Q4 2021 Air Transport Services Group Inc Earnings Call

February 25, 2022

[music].

Okay.

Welcome to the Q4 2021 air Transport Services Group incorporated earnings Conference call.

My name is Vanessa 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 session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone I will now turn the call over to Mr. Joe Payne Chief legal.

<unk> of ATSG, Mr. Payne you may begin.

Good morning, and welcome to our fourth quarter 2021 earnings Conference call. We issued our earnings release yesterday. After the market closed its on our website ATSG IMC dot com let.

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 described 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 limited to the following which relate to the current COVID-19 pandemic.

Pandemic may continue for a longer period or its effect on commercial and military passenger flying may be more substantial than we currently expect it may also disrupt our workforce and staffing capability.

Our ability to access airports and maintenance facilities, our customers credit worthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels.

Other factors could also cause our actual results to differ materially from those we described here, including unplanned changes in the market demand for our assets and services, our operating airlines' ability to maintain on time service and control costs.

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.

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 U S, which may be more severe or persist longer than we currently expect.

The impact of the current competitive labor market changes in general economic and industry specific conditions and other factors is contained from time to time in our filings with the SEC, including the Form 10-K , we will file next week.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings adjusted earnings per share adjusted pretax earnings adjusted EBITDA and adjusted cash flow management believes these metrics are useful to investors in assessing atsg's financial position and resolve.

These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website and.

And now I'll turn the call over to rich Corrado, our president and CEO for his opening comments.

Thanks, Joe Good morning, everyone.

2021 was a great year for ATSG and not only for the exceptional financial results. We delivered we also laid the groundwork to grow our fleet substantially faster over the next five years than the last five and we committed to add two new converted freighter types to our leasing portfolio. The Airbus <unk> hundred 30, <unk> hundred 21.

To support e-commerce customers around the world.

We generated $541 million and adjusted EBITDA last year $6 million more than the target we shared with you last November .

Capital spending of $505 million last year was well below our target and funded deliveries of a record 15 leased 767 300 freighters.

Our airlines again achieved double digit growth in revenue block hours and improve their on time performance over 2020.

This is a testament to the resilience and skill of our workforce during another year of pandemic challenges.

There are many other great elements to our story and our outlook for almost $100 million more in adjusted EBITDA for 2022.

I'll be back to share more color after <unk> reviews, our financial results.

<unk>.

Thanks, Rich and welcome to everyone on the call. This morning.

The next slide in our deck summarizes the strong 2021 results that rich was referring to our.

Our consolidated revenues for 2021 grew 164 million to $1 7 billion.

That's an all time high for ATSG.

Our adjusted EPS increased to $1 66 per share up from $1 60 in 2020.

Adjusted pretax earnings increased 11% and adjusted EBITDA Rose 9%.

Our aircraft leasing company Cam and the three airlines that comprise our <unk> services segment each delivered great results.

<unk> pre tax earnings increased 37% for the year and pre tax earnings for our <unk> services segment grew by 39%.

On the next slide you can see that on a rolling 12 month basis, our adjusted EBITDA continues to accelerate aided by a 27% gain in the fourth quarter.

That improvement reflects both a faster pace of 767 lease deployments during the year, along with steady improvement in our passenger flying for both the military and commercial customers.

Again, our adjusted EBITDA excludes among other items the changes in values of our financial instruments and the benefits of federal pandemic relief assistance for our passenger operations under the payroll support program for all periods shown.

Our airlines realized $112 million in federal Grant proceeds during 2021 versus $47 million in 2020.

On the next slide you'll see that our capital spending for the fourth quarter slowed somewhat to finish the year at $505 million.

As you can see we're continuing to separate what we call a sustaining capex, mainly for airframe and engine maintenance technology and other equipment from the spending we allocate to fleet expansion.

Sustaining capex was $183 million for the year and growth Capex was $322 million.

Both were lower than our prior projections are.

Our growth spending was down due in large part to supply chain disruptions and pandemic challenges at our conversion vendor.

We deployed $4 767 freighters in the fourth quarter for a total of 15 for the year.

Freighter conversion businesses are running at peak capacity now as the pandemic has both accelerated e-commerce , driven volumes and reduced cargo space on commercial passenger flight.

To meet this demand 12 of our feedstock 760 Sevens and $1 <unk> hundred 21, we're awaiting or undergoing conversion at the end of last year.

The next slide is an update on our new financial metric adjusted free cash flow.

Represented by the bottom portion of each bar is our operating cash flow net of the sustaining capex shown on the top portion.

Our GAAP operating cash flow also includes cash our passenger airlines received in federal pandemic relief grants.

Our strong adjusted free cash flow of $400 million last year illustrates a key point about the power of our business model it can generate more than enough cash flow to cover our growth.

As we acquire convert and lease more freighter aircraft, we are well positioned to fund that rapid growth internally that will further reduce our debt leverage and make capital available for other uses.

The next slide illustrates our continuing progress towards growing our fleet from internally generated funds.

Our overall debt to adjusted EBITDA leverage ratio as measured under our bank credit agreement is now below two times.

As short term rates increase in 2022, the debt restructuring we completed early last year to replace variable rate with fixed rate debt will help to mitigate some of the effect of higher rates.

We continue to project double digit earnings growth from Cams aircraft portfolio, most of which are under seven to 10 year leases.

You May have noted the comments in our earnings release about the exploration last fall of camps power bi cycle arrangement with Delta for maintenance of engines on the 767 200 aircraft, we offered a lessees.

We decided to offer those lessees and new service that provides them access to a pool of engines that we are responsible for maintaining under new pay by cycle arrangements.

Kam will play a more active role in making sure engines are available to its customers under a structure that is more efficient for lessees and improves camps margin opportunity.

Maintenance cost for engines provided to the pool will be classified as sustaining capital expenditures and depreciated as the engines are operated.

As a result, our sustaining capital outlays for engine maintenance will increase along with our adjusted EBITDA for.

For 2022, we expect the contribution to our year over year growth and adjusted EBITDA will be between $40 and $45 million from this service offer and contribute positively to our adjusted EPS.

Most of the nearly $100 million increase in adjusted EBITDA, We are forecasting for 2022 will impact our bottom line.

Strong growth in earnings from our airline businesses in particular, along with the momentum of our leasing returns from Cam will yield approximately $2 and adjusted EPS for 2022, a 20% increase over last year.

This projection includes the adoption of new accounting rules pertaining to our convertible debt.

The change effective this year raises our 2022 adjusted diluted share count by 8 million shares and will reduce our pretax interest expense by approximately $8 million.

With that summary of our financial and operating results I will turn it back to rich for some comments on our operations and outlook rich.

Thanks, Quint our earnings release list a number of key 2021 operating accomplishments in what was a very good year for ATSG overall, let me highlight and provide some additional color on a few of them now a record 15 external leases and deployments of Boeing 767, 300 freighters plus three pre leases at <unk>.

167, two hundreds was a true success story.

You may recall that 11 of them were leased to Amazon along with CMI assignments for our airlines to fly them.

Those 11 deliveries completed in order of 12, 760 Sevens that Amazon place with Cam in June of 2020.

We now slide $46 760 Sevens for Amazon that includes four they own or lease from others and prefer to place with our ATI airline to fly.

Later this year Amazon may assign us to fly more of its freighters. We continue to be very proud to be the largest provider of least cargo aircraft in flight services to Amazon.

Earlier last year, the FAA certified our joint ventures design for passenger to freighter conversions of Airbus <unk> hundred 21, 200, aircrafts, we followed that with the conversion and delivery of the first a $3 21 freighter based on our design.

Kam will convert and add to <unk> hundred 21, two hundreds to its lease freighter fleet later this year and at least one more in 2023.

In August we announced the commitment to acquire 20 conversion slots for Airbus <unk> hundred 33, hundreds a new aircraft type slightly larger than our Boeing 767, three hundreds.

Next year, our <unk> hundred 30 conversion vendor, we will conduct our first feedstock aircraft for conversion for delivery in 2024.

Already we have deposits from customers for 14 of the 20 <unk> hundred <unk> that we have previously committed to convert I'm confident by the end of this year. Our order book will include customer commitments for all of the <unk> 20, <unk> hundred <unk>, we plan to deploy.

In light of that strong customer interest for an aircraft still two years away from delivery, we have boosted our conversion slot commitment by nine to 29 <unk> hundred <unk> for delivery over the next five years.

Those additional <unk> hundred 30 conversion slots means that Cam now has slot commitments for more than 70% passenger to freighter conversions, including $35 767, three hundreds which remain the preferred aircraft for E Commerce driven air networks.

Our order pipeline includes customer commitments for all of the freight as we will deploy this year and more than half of those in our leasing plan for 2023, we already own and have scheduled for conversion all of the $9 760 Sevens and <unk> hundred 20 ones, we expect to convert at least this year.

During the second half of 2021, and especially in the fourth quarter, our passenger air operations for the military and commercial customers rebounded significantly from 2020 levels.

That included more scheduled air operations for the military but also on the Euro a significant role in Americas rescue of Afghanistan, evacuees last summer and a stronger than anticipated recovery in commercial charter flying in the fourth quarter.

For 2022, we expect omnis performance to roughly match is 2019 pre pandemic levels.

And finally, our 2021 negotiations with DHL led to a set of agreements this month to extend and expand our 18 year commercial relationship that included a six year extension of our CMI operating agreement through April of 2028, and another six years added to leases for five.

Of the 760 Sevens, we fly for them.

