Q3 2021 Air Transport Services Group Inc Earnings Call
[music].
Welcome to the <unk> third quarter 2021 Air Transport Services Group incorporated earnings Conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer sector during the.
<unk> and answer session. If you have a question. Please press Star then one on your Touchtone phone.
I'll turn the call over to Mr. Joe Payne, Chief Legal officer, Mr. Payne you may begin.
Good morning, and welcome to our third quarter 2021 earnings Conference call, We issued our earnings release yesterday after the market closed.
On our website ATSG IMC dot com.
Let me begin by advising you that during the course of this call we will make projections and other forward looking statements that involve risks and uncertainties, our actual results and other future events may differ materially from those we describe here.
These forward looking statements are based on information plans and estimates as of the date of this call 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 limit.
Due to the following which relate to the current COVID-19 pandemic. The pandemic may continue for a longer period or its effect on commercial and military passenger flying maybe more substantial than we currently expect.
Cause disruptions to our workforce and staffing capability, including through our compliance with federally mandated COVID-19 vaccination and testing requirements.
Caused disruptions in our ability to access airports and maintenance facilities and adversely impact our customers' creditworthiness or the ability of our vendors and third party service providers to maintain customary service levels.
Other factors that could cause atsg's actual results to differ materially from those indicated by such forward. Looking statements include but are not limited to.
Unplanned changes in the market demand for our assets and services, including the loss of customers or a reduction in the level of services, we perform for our customers our operating airline's ability to maintain on time service and control costs, the cost and timing with respect to which we are able to purchase and modify.
Aircraft to a cargo configuration.
Fluctuations in Atsg's traded share price and in 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 key agreements with customers lenders and government agencies the impact of current supply chain constraints, both within and outside the United States, which may be more severe or persists longer than we currently expect.
The impact of a competitive labor market, which could restrict our ability to fill key positions change.
Changes in general economic <unk> 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 on Monday.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings per share adjusted EBITDA and adjusted free cash flow.
Management believes these metrics are useful to investors in assessing atsg's financial condition 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.
And now I'll turn the call over to rich Corrado, our president and CEO for his opening comments.
Thanks, Joe Good morning, everyone. You just heard Joe mentioned that we are disclosing for the first time this quarter another non-GAAP metric in our financial reporting adjusted free cash flow.
It's part of a broader set of disclosures to help us highlight the power of our business model to our shareholders.
And to help many of you who tell the ATSG story to prospective investors on our behalf.
The earnings release, we issued yesterday includes a summary of our GAAP cash flow statement, along with a breakout of the sustaining portion of our total capital expenditures.
As Quint will discuss shortly supported by the slides accompanying our remarks significant cash remains after funding those essential payments to maintain the assets we already operate.
Our business model is highly visible future cash flows afford us many attractive capital allocation options, including further growth investments and direct shareholder returns.
For the third quarter, we generated a record $153 million in quarterly adjusted EBITDA, our traditional non-GAAP measure and put nearly all of it back into the business to keep it humming and Stoke our growth engine midsize freighter leasing.
We have placed 13, Boeing 760 sevens into external customer leases since September 2020.
Airlines again achieved double digit growth in revenue block hours versus the prior year and we are strongly profitable with improved margins.
Omni Air was a notable contributor to those gains due in part to its supporting role in operation Allies refuge the U S component of the evacuation of Americans and at risk civilians from Afghanistan.
Omni is completed 79 missions and transported over 20000 passengers in this effort.
I know I speak for everyone at ATSG and expressing our gratitude to the omni team for their courage and dedication in completing these vital missions.
There are many other great elements to our third quarter story and are now a stronger outlook for adjusted EBITDA through the end of the year.
I'll be back to share them after quint reviews, our results in more detail.
Quint.
Thank you rich and welcome to everyone on the call. This morning.
Our consolidated revenues grew a substantial 15% for the quarter to a record $466 million.
Both our aircraft leasing and airline businesses delivered outstanding results with gains of 22% and 10% respectively.
Revenue growth reflects the impact of 13 more freighter aircraft leases and the related increase in CMI flying by our airlines from freighters, we're leasing to and flying for Amazon.
Our defense Department revenues were also strong due in large part to the Afghanistan evacuation missions, we flew through September.
Block hours flown for the department of defense increased by 581, or 7% compared to the third quarter of 2020.
Third quarter, adjusted EBITDA of $153 million was up 22% from a year ago and up 20% from the record $128 million, we generated in the second quarter.
Again these gains reflect our additional 767 leases and flight operations for Amazon and also leases of our 767, three hundreds and two hundreds to raia sky taxi, <unk> and Astro diversifying our customer base and enlarging our global footprint in Asia Europe flat.
In America and Africa.
On slide four for the trailing 12 months ended September 30 of this year, our adjusted EBITDA increased to $508 million from $481 million at the end of the second quarter of 2021.
We project for the full year 2021, we will produce adjusted EBITDA of at least $535 million.
In the year ago period, reflecting.
