Mesa Air Group, Inc. (MESA) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to the Mesa Airlines Quarter Two Investor Conference Call. All participants are on a listen-only mode until the question-and-answer session. This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to, CEO and Chairman, Jonathan Ornstein. Thank you, sir. You may begin.
Jonathan Ornstein: Thank you, operator, good afternoon and thank you for standing-by everyone on the call. I'd like to welcome you to the second quarter fiscal year 2021 earnings call. It is now my pleasure to turn the conference over to me.
Brad Rich: All right. Thank you, Jonathan and good afternoon to everyone. Thank you for joining us today. I'd like to begin with highlighting some of our main priorities. First, the health and safety of our employees and passengers remain at the top of our priority list. As you would expect, we're in constant contact with our partners and the CDC on the latest guidance and protocols. We're also committed to improving our operational performance as a high priority. Our collective work with our partners continues to strengthen these relationships and we're committed to continuous improvement of our performance. Now, while all of the new things going on and the new ventures at the company are exciting, I would like to reemphasize that the key to maintaining these long-term relationships is delivering consistently strong operational performance and producing industry-leading economics.
Torque Zubeck: Great, thanks, Brad. Appreciate that. Let me do a quick recap on earnings. For the second quarter of fiscal year 2021, we reported net income of $5.7 million or $0.14 per share. This compares favorably to net income of $1.9 million for the same quarter last year, or $0.05 per diluted share. As noted in our press release, the primary reason for the increase in earnings from Q2, 2020, to Q2, 2021 is due to the combination of a $56 million pretax benefit received through PSP2 under the Cares Act, largely offset by temporarily reduced rates offered to our partners related to the PSP program, and the deferral of $4.9 million of revenue, all of which was built and paid by American and United during the quarter and will be recognized over the remaining terms of the contracts. We reported $1.9 million of income tax expense for the quarter. However, we do not pay any cash taxes, as we have over $500 million of valuable NOL carry forward. So let me review where we are in cash and liquidity. We ended Q2 at $148 million compared to $181 million in Q1. As we have pointed out last quarter, $181 million for Q1 included $48 million of United CPA prepayments for future months, which was reduced to zero in Q2. During the quarter, we also made $21 million in scheduled principal payments and so the PSP program we received $48.7 million for PSP2 and $7.3 million top offer PSP2 in Q3. For PSP3 we have allocated $52.2 million, half of which was received in April with the balance expected in Q3. So there was no CapEx in the quarter, although, we did make a $7 million deposit to GE on five engines to be delivered in calendar year 2021. CapEx for the remainder of fiscal year 2021 is one GE engine, with remaining nine in fiscal year 2022 and 2023.
Jonathan Ornstein: Thank you very much Torque. The last year is obviously been very difficult for the entire industry, for the entire countries, entire world. However, we are pleased that Mesa has been able to remain profitable, perform well for our partners, and importantly, protect our people fully employed. This is due to our operational performance, our industry leading economics and the tremendous reports we've received from our people in the field and here in the office. These factors divisions well for growth, and we will continue to look at new opportunities as the industry evolves. I'd like to now open this up for other questions that we might be able to help you with.
Operator: Yes, sir. It is now time for the question-and-answer session of today's call. The first question comes from Savi Syth from Raymond James. Thank you. Your line is open.
Savi Syth: Hi. Thank you. Good afternoon, everyone. Just a quick question on the block hours, it looks like maybe block hours down slightly versus the guidance provided last quarter, even though you're kind of extending the aircraft with the Americans. Just curious if you can provide any color around that?
Jonathan Ornstein: Brad or Mike?
Mike Lotz: This is my guess. So I think -- is it fairly close to where we were? I think we're probably just being a little bit more conservative as you know, these schedules -- they're changing week-to-week. So I think we're just being a little bit more conservative with our estimate.
Savi Syth: That make sense.
Brad Rich: Yeah. Hey Mike, Brad here. Second that completely. It's just -- we're just trying to be a little cautious in the projections.
Savi Syth: Okay. And just around the CRJ purchase off lease, I was curious, the thinking around that, if you can provide any color on how attractive that deal was, and any update on the European JV. The conversations you're having there and the timing of when we might hear more on that front?
