Q2 2020 Air Transport Services Group Inc Earnings Call
Welcome to second quarter 2020 Air Transport Services Group Inc. earnings Conference call.
So I'll be happy operator for today's call.
Hi, all participants are not listen only mode.
Later, we'll conduct a question any interest gosh.
During the question answer session they'd be happy question. Please press Star then one and you touched how phone. Please note that this kind of put this being recorded.
I'll now turn the call over to Gelpi Keep me officer Mr. paying you may begin.
Good morning, Sylvia 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 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 fall.
Which relate to the current covert 19 pandemic and related economic downturn.
The pandemic may continue for a longer period or its effect on commercial and military passenger flying maybe more substantial and we currently expect.
Disruptions to our workforce and stocking capability and there are believed to get hit you to access airports and maintenance facility.
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 operating airline's ability to main on time service and control costs.
And timing with respect to which we are able to purchase and modify aircraft to a cargo operation.
Fluctuations in Ats cheese trade and share price and an interest rate, 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 key agreements with customers lenders and government agencies changes in general economic and or industry specific conditions and other factors. That's contained from time to time in our filings with the FCC.
Including the form 10-Q, we expect to file tomorrow.
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 chief financial position and resolved.
These non-GAAP measures are not meant to be a substitute for our GAAP financial and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
And now I'll turn the call over to rich Corrado, President and CEO.
Thanks, Joe welcome everyone to our second quarter 2020 earnings Conference call Quint Turner, Our Chief Financial Officer is with me today, along with Mike Berger, Our Chief Commercial officer, who is getting BARDA field any questions you may have about our market outlook.
We issued our earnings release today after the market closed its on our website Ats G Inc. dot com.
We will file our 10-Q tomorrow.
I'm happy to tell you that during the second quarter, the cash generating potential Ats G.'s unique business model was on full display.
We delivered more of our strong ongoing cash flow from more long term leases of midsize freighter aircraft.
We also achieved better than expected returns from our cargo and passenger airlines, which found innovative ways to serve our customers and our nation.
Our revenues increased by 13% to 378 million and adjusted earnings minus warrant and other effects were 47 cents up 20 cents or 74% from a year ago.
On a similar basis, our adjusted EBITDA increased 20% to 126 million in the second quarter and 14% to 250 million for the first half.
And this economic climate.
Those results are remarkable but even more impressive is the fact that we sharply expanded our leading role in freighter aircraft dry leasing during the quarter.
The order from Amazon for 12, more 767 is that we announced in June will extend our leadership position and it shows an expanding stream of cash flow from those leases through 2021 and beyond.
11 of the 12 leases will be delivered next year one was delivered in June.
Even so our 767 dry lease schedule for 2020 has grown from what we projected in May.
We now plan to execute 12, 767, 300 trader leases this year up from our prior guidance of eight to 10.
We also expect to release at least 37672 hundreds this year, including two in the second half.
Of course, we're not immune to the pandemic as we told you in May we asked for 75 million in grant funds for omni and <unk> are the airline provisions of the cares Act.
We were granted that amount to offset reductions in our ongoing passenger operations, including Kabi flying for the department of Defense and also flying for certain commercial passenger customers.
Those reductions did occur and are continuing we recognized a bit less than 10 million of care support and second quarter pretax GAAP earnings and we'll recognize the remaining cash proceeds and GAAP quarterly earnings should the second quarter of 2020 Watt.
We are excluding those amounts from our adjusted results.
In addition to the effect on our airlines are aircraft maintenance business is also down due to the pandemic as some of its external customers have park. The aircraft we were servicing.
Matching our second half outlook for airline and other businesses.
With cans leasing growth, we now expect our adjusted EBITDA for 2020 to be at least 470 million up 18 million for my 2019 total of 452 million.
Quint is ready to fill you in on the details of our consolidated and operating results I'll close with more comments on our second half outlook, including why and how our business model helps us to weather and even grow during economic storms like the ones we are facing today.
Quinn.
Thanks, Rich and thanks to all of you on the call for joining us this morning.
As rich said, our second quarter results were very good on both our top and adjusted bottom line.
We're proud of our high quality service reputation both for our superior everyday performance and particularly for our ability to deliver in tough times.
On a consolidated basis second quarter revenues rose, 13% or 43 million from the prior year to 378 million.
The increase stems primarily from more leased aircraft in service and expanded airline operations versus a year ago.
72% of our first half revenues came from our three largest customers. The department of defense represented 32%, Amazon, 29% and DHL, 11% of the total.
On a GAAP basis, we had a second quarter loss from continuing operations of 105 million or $1.78 per share basic.
The 22% increase in 80 SG share price during the quarter plus 7 million in additional warrants awarded to Amazon in June in connection with its latest freighter lease commitment had the largest impact on those GAAP results.
The warrants and other financial and FX reduced GAAP income by $108 million or $1.75 per share.