As reflected on slide four adjusted EBITDA benefited from additional passenger charters to recover Americans during the pandemic.
As a reminder, our adjusted EBITDA excludes the benefits of federal pandemic relief assistance under the payroll support program for all periods shown.
On slide five our capital spending for the third quarter has roughly plateaued at an annualized rate of about $545 million, but remains above our prior run rate.
The lower section of each bar shows the portion of our capital spending that we have allocated to growth, which consists mainly of feedstock aircraft purchases and freighter modification costs.
The upper portion of the bars show spending for what we call sustaining Capex, which primarily includes scheduled aircraft maintenance and engine overhauls technology improvements and other non aircraft spending.
As shown on the slide approximately two thirds of our total capital spend is for growth and one third for sustaining our operating assets.
For the full year 2021, we project total capital spending of $530 million.
$335 million for growth and $195 million of sustaining capital.
The next slide slide six shows adjusted free cash flow, which is our operating cash flow net of the sustaining capex I mentioned a minute ago.
Unlike our adjusted EBITDA measure our GAAP operating cash flow includes cash received under federal pandemic relief programs for passenger airlines.
We did not receive any such cash in the third quarter, but did receive payments of $83 million in the first half.
That difference along with other variances in our working capital reduced our accelerating cash flow trend for the trailing 12 months ended in September.
The bottom portion of each bar shows the significant adjusted free cash flow our business produces.
For each trailing 12 month period shown adjusted free cash flow has exceeded $330 million.
Which is capital potentially available for growth investments debt repayment and other uses.
Spending for fleet related growth has roughly equal our adjusted free cash flow for the period shown as we believe that investments tied to fleet expansion represent optimal use of that adjusted free cash flow in todays hot market for mid sized freighters.
In future periods, we expect our adjusted free cash flow to increase as we execute additional long term leases and expand customer operating agreements.
Slide seven illustrates how the significant cash flows our businesses generate have enabled us to expand the size of our owned aircraft fleet, while reducing our debt to EBITDA leverage in other words, our business self fund significant growth.
Our current debt to EBITDA ratio as defined under our senior secured credit agreement stands at two two times down from two nine times at the end of September of 2020.
The 122 aircraft Cam owned at the end of September including aircraft staging for re lease and awaiting freighter mod speak to the strong overall returns we are earning while at the same time Delevering on an owned fleet now twice the size that it was five years ago.
With that summary of our financial and operating results for the quarter I will turn it back to rich for some comments on our operations and outlook rich.
Thanks Quint.
We couldn't have picked a better time to put the cash generating power of our business strategy on full display in our reporting as our businesses are performing as well as the pandemic constrained economy will allow.
Record revenues and adjusted EBITDA for the quarter and year to date, the rewards of substantial fleet and other growth investments that quint, just outlined and the dedication and skillful execution by our people.
And we can make a stronger case than nearly anyone in the transport sector that the future cash flows from our long term relationships and business agreements with Blue chip customers are undervalued in today's market despite being highly visible.
All of that aside we still face challenges related to the pandemic, particularly in our passenger operations. The good news is that we anticipate omni as passenger charter operations to continue to make progress, but expect fourth quarter passenger operations, including Ati's military combi to yield results similar to last.
Two years fourth quarter.
Like others, we are immune to supply chain challenges, we had planned to put 16 or more converted 760 sevens on lease this year.
It has recently become clear that supply chain constraints impacting our freighter conversion lines will keep us one aircraft short of that Mark in 2021 with aircrafts sliding into 2022.
Even with this delay deploying 15 converted 767 300 freighter aircrafts and re leasing for 767, two hundreds will be a yearly record.
And represents and a remarkable achievement for the teams that made it happen.
We're taking steps to expand our freighter conversion capacity in multiple ways, including our commitment to convert and lease 20, Airbus <unk> hundred 30 aircraft starting with the first lease deployment in 2024.
We're also adding Boeing as an additional conversion source for at least $4 760 Sevens with the first induction scheduled for August of next year.
Additionally, we will continue to convert Boeing 767 aircraft with our longtime conversion vendor.
Altogether, we have secured access to 70 conversion spots for Boeing 767, 300, as well as Airbus <unk> hundred 21, and <unk> hundred 30 aircraft over the next five years.
We are continuing to find willing customers for all of our midsized freighters that we can deliver our order book for Boeing 767, 300 freighters is full until late 2023, we already have significant customer interest in both the <unk> hundred 21, and $3 30 platforms.
Cam has already purchased the first <unk> hundred 20 ones it intends to convert at PEMCO facilities in Tampa and.
And to deliver to the lease customers in 2022.
We also have other operating accomplishments worth celebrating ati's customers are benefiting from a series of upgrades at its flight control center that are reducing fuel consumption.
The 17% increase in revenue block hours at all of our Airlines is great news, but it's important to note that those gains would not have been possible without our airline's ability to attract and select new flight crew personnel from the outstanding pool of talent and get more than 100 of them trained certified and ready to fly those assai.
