Q4 2022 Air Transport Services Group Inc Earnings Call

February 24, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Okay.

Good day, and thank you for standing by walking through the Air Transport Services Group fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the special need to press Star one on your telephone you will then hear an automated message advising your hand is reyes please be advised.

Today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Joe Payne Chief Legal Officer. Please go ahead.

Good morning, and welcome to our fourth quarter 2022 earnings Conference call, We issued our earnings release yesterday after the market closed.

Our website ATSG IMC dot com.

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

These forward looking statements are based on information plans and estimates as of the date of this call Air Transport Services Group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions factors, new information or other changes.

These factors include but are not limited to unplanned changes in the market demand for our assets and services, our operating airlines' ability to maintain on time service and control costs.

The cost and timing with respect to which we were able to purchase and modify aircraft to a cargo configuration.

Fluctuations in Atsg's traded share price and in interest rates, which may result in mark to market charges on certain financial instruments.

The number timing and scheduled routes of our aircraft deployments to customers our ability to remain in compliance with key agreements with customers lenders and government agencies the impact of current supply chain constraints, both within and outside the U S, which may be more severe or persist longer than we currently expect.

The impact of the current competitive labor market.

<unk> in general economic <unk> industry specific conditions.

Factors relating to the COVID-19 pandemic, including that 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.

Disruptions in our workforce and staffing capability.

Disruptions in our ability to access airports and maintenance facilities.

Virtually impact our customers' credit worthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels 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.

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 <unk>.

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 comments.

Thanks, Joe Good morning, everyone.

2022 was an exceptional year for ATSG.

Even with rapid inflation and delays at our 767 freighter conversion vendor youre companies still exceeded its 2022 financial goals.

$640 million, and adjusted EBITDA and $2 and adjusted EPS.

We also began to invest in new freighter platforms from the Airbus family, while maintaining our leadership and Boeing 767 freighter leasing.

I am very proud of the excellent planning and execution throughout the company that drove our considerable success.

Many of those efforts are playing into our outlook for 2023. Despite some headwinds we expect more adjusted EBITDA growth and accelerated growth in 2024, and later years I'll be back to share more of that perspective. After quint reviews, our financial results for 2022.

Quint.

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

The next slide in our deck summarizes the strong 2022 results that rich highlighted.

Our consolidated revenues for 2022 grew $311 million to 2 billion. Another all time high for revenues at ATSG are.

Our adjusted EPS increased by more than 40% to $2 28.

Compared with $1 61, and 2021 that was well above the $2 target, we set a year ago.

Adjusted pretax earnings increased 51% and adjusted EBITDA Rose 18%.

Earnings from our airline businesses, along with the momentum of our leasing returns from can produce most of the EPS gain above our targets.

We are projecting lower EPS for 2023 as rich will discuss in his remarks, mainly because of increased interest expense on our current fleet additions and inflation effects, particularly in our <unk> services segment.

On the next slide you can see that versus the 12 months ended in December 2021, our adjusted EBITDA grew a record $100 million.

Or 18% in 2020 to.

That improvement includes a full year cash flows from the 15 newly converted 767 freighters were deployed in 2021 and more than doubling our earnings from <unk> services.

For adjusted EBITDA, we exclude 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 programs for the 2021 periods.

On the next slide Youll see that our capital spending finished the year at just under $600 million $25 million less than we projected last quarter.

We separate what we call sustaining capex, mainly for airframe and engine maintenance technology and other equipment from a spending reallocate to fleet expansion.

Sustaining capex was $187 million for the year up $4 million.

Growth Capex was $412 million up $90 million from the prior year, both to convert existing aircraft to freighters and to buy more feedstock passenger aircraft.

And 2022 those purchases included eight Boeing 760 Sevens and six Airbus <unk> hundred 20 ones.

We deployed and leased six newly converted 767 freighters last year.

Turnaround times at many passenger to freighter aircraft conversion houses remain well above pre pandemic levels.

Spite their efforts to increase throughput.

We expect those bottlenecks to lessen this year.

The next slide updates, our adjusted free cash flow as measured by our operating cash flow net of our sustaining capex.

Adjusted free cash flow of $285 million last year was down $115 million from the year earlier period and down $88 million for the 12 months ended last September .

Cash flows from federal grants in 2021 were $83 million all of that cash was received in the first half.

Our full year 2022 results reflect the impact of a temporary fourth quarter increase in working capital related to reimbursement of fuel cost from omnis federal government customers.

We project our growth capital investments to exceed adjusted free cash flows until 2025.

We expect that trend to reverse.

Through 2024, we expect our debt leverage ratio to remain under three times and begin to decline in 2025.

You may have already seen the 2023 of guidance we provided in the earnings release, we issued yesterday.

Rich will cover some of the factors that will affect our earnings and cash flow in his remarks.

I wanted to provide some color around the significant increase in our capex budget of $850 million this year.

And the strategic decisions and steps that prepared the way for our growth investments in 2023 and 2024.

The bulk of our Capex this year and into 2024, we will continue to fund the expansion of our leased 767 fleet.

The other major driver of our stepped up growth in spending over the next several years is our decision to begin offering our lease customers to other freighter types. The Airbus <unk> hundred 21, and narrow body midsized freighter designed to replace retiring Boeing 750 Sevens <unk> hundred <unk> a wide body mid sized freighter.

That will complement our still expanding fleet of 700 success.

We started this freighter platform expansion from a strong financial position through 2022, our debt to adjusted EBITDA ratio as calculated under our bank agreement was below two times and well below our average over the last several years.

We also acted in 2020 and 2021 to lock in favorable fixed rates by issuing seven year unsecured notes at a 475% coupon rate.

We amended our senior credit facility to increase our borrowing capacity free up some collateral and accommodate the resumption of our stock repurchase program.

Available credit under our revolver was $365 million at the end of 2022 with an option for additional capacity subject to bank approvals.

To coincide with our increased business with airlines in Europe , and Asia, we intend to establish a similar $100 million credit facility in Ireland in the next few days.

When our fleet development program is at its peak in 2024 and lease revenues from Airbus Fleet additions are just beginning we project that our leverage ratio will still remain less than three times.

After that we expect to begin delevering in 2025.

