ExpressJet Holdings Inc. Q3 2008 Earnings Call Transcript

ExpressJet Holdings, Inc (XJT)

Q3 2008 Earnings Call

November 5, 2008 at 10:00 pm ET

Executives

James Ream - President and Chief Executive Officer

Phung Burns - Vice President and Chief Financial Officer

Kristy Nicholas - Investor Relations

Analysts

Brian Brockmire - Credit Suisse

Bob McAdoo - Avondale Partners

SG Telaforgotta - Quattro Global Capital LLC

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the ExpressJet third quarter 2008 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Ms. Kristy Nicholas. Ms. Nicholas, you may begin.

Kristy Nicholas

Thank you, Lorraine. Good morning everyone and thank you for joining the ExpressJet Holdings third quarter conference call. On the call, we have Jim Ream, President and Chief Executive Officer and Phung Burns, Vice President and Chief Financial Officer.

Portions of this call may contain forward-looking statements not limited to historical facts, but reflecting our current beliefs, expectations and our 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 2007 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 reconciliation to our most directly comparable GAAP financial measures on our website at www.ExpressJet.com. Jim will cover the operating and financial results for the quarter and then he will take questions.

Now, I would like to introduce Jim Ream.

James Ream

Thanks, Kristy. Good morning everybody. Well for the quarter and excluding these special and nonrecurring items, ExpressJet had a net loss of $10 million which is an improvement over last year's results by $13 million and when you look at the pretax results are actually $27 million than where we were in last year's third quarter.

This quarter, the P&L reflects significant changes year over year by account category but it is consistent with the direction that we discussed in August. We operated under the new Continental capacity purchase agreement starting July 1. We operated our Delta and branded operations in July and August and then discontinued both of this on September 2. For the month of September and sort of throughout the month, we returned 39 aircraft, two Continental and Continental elected to ground 30 of the aircraft that we had in working in the old CPA as a kind of took the aircraft that we return to them back into their fleet, we are operating those under the Continental Express system and they pulled 30 of the older 135 out and have grounded those aircrafts.

The net effect of these fleet changes on the third quarter was the reduction of the block hour’s year-over-year of about 15.5% and the reduction from the second quarter of this year of 12%. Now in the quarter, we had a charge and a gain reflecting these fleet decisions. We took a $21 million pretax charge for the cost of shutting down our branded and prorate flying and for the cost of returning the aircraft to Continental. Offsetting this charge was the $23 million pretax gain we received from unwinding our forward fuel contracts as our contract flying now is covered the fuel cost related there at flying.

We also had a gain of $12 million from modifying the terms of our $69 million of convertible notes where the new terms of those notes were more favorable than the market value of comparable debt at the time the amended terms does affect. This gain will be amortized over the three years to the next put date of those notes so this will be a non cash impact in both directions. Finally, we had a $5 million charge of the reserve to our deferred tax asset position. Now the cash impact of the quarter can be summarized as follow:

Cash flow from our operations was negative by $2.7 million and when you think about the magnitude of the changes we had operationally just sort of number of aircraft moving around, we were still dealing with record fuel prices and branded and our prorate flying in July and August and we are already working for the full quarter under the modified terms of the new CPA with Continental which obviously less revenues under that new agreement and still kind of underway in our restructuring efforts to kind of catch up with all of those decisions and we are obviously not quite done with sort of our discussions with our labor union in modifying those agreements.

So a pretty good result in the quarter giving the magnitude of change and where we were and the transition of where we are trying to get to. We spent $2 million in CapEx in that quarter, we had $2 million in transaction cost from the convertible note restructuring and we purchase $2.3 million under our stock repurchase program.

All of this was largely covered by $8.6 million in proceeds from selling surplus equipment. The reduction of $46 million of cash in the quarter is tied to an equal reduction on our current abilities to include the pull down of our air traffic liability by $27 million and the reduction of payables and accruals related to shrinking our expense base.

In the quarter, the Company's total liabilities were reduced by $132 million when you look at short and long term liabilities. Now, the balance sheet obviously changed as quickly as the operations did. Through modeling kind of the fourth quarter, projections right now show about another $10 million in reduction to liabilities in the upcoming quarter and about $2.5 million in CapEx for the rest of this year. After this upcoming quarter, we expect to have kind of a normalized balance sheet activity. So I think this will be the last big charges you are going to see kind of flowing off the balance sheet related to the fleet change.

The other comments that I have about the fourth quarter. We are near closing out our new labor agreements with all our employees. We have one agreement that is in final review with the national office. We should hear about that agreement shortly and we expect to have all to ratify, all the agreements to ratify locally and fully expect this week to be able to make that announcement. Employees did a really good job to kind of transitioning the entire fleet. Our operation has just run perfectly. They did a great job right up to the last day of our branded and prorate operation. I got nothing but tremendous compliments from all the customers and they were able to sit and reflect on the Company's future and ultimately made the right decisions and I think they deserve all the credit in the world.