DHL was our principal customer when we became a public company in 2003, and our relationship with them continues to grow in line with their commitment to freighter leasing and the ability of the AVX air employees to provide great service within Dhl's U S network.

Those are a few of the operating and commercial successes that helped us generate record financial results. This year and will continue to contribute to our results for several years to come. They are also a major reason we were able to set a new adjusted EBITDA target for 2000 $20 million to $640 million.

Or about 18% more than we generated in 2021.

The target assumes the 90 767 million and $2 <unk> hundred 21 lease deployments I mentioned earlier strong growth in both our cargo and passenger airline earnings <unk>.

A gradual easing of pandemic restrictions on our workforce and access to certain airports as the year progresses.

We also expect capital spending of about $590 million, including $200 million in sustaining and $390 million and growth capex much of that 2022, capex growth budget will be for feedstock purchases and conversion costs for freight as we will deploy next year.

In summary, I'm confident that 2022 will launch ATSG on a path to deliver strong continuing cash flows from a superior business model and concentration of the aircrafts are growing customers need.

That will allow us to self fund most of the fleet expansion targets and still adopt a more diversified capital allocation strategy when cash return restrictions expire in September .

That concludes our prepared remarks, clintonite, along with Mike Berger, our Chief commercial officer are ready to answer questions.

We have the first question operator.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign or the hash key if youre using a speakerphone. Please pick up the handset first before pressing the numbers once again with your question. Please press Star then one.

And we have our first question from Jack Atkins with Stephens.

Hey, great.

Good morning, Congrats on the great quarter guys. This is Cameron Hogan on for Jack.

Thanks for taking my question.

So first one a quick would you mind walking us through the accounting changes here on maintenance expense of read that as recurring.

But just wanted to confirm that and also for the share count from convertible debt.

What share count is that guidance, assuming thank you.

Sure Kamran.

I guess in terms of I'll do the last one first I guess the share count.

To do with the.

Accounting changes required for convertible debt and the impact on our share count and of course that took effect right right out of the gate in 2022.

We will be to add about 8 million shares to the denominator.

It's essentially the if converted method youre, assuming that you satisfy the debt with shares and so forth.

And it will remove about all of them.

Approximately an 8 million dollar annual non cash expense that was going through interest expense also so you've got those two effects the net effect.

As a as a headwind for EPS because of the increase the 8 million share increase in the denominator.

As far as the and I think your the first part of your question was pertaining to the.

The new engine service that.

That we're putting forward for the 787 200 engines is that correct.

Yes for capitalizing those expenses.

Right.

For many many years, we had those engines under power by cycle arrangement with Delta Tech ops and that contract terminated.

Kind of stand in the third quarter, beginning of the fourth quarter of last year.

Under that.

Accounting treatment for powered by cycle.

The way, we were essentially passing through to the lessees you wanted to take advantage of that sort of piggybacking on that agreement and leveraging the scale of engines that we had in that contract and then we had.

Recognize some more.

Margin on that sort of a markup on that pass through power by cycle.

That contract came to an end and so we made a decision when we looked at the options, we could have renewed and extended it but based upon what we saw an opportunity for if we actively manage those engines and move them to a pool that we can make accessible to lessees. It provides us an abyss.

<unk> to better manage that more efficiently for them and also provides margin opportunity for us and of course. The 767 200 over time, we may take some of those aircraft out of service and cannibalize. The engine. So it also allows us the ability to.

Make rational decisions about.

How we manage the engine.

Modules to get the best life out of the engine. It will also extend the fleet lives for the 767 two hundreds. So we made that strategic decision. So we're no longer in our powered by cycle arrangements so going forward.

We will we will be responsible to maintain that engine pool and the cost that we incur as engines go through the shop will be capitalized and depreciated.

And what we've disclosed.

In the earnings release.

Is given that now will be depreciating, those costs and no longer paying a powered by cycle fee.

It will have an impact on depreciation and our.

Our EBITDA, because we will add that back.

It also is accretive to our earnings and as I say provides more margin opportunity, although there's a little bit more risk we will have more capex to maintain those engines.

Some of those engines were also installed on our.

732, hundred's flown by our affiliates and again.

The positive part of that is we're no longer paying that cycled charged to delta as those engines fly and so we believe certainly that over the long pole, that's a cash flow accretive.

And our margin opportunity for us that we didn't have under the prior arrangement.

In the short run and this year, we will have capex, though because like any new venture. Sometimes there is an upfront investment. So we will have a number of shop visits that will occur this year. So our capex.

We will go up.

And we've shown that as sustaining capex and our.

And our guidance here and so it will be reflected in that adjusted free cash flow stat. It will be taken out of operating cash flows.

You could you could probably argue that thats somewhat of a growth investment too because it is a new business line, but we looked at it.

More conservatively as sustaining capex.

We wanted to tell you because it is a change from an it happened late in the year so year over year. It's a number of engines. It had a pretty big impact on EBITDA given that it happened so late last year.

<unk> got about 60, or so engines that suddenly move to this this other.

Treatment in terms of how we're approaching making them accessible to lessees and so of our growth in EBITDA, it's about $40 million to $45 million it'll depend upon of course, how many cycles. The lessees fly because they will pay tam on a per cycle basis.

And so forth.

But it's.

It gives them a lot of flexibility they can draw on the pool.

So we're excited about.

Being able to offer that new service.

Okay. Thanks.

Yes.

We own the lion's share of these engines.

Just out there.

And as Quint Quint.

Quint mentioned I'll, just emphasize it's a huge advantage for our customers.

To have this pool of resources.

As we continue to fly.

767, 200, which is just remains to be a great airplane for us.

Thanks for the color there guys really appreciate that and if I may ask a quick follow up.

The guidance you gave you said the passenger flights that returned to pre pandemic 2019 like level on the <unk>.

<unk>, where things today versus that run rate and what is driving that outlook. Thank you.

This is rich.

The Dod portion of on these business is pretty much back up to pre pandemic levels now there's.

There's a few.

Places that they are flat.

A little bit differently too, but in terms of the volume of business.

That's.

Come back as it relates to the commercial we saw a really good.

Come back in the fourth quarter related to <unk>.

Charter is for cruise is related to.

The commercial passenger opportunities a lot of bolt charters for football games those types of things. So it was very encouraging to see that they are also getting inquiries.

For bids.

For additional <unk> four standard.

Commercial airlines that May.

Half.

<unk> needs that don't line up with what their fleet currently looks like maybe because of the way that they're managing their assets because of the pandemic. So given the commercial activity that we're seeing with omni.

We think we're comfortable that we'll have a good year and certainly a growth year over 2021, and we're projecting that they will.

A year, that's fairly similar to 2019.

Alright. Thank you appreciate the color there I'll turn it over thanks again for the time and congrats on a great quarter.

Thanks Sharon.

And we have our next question from Frank Galanti with Stifel.

Okay great.

Thank you for taking my questions I wanted to start on.

On.

On the conversion slots.

In the press release, it indicated that all of the 22 deliveries were.

I guess set for our customers and most into 2023.

Just wanted to get an update on what.

How that's changed in the last couple of months.

<unk> been seeing progress on extending the.

Those deliveries past mid 2023.

And then I guess.

Part of that is of those customers who are interested in using leasing aircraft from you guys can you give us a sense for it.

From a high level.

Type of customers those are from <unk>.

Geographic or end use perspective.

Any color there would be helpful.

Yes, sure. So are the geographic concentration of our deliveries.

Continuous degree continues to be very broad based.

We will see new customers as well as existing customers.

From a geographic perspective.

Some will be in the U S and North America other parts will fall out too.

Europe .

As well as into into the Nordics for the first time for us. So we continue to see that.

Expansion from a geographic standpoint.

Which is one of our initiatives to expand further globally.

We have guided to the fact that.

All of our.

Deliveries for 'twenty two.

760 Sevens in two to three <unk> hundred 20 ones. Our book is complete.

We have.

The volume share of our 2000 Twenty's rebooked.

Order book completed as well.

But we do anticipate to still deliver.

More.

Eric converted freighters in 2023.

Yeah.

The <unk> hundred 30.

We will start delivering in 2024.

We see as rich mentioned in his comments very very strong demand for that we've we've mentioned we've got 14.

14 of those initial 'twenty, not only under LOI, but with deposits and.

And we firmly believe as rich says it all 20 of our initial slots will be completed by the.

At the end of 'twenty three.

Excuse me by the end of 'twenty, two and that's the reason why we went out and secure the additional slots. So we're very bullish on an airplane and then it'll take us all the way out through 2026.

Okay. That's really helpful. And then taking a look at the Capex. So you guys guided to about $590 million in 'twenty two.

And it sounds like.

Feedstock has already been purchased for most of those.

Conversions in 'twenty two 'twenty three that we just talked about.

I guess just wanted to get a sense for timing.

The composition of that Capex and really with the.

View towards 2023 and beyond how much.

Capex.

Of that 390 million growth and 200 million sustaining.

It's sort of accounted for with those with those.

Airplane purchases.

Another way of asking it had those planes and paid for yet or will they be paid for.

In 'twenty two 'twenty, three and then I.

Hey, guys.

Does that.

How do you think about.

Growth for sustaining Capex.

Going out into the future past 'twenty two.

Sure Frank This is Quinn.

In terms of 'twenty twos guidance further growth Capex at 390 <unk> that includes <unk>.

Actually buying seven 767 300 feedstock aircraft remember at the end of 'twenty. One we had a dozen that were in conversion. So we're putting what nine 760 Sevens online. This year. So you can see that we've already got more than enough.