Mike Lotz: Yeah, so I'll take this one Jon. So on the lease purchase, look, we have made it clear, we're trying to buyout all of our leases and take them on as owned aircraft. We had 18 leases, we're down now to 17. This particular aircraft was just one of the unusual ones in our fleet, as we -- it’s the only aircraft we were paying, like supplemental maintenance, rent for. So net-net, we ended up having to return, forego getting the maintenance reserves on it. So we picked up from a cash standpoint, we picked up the aircraft for very little cash and avoided return conditions. But the way the accounting works based on fair market value, we ended up being a non-cat write off. As far as the European JV, we're still moving along with it. We had the LOI, we intend to probably give a better update next quarter. I don't know if Jonathan you want to add anything to that?
Jonathan Ornstein: Well, yeah, I mean, I think that as some of you know, Mike and I have some experience over in Europe. We had known Tony for awhile, he'd actually advise us on a couple of other deals that we've looked at. He -- I think he's probably the most knowledgeable guy in Europe when it comes to regional operations. He has had tremendous experience in Europe, and with real serious players in the industry who respect him. And so the fact that they were willing to invest alongside of us was very attractive. And I think this could be a good opportunity for Mesa to put to use a few aircrafts that are tailing the water. There has been a significant restructuring in regional operations in Europe as a result of COVID. And I think this could be a really good example of being in the right place at the right time.
Savi Syth: Appreciate the comments. Thank you.
Operator: Thank you. Our next question comes from Helane Becker from Cowen. Your line is open.
Helane Becker: Thanks very much operator. Thanks for the time, guys. So on CapEx, I missed the number. I think you said, Torque, one GE engine, and then nine in fiscal 2022 and 2023, or do I think of that as calendar year. So do you have just a single point number four, I guess fiscal 2021 and fiscal 22?
Mike Lotz: Yeah, this is Mike, I’ll jump in for Torque here. For fiscal 2021, it's just one aircraft for fiscal 2021, one engine for fiscal 2021. And then it would be four in fiscal 2022.
Mike Lotz: Yes. And the remaining five.
Jonathan Ornstein: And the remaining five in 2022.
Mike Lotz: Yeah, 2033…
Jonathan Ornstein: In 2023.
Helane Becker: It's correct. Okay, that's perfect. And then, do you have an estimate for how the storm and power outages in Texas? And how they impacted your operations?
Jonathan Ornstein: You want to?
Torque Zubeck: Yeah. Yeah. Helane, we estimated it was roughly a factor of about $3 million net-net at the end of the day.
Helane Becker: Okay. Do you have to cover that or do your partners?
Mike Lotz: Well. We -- this is Mike -- we cover the crew after that right, because it means now our crews have a guarantee flying and the extent that flying is cancelled and then we still have to pay the crews. The maintenance costs we're not burning engines. We're not burning expense.
Helane Becker: All right.
Mike Lotz: So it's kind of a mix. But we still got the crew cost.
Helane Becker: Got you. And then my final question,…
Jonathan Ornstein: I think, what we're saying is that the net impact after what our partners pay us and what we pay in fact for that $3 million.
Helane Becker: Okay. Got you.
Jonathan Ornstein: …of net income.
Helane Becker: …Net. Okay, that's perfectly understandable. Thanks, Jonathan. And then my last question,…
Jonathan Ornstein: Yeah.
Helane Becker: … how long will you give your partner's lower contract rates? Is it just when you're receiving PSP, or just that continue after PSP?
Jonathan Ornstein: Well, I'll answer it, then Mike if you want to give some more technical views. But the lower contract rates clearly were around what was going on with COVID and PSP. So I don't think that anyone would expect us to continue to have lower rates in the absence of PSP. You want to add anything to that Mike?
Mike Lotz: No, I think that's fairly accurate. I mean, we got to offer the rates through PSP three, which is through September of this year. And if there's a PSP four we'll address that and probably do something along those as well. But right now, it's just through September.
Helane Becker: Got you. Okay, thanks, everybody. That's all very helpful.
Operator: Thank you. Our next question comes from Michael Linenberg from Deutsche Bank. Your line is open.
Unidentified Analyst: Hi, this is Hilary on from life. Thanks for taking my question. I guess in terms of the JV of renewal Gramsci, how would that be recorded? Would that be recorded as earnings from an affiliate given that you will be, owning, less than 50%? And if that's the case, I guess, we probably won't see an expense coming out of the operating P&L, right, or will it be?
Mike Lotz: Yeah. This is Mike. Depending upon the final structure, we're not sure what the accounting will look like. But there is -- not expected to be anything in this fiscal year that would be significant.
