Q1 2020 Earnings Call
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Thank you for joining your conference will begin momentarily. We appreciate your patience and please continue to hold we will begin momentarily.
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Welcome to the Q1 2020 Air Transport Services Group incorporated earnings Conference call. My name is John I'll be your operator for today's call.
I'm all participants are in what can only mode. Later, we will conduct a question and answer session. During the question and answer session. If you do have a question.
Press Star then one on your Touchtone phone and no one I'll turn the call over to Joe He D. CEO of PSG, Sir you may begin.
Thank you John.
Good morning, welcome to our first quarter 2020 earnings conference call.
With me today are Quint Turner, our Chief Financial Officer, and Rich Corrado, our president and my incoming replacement as CEO.
We issued our earnings release yesterday after market closed its on our website, a T.S.G. inc. dot com.
We will file our form 10-Q later this week.
The first quarter 2020 was a good one for us but it also reflects a different world then when we last talked to you in early March.
Were adapting to the Corona virus pandemic were necessary. So we're not compromising the core principles that have made a successful safety and everything we do superior customer service and solid returns on your investments in us.
Throughout the first quarter, our business was on a strong pace with solid increases over the first quarter of 2019.
Including results from omni for each period.
Revenues increased by 12% to 389 million and adjusted earnings minus warrant and other effects were up 13%, which translated to 43 cents per share up success.
On a similar basis, our adjusted EBITDA increased 9% to 124 million.
Our airline operations were particularly strong in the first quarter and that pace continues through today for the cargo portion of their work principally for Amazon of DHL, who are benefiting from a surge in ecommerce activity.
Meanwhile, our Cam leasing business remains solid and is still on track to lease eight to 10 newly converted 767 freighters this year, including a lease for for Amazon and three for you PS.
Quintas ready to flesh out those consolidated results.
Rich will cover our segments and operating highlights and I'll close with more comments on our new more focused outlook for the second quarter Quint. Thanks, Joe and thanks to all of you on the call for joining US. This morning, as always I'll start by saying 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 described here.
These forward looking statements are based on information plans and estimates as of the data this call and Air Transport Services Group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions factors, new information or other changes.
These factors include but are not limited to the following which relate to the current cobot 19 pandemic and related economic downturn.
Our expectations regarding the receipt of funds by two of our subsidiary Airlines pursuant to the payroll support program under the cares Act and the final terms of the grants issued through such program.
The potential for reduced flight operations disruptions to our workforce and staffing capability.
The impact on our customers creditworthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels.
And other factors that could impact the market demand for our assets and services, including our airlines are operating airline's ability to maintain ontime service and control cost the cost and timing with respect to which we were able to purchase and modify aircraft to a cargo configuration.
Fluctuations in Ats these traded share price and an interest rates, which may result in mark to market charges on certain financial instruments.
The number timing and scheduled routes of our aircraft deployments to customers our ability to remain in compliance with our agreements with key customers and lenders.
Changes in general economic and our industry specific conditions.
And other factors as contained from time to time in our filings with the SEC, including the form 10-Q, we will file this week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings adjusted earnings per share adjusted pre tax earnings and adjusted EBITDA.
Management believes these metrics are useful to investors and assessing Ats sees financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
As Joe said, our first quarter results were very good on both the top and bottom lines, both before and since the Corona virus pandemic caused widespread curtailment of economic activity in March our air cargo business has been solved reflecting our customers imperative to move essential supplies.
Rapidly to help abate in the spread of infection and support stay at home guidelines.
On a consolidated basis first quarter revenues were 389 million of 41 million or 12% from the prior year.
That gains stems primarily from more aircraft in service and expanded airline operations.
Block hours rose, 31% versus the first quarter last year.
The Department of Defense remained Ats sees largest customer representing 30% of our revenues for the first quarter, 29% of revenues came from Amazon and 11% from DHL.
On a GAAP basis first quarter earnings from continuing operations were 134 million versus $23 million a year ago.
GAAP earnings per share for the quarter were $2.27 per share basic versus 38 cents a year ago.
The 22% decline in the price of Ats. These common shares during the first quarter had the largest impact on our GAAP earnings.
That triggered an unrealized reduction in the value of our warrant liabilities with a corresponding gain in income none of the warrants Ats GE has issued to Amazon had been exercised.
Hey, Steve operating expenses increased by $38 million or 13% over last year salaries wages and benefits increased 26% as our airlines added pilots over the last 12 months to crew additional 767 freighters for Amazon.
Depreciation and amortization expense increased 11% has the Cam owned fleet increased.
Maintenance expense decreased primarily due to some external MRO customers, reducing their scheduled maintenance commitments in March along with reduced unscheduled engine repairs at our airlines.
Fuel cost increased 25% in mid year last year, Amazon started up a regional hub in the Wellington Air Park and logistic services took over fueling operations for aircraft at that location.
Interest expense decreased more than $1 million to $16 million for the quarter.
The change reflects lower effective interest rate stemming from 80, SGS unsecured debt offering in January and from reductions in lender pricing and market rates for our variable rate debt.
Several mostly noncash items in our GAAP earnings continued to obscure our operating performance in the first quarter.
This time, we recorded unrealized gains and losses in our warrant at an interest rate derivative liabilities amounting to net 108 million gain after tax compared with a $5 million net gain on the same basis in the first quarter of 2019.
On a net basis this and other items reduced our reported GAAP diluted EPS by 41 cents per share versus the 12 cents increase in the first quarter last year.