It's when our customers needed them.
Our logistics services business has worked hard to be a reliable partner for Amazon for the ground and fuel services it needs to match the rapid buildup of its fulfillment network that.
That includes the opening of a new gateway facility in September and Nashville, and continued support of Amazon's gateway facilities, and Charlotte Tampa and here in Wilmington, Ohio.
Earlier this year, our Ames aircraft maintenance business announced a new multi year agreement with United Airlines for heavy maintenance work on its Airbus <unk> hundred 20 ones and several of its Boeing aircraft types.
That work will be completed in the Ames hangar facilities in Wilmington and Tampa.
And finally aims PEMCO division completed delivery of its second Boeing 737, 700, Flex Combi and received an order for another.
PEMCO also inducted the first of what we anticipate will be many Airbus <unk> hundred 20 ones for conversion to freighters.
Those are a few of the operating and commercial successes that helped us generate record financial results. This year.
And will contribute to the results for several years to come.
They are part of the reason why we are able to announce an increase in our financial guidance for 2021.
Our adjusted EBITDA is now expected to be at least $535 million. This year ahead of the $525 million target we set last February.
I expect Atsg's business to post strong positive free cash flows net of our sustaining capex spend for years to come.
That concludes our prepared remarks, quintin nine along with Mike Berger, our Chief commercial officer are ready to answer your questions.
We have the first question operator.
Thank you and our first question is from Jack Atkins from Stephens.
Okay, great good morning, and congrats on a great quarter guys.
Thanks Jack.
I guess, maybe first if we could talk about the guidance for a moment and the increased outlook for 2021, Quint I don't know if you want to take this but maybe if you wouldn't mind kind of walking us through some of the some of the puts and takes behind the raise I would imagine.
There was a little bit of an additional benefit from omni related to the Afghanistan withdrawal of the third quarter, but it sounds like.
Maybe.
The ramp and expected underlying military demand was maybe a little bit below expectations. I guess, if you could just kind of help us kind of walk through all the different puts and takes there from a high level that'd be that'd be helpful.
Sure sure Jack.
It's certainly true that.
The Afghanistan evacuation added some.
Revenue opportunity.
And omni during the third quarter and that that is a part of it however, the expenses necessary to satisfy those opportunities.
We're also probably higher than folks might expect we had to pay some premium pay certainly to the flight crews and the flight attendants to work those slides from an EBITDA perspective, it wasn't as big a driver as some might some mine suspect I think that.
We have seen.
We saw it last quarter the second quarter, we saw in the third quarter and expect it to continue.
And before we see improvement in our airline <unk> operations.
We've.
We're getting larger certainly in our support for our network cargo customers and as you would expect you to look for efficiencies as you grow in size in those networks. We're also seeing.
Some improvement certainly.
With omni in terms of the commercial passenger business, it's still constrained.
With the pandemic effects, but as you guys do much in college football and things no.
They are a little bit more normal we're seeing some some signs of life, there and thats helped and of course Cam and the deployments that.
We talked about the 40 plus percent earnings increase and Cam over the prior year quarter Cam.
<unk> is doing an outstanding job of delivering on its lease commitments for customers with a record number of leases put in place.
And again these are long term agreements so that that is all helping to come together to allow us to bump our guidance.
Jack I'd also add to that I think it is important to note that we have put in if you recall, we talked about a lot of technology improvements and operational improvements that we were working on and those are starting to bear fruit now.
We put our continuous improvement program in about a year and a half ago and did a large supply chain optimization program across the enterprise to leverage the full scale buying power of ATSG.
For all of the individual entities and that's bearing fruit we've implemented.
New flight scheduling planning and following as well as crew optimization scheduling software at the two cargo airlines.
And so that is starting to allow us to be more efficient with our crews and so when you look at the better performance by the airlines it wasn't it wasn't.
All volume related there was a lot of hard work by a lot of people leveraging technologies and projects.
That are helping us become more efficient and productive.
Okay. That's really helpful. Thank you were kind of walking us through all that.
I guess, maybe for my next question here.
The 70 convergence slots that you guys have secured over the course of the next I believe you said five years rich.
I guess two questions. There one could you maybe provide us some visibility into how many of those you think are kind of already spoken for or do you feel like you've got visibility into sort of the.
The demand for those and then secondly kind of within that broadly could you talk about the types of customers that.
Or you think those incremental 70 planes will be going to over the next the next five years are these going to be large sort of enterprise level customer contracts like we've seen over the past five years or do you think theyre going to be.
Yes.
Smaller type contracts with.
Kind of one off customers I was just kind of curious if you can maybe break that down a bit for us.
Yes, Jack it's Mike.
Take that one.
We really see it as a continued combination in regards to the type of customers.
That we project these aircraft to go to.
Certainly you have heard us over the last several several quarters talk about the expansion globally and the push.
Into other regions of the world and we're going to continue to build upon those customers.
And they certainly are part of our order book today, So the astra's Astral psoriasis guide taxes of the world.