Our charter business also continues to build. We had a three fold increase year over year on the revenue basis in the third quarter and right now fourth quarter, revenue with the other growth year over year is building nicely. The near term challenge for the fourth quarter is that block hours are going to be down another 17% from this third quarter that you are looking at. So it is driven by fewer aircraft, normal seasonality that impacts the fourth quarter versus the third quarter and of course just generally all networks have pull down their overall schedules and Continental is no exception and so our Continental Express Network reflects that pull down.

So right now I would say the process I just talked about with the new labor agreements in effect, kind of having the fleet where they are and the progress we have made so far are probably about equaling this pull down right now in utilization of the overall fleet. Obviously as we move to the backend of the year, assuming a return of utilization given the typical seasonality pattern, we would expect those results to obviously improve from there and we continue to make progress at kind of restructuring the business as we are able to kind of look at each expense category.

As I mentioned, we do spend $2.3 million in repurchasing shares in the quarter and we have moved our share account from 21.6 million shares outstanding to 20.7 million at quarter close. We still have 5 million under our share and bond repurchase program and we will be in the market in the fourth quarter looking for value.

Well that hits the highlights of the quarter. I think we are open for questions, Lorraine.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Daniel McKenzie - Credit Suisse.

Brian Brockmire - Credit Suisse

Hi. This is actually Brian Brockmire filling in for Dan. Just on the charter business historically, it has been poorly performing and I am just kind of wondering given the worsening economy, how are you thinking about that business looking ahead?

James Ream

Actually we will continue to see pretty solid growth in that business and I think it is obviously spilling as a real business would as we gain more customers, we are seeing more follow on business from those customers and we are sort of moving into different segment. So pretty solid improvement in revenues year over year and we see a pretty positive trend in the fourth quarter.

Operator

Your next question comes from the line of Bob McAdoo - Avondale Partners.

Bob McAdoo - Avondale Partners

Yes, in the statistics chart back there, you have a little footnote that says it excludes charter because obviously ASMs are RPMs are not relevant to charter. So the block hours, you exclude charter as well so that those block hours that are there are literally only your branded plus the Delta plus Continental or is this the total block hours that were flown?

James Ream

They are just the scheduled block hours that are under the schedule of service and the statistic that you may see with the DOT, we filed those with the DOT but for the press release information, it is just scheduled service.

Bob McAdoo - Avondale Partners

Okay. Is there any way that if we are trying to figure out how things are going to look and try to get some models that are kind of halfway interesting or halfway closing now so we can maybe get people interested, is there any way we can get more information about on the revenue side and what is kind of the ongoing Continental stream of revenues relative to your block hours so that we could, with this number kind of number there with Delta plus Continental plus branded and whatever it is, it is really tough to go forward with any kind of a real number. Is there any way we can get any handle on that or is that going to be filed in an SEC filing or something?

James Ream

Yes, Bob the best thing to do is to call Kristy Nicholas and she can help you with the modeling. We are kind of working through all of these ourselves and obviously by the fourth quarter into much cleaner result but to help you out, she can get you going right now. If any will get the queue here at the end of this week, that will be the next level of information and by the time we get to the fourth quarter, it will be pretty clean.

Bob McAdoo - Avondale Partners

Okay and when will we be able to see a balance sheet for this fourth quarter?

James Ream

It will be at Friday when we file Q.

Operator

Your next question comes from the line of SG Telaforgotta - Quattro Global Capital LLC.

SG Telaforgotta - Quattro Global Capital LLC

Yes. Hi, it is SG Telaforgotta. The restricted cash looks like it dropped about $20 million. I was just wondering if you could just sort of elaborate on that whether because of the reallocation or one of the major charges out of restricted cash.

James Ream

Yes, it was the credit card holdbacks from the prepaid tickets that we had out there kind of related to the ATL so that is kind of the branded operation unwound. Those flowed for over into non-restricted.

SG Telaforgotta - Quattro Global Capital LLC

Okay and on the auction rate securities, can you say what the rate is that you are earning right now on the sales auction rate and can you say which institution these securities are being held with because you are contemplating litigation?

James Ream

It is 3.74% is the rate. We have Royal Bank of Canada, Bank of America and Citigroup.

SG Telaforgotta - Quattro Global Capital LLC

Okay and on the operating leases, which line item in the expense lines can we look to try to determine what the portion of the operating leases that you have paid for Q3 has been? So in the second quarter in the June 10-Q, you had about a $198 million remaining in operating lease payments in the commitment section in the Q, what portion of that of was paid in Q3 and what is remaining for Q4?

James Ream

You are going to have all that information on Friday. If you need it before that, just call Kristy but obviously all those leases moved over to the Continental balance sheet and we have them on kind of short term leases that are really tied specifically to the CPA. So now it is just the remaining lease obligations. It is the seven year lease terms on the 30 aircraft under the modified lease terms on that agreement. So, all that will be filed in the Q. Kristy can kind of help you walk you through that if you need to before Friday.

Operator

(Operator Instructions)

James Ream

Okay. Well, I appreciate everybody joining us on the call this morning and obviously when we get the Q out there, there will be more information and hopefully we will be able to help you with your modeling into the fourth quarter. I think we will be looking at fairly run rate results. Thank you.

Operator

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

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