Today, none of the warrants Ats GE has issued to Amazon have been exercised.
We also recognized a second quarter noncash impairment charge of 30 million after tax.
The impairment charge like the Amazon warrant effects are excluded from our adjusted earnings and EBITDA.
The impairment stem primarily from our decision to retire our for Boeing 757 freighter aircraft.
Three of them. We're retired by June 30, after DHL opted not to continue operating them as North American network. One remains in service through the end of 2020.
We expect to continue to derive some benefit from that aircraft and from leasing out several 757 engines.
Keep in mind that the impairment charge is unrelated to our for Boeing 757 combination freighter passenger aircraft or comedies, which are under contract to the Deo D.
We also recognize the benefit of nearly 10 million in GAAP pre tax earnings from the cares Act grants for omni and 80, API, representing a pro rata share of the 75 million in grants, we will recognize through June 2021.
The effects of warrants cares funding and the impairment charges were excluded from our adjusted results along with other mostly non cash items referenced in our earnings release.
Our adjusted EPS for the second quarter was 47 cents versus 27 cents a year ago.
On the same basis, our adjusted EBITDA increased $21 million or 20% to 126 million.
Second quarter interest expense decreased by 800000 versus last year. The change reflects lower effective interest rate stemming from lower pricing and lower market rates on our variable rate debt.
We devoted 266 million of our cash flow to capital expenditures during the first half up 23%, mostly for seven feedstock 7673, hundreds and related mot costs.
Those purchases and modification costs will continue through the year as we feel strong demand for our 767 freighters from Amazon and others.
We're now targeting 465 million in 2020 Capex up from the 420 million guidance. We gave you in may.
Some of that Capex is for freighters to be delivered in 2021, if we purchased more 767. This year that will mean less required capex next year.
We had available revolver capacity of 408 million at the end of June our total debt to adjusted EBITDA at quarter end declined from 3.6 to 3.25 times under our credit agreements.
That summarizes our consolidated financial results for the quarter.
On a segment basis I'm pleased to tell you that results from our a semi services segment continued to improve year over year.
That segment earned $20 million on a pre tax basis in the second quarter up from just $1 million a year ago.
Our airlines operated seven more aircraft and flew 17% more block hours compared to the prior year period.
The earnings improvement came from omni his ability to find charter opportunities even as regularly scheduled deo de flying declined.
Also HCM offline for commercial passenger customers largely dried up.
Increased cargo network line and a reduction in the significant ramp up costs, we were incurring a year ago. We're also factors.
Omni played a key role and retrieving us citizens and their families from abroad as the pandemic swept through Asia and Europe.
Italy charter assignments for other U.S. government customers and transport energy workers. After the scheduled passenger airlines reduced service.
These and other AD hoc assignments offset much of omni second quarter revenue shortfalls.
However, very little of that AD hoc business has continued into the second half and our copy flying will remain sharply lower than a year ago.
Cam our leasing business continues to perform well with pre tax earnings up 18% to 20 million for the quarter.
It's externally leased fleet increased by seven aircraft and external revenues increased by $10 million to 50 million.
Fleet growth increased cams, depreciation and amortization expense by 3 million and its interest expense by 300000.
Cam purchased seven feedstock Sevensix sevens in the first half of the year, including two in the second quarter for more 767 feedstock aircraft are scheduled for purchase and the second half.
External customer revenues from our other businesses grouped as other activities were slightly higher than a year ago higher aircraft fuel sales and more revenues from gateway services were offset by reduced revenues from external aircraft maintenance customers many of which park. The passenger aircraft we were services.
The pre tax loss from those businesses for the period was largely due to lower aircraft maintenance service and parts sales volumes.
Thats, a summary of our financial and operating results for the quarter I'll turn it back to rich for some other comments on our operations and outlook rich.
Thanks Glenn.
Overall, I'm pleased and proud of the way the TSG businesses are performing this year our employees are helping our customers responded the pandemic, sometimes under very challenging conditions.
We are at service business and services are delivered by people, our financial results and strong reputation or possible only because our people excel at virtually everything they do.
During the second quarter, we offset much of the revenue gap from operations. The pandemic took away with better than expected revenues from the short term charter and CMI opportunities that ironically, the pandemic brought us.
Protecting the health and safety, our employees and others. They work with is always a top priority for us.
During the pandemic flight crews and ground support personnel are distancing, where possible and using the best available PB.
We're maximizing work from home opportunities and monitoring temperature and other health indicators in our offices.
The pandemic is driving changes in the way people shop in work.
That gives us confidence that express packet transport.
We will continue to expand as online order preferences grow even faster.
In the meantime, customer dedicated cargo and passenger aircraft like ours are compensating for the contraction in belly space capacity from the scheduled passenger airlines.
These factors are growing the markets that SG serves now and in the future.
We talked to current and potential customers about other ways. We can help them, we don't intend to make charter flying a major part of our business, but we will meet their needs with AD hoc support where we can with a goal to convert some of that business to AC.