Our adjusted earnings EPS, and adjusted EBITDA exclude those mostly non cash items as a result, our adjusted EPS for the first quarter was 43 cents versus 37 cents a year ago up 16%.
On the same basis, our adjusted EBITDA increased from 114 million to 124 million or 9% for the quarter.
We spent $143 million on capex during the first quarter, including $105 million purchased 5767, 300 aircraft and to continue freighter modification on those being readied for customer deliveries.
We still expect at 2020 Capex spend of about 420 million, mostly to acquire and modify more sevensix sevens for deployment through next year.
Joe will share more about our fleet development progress short.
We ended the first quarter with significant borrowing capacity, thanks to the fortuitous timing of our unsecured 500 million bond offering at the end of January.
We use that to reduce our outstanding secured revolver borrowings, giving us significant liquidity.
At present under terms of our senior secured credit facility, we have access to additional borrowings under our revolver of approximately 300 million.
Our total debt to adjusted EBITDA at quarter end was approximately 3.6 times.
We expect to continue to benefit the remainder of the year from lower interest costs tied to LIBOR on our variable rate debt.
As we told the market last night in our earnings release, two of Hcfcs subsidiary Air carriers, omni hair and 18.
Which carry passengers each submitted an application for worker protection Grant funds available under the cares Act.
Abby ex air and all cargo airline has not been significantly impacted by the current a virus and is not expected to participate in the program.
In late April Omni received notification from the Treasury Department that its application for grant funds under the payroll support program has received preliminary approval and that it can expect to receive approximately $67 million to be paid and monthly installments through September.
Hi, guys application for a grant under the payroll support program is pending.
Our air carriers intend to use these funds to maintain their respective airline staffing necessary to serve the department of defense and commercial customers during an extended period of economic uncertainty due to the pandemic.
That summarizes our consolidated financial results for the quarter Rich is ready to share some segment highlights rich thanks Glenn.
Over the past two years the principal factor in our earnings growth has been the improvement at our airline.
That progress continues in 2012.
18, my services on a pre tax basis at $18 million in the first quarter up 6 million from a year ago.
The three airlines earned revenue from the operation of 69 aircraft at the end of the quarter six more than a year ago that includes 35 freighters, we leased to customers and operate on a CMO basis.
Increased support for Amazon drove the bulk of that gain thanks to eight more seven six sevens, we operate for them six of which were Cam least last year.
Also the prior years maintenance expense included higher costs for unscheduled engine repairs and crew training for Amazon assignment.
Interest expense allocated to our airline segment, mostly from debt used to fund the omni acquisition was lower than a year ago.
Due mainly to lower rates associated with the repricing of our variable rate loans and our unsecured notes offering in January.
The pandemic had a limited effect on our CMI operations in the first quarter.
It began with reduced kabi flying by 82 remote military installations in late February.
And extended to reduced commercial and contracted military passenger flying for omni in mid March.
Several AD hoc assignments for the federal government in March offset part of the cuts to contract to supply.
Those AD hoc assignments have continued in April but are anticipated to decline during the second quarter.
Cam our leasing business performed as expected with pre tax earnings of 16 million slightly below what it earned a year ago.
Earnings from the larger lease fleet were offset by a 4 million increase in depreciation and amortization and a 300000 dollar increase in interest expense.
Both tied to with expanded fleet and capital requirements.
Cam deployed a third converted seven six freighter to EPS during the quarter. It also accepted lease returns of three freighter aircraft 1767 200.
1757, 201 737 400.
We expect to complete the sale of the 737 400 freighter in the second quarter.
Kim has purchased for feedstock seven six sevens for conversion to freighters and one existing 767 freighter this year.
At the end of the quarter Cam had 12, seven six sevens in our awaiting conversion to freighters.
All of which we expect to deploy this year are in 2021.
Results of our businesses group is other activities included 10 million in first quarter customer revenue growth, but minimal pre tax earnings.
The lower margins reflect amazon's decisions to in source some of the gateway services that are logistic services unit had performed for them in the prior year.
We also had a different mix of scheduled heavy maintenance work and higher low margin jet fuel sales at Wilmington aircraft and the Amazon network.
During the quarter logistic services and its subsidiary Tri factor announced a new agreement with the U.S postal service to design develop and manage a new us PS regional sorting center in Aurora, Illinois.
The New center is scheduled to start up in the third quarter.
Overall, the TSG businesses performed well during the winter season with minimal aircraft Downtimes and good on time performance over the express network routes we cover.
Our dedication to continuous improvement programs across our operating business also continues to payoff.
As with all businesses. The pandemic has led to changes in our operating procedures to protect the health of our employees and that of our customers.
But has also created opportunities for us to be part of the solution.
Carrying medical supplies and other essential goods rapidly to us destinations and supporting others on similar missions.
Like the rest of the logistics industry, we and our employees know that we continue to play a vital role in our nation's recovery from one of the worst episodes in its history.
At eight TSG, our employees has stepped up with creative solutions that are focused on safety and service for our customers.
But adjusting to the speed and scope of recovery will present challenges for many months, we've continuously demonstrated our agility in the past and this will service well going forward.
I am confident however that the vulnerabilities that the pandemic has exposed demonstrate that the strategic importance of commercial air cargo and outsource military air transport will become greater than ever.
