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(NASDAQ:MESA)
Q4 2018 Earnings Conference Call
Dec. 4, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome and thank you for standing by. [Operator instructions] Also, the conference is being recorded. If you have any objections, you may now disconnect at this time. Now I will turn the meeting over your host, Mr. Jonathan Ornstein.

You may begin.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you very much, operator, and thanks, everyone, for joining us on our call today. As the operator indicated, this is Jonathan Ornstein, I'm chairman and chief executive officer, Mesa Airlines. On the call with me today are Mike Lotz, president and chief financial officer; Brian Gillman, our executive vice president and general counsel; Mike Fervada, the chief operating officer; and Darren Zapfe, our vice president of finance. I would like to ask Brian to read the safe harbor statement.

Brian Gillman -- Executive Vice President and General Counsel

Thanks, Jonathan. This conference call will contain various forward-looking statements that are based on management's beliefs as well as assumptions made by and information currently available to management. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions.

Should one or more of these risks or assumptions or uncertainties materialize, or those underline assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. All materials distributed by the company prior to this call and all materials discussed during this call will be covered herein. Thank you.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Hi, everybody. This is our second-quarter reporting as a public company. We are pleased with both our financial results and the success we've achieved in pilot hiring and reduced attrition, resulting in our ability to increase block hour production. Our career path program, which allows our pilots to move to United has been very helpful.

I would like to thank United for their support. We're also pleased with the increase in pilots completing training. And the more efficient pilot training time line primarily result from the increased simulator availability. With lower attrition and increased training production, we've actually reduced our class size in November, reflecting the fact that we believe we have an adequate number of pilots in training coming forward.

With the applicant pool, we believe we're very well-positioned to pull up as opportunities present themselves. As a result, block hours were 112,475 for fourth-quarter fiscal '18, a 9.3% increase from the third quarter and almost 15% over the second quarter. I will note that this is all done with the same fleet of 144 aircraft. The 112,475 is the highest block hour production we have achieved with the current fleet.

Our forecast for quarter one is a slight increase of 2% at 114,650, which is where we have previously anticipated to be steady-state without additional growth. That being said, both United and American have requested us to further increase block hour production beyond what we have previously anticipated. Based on our approved pilot staffing capability, we are focused on meeting their targets, which we believe are achievable given sufficient lead time. Given our existing network, route structure and stage length, we are uncertain, however, as to how much additional production is possible. Beyond our existing business, we continue to explore potential expansions that include increased CPA flying and other opportunities previously discussed, including new partnerships and cargo.

We believe as a low-cost regional operator, we are well-positioned to take advantage of these opportunities. For our United CPA update, we continue to have productive discussions with United and remain confident on a CPA extension on the 20 CRJ700s. Operationally -- on operation's performance, we have controllable completion factor of 99.1% in the fourth quarter. That was down slightly from 99.4% in Q3.

And for Q1 fiscal-year '19 to date, we are at 99.4%, a slight increase. Although there's always room for improvement, we are well above our contractual requirements. That being said, our partners' expectations in regards to our operation importance have increased, and we are working hard to meet and exceed those new expectations as well. Mike Lotz will now walk through some of the financial detail.

Mike Lotz -- President and Chief Financial Officer

Thanks, Jonathan. So for the fourth quarter, we reported earnings before taxes of $26.6 million, this is a significant increase from our previous quarter where we reported adjusted earnings before taxes of $11.6 million. Additionally, we reported $7.3 million of income tax expense for net income of $19.4 million or $0.65 per share. I'd like to point out that our EPS calculation of $0.65 per share is based on the average weighted shares outstanding for the quarter of $29.7 million.

And since our IPO was down mid-quarter, the average weighted is much lower than where we had it at quarter-end, which was TR run rate, which was 34.5 million shares. If used the quarter-end shares of 34.5 million, earnings per share would be $0.56 per share. Also, from an income tax perspective, although we reflect income tax expense at $7.3 million for accounting purposes, we will not pay any cash taxes as we still have approximately $415 million in NOLs. We believe, based on our current projections that will not be a cash tax payer in 2024 or 2025.