He will become bigger customers for US no question in the future.
We are also.
We're also excited about the opportunities that.
We have new opportunities and new customers.
Those parts of the world as well in regards to the enterprise type customers.
We certainly believe.
That.
E Commerce growth is going to continue to drive.
The market for our big enterprise customers. So we continue to see a large youll see a combination of both.
And the engine continues to be.
The E Commerce and commerce that are driving the integrators as well as the regional players.
<unk>.
In regards to how much how much visibility we have.
In regards to it.
Thousand 22, we have previously said that.
Our order book from a conversion standpoint will be at least 10 760 sevens as.
As we look out further into 2023 at this point.
We've got visibility on.
Probably close to.
Somewhere between the high <unk>.
<unk> two.
Somewhere in the high teens for 2023 deliveries.
Based on that and as rich mentioned earlier, our 330 conversion slots slots.
Start in July of 'twenty, three and runs through December of 2005. So our first 330 deliveries will be very early in January starting in January 24.
So thank you again.
And I would also say Jack that.
As far as customers for those airplanes.
We're pretty much booked through the middle of 2023, and the 767 side all three 2021.
<unk> hundred 20 ones have customers that we're working with right now so.
As far as not just the slots and I should say, we also have feedstock.
767 through the third quarter of 2023, so we've got feedstock, we have slots and we have customers.
So 2022 is looking closed out in 2023 as we're finalizing things.
And just one final thing I mentioned the slots in terms of <unk>, but the.
Customer interest in <unk>.
Regards to.
Getting getting customers actually assigned to the 300 series has been very very strong.
Been at <unk>.
Industry conferences.
Over the last month or two we will go to another one here rich.
Austin and is that a couple of weeks, so the conversations and discussions around their future aircraft specifically at 330.
Or even stronger than we thought so we're extremely excited about the future of that aircraft.
Okay.
That's very very helpful. I guess, maybe for my last question before I turn it over.
No you guys.
Historically have sort of thought about pricing your assets relative to the.
Cost of capital right Youre trying to achieve a specific level of Unlevered return on invested capital and then looking to boost that with additional services that you can add on after that but just given the high level of demand that you guys have been seeing now for quite some time and the visibility you have in demand looking forward.
How are you thinking about that.
Per unit economics of these aircraft moving forward or is there an opportunity to sort of move the needle higher just given given.
The level of demand, we're seeing for your asset specifically looking out over the next several years.
Yes, it's a good question Jack.
As far as the market goes we deal with all different types of customers some very large.
And we'll take.
Large blocks of airplanes at a time as you know others will take medium blocks and then we have smaller customers that tend to do business with our larger customers in other parts of the world.
<unk> is a good example down in Mexico that glad for DHL Sky taxi in Europe flies for DHL, but just some examples.
And so there when you look at the.
Kind of the negotiating leverage side it doesn't even though these are smaller companies. They have to have a cost structure that can compete.
For that same type of business. So we've been able to ratchet rates up a little bit keep in mind that when you're negotiating a lease term.
How long the leases, whether it's an eight year lease a seven year lease or a 10 year lease.
<unk> will impact the <unk>.
The.
Lease rate per month, and so a lot of times customers will want to extend the term to get a better lease rate, but we've been able to get ratchet.
Up a little bit, particularly on re leases and extensions in the past.
Pretty much when you gave an extension to a customer you take a haircut on it because there was a benefit to the company not having to have the aircraft come back and be down for two to four months.
Why you recheck, it and get it ready for another customer if you had one available.
But now with the demand out there customers are hanging on to aircraft a lot longer they are renewing their leases ahead of time.
And the rates are firming up on those renewals. So that's all good news.
That is good news, okay, I'll turn it over thanks again for the time alright.
Alright. Thanks.
Our next question is from lean Becker from Cowen.
Thanks, Darryl Hi, everybody and thank you very much for the time.
Well first of all thanks for adjusted free cash flow, that's very helpful and.
I appreciate that and then for my question I have two questions one is with the.
The amount of flying you did for us.
People out of Afghanistan, and so on how should we think about the <unk> revenue going forward.
I'm, assuming we're not going to have as much on <unk> and just kind of wondering how to think about that.
Yes, I think Helane this is quint.
In terms of the fourth quarter I think we said, we're expecting a fourth quarter.
Similar to what we saw.
In the fourth quarter of 2020.
As far as changes in the D O D.
Longer term in terms of the volume of military flying.
What we've seen in the past is that.
When theaters change it doesn't necessarily have.
A large impact on the on the actual volume offline because troops move from fee entered the theater and the rotations of those troops still take place.
Training exercises.
Move around but ultimately that.
Our experience in the past has been that our omni experiences and it hasnt made a real significant difference.
Over the long pole.
Sure.
But.
As we've said in the past, we don't get as much visibility on the on the passenger side with the Dod as we would for example, with scheduled cargo network flying for our other customers.