I also want to note that even with higher capex spending we have the liquidity and cash flow visibility to continue to accommodate opportunistic share repurchases under the $150 million facility. The board created last fall.

As we noted in our release, we repurchased 2 million shares or about 3% of those outstanding during the fourth quarter. After pandemic grant restrictions on our repurchases expired.

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 Quinn the earnings release, we issued yesterday lifted some key 2022 operating accomplishments that contributed to the financial results that Quint just reviewed let.

Let me highlight them and share some additional color to give you more insight about how well we performed last year.

Overall, we added 13 767 freighters in 2022.

Six of which were Cam owned and leased to third party customers.

<unk> also released $1 767, 200 and extended leases on four other two hundreds.

Two of the six newly converted 767 300 freighters leased last year are also being operated by Atsg's Airlines under crew maintenance and insurance agreements.

We also added seven other 767, three hundreds to our fleet under asset light CMI arrangements, those who are assigned to our airlines by customers, who obtain them elsewhere, but shows our airlines AVX air and ATI to fly them.

They joined six others, we were already operating on the same basis, we expect our customers to assign us three more in 2023.

These decisions by our customers a test to their confidence in the airline services that we provide.

Our original 2022 plan call for more freighter leases, but both vendor and regulatory issues that prevented us from reaching our targets our.

Our principal 767 conversion vendor.

<unk> continues to add conversion capacity, but throughput times, we remain well behind pandemic pre pandemic levels.

Anticipating delays, we decided to book several conversion slots with Boeing in 2021 and added more than 2022.

Boeing will convert four of the 767 three hundreds we expect to deploy this year.

We believe that a combination of additional slots and faster throughput will allow us to meet our 2023 fleet expansion goals.

Another challenge is gaining approvals from the regulatory agencies to put our converted <unk> hundred 21, 200 freighters into service.

Three of the six <unk> hundred 20 ones that Cam intends to lease this year, including Cams first two two Asl aviation and Ireland are ready to go with regulatory approval, we expect that to happen by mid year.

To prepare for a step up in fleet investments starting this year can was active in the feedstock market in 2022 to.

<unk> purchases and other commitments Cam now controls all of the passenger aircraft. It requires for in our anticipated 20 freighter leases in 2023 and nearly all of those that were leased in 2024.

Please go to the next slide.

<unk> noted that the scale of our fleet investments will be much larger over the next few years and then we have the financial backing to complete them.

To those who might be concerned about whether customers will be ready to make long term lease commitments for those aircraft as they complete conversion, it's important to understand that the surge in U S. e-commerce activity that preceded and saw during the pandemic is only now beginning to surge in other parts of the world. The e-commerce portion of retail sales.

<unk> is still growing rapidly elsewhere, including eastern Europe .

Asia Africa, and Latin America as air networks expand.

Accordingly, more than 80% of cam's leased freighter deployments over the next several years will be to airlines operating outside North America and many of them will operate in networks established by DHL and other integrators, who lease our freighters themselves, but were rules limit where they can operate directly.

Turning to our airlines some of the continuing growth in e-commerce fulfillment in the U S last year led to expansions of their fleets and more operating block hours.

AVX Air and ATI added nine 767 freighters, including seven assigned to them.

Block hours of flying for all three airlines increased 8% with a 9% increase in cargo operations and a 4% gain in passenger operations.

Even with one fewer 767 in its fleet.

Still completed a strong schedule of passenger airline missions for government customers.

Also the department of defense restored our full kabi schedule, including our longest route in the fourth quarter.

We are also proud to note that a year ago DHL agreed once again to extend and expand the longstanding commercial relationship we have enjoyed with them since the inception of ATSG as an independent public company in 2003.

The agreement extended our airlines service and supportive Dhl's U S Express network for six years and included the lease of three more 767 300 freighters from Cam.

Our deployment schedules include still more 760 Sevens plus some <unk> hundred <unk> for Dhl's Global network.

Please go on to the next slide.

Those are a few of the operating and commercial successes that helped us generate record revenues adjusted EBITDA and adjusted EPS in 2022 and will contribute to our results for several years to come in.

In 2023, ATSG expects to generate between $650 million and $660 million and adjusted EBITDA and between $1 85, and $2 and adjusted earnings per share.

Those targets reflect our record pace of 20 freighter lease deployments I mentioned a moment ago.

And which we announced to the market on February six.

Four of the international companies, we will lease freighters to in 2023, and 2024 are new customers supporting Air Express networks and other regions.

Several years ago, we began to expand our sales and marketing outreach to customers where E. Commerce is just beginning to take hold and those efforts are paying off and record demand for our freighters today.

Later in the year, Ken will begin the passenger to freighter conversions of our first <unk> hundred 3300 for lease delivery in 2024.

<unk> expects to convert and lease 30, such aircraft by 2028, two thirds of which are already backed by customer commitments.

Ken will also begin conversion of a projected 16, 767, 300 freighters that expects to lease in 2024, most of which have customers awaiting them.

Atsg's 2023 outlook also includes the return of eight of the 12 767, 200 freighters that ATSG leased to Amazon in 2016. The remaining eight will be re leased sold are harvested with their engines added to the power buy cycle pool for 767 200 lease.

<unk> eight.

<unk> also expects inflationary and schedule reduction impacts on our airlines in 2023, when we expect fewer hours of flying for CMI and CMI customers. We remain positive on Atsg's long term growth opportunities with our major U S Air network customers and expect to add three customer provide.

Aircraft this year.

We expect that 'twenty 'twenty, four and 2025, we will bring the resumption of strong earnings and cash flow growth from today's investments with year over year growth of about 10% and adjusted EBITDA and even stronger growth in our leasing segment.

Few companies have customers committed to long term agreements that will generate the kind of cash flow visibility that ATSG enjoys.

We have a strong balance sheet, a leadership position in the mid size freighter leasing market and the strong backing of investors in our credit facility and debt Securities who regard the feedstock aircraft, we are acquired as prime assets.

Our employees are also prepared to execute all of our 2023 plans with a goal to turn exciting opportunities into long term superior returns for shareholders.

That concludes our prepared remarks Clinton I, along with Mike Berger, Our Chief strategy officer are ready to answer questions.

We have the first question operator.

Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered and wish you move yourself from the queue. Please press star one again, one moment for our first question.

Yes.

