Q3 2022 Air Transport Services Group Inc Earnings Call

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[music].

Okay.

Good day and thank you for standing by welcome to the Air Transport Services Group third quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone you.

Well there than here and automated message advising your hand is race.

Please be advised that today's conference is being recorded I would now.

Now like to hand, the conference over to your first speaker today, Joe Payne Chief Legal Officer. Please go ahead.

Good morning, and welcome to our third quarter 2022 earnings Conference call, We issued our earnings release yesterday after the market close it's on our website ATSG IFC Dot com.

Let me begin by advising you that during the course of this call we will make projections and other forward looking statements that involve risks and uncertainties, our actual results and other future events may differ materially from those we describe here.

These forward looking statements are based on information plans and estimates as of the date of this call.

Air Transport services group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions factors, new information or other changes.

These factors include but are not limited to the extent to which changes in market conditions impact the number timing and scheduled routes of aircraft deployment to new and existing customers.

The cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration, which may be impacted by global supply chain disruptions.

Our operating airline's ability to maintain on time service and control costs.

Our ability to remain in compliance with the key agreements with customers lenders and government agencies.

The effects of persistent elevated rates of inflation and changes in general economic <unk> industry specific conditions, such as higher labor costs increases in interest rates and economic recession and downturns in customer business cycles.

Impact arising from COVID-19 outbreaks, including the emergence of COVID-19 variance.

Mark to market changes on certain financial instruments and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q, 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.

Adjusted pre tax earnings adjusted EBITA, and adjusted free cash flow.

Management believes these metrics are useful to investors in assessing atsg's financial position and results.

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

Thanks, Joe and good morning, everyone.

The next slide shows that the third quarter was another successful one for ATSG.

Cam our core aircraft leasing business turned in a record third quarter with a 30% gain and pre tax earnings that gain stems from the 15, new leases of Boeing 767, 300 freighters, we completed last year.

And the five others, we leased through September this year.

Our two cargo airlines are flying more hours and more aircraft.

Since last year, our principal customers have been turning to us to fly freighters not only leased to them by Cam.

But also aircrafts they obtained from other sources.

We had 10 customer provided freighters in our fleet in September .

And are adding three more in the fourth quarter.

Okay.

Our revenues grew 11% and we delivered <unk> 60, and adjusted earnings per share for the quarter.

And a $1 75 per share through nine months we.

We advised you in February that we expected to deliver $2 per adjusted share for the year. So we're well ahead of that pace.

We are also on track to meet or exceed our $640 million of adjusted EBITDA target for 2022.

Quint is ready to review the details of our third quarter results I'll be back to share more about our very bright long term outlet outlook after that.

Quint.

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

The next slide sales in the details of the third quarter operating highlights that rich just noted.

Overall, our year over year results for the third quarter were strong our.

Our consolidated revenues grew 11% to $517 million.

Each of our principal businesses, greater leasing and airline operations plus our other activities group delivered good revenue growth.

Our adjusted pre tax earnings also rose by 11% to $67 million.

Adjusted EPS increased 30 to.

To <unk> 60 per share a penny more than the second quarter.

And our adjusted EBITDA of $163 million beat the prior year quarter by $10 million.

As rich noted 2021 was a record year for our 700 7300 freighter deployments, which means that the returns from all those deployments have stumped cams growth throughout 2022 and helped support a 30% increase is pre tax profits in the third quarter.

Pre tax earnings for our <unk> services segment were $25 million in the third quarter that was down from the prior year period, but up.

$3 million sequentially.

Third quarter 2021 results for <unk> services, including $30 million and pandemic related government grants for omni air and in support of the withdrawal from Afghanistan.

As we said last quarter inflation is driving up our airline cost travel cost to position our flight crews increased premium pay and crew training costs and contracted line maintenance are still impacting our bottom line.

We expect those cost pressures to persist into 2023.

The next slide shows that our $10 million growth in third quarter adjusted EBITDA raised our trailing 12 months paced for 633 million very close to our 2022 full year goal.

We will achieve that goal of at least $640 million through a solid fourth quarter from our airlines more contributions from Combi operations and additional customer provided cargo aircraft.

Plus three more newly converted 767 freighter leases.

On the next slide you'll see that we're still on a strong pace for passenger aircraft purchases and conversions.

This year's Capex plan still at $625 million includes $430 million and growth Capex, most of which will be paid for from our adjusted free cash flow.

