ExpressJet Holdings, Inc. Q3 2009 Earnings Call Transcript

ExpressJet Holdings, Inc. (XJT)

Q3 2009 Earnings Call

November 4, 2009 10:00 am ET

Executives

Kristy Nicholas – Investor Relations

James B. Ream – President and Chief Executive Officer

Phung Ngo-Burns – Chief Financial Officer

Analysts

Bob McAdoo - Avondale Partners LLC

Presentation

Operator

Good morning ladies and gentlemen and welcome to the ExpressJet third quarter 2009 earnings call. (Operator Instructions)

I will now turn the call over to Miss Kristy Nicholas. Miss Nicholas you may begin.

Kristy Nicholas

Thank you Hilda. 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 Ngo-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.

Jim will cover the operating and financial results for the quarter. Then he will take questions. Now I’d like to introduce Jim Ream.

James B. Ream

Thank you Kristy. Good morning everybody. Well for the quarter we closed at a loss of $9 million which was worse versus last year on a reported basis. You know, however, last year’s number had a significant amount of gains and settlements you know offset by a reserve that we set up as well for a couple of the business lines that we were closing down. So if you exclude the special items from last year’s numbers, you know, on a net basis we actually had an improvement versus last year of about $8 million and it’s actually better than the second quarter by about $3.9 million as well.

This should be the last quarter where it’s difficult to make year-over-year comparisons. But you know let me give you just a couple of facts that are impacting kind of where our results are in this quarter. Start with Continental Express flying. You know revenues are down year-over-year about 4.9%, just reflect kind of the pull down in flying that all networks are experiencing just given where demand is right now with the state of the economy. The utilization on our Continental Express fleet is at 8.6 hours, which is about 5.5% lower than we were last year. And last year was already starting to get pulled down, given where people could see the economy going and just the fact that the entire network seemed to be pulled down given where the demand was going.

So very much the same story that we had in the last couple of quarters. You look forward over the fourth quarter, first quarter of next year, you know right now expectation is it’s not going to be a lot better than sort of the current environment that we’re in. So we’re anticipating that we’re going to be in this [recessionarily] low utilization level for you know for the next six months. You know and just waiting for the industry to hopefully start seeing some rebound in demand and start seeing some flying being added back into the networks.

On the corporate aviation side you know a significant improvement last year. I mean netting revenues is up about 1.5 times over last year’s levels. You know we have the summer flying that we did for United for two of the months here in the third quarter are in those numbers. If you back out the UAL revenues on a net basis you know including the impact of fuel moving around, year-over-year, because it’s sort of a pass through in this line of business, you know revenues were up almost 10%. So you know not up as much as we saw in the second quarter on kind of the run rate, you know basic corporate aviation activity, but very much reflective of what’s going on in the economy in this sector. As been reported recently, there has been some improvement in corporate aviation and business aviation generally, and we are seeing that. We are a little bit busier now in October and going into November than we had been for the last couple of months. So we are seeing some improvements in that area and kind of getting back to that year-over-year improvement we saw in the first part of the year.

On the expense side, again kind of difficult to compare because we’ve got sort of a different business model on a year-over-year basis, but very much like I talked about the last quarter if you look at generally where block hours are down 13% year-over-year. So if you look at some key expense lines here that should be reflective of that volume kind of weighted salaries, maintenance and other expenses are the ones that are most clearly linked back to kind of where we are in a most consistent run rate year-over-year. You should look and sort of see an improvement that’s better than 13%. So we’re doing pretty good on wages, down 17% and other expenses down about 27%, so we’ve matched up well with the volume pull down.

Where we’re lagging is on maintenance materials and repairs. We are you know going through a little bit heavier check cycle process now as the fleet is getting older and also just given the timing of kind of the more extensive checks kind of peaked on us in the third quarter. So you see that number is higher than it was in the second quarter and that’s just reflective of the checks being a little bit deeper and there were more of them than in the second quarter. And some of that is just timing. And so if you look over the next couple of quarters, it kind of comes back down to somewhat more of a run rate on kind of a run rate number that we saw in the first part of the year.

We ended the quarter with $105 million in cash versus $116 million at the end of the second quarter. We had debt repayments of $6.4 million in the quarter. We retired about $7.5 million of face value of debt. We had about $900,000 of CapEx net of some stuff that we sold and we had a couple of charges hit the reserve. We don’t have a lot left under the reserve but we had a modest amount of about $400,000 went against the reserve in the quarter.

On the working capital side we had a cash usage in working capital of $3.7 million, kind of the reversal of things working in the other direction in the second quarter just sort of the timing of when things come and go from one quarter to the next. The P&L was breakeven for the quarter, so an improvement from where we were in the second quarter reflective of having some more hours. It obviously would have been a little bit better than breakeven had we had more of a run rate maintenance expense number and not having as many checks hit this third quarter as we did.

You know second we had a little bit of pricing pressure on a couple of sectors where working on the corporate aviation side. You know those will not be with us kind of going forward. Sort of pushy on a couple of sectors I thought might work and by the time the pricing worked out it just ended up not being as productive as I hoped it was going to be. You know that was sort of my fault just for pushing on those and you know we do not have the kind of continue to go on with that. So the quarter probably would have been a little bit better you know having not had those two things kind of impacting us.