Our first question comes from Jack Atkins with Stephens. Your line is open.

Hey, guys. This is grant on for Jack. Thank you guys for taking my question.

I just wanted to dig in a little bit on the 2023 guidance really on the AC side and kind of how you're expecting that to play out maybe first half versus second half and you mentioned in your fleet update that the first half would see a year over year decrease in block hours with your larger customers in today.

On a full year blackout.

Decrease year over year in cargo and passenger just maybe any color on how youre thinking about <unk>.

Great. Thanks.

Yes. Thanks, Thanks for the question.

In terms of AC.

The block hour decrease that we talk about remember we had the resumption or ATI of economy route in the fourth quarter of 'twenty. One so we will have that for the full year.

And our excuse me fourth quarter of 'twenty two.

And we'll have it for the full year of 'twenty three.

And we consider that as passenger.

And of course, the other passenger hours being spun by omni.

Primarily for its governmental MDA, the Dod and governmental customers, we expect passenger.

And cargo hours.

To be down there'll be down less than 5%, we would anticipate year over year for the full year.

And I.

I think really in terms of differentiating.

We do expect.

Perhaps in the second half to see.

As we typically do and you see a lot of the forecast.

Some recovery, particularly on the cargo side were hours may pick up.

Seasonally.

But on the on the pack side, it's more of we expect sort of a steady.

Environment those are sometimes a little tougher to forecast as you know some of those hours you don't have as much.

Notice how long we've had events happened in the world that can affect the demand, particularly.

Particularly for Hanmi.

Military side.

We do we do anticipate I believe in.

Based on what we've seen in the first quarter, we may see some reduced hours and fly for.

<unk>.

On the on the on the government side.

If that helps any but basically.

That part the Pax flying we're assuming pretty much steady state in the absence of that in any specific information about the second half.

Yes. Thank you for all that and if I could just follow up one more thing. So you mentioned the strength internationally and e-commerce and what you're hearing from your customers. Maybe if you could just talk a little bit on your U S customers.

Any more negative commentary you've heard from them or any cause for concern as you maybe think about trying to re lease those.

737, 200 that you mentioned.

Okay.

Yes, no. Thanks grants for the call is Mike Berger.

From a U S perspective, as rich mentioned.

Just to go back to Rich's remarks.

Our order book for the next couple of years 'twenty three 'twenty four is really been dominant over 80%.

At least outside the U S from an international perspective, so our strategy to move forward further globally.

We started several years ago now really is taking hold and we will continue to.

So we are.

We continue to look for are opportunities within the U S.

And we will continue to support our customers' growth where needed.

Our opportunity is it really been greater outside the U S and we can.

Continue to push that way.

Great. Thank you guys for the time.

One of them before our next question.

Our next question comes from <unk> Becker with Cowen Your line is open.

Thanks, very much operator, hi, everybody and thank you for the time, let's say I have two questions. The one question.

Question Quinn can you when you talk about.

Aircraft that you have or that are going to customers or were.

You have customers signed up.

Can you talk about it in terms of committed revenue over that timeframe like can you say.

Already.

<unk>.

<unk> of dollars over the next X number of years are you able to say that.

Yes.

Good question Helane, we talk about.

The 20 aircraft for example that we're looking that we.

Our targeting for deployment in 'twenty three on an annualized basis.

Looking about around $70 million.

Revenue for those for those placements.

And if you look at 2024.

It's a it's probably more like about.

$85 million to $98 million.

On an annualized on top of that and we have as.

Rich said excellent visibility.

On that.

On those placements, we've got customer commitments that make for.

All but.

Two or three of those.

Yeah.

Okay. That's hugely helpful. And then my follow up question is I think I don't know if it with you.

Rick you said in your prepared remarks that.

You have been placed generic pressure in some of your HDMI businesses.

That.

Reimbursable by your customers with cost pressure.

Well certainly there's escalators that are built built into our customer contracts.

We've all seen inflation it.

In recent the recent years that has outpaced I think what most folks would have.

In their contracts, but having said that I mean, I think it's important to say that when you look at AC My services.

It has made tremendous progress throughout the pandemic.

For Ats These airlines and what we have projected in 'twenty three for example, their contribution.

Adjusted EBITDA is about 12% higher than it was in 2021.

In 2023, now 2022 was an excellent year Ryan they had.

There were some there were some opportunities for.

Where customers needed charter flights and things that were higher margin.

Then we might see in 'twenty three due to the macroeconomic environment and then of course in 'twenty three.

With perhaps less commercial opportunities you may see some of the airlines.

To participate in a government fund the craft program. They may fly there more of their entitlements. Some of those airlines may have been opting to fly.

Commercial trips.

Mark.

Rates being offered for those those types of trips were really high on that.

And now there may be less of those.

A slower economy in 2003, so we anticipate that omni, while it's going to do it's going to do well in 'twenty three.

It may not have as many opportunities to fly.

Clean up some of the entitlement not flown by some of the other carriers.

The only things that there are reimbursable.

A CMI agreements things like permits landing fees those types of thing fuel is a big reimbursable.

But the things that have impacted us on an inflationary basis things like travel cost because we have to position pilots all over the world maintenance costs.

For for maintenance technicians or maintenance contractors those costs have been rising over the past few years and those are built into the rates. They do get escalated as Quint said and the general agreements year to year, but it's just a matter of whether that that escalation keeps up with where the inflationary pressure may be in those different cost items.

And on the and on the military.

Dod type flying those those contracts.

Are more akin to cost plus and so rates are adjusted.

There is a look back there's usually a lag right in the year. The inflation is occurring you may not get the reimbursement, but when rates are reset in subsequent years.

Adjustments are made so thats a risk mitigated but.

It creates a dislocation.

Okay.

Can I squeeze in one more question.

I think rich you said that you were going to use more Boeing to do more conversions.

Hi.

Why are they going to be faster to do conversions or turnarounds given all the supply.

<unk> issues they have.

Yes.

I didn't say that where we are going to use more Boeing but we do have eight slots from Boeing and we're still we're still using a lot of AI, we have five lines operating there pretty much at all times.

The difference between III and Boeing really is that Boeing has a full production lines still going.

Factory freighters and factory tankers, and so I think they've got.

<unk> to your supply chain.