Our 21 total aircraft awaiting or in conversion at September 30 includes all we expect to deliver this year and most of those for delivery next year.

Rich will update you on our order book in 2023 deployment outlook shortly.

The next slide update you on our adjusted free cash flow the metric, we began providing last year.

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

Our adjusted free cash flow is $373 million on a trailing 12 months basis, driven by strong operating cash flow of $552 million.

The next slide reflects the self funding power of our business model to generate significant recurring cash flow to fund a market driven fleet growth program.

Returns from deploying newly converted freighters under long term external leases provides us with a substantial portion of the cash we need to meet all of the demand our conversion line capacity allows us to fulfill.

Our overall debt to adjusted EBITDA leverage ratio as measured under our senior secured credit agreement remains at about two times.

Speaking of our senior secured credit agreement, we recently amended and extended it through October of 2020.

The changes also included an increase in our revolver credit capacity from $800 million to $1 billion with no change in our rate structure.

It's more flexible terms for share repurchases.

A hard limit of $100 million per year in repurchases was replaced with a new variable limit tied to our leverage ratios.

The new limit is a full percentage point above our current ratio.

We also noted on our August conference call that restrictions on our ability to buy back shares under the cares Act would expire in September and that we would resume repurchases as part of our capital allocation strategy.

Accordingly, we resumed repurchases in October under our existing Board authority.

During that month, ATSG repurchased nearly one 6 million shares or just over 2% of those issued in outstanding through a combination of open market and private transactions.

We anticipate continuing to buy back shares along with funding the expansion of our fleet to return value to shareholders.

With that summary of the quarter's operating and financial developments I'll turn it back to rich for some comments on our business drivers and outlook rich.

Thanks Quint.

Let me begin by expressing my thanks to everyone at ATSG, who contributed to our solid third quarter performance.

We met our key objectives by focusing on delivering the superior service quality, our customers expect from us.

We also work with our suppliers to overcome challenges and global supply chain impacts.

On the next slide you can see that the tremendous achievements, we recorded in 2021, including a record 15 external leases of 767 300 freighters are paying off in 2022.

I noted at the beginning the cans continuing ability to meet that demand with the principal source of our strong results Cam's pre tax earnings are up 54% year to date.

This year <unk> focus has shifted from the domestic market for our 767 freighters to demand from abroad.

The majority of the 767 freighters will lease this year, we will go to non U S customers.

Like our customers in the United States customers in Asia, Europe , and Canada are pushing ahead with their own express and cargo networks.

The next slide shows that we are already acquiring Airbus passenger aircraft to convert and deployed in addition to Boeing 760 Sevens that remain the mainstay of our fleet.

We owned seven narrow body Airbus <unk> hundred 21, 200 aircraft at the end of September .

And we will acquire more in the fourth quarter.

We will purchase our first wide body <unk> hundred 30 aircraft in the fourth quarter.

It's the first of 29, we expect to acquire convert and lease starting in 2024.

You have likely read recently about Amazon's plans to add <unk> hundred 30 converted freighters to their network there.

<unk> decision validates what we have known for several years that twin engine medium widebody freighters will remain the ideal solution for time definite regional express networks and that the Boeing 767, and Airbus <unk> hundred <unk> will remain the leading candidates to fill those roles, which leaves us well positioned to.

To continue our leadership position in this segment.

As I said last time, you won't find any evidence of uncertainty among the names in our leased freighter order book.

We already hold deposits our commitments from existing customers for more than 20 freighters, we expect to deploy in 2023, including at least 14 767, three hundreds and six <unk> hundred 20 ones.

At the start of the year Cam held more than 80 passenger to freighter conversion slots for induction in 2022 through 2027.

We have identified customers for more than 50.

And no one has retracted in order.

While demand remains strong meeting that demand has challenges we continue to work with all of our conversion suppliers at the highest levels on opportunities to improve conversion throughput.

Okay.

As the next slide shows we expect 2022 to be another record setting year for ATSG with adjusted EPS of more than $2 per share and at least $640 million and adjusted EBITDA.

We will get there via on scheduled deployments of lead to 760 Sevens.

The October resumption of a full schedule of Combi flying for the U S military and a strong fourth quarter in both cargo and passenger flying.

Quint mentioned that we resumed share repurchases in October for the first time since April 2018.