Our EBITDA was $59.3 million and EBITDAR was $73.6 million. And again, these are significant increases from our previous quarter, where adjusted EBITDA and EBITDAR were $41.7 million and $59.7 million, respectively. For revenue, we reported contract revenue or CPA revenue of over $168.4 million, an increase of 5% versus the last quarter at $159.9 million. We also included revenue passed through revenue.

This is passed through directly to our partners and reimbursed. It has no P&L impact. And for the fourth quarter we reported $9.1 million down for $11.8 million last quarter, all related to the timing of these past remaining expenses. On the expense side, our flight operations, we continue to see higher-than-normal expense as a result of elevated number of pilots in training, the increased training time line, and pilot incentive pay. While we are certainly seeing a reduction versus prior quarter, our expenses are still higher than our normalized rates.

With the increased number of pilots coming out of training, we expect to see continued reduced cost in flight operation expense relative to our block hours. Our engine expense was only $2.5 million for the quarter, down $6 million from Q3. Again, this is a predictable expense, which vary significantly from quarter to quarter and year to year. On guidance and forecast, similar to last quarter, we are providing guidance on next quarter, Q1 '19 block hours and engine expense. As Jonathan had mentioned, our block hour forecast for Q1 is 114,650.

I'd I like to forecast for nonengine -- nonpass-through engine expense is $8.5 million. In cash and liquidity, we ended the year at $123.2 million in cash. Total debt for Q4 '18 was $915 million, down $62 million from Q3. During the quarter, we did pay down the full outstanding balance of $25.6 million of our revolving credit facility with CIT, reducing our interest expense by about $1.2 million per year. The revolving credit facility of $35 million is still available, and in fact, we are in negotiations with CIT to extend the term of that facility at more favorable rates.

We're also finalizing negotiation to refinance our higher cost debt, primarily associated with spare engines purchased -- spare engine purchases, and we expect to close that by the end of this calendar year. This is expected to result in further reductions of interest expense going forward, and I believe that's in the range of $4 million to $5 million per year. Recently, we also purchased six engines, which were in our plan for $29.2 million. We paid cash for these engines, and we expect -- we will be including those in our refinance package.

Also going forward, we expect to close on the purchase of 10 aircraft currently on lease for approximately $70 million. This will have a positive impact on earnings similar to the previous lease buyout we did of about $4.5 million per year over the next few years. It will require roughly $10 million in cash and add $60 million again in debt. And again, we expect this to be completed by Q2 fiscal '19 or about March of '19.

Other CAPEX for fiscal '19, in addition to the 10 aircraft and six engine purchases, we're looking at roughly $12 million to $14 million in maintenance-related CAPEX. I'd now like to turn it back over Jonathan, and open it up for questions and answers. 

Questions and Answers:

Jonathan Ornstein -- Chairman and Chief Executive Officer

Hi, everybody. If you have any questions, we'd be happy to take them and do the best we can to answer them.

Operator

[Operator instructions] Our first question will come from Raymond James. You have an open line.

Unidentified speaker

OK. Thank you and good morning. Just on the follow up to your comments on the United contract, I know there's a little bit of anxiety on getting that secret out from the investor's side. Can you kind of talk about like your confidence there? And maybe if United were to not extend it, at what point you would need to know just to handle the kind of logistics of returning those aircrafts?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Yes. I can certainly appreciate the consternation that may be out there regarding the fact that this has taken longer than we anticipated. I think it's fair to say that we are -- remain highly confident that these will be extended. And the only thing at this point in my mind that's delaying things is that we are looking -- we are talking to United about other potential transactions that might be tied to this.

And we're waiting to see how all those pieces could potentially fit together. So in terms of just the 2,700, I remain very confident. Again, we're hoping to potentially build on that transaction that may lead to yet other transactions at this point.

