ExpressJet Holdings, Inc. Q4 2008 Earnings Call Transcript

ExpressJet Holdings, Inc. (XJT)

Q4 2008 Earnings Call

February 18, 2009 10:00 am ET

Executives

Kristy Nicholas – Director, Communications

James Ream – President and Chief Executive Officer

Phung Burns – Chief Financial Officer

Analysts

Bob McAdoo – Avondale Partners

S. G. Telaforgotta – Quattro Global

Ross Margolies – Stelliam Investment Management

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the ExpressJet fourth quarter 08 earnings call. At this time all participants are in a listenonly mode. Later, we will conduct a questionandanswer session. Please note that this conference is being recorded. I will now turn the call over to Miss Kristy Nicholas. Miss Nicholas, you may begin.

Kristy Nicholas

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

Portions of this call may contain forwardlooking 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 different materially from those in the forwardlooking statements. Additional information concerning risk factors that could affect our actual results is described in our filings with the SEC, including our 2007 10K.

During this call, certain nonGAAP 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. Jim will cover the operating and financial results for the quarter. Then he will take questions. Now, I would like to introduce Jim Ream.

Jim Ream

Thanks, Kristy. Good morning everybody. We reported in the quarter a loss of $30.2 million. We had one big unusual item that I will spend a second talking about and then talk about the ongoing business. We had to take a $22 million tax adjustment related to writing down the deferred tax asset that we had primarily on the limitations imposed by triggering the change of control provision within Section 382. All of that driven with the partial redemption of the convertible notes in August.

Of the $22 million, we've got $19.3 million, which is a balance sheet entry, would be a noncash adjustment to the balance sheet. We had to do a threeyear lookback and go back and kind of compare the returns now back to 05. We've got a little bit of a cash adjustment that we're going to have to make that makes the balance of that $22 million. But we think we have the balance sheet now cleaned up based on a fairly technical interpretation of the tax code and related to the change of control under 382.

Obviously, we had a fairly dramatic change to the balance sheet on the convert redemption and so we've got that done and behind us and we shouldn't have to talk about that going forward.

When you look at the run rate business on a pretax basis, we ended up with a loss of $14.7 million. That's an improvement yearoveryear of $33.7 million. On the revenue side, we have got 214 aircraft working for Continental airlines. Obviously, the utilization on those aircraft is historically low right now. It was just based on kind of the demand levels for travel out there both in the fourth quarter, and it's going to be the same here in the first quarter as well.

Our utilization is down just like Continental's, just like every carrier has got their aircraft flying the least amount of hours possible to try and match capacity with where demand is at this point in time. You know, as a comparison last year in 2007, we were flying 205 aircraft 9 hours and 20 minutes.

When you look yearoveryear, just on the Continental Express side, we're down 10.6% in block hours and down really 8.5% when you look at the third quarter where we were versus the fourth quarter. Revenue for Continental Express on $142 million. The yearoveryear comparison is not particularly meaningful, but if you really look at kind of where the $142 million is versus the third quarter, down from the third quarter capacity purchase revenues of $35 million. There's some Delta in there; but if you just look at the Continental Express side, we're down about $20 million in revenue from where we were in the third quarter versus the fourth quarter.

On the charter side, revenue was $8.4 million, an improvement yearoveryear of 42%. Again, that business just continues to grow and this is obviously a very difficult economy to try to make that business work. But we've been happy with the progress we made in the fourth quarter. When I look at the first quarter, I can see the same kind of similar growth patterns there. It's kind of tough sledding right now in that arena, but we have been able to kind of make some fairly compelling value propositions in that area; and we continue to see that grow nicely.

On the expense side, fairly dramatic shift. Obviously, we had to pull a lot of expenses out here in the fourth quarter, given the changes with what's going on. And, most importantly, with system block hours down 32.5% yearoveryear, if you kind of look at the expenses, back out fuel and aircraft rent, in both 08 and 07, to kind of give you, backing out the contractual differences of one P&L versus the other, and just look at the expenses that we can manage, the expense base is down 45% from where we were in the fourth quarter of 07.

On the cash side, we ended up with $119.4 million. That's down from the third quarter $25.9 million. We had talked about on the last call that we had some cash payments to make in the fourth quarter related to the restructuring charges that we took in the third quarter based on shutting down branded and pulling out of our Delta operations.

We thought we'd be in the $8 million to $10 million range there on cash out. But it was actually $8 million in the quarter. We probably got about $4.7 million left in cash payments under what we've already written off. Probably most of that will be done in 09. We spent $10.1 million on securities repurchased.