We are seeing new awareness of the need to onshore the production and storage of vital commodities versus relying on international suppliers, which bodes well for the regional air networks that we serve.
This adds to the expectation that the increase in ecommerce shopping and air fulfillment will lead to lasting changes in buying habits.
And we expect that it will be many months if not years before the major passenger airlines fully restored their networks. So cargo carriers can expect to receive volume that had traveled and belly space of passenger jets for some time to come.
We will keep you up to date on how our business evolves and grows as these trends play out with that I'll turn it back over to Joe.
Thanks Rich.
We are able to hand, you. The CEO role can begin my retirement under more favorable circumstances, but the management team you will lead has already shown that they are more than up to the challenges ahead.
That team includes talented and battle tested leaders in each of our business units.
Our operating teams down the line are full of people who can extend Ats. These records as exceptional performance.
The HSC businesses have responded with fresh thinking innovative solutions and close cooperation with customers that need their support now more than ever as a corona virus on settles the economy and our industry.
You may have heard that our maintenance techs here in Wilmington responded on short notice and under very tight deadline. When we're called to modify avionics on the 767, the normally carries a new England Patriots.
There are sending that plan on a special mission to China. Its first trip to Asia to bring back more than 1 million mass for healthcare workers in the Boston area.
We've also worked closely with DHL and Amazon to protect the people who handle the cargos, we carry by adopting new sanitizing and shielding practices.
Those measures will remain in place and become stronger is this crisis unfolds.
As Rick noted armies military business has been more significantly affected in the second quarter due to a global curtailment of not a central troop movements to limit Corona virus spread among us forces.
Omni stands ready to pickup the pace when those movements resume and for the AD hoc transport that is likely to continue as well.
That service included providing passenger capacity to repatriate Americans, who were stranded abroad, when the pandemic unfolded.
As evidenced by our 31% growth and block hours. The TSG Airlines remained very busy through the winter mainly in support of Amazon's hair network.
We expect those operations to continue to grow and we're already recruiting and training the pilots that will fly at least for additional Amazon seven successes, we will deploy for them later this year.
We now own all the seven six Evans, we expected deploy as newly converted freighters. This year plus a few that will fill fill orders for delivery next year.
The eight to 10, Sevensix Seventhree hundred freighters, we expect to convert and deploy this year, we'll complete a decade of rapid growth in the medium widebody component of our fleet.
This will bring us to 50 767 300 freighters are airlines will operate by the end of 2020 compared with just one at the end of 2010.
We expect that aircraft type to remain the primary component of regional air cargo networks for many years to come and we will continue to deploy them at a similar rate in 2021.
At the same time, becoming a major aircraft lessor means coping with aircraft returns as customers needs change.
We will receive some aircraft back from external lease in a semi deployments this year.
Transitioning costs and loss of lease revenue from those aircraft will offset some of the gains from leases of newly converted seven six severance.
Our seven success with 300 investments will continue even as we pursue opportunities with other types as evidenced by our joint venture investment in the STC for the passenger to freighter conversion of Airbus Athree 20 watts.
We expect them to replace at a minimum the more than 300 757 freighters now in operations and also be the preferred narrow body choice for our customers who operate regional air networks for many years to comp.
Quint mentioned at our Capex guidance for 2020 remains at 420 million, which will be down 34 million from our 2019 spend.
We have access to additional 767 feedstock under our arrangement with jet trend and available conversion slots if needed.
At the same time, we are boosting our 767 passenger capacity dominate this year with one leased in aircraft in the first quarter and another one in the third.
These fulfill omnis commitments to a third party less or made before we acquired on the in 2018.
We are pursuing both military and commercial options for them as they arrive.
When we last spoke with you in early March the Corona viruses already sweeping the globe and beginning to affect both Eric our cargo and passenger flying for the military.
But the broad scale contraction of economic activity. The followed soon after was beyond what anyone anticipated at the time.
I want to affirm that 2020 will be a growth year for adjusted EBITDA. The art stick, we choose to measure our progress.
We expect to exceed the 452 million we delivered for 2019, but are currently not able to forecast how strong that growth will be.
Instead, we are providing guidance of $110 million to $115 million for the second quarter alone.
Thats five to 10 million more than 105 million and adjusted EBITDA, we generated in the second quarter last year.
I'm confident that if the economic recovery from the pandemic continues and once the military reopens its transport network.
Rich and Quint will be able to revisit 2020 guidance when they report third quarter results next August.
Hey, TSG is fortunate and that is leasing operations are centered on freighter aircraft for customers, who have not seen the demand disruption of passenger operators. In fact, we continue to see significant customer interest in long term leases for freighter aircraft.
The only passenger aircraft we own are primarily utilize to service us military and other governmental agencies with limited exposure to commercial passenger operations.
Once virus oppression efforts are relaxed, we expect the demand from our governmental customers to return to historical levels quickly.
That concludes our prepared remarks, John we're ready for the first question.
Thank you and I'll begin the question and answer session. If you do have a question press Star then one on your Touchtone phone.
So again that Star then one on your Touchtone phone.
And our first question is from Jack Atkins from Stephens.
Hey, guys good morning, and congratulations on a great quarter.
Correct.
So a lot of lot of points that we could go here I'm going to ask a handful of and jump back in queue, but.
Well I guess, maybe you could you just sort of start off with with the places in your business where.
The pandemic and the containment efforts related cobot 19 are impacting things not just it sounds like it's principally related to military flying at omni.