Dan some of the other converters and some of the other lines of business now we're under the <unk> hundred 21, the <unk> hundred 30, we've got multiple vendors on.

On the <unk> hundred 21 on the conversion side and of course, we do our own and then we've got the two on the on the 767. So we get we get a good view into whats going on in some of these supply chains and I think we mentioned it in the prepared remarks that we saw some delays in that.

A lot of that was related to fabrication.

In parts vendors that they use.

Other countries and I think Boeing just has a more captive supply chain just because they've got I believe because they've got that large production line and that supports their conversion line as well.

Okay.

I'll ask Mike they tend to be a little bit more if I can put it this way a cookie cutter so.

The work the work scopes that go into the conversion is upfront.

Our well defined and they are just more cookie cutter approach changes don't.

Impact of the extra delivery times, another way to say that they are less and less flexible.

Alright got it okay, alright, thanks, everybody I appreciate your time, thanks, Helane one of them.

For our next question.

Yes.

Our next question comes from Microsoft Hollywood tourists. Your line is open.

Hey, good morning, guys. Thanks for taking my question.

Just I guess I guess, Richard Quinn, just looking at the EBITDA guidance next year.

The run rate I mean, it's basically the second half 'twenty to EBITDA run rate basically put you at the low end of that range.

Youre going to have more planes in service.

Is all of this pressure is coming from from <unk>.

Can you just elaborate a little bit.

<unk> operating under the impression you know.

Playing out there, it's maybe $4 million to $5 million of EBITDA, but just maybe can you provide some color as to the EBITDA why the run rate just kind of holds from third quarter fourth quarter, all the way through.

Yes.

Michael It's Glenn.

You are correct that the in terms of the.

Yes.

More of a headwind in 'twenty three is HDMI services, even though as I mentioned in <unk> services and 23 as you know.

Projected.

To be up versus for example, 21 and certainly way absent the pre pandemic period, I mean HDMI services.

<unk> been a great.

Contributor but.

There is there is as we've always said a little bit more volatility in our business model has a great deal of stability with the Cam piece.

But there is always a little bit of volatility on the Acu My services side now we like that because it's an asset light business and generally it's been a great contributor in terms of overall cash flow and as I said it has made progress.

Every year, except comparing to 'twenty two as we look at 'twenty three.

Going to be down, but it's still up versus prior periods. So there's some volatility around the margins on <unk> services.

That has to do with.

What we said earlier about.

Where the opportunities might lie for military flying in commercial line.

But on the Cam piece.

We talked about in our pre release, there will be some aircraft coming back we believe that.

We will create.

Sure.

Pause I guess in terms of a revenue stream on those 77, two hundreds that we've put the earlier release add on.

Cam certainly in terms of there.

Earnings margins they are impacted by the rise in interest costs.

Which is certainly a factor.

And.

Of course inflation also can affect the <unk>.

Estimates.

What it takes to put an aircraft on the ramp in leases.

Sure.

The lease rate has held up nicely, but similar to comment earlier, sometimes theres a little bit of a lag there.

Relation moves really quickly because we have a lot of our growth already programmed in just like we've talked about our pipeline in 2000.

Three and 'twenty four.

Got 40, some aircraft coming out and being leased.

We have a lot of that pipeline locked in.

18, 24 months prior to when the asset comes at.

Sometimes that in place you can impact.

The annual service cost and Thats, something Cam has to deal with it but it's we're hitting our return margins there in the businesses.

Looks to be positioned as rich said to be the engine that will drive again in 'twenty four and 'twenty five.

We believe double digit EBITDA growth year over year.

And in 'twenty three.

You have you have those some returns coming back and you have that higher interest costs, so theres, a little bit of a headwind there.

I don't know Mike anything.

Yes.

We view it as an investment year and the line of sight as Quinn mentioned in terms of our order book in 2023, and four and quite honestly are into 2025 on the 767 side.

Is fabulous and.

As we look at the engine the E Commerce engine will drive that.

Retail sales as a whole from.

From now to 2026.

To grow scheduled to grow by $4 six trillion dollars.

In 2.2 of that is going to be in ecommerce.

As rich mentioned in his earlier remarks, we're still seeing.

Very very strong growth in the areas that around.

Around the world that we are seeing success in Southeast Asia Africa, the Middle East for example.

Are areas that we're seeing great success, with new customers as well as our existing customers in those areas and.

As we progress in 'twenty four 'twenty five.

Right in the midst of our deliveries of the <unk> hundred 30 in that investment for the <unk> hundred 30 is taking place now so.

We're really keen on what the future specifically lies in our EBITDA growth.

Getting back to that 10 plus percent as quick as Quint talks about in the upcoming years the.

The other piece that I'll just talk about this from a strength standpoint.

As retirements during the pandemic.

About 15 freighters were being retired a year, but a normal a normal year, it's about 70% what does that mean that means that the demand for cargo freighters around the world is going to continue to add.

Ed strengths. So we continue to be real positive.

Okay, just on the capital intensity of the business I mean that sustaining capex guidance is going to be up 40% to $260 million. I mean is there anything unique happening this year.

I mean, presumably maintenance part.

Overall.

Shop visits are getting more expensive, but how should we think about the sustaining capex going forward.

Yes.

Thanks, Michael it's Glenn.

Sure.

We've kind of said because maintenance capex can move based on the timing of scheduled maintenance from year to year I think we've kind of said it's around a couple hundred million dollars of our capex in any given year, but youre right 23 is a little bit higher now.

Now 22 was I think what we say 187. So you can see came in a little lower 23.

It's higher than that 200 sort of trend long term trend line, mainly because of the timing of some engine overhauls.

We maintain a pool of engines for some of our lessees.

One of the engine types.

And.

It's just based upon their shop visit their expected shop visit timing.

<unk> got more of those this year.

Correct inflation as we've said.

I don't think any of us can probably think of any cost to that.

The fact that it has more to do with the timing of scheduled maintenance as to why we're looking at a higher number for capex.

Okay that makes sense and then just the last one if I may any any update on your.

Contracts with your pilots just kind of watching the news here of seeing what's going on at Fedex. How are you kind of handicapping or thinking about that risk.

So we.

We've got pilot contracts open are amendable, I should say with both ATI on.

The cargo side and on our passenger operator omni.

And both of those contracts are have been in negotiation.