It was a timely move as the stock market declined sharply creating opportunities to acquire shares at attractive prices.

Our stock price remains a great value even at current prices.

As I've said many times our business model was built for resilience in the face of market uncertainty.

Our long term cash flows from aircraft leases and operating agreements with major organizations like Amazon DHL and the department of defense will allow us to perform at superior levels, even in challenging economic times.

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

And we have the first question operator.

Thank you.

And as a reminder to ask a question. Please press star one one.

Please standby, while we compile the Q&A roster.

Our first question will come from Frank Galanti from Stifel. Your line is open.

Yeah, great. Thanks for taking my questions.

Congrats on a great quarter.

I wanted to ask about the Amazon <unk> 30 orders.

Not sure what you can talk about but to the extent that you can.

Can you sort of talk about HST was competing for those contracts.

Is that.

Was that sort of expected longtime coming or can you just sort of talk around that deal from <unk> perspective.

Sure. Thanks, Frank I'll start this.

Answer and then I'll turn it over to Mike.

First off <unk>.

Known about.

Amazon looking into the <unk> hundred 30 for some time.

It validates our decision to get into the $3 30, as well as the logical long term medium wide body.

Airplane of choice.

Obviously are the mainstay of our fleet is the 767 freighter, which we've got 42 on lease to Amazon right now and we're flying 49 of those for them.

By the end of the year. So yes, we knew about it for some time we.

Historically, the way that bid their network they tend to select carriers that already have.

The aircraft on certificate, which Hawaiian did already have the <unk> hundred 30 <unk> certificate.

It takes an airline about 10 months to a year to put an aircraft on certificate.

It also cost a lot of money somewhere between $6 million to $8 million to do that type of work so that puts us at a disadvantage in bidding where we didn't have it on certificate.

So that's kind of like.

In a nutshell, what the what the view looks like I'll turn it over to Mike if he's got any comments, yes, I'll just reiterate that is consistent with what we've seen in the past Amazon tends to as chosen.

A provider that has the aircraft on our certificate.

But as we've seen that doesn't mean in the future.

We may we may operate the aircraft as well, we see Amazon historically look for multiple providers of aircraft.

As they develop their network.

So we stand ready to support.

Amazon is our largest customer and shareholder in the future.

Just to emphasize a little further than the Amazon decision really does validate what we've known.

For some time that the $3 30.

The next aircraft that we want to get ourselves into <unk>.

767 feedstock becomes more difficult. The 330 is certainly going to be the choice of the integrators.

And the folks that are flying and integrators regional networks, we've already seen that with DHL.

They're already flying the aircraft.

And they are also in our order book for the 330, so as we look forward two to three <unk>. The 20 plus orders from commitments in deposits that we've seen really aligned strategically with what we're trying to do globally all those orders.

<unk> will be for our customers outside the U S. As we stand right now so we really think it reinforces the fact that we made a great decision to get into the <unk> hundred 30 aircraft going forward.

That's super helpful and actually just a quick follow up on that.

You mentioned not having the STC is.

It was an issue potentially.

<unk> do you have plans to get that and sort of what's the timeline around that.

We're evaluating that right now in terms of.

And we have three airlines, which airlines it would make sense to look at the $3 30, and we've looked at in the past obviously to see what the cost was in the timeline to do it. So it's still under still under review right now.

The way, we've Architected, our model, where our lease first.

The business. So we look to lease the aircraft first in flying for US is more like an asset light value added service that we offer to enhance the value of the lease that we offer to our customers. So.

If.

And looking at DHL or Amazon if they wanted to fly in the U S. As an example that would certainly be a catalyst for us to move ahead more quickly with with getting the aircrafts on certificate.

Okay, Great and then.

Sorry, I wanted to ask about the share buybacks, it's great to see.

Eligibility to do that and.

Kind of moving in size in October .

I just wanted to ask around future expectations around that was that more of a.

One time opportunistic purchase given the share price movements or is that.

I guess, how should we frame in how much share buybacks should be occurring going forward.

Hi, Frank it's Quint.

As we've said in prior quarters once cares expires, we were looking forward to having a share buyback as an ongoing tool to add value to.

The value of its coming through our growth investments for shareholders.

So.

I wouldn't view this.

The October activity as.

Sort of a one off.

Again in terms of the volume of share buybacks you may see some.