It doesn't sound like you saw much of that in the fourth quarter.
And that is that impacting your MRO operations as well and how does all this play together with the Theres that funding quit that you're receiving I just want to make sure we understand how it's all flowing together.
Yes.
Good question Jack.
The as we mentioned in the release.
The passenger.
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Business that we have we have a little bit at 18 with economy.
And of course Ami is a passenger carrier so those were in the areas.
Most impacted.
And the ones, we expect to be impacted most going forward.
The flights for the the military the department of Defense, particularly for May and June were expected to be perhaps down.
Actually through the first quarter, even though there was some reduction as early as late February and into March for the Combi.
We were we were able really pretty much into April through April two continued to have.
Chance to do AD hoc moves.
For the for the.
Department of Defense you know there was some repatriations of American citizens of or abroad. So forth that helped offset that but the idea of the has put some restrictions in place.
For some of the troop movements that that will be more evident in may and going forward and we'll just have to see how long that persists and how it plays out you also mentioned the Mros and as you know we do a mix of our own owned aircraft and aircraft that are lessees.
Use and that's probably what about 50% to 50% of the business that about half of it is external customers passenger carriers, we do frontier and and America.
Hi, Good Delta Delta and.
Given what's going on in the passenger side that business is likely to be scaled back as we go forward, but where we have opportunities as we can bring in more in house of our own aircraft. We were planning on actually farming some of our maintenance checks out this year because of the amount of external business.
We had so we had the ability to pull some of that back in and avoid that external costs, which is nice given our our business model as far as the cares funding goes the cares funding was aimed at airlines. So it was not aimed at mros, but of course as business volumes are impacted in them.
Roes, we have the ability to.
Reduce our costs make changes in staffing and so forth based on the volume of work that they have so we'll be able to deal with that we feel.
Going forward and.
We course disclosed in our in our release so the situation with the cares funding.
We've been told that omni has been approved.
For 67 million, which will certainly help offset the impacts there and the application remains pending at this time.
Okay Gotcha. Thank you for all all that.
Additional color there quit and so I guess as we sort of think about 2021, obviously, there's a lot of different moving pieces in 2020.
But what do you think about the longer term impacts from cobot 19 on.
Your business.
And you think about how that would play out not asking for clinically on guidance, obviously, but I mean.
Is there any reason to think that any of these different.
Uh huh.
There is any structural change to Europe. Your earnings power. When you look out in 2021 relative to sort of where you are thinking about at 90 days ago from all of this.
We will.
Certainly on to the extent that impacts to the passenger side of the business linger Theres always a chance for some spillover that although that the majority of our passenger flying is done for the military and where we think we are fortunate and is that when restrictions.
These and began to be lifted.
Suits need to be deployed redeployed.
And so we we see that demand is coming back to historic levels.
Rather quickly once those restrictions are ease.
Unlike the commercial passenger side, where I think the pace at which demand comes back as more and question now omni does do a little bit of commercial passenger flying they have some vacations business. They fly on have flown for many years for example for folks traveling from Hawaii to Las Vegas, and just as.
With the rest of the commercial passenger market that was impacted it's not a particularly large piece of business, though in the overall scheme of things freight TSG and on the cargo side.
As you as you're alluding to we that's done that's been strong and demand for our lift in our services. There remains strong so as we look at 2021 provided that.
You know that the world make some progress at all with this virus we see.
You know us less impacted certainly than many others, who have more persistent lingering effects.
I think Jack I think it's important to note also on the leasing side, we've got a number of aircraft and conversion.
Now that will come out towards the end of the year.
That will be deployed in 2021, and we've seen no degradation in the demand for the 2021.
Converted freighters that will be leasing as well so still strong demand for for the folks that need freighters.
Okay that that that's great rich and I guess that leads into my my last question and I'll turn it over but and this is going to be for you, but can you could you could you talk about the extent to which.
He is benefiting from lower passenger belly space, both whether that's in the domestic market or internationally.
And you know.
Given this feels like a structural shift an acceleration of the move towards B to C. In E Commerce.
You know.
What are you hearing from additional customers, who may be wanted to set up their own networks, maybe a smaller version of what you're doing for somebody like an Amazon is is that beginning to sort of particularly a little bit.
No we havent heard from many new customers wanting to establish new networks at this point.
We've had some conversations in the past nothing's accelerating on that and in general in the market.
Thank you know the.
With the 80, 590% of the passenger.
Flying.
Not going on right now the belly capacity, particularly with the larger long haul jets is.
Not available right now and so.
Even though air cargo in general is down the capacity is down even more because of the the passenger jets being down. So there's more volume remained at freighters than they normally would be so there's a heavy demand right now we're seeing a lot of request for charters.
We are currently bidding a couple of long haul.
Charters.
That will last for months their regular routes for existing customers that were hoping to get we don't keep a lot of assets around and crews around to fly charter work.
So these are coming out of some other deployments.
That are transitioning and so it's kind of fortuitous for us. So heavy demand. We've also had hundreds of request to omni to fly cargo.
And obviously, it's complex in the US regulatory basis has been a little bit behind the rest of the world in allowing cargo.
And the upper deck on so we're we're just now getting into the ability to reconfigure the aircraft so where that goes we're not sure because the cargo rates are very volatile their high.
Because of the lack of capacity in the long haul lanes, but we think we'll get some good long term base business out of this for some longer routes and.
And and one thing is for sure is that the network flying that we do is is very strong.