I Gotcha, Okay. That's very helpful. And then my other question is on <unk>. So I think you mentioned about United and doing the maintenance for them and I know you have some other customers for them.
When you think about growth for them, how do you think about.
I guess, how many outside customers because they have because they also do some of your in house maintenance I think so.
How big can they get as non ETS customers.
So it's a good question because this is.
Originally thank you it's a good question because.
We are constantly balancing that internal versus external revenue as it relates to the Ames profile.
Generally they.
We have demands, particularly the cam puts on them and then the other airlines have.
C checks et cetera, and sometimes there's things that only only aims can do for example, they are the only MRO in the world that will do it in a pressure bulkhead as far as we know.
And so we have some of those from time to time. So we tend to populate the specific needs of airplanes, our own airplanes, where we know it's more beneficial for AMC those airplanes, we do send some of our airplanes outside.
Due to allowing aims to optimize external customer views. So when we get a customer like United that has a multiyear agreement that will be consuming hangar space nose to tail.
For a long period of time, that's a good deal for us, it's a very predictable amount of revenue and cash and so we.
We optimize around that we've got other deals such as with frontier down.
Got it.
Ames in Tampa, and then we have conversion lines that are dedicated for the <unk> hundred 21, and right now for the 737 down in.
Tampa those conversion lines will probably shift by 'twenty.
2023, we will have a <unk> hundred 21 lines.
It's likely up in Ames, and we will probably be back off on the 737.
So it's really when we look at our annual plan. It's what's on the docket for C checks, an odd maintenance items, we do profile cams needs too.
Or whatever they're doing it's one of the huge advantages that cam has over other leasing companies is to have access to an MRO that'll prioritize their business and so when we have lessees that want upgraded avionics or they want some special worked under the airplane or they want us to help them put the aircraft on their certificate all of those things.
We can do it's captive and.
And we prioritize that with our MRO for Cam, but it's been in terms of total MRO capacity is kind of limited based on facility space.
Got it.
Kelly I was getting that feeling from rich excellent okay.
Alright, well, thanks very much we'll see you in a couple of weeks alright. Thanks Helane.
Our next question is from Frank <unk> from Stifel.
Yeah, great. Thank you very much.
Thank you for <unk>.
Breaking at the just the free cash flow and that sustaining capex number that that was very helpful.
I wanted to dig in on that a little bit last quarter, you had said.
I guess my question is on <unk>.
Maintenance Capex side that it was closer to $160 million a year.
Just wanted to kind of get clarification around that.
Versus kind of the $195 million guidance today for.
For 2021.
Are those numbers are those numbers.
Kind of different.
Asking a different question or is this kind of a higher year than normal I guess.
The real question is what does that number look like generally going into the future.
Previously you had said that it was scale.
Kind of linearly with plane additions can you give us a sense how to think about that on a per plane basis.
Yes, good question Frank.
If you look at what is in that sustaining we wanted we wanted to put growth.
Make it as pure as possible with just.
Feedstock purchases plus converge.
And then the.
What we're calling sustaining is primarily what you would call maintenance Capex, which is.
Heavy maintenance on the airframe as scheduled.
And an engine overhaul et cetera, but it also includes.
Some of the Capex that we invest here too.
Rich mentioned some of the technology improvements that we've invested in.
And so forth and so from year to year from period to period like for example, we've significantly.
<unk> upgraded.
Revise some of our big systems around here, whether it's flight dispatch or maintenance and we've made some investments in that which thankfully we're pretty much at the end of this period cycles kind of kind of over with that I think is responsible for the little bit higher.
<unk>, our sustaining capex guidance that we've given of 195 I do believe that the.
<unk>.
And timing of scheduled maintenance can have an impact from period to period, but in general I think kind of 160 <unk>.
One 180 number is a good number for our fleet driven maintenance capex on an annual basis.
And the thing about our business model is as the fleet grows.
Because we lease these aircraft out.
For the most part two external lessees.
They are responsible for the maintenance during the life of the lease. So you think about our business model the maintenance or the sustaining capex will not grow in line with the fleet because for the most part that's the lessees responsibility.
Youre going to see an expanding adjust over time youre going to see the adjusted free cash flow ATSG producers go up as we build out cam's portfolio of leased aircraft, it's not going to drive substantial.
Maintenance Capex.
Now we will have in terms of engines, we will have some more capex as we enter next year associated with some of the 77 engines that had previously been covered under power by hour agreements. So that will have some impact.
That's more of an accounting thing than it is a cash flow thing because we won't be paying for the power buy cycle.
Expense for that the maintenance of those engines instead, we will be capitalizing those overhauls.
And so youll see that have some impact but.
The good thing about our model is it shifts maintenance responsibility largely to our customer.
Okay.
That's really helpful.
And then I wanted to ask on the.
Capital commitments for.
70 slots.
For conversions that you guys have.
Booked.
<unk>.
And obviously.
Our that capex requirements is going to be the feedstock.
And not all of that those feedstock.