We retired $7.6 million of debt and now we have the convertible note balance down to $60.8 million at the end of the quarter. We also bought 3.1 million shares in the quarter and we have a yearend share count outstanding of 17.7 million shares.

We had $1.6 million in CapEx. We had some more debt retirement on our EDC payments of $1.1 million. We also wrote down our auction rate securities to kind of reflect where the market is right now. We took a $2 million charge to cash on that. You're kind of left with about a $3 million cash impact from third quarter for our operations of the fourth quarter. $2 million of that is some timing on the working capital. About $1 million is coming off the P&L.

With utilization where it is, still growing the charter business, obviously we still have some work to do off the P&L, but we're probably going to be in this breakeven point given again where the economy is right now, where the demand for travel is, and just basically when you look at the overall industry, I think everybody is in fairly similar circumstances.

The first quarter is going to be very similar to the fourth quarter, just utilization on the aircraft where we are in block hours, and right now we don't have enough visibility on the second quarter.

I think everybody is sort of trying to wait and see, does demand start to return in that second quarter. If it does, we obviously expect an improvement in our overall utilization of the aircraft and should see a corresponding improvement off the P&L that you are seeing here right now. That's an overview. We can take some questions.

QuestionandAnswer Session

Operator

(Operator Instructions) Our first question comes from Bob McAdoo from Avondale Partners.

Bob McAdoo – Avondale Partners

Thanks. Question, obviously the real challenge here is to try to figure out how long it takes you to get to breakeven. As we look at the expenses for the fourth quarter, I am trying to figure out are there any lines among the operating expenses where we have special items which would not be recurring, for example, the maintenance with the conversion of the airplanes, are there extra expenses there? Is your depreciation, this 8144 number, is that likely to be kind of a similar, ongoing number? Or are any other places in there where we've got some things where we can see that it's fairly straightforward that your ongoing operating expenses are going to come down some.

Jim Ream

You just got the million that you can look at there with the impairment of the fixed assets and the special charges. Obviously, that's not an ongoing, so that comes off. Really, probably the only expense item that we have right now is obviously our average seniority of our folks is increasing fairly dramatically from where it would have been just say in the spring of this year.

We're mostly, that's our biggest expense item are the folks that we have flying our aircraft, working on aircraft, running the airport. Just typically in our sector, we're going to have folks who have career pursuits that sort of drive them off to sort of work at other carriers as those opportunities present themselves.

Kind of the slowdown, both in the utilization of our aircraft and with every airplane operator out there not really adding anybody, you are clearly seeing a lot of pressure there that we would expect to unwind on us once the industry starts returning to normal. That's a big thing. The only other item we've got, we've got two months of our pay cuts in here, so there's probably another million and a half to $2 million improvement that would come out of expenses if you looked at the full three months of those being implemented for a full quarter.

The real leverage point here on the expense side is really going to be on the utilization side. All the fixed stuff is fixed. As folks start getting used more, we're going to have folks that have career pursuits that sort of drag them out the door and we can start bringing people in and drive down that average seniority.

Bob McAdoo – Avondale Partners

As we look forward, then, this roughly $8 million a quarter depreciation, there wasn't anything special there, so that's a number that we can probably go straight forward with. And something in the range of $35 million to $40 million in maintenance going forward. That's kind of what the run rate is likely to be going forward there, too? There weren't any special things there?

Jim Ream

That's correct.

Bob McAdoo – Avondale Partners

From a tax rate point of view, obviously you had this little issue with the special provision of the tax code. What kind of a tax rate should we be thinking about going forward?

Jim Ream

We really don't have a lot of permanent differences in here. I think you're going to be pretty close to the statutory rate. That's the way I would model it.

Bob McAdoo – Avondale Partners

Then one other thing. The new contract with Continental, you are down to kind of 8 hours of utilization. If they decide to squeeze it down more, is there any provision, like some guys have provisions to say if you get below a certain level, we can readjust because you got us at a level that's uneconomic, where we can adjust the rates. Or is this kind of they have flexibility to take you down even more if they really felt they had to?

Jim Ream

We have kind of a baseline level of block hours that sort of supports where we are right now. Obviously, the spirit of the agreement is as they have to adjust their own fleet, they should have the flexibility to adjust ours as well. How their domestic system operates is sort of what we would expect on our side. It just doesn't make sense to fly our aircraft into empty bank structures. As they set the whole bank structure, whatever they need to do to be successful on their side, they have the flexibility to do with our aircraft on our side.

Bob McAdoo – Avondale Partners

There's not an automatic oh, gee, you are down below 8, so therefore you have got to adjust our rates or anything?

Jim Ream

That's correct.