And looks to be so for for a long time to come.
Okay, great. Thanks, Thanks for the color guys and Joe Congratulations again on you're assuming a retirement here.
Thanks Jack.
Our next question is from David Ross from Stifel.
Good morning, gentlemen.
With that.
Based on the current pipeline backlog that you guys were talking about how much growth capex is going to be left for 2021, assuming that.
You don't add any more new contracts or new planes. So the mix. We think most is being spent this year for both 2020 and 2021 growth, but how much might be left.
For next year for next year growth.
Well they we think this as Clint we we think right now in terms of looking at it just feedstock procurement.
We expect to take I think five aircraft next year, five new airframes as feedstock for conversion.
Otherwise.
And you compare that to this year, where we're taking eight.
Aircraft and we're we're by the end of the year I think will rich will have what three aircraft that are pretty much converted we're waiting for 2021 deployments of the investment for those will all be in correct.
I think that we continue to expect next year to be.
Capex wise down down versus 2020.
We're not prepared to give.
Specific guides on of course today, but it'll be.
A fairly significant decline in Capex next year, we believe one of things will be looking at next year as well Davis.
Started potentially make investments in the 321.
We still expect to get our STC for their car conversion this year and.
Look forward to starting to add that to our leased fleet in 2021.
And given the growth in the fleet, where would you say maintenance Capex sits right now Quinn.
90 million hundred million.
That's that's approximately correct.
Yes, yes, so keep in mind under the business model that customers responsibility when we lease manned aircraft for the heavy maintenance piece, we obviously carry the legacy Sevensix seven 200 fleet as part of our maintenance Capex, but for all the needle third party leases that becomes the lessees responsibility.
And then last questions to threatened.
The Amazon CVG hub.
In the build out there any any updates and when you think thats going to be ready to fly in and impacts for eight TSG and its operations.
We really don't get a lot of guidance out of Amazon in that respect, but just based on what it looks like right now from the construction probably late 2021.
For that start operating out of that maybe 2022.
They would know better.
And you guys still have room at Wilmington to grow in the meantime.
Yes, there's plenty of room in Washington, I mean, we used to fly.
115 aircraft out of here and I think the Amazon operation is than the growth.
10 to 15 right now.
I think they plan to get it much greater than that but again, they don't share their their ROE their plans with it.
And until we know Dino.
At least no basis.
Thank you very much.
Thanks, Dave.
Our next question is from Helane Becker from Cowen.
Thanks, very much operator high team Joe It has been a pleasure.
And while you are leaving the business in good hands I will still missed.
Now for my questions.
Are you noticing the price of 767 feet stock first of all there's obviously a lot that are being part on March being retired right. So are you noticing prices coming down.
And can you put back in many machine.
That haven't delivered yet.
Thanks Rich.
So theres some bids out now for.
Handfuls of planes.
We're probably already in process. It generally takes an airline a little bit of time to package up.
Right.
Or anything of significant size I think the records together the engine records together. So we havent, we know there's more coming certainly and until you get into the bidding in the negotiation piece, it's difficult to say supply and demand would tell you that theres going to be more on the market and therefore, the price should come down, but you know engines drive.
A lot of what the value is on the air frame.
And of course the conversion is.
That at prices do around 15 million up about half of what you'd expect of total cost to be so.
Thats not going to change so we expect that the prices will come down as far as renegotiating. What we've currently got in the pipeline that's not really what we're looking at this point in time.
But we think we still have a good value and will produce a good a good product and that will be a have a competitive lease rate at the end of the day.
Right. Okay. Thank you and then my other question.
Is.
What's the right now.
Yes.
New aircraft and.
Number of lease expiry every year that you think makes sense for the business.
That's a pretty wide open question Helane I mean, when you think about the number of aircraft obviously market demand is going to dictate what we.
Continue to acquire over time.
And if you look at our history in terms of our leases you know for example, a lot of income in bunches on a calendar year basis, you've got the DHL, which runs through 2022.
For a number of aircraft and then you start looking it when we started the Amazon business in terms of potential returns, but by the same token you look at it and say well heck, where they're going to replace those number of aircraft and such a short order.
So our expectation is generally those leases are going to get rolled over than if they do that it's really a function of keeping up with what the market growth.
Requirements are at some point in time, you're going to see a peaking as far as the lease I believe so in terms of the number of seven successor funds that will be demanded by the market there'll be some upgrades from the two hundreds to the three hundreds over time.
But that's one of the reasons, we got into the 321 is we think thats going to be the next real growth opportunity.
From a car conversions.
Converted freighter perspective.
Gotcha and then the other question I have is your three customers provide a big percentage of the business in Joe you and I go back to the start when.
Keith Keith predecessor, we'll find out from airborne and.
You had one customer on your revenue and you've done over the years, an amazing job.
You know.
Diversifying the business.
And in some years.
Given really sort of.
Right.
Being Delta Bad Hound.
You know, we can reminisced over at some point in order, but.
What are the opportunities for other growth.
I don't have fewer or rich went to answer this but.
You know, what where do you think that the business should should trend I mean, I know amazon's kind of keep adding more business right. We think the need to scale up to something like 200 aircraft, but.
What's the rate mix there for you know diversification and what are the opportunities that you see.
Helane knowledge bridge answer the future piece, but to your earlier point.
You do go back to up with US all the way to day, one essentially one DHL was 99% of our book of business.