Our dry lease plus semi flying over time.
Quint told you that our passenger flying was down in the second quarter and the second half we expect that to continue.
That's the main reason, we expect our adjusted EBITDA will be down from the first half.
The cargo Airlines will remain very busy we just announced new CMI agreements with DHL for freighter service between Hong Kong in Australia.
And between Europe, and the us.
80, I will operate for more Amazon least seven six sevens deploying in the second half along with one it added in June.
Revenue growth in our cargo cm I operations is encouraging but theres more to do.
We're not yet satisfied with margins on our cargo cm I fly.
Earnings are challenged by high line maintenance and other cost to support rapidly changing customer flight schedules.
We are adding pilots to fly those sevensix sevens, and what has become a dramatically different market for recruitment.
We are having no trouble finding pilots that meet our high standards.
At the same time Adx management continues to meet with its pilots to reach agreement on an amended contract.
We now expect to exceed our prior target of leasing eight to 10 767 300 this year.
Our plan includes 12, such deployments with 10 in the second half. We also anticipate leases for 376 to seven two hundreds during the year, including two in the second half.
We had expected to customers leasing 767, 200 freighters from us to return them this year.
Instead, they have extended their lease commitments for them through the end of 2020.
Those redeployments and extensions are evidence of the continued strong demand for 767 freighters.
We're looking forward to completing our Airbus Athree 21 freighter conversion initiative.
We expect the first Epay test flight of the Athree hundred 21 prototype to take place next month and every a certification of our designed to follow in the fourth quarter.
We believe that our Athree 21 freighter platform will be the preferred narrow body choice for regional air networks, replacing 757 freighters, whether as a lease from us our from conversions of customer aircraft.
We will make our owned fleet investments in Athree 20 ones, but perhaps only minimally until 2022.
We raised our projected capex spend for 2020 backup to 465 million with the signing of the latest Amazon order, we own our have available all up to 767 feedstock, we will need through 2021.
We expect to acquire only three to five feedstock seven six sevens next year versus 11 this year.
Can't projects deployments of at least 20 newly modified 767 freighters from July 2020 through December 2021.
That includes 17 under from customer agreements and three currently being finalized.
I want to reaffirm that our 2020 adjusted EBITDA will grow despite pandemic bad effects beyond the $452 million. We delivered last year. We currently expect at least 470 million this year.
That's our best estimate now, but we would urge you to keep in mind at forecasting in the current climate is especially challenging.
On these commercial customers include sports teams and vacation travel companies that have already reduced demand in the face of continued growth in cobot 19 cases around the country.
Our comby operations are continuing on a limited basis, but that could change further if the military our foreign governments impose new restrictions.
In total we project that our second half adjusted EBITDA results will be $30 million lower than the first half for many of the reasons I just mentioned.
Today, we expect a good peak season for our cargo airlines by November However, we could be facing a different fourth quarter outlook.
Then we have today.
But what will change as our strong confidence in the long term results of Ats G.
We expect that as our spending of 767 fleet growth declines next year, our capex spend will fall by at least 115 million to about 350 million.
That reduction together with strong cash flow from at least 20 additional 767 leases.
And normalized returns from our passenger flying and aircraft maintenance operations point to a very attractive discretionary net cash flow outlook for eight TSG in 2021 and beyond.
You may affected our cash flow growth into your own while outlooks rate TSG, but also keep in mind that much of that cash flow comes from freighter leases that extend well into the next decade as well as the returns generated from our other businesses that support that growing fleet now and post pandemic.
With the growing cash flow generating power of our businesses, we look forward to expanded opportunities to allocate capital among a wide range of value enhancing alternatives to increase shareholder value.
That concludes our prepared remarks, Sylvia we're ready for the first question.
Thank you we will now begin the question answer session. It be happy question. Please press Star then one and you touched on the phone.
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And our first question comes from Jack Atkins from Stephens.
Hey, guys good morning, and congratulations on a great quarter.
Good morning, Jack Thanks, Jack.
So I guess, just maybe start with with the guidance for a moment if I go back to the initial.
Thousand 20 guide I think that was 487 to 492 million.
I would you guys put in place in early March obviously, the world is totally different.
Today versus bad but.
For to think about set the puts and take.
But at least 470 million guide relative to the initial.
For 87 to 492 can you kind of walk us through the bridge certain servitude feels like the first half of your came in much better than initially expected second half sounds like there's going to be lower passenger demand.
Yes, just feels like that the run rate is.
Pretty strong even what that lower passenger level, good use kind of walk us with everything the initial guidance and sort of where we are now.
Sure Jack this is Quinn the.
I guess when you look at the year. So far of course, the biggest impact and we started seeing the pandemic effects in late February.
Was to our commercial passenger flying that omni does I mean, just like all the other commercial packs carriers.
It it had a really significant impact and so.
There, we were sort of heading into second quarter ended the first quarter.