Both sides are meeting.

Multiple times per month, now and trading information and going forward and so the things are progressing.

Just based on where they are individually and they're both in different places but.

We don't believe that will get to anything very quickly.

Okay, we have always taken the position that we'd need a pilot contract that pays the pilots well enough that we.

Can retain and attract pilots.

But also it gives us the cost structure if required that we can compete for business.

And we've always been able to two.

To make those two positions.

Physicians meet.

At some point and we will continue to pursue the contract negotiations with that perspective.

Okay perfect. Thanks, guys.

Yes.

One moment for our next question.

Our next question comes from Frank Galanti with Stifel. Your line is open.

Yes, hi, Thank you for taking my questions I wanted to follow up on that last question on pilots.

You sort of talk about availability of higher pilot.

<unk>.

Have you.

Considering the kind of new EBITDA guidance.

Expectations for lower block hours.

And thats sort of alleviate some of the pressure.

From.

Pilot perspective, and can you talk about how variable that cost us with block hours.

So couple of things one is that we've been.

Able to attract pilots.

Without a problem over the past year.

And any.

Attrition that we've had we've been able to.

Stay ahead of the curve in terms of getting the training done and getting them able to be able to.

Fly and preserve all of our schedules and et cetera et cetera. So that's been a good thing our average hours away over the minimum of the new pilots coming in.

So we're in good shape as far as.

As far as the pilot situation goes but in terms of the variability of pilot cost as it relates to block hours.

The pilot cost.

Is really.

It's under contract so.

The pilots who will go through the.

Increased their pay as they go through scales.

It doesn't really change that much on an average cost basis per block hour.

And the contracts that we have.

There are escalations that address.

Cost on an annual basis.

Okay Frank.

As we look forward at the placements for aircraft.

As Mike commented most all of these are going internationally. So we don't anticipate.

Operator.

Through the airlines, so I think what over 80% or something of our international placements 23, 84, and so that will to your point there.

It won't drive a demand for additional pilot, it's more about keeping pace with that attrition that rich and if you look at just the next two years, we're going to be 40 airplanes, we're putting out and you look at the diversification, we're getting away from some of our larger lessees.

Great story, because we've got the ability we've got visibility to cash flows and we've got a differentiated business model going forward into different parts of the world.

That's helpful.

So I wanted to ask about the.

707 200.

Can you sort of talk about or in the <unk>.

And expectation.

At the end of 'twenty, three being down eight planes.

Just talking about the age and efficiency interest in that platform.

And then kind of second part of that.

And last year, you took in house the engine services for that plane, you sort of talked about $40 million to $45 million of EBITDA contribution from that.

<unk>.

Where does that sort of stack relative to what you expected and 22 versus <unk> 23.

Sort of the changes in net.

Yes in terms of the last part of that question and I don't know if I might jump in the first part on the two hundreds.

Your question about.

The engine piece, yet for 'twenty two it was right around the $40 million that we talked about at the beginning of the year when we gave guidance.

In terms of that EBITDA contribution remember there was kind of a step up there because we ended our long time PVC agreement with.

Provider and we went to the pooling.

Structure that we have now where we essentially.

We overhaul, we maintain our full of engines and make it available to less easy to operate the aircraft. So on a 23 versus 22, there won't be much of a change in other words, it's not a big driver of incremental EBITDA.

That was sort of that.

Changing that.

Structure from 'twenty, one to 'twenty late 'twenty, one to 'twenty two that drove that.

$40 million increase in 'twenty two.

So.

Pretty much.

Stable contribution in 'twenty three versus <unk> 22 from the engine piece.

In regards to the first and the first part of your question about the demand for the 767 200.

We have seen is still very very good demand for the <unk> for the airframe.

As Richard mentioned in his opening remarks.

We certainly will have some opportunities to sell some of those airframes as well as re lease up.

Out of the marketplace. So as we as we view those opportunities and we'll kind of have our choice. If I can put it that way to pick and choose what's best for us as we get those returns coupled that with the engine program. The pool of engineers that Quint mentioned.

We still feel that they are still steadily feel that see.

Strong request and strong demand for that aircraft.

Great. Thank you very much.

Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered and wish to move yourself from the queue. Please press star one again one of them are for next question.

Okay.

Our next question comes from Howard Rosencrans with VA. Your line is open.

Yes.

Hi, guys. Thank you for thank you for taking the question.

Yes.

I guess I just wanted to understand the.

I mean, obviously the market is having a different reaction to what you are saying.

Okay.

In terms of one of the prior speakers commented on quote great story.

So I just.

Simplify in terms of the growth Capex.

You've got <unk>.

$600 million in 'twenty, three and it sort of implies about $600 million and 24 is that sort of related to it again, just oversimplify without the breakdown between <unk> and <unk>.

The Airbus equipment.

Our sensibly, we're talking about the 27% and $30 million.

Per.

I'm sorry, how are you.

Cut off there.

I have completed the question.

That's hopefully are we talking about 2000 $7 million to $30 million per aircraft.

That's.

Again, whether it flows in as working capital or flows it is but basically in terms of the capex is that what we're effectively talking about it and then I want to ask you to follow on.

Well, we've talked about that range in terms of the 767 three hundreds.

To what.

On investments look like.

Put them on the ramp in reasonable shape right.

Alright, okay.

And it's pretty much the same ballpark for the Airbus rates is that fair to say.

Yes in terms of it depends upon the Airbus.

Right.

And rich you said in the past so think of the narrow body $3 21 is about two thirds.

<unk> done about two.

And then the 330 is about 20% larger.

700, <unk> 300.

So let's get into the end of the day it all washes out to about the same thing so that so that leads me to my real question here. So.

The market is suggesting or.

The investment community. However, you want to look at it is suggesting that.

That now the returns that you're going to generate are not going to be the returns that you have generated historically and I guess just to speculate this a lack of comfort with the.

The customers vis vis <unk>.

The customers like Amazon and DHL and Fedex.

The ones that have been part of your fleet. So how do you give us the comfort level that the customers that you have on the horizon, where you're going to do these placements are going to have the same fortitude.

Hi.

Let's say for the sake of conversation.

Yeah.

E Comm growth on an international basis is not as pronounced exactly.