Unidentified speaker

That's helpful. Thank you. And just on the pilot recovery, Mike, that you mentioned. How -- any kind of additional thoughts on how that cost might trend down over the next year or two based on the latest dispositions -- your pilot training class?

Mike Lotz -- President and Chief Financial Officer

Yes. We -- it's come down in last two quarters. And look, with the reduced size of the class in November, and again, as we start getting most of these pilots out of the training, combined with our reduction in the amount of premium pay that we'll have to be paying to the pilots, we're expecting, like again, get back to that normal run rate, which I think is 4% or 5% below where we are today as a percentage of our CPA revenue probably over the next two to three quarters.

Unidentified speaker

Very helpful. Thank you.

Operator

Our next question will come from Helane Becker. You have an open line.

Helane Becker -- Cowen -- Analyst

Yes. Thanks. Thanks very much, operator. Hi, guys.

Thank you so much for the time. So just a couple of questions, Jonathan and Mike. The -- as you kind of think about December quarter and then March quarter, how should we think about the -- your ability to grow block hours without actually adding additional aircraft? I mean, you are able to grow them pretty significantly in the September quarter and then -- so how should we think about it for December and March?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, let me tell you, this is something obviously we think about and talk to our partners. We have mid-continent hubs, which have some level of restriction in terms of additional capacity. In other words, growth of block hours just because stage lengths. Our stage length in Dallas has declined almost a 100 miles over the last couple of years.

I know that at United, we're looking at potential restructuring the route network a little bit to pump up additional utilization. We have the cruise at this point. In fact, as I mentioned, that we actually -- normally, we're having 50 to 60 pilots in our new hire classes, we reduced that to 36 in November because we've had a lot of success getting people through training, and we don't mind being overstaffed. We don't want to be carrying 200 extra pilots.

But I think the real issue is just being able to come up with schedules that can be flown that can allow us greater utilization. Like I said, for example, what's happened in Dallas, a lot of the -- as American took Embraer 175s, they moved those into the longer haul routes and the CRJ900s went on to shorter-haul routes, so that our average block time went down about 20 to 24 minutes a flight. So that's going to hurt your utilization because you have to still -- you turn the aircraft and you still take that hour on the ground to turn it. So I think they're going to have to be creative.

I know United's talking about maybe flying the aircraft on somewhat different routings that would give us longer haul and be able to pump up utilization. Again, it's really just a function, at this point, of how much flying we can do based on the schedule. We don't think that we have any real restrictions, particularly as we get further out. I know that -- I heard and, Mike, maybe you can confirm, isn't March going to be the highest number of block hours we've ever flown under the American system?

Mike Lotz -- President and Chief Financial Officer

Yes, it will be.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Yes, so we are setting new records. And the biggest thing we need is just some lead them. I mean, if we have lead time, then we need to do something, we can do it. We just need that lead time because, as you know, it now takes -- it used to be about 60, 70 days to get pilots through training, it's now probably closer to 100.

And the failure rates among new-hire pilots can similarly be significantly above what they had been in the past.

Mike Lotz -- President and Chief Financial Officer

Yes. And Helane, this is Mike. Just on closing for December quarter and the March quarter, the December quarter is two months into it already. So again, our forecast that we put here is 114,650, so I mean, that's not going to change obviously at this point.

And even the March quarter, we've got schedules filed with our partners for almost through March already, so we should be about the same level, maybe 1,000, 1,500 hours higher.

Helane Becker -- Cowen -- Analyst

OK Does that allow for, like, weather in March?

Mike Lotz -- President and Chief Financial Officer

Yes.

Helane Becker -- Cowen -- Analyst

OK. And then the other question I have, and I probably should know this and I apologize that I don't, but as you think about American and the opportunities they about, right? I mean, Dallas they are -- talked about -- that's a big opportunity with adding all those gates and a lot of -- 15 gates and a lot of that's going to be regional flying and then they're talking about when the new airport opens at TCA, that's going to allow for larger regional jets. I mean, have you -- is that an -- are those more opportunities for you? I imagine Dallas maybe more so than TCA, but are they both opportunities?