What we were fortunate and the first half was having these opportunities for charters because you know their work and that was on the.
As we said on some of these repatriation type missions, where we brought citizens back some of those charter opportunities were with the.
The military the department of defense and other governmental agencies. There were also some charters that we operated.
We mentioned.
Moving some energy workers, we just some Exxon Mobil charters.
We had and charter opportunities op income.
At a little higher margin right, because they're not regular consistent flying and say you typically generate nice bottomline effects from those so we were fortunate to replace.
The loss of our commercial flying as well as some curtailments on the the military that sort of regularly scheduled military type rotations, we were running including the comedies that 80 I operates 757.
Because the pandemic of course.
Resulted in restrictions and some airports and some locales getting in and out and those we we were able to mitigate with some nice high margin charter opportunities.
In a lot of our Deo de flying is considered essential so as we've said before the military flying really has never stopped although there have been effects.
And so.
That helped US do is of course post some really great. We feel really good about our first half as we look to the second half those citizens that were displaced course have been brought back there maybe some other charter opportunities, but we don't foresee it to the same degree so the opportunity to mitigate sort of these.
Going effects of the pandemic on our commercial flying our comedy flying to some degree and to some degree the regular military flying will be reduced in the second half and so you're really seeing more of the effects of the pandemic in the second half now with that could change you know thanks could improve.
Thanks, Good I suppose get worse, but that's sort of the guidance, we've given for a lower second half EBITDA.
And we have increased our guidance for the full year based on this really strong first half.
You know, we'd love to we'd love to climb back near more and more close closely to our initial guide range that we gave in February but right now, we're seeing something for 70 or better.
Hey, Jack this is one thing Quinn.
Didnt mentioned is to smaller issue and that is our maintenance group.
No did a lot of work for passenger airlines for Delta for United for Frontier Allegion.
Carriers like that May have aircraft in the hangar and had aircrafts scheduled for the remainder of the year, though those dried up obviously, because those airplanes have been parked.
Now the the Mros had been able to fill those slots with our own airplanes that had been put out sized for C checks and things like that so if we're able to fill the hangs with our own work, but as you know.
The that revenue and profit gets eliminated in our and our consolidated profile.
Okay, absolutely that does that make that banks walking through that.
So so maybe kind of shifting gears for moment, it kind of stepping back and thinking about this significant growth that we've been seeing in ecommerce demand that's really been pulled forward by the pandemic.
We're hearing about an additional retailers that one of want to put.
Speed first it sort of get the product to consumers quickly to compete with with the likes of Amazon.
What do you think that does to the outlook in the demand for the mid mid size.
Freighter assets like Yours and are you as you look out over the next couple of years, you know rich I mean.
Is there anything in your mind that slowing down the growth outlook for.
For the type of assets you guys put into service.
Great question, Jack I mean, what we're seeing so far this year is that.
The two large customers that we service in the network basis, DHL and Amazon are essentially flying right now at peak levels.
And so and that was not an opportunity to date they had they could planned for.
It's not like you know peaks coming in November December and you got all year to kind of get production line.
And that spans right from pickup of pickup through line haul through air through delivery challenges.
And so and it and at the same and at the same time demand is picking up even more significantly because people who didnt you didn't used to order online ordering online in the some of the studies I've seen and said that about 60% of that's going to stick so people in ever order online before or 60% and we're going to continue to order online even after the pandemics over.
So all that said I mean, we've seen that.
It's one of the reasons, we went from eight to 10 projected 767 this year to to at least 12.
And that's because we kind of realigned the way we're deploying the sevensix sevens because short term, we handle a big jump from our existing customers to get more airplanes in the network quicker.
We're currently flying.
Just about everything we can we've got two customers as we noted that we're going to be returning 7672, hundreds that have opted to hang onto them.
At least through the end of the year and probably into 2020 and so the demand is really strong now since the.
Online ordering is picked up all the projections I've seen is that it's going to continue in the future and so what that means is not just this year, but going into 2021 and even into 2022 on the demand for freighters is going to continue to be strong.
I'll, let Mike you can add any color yes.
That's very solid start there rich the other thing I would just add that obviously.
Driving the demand is is is belly freights down.
70%, so obviously with the passenger folks.
Sitting a lot of planes the deck.
That's also driving.
An incredible demand for for the freighters.
And we're seeing greater usage as an industry of 30 plus percent as well as block hours are up 7% to 11% over the last few months.
And the great part about it we're not only seeing the demand here in the us.
But we're really seeing it around the globe.
We had mentioned that we had first but our first lease.
In Mexico for example, with mass there few weeks ago.
Further expansion with with our customer and Malaysia with right Airways and we anticipate the for the ended the year. There will also expand into Africa. So the demand continues not only across the us Jack but also really around the globe.
Okay, Great Classic last question I'll turn it over but theres, obviously quite a bit of passenger feedstock that's available for both the 767 and then the Athree 21, because of what's happening with with passenger air travel from the pandemic, how does that change feedstock costs for you guys and so what are the implications for free cash flow.
