it seems like most of this takes care of the CRJ700 whitetail risk. Could you talk a little bit about -- I think last quarter you talked about a lot of the contracts going through 2020. Could you talk a little bit about kind of the durations of your various contracts? Not one by one but generally how we should think about the longevity of some of these contracts?

Yes. So Savi, this is Wade. So the contracts that we've entered into, the American, 38, as we said, it's a multiyear longer-term type agreement that's out there. We also entered into a lease for the 29 aircraft that do have a 10-year duration on those. Those are the 2 new ones that we entered into the quarter. All of our E175s have original maturities of somewhere between 9 and 12 years on them. So there's -- a lot of our dual-class are very long-term type agreements.

Maybe -- I can ask it in a kind of a simpler way. Just as you look at -- when you have some whitetails coming, what's kind of the first year [rate] you have more than just kind of 1 or 2 here and there coming up?

Now the -- now that we've entered into these agreements, we don't have any significant tail risk until 2023, 2024.

Perfect. Got it. And then if I might ask just another question on the pilot side. Just kind of an update there, and I'm just wondering if anything has kind of changed in recent months or especially with all the kind of moving parts here, just kind of how you feel about your pilot levels and kind of the supply levels there.

Yes. Savi, this is Chip. That's a good question. I think -- look, as I stated in our script, our recruiting so far as this year in the first quarter has probably been the best recruiting that we have seen in our history, quite candidly. We attribute that to an exceptional culture here at SkyWest as well as outstanding aviation professionals and an outstanding training department plus good opportunities for our pilots to go to some exceptional carriers after they've spent -- some good experience with us.

On the attrition side, I would say that it's very much as expected, if not even a little bit less but pretty much as expected. So I think we've talked in previous calls the level of effort that we put at our entire pilot pipe line that goes from new pilots learning how to fly clear through, some of our flow-through and resume review programs with our major carriers. All of that is -- we felt very, very comfortable with and probably feel as good as we ever have, and we're very excited about just the exceptional level of pilots that have shown interest in SkyWest, and our group is just an outstanding group. So we feel very comfortable about taking that and making sure that we're meeting the needs of our partners and our passengers.

The next question will come from Michael Linenberg of Deutsche Bank.

This is actually Matt Fallon on for Mike. Last quarter, you mentioned that buying out expensive leverage leases on CRJ aircraft would yield double-digit returns. Do you see the incremental opportunities you mentioned yielding similar returns? And if so, could you give us a rough idea of the number of planes you see as potential candidates for these transactions?

Yes, thanks, Matt. I think that as we, I believe, said last quarter as well, that there were originally a couple of pockets of opportunity for this and one we got done this quarter. The other pocket of opportunity that's out there is a little more complicated. It was a little more broadly syndicated. There are more counterparties involved in the conversation. So it's something we're definitely very interested in pursuing, but it's not something that I would expect to see completed this year.

Got it. And I guess I have a follow-up. Are you seeing any incremental cost savings or revenue opportunities fall in the divestiture of ExpressJet since we've last heard from you?

Yes, Matt, that's a great question. I think there's a couple of things relative to that. I think more specifically there is actually a very large amount of assets that we did not sell as part of the sale of ExpressJet, mostly on the side of the CRJ700 side. And our intention with that, like we've announced, is to take those assets and find ways to lease both the aircraft and engines. It's a very good market for that type of stuff. So the announcements that we've said today, I think that you can kind of integrate that into somewhat of our thinking, but I think it is -- it should be widely known that we sold a lot of assets with ExpressJet, but there was a quite a bit of assets that we did not sell that we're going to continue to find leasing opportunities for.

The next question will come from Helane Becker of Cowen.

It's actually Conor in for Helane. Just a couple of questions on the dry leasing business. So I mean it seems like you're going to make a pretty decent splash here. I'm just curious what you think about it long term. Is it actually conceivable that you may look to purchase new regional aircrafts with the intention of actually just doing dry leases with them and rather than operating them yourself?

So I think that -- that's a great question because with some of the opportunities that we have seen so far, with the existing assets that we have, it would have to fall within our strategic footprint of what we would like to do long term with our partners and with our existing enterprise. So if there are opportunities for us to invest in additional assets whereby we could lease those domestically or internationally, I would say that we would be open to that. I still think that we're in a phase of confident exploration right now and as we move through that phase we'll keep you guys updated on any other further developments but it certainly is not out of the question that we could develop this a little bit further.

Is it fair to assume that the margin on that business is going to be similar to the system right now or maybe you can just give a little context to that going forward?