It had been purchased can you sort of give us a sense for how much that total capex is whats sort of happening to feedstock pricing.
Today, and then from a holistic perspective what.
How does that sort of break out on an annual basis is that expected to be funded with internally generated cash flows.
And there's a big question, but what does that look like then on that basis for the company.
Level of debt.
Yes.
Are you guys comfortable with.
Let me, let me help you out a little bit on that if I can frame it as kind of a.
A broad question there but.
The slot commitment.
Are typically involved putting deposits down to secure slides, but then those deposits.
Our part of your cost of conversion when you end up the airplane, but where you put them at risk. Obviously is if you. If you wanted to walk away and not use the slot.
Forfeit your deposits.
And so we don't want to talk necessarily about what specific.
Conversion providers have.
Required in terms of deposits, but we account for those expenditures as capital expenditures when we when we put down on the cash when we make the deposits and it becomes effectively part of the.
Into service and conversion cost of the aircraft because when you're in depth.
It gets applied to the cost of the conversion.
So.
Hopefully that answers that in terms of commitments, you're right I mean, the timing of capital expenditures for R. R.
Aircraft investments for Cam are going to be more driven by the timing of feedstock purchases and you see us at the end of this quarter already with I believe 15 760 Sevens.
We've purchased feedstock for and those are in some stage of converged either in or awaiting conversion and one 321. So that's already in our Capex that we've reported for those aircraft and then in future years of course, we will.
Mike and Rich commented, we've already secured feedstock commitments to take aircraft to fill up a large portion of these 70 slots, particularly for the centers et cetera.
In the future years.
We've negotiated conversion pricing and so forth as far as how it impacts our debt or our debt leverage as we think about how we expect to grow our fleet.
And as you've seen with our business model, we have delever, while growing our fleet one of our slides illustrated that quite clearly and I think that with the adjusted free cash flow that we produce we expect to continue to build out and grow our our operating cash flow or EBITDA.
And our fleet size without really adding debt.
To any significant degree because the model simply produces that much adjusted free cash flow.
Situation to be in because as we said in our remarks.
Business self fund significant growth.
In regards to the cost of the feedstock maybe thinking to take you through that piece of it.
Richard mentioned that we've identified.
Our acquired feedstock.
Makes us through.
Certainly through 2022.
But for all of 2023.
767 side.
Feedstock remains.
A little bit tight from a market standpoint, and that's really driven by the market demand.
The growth of the entire market is going so that's really been I would say stability in pricing for 760 Sevens.
Really from.
Before the pandemic in 2019 through the pandemic.
In 2020, and really still stable.
As we totally come out of the pandemic so far.
From that standpoint feedstock prices have been.
Relatively.
Solid for the last couple of years in regards to the <unk> hundred 30, we haven't purchased any of those yet, but we continue to look at feedstock of feedstock is very plentiful.
<unk>.
So we think the feedstock costs on that aircraft over the over the next couple of years will will improve.
Come down.
Those airplanes become even more available.
Great.
Really appreciate the answer thank you very much.
Our next question is from Annapolis.
Quanta.
Yes.
Hey, good morning, everyone. Thanks for taking my question so.
If I look at the.
The focus here and the disclosure on free cash flow.
The time you spent in your prepared remarks on the balance sheet and also the out year guidance on the slides.
Having followed.
We followed you for a few years now or some time if I put these together I mean are you signaling that perhaps just here.
The next chapter for Cam and perhaps the enterprise as a whole.
As.
Amazon and its order book is fully appreciated by the market now.
And.
Just assuming anywhere Youre at next year 128 aircraft at the end of the year.
If we put these points together.
And make some modest assumptions around the slot conversions could can be a top 15 lessor by mid decade or so.
Meaning.
Is it reasonable to assume that we could see somewhere in the low two hundreds on the active fleet by 2025 2026.
Yes.
Based on the amount of thoughts, we have and the amount of airplanes, we already own over the next five years, we should be close to 200 airplanes. I mean, we already over the past few years have been the largest lessor of freighter aircraft I mean, there's a lot of large passenger lessors that.
Wire large blocks of airplanes and they are just in a different business than we were in.
There's a few.
Larger afraid of lessors that are also passenger list. So it was like <unk> as an example, and they just merged as well.
But.
Our goal is to maintain our leadership position.
And the medium range medium wide body freighter market globally, we're there now and we intend to stay there and everything we've done.
Whether it's our capital planning, whether it's the way we restructured our balance sheet, whether it's the way we've acquired our slots got into the <unk> hundred 21, <unk> hundred 30.
Is to maintain that position, we feel it's driving good returns for our shareholders and that the growth prospects in that segment because its been powered by the e-commerce growth globally, that's still.
Still in a very low penetration compared to general retail is going to have strong demand for years to come and we think we're very well positioned at this point to to continue to ride that wave.
Okay and then.
Quint could you just remind us as we look out past.
As we look at next year and through 2025 with the slides here.
We should think about ballpark EBITDA.
EBITDA per aircraft.