I remember you showed up for our for shareholder meeting here in Wilmington way back when and so you're the one person has been with us through thick and thin and we've had a lot of stick and we've had a lot of thin over that period of time. So before you sign off I just want to say, it's been a pleasure working with you as well and with that I'll turn it over to Colorado to talk about where things he sees things going.
No. It's a good it's a good question Helane in one one we frequently discussed here because it is it is what we do is trying to grow the company right. So.
767 markets going to continue for several years, we think it's a strong market, there's still building, new freighters and and as theirs as youd be already discussed is more feedstock coming available. So we plan to continue to drive that as long as the demand is there.
We've invested in the Athree 21.
And we're hoping to get the SDC approved midyear this year and then start.
Putting that aircraft into the same business model, we have today in fact, extending it because we'll have this SDC.
We would like to converted in that PEMCO as we do 737 is now leased the airplane fly the airplane for customers want us to etcetera etcetera. So we can build a nice business smaller on it.
Thats a replacement for the 757, which it has an installed base of over 300 in the market right now so it's a significant market opportunity plus it can compete with the 737 400 installed base. So it's got a very flexible opportunity for us. So that's one area of growth that we think and keep in mind that when you look in the growth aircraft.
From two places one is growth in cargo so as the market grows and the other one is for replacement.
And the Athree 21 is a solid replacement for the 757, which is getting along in the tooth at this point so thats one area that were.
Heavily focused on continuing to grow the 767 transition into the Athree hundred 21, as additional growth platform and the other thing is we have always manage the company with a conservative balance sheet of course, we spend some money on omni and we've got.
I think we're at three and a half times roughly right now EBITDA on our debt.
And we traditionally float around between two and two and a half and we we were managing the company in managing the growth to drive towards that again and the reason for that is to is to remain flexible to M&A opportunities in adjacent season opportunities that enhance the business model and diversify the revenue base. Further so those are the two areas where.
Thank you have the strongest opportunity for growth in the future one building on our expertise and are on our business model and our differentiated business model today and the other one looking for opportunities to differentiate to diversify the revenue and build the company growth going forward.
That's really all very helpful thing spread 10, you know obviously good luck with with the future.
Thanks, Phil and excellent.
Our next question is from Chris Snapple outflows from Susquehanna International.
Good morning, guys and Chris So on the military side with the stop order movements.
Could you give us a sense.
No where we are in terms of utilization levels and any indication that those might improve I'm guessing that the millet military passengers will fly before.
We do for obvious reasons, and then you alluded to an earlier question.
The opportunity to potentially use the.
For main deck ops, but it sounded like there were some.
Regulatory issues there, what's the likelihood that you could re purpose those aircraft.
And.
And use them for freight.
On your first question on the military side so the military.
Order was to cut back on non essential truth moments. So they still have been moving troops, but it's just been cut back.
I believe we've been told around mid June they should start to ramp that back up.
The other governor on that if you will is the airports that those military routes fly through the initial restriction that interrupted some of our flying particularly on the Comby basis, but also in some of the omni routes was that the airport routings that we went through.
We're not available to us to to smoothly run. The route for example, you couldn't fly from Singapore into Bahrain.
And that was part of a normal route for us and so that had to be rerouted in some of the some of the applying change. So thats one of the restriction. So we're looking for mid June for that to snap back we believe that the the passenger flying as it relates to the military will will be more of a V shape than than what you'll see in the passenger environment with with.
Leisure and business travel where that that will probably will be a much slower role to come back.
It relates to armies utilization for its.
Potential for main deck cargo on the passenger jet a couple of things. One is we havent had the capability yet because those triple sevens have been utilized either for military routes or for X.
For repatriation of Americans abroad.
And so they probably wouldn't be available till June as we're looking at it now we believe that the approvals and now in for the way in which you can put cargo in the upper deck.
So theres opportunity to do that that's not a long term business profile, it's more of an opportunistic some solution to support mostly PPD movements.
It's.
Generally you're not going to.
The the cargo rates for flying that that do not support the level of freight that you would get in a converted or.
Using cargo in the upper deck of a passenger jet so as soon as that those those moves calm down that those that that business goes away. So we would only be an opportunity to utilize those jets. If there are available.
Okay and then there was also you've made some comments earlier about.
You've had some interest in the charter market or short term HCM mine, which is.
In area. Historically, you haven't participated can you give some more color there.
Yes, so weak because the military we've got military routes that we fly cargo on AI in MBX.
Slide.
Every other week certain routes. So then was off weeks, we do have some assets available and so we've been able to.
Get a few charter out that way, but it's not a regular thing that that that we talent on our or look to establish.
Common ongoing revenue and profit stream out of that business. We just look to utilize our excess capacity, which is not as predictable.
As as companies that keep assets around as the chart business.
We find that when investing in a long term asset like an airplane and using it on the charter market is not a is not so good long term strategy for that asset would rather Lisa.
Or get long term HCM RCM I agreements on on that asset.
We as I said I think in my remarks earlier, we do have a couple of long term routes that because as an example, the 757 flying that we had from DHL.
There is transitioning.
We were down to two aircraft, we have four were down to two.
Last month.
Those crews that can becoming available and so we're looking to do some additional flying us long term routes for existing customers using those crews.
And available aircraft to take advantage of that so that's good as fortuitous and it's going to add to our plan going forward for us the year.
Okay, and then two questions for Quint quit your liquidity exiting the quarter and assuming that there is no pickup in omni and let's come back.