Over the next couple of years because of that.
Yes.
Thats a great question, we've we've we here and we see we read all the feedstock thats coming available to the market as it relates to the seven six though for example.
We really havent seen from in a formal basis Jack.
Those who those airplanes become available that's about a lot of discussion about auto I'll talk about them up but theres no really formal.
Communication in terms of RFP isn't that type of stuff that we normally would see.
From the from the providers in regards to the ones that we are seeing the won the two these are that we're seeing out there in the market right now.
The price on a 767, it's actually very stable if not increasing sub.
Which is which is really quite quite interesting.
In regards to 321 as well it's again, we anticipate quite a few of those coming on the market, but rich gave some guidance in terms of where we see our investment over the next this year over the next few years.
In the 321 itself.
Okay, and Jack Squint regarding free cash flow.
We had.
We discussed in the and the remarks earlier.
The fact that we foresee increasing free cash flows we look towards 2021 keep in mind at the end of June.
We had I think between aircraft in March and Air at 7767, 300, and Mot and 300 staging for lease we had 15 aircraft.
As we sit here today, we have seven more committed feedstock purchases.
For in the second half of this year and three next year. So that would bring you to 22 available and as we said we have 20.
Newly model 300 leases.
To deliver at at least.
By the end of next year, so at Allen leaves a couple.
That kind of art soul of what we have committed to buy currently now we said we made by a couple of more.
Next year, which would mean you know we'd be delivering.
Now somewhere between 11, and 15 leases if all of them got filled and we we are committed to a couple more planes.
But the guidance and Capex.
A 350.
As quite a reduction next year versus this years for 65, so we see a lot a lot of free cash flow growth next year.
Well, that's that's great to hear quit thanks, so much of the time guys. Congratulations again.
Thanks, Eric.
Our next question comes from Helane Becker from Cowen.
[music].
Morning Holly.
I'm not sure she is on.
Okay.
Might be muted.
I will try again moderator can we can we head to the next caller maybe.
Our next question comes from David Ross from Stifel.
Yes, good morning, gentlemen.
Yes.
I'm.
I wanted to start out rich on your last comments there in the prepared remarks was about using capital.
Potentially a wide range of alternatives.
There has to be demand from customers right now to get into the cargo charter market.
How are you thinking about.
Service CUSIP extensions product extensions to do more on that side of things.
Well there we we are doing a little bit of charter work now we.
We call charter.
And.
It's not part of our long term strategy, we will.
We like to move charters and HCM Islands.
Then the leases if we can.
We.
In the fourth quarter of this year will have several more aircraft out of maintenance and we'll be able to expand on what we do for Pete in general every year.
With that and we plan for those aircraft to be out of out of maintenance, but our view in the charter is as short term fluctuating thing and although it's it's a real spike right now and probably will be for the remainder of the year.
When you look at our business model and how we've got these 20 aircraft tagged with leases going forward and the ability to do more we believe that it's a much better return to the shareholders for the money that we invest to have the long term return on the assets that we buy and put into service.
That said we are doing as much chartering is we can the aircraft that we have matter fact, we just signed a deal right now to put our Comby I believe it or not a copy the normally flies for the military since we've got less flying there. We're putting up is just a freighter for one of our customers to take the place was 737 for a week or two that's in maintenance.
So everything we can fly we are flying now, but we don't still don't think the charter is going to deal a long term part of our strategy because it really doesn't match the long term investments that we make in the aircraft.
That's helpful. And then you mentioned the two temporary semi routes are flying from Hong Kong, as Sydney and Asian to Us.
Like short term multi month contracts, what's going to happen to those planes and those contracts are over do you think.
Well, you're exactly right. There those are lanes that were that are augmented were formally.
Some of that a material was handled and belly space.
And in some of it is just an increase in demand for the lanes that they're in.
We believe both who will go through the fourth quarter the.
Once it's in the far East this line between Hong Kong and Sydney, We think we'll go longer than that because we don't believe that will be enough charter on an up passenger belly capacity back into service for quite awhile.
When we originally got into that platform.
We were looking to handle that charter business for the rest of the year and then and then converted to a dry lease in fact, and that's still a possibility because weve.
It really just depends on the long term needs of the customer that we outlined for DHL.
But but we anticipate that both of those routes Elise flights in the ended the year and the one of this in the fire parties will probably go longer into 2021.
And last question is just on the staffing side in the past we've talked about some labor issues.
With mechanics in the hangers.
Has that changed is that it's been more of an issue less of an issue.
Yes, so that's what I can tell you the couple of things one is.
We anticipate that hiring.
It will will be easier.
Through the rest of the year.
There's a lot of.
Airline personnel that.
We'll be will be available.
When the cares Act.
Period on no furloughs is up is up right now, it's still kind of tight but we made a number changes in our some of our human resources policies and compensation and we've actually reduced the turnover by 50%.