The variance over time of that depending upon because we want to be somewhat opportunistic about it but it will it will consistently remain in our toolkit for providing value to shareholders. So we would anticipate maintaining that capability and utilizing it on a recurring basis.

Great Okay.

I really appreciate the color thanks very much.

Thanks Frank.

Thank you.

One moment for our next question please.

Our next.

<unk> will come from Christopher <unk> from Susquehanna Financial Group. Your line is open.

Good morning, everyone rich good morning.

Hey, Chris.

So.

Let's see here.

There's been a lot of debate as you are aware here that the.

Our freighter capacity, if you will thats been underwritten.

Over the last two or three years on this.

Power.

Was done under the sort of the framework here of this power.

Growth in rates here so.

Wanted to help because this is a question I get a lot as it relates to.

Lessors.

I would say lesser operators as well the conversations that you're having with customers today could you help us.

<unk> the mix of one existing to those that are new to dedicated airlift on three growth.

Okay.

Yes.

Sure.

Thanks for the question Chris.

A couple of things one is if you look at the growth in the network.

Keep in mind that our.

Our assets are focused on express networks, So thats DHL Amazon, we fly for UBS during peak and then most of if not all of our lessors lessees I should say around the world that we lease to.

Also fly in networks.

For example, Ryan Adam Malaysia, who was just named the Southeast Asia.

E Commerce carrier of the year, Brian flies for DHL.

And we leased two star as an example in Europe . They fly for UBS. So a lot of our lessees are also flying in these networks.

Express network is powered by E Commerce, and that's the growth engine for that business now you saw a spike in E. Commerce. During the pandemic that was more related to folks leveraging the internet to get goods and surfing to get goods and products that they didn't maybe didn't feel safe going.

At home for.

That's a whole host of folks that never would have.

Bought online before and they're continuing to buy now if you look at the statistics globally about e-commerce growth isn't in several of the areas. It's in the 20% 30% growth still.

When we talk to our customers in the United States.

<unk> seen a kind of.

A slower a slowdown in growth in those areas, but theres still growth when we look at we had a conversation with with DHL a few weeks ago.

And their business in the U S, which by the way we are adding four planes for additional aircraft into that they provided to us.

The last one goes in in the fourth quarter here.

They are still looking at it right sizing their network is in a good example of why additional freighters are needed.

So we're still bullish and all the customers that we have waiting for assets would take them as fast as we could get them get them to them and so this e-commerce <unk>.

<unk> phenomenon. If you will remains now it's adjusting you went from 2019 to 2022 is about a 28% increase in express volume.

Prior to that it was in the 5% to 6% range and according to Boeing it'll settle in around the five or 6% range going forward. So.

We're in an adjustment year, but folks are still looking at getting aircrafts the lead times for airplanes.

If you recall, a very different from reactions too.

<unk>.

Express growth and one of the great things about this network situation is.

These these carriers have to service the geographies everyday they have time definite and day definite commitments and so when you look at our network such as DHL or Amazon's.

Those networks have to go to Boise Billings view, Buffalo, Boston and Baltimore everyday.

When the planes full or whether it's not so that's what's bolstering our growth.

And then.

Ben.

We're pretty bullish on it I don't know Mike if you have more to add just add a couple of things and it's a really it's an important.

Toy I'm glad I'm glad rich emphasized that the major integrators.

We're out there selling time definite guarantee products.

He talked about it for the U S domestic perspective, but the other there is another component of it that I would like to speak to in regards to the global connectivity on why the freighter market along with the growth with I'll emphasize is still very much positive and the engine of E. Commerce is very much. There is is that these major integrators the DHL.

Specifically the EPS is the effects of the world. There are huge huge buyers of belly freight of wide body aircraft as they connect globally through the major hubs.

Hong Kong Frankford scaffold Heathrow for example.

And when you think about the scheduling.

Wide bodies, yet they have not come back to pre pandemic levels.

And the labor issues within these within these airports and the connectivity and the throughput.

Still an enormous enormous issue, which gets written about and talked about all the time.

So that's a component of people tend not to think about.

Is not going to go away for any time. So it just really helps support the growth and the stability in the future the future of the freighter market. So there is other aspects out there in the.

<unk> e-commerce projections.

Five trillion dollars of goods and 80% of cross border ecommerce sales are transported by air right 131 billion parcels delivered every year from ecommerce that's expected to double by 2026, So when I talk about the engine is still there.

It's still there and it's going to fuel that is going to fuel our market for some time.