Unidentified Analyst: Okay. Got you. Thank you. And then, I just, I guess, a longer term question, you've been doing a great job of paying down debt, and just wanting to get your thoughts on what your longer term capital structure will look like? And I guess, over the next year or so, will we be focused more on paying down debt or maintaining liquidity? If you have a target debt to cap number and target liquidity, I guess over the next year or so?
Mike Lotz: Well, I'll say so that if anybody wants to add in, I mean, the government loan has helped us significantly in terms of liquidity. And, you know, while there is obviously, we repaid United some of the money that they had given us, in terms of an advance. The benefit of that loan will become apparent as we continue to receive payments, and we are not making principal payments. So, in my view that would, that will more than suffice for the liquidity that we will require or at least the next few years. I think that we will continue to pay down all the other debt that we have. And we'll focus on continuing to purchase aircraft off of lease, which we find, obviously, we find attractive. The likelihood of us taking on any additional debt, which, of course, we have a somewhat different view sometimes in the street and that when we take on debt, it means we're getting new orders for aircraft and that debt is effectively a pass-through to the partner that takes on that aircraft. So, if we were to take on additional debt, in all probability that would be associated with the addition of aircraft or potentially down the road, you know, some of the engines that we have to purchase. Mike, Torque, you want to add anything to that?
Mike Lotz: No, I think that's – that's my writing. You know, we, like Jonathan said, taking on debt to buy aircraft to expand our operation, but our partners is good debt for us. There is no better debt for us. And, you know, after that we're still on – we're still like Torque alluded to, I think we end the year at 650 rough million, and with – we are not having new debt. I think we're scheduled next year to pay off, the next fiscal year over 100 million and close to 100 million in 2023. So we're starting to pay down the principal payments pretty significantly.
Unidentified Analyst: Okay, great. That's very helpful. Thank you so much.
Operator: Thank you. Our next question comes from Savi Syth from Raymond James. Your line is open.
Savi Syth: Hey, thanks for the follow up. Just a couple of questions for me. One, a bit of a longer term question. What do you think Jonathan is kind of the normalized margins of this business coming out at COVID? And when do you think you'd get there?
Jonathan Ornstein: Normalize margin? That's the interesting question for sure. You know, there's always been so much that impacted our margins and earnings. That it's just as hard to say, as we, I think. I mean, you know, because for us, obviously, the timing of maintenance events always plays a big a big role in that, as well as what our partners. I think as we get through this next period, where we do have, as we mentioned, there are a fair amount of heavy checking work that we have to do. Moving forward to that, Mike or Torque, do you want to comment where we think margins will be 2022, 2023, 2024, given the existing fleet.
Torque Zubeck: I mean, look, we generally don't project our margins, but look, they should return to the levels they were at pre-COVID by fiscal 2022. This year is still a transition year. Some of that our heavy maintenance will roll out maybe into the first quarter of 2022 for us and beyond that it should be back to traditional levels.
Savi Syth: That's helpful. And if I may, just a clarification on the PSP, is it kind of roughly half and half over the next couple of quarters, or is it – how should we think about how that PSP3 shows up in from a timing perspective? Since it goes out through September?
Jonathan Ornstein: Sorry. So yes, so it goes from April through September, so six months for this last round. So if you think about, we got 52 million in change for this one, that's going to be spread over six months versus that PSP2 was over four months. So we're going to be getting net less every quarter compared to where we were in PSP2. That makes sense?
Torque Zubeck: And it'll be split about 50-50.
Jonathan Ornstein: Yes. Yes.
Savi Syth: Okay. I think that's helpful. And actually, if I may -- just some of the commentary on the maintenance. Is that kind of tied to -- are you seeing that both on the ERJ side and the CRJ side, or is that kind of tied to more on the Bombardier side with that not being an aircraft that's manufactured much and people's willingness to support that that aircraft such.
Jonathan Ornstein: You thrown that on this, the speed check issue?
Torque Zubeck: Yes. It's definitely more so on the almost exclusively on the CRJ side. Remember, the E-Jet, United owns 42 of them. So that expense really a pass through, doesn't really impact our bottom line. We own 18 of them. And then the new 20 we got aren't scheduled for a few years before they're in E-Jet. It's really CRJ-900 cost item.
Jonathan Ornstein: Yes.
Savi Syth: Yes. Are you expecting that to be issue going forward, Mike or is this more of a COVID-related recovery pains?