Of our maintenance technician and we are having an easier time of finding people, we anticipate that it's going to be a lot easier to find people now we noted in the prepared marks remarks. If you saw that we're not happy necessarily with some of our line maintenance costs for our network operations and that really goes into not so much.
Our ability to hire people as it isn't that frequency of the changes in the schedule and in general when you go into a market you.
You have to kind of rely on contracting that line maintenance on initially.
Until you are able to training room folks to go in to backfill so.
But we believe that the the market will certainly get better and in the meantime, we've made some changes in our own that have kind of solidified our our workforce.
Great. Thank you.
Our following question comes from Helane Becker from Cowen.
Okay does that work. This time can you hear us loud and clear yet.
Yes.
Hello.
Worried about it.
I couldn't hear you perfectly fine but.
Whenever I guess this house has.
So so thanks for all the help on.
And the comments that you maybe just a couple of questions.
Well when when you think about like demand worldwide going into some of these new markets like Mexico on Africa, increasing in Indonesia is in Malaysia is that.
Something that long term, we should think about is.
Available to you or are these like one off.
One off that wouldn't be there it's belly space was more readily available.
Hi, guys Mike.
We definitely think its long term and where.
I mentioned rises as a start there we placed our second aircraft with them.
Anticipate.
Further aircraft of development with those folks.
Entered in 2021, and we also anticipate further further growth into Mexico with modest there.
Outside of outside of the first deliver they took their share we would anticipate.
Another delivery in 2020.
Also our are quite confident we're going to we're going to enter into a longer term opportunity with them over the next that work that will take us through the next.
Three to five years or so as it relates to Africa.
We also as I said anticipate being in the market this year.
Our quite excited to to get ourselves into that part of the world.
And do not see that as a one and done at all.
Correct.
We see that much much as our growth plan as possible with.
With the customers that that we're working with.
We're quite excited about the future and in Mexico and.
In Southeast Asia, and real excited to move into into Africa as well so.
That should give you a little bit more color tier.
To your question.
Yes, that's very helpful. Thank you.
And then my other question I know that most of your customers are high quality and probably prompt payors do you are there any customers, we should be a whereas that are.
So impacted by the Corona virus that they're not.
That they're not not paying on time.
Helane.
As Clint we we.
I would say no at this time, we were not foreseeing any collectability issues. We you know as rich commented that the customers for our MRO you know the passenger carries a courseware were impacted quite severely and.
And we did.
Of course.
Discussions with them early in the year you know in the pandemic was was settling in and today have all.
Performed as agreed and are paying their bills. So we really don't.
Foresee a lot of of issue.
As you know over 70% of our revenue is.
Is the Deo D Amazon and DHL.
Great well just just.
Just had other revenue that.
You are replaced that you talked about I think in answer to Jack's question, replacing with your own.
Yes.
And the cargo the cargo less ease of course have been saying a lot of demand. So unlike a lesser a passenger aircraft, we're not being approach with a lot of request to defer renter or have had those issues.
Okay, Thats perfect alright, well, thanks, very much thanks for coming back to me I appreciate it.
Thanks, Lynn acute idling.
Our next question comes from Stephanie Benjamin from Cats Company.
Securities.
Hi, Good morning, good morning, I step in the morning.
I appreciate the update that you provided on just the 80 21, I think you mention essay approval expected in the fourth quarter could you remind us how that should play out.
First in the short to medium term with your current and joint venture and long term, how you might be able to leverage that with your on leasing model. So how should we we should think about the impending approval.
Sure.
This is rich so the way we're looking at this rate now we've got we'll we'll start our flight testing of most of our ground testing is in process now were completed.
I will start flight testing next month and look forward to.
The STC being approved for the.
One engine tied to two different engine types on the airplane, but for the Cfmfifty six engine.
And so I mean once we've got that completed them were comp we're on our way we're in the process of of getting the second aircraft lined up for conversion.
And then we've got a pipeline of about six customers with 14 aircraft that were in conversations with.
And.
And they'll go into conversion next year when you look at the way, we're planning our capital spending as it relates to the Athree hundred 21.
For the year 2021, it's really just involving kits.
To get prepped for conversions.
We're also.
Our MRO.
In Tampa the their conversion business PEMCO has been we're in the process the finalizing an agreement with the with our joint venture.
To be a convert or of the Athree hundred 21 in Tampa and we believe that we'll be able to convert up to four of the Athree hundred 20 ones in Tampa, there will be other conversion houses in other parts of the world that would be involved as well.
And we don't anticipate being a less or of the aircraft.
And investor in the airplane and conversion to BLS or until late 21 into 2010 2022.
Before we would have that is.
Ongoing.
That formed for investment.
Our plan is to in addition to the to the leasing and the conversion and being a party to the to the licensing of the STC.
If our customers want us to fly will put around certificate and fly it.