Chris Let me add one this is rich again, let me add one more thing there are new markets developing in addition to e-commerce.

One of those we've been able to capture a trend on has been passenger carriers.

We're.

Almost 100% passenger carrier prior to the pandemic looking at coming out of the pandemic meeting main deck freighters to supplement what they do to never get into the situation again that they were in air Canada, We did two aircrafts purchase.

We purchased the aircrafts from gas, Canada, we converted them and then we leased them back to Air Canada.

We're in the process of doing a similar agreement with Vietnam Airlines that were purchasing to 821 freighters from them converting them and leasing them back to them. So that's a new trend that we're seeing additionally, theres been a lot in the market about ocean.

Transcon container transporters that are getting into the air business.

And there is speculation on why they are doing this to supplement their service they've got the advantage of having a captive network of customers and they can speed up certain pieces of the supply chain and improve some of the bottlenecks that they have today.

We have.

In our order book for airplanes going to Maersk.

They've got rebranded their star Air out of Denmark that flies for UBS and they'll be flying airplanes.

For Maersk reasons Supper.

Supplementing their solutions as they go forward to try to help with some of the supply chain issues going on around the globe.

Okay. Thank you and then rich if you could.

Give us.

An update on the pilot contract with ATI, So output put out a press release I think it was last week.

It looks like a proposal was submitted to the union that wasn't accepted.

Are we what are the next steps here and then if you could talk about.

Your hiring plans for pilots next year.

Any are you seeing anything outsized with respective turnover for Patricia Thank you.

Thanks for the question, Chris given us the opportunity to clarify that.

So <unk> is in its second year of <unk> six bargaining with Alba.

<unk>.

Sure.

Advance a new contract.

We.

Through the first two years, we got a proposal from the Union I should say ATI got a proposal from the Union.

Probably a few weeks before we submitted ours.

We're far apart, but these these negotiations tend to go on for several years.

We're engaged with the Union a couple of times a month at least for several days and and talked about they've made a lot of progress on non economic.

Areas and so we're continuing to work with the Union and worth Union negotiation to try to get to a solution.

As it relates to hiring plans were not immune to what's going on in all of the aviation industry, which is.

A shortage of pilots and pilot attrition as other airlines get innovative in the way that they approach hiring in some of the things that they're doing and we have got some innovative things in terms of trying to attract pilots. So our attrition is up in all three of our airlines this year, but we planned for it and we've adjusted.

To it and we've adjusted our hiring and.

Our training classes and we've been able to stay ahead of it and continue to be to lead the pack in terms of the service that we offer to our customers.

We're in a service business and we realize that and when we are servicing express business with those time definite definite commitments. We spoke about earlier on time service is critical in our airlines have done a fantastic job throughout this year.

So we're staying ahead of it it's something that we're dealing with it is raising cost.

As we noted in the.

The press release in terms of training and in terms of bonus pay we may have to pay in terms of.

Getting crews to substitute in for training pilots, but it's something we're managing just like every other airline is managing and going forward. We will continue to make sure that we've got enough crews to make sure that we meet our commitments to our customers.

Okay. Thank you just squeezing one more Quinn, it's been a while since I looked at your network.

Any level of detail.

Detailed here, but your competitor Atlas yesterday.

It looks like volumes were.

Significantly impacting the third quarter due to COVID-19, sic outs and Ian I didn't see any of that.

Any impact.

Some kick outs in the quarter.

Or or Ian and again I haven't looked at your that work, sometimes they don't know how much flying we're doing down there in Florida. Thank you yes. It is.

Rich Chris.

So a couple of things one is we don't compete with Atlas.

And the vast majority of what we do and the places that they are flying and some of the concerns that theyre, having and not areas that we fly into so where most of our flying is domestic U S. Army flies almost all international passenger and Adi of course flies for copies for the military that are international but most of the flying.

As domestic we've had.

As I said before we've had some pilot attrition we have had some.

Pilot sick calls, but nothing.

Unusual and.

And we've been able to manage it and like I said, where we're pretty proud of the service that we've been able to offer.

We've got we got.

Amazon has that accelerated.

Yes.

Its peaks.

PS program that was like a second.

Prime week in October and they gave us a very solid feedback on how well, we adapted and we're able to service them. So.

Like I said, we haven't had the same level of concerns and we're managing through.

The pilot situation and we're able to maintain service quality, that's required by our customers and Chris just to tag onto that.