In June.
Address how we should think about that drag on cash through the quarter for that piece of business and then.
In your prepared remarks, you spoke about.
Keeping an eye on.
Credit of your customers now Amazon DHL, you PS high credit customers, but I'm curious if you could just give some color on your rather book of business. Thanks.
Yes.
Chris the as you as we noted we purchased five of the eight aircraft in our Capex in first quarter. So the.
We had was 143 million we spent the first quarter. So we'll see.
Sequential basis.
Some.
Reduction right in terms of of what we're spending for Capex as we move through the year. So that will help our cash position certainly and then we spoke about the carriers funding for omni.
Rich.
Certainly will will help with that as well.
Hi application is pending.
So we really anticipate and you can see that we're saying that.
And our guidance that we expect.
As best we can.
Project that we will still to exceed last year's adjusted EBITDA of four for 52 for 53. So I mean, I think we'll be will be in good shape liquidity wise certainly as we said in the remarks earlier, having completed the bond offering at the end of January gave us a lot of flexibility.
And the the business model, we have that.
Has.
Certainly helped insulate us if you think about the cargo side, you know that business really remains strong.
And we have now and as some sort of a.
Scenario, where we really for whatever reason had to pull back harder you know a lot of our capital spending is in the conversions itself, which gives us some flexibility further flexibility should we need it. So I think we'll be in good shape cash flow.
And then on credit with your sort of customers outside of Amazon DHL, Yes, how we should think about that.
Well of course as rich mentioned.
Cargo business.
Particularly in network, operator, integrators, Yunos remains really strong and so no issues there.
Video D. as it is a great payer, we just need that business to get back to its full full volume that it was that previously.
And I guess from our standpoint, it would be more at the MRO.
Location, where we do have as we said some external customers you know some some of the big flag carriers.
You know that that we operate with and of course, they were participants in the carriers Act as well they have scaled back their business volumes with us and in some cases needs cleaned up outstanding amounts.
And we feel good about where we are at in terms of receivable position from those customers. So we really don't anticipate.
Any issues with that.
Okay. Thank you.
Our next question is from Steve O'hara from Sidoti and company.
Hi, Thanks for taking my questions.
Hi, Yes, first just echo the comments by everyone else, Joe it's been a pleasure and.
No I know, it's tough to leave it at times like this but.
Yes, it seems like timings pretty good.
[laughter] good people did Miss our annual road trip, Steve through Ohio.
No I know you.
Chris Didnt rich on that.
But.
I guess just in terms of the outlook.
Or.
2020.
I mean is the current expectation that twoq use kind of your toughest comp here given the I mean, it seems like that the cargo cited performing pretty well obviously the MRO.
Hi, there but.
With military may be coming back you know are beginning to come back in June.
You would you expect twoq you to be kind of the toughest comp.
Well I think you hit you hit on the key is you know the pace at which things come back and the degree to which things come back, particularly.
On the military side.
Based assuming that things do resumed to something resembling normal.
Operations by the third quarter I think it's fair to say second quarter does present.
Perhaps the.
The biggest the biggest comp.
We still expect.
You know that cargo business to remain strong and of course, the leases that we have.
Now we are fortunate again that we are less or but we really don't we concentrate on cargo leases and the cargo business has remained robust and the demand strong as rich said earlier and the passenger aircraft that we have in our portfolio are primarily operated.
For the the military and other governmental agencies so.
I would say, you're you're correct, Steve the second quarter, probably until a little bit the.
The one that.
It's probably most in question I guess.
Okay, and then just in terms of.
The aircraft coming online and I know Ams on slide that.
A number those but.
When you talk about.
Demand strength.
Are you seeing kind of improving demand in terms of.
Long term.
Desire to kind of take these aircraft under contract.
Looming kind of a swift or economic recovery or is this may be.
Well thinking this is kind of a new normal in terms of cargo.
Demand and I guess, that's on a regional basis more so than long haul.
Yes. This is rich.
So.
The demand profile from our existing customers hasn't changed.
Aircraft that are in Q for those folks are the remaining Q there remain.
Focused on taking those airplanes.
And as it relates to other markets and other opportunities there's a.
A large.
Level of interest in folks inquiring, if you will about things, but you look at some of these some parts of the world than some of the smaller groups and things like that and.
It's more inquiry than it is kind of solid opportunity within existing airline that is looking to add the sevensix freighter and so we would.
Question, the credit opportunities so it's kind of.
So the.
Dual market out there the existing strong credit folks that we deal with an existing customers that we have.
Our our are growing and they're they're looking to take more aircraft. There's more inquiry from folks that need a lot more diligence on our part before we get into some of those parts of the world.
Other than the ones, we've talked about the Amazon on the EPS just that are going in this year, we've got an existing operator in Malaysia, that's looking to take an additional 200, that's in paint right now.
And we've got another 300 go into another hair carrier in the Americas. So.
Good demand outside the core large customers that we deal with and and we look for that to be strong going forward and the other thing I should say is on the Athree 20 wanted mentioned before but the the feedstock on that aircraft was always one of the things that we would keep in a real strong look at because it needed to come down a little bit before that the the economics of.
That airplane got into a that advantage over the seventh an older seven five if you will and is there now given where the feedstock.
Values of the Athree 21 in the model than that our park right now so thats another real solid plus the demand for that aircraft should should be there right away when the STC is available and and we start to deploy those things going into 2021 and 2022 I think the other thing to think about Steve is clearly with the pandemic there.