Wrapping the rest of our business model around it. So we'll have an a plus the CMO and then also obviously our RMR Roes are already.
Well involved in doing maintenance on Athree 20 ones today for their customers. So.
And our specs we plan to have an even bigger business model around the 321 than we do around the 767.
Great. Thank you and then lastly, obviously stressing the plans and a reduction in Capex next year in a continued cash flow improvement can you discuss intentions from a capital allocation allocation standpoint, what you would possibly focus on Inc.
Well I think we've got a situation right now where weve since we're going to be converting and having available several of the aircraft that are deploying next year. It will be in process. This year. So next year's Capex will be although it will be a lot of airplanes deployed on the Capex will certainly be lighter.
And we'll have.
We'll have options to.
Use that capital for other things or continue to grow the seven six Seventhree hundred fleet I mean, the demand on the Sevensix Evan.
Just as evidenced in addition to the way that we're redeploying or 7672, hundreds is very strong and Thats a solid return as we've seen in the growth of that.
We have however get of kind of a more structured M&A program right now in terms of evaluating companies that are Jason sees that makes sense to enhance the value proposition that we currently have for our customers to add even more value to to what we currently do so thats a potential.
And then and and then also once we're through the.
Restrictions that we have in the cures act it would be a potential to return capital to shareholders.
And Stephanie.
Although we talk about Capex of 350 million or this year for 65 remember the maintenance Capex portion of that annually probably is average around only $100 million. So there's there's a significant amount of discretionary cash flow that.
We allocate.
To to generate returns and we have that ability.
Going forward as you know back at the end of what 2018, we committed to via 20 aircraft fleet.
Been operated by American Airlines, and we complete that next year.
Said, if you look at committed aircraft purchases when you get at next year, there's only three as we sit here today and nothing beyond that Tom. So you know with only 100 million of annual Capex and EBITDA heading probably next year, we would hope somewhere north of half half a billion.
Now that there's theres, a tremendous amount of cash flow.
That we can.
Aim at generating attractive returns.
Great. Thank you so much.
Our next question comes from Howard Rosencrans from the.
Yes, hi, guys.
Thank you.
Thank you very much.
Yes, Matt actually continue with exactly where you were in terms of.
With what you were talking about I mean, the three playing in talking about the free cash flow five three planes are like 75 million box, so you're right if.
Please correct me what their retrofitted so.
We really talking about the starting point for Capex for 21, being a 175 million.
Well, you've got 11 aircraft that you have to deliver to Amazon Howard next year based upon current orders and member those aircraft are going to be in conversion many of those aircraft and conversion.
Throughout next year, so youre going to have the conversion costs on those aircraft as well.
Along with the maintenance Capex that you mentioned.
Alright, Okay, I feel like most of.
The conversion on knows what's going to be done.
We're going to be done this year, but.
Hey.
Yes.
There will be there will be several that are largely done, but not 11, and you're you're still youre still going to have to complete those conversions on the rest of the order.
Okay would it be fair to say just for kicks in giggle. Okay. If you were not to commit.
Further our aircraft sort of back of the on bulk math. It seems to me that you would have at least.
Other.
At least another $50 million.
Let's say you would cut your capex to 300.
Hi.
That that seems like.
Okay.
I don't really know how you could get to 300, but it's fair to say if you don't commit to more than three year.
Your Capex is going to goes up 300.
That's that's ballpark correct Howard I I think Thats that's correct.
Okay. So I.
I applaud you for what you have accomplished.
Not just this year, but over many many years and mean that.
Very sincerely it seems like what you guys do with what you've accomplished.
Let me, there's certainly few and far between the companies that are that are performing this year, along the lines of their original or very close to their original expectations.
Yes, there's still a six multiple uh huh.
The able to assist associated with this stock I no matter what goes on here, there's still a six multiple so in some way there's not there were sort of a lacking a connection will get well as analysts will get last year will go over there, but no sure we'll decide if it's if its fourth.
Kevin the or whether next year is 500 or five plan, but the bigger picture message seems to get lost and I am just pull pulled back the old start redirecting.
Since it's going to get lost anyway, so why not redirect the.
More free cash flow to sending that message to shareholders.
In the form of of pop up I guess for most share buybacks, but maybe initiating a modest dividend for those who can't.
Okay, I don't stocks that are.
I mean, you're going to go to substantially less than three times.
Next year on your leverage ratio is that's the sort of bogey for bar whatever that you were looking for to two to really move in to it and I assume a return of capital direction.
Howard.
We certainly.
I understand the sentiments that you're expressing here and these are I think we all acknowledge right. These are these are good.
Problems to have as the same goes as we add we also.
Recognize that the cash flow part of our story is a very powerful part of our story we've been in growth mode.
Because the demand has been so strong and we feel like that was the right thing to do.
Over the last couple of years, we've spent a lot invested a lot of capital as you point out to.