Already in our possession to fulfill 2020 twos delivery commitments, we will be buying airplanes, though for 'twenty three so we'll have.

We plan to buy seven more feedstock airplanes, we also.

No.

Made our.

First our secured access to our first feedstock for the <unk> III <unk>.

We have a deposit on the first five of the 20 aircraft now those aircrafts wont be delivered and we won't finish paying for them until 2023, so that'll be part of 2020 threes.

Capex budget as Mike mentioned, the first conversion inductions on that line or mid year next year July of next year Yeah.

So.

Those are those are some of the pieces along with of course, the ongoing conversion costs of aircrafts that are going through the lines.

To complete their passenger to freighter.

Later work.

Make up the lion's share of that.

Growth Capex this year as far as sustaining capex and what that might look like.

Going forward you can see it.

It's up a little this year and of course, we mentioned.

And then <unk> talked about the investment we'll be making.

Is the maintenance of some of the engines that will put in a pool for certain of the lessee access.

So that took it up a little we have been in the sort of a 180 range to last for a while and that's we're saying 200.

In 2022, I think that there still may be some engine shop visits related to that type that impact the first half of 'twenty three but then.

It should that should fall off in a bay.

And in our business model, the sustaining capex really does not grow.

Absent.

This engine change was something.

That's a little unusual because it has been in place for years, but.

Just leasing additional airplanes in growing cams leasing portfolio does not in and of itself.

Much impact in growing our sustaining capex because the lessee is responsible to maintain.

The aircrafts during the life of the lease and so I don't expect sustaining capex to really.

Changed much.

Once you look out past 'twenty three.

We will of course add aircraft leased <unk> hundred 20 ones in more 760 Sevens.

But under those contracts, we won't be responsible for the maintenance the lessee returns at the end of the lease.

For like maintenance condition.

Okay.

Really helpful. Thanks for the answer.

That's on a great year.

Thanks, Alright, thanks Frank.

And we have our next question from Helane Becker with Cowen.

Thanks, very much operator, hi, everybody and thank you for the time.

A couple of questions on that.

<unk> is a new aircraft.

That are committed.

Yes.

New customers that you could talk about.

On behalf of Helane This is Mike.

New customers.

We will shortly to put out some.

Some press releases about who those customers are.

I mentioned.

And.

Cargo effects late yesterday.

That.

The geographic areas, where across Asia Southeast Asia.

And into Europe , but.

There are the makeup is about.

50, 50, right now in regards to new customers and existing customers.

Okay. That's helpful. Thank you and then the other question I have on.

<unk>.

Since you are not responsible for fuel is there a lag time on your contracts between when when when fuel goes up and when you Bill.

No it's really small helane this is quint.

The way our contracts are.

Our structured theres not a lot of float that were at risk for and as you know we don't take the actual fuel risk.

Under our arrangements the customer pays for the fuel.

And our customers.

Pay us a few of them very quickly.

Okay, Alright, that's helpful. And then the other question I have is.

On omni and the level of business that you mentioned, they're doing for the Doj.

Do you have any thoughts about the article that appeared recently intercept.

And.

The accusations that people are mistreated.

Yes.

The article that was in there was some gross exaggerations as it related to the treatment of passengers in this these are.

Flights that we do for a government agency.

For ice.

Yeah.

It is important to note that debt.

Omnis.

I think they did three flights price in 2021, it's less than 1% of their business.

And it's a tiny amount and.

Those flights.

Of course, we have we.

We control the safety on the flight. So we do have flight attendants Omniflight and obviously, we have fly cruise on the flight.

The.

The passengers.

Have oversight of.

Government employees.

They are there for the safety of the flight.

Passengers as well.

But that article was a gross exaggeration of the treatment of the of the passengers.

Okay, Alright fair enough. Thank you.

Excellent excellent.

And we have our next question from Stephanie more with twist.

Hi, good morning.

Good morning, Anthony.

I wanted to touch on maybe more of a high level.

Discussing our conversation it looks like obviously the demand or your leasing.

Services remains quite strong you clearly have locked up the conversion capacity for the next several years.

Layering all those factors together, what's the optionality of your ability to Steve in a higher return a higher EBITDA contribution from maybe some of these new leases versus.

Historical ranges I mean, just if you could walk through some of those puts and takes that'd be helpful. Thanks.

It's a good question.

When we're stepping into new aircraft types, we want to get the same return that we've gotten from the 767 and so we've done a lot of financial modeling around that and a lot of market.

Discussions and analysis to see that we're able to get the same return.

For.

Which is 10% unlevered minimum.

For those new assets.

And what can we get for the.

760 sevens that are either extended leases or new leases coming out we have been trying to.

Test the market and move.

Pricing up.

To some extent.

It really just depends on.

Who the customer is and how they evaluate the aircraft most airlines when they are evaluating the performance of the economic performance of an aircraft.

They look at all the costs associated or running at what they are what they are.

Flight segments are going to be and then.

Look at the tonnages are going to handle and break it down to what's the cost per kilo to run their network using these aircraft and so you kind of run up against the competitive nature of our cost per kilo versus what <unk>.

Market.

Dynamics, you can get from improving the lease rates, you're getting on the airplane.

So all of that said the way the market is flowing today is.

Re leases and extensions are going at the same rate, which is unusual or higher in some cases.

And the.

Under normal circumstances, when the market is less.

I guess you would say.

You usually take a small discount when you extend at least because it's.

Best interest of both parties to extend.

We save a lot of downtime of the airplane and potentially some maintenance cost.

We're looking to get a good rate of return that meets or exceeds our historic on the 767% and we feel pretty good about it right now.

This is quint 70, I would just say that the demand environment that is helping us sell aircraft. So far in advance with the pipeline visibility we have.

There is naturally a plus.

For what you can get in terms of return and our lease rates.

It says.

We've been we've seen airplanes that have come off lease renew at at or better than what we had.

What the prior lease had been.

Certainly.

There continues to be really strong demand for the midsized freighter.

And.

And that's a good thing for lease rates, we don't that said, we don't get into specifics.

Because as you know thats, our discipline is 10% or better but.

I think we all understand that the current e-commerce growth is driving conditions that make it possible to get.

Upward movement in terms of lease rates.

Got it no that's really helpful. And then I wanted to follow up to the first question about the impact from the accounting changes that you highlighted.

Thank you for giving that I guess the impact.

The share count from an EPS standpoint, but maybe you could help us think about it.

How we should think about it maybe just a valuation standpoint, and if we are including those incremental 8 million shares are those being hedged.

Okay.

Obviously that would be great. Thank you.

Yes, I mean, we had as you know when we did it we did a bond hedge to to make the dilution.

The impact of any share dilution, even less likely I think we bought up that thing to like 70 <unk>.

75% or so premium over what we at what we were trading at the time, which if memory serves me right. We were at 21 Bucks. So it's like before you could even possibly see any share dilution. It would have to be in the I believe the low forties.

And then it's our choice right, how we settled that and it's a relatively small slice of our overall debt capital $259 million out of about 1.3 or $1 4 billion and it matures in October of 24.

Actually I think truest was involved with that so you guys probably are across the hall there.

All about it but.

Likely next year, we'll take a look at that we could put that in our revolver without any any trouble at all and of course, our revolver were paying just a little over 1% for our variable debt.

Which is about the same as our coupon is on that convertible debt. So the likelihood we will actually issue shares to satisfy it.

Very tiny.

I would almost say nonexistent, so, but the accounting rules nonetheless that take effect require you to reflect the underlying shares in the denominator sort of the most conservative way I guess to show its impact on EPS.

And so that's the 8 million shares which was the underlying share amount that.

Back up to $259 million of debt. So we put that in the denominator.

There is somewhat of an offset and we don't we no longer have to show an interest charge.

About 8 million Bucks and the net effect on the EPS adjusted EPS is about five five cents a quarter or so so 20 <unk> call it for the year.

Got it well thank you so much.

Thanks, Patrick.

Yes.

And our next question comes from Chris Stephanopoulos with Susquehanna.

Hey, good morning, Thanks for taking my questions.

<unk>.

We're rich in the $6 40 guide for this year.

What's contemplated in terms of fleet utilization. So you don't report your absolute block hours.

So we can get to kind of like a weighted average.

The utilization rate there just curious if you could help frame us how youre thinking about your overall fleet utilization and then how much AD hoc flying is also contemplated or included in that 60 40 guide. Thanks.

Sure Chris.

I'll take a shot at it first of all the reason we don't highlight block hours is because we do a lot of networks line right. The CMI flying they're sort of medium range and so what drives our revenue in our results.

And in fact, our contracts.

Typically we're being paid more for the resources.

Supplying the aircraft and the crew and the maintenance and so forth and spreading it over a while while we do it we do look at it.

That way some sometimes spreading it over a block hour total is not as meaningful as it would be if these were long haul freighters.

Trans Pacific type schedules. These are flying short shorter hops.

But we take the schedules that we.

But our customers are asking us to fly.

And.

We of course baked those into the drivers in our revenue contracts when we do the budget and so whats behind the $640 million is basically.

Our CMI fleet, which as you know grew substantially in 2021.

We put I think what was rich 13 airplanes on for Amazon and we put on.

For three years or four for DHL as well, so we're reflecting that we're reflecting what we typically would expect to see maybe in peak, but the customer is has the flexibility to change schedules during the year.

So it's not like those can change based on customer wishes. So we're basing our projections on what we are currently flying we anticipate getting some additional aircraft into the Amazon CMI. This year I think as many as three and those are aircraft they will.