Jonathan Ornstein: If I can just think that I think that there's two issues. There is some amount of COVID-related, but there is also the impact of Bombardier. They acquired by MHI. And, obviously, in any transition there, it's not always as smooth as one would like. I do having -- had extensive conversations with the MHI Bombardier team that they're working very hard to correct any deficiencies that we've had over the last few months in terms of parts availability or timing. So, I think that has probably played as much role as anything else. And knowing Mitsubishi, I think that there is a high probability there's all that will be behind us as we go out six months. Mike, do you want -- or Torque or Brad, want to add anything to that.
Brad Rich: Jonathan, this is Brad. I think you've covered it pretty well. I mean the issue primarily 900, the issues of there are some COVID related, labour issues at the respective heavy check providers. Their ability to support parts is becoming an issue. But look, we're -- we've got very high levels of leadership attention on this issue. We're bringing on new providers. We're opening new lines. I mean, we've got a lot of just attention and focus on this issue. And we got to a kind of a bubble here to get through as we're bringing these additional aircraft back up that have been down during COVID. And once we get that behind us, I expect this to be in relatively good shape. So…
Jonathan Ornstein: Yeah. And if I could add something, which -- I mean, American has been very good in terms of understanding is, there was a -- as you can tell by our numbers that American have rapid screw up of the American hours, I mean, they are now at 100% and going over 100%. They came to us asking for us five additional aircraft that we had not planned on flying. That's -- we accommodated that request, obviously because a, we want to be good partners, b, we think we can make more money flying more aircraft. But that certainly impacted some of these items, because we had to keep five additional airplanes flying and again, move around our C-checks schedule. So, there's a lot of good news to this is the fact that our partners want more flying, and we've been able to provide it. And as a result, we've had to make some accommodations in terms of C-checks. So I don't want to give the impression that this was something that was unplanned, it's something that happened in large part due to the fact that we took on additional flying.
Savi Syth: Make sense. All right. Appreciate the answers. Thanks.
Operator: Thank you. I'm showing no further questions in queue at this time.
Jonathan Ornstein: Okay, operator. I'd like to just make a couple comments that I think I'm a little bit surprised that no one asked us more about what we're doing in terms of decarburization, and electric, because I want to make sure that people appreciate that this is going to be a very significant emphasis for the company going forward. We fully intend to be the leader in decarburization and ecofriendly flying. We see how important this has become around the world lead of course in Europe. It's one of the reasons why we're beginning a European certificate. We are already now invested with United with Archer, which we think is the leading developer of urban mobility vehicles, which technology changed so rapidly, even since, I began in the industry, which it didn't seem like that long ago, but I tell the story that the first aircraft that I loaded back at AirLA was a chartered DC-3 built in the 1940s. Now we're flying regional jets to Havana. The idea that electric aircraft are not going to be a big deal, I think is wrong. I think there's a huge opportunity in front of us. I am really delighted that United has chosen us to be their partner. And we had worked very closely with them on this deal. I think there are more deals down the road that we are working on today that we feel have a high probability of coming to fruition. And that -- we call it’s just the beginning, as we’ve seen this technology really emerge into what I think is going to be the wave of the future. And we are really dedicated to make that happen. In addition, one of the areas that we think provides us still to be a big opportunity is our cargo. We’re taking on this third 737 to support the operation. We think it will find a lot of business to that aircraft. We are looking at putting on additional fleet types. And I think we're -- in that discussions with our partner in that will provide some additional opportunities as we move going forward. But to do that, the area that has our biggest focus is in operation performance, which to-date, given the fact that we're operating over two aircraft with no spares. I think they've been excellent and has been beyond our expectations. When you think about the fact we're offering a new fleet type remotely with no spares. I think it really does bode well for the future for us. So those are two big areas of opportunity that I think the company is going to excel at. And I think it's something that people will begin to focus on when they realize exactly how big the opportunities are which I think they are expensive.
Brad Rich: So, with that, if no other questions, I'm happy to conclude. I want to thank everybody at the company again for a great job in spite of the difficulty out there. It's nice to see things beginning to look like they're getting better. And I would like to thank everybody for their support out on the street and an investment community -- the industry is a tough industry. We appreciate you hanging in with us. And again, if you have any additional questions, please feel free to call any of us privately and we'll be glad to answer them as best we can.
Operator: That does conclude today's conference. You may disconnect at this time and thank you for joining. Have a great rest of your day.
Jonathan Ornstein: Thank you.