Again, we've talked about differences between our business model and analysis in the past.

I think again, where we came out of this quarter's another good illustration of it I mean, you've heard us talk about the order pipeline for our midsized freighters and the fact that we haven't had really any issues with customers pulling back from that strong pipeline that extends out really a couple of years.

And it's why we think that and you saw this quarter in our revenue up 11%.

The consistently strong performance that we've had throughout.

Our business model is and should be less.

Less volatile.

And I think it's proving that again this quarter.

Why we think that combined with the strong demand that's out there for our what.

What we specialize in these mid sized freighters and the services, we tag on it and Thats why we think our stock is a great investment and that's why you've seen us come out aggressively for share repurchase.

And anticipate.

Continuing to use that obviously you evaluate that against.

Our capital allocation strategy that may include other alternatives right from time to time.

You can modulate that depending upon your opportunity set but we think we're fortunate in this environment and really differentiate us from so much of what you are hearing right now about the economy I know everybody is tuned in and wanting to hear about.

Or is there going to be this big falloff in demand and so forth and we just we really haven't been able to talk about it because we have not seen it in our case.

Okay. Thank you.

Okay.

Thank you.

One moment for our next question please.

And our next question will come from Thomas Fitzgerald from Cowen <unk> Company. Your line is open.

Hi, Thanks, so much for the time and congrats on the great quarter.

Just a quick one for me I was wondering if you would mind, providing a little more color on the strength in your engine leasing business and Cam I know theres a lot of supply chain.

Issues.

And with an aircraft engine. So I appreciate your color there and your outlook thanks very much.

Yes.

Yes.

I'll take that Tom Thanks for the question.

Yes, so we.

We are unique.

What we do from a.

Customer service standpoint, when we leased an airplane to come.

Customer.

They have the option to take a power by the cycle program that we have with both our 787 200 767, three hundreds and so in doing that we also spare the leased fleet that we have I mean, we have spare engines. So at any one point in time, we probably have anywhere from nine to 12.

Engines out on lease.

And so that's a way that we can add value to our customers. So that they know that they don't have that with a smaller fleets to some of the smaller airlines. We leased two they don't have to worry about going out and getting one or two spare engines that they have to.

To make sure their fleets maintained.

And so those.

Through those agreements. It's also a lot more stable paying power by the cycle, rather than having to accumulate reserves and have enough money. When you have to do a $4 6 million.

Engine overhaul. So the engine leasing has been good it's been a great value added differentiator as a lessor.

And it's enabled us to.

Also get more return on the investment from those engines that we have.

Okay.

Pardon me Mr. Fitzgerald, Please make sure your line is not on mute.

That's very helpful. Thanks, so much that's it for me.

Thanks, Tom Thank you.

And as a reminder to ask a question. Please press star one one.

And our next question will come from Michael Chairman Li from <unk> Securities. Your line is open.

Hey, good morning, guys. Thanks for taking the questions.

<unk> here.

I guess, maybe Rick just one but one follow up here you guys are a leasing company, but clearly you've got some of these deep airline operating risks as we think about.

This alpha contract and thinking about labor costs and wages.

They put out something.

Last week I guess, it was citing their concerns about ATI, but I guess I'm just trying to think of.

As you go through the contract process as we look at pilot shortages, how should we think about overall costs across some of your airlines and Thats that relates to margins. I mean is that something we should be contemplating for next year even 24.

It's tough to predict when.

<unk>.

The Union negotiations will result in a new CBA.

And so as we look at.

I think your question was about down line operating risk we look at the current competitiveness of R.

Our compensation program as it relates to attracting and keeping pilots.

And that as it sits today, we've been able to manage through.

I am not saying as I said were the same as we were in the same part is every other airline and so there is attrition and we are managing it and it is resulting in an increase in cost.

And you can see that in our in our current operating results.

But as we go forward.

We're going to look to get the most competitive contract that we can so that we can continue to attract the best professional pilots.

They are going to allow us to offer the services that we offer.

And but also we need to make sure that we're competitive.

On the other side of the ledger to be able to win business.

And so balancing those two is something that we've been able to do in the past and we believe that we'll be able to do it in the future that fairly compensate our crews have the type of program and work rules that will attract and keep pilots going forward and allow us to compete for business and win business and offer.

The best service that we can.

Got it got it that's helpful and then just back to <unk>.