Jonathan Ornstein -- Chairman and Chief Executive Officer

What I think to the extent that American has to fly more flying, they will continue to look at different options that they have. I think it's fair to say that American has continued to move aircraft into their wholly owned regionals, and we're cognizant of that. And I think for us in order to do that, we have to continue to operate at the highest possible level at the lowest possible cost. And I think if we can do that, then maybe those opportunities would exist.

But it's a little different situation than with United, who -- using all outside operators. We feel in that environment we are the most competitive carrier by a pretty good margin.

Helane Becker -- Cowen -- Analyst

OK Great. All right. Thanks, guys. I appreciate your time.

Mike Lotz -- President and Chief Financial Officer

Thank you, Helane.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you.

Operator

As of this time, we don't have any questions on the queue. [Operator instructions] We have a question coming from Bert Subin.

Bert Subin -- Stifel Financial Corp. -- Analyst

Hi, Mike. It's Bert Subin on for Joe DeNardi. Just wondering if you could talk through sort of the rationale behind the acquisition of these 10 aircraft, sort of maybe anything around the timing and why you decided to do this now?

Mike Lotz -- President and Chief Financial Officer

Sure. So we did -- this is similar to what we've done in the June quarter where we purchased nine aircraft last week off of lease. And given the financing markets, interest rates that are available to us, the fact that we would much prefer to own these aircraft as opposed to lease them, the fact that we avoid any lease return conditions and costs that we would have to pay the economics of owning the aircraft and the depreciation and interest that gets charged to the P&L as compared to the whole lease rate, all those economics play into a pretty easy decision to go forward and buy out these aircraft from lease. So it's -- from a timing standpoint, we expect to get it done I'm saying by March of 2019.

I think it will probably be more likely be done in the January, February time frame.

Bert Subin -- Stifel Financial Corp. -- Analyst

Great. Thanks. And just maybe one more question. Just wondering if slowing ULCC capacity growth is having any near-term impact on regional contracts to market? Or if it's really just a matter of scope, still?

Jonathan Ornstein -- Chairman and Chief Executive Officer

No, I think it's really has to do with scope. I mean, the fact of the matter is, the ULCCs and the majors, the interaction is really on the larger-capacity routes, not so much our routes. We're flying through the cities that most of these ULCCs don't go just because traffic is smaller. So I don't see a real correlation there, at least from my perspective.

The issue on the ULCCs is to what degree how they continue to expand and there has been some -- I've heard and we've been contacted by a couple of the ULCCs looking to say they might want to expand their regional flying and get into the regional business. So I mean that would change things, the dynamics certainly. But at this point, I don't see anything, any direct correlation.

Bert Subin -- Stifel Financial Corp. -- Analyst

Great. Thanks, guys.

Operator

Our next question will come from Savi Syth.

Savi Syth -- Raymond James & Associates -- Analyst

Thanks for the follow-up. Just curious, Jonathan, if you have any kind of updated thoughts on the cargo opportunity and again, given all that -- up in the air on the kind of the regular CPA side if you still have the same level of appetite or any additional color on that?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Sure. We continue to have conversations both with small aircraft operators and larger aircraft. The smaller aircraft operators, we feel like we could move forward on a couple of transactions. Obviously, we -- at this point, just with -- we have so much going on on the financing side and with our partners.

We've basically put those on hold temporarily. When I say temporarily, we're talking maybe 60 to 90 days, and it's also a very busy time of year for them as well, so everybody felt that we should just maybe take a step back for a minute. On the larger aircraft, the lead time on that is 18 to 24 months. And so on that process, we've already begun to enter that process and start to put work together.

So we still have a very significant interest on the larger jet aircraft opportunity and in fact have started that process in terms of putting together the required RFP. I wanted to mention -- to go back to about the additional utilization, and just to point out that you just -- you have a situation where stage length really plays a major role in terms of utilization and make the stage length, for example, on the American side is 532 miles. That compares to the other carriers that are -- some -- both -- two of them over 600, one's actually over 650. And frankly, to pick up 8% or 9% greater utilization is pretty easy to do when you have that additional long-haul flying.