They would supply it's not once we will be leasing to them. So we bake that in as well.

And to the extent hours drive our revenues, that's what we put in our plan.

Okay.

So if we back out this 45, 40% to 45% from this new maintenance agreement that gets you to an implied EBIT of around 10%, which.

I'm guessing your fleet is probably no.

Not perhaps close to but not a pre pandemic utilization and so that 10% actually within that light is pretty good.

Is that.

With where your order book is here and move and the introduction of the <unk> hundred <unk> is 10%.

<unk> the right way to think about this now through the next stages of the recovery or through a cycle versus what you've done in the past has been sort of mid to high single digit.

You mean as you think about 2023 versus 'twenty, yes, I mean the.

10% to 15% I realized.

There's a lot of different things that play here, but you do have a very full order book and you have the <unk> 'twenty is coming in so.

10% to 15%.

A fair sort of rate that you believe that you can sustain here through the cycle.

Yes.

10, remember youre on a bigger and bigger base every year right and.

And when you think about.

The impact on EBITDA, if youre, if youre talking about growth on the EBITDA that remember because of the timing of the termination of the prior engine contract. There is year over year sort of an outsized jumped right related to that.

So you'd be talking to.

It's a.

I think 10% is maybe how you would think of it sort of at a more normal but it will depend on the opportunities right.

The market stays hot like it is you were adding new platforms, we are adding the Airbus platforms. The number of aircraft we could lease.

Instead of being more like 10, it can be more like 'twenty and some of those years.

The timing of delivery of some of those aircraft.

You're talking about the 320 ones. This year the two they're coming late in the year.

No.

It always depends upon timing of delivery when you're comparing one year over another.

There is a whole host of factors, but I will tell you that one of the drivers.

I think maybe the <unk>.

Folks may not have expected I mean, and as we've been saying it is the momentum in leasing that we've had and also improvement in our <unk> services segment year over year is driving a lot of our EBITDA growth and I don't know that the market had appreciated that certainly the pandemic.

Nick has sort of.

Ben harmful to the <unk> services segment, particularly omni and so we are getting as we said we're coming out of that and we hope we hope for further moderation in those effects for 2022, so that's been a big plus.

The Combi flying.

We think there is there is some.

Further improvement that we're projecting in the second half related to some of the destinations the.

757, combi supply into that will be helpful. For us so that will help us in 'twenty three if that happens youll get a year over year.

And.

That'll be helpful for that so there's a whole host of factors I mean, if you want to make some assumption I would point you more towards the 10% and 15, 15%, it's pretty hard when youre on a.

Significant base.

The market is really hot and we increased the leasing that can that can help push us closer to that.

Okay, and the $1 30, the active fleet at the end of this year. The $1 30, I think back in November you had suggested that you could do kind of a.

Teens growth on that which would imply around $1 45 to 2023 is that still the right way to think about the active fleet for next year.

Yes, Chris It's Mike, Yes spot on we think that's.

It's still very.

Very accurate.

Thank you.

Youre welcome.

As a reminder, if you have a question. Please press Star then one to enter the queue and our next question is from John Kim with <unk>.

Hey, good morning, Thanks for your time I appreciate it.

Granularity around.

On guidance.

As you alluded to in the last question, obviously youre layering in 11, new leases. This year can you talk about.

The guidance for 2022 can you talk about the exit run rate of 22 from an EBITDA perspective.

That's a good a good question John .

It's.

It will be.

Above what we've guided to for the full year.

As I forgot.

I don't know that I have.

Given a whole lot of thought to the.

As I say some of those.

Good guys that we are looking for are in the second half, although by and large the EBITDA that we expect this year is more evenly spread between first half and second half than we saw in 2021.

We do expect improvements sequentially in the second half.

And what's driving that is of course, the timing of the leases lease deployments.

And also that Combi flying that I mentioned a minute ago.

And so.

It's going up that will push the exit run rate higher than $6 40.

I don't know that I can.

Or would want to at this point give you.

Some specifics that will depend on some some other factors that may be a little premature maybe we talk about that.

Later in the year at one of these calls when we've got.

Even better visibility on everything.

Fair enough and understood.

You made some comments early in the call and highlighted.

Your leverage positions.

Pretty strong.

Strong right now and obviously you have got.

A high degree of visibility into your growth for 2022 23 and beyond.

And the ability to repurchase shares beginning in Q3.

You guys have begun to think about.

Quantifying what share repurchase might look like.

I know you have to play a little poker here with the market, but would be interested in your general thoughts on that.

Yes.

And looking at a number of ways as far as capital allocation goes.

And certainly as ice.

Putting the remarks that we're looking forward to.

Having the restrictions removed from US and then we will have the opportunity to return capital to shareholders. We haven't made any decisions yet.

But we are looking to continue.

Evaluating towards a balanced.

Capital allocation strategy.

That would be certainly become include returning capital to shareholders in the future.

Great. Thank you.

We have our next question from Howard Rosencrans with value Advisory.

Hi, guys. Thank you very much.

I joined the call a little bit like just wanted to get a quick clarity on the $45 million and then I have or the 40% to 45 million than I have.

A quick follow up.

So the 40% to 45.

Hello again.

It was previously.

Now, it's going to be hitting our EBITDA, whereas previously it was sort of swap in Pryor.

Yes, Howard this is quint.

Of course, we went through that in some detail in an earlier question I am not sure I can be as eloquent again.

But I'll I'll take I'll take a whack at it.

Yes, the previous.

The contract that we had that covered the vast majority of our 767 200 engines.

Delta in it it.

It was a powered by cycle arrangement.

And we extended that to lessees.

Wanted to not all of them used it some of them wanted to be responsible take care of the engines during the lease themselves, but we extended that to our lessees and there was some markup on that that Cam recognized and so that qualified as PBC.

That came to an end.

Right around the start of the fourth quarter.

Terminated it had been in place for years, and we could have extended and renewed but we looked at our options and we said hey, there's an opportunity here to more efficiently manage the this engine maintenance at the Cam level and so we've transitioned it to providing lessees access to a pool of engines.

That we are responsible to keep maintained and available.

And as we do that we'll capitalize those visits.

We don't have an arrangement of power bi cycle arrangement with any vendor to do the maintenance we're doing it on a time and material basis and so when those go through the shop there'll be capitalized and they will depreciate over the engines lives.

Right.

If I could just.

Appreciate the elucidation.

Just from a more simplistic standpoint, so in essence on a on a sort of free cash flow from what you would generate standpoint, we've really.

It seems to me.

If I am wrong I will just take it with you offline. It seems to me that we have.

Yes.

<unk> get for one bucket.

Either I mean, you would still be guiding to a great year of like 600 million Bucks, but.

Yes.

Free cash flow effect of it seems unchanged. So it seems like with the old accounting or not with the old accounting, but if you were doing it the same way you would really be at about 600 again, if I'm wrong I will just take it offline.

If you wanted to if you want to look at it if nothing had changed that's probably that's probably correct I would say that we believe that there is cash flow positive opportunity and certainly margin opportunity.

From this change and it's also beneficial to our lessees and it extends the life of that aircraft type.

To be more actively managed to get it but I wanted to jump back to what you said about the CMI, which I think is great.

I certainly beat you up enough about it offline.

Because the <unk> over the years has been.

As I don't hesitate to tell you horribly and consistent.

It seems to me you are really making please tell me if I am Misconstruing. Your sentiments here. It seems to me you are really making a very positive statement with a high degree of confidence that we're going to really see a sustained change in CMI and the EBITDA contribution I don't care about what the revenue contribution.

But its online distribution from that line.

Yeah, well certainly there is there is last year. We added all these airplanes. So you had a lot of startup cost as you often do when youre, bringing on crews and so forth opening maintenance stations.

For growth like that this year, we said maybe up to three going into the Amazon agreement. So theres more stability, which I think allows for more efficiencies and also the scale that these operations have grown too we renewed our DHL contract, we expect to see some growth opportunity.

These.

With that in place and a six year crew agreement that one of our airlines AVX.

Executed at the beginning of last year, so there's a whole lot.

Good things going on in the CMI and also the recovery from the pandemic in the tax line for omni, which is all stacking up to make.

Conditions right for year over year improvement in that segment.

And Howard we've been I think we've talked on previous calls we've also done outside of the scale.

As mentioned, we've done a lot of work with the airlines and with and with our MRO in terms of improving supply chain.

Patiency, so that were taking advantage of the full buying power of the enterprise versus sub optimizing and we've done a lot of other things with flight planning with some other predictive maintenance technology programs and some other things to actually improve both our efficiency.

And that will lead to improved profitability and we will.

We're already seeing results.

Our investments prior investments in 2021, so we're looking forward to a more efficient aviation situation going on in the future.

Okay.

I think this is really the inflection point on CMI.

Long overdue game changer for your for your multiple as well as will the return of capital.

So thank you very much thanks.

Thanks, Howard Thanks Howard.

And we have a follow up question from Chris <unk> with Susquehanna.

Hey, Thanks for taking my follow ups. So quint I think on the last few calls you've used the term self funding model and.

I feel that it's sort of under appreciated here.

<unk>.

If we look at all the sort of the puts and takes here eventually the spread here between the market value book value or the residual value on the 760 Sevens is going to go the other way.

But you are attached to customers like DHL and Amazon and you do have the <unk> hundred Twenty's.

Slowly working into the fleet. So when you talk about.

The self funding model, which again I think you've used now in the last two or three calls as we look at your free cash flow back.