Amazon.

Dynamic here I guess with their third deal here with Hawaii, They want to eventually move away from 767.

How does how do you guys think about that with your current read of <unk> do you have an opportunity to again I think it was brought up earlier, whether or not you get an FTC, but do you have an opportunity to provide <unk> into them or should we be thinking about 767 with amazon's coming off lease.

Is there a risk there I guess just trying to figure out how this kind of.

Our relationship with Hawaiian shakes out over time here.

Yeah, well first first off.

Amazon.

And our discussions is not moving away from 760 Sevens in fact, okay.

We're already getting that we've already been awarded another 767 from Amazon.

For 2023.

There are more and more coming available. So the issue Michael with the 767 is that doesn't have anything to do with the competitiveness of the airframe.

It has to do with.

The fact that that going forward in the future, there's less feedstock available and so if you're looking to.

Clean your fleet in the future it makes sense to to to look to the next generation airframe to augment your fleet and I think thats, what Amazon has done so we're still very bullish on the 767, we've got.

I believe 30 slots plus options.

We've got 16 kind of at least 16 come in next year I'm, sorry, 14 come in next year and then more in the year after that and so it's still a solid airframe now all that said the same reason we got into the <unk> hundred 30.

We believe that going into the <unk> hundred 30, which is it's the logical hi is up 500 of them are passenger units out there for conversion so.

Theres, probably a couple of hundred left of 767, three hundreds so plenty left.

But you also have to be in a market, where the passenger carrier wants to release that airplane.

We've been very astute and very good at finding feedstock because this is our business. We don't dabble, we don't go in and out of the feedstock market were in there.

Constant looking to get the best.

Move go forward airplane, that's going to make a good freighter. So we both are both airframes are important to the ATSG future and I think Amazon has made a wise decision to augment their fleet with a different aircraft type.

Got it got it and just last one for me maybe you might not answer this but any early read on 23 EBITDA or capex.

Yes.

Thanks, Michael.

Typically of course, we guide on that.

On the next earnings call, but and we're still of course working through in more detail our own our own projections.

But if.

If you think about kind of where we're finishing out 2022, theres a lot of embedded growth and I'm now talking about EBITDA.

And in the assets that have gone online in 'twenty, two including some that are coming on in the fourth quarter. So if you think about.

Sort of the exit run rate, where we're at here as we leave 2002 and your bill.

A full year's contribution from.

The eight newly converted freighters that we will have place in service this year and as Rich said, you've got 14 760 Sevens next year.

That will sort of be spaced out through the year right and then you've got we say at least half a dozen 320 ones.

That's a nice.

Starting point to think about growth in EBITDA.

And then in terms of Capex.

We produced eight aircraft this year newly converted freighters next year, it's more like 20.

That piece of our Capex naturally is going to be is higher because of the production schedule just the timing of these assets as they move through.

And we will be acquiring some feedstock for these new platforms. The <unk> hundred 30 in particular next.

Next year, so we'll be buying some passenger feedstock to fund the conversions that will began producing <unk> hundred <unk> in 2024.

And so we do expect Capex to again be reflective of a company that's in a growth mode next year.

I anticipate elevated capex.

Compared to where we're coming out this year.

Next year in total.

Because of that.

But of course, we have.

Have orders and returns that we project on those investments are really strong and we have a balance sheet.

<unk>.

Lightly levered. So we're in great position to continue to add value through our growth investments.

And as we talked through earlier supplementing that with the share repurchase.

Okay.

Got it perfect. Thanks, a lot guys I appreciate it.

Taylor.

Thank you.

One moment for our next question please.

And our next question will come from Anthony Bernie from Susquehanna Financial Group. Your line is open.

Hi, Good morning, Thank you for taking my question.

Just had a quick question on <unk> EPS.

Did your guidance from I believe February Hasnt changed but your performance year to date is tracking significantly above that and if I look historically it seems like from <unk> to <unk> your EPS tends to increase.

Pre pandemic, but in the past two years, it's kind of dipped a little bit.

Any color you can give on the near term in terms of earnings would be great. Thank you.

Thanks, Thanks for the question.

I think that.

When you think about EPS Youre correct that this year. We've tracked ahead of our initial guidance, we talked about adjusted EPS of $2.

And.

Certainly.

Clearly on pace to.

To beat that I think.

Next.

In terms of the fourth quarter, you got higher interest expense will be a factor.