Considering now that youre going to have a bit of a different mix here with this move to Airbus.
Well.
Youre jumping.
Jumping out there, Chris and it's a good question in terms of.
How far forward Youre looking.
Talked about the 767 right for for a long time about what.
And rich gave you what some of the variables are in terms of how we think about pricing based upon on term and so forth.
But.
The 767.
Just for the lease.
Before you think about value added services.
Probably.
375.
$4 million.
On an annual basis.
In terms of revenue and if you think about.
The EBITDA margins on our lease it's probably over 90% on just the leasing income.
If you think about the $3 30.
The 330 is 15% to 20% larger.
767.
In terms of acute capacity and so forth so.
20% large so you're probably looking at a similar increase over those numbers in terms of what you would expect to produce on the <unk> side.
The <unk> 21 is kind of two thirds the size of a 767 300.
And as you can jump in here, but I would say that the investment.
And the lease on it.
<unk> hundred 21 is going to be about two thirds of what we get on the 767 300, and we target as you know, Chris and Unlevered return in excess of 10%.
On incremental Capex investments that we made to build out our fleet and certainly we are.
We are beating that.
Today's market and then you look to add those value added services you know it all depends upon how many of those services are leasing customers want to buy they want us to fly the airplane for them do they want us to maintain it et cetera.
Okay, and if I could get in one more question the four slots at Boeing here.
Just curious why the move.
Tradition.
Typically done the conversion.
Is that just because of.
Capacity or perhaps you got a little bit better.
On pricing thanks.
Yes. This is Mike.
It was solely driven based.
Ensuring that we meet our customer commitments.
That's been our theme rich reemphasize is that all the time when he was speaking.
We're going to do something we're going to do it.
And just this allowed us really to ensure that we meet those commitments.
Starting in the starting in 'twenty three so these four slots that we secured with Boeing.
Two of them will be for next year or two will be for 'twenty three but.
All of the airplanes will be delivered in.
In 2023 at this point so that's the nature of it.
There are certain.
Places in the World, if I could put it that way.
We're the Boeing greater.
Plays better for a variety of different reasons. So it gives us incremental flexibility and opens up even more opportunities to diversify our customer base.
And to ensure that we're like I said meeting the commitments of our customers.
Great. Thank you.
Our next question is from not anymore from truth.
Hi, good morning.
That's on a great quarter.
Stephanie Thank you.
You just touched on this a little bit in terms of the return profile of these new leases kind of targeting at least a 10% return it sounds like you've been exceeding that but maybe if you could just break that out a little bit further and just walk through the math between preparing obviously.
And then depreciating and really how we cut back in the mid <unk>.
The return profile of these leases.
And.
As a follow up to that.
Entity for these returns to maybe increase over times your thoughts overall in the long term. Thank you.
Yes, I mean, Stephanie we of course, we don't necessarily.
Because of.
As rich says there are some variables involved.
Not necessarily in a detail in terms of pricing strategy, but for example, I can tell you. If you take Cam if you take the assets Cam has on its books.
The free not net book, but.
Investment costs.
And you look at what Cam as art is getting on those.
In terms of EBITDA for example inside of the Tam is gaining about a 12% return on an annual basis on its investments.
And of course, Pam isn't the operating pieces of our company. It isn't the airlines it isn't the MRO. So that's where those additional services are sold.
If you think about.
We've talked about the cost of a 767 $300 to put it on ramp and leasable condition.
Can vary obviously, depending upon the age of the aircraft.
But youre, probably looking for somewhere around $30 million to put one on ramp and leasable condition.
And we look to earn a unlevered return on that $30 million on an annual basis over the life of the asset, which we believe has 20 plus years.
In excess of 10% and as I mentioned, where we're exceeding that.
Based on the demand.
For these mid sized cargo aircraft in today's market and we expect to exceed that over the long haul.
So.
As we said a minute ago. The investment costs were $3 21 is going to be less smaller aircraft.
Our leverage to about two thirds the size of it.
300, <unk>. So you can say, it's going to be somewhere probably in the neighborhood of $20 million, depending on ramp and then you think about a 330.
Going to be 15% to 20% larger than that so you can take that $30 million $30 million up some right in terms of your investment cost, but our return targets remain the same on those investments and we expect to achieve or exceed those over the life of the asset.
Great. That's really helpful. And then just lastly, a housekeeping question for me and sorry, if I missed this earlier, but I believe you said that you were kind of locked in at least 10, new leases for 2022.
Dave you mentioned.
<unk> number for 2023.
Alright, I just missed the color around 2023.
Yes.
Thats correct.
We're still anticipating.
Anticipating at least 10 in 2022.
In the high teens somewhere.
2019 at this point in 2023.
Got it well thats it for me thanks, so much.
<unk>.
Once again, if you do have a question Star then one on your Touchtone phone.
And our next question is from it.
<unk> from Stephens.
Great.
A quick follow up here the vaccine mandate has been.