Buying habits of the public get changed significantly.
People are going to retail outlets like they were in the past its more convenient and safer for them I guess to add a delivered to their homes. So I think the demand from an ecommerce perspective, only got accelerated by the.
Pandemic issues.
Okay, and then maybe lastly, just in terms of.
Maybe a pull forward of.
E Commerce demand or Canada, India shortening of the curves in terms of adoption versus kind of a maybe a weaker economy with with job losses and things like that I mean.
How do you think about maybe the potential for.
Economic weakness here.
With all the.
Issues with job losses.
Like that.
And how do you think that might affect.
The business in the maybe near term.
Yes.
Steve.
This quintas that's one of the the pluses I guess in terms of the we really we leased the airplane we don't.
We don't sell the cargo on it we leased the aircraft itself.
And so you know Joe said.
Buying habits or.
Plus right that should help and volume and to the extent thats been accelerated by the pandemic, but understanding. Your question you know I guess it will have to see what the longer term effects on consumer spending on everything in terms of that volume piece, but in terms of us leasing the aircraft and and having these long term leases in place.
So we're pretty insulated from the direct exposure to that.
Okay and maybe.
Just a follow up on that I mean in terms of the.
Results for the quarter.
You know how much of it was kind of.
Driven by volumes and maybe.
Abnormal flying for the quarter versus kind of having more aircraft.
In service for long from customers things like that is there way to kind of think about that maybe.
For the quarter and then maybe.
Going forward, if things kind of playing out where you know maybe flying demand is reduced but you do have more aircraft in service.
Thank you appreciate it.
I mean, I think we saw better performance out of the AC My services segment, which helped drive improved results.
Compared to the prior year quarter, a pretty significant you recall last year, we had a lot of ramp up costs.
As we were taking on what what ultimately was what.
Six actually a eight eight aircraft for Amazon.
And this year.
At least four in the back half for them on a seem odd basis, a little bit.
Not a steeper ramp in terms of the cost that help.
We had some engine cost last year that we did not some unscheduled engine repairs last year that we didnt have this year. So all those things helped generate a better result for the semi services segment as far as the the flying that we did we mentioned there were some AD hoc opportunities.
Yes for.
Omni.
That while not part of their typical scheduled route certainly did help during the quarter mitigate.
Reductions in some of those and restrictions in some of those locations that rich mentioned that affected some of our military flying and so that was certainly a factor had we not had that in the first quarter. It would have.
Not been the quarter that it was but that was only a somewhat of a replacement for what we didn't fly owns the more schedule basis.
Okay, alright, thanks very much.
Thanks.
Our next question is from Stephanie Benjamin from Suntrust.
Hi, good afternoon everybody.
Definitely Stephanie.
I just wanted to touch on quickly on the 577 the call that never purchased 31st quarter. It's kind of your Capex plans can you speak to that really the timing of service that you're kind of kneeling those aircraft when they should be deployed but also just type customers address that are being customer has largely out looking at replay.
Plan or is that growth in cargo geographic expansion any color there helpful. Thank you.
Yes, so they're all of those aircraft are.
Designated for.
You asked based operations.
The.
Im just trying to go through in my head when when they're going to come out of conversion, but I think a couple of them or will be 2021 deployments.
And the remainder will be deployed throughout.
2020.
Got it and all the other question does now thank you.
Thank you.
And we have Jack Atkins from Stephens.
Hey, guys. Thanks for taking my quick follow up here Clint I guess this was just so.
Just a quick one for you on modeling.
The does the cures Act funding impact the book tax rate at all for modeling purposes.
No it shouldn't we're projecting what about 24, 25% once you exclude that.
The warrants from the from the impact and that that is not affect does not affect that.
Okay. That's great. Thank you.
Thanks.
And we have another question from Kristof thoughtfulness from Susquehanna.
Great. Thanks for the follow up quick.
The PSP was that.
A straight grant or did include a a loan provision as well.
It was in terms of me omni piece, it's a grant.
Okay and have any of the carriers applied to the LP program under pairs that.
No they have not.
Okay and last question any update.
Labour, where we are maybe yet.
Maybe exit actually there in negotiations this week Chris.
Obviously, the media mediators are involved in the process.
And again as we've said on previous calls cautiously optimistic that we will get a deal sometime this year.
But.
Like I said they are still in the negotiation process.
Thank you.
And then I'll turn the call back over to rich Corrado for closing remarks.
Thank you moderator.
I'd like to congratulate Joe 80 on his retirement from the CEO position and as a function of his new role as chairman of the board.
Joe built this tremendous organization, establishing a real strong foundation.
This includes a significant differentiated business model and the safety and service culture that transcends the parent holding company Devry TSG subsidiary.
We need to preserve that important part of a TSG and use our culture to pivot propel our value proposition into the next growth phase of the comp company.
Our challenge moving forward is to keep all the good stuff. If you will that got us here, but if there is one thing that the current koby challenges taught US does it change comes rapidly in today's world and we must maintain our flexibility and agility as a core strength as we adapt to the changing business needs of our customers.
I'm excited to be leading such a season hard working in innovative group of employees as we take off into the future understand that together, we can build on that solid foundation that Joe he built but with renewed challenge to take this company to the next level with the same worth ethics integrity and customer focused that defined our reputation.
Thank you for your interest in eight TSG have a great day and stay safe.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
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