So we're going to be talking at a number of different ways that we can improve utilization, and sometimes a somewhat better mix of flying will help us do that. You can basically oftentimes fly more utilization, but if you have fewer departures and longer hauls, you can actually do it with less pilots. So those are all things that we're going to be exploring because obviously we'd like to put as many hours we can possibly can on the aircraft and be as good partners as possible and just a question of how they get put into the mix. And I think that again, we've been working cooperatively with our partners to do that.

Certainly, there's things that we need to do, and we're going to do whatever -- what it takes and make sure that we're providing as much support at the best possible price, at the best possible performance levels. So there are ways that we can add those block hours. It's just going to take work with our partners and certainly work internally here to continue to have the adequate number of staffing and pilots that we need to make that happen.

Savi Syth -- Raymond James & Associates -- Analyst

[Inaudible] Thanks.

Operator

Our next question will come from Eric Sutherland. You have an open line.

Eric Sutherland -- Unidentified Affiliation -- Analyst

Hi, guys. Just wanted to get some clarification on some of the numbers. I think Mike was the one kind of laying them out. In terms of new savings, the debt pay down, I believe you said $1.2 million and then you had spare engine refi, $4 million to $5 million and then the lease fly out of $4.5 million.

I just want to confirm, so we're basically talking about over $10 million of savings and then you have in addition -- you have the normalized pilot kind of helping you as well with utilization. But just want to confirm those three numbers, is that right?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Yes, those are right.

Eric Sutherland -- Unidentified Affiliation -- Analyst

And these are kind of new numbers that you're kind of throwing out at us?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, they're new in terms of -- we've spoken about all of these certainly in the S1 and even in our previous quarter. So they certainly are not new in terms of things we haven't discussed before. But again, the current numbers don't -- the actuals to date don't reflect those type of savings.

Eric Sutherland -- Unidentified Affiliation -- Analyst

Great. Thanks. That's perfect.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Sure.

Operator

As of this time, speakers, we don't have any questions on the queue. [Operator instructions] Speakers, as of this time, we don't have any questions on the queue. You may proceed.

Jonathan Ornstein -- Chairman and Chief Executive Officer

OK. Thank you very much, operator, and thank you very much to everyone for joining us. I'd like to wrap up and say I'm very pleased with the results for the quarter. It was nice to see us meet or exceed our targets in terms of financial performance.

I will tell you there continue to always be challenges in this business. It is a tough business. The requirements from our partners continue to move higher. Contracts that were signed 10 years ago had performance levels in it that now folks look back and those -- all that has shifted.

A completion rate of 99% back in the day was considered a great month and now it's considered a bad month. So we just have to continue to work hard to move that up and do the best we can. And again, it's just one of those things where you just have to have the continuous improvement process and always be working and making sure that you're doing the best job possible. We're very thankful for the cooperation that we've gotten from our people.

They have really worked hard to meet all these new expectations, and I'd like to thank all the vendors that we work with, the folks all around the system that have done a great job helping us really turn Mesa around and become what we think is the low cost and leading regional airline in the country right now. So again, thank you very much. We should have some more news out shortly in terms of personnel and hopefully some new business and all the kinds of things that people like to see from us. But right now, we're just sort of sticking to our knitting and putting our operation where it needs to be and continue to do the right thing by our partners.

So thank you very much and have a great week.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Jonathan Ornstein -- Chairman and Chief Executive Officer

Brian Gillman -- Executive Vice President and General Counsel

Mike Lotz -- President and Chief Financial Officer

Helane Becker -- Cowen -- Analyst

Bert Subin -- Stifel Financial Corp. -- Analyst

Savi Syth -- Raymond James & Associates -- Analyst

Eric Sutherland -- Analyst

More MESA analysis

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