That's going to impact that we assume more euro <unk>, which is the <unk>, which is more of the volatility side of the business, but as long as we get the Cam placements, there and as long as they're taking them then we get the return on the Cam side and let's face. It that's the lion's share of the cash flow since your debt is going up so much.

Over the ensuing couple of years.

To me I, just wanted to and I think for others just wanted to get a higher level of comfort that the that the.

Very good.

Buyers that we're now going to be doing business with our sharply accelerated we'll be able to.

Comfortably perform.

Perform in line with the way you're Goliath.

Let's say domestic or global players have have performed.

Yes, no. It's a good question I'm glad you asked it because we've made that we've made this.

We handle a similar question in the past about some of the smaller lessees that we have.

There's a couple of things one is that several of the lessees that are prominently positioned to take whether it is <unk> hundred $21, 767% or <unk> hundred 30 <unk>.

Also fly for express companies or fly in express network that multiple companies may participate in.

For example cargo jet.

Up in Canada.

We've also got some large companies in this portfolio that will be taking airplanes internationally DHL is in line for both 760 Sevens and <unk> hundred <unk> from now through 2026.

You've got a company Asl, that's based in Ireland, but has several.

<unk> all over Europe . They are the largest <unk> operator in Europe , and they fly for multiple express companies and they have very strong agreements.

And so and then you've got a company like riot in Malaysia, which is going to be taking <unk> hundred 20 ones and there are currently 767 customer they fly for DHL. So when you look at these lessees, they're diversifying us globally and although they may not be your household name of DHL EPS are Fedex.

They fly for those people. So the credits that they represent are very strong in relation to.

Just a general airline.

Thats out there. So we have a lot of confidence we do a lot of betting.

Of airlines in terms of what they are going to do with.

What they are going to do with the airplane and so we have a general understanding another one I forgot to mention was.

Maersk is taking we'll end up with five five airplanes from us they have already taken three there's two more to be delivered to them and of course <unk> because one of the largest if not the largest one.

<unk> company.

In the world and so those are the types of customer we've got and so we're very confident in the cash flows that we'll be receiving from these customers.

Just just just a bit a little bit more color to it Howard.

Our partner one of our partners in Africa.

Astral Astral Airways was just named cargo cargo airline of the year for that region Rich mentioned right. They were named E Commerce airline of the year in Southeast Asia.

Just a little bit further detail on <unk> they have been.

Provider of EPS in the European network for literally for over 30 years or so.

The vetting goes the vetting is very diligent.

And understanding their business plans and how theyre going to succeed is also very important but as rich said as well.

<unk> specifically is in line to take several aircraft over the next few years six side as well as the $3 30.

So Howard you mentioned, how the market views and in contrast, with what we're saying and of course.

We don't we're not second guessing antibody or in the market, but it is a little frustrating I mean like when we look at somebody looking just at a quarter for example.

And even this quarter.

I think we had a tax item, where we adjusted our state tax apportionment based on where the aircraft fly, which Stacy fly over because they have different tax rates. So as you run that so we had something that was probably three to five.

In the fourth quarter, well, that's kind of the difference between the consensus.

Our 53.

Sure.

We hit our <unk>.

In our target that we set in February of last year for full year EBITDA.

And of course, we've talked at length about.

The visibility we have to sustainable structural growth in our leasing business, which as you point out the source of the majority of our cash flows and will be under long term agreements for many many years and so we feel very fortunate.

To have that in front of us.

As I mentioned, there's a little volatility around the edges with our asset light HDMI flying but even they have made tremendous progress since pre.

Pre pandemic period, and even since 'twenty one.

Capex wise the leasing business requires capex.

That comes with that comes with that territory, we get but with the placements of 20 aircrafts this year and more than that in 'twenty four and the first of the 300 <unk>, we essentially have locked in growth for three years four because even if you pull your pull back on investments after 'twenty.

For the placements you make and 24 are going to drive substantial EBITDA growth and 25.

So we feel very fortunate about that and we hope that investors focus on that long term in and recognize that.

We have now demonstrated that our model performs well under.

Different economic cycles, having gone through the pandemic coming out of it and even.

The slower growth that we've guided to in 'twenty three.

Contrast that with other transportation companies and you can see that there truly is a stable base.

Here that we feel very fortunate to have as part of our business model.

Well thank you.

Thank you Victor.

And I appreciate it. Thank you for all the incremental color I think you need to dedicate more time to.

To discussing the international customers in slides et cetera, because clearly there has been a significant transition that was underappreciated by the investment community number one and number two clearly things have changed just in terms of the Boeing fleet because six months ago those were not your expectations.

Those were going to come off or that you were going to.

Which was going to extensively lead to as somebody else commented a flat run rate of of the base core EBITDA. So I think there is there is a greater understanding and I can assure you that the market commentary is not based on whether whether or not you've made or missed.

The fourth quarter by a penny here or there. Thank you.

Thanks Howard.

I'm not showing any further questions at this time I'd like to turn the call back over to rich Corrado for any closing remarks.

Thank you Kevin.

We've long discussed the resiliency of our business model with freighter leasing is the foundation and value added services that make us unique and differentiated from any other competitor in the world.

We have no peers and what we do many air transport services companies have struggled through the pandemic trying to get back to a 2019 baseline.

Since 2019, ATSG has delivered 38% revenue growth and 42% growth in adjusted EBITDA and our guidance today continues on that growth trend, although slowed by the same economic headwinds impacting all companies.

Still the visibility we have the cash flows from our freighter investments with waiting customers over the next three years gets us right back on to a 10% EBITDA growth trajectory in 2024 and 2025, just based on the leasing commitments alone.

More fortunate market conditions could also lift our other services delivering even higher returns.

Once again atsg's resiliency as demonstrated through the most challenging of times as we drive our results for 2023 and beyond we remain a great investment for stability growth and high visibility of future returns.

You all for your interest in ATSG and please stay safe.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day, and thank you for standing by and welcome to the Air Transport Services Group fourth quarter 2022 earnings Conference call at this time all participants.

We are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session will be depressed star one on your telephone you will then hear an automated message advising your hand is Reyes. Please be advised today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Joe Payne Chief Legal Officer. Please go ahead.

Good morning, and welcome to our fourth quarter of 2022 earnings Conference call. We issued our earnings release yesterday. After the market closed its on our website ATSG IMC dot com.