Operator

Our next question comes from the line of S. G. Telaforgotta from Quattro Global.

S. G. Telaforgotta – Quattro Global

Just a couple of really quick questions. The restricted cash, can you just review what the components are of the restricted cash balance?

Jim Ream

The lion's share of it is provisioning for workers' comp. That's going to be 80% of it. We've got a line of credit out there that backs up EDC. That's a fairly small amount. Some very slight amounts remaining on some bank card holdbacks that are going to be cleaned up here very quickly. But workers' comp is our big one. Obviously that's based on last year's experience in the first half of the year. We would expect to start getting some relief on that as you look at where we are in staffing levels right now and the experience that we're observing here through the winter. I think that's going to get a little bit better, but that's the big one.

S. G. Telaforgotta – Quattro Global

What is the remaining cash that's authorized, that you have remaining that's authorized to buy back securities?

Jim Ream

$10.1 million.

S. G. Telaforgotta – Quattro Global

And you said that the share count at the end of the year was 17.7 million. Could you say if it's, what the current share count is? Have there been buybacks since the end of the year or can you not disclose that?

Jim Ream

We have been out of the window once we cross the yearend, and as we're getting close to closing the books. We have not been in the market after yearend.

S. G. Telaforgotta – Quattro Global

And finally, can you just talk generally about your outlook for growing the charter business in the coming year?

Jim Ream

Well, my outlook is mixed. I can see what I can see in the first quarter. I am pretty happen because it's going to look similar to what we experienced in the fourth quarter. It's growing nicely. Clearly, the people that we're chatting with and where we think that we have an opportunity to add some value, those conversations are just taking longer because they're under budget pressures so they're thinking about changing their business and what they're doing.

The sales cycle is just longer as you're working through kind of these specialty solutions that you need to put together to make this a real business. That's just generally what you would experience in every business in the economy. We're just in the economy right now with this particular product offering, and so it's moving just as slowly as everything else is in the economy.

Operator

Our next question comes from the line of Kimberly Sales from Stelliam Investment Management.

Ross Margolies – Stelliam Investment Management

This is Ross Margolies. Two questions. First the operating cash flow break even that you had for the last two months of last year, will that be able to continue or do better than that through 2009?

Jim Ream

The forecast would be similar for what we experienced because we're really kind of forecasting right now that nothing improves from a utilization standpoint. There's a little bit of improvement just based on kind of that normal increase in flying that you would see in the summertime, but nothing that would look like where we were flying in the spring of 08. Just assuming that we're in the same world we're in right now, that's our expectations based on what we saw in November and December.

Ross Margolies – Stelliam Investment Management

So basically you have gotten, November and December, you got yourself just slightly positive on operating cash flow and if things are as bad as they were in November and December, your run rate plus or minus should be similar to that?

Jim Ream

Correct. When you say slightly cash flow positive, you couldn't say it slightly enough.

Ross Margolies – Stelliam Investment Management

Positive is better than negative.

Jim Ream

Positive is better than negative, yes, sir.

Ross Margolies – Stelliam Investment Management

Second, will you be able to use any carry back from losses generated subsequent to the August 1, 2008, restructuring to generate any tax refunds going forward? Or do you expect to get any tax refunds going forward if you are running at the same operating loss rate on an operating basis?

Jim Ream

We're kind of going through that analysis right now. There is going to be some carry back we can do. Obviously less based on sort of having to write down this deferred asset. But there's a little bit. Going forward, none.

Ross Margolies – Stelliam Investment Management

So any losses generated post August 2008 can only be used to offset, I guess the question is, is August 2008 a cutoff date for when you can generate losses or not or are you still going through that now?

Jim Ream

We're still working through that right now. We've got to go back. We're going to have to file amended returns for 05, 06, and 07. We're doing that right now as fast as we can. Obviously, there's that threeyear lookback. As you go back, there are the complexities around a lot of folks coming and going out of ownership positions in this company as far back as the spring of 05. And those 13 filings, they can happen and then they get amended, and wherever you thought you were you need to go back and say what did really happen and that's kind of what we're cleaning up right now.

Operator

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

Bob McAdoo – Avondale Partners

One more thing. As we think about charters in the first quarter, is your fleet such that it's attractive for NCAA basketball charters? Do you have any shot at getting any kind of a bump there?

Jim Ream

Yes. We will generate more revenues in the first quarter based on the fact that's a busy season for us. As you mentioned, the NCAA schedule and how those teams move fits perfectly with this aircraft.

Operator

We have no further questions at this time.

Jim Ream

Thank you. Thanks everybody for joining us today. I look forward to chatting with you in 90 days.

Operator

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

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