Yes, I wouldn't say that this -- the margins -- you're kind of comparing apples to oranges a little bit on that, certainly flying aircraft is the backbone of our business which we certainly enjoy and would prefer to do. However, given the construct and the strategic focus that where some of these assets are and how they can be utilized to help support our partnerships we're open to evaluating that between flying in and not flying them but as of right now with the excess assets that we have, it's a very good strategic approach to lease them to other people right now.

Matt, I'd just add to that, that anytime we deploy capital, we're going to do it in a very disciplined way and with returned thresholds firmly in mind.

Great. And then just changing topics for a second. So I mean I know you guys don't fly or aren't contracted to fly the CRJ550 but just curious if you think there's actually long-term potential with that? Has anyone actually approached you about [de-seating] some CRJ700s? I don't -- I realize that there's probably not a lot left with the new lease agreement at this point.

Well, I think that the 550 is a very compelling case that we've worked particularly with one of our partners. We watch it very closely. I think it's an intriguing product I think that we're the number own owner in the world of CRJ700's. So that 700 platform has a lot of flexibilities across all of our partner bases. At this point, we're studying it, watching it very closely. We think it's a very good, compelling case. At this time we also have some other opportunities with CRJ700's that are equally if not more compelling but that doesn't mean that we don't think that that could put -- we could play a good part in that sometime down the road.

Your next question will come from Catherine O'Brien of Goldman Sachs.

This is actually Joyce on for Catie. And I was just wondering -- so just with this third party that you've leased the CRJ700's to, I was wondering if maybe they'd be interested in leasing further aircraft as they come off contract or if this is more of a onetime feel that you would have to find additional counterparts for, if they were [scheduled for] leases?

Yes. Joyce, this is Wade. I think what this counterparty I think they've fulfilled a lot of their needs. We continue to work with them on additional needs. I don't know if it will be additional aircraft or potentially helping them with some of their current fleet, but we'll continue to work with this counterparty and other ones that have interest in -- in leasing aircraft from us.

Okay. Got it. And then you mentioned that that sort of guidance you had for earnings growth in 2019 of no longer having that 5 handle in front of it, I was wondering if that improvement was really just that extra goodness in the March quarter or if it's really these other initiatives that are driving for their full year of 2019 with the joint ventures, the new leasing agreement or potential leasing agreement, if you can expand on that a bit more?

Yes. Well, let me answer the question this way and I think, again, we're pleased about how we started the year, but as we look at 2019 and 2020 obviously 2019 we're going to see some growth just from the timing of when we brought in some of those E175's last year. We're obviously seeing some of the economics read through already from the leverage lease buyout that we did last quarter. Wade took you through some of the lease extensions, the contract extensions. We've got 12 new aircraft scheduled to be delivered in 2019, another 12 in 2020. Obviously, this new 10-year lease for 29 planes, that really is more of a 2020 story. It should start to read through later in the year though. But I think it's a combination of obviously a good first quarter and some nice opportunities that we've got going into 2020 as these initiatives play out.

(Operator Instructions). The next question comes from Savi Syth of Raymond James.

Just a question on pro rata. There's clearly a lot of volatility that goes on in the non-regional space and you have exposure to that. But I think pricing and that environment is very different. So just wondering if you could talk about what you saw on the pro rate side of the business in 1Q and your expectation for size for the rest of the year.

Yes. Savi, this is Wade. So as far as pro rate, I'll first start off with just the size of pro rate. It's a little bit more than 10% somewhere in the 10% to 12% range of our flying. So it's a very small portion of our flying. It is a little bit different than what the majors see. It's all domestic, it's all -- it's all -- it's fairly predictable for us. The fuel side of pro rate the fuel, if you look at our P&L it was actually down a million dollars, so it was actually pretty consistent year-over-year. We won?t get into the specific profitability but it's fairly consistent year-over-year and we've -- and it's a very small portion of our business. So --

That's helpful. But the -- so the pricing environment, especially with kind of the ESA contracts and things like that's been pretty stable?

Yes, it's been very stable for us.

And this concludes our question and answer session. I would now like to turn the conference back over to Chip Childs for any closing remarks.

Thank you, Carrie. Thanks, everybody, for joining us on the call today. Like I -- like usual, we want to continue to execute on our strategy, it remains flexible, to make sure we're in the very best position long term to have good sustainable opportunities for shareholders as well as the -- all of our wonderful professionals here at SkyWest, and we look forward to updating you again next quarter. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.