Through 2010.

Depending on where you are in the order book cycle. It's gone positive negative so should we kind of interpret that as you believe that you can sustain.

Positive free cash flow through an order cycle or an economic cycle and if so outside of buybacks here, which it sounds like you have seven or so months to figure it out.

How we should think about capital allocation beyond.

Aircraft acquisitions. Thank you.

Thanks, Chris.

<unk>.

When we when we publish the stat, a couple of quarters ago, adjusted free cash flow and separated our capex into the sort of non discretionary or sustaining capex versus the growth or discretionary we did it to further highlight.

<unk>.

That aspect of our business model. It does fund tremendous growth I mean, when you look at the.

The trailing 12 month basis $400 million that is available to allocate.

And of course, none of the allocations are mutually exclusive you can allocate those towards growth, which we do have a bias when the market is there and the returns are good and thats the environment we've been in.

But when you when it is self sustaining like that and funding the growth in your debt isn't going up or in the case of last year even declining.

You can see in one of our slides shows the fleet growth and yet the debt is going down so that's clear that this business funds.

Grow but.

That means that youre caps your leverage ratio.

Is going to decline.

It allows you to.

Look at the use your balance sheet to create value in a number of ways. We've been constrained from doing that certainly with the carriers restrictions on the grants that we participated in and that changes later this year I think rich said mango. He was asked about have you been looking at different.

Different ways to create value that might include return of capital and certainly we always we always have that as part of our balanced strategy is just we have been able to.

We think the valuation of the company hasn't.

It doesn't reflect a lot of the.

Improvements that we've had in terms of our leasing book and the cash flows that you can.

That we have visibility on that go out for years.

It's funny, we get questions, sometimes about M&A do you look at M&A and I think we answered like well, we certainly want to know about what's out there, but it's rare that you find something that.

As of either a value or strategically fits into your model, but if we were looking for something it would look a lot like us because we're not we don't believe we trade at a multiple that really reflects the value of the business.

And I think you can take that to mean, we believe our shares are certainly a bargain at the price they are at.

And so when we're able to I think that will and hopefully the market.

Recognize that value and we all hope for that right that we see share price more appropriately reflect the progress of the business. We've made and so we will have to take a look at that but we do believe returning cash to shareholders as smart as part of a.

Our balanced strategy to create value.

Okay. Thank you.

And thank you we have no further questions I will now turn the call over to rich Corrado for closing remarks.

Thanks, operator.

I'd like to close by again, recognizing the employees of ATSG for their outstanding commitment to safety to the pandemic challenges, while continually continuing to deliver excellent service to our customers.

The most highly valued companies achieved the goals they set for themselves year after year, we hit or exceeded our performance targets because the vast majority of our results come from expanding base of long term leases and contracts. We belong among the highly valued companies whose value is not based on just what they say, but on the ability to deliver.

Appear your performance year after year.

Thank you for your continued support of ATSG and stay safe.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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Welcome to the Q4, 2021 and Air Transport Services Group incorporated earnings Conference call. My name is Vanessa 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 session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone I will now turn the call over to Mr. Joe Payne Chief legal officer of ATSG. Mr. Payne you may begin.

Good morning, and welcome to our fourth quarter 2021 earnings Conference call. We issued our earnings release yesterday. After the market closed its on our website ATSG IMC dot com let.

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 limited 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 may be more substantial than we currently expect.

It may also disrupt our workforce and staffing capability.

Our ability to access airports and maintenance facilities, our customers' creditworthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels.

Cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.

The impact of the current competitive labor market 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-K , we will file next week.

And now I'll turn the call over to rich Corrado, our president and CEO for his opening comments.

Thanks, Joe Good morning, everyone.

To support e-commerce customers around the world.

We generated $541 million and adjusted EBITDA last year $6 million more than the target we shared with you last November .

Capital spending of $505 million last year was well below our target and funded deliveries of a record 15 leased 767 300 freighters.

Our airlines again achieved double digit growth in revenue block hours and improve their on time performance over 2020.

This is a testament to the resilience and skill of our workforce during another year of pandemic challenges.

There are many other great elements to our story and our outlook for almost $100 million more in adjusted EBITDA for 2022.

I'll be back to share more color after <unk> reviews, our financial results.

<unk>.

Thanks, Rich and welcome to everyone on the call. This morning.

The next slide in our deck summarizes the strong 2021 results the rich was referring to our.

Our consolidated revenues for 2021 grew $164 million to $1 7 billion.

That's an all time high for ATSG.

Our adjusted EPS increased to $1 66 per share.

From a $1 60 in 2020.

Adjusted pretax earnings increased 11% and adjusted EBITDA Rose 9%.

Our aircraft leasing company Cam and the three airlines that comprise our <unk> services segment each delivered great results.

<unk> pre tax earnings increased 37% for the year and pre tax earnings for our <unk> services segment grew by 39%.

On the next slide you can see that on a rolling 12 month basis, our adjusted EBITDA continues to accelerate aided by a 27% gain in the fourth quarter.

That improvement reflects both a faster pace of 767 lease deployments during the year, along with steady improvement in our passenger flying for both the military and commercial customers.

Our airlines realized $112 million in federal Grant proceeds during 2021 versus $47 million in 2020.

On the next slide Youll see that our capital spending for the fourth quarter slowed somewhat to finish the year at $505 million.

Sustaining capex was $183 million for the year and growth Capex was $322 million.

Both were lower than our prior projections are.

Our gross spending was down due in large part to supply chain disruptions and pandemic challenges at our conversion vendor.

We deployed four 767 freighters in the fourth quarter for a total of 15 for the year.

Freighter conversion businesses are running at peak capacity now as the pandemic has both accelerated e-commerce , driven volumes and reduced cargo space on commercial passenger flight.

To meet this demand 12 of our feedstock 760 Sevens and one <unk> hundred 21, we're awaiting are undergoing conversion at the end of last year.

The next slide is an update on our new financial metric adjusted free cash flow.

Represented by the bottom portion of each bar is our operating cash flow net of the sustaining capex shown on the top portion.

Our GAAP operating cash flow also includes cash our passenger airlines received in federal pandemic relief grants.

Our strong adjusted free cash flow of $400 million last year illustrates a key point about the power of our business model it can generate more than enough cash flow to cover our growth.

The next slide illustrates our continuing progress towards growing our fleet from internally generated funds.

Our overall debt to adjusted EBITDA leverage ratio as measured under our bank credit agreement is now below two times.

As short term rates increase in 2022, the debt restructuring we completed early last year to replace variable rate with fixed rate debt will help to mitigate some of the effect of higher rate.

We continue to project double digit earnings growth from Cams aircraft portfolio, most of which are under seven to 10 year leases.

You May have noted the comments in our earnings release about the exploration last fall of camps powered by cycle arrangement with Delta for maintenance of engines on the 767 200 aircraft, we offered a lessees.

We decided to offer those lessees and new service that provides them access to a pool of engines that we are responsible for maintaining under new pay by cycle arrangements.

Kam will play a more active role in making sure engines are available to its customers under a structure that is more efficient for lessees and improves camps margin opportunity.

Maintenance cost for engines provided to the pool will be classified as sustaining capital expenditures and appreciated as the engines are operated.

As a result, our sustaining capital outlays for engine maintenance will increase along with our adjusted EBITDA for.

For 2022, we expect the contribution to our year over year growth in adjusted EBITDA will be between 40% and $45 million from this service offer and contribute positively to our adjusted EPS.

Most of the nearly $100 million increase in adjusted EBITDA, We are forecasting for 2022 will impact our bottom line.

This projection includes the adoption of new accounting rules pertaining to our convertible debt.

The change effective this year raises our 2022 adjusted diluted share count by 8 million shares and will reduce our pretax interest expense by approximately $8 million.

With that summary of our financial and operating results I will turn it back to rich for some comments on our operations and outlook rich.

167, two hundreds was a true success story.

You may recall that 11 of them were leased to Amazon along with CMI assignments for our airlines to fly them.

Those 11 deliveries completed in order of 12, 760 Sevens that Amazon place with Cam in June of 2020.

We now slide $46 760 Sevens for Amazon that includes four they own or lease from others and prefer to place with our ATI airline to fly.

Later this year Amazon may assign us to fly more of its freighters.

We continue to be very proud to be the largest provider of least cargo aircraft in flight services to Amazon.

Kam will convert and add to <unk> hundred 21, two hundreds to its lease freighter fleet later this year and at least one more in 2023.

In August we announced the commitment to acquire 20 conversion slots for Airbus <unk> hundred 33, hundreds of new aircraft types slightly larger than our Boeing 767, three hundreds.

Next year, our <unk> hundred 30 conversion vendor, we will conduct our first feedstock aircraft for conversion for delivery in 2024.

Those additional <unk> hundred 30 conversion slots means that Cam now has slot commitments for more than 70 passenger to freighter conversions, including $35 767, three hundreds which remain the preferred aircraft for E Commerce driven air networks.

Our order pipeline includes customer commitments for all of the freight as we will deploy this year and more than half of those in our leasing plan for 2023, we already own and have scheduled for conversion all of the 90 760 Sevens and two <unk> hundred 20 ones, we expect to convert and lease this year.

During the second half of 2021, and especially in the fourth quarter, our passenger air operations for the military and commercial customers rebounded significantly from 2020 levels.

That included more scheduled air operations for the military but also on the year significant role in Americas rescue of Afghanistan, evacuees last summer and a stronger than anticipated recovery in commercial charter flying in the fourth quarter.

