Air Transport Services Group Inc. (ATSG)

Q3 2012 Earnings Call

Executives

Joe Hete – President and CEO

Quint Turner – CFO

Rich Corrado – Chief Commercial Officer

Analysts

Kevin Sterling – BB&T Capital Markets

Jack Atkins – Stephens

Helane Becker – Dahman Rose

Steve O’Hara – Sidoti & Company

Adam Ritzer – Pressprich

Michael Chapman – Private Capital Management

November 9, 2012 10:00 AM ET

Presentation

Operator

Welcome to the Air Transport Services Group Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Please note that this call is being recorded.

I will now turn the call over to Joe Hete, President and Chief Executive Officer of Air Transport Services Group. Mr. Hete, you may begin.

Joe Hete

Thank you, operator. Good morning and welcome to our third quarter 2012 conference call. I’m Joe Hete, President and Chief Executive Officer of ATSG. With me today are Quint Turner, our Chief Financial Officer; Joe Payne, our Senior Vice President and Corporate General Counsel; and Rich Corrado, our Chief Commercial Officer.

We released our results and filed our 10-Q yesterday afternoon. If you haven’t had a chance to review them, you can find them on our website atsginc.com.

I want to begin by expressing our concern for the many people in businesses in the Northeast, dealing with the devastation caused by the Superstorm that hit them last week. I also want to express my appreciation to our employees, who have again proved their flexibility and professionalism as they dealt with disruptions to our U.S operations caused by the storm and its aftermath.

Through our partner in DHL and on our own as well we’re supporting relief efforts by carrying important supplies to the Northeast that will hopefully bring comfort and faster restoration of normal conditions to the millions affected by this disaster.

Turning to our financial results for the third quarter, I would characterize them as demonstrating the resilience of the business model when measured against the unprecedented uncertainty in the markets we serve. They were consistent with the guidance we gave you in August when we said our third quarter would look very much like the second.

But behind the scenes the last three months have been extremely challenging and as we described in our press release that led us to once again revise our outlook for the remainder of the year. Beyond this year and especially if the market improves in 2013 we think we have very compelling shareholder return opportunities resulting from a relatively unencumbered cash flow.

I’ll share more about the events of the last three months, the current environment and how we see this skies ahead in a few minutes. Rich Corrado is going to share his perspective on our market opportunities as well. But first Quint will review our numbers and discuss how our strong financial position and intrinsic cash generating power puts us in a very favorable long-term position relative to many others in the space. Quint?

Quint Turner

Thanks Joe and good morning everybody. As I always do I need to start by advising everyone that during the course of this call we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here.

These forward-looking statements are based on information, plans and estimates as of the date of this call. And Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in the underlying assumptions, factors, new information or other changes.

These include but are not limited to changes in the market demand for assets and services, timely completion of additional Boeing 767 and 757 aircraft modification scheduled during 2012, our continuing ability to place completed aircraft into commercial service, the availability and cost to acquire used passenger aircraft for freighter conversion to redeploy or sell surplus aircraft. Our operating airlines’ ability to maintain on-time service and control costs and the timely completion of the merger of two of our airline operations that were impacted by Schenker’s elimination of its U.S. air cargo network in 2011. There are also other factors contained from time-to-time in our filings with the SEC, including our third quarter Form 10-Q.

We will also refer to non-GAAP financial measures from continuing operations including adjusted EBITDA as well as adjusted pre-tax earnings, which management believes are useful to investors in assessing ATSG’s financial position and results. These non-GAAP measures are not meant to substitute for the GAAP financials. We advise you to refer to the reconciliation to GAAP measures, which was included in our third quarter news release, and can also be found on our website.

As Joe said, despite the uncertainty in the transportation sector right now our third quarter results were in line with the expectations we set during our August conference call. It was the third quarter that looked a lot like the second. I’ll quickly cover the income statement highlights for the quarter and call your attention to a few balance sheet and cash flow items as emphasis for Joe’s comment about our very strong financial position and cash generation potential going forward.

On a consolidated basis revenues for the quarter were $153.8 million flat with second quarter’s $153.6 million, while down from last year’s $195.5 million. The $41.7 million decline in year-over-year revenues is all Schenker related, recognizing that the line down of the dedicated air network we provided for Schenker began in September 2011, but still contributed substantial revenues for us through the fourth quarter.

Net earnings from continuing operations for the quarter were $11.6 million, below our $13.9 million in adjusted third quarter earnings in 2011. Last year we recorded a GAAP loss of $4.8 million in the third quarter including $27.1 million in pre-tax non-cash impairment charges related to the reduction in the Schenker business and $1.9 million in unrealized losses on derivative instruments.

For the first nine months this year revenues were $452.9 million compared to $563.7 million in 2011. Again most of the decline can be attributed to the loss of the Schenker business. Net earnings from continuing operations were $29.4 million up from $10.3 million a year ago, which includes the impairment and credit facility charges I’ve just mentioned.

We completed a five year credit agreement under more favorable terms in May of 2011 which included one-time cost to close out the former credit facility and non-cash derivative items totaling $6.8 million pre-tax. This year that facility was extended for 14 months to July 2017 under similar terms but with even greater borrowing flexibility than before.

Once again as you consider our GAAP earnings you need to keep in mind that our tax NOL carryforward remains large enough that we do not expect to be a significant cash payer of federal income taxes at least through 2014. Our adjusted EBITDA, which excludes the non-cash charges I’ve just described and the continuing non-cash effect of unrealized derivative gains and losses was $43.4 million in the third quarter down from $48.3 million in the third quarter of 2011. But again adjusted EBITDA was roughly flat on a consecutive quarter basis.

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