Let me begin by advising you that during the course of this call we will make projections and other forward looking statements that involve risks and uncertainties.

Our actual results and other future events may differ materially from those we describe here.

These factors include but are not limited to 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 were 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 impact of the current competitive labor market change.

Changes in general economic <unk> industry specific conditions.

Factors relating to the COVID-19 pandemic, including the UK.

And do you think may continue for a longer period or its effect on commercial and military passenger flying may be more substantial than we currently expect.

Disruptions in our workforce and staffing capability.

Disruptions in our ability to access airports and maintenance facilities.

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 comments.

Thanks, Joe Good morning, everyone.

2022 was an exceptional year for ATSG.

Even with rapid inflation and delays at our 767 freighter conversion vendor youre companies still exceeded its 2022 financial goals of $640 million and adjusted EBITDA and $2 and adjusted EPS.

We also began to invest in new freighter platforms from the Airbus family, while maintaining our leadership and Boeing 767 freighter leasing.

I am very proud of the excellent planning and execution throughout the company that drove our considerable success.

Quint.

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

The next slide in our deck summarizes the strong 2022 results that rich highlighted.

Our consolidated revenues for 2022 grew $311 million to 2 billion. Another all time high for revenues at ATSG are.

Adjusted EPS increased by more than 40% to $2 28.

Compared with $1 61, and 2021 that was well above the $2 target, we set a year ago.

Adjusted pretax earnings increased 51% and adjusted EBITDA Rose 18%.

Earnings from our airline businesses, along with the momentum of our leasing returns from can produce most of the EPS gain above our targets.

On the next slide you can see that versus the 12 months ended in December 2021, our adjusted EBITDA grew a record $100 million or.

Or 18% in 2022 that.

That improvement includes a full year cash flows from the 15 newly converted 767 freighters, we deployed in 2021 and more than doubling our earnings from <unk> services.

On the next slide you'll see that our capital spending finished the year at just under $600 million $25 million less than we projected last quarter.

Separate what we call sustaining capex, mainly for airframe and engine maintenance technology and other equipment from a spending reallocate to fleet expansion.

Sustaining capex was $187 million for the year up $4 million.

Growth Capex was $412 million up $90 million from the prior year, both to convert existing aircraft to freighters and to buy more feedstock passenger aircraft.

In 2022, those purchases included eight Boeing 760 Sevens and six Airbus <unk> hundred 20 ones.

We deployed and leased six newly converted 767 freighters last year.

Turnaround times at many passenger to freighter aircraft conversion houses remain well above pre pandemic levels.

Spite their efforts to increase throughput.

We expect those bottlenecks to lessen this year.

The next slide updates, our adjusted free cash flow as measured by our operating cash flow net of our sustaining capex.

Adjusted free cash flow of $285 million last year was down $115 million from the year earlier period and down $88 million for the 12 months ended last September .

Cash flows from federal grants in 2021 were $83 million all of that cash was received in the first half.

Our full year 2022 results reflect the impact of a temporary fourth quarter increase in working capital related to reimbursement with fuel costs from omnis federal government customers.

We project our growth capital investments to exceed adjusted free cash flows until 2025.

We expect that trend to reverse.

Through 2024, we expect our debt leverage ratio to remain under three times and begin to decline in 2025.

You may have already seen the 2023 guidance, we provided in the earnings release, we issued yesterday.

Rich will cover some of the factors that will affect our earnings and cash flow in his remarks.

I wanted to provide some color around the significant increase in our capex budget of $850 million this year.

And the strategic decisions and steps to prepare the way for our growth investments in 2023 and 2024.

The bulk of our Capex this year and in 2024, we will continue to fund the expansion of our leased 767 fleet.

The other major driver of our stepped up growth in spending over the next several years is our decision to begin offering our lease customers to other freighter types. The Airbus <unk> hundred 21, and narrow body midsized freighter designed to replace retiring Boeing 705 Sevens <unk> hundred <unk> a wide body mid sized freight.

That will complement our still expanding fleet of 700 success.

We also acted in 2020 and 2021 to lock in favorable fixed rates by issuing seven year unsecured notes at a 475% coupon rate and amended our senior credit facility to increase our borrowing capacity free up some collateral and accommodate the resumption of our stock repurchase program.

Available credit under our revolver was $365 million at the end of 2022 with an option for additional capacity subject to bank approvals.

To coincide with our increased business with airlines in Europe , and Asia, we intend to establish a similar $100 million credit facility in Ireland in the next few days.

When our fleet development program is at its peak in 2024 and lease revenues from Airbus Fleet additions are just beginning we project that our leverage ratio will still remain less than three times.

After that we expect to begin delevering in 2025.

I also want to note that even with higher capex spending we have a liquidity and cash flow visibility to continue to accommodate opportunistic share repurchases under the $150 million facility. The board created last fall.

As we noted in our release, we repurchased 2 million shares or about 3% of those outstanding during the fourth quarter. After pandemic grant restrictions on our repurchases expired.

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 Quinn the earnings release, we issued yesterday lifted some key 2022 operating accomplishments that contributed to the financial results that Quint just reviewed.

Let me highlight them and share some additional color to give you more insight about how well we performed last year.

Overall, we added 13 767 freighters in 2022, six of which were Cam owned and leased to third party customers.

<unk> also released $1 767, 200 and extended leases on four other two hundreds.

Two of the six newly converted 767 300 freighters leased last year are also being operated by Atsg's Airlines under crew maintenance and insurance agreements.

We also added seven other 767, three hundreds to our fleet under asset light CMI arrangements, those who are assigned to our airlines by customers, who obtain them elsewhere, but it shows our airlines AVX air and ATI to fly them.

They joined six others, we were already operating on the same basis.

We expect our customers to assign us three more in 2023.

These decisions by our customers a test to their confidence in the airline services that we provide.

Our original 2022 plan called for more freighter leases, but both vendor and regulatory issues that prevented us from reaching our targets.

Our principal 767 conversion vendor.

<unk> continues to add conversion capacity, but throughput times, we remain well behind pandemic pre pandemic levels.

Anticipating delays, we decided to book several conversion slots with Boeing in 2021 and added more than 2022.

Boeing will convert four of the 767 three hundreds we expect to deploy this year.