For 2022, we expect omnis performance to roughly match is 2019 pre pandemic levels.

And finally, our 2021 negotiations with DHL led to a set of agreements this month to extend and expand our 18 year.

Commercial relationship that included a six year extension of our CMI operating agreement through April of 2028, and another six years added to leases for five of the 760 Sevens, we fly for them.

Or about 18% more than we generated in 2021.

The target assumes the 90 767 and <unk> hundred 21 lease deployments I mentioned earlier strong growth in both our cargo and passenger airline earnings.

Gradual easing of pandemic restrictions on our workforce and access to certain airports as the year progresses.

We also expect capital spending of about $590 million, including $200 million of sustaining and $390 million and growth capex much of that 2022, capex growth budget will be for feedstock purchases and conversion costs for freight as we will deploy next year.

In summary, I am confident that 2022 will launch ATSG on a path to deliver strong continuing cash flows from a superior business model and concentration of the aircrafts are growing customers need.

That will allow us to self fund most of the fleet expansion targets and still adopt a more diversified capital allocation strategy when cash return restrictions expire in September .

That concludes our prepared remarks quintin.

Along with Mike Berger, our Chief commercial officer are ready to answer questions maybe.

And we have the first question operator.

And we have our first question from Jack Atkins with Stephens.

Hey, great.

Good morning, Congrats on the great quarter guys. This is Cameron Hogan on for Jack.

Thanks for taking my question.

So first one on <unk> would you mind walking us through the accounting changes here on maintenance expense of Red that.

Recurring but just wanted to confirm that and also for the share count from convertible debt what share count is that guidance assuming thank you.

Sure Cameron I guess in terms of I'll do the last one first I guess the share count has to do with the <unk>.

Counting changes required for convertible debt and the impact on our share count and of course that took effect right right out of the gate in 2022.

We will be to add about 8 million shares to the denominator.

It's essentially the if converted method youre, assuming that you satisfy the debt with shares and so forth and it will remove about approximately an $8 million annual non cash expense that was going through interest expense also so you've got those two effects the net effect.

As a as a headwind for EPS because of the increase the 8 million share increase in the denominator.

As far as the.

And I think the first part of your question was pertaining to the.

The new engine service that.

That we're putting forward for the 787 200 engines is that correct.

Yes for capitalizing those expenses right.

For many many years.

Had those engines under our powered by cycle arrangement with Delta Tech ops and that contract terminated.

Kind of stand in the third quarter, beginning of the fourth quarter of last year.

Under that occur.

Accounting treatment for powered by cycle.

Recognize some maher.

Margin on that sort of a markup on that pass through power by cycle.

Make rational decisions about.

How we manage the engine.

Modules to get the best life out of the engine. It will also extend the fleet life for the 767 two hundreds. So we made that strategic decision. So we're no longer in our powered by cycle arrangements so going forward.

We will be responsible to maintain that engine pool and the cost that we incur as engines go through the shop will be capitalized and depreciated.

And what we've disclosed.

In the earnings release.

Is given that now will be depreciating, those costs and no longer paying a powered by cycle fee.

It will have an impact on depreciation and our.

Our EBITDA, because we will add that back.

It also is accretive to our earnings and as I say provides more margin opportunity, although there's a little bit more risk we will have more capex to maintain those engines.

Some of those engines were also installed on our.

706, 200 flown by our affiliates and again.

The positive part of that is we're no longer paying that cycled charged to delta as those engines fly and so we believe certainly that over the long call that's a cash flow accretive.

And our margin opportunity for us that we didn't have under the prior arrangement.

We will go up.

And we've shown that as sustaining capex and our.

And our guidance here.

So it will be reflected in that adjusted free cash flow stat. It will be taken out of operating cash flows.

You could you could probably argue that somewhat of a growth investment too because it is a new business line, but we looked at it more conservatively as sustaining capex.

We wanted to tell you because it is a change from and it happened late in the year. So year over year. It's a number of engines. It had a pretty big impact on EBITDA given that it happened so late last year.

You've got about 60, or so engines that suddenly move to this this other.

Treatment in terms of how we're approaching.

Making them accessible to lessees and so of our growth in EBITDA.

About $40 million to $45 million it'll depend upon of course, how many cycles. The lessees fly because they will pay tam on a per cycle basis.

So for us.

But it's.

It gives them a lot of flexibility they can draw on the pool.

So we are excited about.

Being able to offer that new service.

Okay. Thanks.

So again that we own.

We own the lion's share of these engines that exist out there.

And as Quint as Quint mentioned I'll, just emphasize it's a huge advantage for our customers.

To have this pool of resources.

We continue to fly.

767, 200, which is just remains to be a great airplane for us.

Thanks for the color there guys really appreciate that and if I may ask a quick follow up.

The guidance you gave you said the passenger flights a return to a pre pandemic 2019 like level on the coming year.

Where things today versus that run rate and what is driving that outlook. Thank you.

This is rich.

The Dod portion of <unk> business is pretty much back up to pre pandemic levels now.

There's a few.

Races.

Buying a little bit differently too, but in terms of the volume of business.

That's <unk>.

Come back as it relates to the commercial we saw a really good.

Come back in the fourth quarter.

Related to.

Charters for cruises related too.

The commercial passenger opportunities a lot of bold charters for football games those types of things. So it was very encouraging to see that they are also getting inquiries.

For bids.

For additional CMI lanes for standard <unk>.

Commercial airlines that May have fleet.

Fleet needs that don't line up with what their fleet currently it looks like maybe because of the way that they're managing their assets because of the pandemic. So given the commercial activity that we're seeing with omni.

We think we're comfortable that we'll have a good year and certainly a growth year over 2021, and we're projecting that they will they will have a year that's fairly similar to 2019.

Alright. Thank you appreciate the color there I'll turn it over thanks again for the time and congrats on a great quarter. Thanks, Kamran. Thanks Sharon.

And we have our next question from Frank Galanti with Stifel.

Okay great. Thank.

Thank you for taking my questions I wanted to start on.

On.

Sure.

On the conversion slots.

In the press release indicated that all of the 22 deliveries were.

I guess set for our customers and most into 2023.

Just wanted to get an update on what.

How thats changed in the last couple of months.

Have you been seeing progress on extending the.

Those deliveries past mid 2023.

And then I guess.

Part of that is of those customers who are interested in using leasing aircraft from you guys can you give us a sense for.

From a high level what type of customers those are from <unk>.

Geographic or end use perspective, any color there would be helpful.

Yes, sure. So are the geographic concentration of our deliveries.

<unk> continues to agree continues to be very broad based.

We will see new customers as well as existing customers.

From a geographic perspective.

Some will be in the U S and North America other parts will fall out too.

Europe .

As well as into into the Nordics for the first time for us. So we continue to see that.

Expansion from a geographic standpoint.

Which is one of our initiatives to expand further globally.

We guided to the fact that.

All of our.

Deliveries for 'twenty two.

760 Sevens in two to three <unk> hundred 20 ones. Our book is complete.

We have.

The lion's share of our 2000 Twenty's rebooked.

Order book completed as well.

But we do anticipate to still deliver.

More.

Eric converted freighters in 2023.

Sure.

The <unk> hundred 30.

We will start delivering in 2024.

We see as rich mentioned in his comments very very strong demand for that we've we've mentioned we've got 14.

14 of those initial 'twenty, not only under LOI, but with deposits and.

And we firmly believe as rich says it all 20 of our initial slots will be completed by the end of 'twenty three.

Maybe by the end of 'twenty two.

That's the reason why we went out and secure the additional slots. So we're very bullish on an airplane and then it'll take us all the way out through 2026.

Okay.

It's really helpful. And then taking a look at the Capex. So you guys guided to about $590 million in 'twenty two.

And it sounds like.

Feedstock has already been purchased for most of those.

Conversions in 'twenty two 'twenty three that we just talked about.

I guess just wanted to get a sense for timing.

The composition of that Capex and really with the.

View towards the 2023 and beyond how much.

Capex.

Of that $390 million growth 200 million sustaining.

It's sort of accounted for with those with those <unk>.

Airplane purchases.

Another way of asking it had those planes and paid for yet or will they be paid for.

In 'twenty two 'twenty, three and then I.

I guess it would.

Does that.

How do you think about.

Growth for sustaining Capex.

Going out into the future past 'twenty two.

Sure Frank This is Quinn.

In terms of 'twenty twos guidance further growth Capex at 390 <unk> that includes <unk>.

Already in our possession to fulfill 2020 twos delivery commitments, we will be buying airplanes, though for 'twenty three so we'll have.

We plan to buy seven more feedstock airplanes, we also.

No.

And made our.

First our secured access to our first feedstock for the <unk> III <unk>.

We have deposit on the first five of the 20 aircraft now those aircrafts wont be delivered and we won't finish paying for them until 2023, so that'll be part of 2020 threes.

Capex budget as Mike mentioned, the first conversion inductions on that line or mid year. So next year July of next year Yeah.

So.

Those are those are some of the pieces along with of course, the ongoing conversion costs of aircrafts that are going through the lines.

To complete their passenger to freighter.

Later work.

Make up the lion's share of that.

Growth Capex this year as far as sustaining capex and what that might look like going forward you can see it.

It's up a little this year and of course, we mentioned.

Minute ago talked about the investment we'll be making.

And the maintenance of some of the engines that will put in a pool for certain of the lessee access.

So that took it up a little we have been in the sort of a 180 range to last for a while and that's we're saying 200.