Major topic of discussion I think over the course of the last couple of days, certainly, but I think over the course of this earning season I was just curious.
Yeah.
Think that it's going to have any sort of impact on either your your.
Sure.
We're groups your labor force in general or productivity, that's something that you guys are kind of keeping an eye out for.
Is this kind of goes into effect early next year.
That's a great question Jack.
People ask which is lose sleep over right.
The problem with this vaccine mandate when it came first came out there was very little to no guidance from the government when they first put it out.
The two executive orders were signed one regarding government contractors, which a lot of our operations fall under and one that will be managed by Osha.
Yes.
Companies that have more than 100 employees and so we have been working with our companies, particularly with the unions and negotiating.
Terms under which they would get vaccinated.
We've been compensate we've allocated compensation for that and we've also instead of our own.
But non CBA covered employees to get vaccinated as well. So we've had a plan even before these executive orders to get the population vaccinated.
But it's been really difficult to figure out how to look at some of our businesses for example, logistics, which which has some postal contracts.
And.
They sort the assortments for the postal service, but they also have Amazon gateways that are completely separated from the government contract and then here in Wilmington Oliver.
Where most of our companies reside although some of our companies like Cam as an example.
We'll get a government contractor, but theyre in the same building and facility is our two airlines that are so under the guidelines of the brand new guidelines that were just issued earlier. This week. They are now considered a government Cam is now considered are impacted by the government piece of it so.
<unk> been shucking, and jiving and Bob and we've been trying to figure out exactly how to execute on this thing, but right now we feel really good our guiding principle has been to one is safety always and thats been since the start of it.
The pandemic and the second one for the fourth quarter in particular has been business continuity and that's the guideline that we have been marching towards with which each individual one of our companies as they tackle the requirements of the government going forward I can say right now because we run a we've been doing.
Surveys.
Ongoing and it is how it unemployed can get the incentive piece for getting vaccinated.
And we've had over 80% of our employees.
Respond.
And out of those employees.
Ones that haven't they have I think until the they've got another two weeks I think before.
To respond to still get the incentive.
And if you look at folks that are vaccinated and are planning to get backs unaided or at one shot of a two shot or have some type of medical or religious exemption, 92% of the folks who responded are covered we.
We feel really good about that all of the companies of the airlines and the.
MRO and logistics have committed that they believed that business continuity will be strong in the fourth quarter and so we're real confident that we're going to be able to deliver for our customers and help them deliver for their customers.
And so it's been a.
Probably telling you how to build a watch when you asked me what time it is but this is Ben.
A real focus of all of the leaders in the company and we've done a fantastic job I have to say that manning managing their individual populations to get to the point now that we're confident that we're going to have.
We're going to be able to service our customers without any disruption in the fourth quarter.
Okay, that's fantastic thanks for that detail.
Response rates really appreciate it.
Thanks Jack.
You have another question from Chris <unk> from Susquehanna.
Thanks for taking the follow up here so.
Obviously, you haven't had to make the adjustments to your workforce similar too.
You're right.
Passenger appears here, but curious.
If youre seeing any pressuring along the pressure excuse me on the <unk> line.
What youre seeing in your hiring class for pilots and then also where you are.
Contract talks with Alpha.
IDT on omni.
Yes, so in terms of in terms of attracting pilots, we're still in great shape.
Sure.
<unk>.
Airlines are growing omni get a soft spot right now, but we haven't had a problem attracting pilots which is good.
Managing any attrition due to retirements and those types of things.
We've got still ATI is a very fast growing airline and so that's what pilots want to work for an airline that allows them to improve.
Improve their career quicker and move from a first officer to a captain So we've had very strong response to.
When we put out a class for training to add crews for for all of our airlines, which has been solid.
<unk>.
In terms of.
Where the negotiations stand.
Both.
Hi.
And omni.
Crew agreements pilot agreements are amendable right now.
And both are really it.
Beginning stages of their their negotiations.
<unk> is there in section six bargaining they are covered by the railway Labor Act.
And so these things generally take a long period of time right now they have defined kind of the process of negotiating process and the cadence of meetings. So theyre meeting three times.
Three days each month to go through that really just working on agreements now haven't gone into that.
Working on crude rules and some other things haven't gone into the compensation side of it yet but there.
Working together, well, both airlines and their and their unions.
We're hoping that.
We'll get through this and.
Get into and maintain a good competitive cost structure and a good.
Compensation program that allows us to continue to attract the best pilots in the business.
Okay I appreciate all the time today. Thank you. Thank you.
And I would now like to turn the call back over to CEO rich Corrado for closing remarks.
Thank you.
This holiday season, the demands on logistics networks, and the companies that operate them a greater than we've seen ever before.
The people at the front lines of the networks will be under even more stressed than COVID-19 as already.
Imposed.
Our people will rise to the challenge as they always have while keeping safety first.
I ask you all to.
To think of those people across those networks every time you hit that order button on your screen this season.
Have a great holiday season, and we'll be back with you again in 2022.
<unk>.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
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