So we’re, you know we’re working pretty hard. Obviously we’re still very much tied to what’s going on with the economy, looking for opportunities with the aircraft that we have. And you know we’re working pretty hard on a couple of projects. Some are closer than others and obviously the ones that are the most close we’re you know it’s going to be of a confidential nature so we’re not going to talk about it until things are done. And you know we’ll just have to kind of let the timing of those work their way out but you know we feel that you know we’re doing the right things. We’re looking for opportunities where we think there’s a good match for the things that we can do well and where we can add some value to some customers.

So that’s it for a current state of affairs. Hilda, why don’t you open it up to some questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Bob McAdoo - Avondale Partners LLC.

Bob McAdoo - Avondale Partners LLC

You talk about what Continental’s likely to do or what you think is going to be your scheduled revenue going forward. If we go look at what Continental has published in their schedule or what they have on their website for this quarter and first quarter of next year, and we kind of look at that, I assume that schedule is pretty much fixed by now. Where is that going to turn out to be relative to the 8.6 hours a day that you got in the most recent quarter? Is it going to be up a little, down a little? What do you think is the likely utilization over the next six months?

James B. Ream

It’s very much about the same, Bob. I mean there’s obviously going to be a couple of months in there where it’ll be a little bit higher, but on balance when you factor in a couple of weaker months. It’s not going to change a lot from that 8.5 hour range for the next six months when you kind of look at those two quarters.

Bob McAdoo - Avondale Partners LLC

You made a comment about charters and saying something that you know was kind of like similar to what we had earlier in the year. Do advance bookings for charter then look better than fourth quarter last year? I mean at least kind of where they are now? How should we be thinking about that?

James B. Ream

Yes, it is a little bit better than where we were last year. You know the first part of the year, when you kind of look at really the second quarter back in that United we were sort of in that 30% growth range. In the third quarter we had kind of dropped into kind of a 10% growth and we think when we look at the fourth quarter and what we’ve got on the docket for the first part of next year, you’re kind of moving back up into that 30% range. So you know it’s still fairly steady growth and you know fairly happy with how that’s progressing.

Bob McAdoo - Avondale Partners LLC

When I look at the items below the operating income line, there’s a $966,000 charge on extinguishment of debt and $108,000 in impairment. I assume the impairment, that’s the further write down on some of the auction rate securities?

James B. Ream

Yes that’s correct.

Bob McAdoo - Avondale Partners LLC

And the $966,000 charge on extinguishment of debt?

James B. Ream

That’s the difference between you know the amount that we paid to pull the debt down versus the mark-to-market that we had to do on the convert when we did it back you know when we renegotiated that convertible debt. So there was still about a $15 million, $20 million difference between the face value of the debt and the market value of the debt based on where the interest rate turned out to be. So by the time you go in and buy it, even if when you’re buying it at a discount there’s still going to be a gap between where the mark-to-market worked out to be based on the interest cost versus where the prevailing interest was when we booked the debt.

Bob McAdoo - Avondale Partners LLC

So does that mean that it’s on the books now at more than par?

James B. Ream

No. It means it’s on there at less than par. You know basically the prevailing interest cost was somewhere north of 25% when we were going through this process. Obviously the coupon’s at 11.25 and that gives you an order of magnitude of the difference between.

Bob McAdoo - Avondale Partners LLC

And then there’s the other piece which is, so there’s the amortization of debt discount to 3.9 per quarter? Is that the bringing of that back up to par by next summer?

James B. Ream

That’s correct.

Bob McAdoo - Avondale Partners LLC

Pinnacle is talking about bringing more Q400’s on in the latter half of next year. If we go back and look at history, when they brought the Q400’s into Newark, was it last year? Did Continental reduce your flying kind of one for one every time they brought airplanes on? Or did Continental find other stuff? I’m trying to think about how do we think about the impact of Pinnacle getting more Q400’s and how that might impact you guys.

James B. Ream

Well that’s a contractual arrangement that Continental has with Colgan. And so as Pinnacle takes delivery of those aircraft they will be deployed in the Continental system. And you know Continental is going to look for the best opportunity to use those aircraft. They’re a little bit bigger. Their mission capability kind of is what it is. You know there could be some negative impact to our aircraft. Could be some negative impact to some of their smaller, narrow bodies flying shorter stage lengths as well. So we just don’t know until they ultimately re-cut the network.

And you know obviously Continental, like every network carrier, they’re going to be long alt sizes of aircraft. So you know until demand returns, you know everything is going to be a little bit of a zero [some] game right now.

Bob McAdoo - Avondale Partners LLC

When they put all those into Newark, I know some of the stuff was in markets where you operated. Some of the stuff was actually in markets where they took some 737 500’s out and various other things. How much of that really hit you guys? How painful was that last year when they came in with those?

James B. Ream

You know not dramatically so. I mean it would have been very much marginal from the overall, how they ultimately re-crafted the market coverage and what aircraft they use to cover those markets. It would have impacted us, but it was not you know I would say it was not material.

Bob McAdoo - Avondale Partners LLC

Right towards the end of your comments I was making some notes on one thing and I thought I heard you say from a P&L point of view you were breakeven in the quarter. What was that part of the business? Did I hear something wrong?

James B. Ream

Consolidated. You know from a cash standpoint and you look at the cash being generated.

Operator

Thank you. We have no further questions at this time. Do you have any closing remarks?

James B. Ream

Well thanks Hilda. Thanks everybody for joining us and you know we look forward to reporting our fourth quarter results. Good morning everybody.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. We thank you for participating. You may now disconnect.

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