In 2022, I think that there still may be some engine shop visits related to that type that impact the first half of 'twenty three but then.

It should that should fall off in a bay and in our business model.

Sustaining capex really does not grow.

Absent.

Its engine change was something.

That's a little unusual because it has been in place for years, but.

Just leasing additional airplanes in growing cams leasing portfolio does not in and of itself.

Much impact and growing our sustaining capex because the lessee is responsible to maintain.

The aircraft during the life of the lease and so I don't expect sustaining capex to really.

Changed much.

Once you look out past 'twenty three.

We will of course add aircraft leased <unk> hundred 20 ones in more 760 Sevens.

But under those contracts, we won't be responsible for the maintenance the lessee returns at the end of the lease.

For like maintenance condition.

Okay.

Really helpful. Thanks for the answer.

That's on a great year.

Alright, Thanks Frank.

And we have our next question from Helane Becker with Cowen.

Thanks, very much operator, hi, everybody and thank you for the time, just a couple of questions.

<unk>.

14 of the new aircraft.

That are committed.

And you have new customers that you could talk about.

Yeah.

Half of them Helane This is Mike.

Our new customers.

We will shortly put out some.

Some press releases about who those customers are.

I mentioned.

Cargo effects late yesterday.

That where the geographic areas where across Asia Southeast Asia.

And into Europe , but.

There are the makeup is about.

50, 50, right now in regards to new customers and existing customers.

Okay. That's helpful. Thank you and then the other question I have on.

<unk>.

Since you are not responsible for is there a lag time on your contracts between when when when fuel goes up and when you Bill.

No it's really small helane this is quint.

The way our contracts are.

Our structure Theres not a lot of float that were at risk for and as you know we don't take the actual fuel risk.

Under our arrangements the customer pays for the fuel.

And our customers.

A few of those very quickly.

Okay, Alright, that's helpful. And then the other question I have is.

On omni and the level of business that you mentioned, they're doing for the Doj.

Do you have any thoughts about the article that appeared recently intercept.

And.

The accusations that people are mistreated.

Yes.

The article that was in there was some gross exaggerations as it related to the treatment of passengers in this these are.

Flights that we do for a government agency.

For ice.

Yeah.

It's important to note that debt.

Omnis.

I think they did three flights for ice and the 2021, it's less than 1% of their business.

And it's a tiny amount and.

Those flights.

Of course, we have.

We control the safety on the flight. So we do have flight attendants on to fight and we obviously, we have flight crews on the flight.

The.

The passengers.

Have oversight of government employees.

They are there for the safety of the flight.

Passengers as well.

But that article was a gross exaggeration of the treatment of the of the passengers.

Okay, Alright fair enough. Thank you.

Excellent Thanks Lynn.

And we have our next question from Stephanie more with twist.

Hi, good morning.

Good morning, Anthony.

I wanted to touch on maybe more of a high level.

Discussion our conversation it looks like obviously the demand or your leasing.

Services remains quite strong you clearly have locked up the conversion capacity for the next several years to kind of.

Layering all those factors together, what's the optionality of your ability to Steve in a higher return a higher EBITDA contribution or maybe some of these new leases versus.

Historical ranges, maybe just if you could walk through some of those puts and takes that would be helpful. Thanks.

It's a good question because when we're stepping into new aircraft types, we want to get the same return that we've gotten from the 767% and so we've done a lot of financial modeling around that and a lot of market.

Discussions and analysis to see that we're able to get the same return.

Sure.

Which is a 10% unlevered minimum.

For those new assets.

And what can we get for.

760 sevens that are either extended leases or new leases coming out we have been trying to.

Test the market and move.

Pricing up.

To some extent.

It really just depends on.

Who the customer is and how they evaluate the aircrafts most airlines when they are evaluating the performance of the economic performance of an aircraft.

When you look at all the costs associated running at what they are what their flight.

Flight segments are going to be and then.

Dynamics, you can get from improving lease rates, you're getting on the airplane.

So all of that said the way the market is flowing today is.

Re leases and extensions are going at the same rate, which is unusual or higher in some cases.

And the.

Under normal circumstances, when the market is less.

I guess, you would say you.

We usually take a small discount when you extend at least because it's.

Best interest of both parties to extend.

We save a lot of downtime of the airplane and potentially some maintenance cost so.

We're looking to get a good rate of return that meets or exceeds our historic on the 767 million and we feel pretty good about it right now.

This is quint 70, I would just say that the demand environment that is helping us sell aircraft. So far in advance with the pipeline visibility we have.

There is naturally a plus four.

For what you can get in terms of return and our lease rates.

It says.

We've been we've seen airplanes that have come off lease renew at at or better than what we had.

What the prior lease had been.

Certainly.

There continues to be really strong demand for the midsize freighter.

And.

And that's a good thing for our lease rates, we don't that said, we don't get into specifics.

Because as you know thats, our discipline is 10% or better but.

I think we all understand that the current e-commerce growth is driving conditions that make it possible to get.

Upward movement in terms of lease rates.

Got it no that's really helpful. And then I wanted to follow up to the first question about the impact from the accounting changes that you highlighted.

Thank you for giving that I guess the impact.

The share count from an EPS standpoint, but maybe you could help us think about it.

How we should think about it maybe just a valuation standpoint, and if we are including those incremental 8 million shares are those being hedged.

Okay.

Obviously that would be great. Thank you.

Yes, I mean, we had as you know when we did it we did a bond hedge to to make the dilution.

The impact of any share dilution, even less likely I think we bought up that thing to like a 70% it would have to be a 75% or so premium over what we are.

While we were trading at the time, which if memory serves me right. We were at 21 back so it's like.

Before you could even possibly see any share dilution it would have to be in the I believe the low forties.

And then it's our choice right, how we settled that and it's a relatively small slice of our overall debt capital $259 million out of about 1.3 or $1 4 billion.

It matures in October of 'twenty four.

Actually I think truest was involved with that so you guys probably are across the hall there they know all about it but.

Likely next year, we'll take a look at that we could put that in our revolver without any any trouble at all and of course, our revolver were paying just a little over 1% for our variable debt.

So which is about the same as our coupon is on that convertible debt.

So the likelihood we will actually issue shares to satisfy is very tiny.

That.

Back up to $259 million in debt. So we put that in the denominator.

There is somewhat of an offset and we don't we no longer have to show an interest charge.

Of about 8 million Bucks and the net effect on the EPS adjusted EPS is about five five cents a quarter or so so 20 <unk> call it for the year.

Got it well thank you so much.

Thanks, Doug.

And our next question comes from Chris Stephanopoulos with Susquehanna.

Hey, good morning, Thanks for taking my questions.

Quit or rich.

The $6 40 guide for this year.

Whats contemplated in terms of fleet utilization. So you don't report your absolute block hours.

So we can get to kind of like a weighted average.

Sure Chris.

I'll take a shot at it first of all the reason we don't highlight block hours is because.

We do a lot of networks line right the CMI flying they're sort of medium range and so what drives our revenue in our results and in fact with our contracts.

Typically we're being paid more for the resources.

Supplying the aircraft and the crew and the maintenance and so forth and spreading it over a while while we do it we do look at it that way some sometimes spreading it over a block hour total is not as meaningful as it would be if these were long haul freighters.

Trans Pacific type schedules. These are flying short shorter hops.

But we take the schedules that we.

That our customers are asking us to fly.

And we of course baked those into the drivers in our revenue contracts when we do the budget and so whats behind the $640 million is basically.

Our CMI fleet, which as you know grew substantially in 2021.

We put I think what was rich 13 airplanes on for Amazon and we put on.

Sure.

For three years or four for DHL as well, so we're reflecting that we're reflecting what we typically would expect to see maybe in peak, but the customer is has the flexibility.

<unk> ability to change schedules during the year. So it's not like those can change based on customer wishes. So we're basing our projections on what we are currently flying we anticipate getting some additional aircraft into the Amazon CMI. This year I think.

As many as three and those are aircraft they will.

They would supply it's not once we will be leasing to them. So we bake that in as well.

And to the extent hours drive our revenues, that's what we put in our plan.

Okay.

So if we back out this 45, 40% to 45% from this new maintenance agreement that gets you to an implied EBIT of around 10%, which.

Im guessing your fleet is <unk>.

Probably not.

Not perhaps close to but not a pre pandemic utilization and so that 10% actually within that light is pretty good.

Is that.

With where your order book is here and move and the introduction of the <unk> hundred <unk> is 10%.

The right way to think about this now through the next stages of the recovery or through a cycle versus what you've done in the past has been sort of mid to high single digit.

You mean, as you think about 2023 versus <unk>.

Yes, I mean, the 10% to 15% I realized.

There's a lot of different things at play here, but you do have a very full order book and you have the <unk> 'twenty is coming in so is kind of 10% to 15%.

A fair sort of rate that you believe that you can sustain here through the cycle.

Yes.

Tim remember youre on a bigger and bigger base every year right and and.

And when you think about.

So you'd be talking about.

It's a.

I think 10% is maybe how you would think of it sort of as a more normal but it will depend on the opportunities right if the market stays.

Stays hot like it is you were adding new platforms, we're adding the Airbus platforms. The number of aircraft we could lease.

Instead of being more like 10, it can be more like 'twenty and some of those years.

It's the timing of delivery of some of those aircraft.

You're talking about the 320 ones. This year, the two theyre coming late in the year.

So.

It always depends upon timing of delivery when you're comparing one year over another.

There's a whole host of factors, but I will tell you that one of the drivers.

That I think maybe the.