Generate a lot of really long term returns remember we aim our capex said at investments that are going to generate cash flow for the case these amazon leases for a decade.
And so we think that was the right decision.
The if the invite if that environment of course changes as as things do tend to change we recognize that there are other ways to provide value to shareholders and.
As you have mentioned.
So those are part of the array of capital allocations that we we can consider.
Yes, as rich stated you have the legislation on the cares funding put some moratorium on that I think through at least September of next year.
But those are things that depending upon the demand environment.
Our our alternative certainly to provide value and those are things that we.
We will and we do consider the board considers.
As as we look at the business. So these are good problems to have I mean, the short answer is Theres. This model is producing strong cash flows even in a stressed environment like we're in and the trajectory. We're on with the growth next year will provide continuing growth in cash flows even through.
2022.
So.
We look forward to wrestling with those issues, but we hear you.
I don't know Thats the answer you looking forward.
Hi.
I've ever.
It's always a high class problem, if you're not a shareholder but anyway right.
Uh huh.
Thanks.
Okay, how Howard.
Our next question comes from Chris step up Lewis from Susquehanna.
Good morning, guys. Thanks for taking my question for.
Good morning, So I'll give it to one question.
Obviously this is a very unique time for anyone in aviation and.
Curious you know what what are the obstacles to driving say, 10% to 15% adjusted EBITDA growth.
Through the next two to three years and getting your leverage down too.
Q2 and half times.
Possibly.
You know, establishing perhaps a floor at high single digit margins for HCM you have the expanded TS say you did back with Amazon in June I don't know, it's a ti has gotten the full lot there, but it looked to have at least one passenger belly capacity doesn't look like it's coming back.
Pre koby 19 levels for at least two three years. So curious why why can't we see that sort of 10, 15% EBITDA growth through this through a recovery. Thanks.
Yes, so one of the things to keep in mind that right now we're looking at 20 deployments of 767 300 traders.
Between now and the and the into 2021, it's at least 20.
And as we sit here today.
You know there aren't too many companies that you can look at in today's economic environment that have their entire book of.
Production, if you will already booked.
Through the next year, which will deliver results into 2022.
Now we also will have the opportunity to fly.
A lot of those 7673 hundreds the ones that go to Amazon will will have an opportunity fund as well and we are looking at ways nodes one of our key initiatives right now is.
Is trying to get more productive.
So on my prepared remarks, I noted the the the line maintenance issue.
And we believe that.
That will have more profitability coming out of the.
My segment as a result of that.
And so when you look at the profitability, we get out of the leases will improve we believe we can improve on returns as it relates to the network flying that we do.
And then of course, we've got the military that that remained stable in in more marketable volatile times.
We will believe will be we'll be able to maximize our EBITDA returns as we go forward.
So just a follow up there so if we look at it.
Perhaps that you know a good chunk of the capacity that has perhaps competed with the cargo airlines is not coming back and I realize that the way. This model works you need to add aircraft to grow but organically speaking here would it be fair to say that you know over a two to three year recovery period, you could kind of easily.
We put up 8% to 10% EBITDA growth.
Well thanks, Chris.
One of the things that drives course, the biggest saying that drives our EBITDA is investment and additional aircraft and so it again in the prior question. We had from Howard you know there so sort of a balance right. It's a cash flow story. So.
We look at.
EBITDA.
Production and we look at.
Cash flows you know net adds.
Investment free cash flow. If you will is also being important so there's it's it's being able to sort of adjust based upon the demand environment to when it's a good idea to go all and sort of with investment and grow that the EBITDA line when it may be more.
Hi, guys to pull back somewhat.
But but generate more free cash flow.
So that's that's the sort of the situation, but if you're just looking at driving EBITDA organically. It requires continued pretty substantial investment and Capex and of course, we're growing on a bigger base because our EBITDA has grown rapidly we've seen double digit type EBITDA grew.
Growth.
Over the last several years so that becomes.
You'd put up 10, 15% I'll ever growing number is requiring more investment.
Great color. Thank you yes.
We have no further questions at this time I will now turn the call over to Mr. Corrado for closing remarks.
Thank you Sylvia.
First I'd like to thank all the TSG employees, the agility tenacity and creativity of they have shown on behalf of safety and servicing our customers has been extraordinary in very very challenging times.
Their performance a delivered strong results for our customers and shareholders that we saw in second quarter.
Moving forward the challenges remain but the TSG business model will continue to Mike to mitigate challenging fluctuations in business cycle demand.
Our strong portfolio of long term dry leases our networks line for Blue chip customers, including our position position of flying passengers for the department of defense, all provide us immunization against market volatility.
In closing as we noted in our discussion we have at least 20 newly converted 767 300 freighters to still delivered by the end of 2021, all of which will also contribute to our 2022 growth for a full year and serves the resulting cash flow and lower capex in 2021 will provide us.
With more options to deliver even better returns for our shareholders.
Thank you for your interest in Ats Gi and have a great day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.