What the fed is doing.

So you've got it you got to figure that in as well.

I believe.

Directionally you may see it slightly below where we wound up this quarter.

For the EPS.

But I think very similar numbers, obviously with our guidance to what we did from an adjusted EBITDA basis for the fourth quarter and again very strong cash flows, but interest expense is a little bit of a headwind for us certainly in Q4 compared to.

Third quarter.

Great. Thank you very much.

Thank you one moment for our next question. Please.

Our next question comes from Christopher <unk> from Susquehanna Financial Group. Your line is open.

Hey, sorry to double up here just quint.

So a lot of moving pieces here with your order book.

With the deliveries and don't think I don't think you'll have any significant planned retirement here, but is there any reason why when we look out to mid decade.

That you Shouldnt have a fleet of around something between 160 to 170 aircrafts.

Well, we talked about.

2000, and you are talking about it in service and of course, our customers are likely our customers are likely to give us aircraft to operate as rich alluded to earlier so it depends on whether youre talking about operating aircraft are owned.

Cam aircraft I guess.

And the next couple of years are going to be continued and Mike you can jump in here, but I mean.

Just just theres been a lot spoken about obviously.

The balance of 'twenty two.

Richard coincide provided color around two.

2023, with at least 14 760 sevens in $603 21 side as we move into 2024.

706 side, we still anticipate.

Double digits in regards to minimally 767 deliveries in the double digit range.

We will start we will start delivering.

<unk> hundred <unk> in 2024.

At this point, we're anticipating somewhere in the <unk>.

<unk> range.

As well as continuing on the <unk> hundred 21 side so.

Your your numbers as you look forward to mid etc. As you get the feel that we have no intention.

Not being the world's largest lessor cargo freighters in the world as we move forward.

Okay. Thank you.

Thank you one moment for our next question. Please.

And our next question will come from Scott Kavanaugh from APG asset management. Your line is open.

Good morning, guys, great quarter, just given your commentary on shareholder returns and the balance sheet ignore de Levered and your commitment to grow with free cash flow how are you thinking about.

Targeted leverage at this point and have you given any more thought about trying to push for the investment grade rating.

Thanks for your question.

Yes, and we've answered I think on maybe some earlier quarters on the investment grade side.

Typically yes, it make some affirmations about staying below.

Certain leverage.

And we haven't.

To date, we haven't.

Felt that was the right necessarily the right place to be where we're just below that currently.

Just below investment grade because we wanted the flexibility to.

Invest when we felt like the opportunities were really strong for returns.

For the shareholders and we've done that a few times.

With M&A and.

And so forth so that hasnt been.

Necessarily.

Our near term goal to be investment grade for us.

And I do think that because we've managed our are finished.

Our company pretty conservatively in terms of our balance sheet and the cash flows that we produced has enabled us to keep a really a lot of liquidity there with low leverage.

We are well positioned if we believe.

Yes.

The returns are there to invest either share repurchase or the continued growth and expansion in Mike's laid out.

To add leverage because we believe.

That's going to help shareholder returns and be smart smart play. So we would be comfortable operating at a higher leverage than we are now.

And that wouldn't be a problem certainly the cost.

Has gone up Sunrise, we're not thrilled about that but that is a reality.

And but.

Even even given that we.

We believe that.

We've got dry powder to invest when returns are strong.

Thank you very much great quarter.

Thank you.

Thank you and that does conclude our question and answer session for today's conference I'd now like to turn the conference back over to rich Corrado for any closing remarks.

Thank you operator.

Since I first shared the three principal sources of our adjusted EBITDA on our first quarter call in May I've gotten a lot of positive feedback about how useful it is to explain why our business model is more resilient to economic cycles than others in our space.

Is the idea that most of our annual EBITDA comes from three sources into.

In descending order they are long term dry leases.

Long term CMI agreements with Amazon and DHL.

<unk> Omnis passenger flying for the department of defense and other federal agencies.

Those pillars are solid today, mainly because none of them depends directly on how much or how many items our customers are asking us to carry and because fuel costs are covered by the customer either directly or via reimbursement.

That's the value proposition few others can claim.

And it's the message we want to leave with you today.

Predictable long term cash flow really shines in times like this we're generating it faster than ever this year and can point directly to our sources for it in the future. Thank.

Thank you for your interest in ATSG.

Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Okay.

Good.

Yes.

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Okay.

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