Folks may not have expected I mean, and as we've been saying it.

Is the momentum in leasing that we've had and also improvement in our CMI services segment year over year is driving a lot of our EBITDA growth and I don't know if the market had appreciated that certainly the pandemic has sort of.

Ben harmful to the <unk> services segment, particularly omni.

And so we are getting as I said, we're coming out of that and we hope we hope for further moderation in those effects for 2022, so that's been a big plus.

The Combi flying.

We think there is there is some.

Further improvement that we're projecting in the second half related to some of the destinations that 757 <unk> that will be helpful. For us so that will help us in 'twenty three if that happens youll get a year over year.

That'll be helpful for that so there's a whole host of factors I mean, if you want to make some assumption I would point you more towards the 10% and 15, 15% is pretty hard when youre on a.

Significant base.

The market's really hot and we increase the leasing that can that can help push us closer to that.

Okay, and the $1 30, the active fleet at the end of this year. The $1 30, I think back in November you had suggested that you could do kind of a.

Teens growth on that which would imply around $1 45 to 2023 is that still the right way to think about the active fleet for next year.

Yes, Chris it's Mike, Yes spot on and we think Thats still very.

Very accurate.

Okay. Thank you.

Youre welcome.

As a reminder, if you have a question. Please press Star then one to enter the queue and our next question is from John Kim with dry Hot.

Hey, good morning, Thanks for your time I appreciate it.

Granularity around guidance.

As you alluded to in the last question, obviously youre layering in 11, new leases. This year can you talk about.

The guidance for 2022 can you talk about the exit run rate of 22 from an EBITDA perspective.

That's a good a good question John .

It's.

It will be.

Above what we've guided to for the full year.

I forgot.

I don't know that I have.

Given a whole lot of thought to the.

As I say some of those.

Good guys that we are looking for are in the second half, although by and large the EBITDA that we expect this year is more evenly spread between first half and second half than we saw in 2021.

We do expect improvements sequentially in the second half.

And what's driving that is of course, the timing of the leases lease deployments.

And also that Combi flying that I mentioned, a minute ago and so.

It's going out that will push the exit run rate higher than $6 40.

I don't know that I can.

Would want to at this point give you.

Some specifics that will depend on some some other factors that may be a little premature maybe we talk about that.

Later in the year at one of these calls when we've got.

Even better visibility on everything.

Fair enough and understood.

You made some comments early in the call and highlighted.

Your leverage position pretty.

Strong right now and obviously you've got a.

A high degree of visibility into your growth for 2022 23 and beyond.

And the ability to repurchase shares beginning in Q3.

You guys begun to think about.

Quantifying what share repurchase might look like.

I know you have to play a little poker here with the market, but would be interested in your general thoughts on that.

Yes.

Been looking at a number of ways as far as capital allocation goes.

And certainly as ice.

Putting the remarks that we're looking forward to.

Having the restrictions removed from us so that we will have the opportunity to return capital to shareholders. We haven't made any decisions yet but.

But we are looking to continue.

Evaluating towards a balanced capital allocation strategy that that would be certainly become include returning capital to shareholders in the future.

Great. Thank you.

We have our next question from Howard Rosencrans with value Advisory.

Hi, guys. Thank you very much.

I joined the call a little bit like I, just wanted to get a quick clarity on the $45 million and then I have or the 40% to $45 million then I have a habit.

Quick follow up.

The 40% to 45.

Hello again.

It was previously.

Now, it's going to be hitting our EBITDA, whereas previously it was sort of swap in Pryor.

Yes, Howard this.

As quint.

We went through that in some detail in an earlier question I'm not sure I can be as eloquent again.

But I'll take I'll take a whack at it.

Yes, the previous.

Track that we had that covered the vast majority of our 767 200 engines was with delta in it.

Powered by cycle arrangement, and we extended that to lessees if they wanted it not all of them used it some of them wanted to be responsible to take care of the engines during the lease themselves, but we extended that to our lessees and there was some markup on that that Cam recognized.

And so that qualified as PBC.

That came to an end right.

Right around the start of the fourth quarter.

That we are responsible to keep maintained and available.

And as we do that we will capitalize those visits we don't have an arrangement are powered by cycle arrangement with any vendor to do the maintenance, we're doing that on a time and material basis and so when those goes through the shop there'll be capitalized and they will depreciate over the engines lives.

Right.

If I could just.

I appreciate the elucidation.

Just from a more simplistic standpoint, though.

Essence on a on a sort of free cash flow from what you would generate standpoint, we've really.

It seems to me if I'm wrong I will just take it with you offline. It seems to me that we wanted to.

Yeah.

For one bucket.

I mean, you would still be guiding to a great year of like 600 million Bucks, but.

After the free cash flow effectiveness seems unchanged. So it seems like with the old accounting or not with the old accounting, but if you were doing it the same way you would really be at about 600 again, if I'm wrong I'll just take it offline.

From this change and it's also beneficial to our lessees and it extends the life of that aircraft type.

To be more actively managed to get it but I wanted to jump back to what you said about the CMI, which I think is great.

I certainly beat you up enough about it offline.

Because the CMI over the years has been.

As I don't hesitate to tell you horribly and consistent.

It seems to me you're really making please tell me if I am Misconstruing. Your sentiments here. It seems to me you are really making a very positive statement with a high degree of confidence that we're going to really see a sustained change in CMI and the EBITDA contribution I don't care about what the revenue.

But it's a hard one distribution from that line.

Well certainly there is there is last year. We added all these airplanes. So you had a lot of startup cost as you often do when youre, bringing on crews and so forth opening maintenance stations.

<unk>.

With that in place and a six year crew agreement that one of our airlines AVX.

Executed at the beginning of last year, so there's a whole lot.

Good things going on in the CMI and also the recovery from the pandemic in the tax line for omni, which is all stacking up to make.

Conditions right for year over year improvement in that segment.

And we've been I think we've talked on previous calls we've also done outside of the scale of that.

As mentioned, we've done a lot of work with the airlines and with and with our MRO in terms of improving supply chain.

And that will lead to improved profitability and we are already seeing results.

Our investments on our prior investments in 2021, so we're looking forward to a more efficient aviation situation going on in the future.

Okay.

I think this is really the inflection point on CMI.

Long overdue game changer for your for your multiple as well as will the return of capital.

So thank you very much thanks.

Thanks Howard.

And we have a follow up question from Chris <unk> with Susquehanna.

Hey, Thanks for taking my follow ups. So quint I think on the last few calls you've used the term self funding model and.

I feel that it's sort of under appreciated here.

<unk>.

If we look at all the sort of the puts and takes here eventually the spread here between the market value book value or the residual value on the 760 Sevens is going to go the other way.

But you are attached to customers like DHL and Amazon and you do have the <unk> hundred Twenty's.

Slowly working into the fleet. So when you talk about.

The self funding model, which again I think you've used now in the last two or three calls as we look at your free cash flow back.

Through 2010.

Depending on where you are in the order book cycle. It's gone positive negative so should we kind of interpret that as you believe that you can sustain.

Positive free cash flow through an order cycle or economic cycle, and if so outside of buybacks here, which it sounds like you have seven or so months to figure it out.

How we should think about capital allocation beyond.

Aircraft acquisitions. Thank you.

Thanks, Chris.

Yes.

When we when we published the Stat, a couple of quarters ago, adjusted free cash flow and separated our capex into the sort of non discretionary or sustaining capex versus the growth or discretionary we did it to further highlight.

That.

That aspect of our business model. It does fund tremendous growth I mean, when you look at the.

The trailing 12 month basis $400 million that is available to allocate.

But when you when it is self sustaining like that and funding the growth in your debt isn't going up or in the case of last year even declining.

You can see in one of our slides shows the fleet growth and yet the debt is going down so that's clear that this business funds.

Grow but.

That means that youre caps.

Our leverage ratio.

<unk> is going to decline.

It allows you to.

Look at the use your balance sheet to create value in a number of ways. We've been constrained from doing that certainly with the carriers restrictions on the grants that we participated in and that changes later this year I think rich said a minute ago. It was asked about have you been looking at different.

Different ways to create value that might include return of capital and certainly we always we always have that as part of our balanced strategy is just we have been able to.

We think the valuation of the company Hasnt.

It doesn't reflect a lot of the.

Improvements that we've had in terms of our leasing book and the cash flows that you can.

That we have visibility on that go out for years.

It's funny, we get questions, sometimes about M&A do you look at M&A.

And I think we answer like well, we certainly want to know about what's out there, but it's rare that you find something that.

And I think you can take that to mean, we believe our shares are certainly a bargain at the price they are at.

And so when we're able to I think that will and hopefully the market.

Recognize that value and we all hope for that right that we see share price more appropriately reflect progress. The business has made and so we will have to take a look at that but we do believe returning cash to shareholders as smart as part of a.

Our balanced strategy to create value.

Okay. Thank you.

And thank you we have no further questions I will now turn the call over to rich Corrado for closing remarks.

Thanks, operator.

I'd like to close by again, recognizing employees of ATSG for their outstanding commitment to safety through the pandemic challenges, while continuing to continuing to deliver excellent service to our customers.

The most highly valued companies achieve the goals they set for themselves year after year, we hit or exceeded our performance targets because the vast majority of our results come from expanding base of long term leases and contracts. We belong among the highly valued companies whose value is not based on just what they say, but on the ability to deliver soup.

Carrier performance year after year.

Thank you for your continued support of ATSG and stay safe.

And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Q4 2021 Air Transport Services Group Inc Earnings Call

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