We believe that a combination of additional slots and faster throughput will allow us to meet our 2023 fleet expansion goals.

Another challenge is gaining approvals from the regulatory agencies to put our converted <unk> hundred 21, 200 freighters into service.

To prepare for a step up in fleet investments starting this year can was active in the feedstock market in 2022 to.

<unk> purchases and other commitments Cam now controls all of the passenger aircraft. It requires for in our anticipated 20 freighter leases in 2023 and nearly all of those that were leased in 2024.

Please go to the next slide.

<unk> noted that the scale of our fleet investments will be much larger over the next few years and then we have the financial backing to complete them.

<unk> is still growing rapidly elsewhere, including eastern Europe .

Asia Africa, and Latin America as air networks expand.

Turning to our airlines some of the continuing growth in e-commerce fulfillment in the U S last year led to expansions of their fleets and more operating block hours.

AVX Air and ATI added nine 767 freighters, including seven assigned to them.

Block hours of flying for all three airlines increased 8% with a 9% increase in cargo operations and a 4% gain in passenger operations.

Even with one fewer 767 in its fleet.

Still completed a strong schedule of passenger airline missions for government customers.

Also the department of defense restored our full combi schedule, including our longest route in the fourth quarter.

The agreement extended our airlines service and supportive Dhl's U S Express network for six years and included the lease of three more 767 300 freighters from Cam.

Our deployment schedules include still more 760 Sevens plus some <unk> hundred <unk> for DHL Global network.

Please go on to the next slide.

In 2023, ATSG expects to generate between $650 million and $660 million and adjusted EBITDA and between $1 85, and $2 and adjusted earnings per share.

Those targets reflect our record pace of 20 freighter lease deployments I mentioned a moment ago.

And which we announced to the market on February 6th.

Four of the international companies, we will lease freighters to in 2023, and 2024 are new customers supporting Air Express networks and other regions.

Later in the year, Ken will begin the passenger to freighter conversions of our first <unk> hundred 3300 for lease delivery in 2020 for Cam expects to convert and lease 30, such aircraft by 2028, two thirds of which are already backed by customer commitments.

Ken will also begin conversion of a projected 16, 767 300 freighters it expects to lease in 2024, most of which have customers awaiting them.

Atsg's 2023 outlook also includes the return of eight of the 12 767, 200 freighters that ATSG leased to Amazon in 2016. The remaining eight will be re leased sold are harvested with their engine added to the powered by cycle pool for 767 200 lease.

<unk> eight.

<unk> ATSG also expects inflationary and scheduled reduction impacts on our airlines in 2023, when we expect fewer hours of flying for CMI and CMI customers. We remain positive on Atsg's long term growth opportunities with our major U S Air network customers and expect to add three customer provide.

Aircraft this year.

We expect that 2024 and 2025, we will bring the resumption of strong earnings and cash flow growth from today's investments with year over year growth of about 10% and adjusted EBITDA and even stronger growth in our leasing segment.

Few companies have customers committed to long term agreements that will generate the kind of cash flow visibility that ATSG enjoys.

We have a strong balance sheet, a leadership position in the mid sized freighter leasing market and the strong backing of investors in our credit facility and debt Securities who regard the feedstock aircraft, we are required as prime assets.

Our employees are also prepared to execute all of our 2023 plans with a goal to turn exciting opportunities into long term superior returns for shareholders.

That concludes our prepared remarks Clinton I, along with Mike Berger, Our Chief strategy officer are ready to answer questions.

We have the first question operator.

Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or wishing move yourself from the queue. Please press star one again, one moment for our first question.

Yes.

Our first question comes from Jack Atkins with Stephens. Your line is open.

Hey, guys. This is grant on for Jack. Thank you guys for taking my question.

On a full year blackout.

Decrease year over year in cargo and passenger just maybe any color on how youre thinking about <unk> over the course of the full year would be great. Thanks.

Yes. Thanks, Thanks for the question.

In terms of AC.

The block hour decrease that we talk about remember we had the resumption or ATI of economy route in the fourth quarter of 'twenty. One so we will have that for the full year.

And that our excuse me fourth quarter of 'twenty two.

And we'll have it for the full year of 'twenty three.

And we consider that as passenger.

And of course, the other passenger hours being spun by Hanmi.

Primarily for its governmental and the Dod and governmental customers, we expect passenger.

And cargo hours.

To be down.

<unk> down less than 5%, we would anticipate year over year for the full year.

And.

I think really in terms of differentiating.

We do expect.

Perhaps in the second half to see as we typically do and you see a lot of the forecast.

Some recovery, particularly on the cargo side were hours may pick up.

Seasonally.

But on the on the pack side, it's more of we expect sort of a steady.

Environment those are sometimes a little tougher to forecast as you know some of those hours you don't have as much.

Notice on we've had events happened in the world that can affect the demand, particularly.

Particularly for omni on the <unk>.

Military side.

We do we do anticipate I believe in.

Based on what we've seen in the first quarter, we may see some reduced hours and fly.

<unk>.

Omni on the on the governmental side.

If that helps any but basically.

That part the Pax flying we're assuming pretty much steady state in the absence of having any specific information about the second half.

Yes. Thank you for all that and if I could just follow up one more thing.

So you mentioned the strength internationally and e-commerce, and what you're going for your customers. Maybe if you could just talk a little bit on your U S customers and maybe is there any.

Any more negative commentary you've heard from them or any cause for concern as you maybe think about trying to re lease those.

737, 200 that you mentioned.

Okay.

Yeah, no. Thanks grants for the call is Mike Berger.

From a U S perspective, as rich mentioned.

Just to go back to Rich's remarks.

Our order book for the next couple of years 'twenty, three and 'twenty four is really been dominant over 80%.

At least outside the U S from an international perspective, so our strategy to move forward further globally.

We started several years ago now really is taking hold and we will continue to.

So we are.

We continue to look for are opportunities within the U S.

And we will continue to support our customers' growth where needed.

Our opportunity is it really been greater outside the U S and we continue to push that way.

Great. Thank you guys for the time.

Income before our next question.

Our next question comes from Helen Becker with Cowen Your line is open.

Thanks, very much operator, hi, everybody and thank you for the time, let's say I have two questions. The one quest.

Question Quinn can you when you talk about.

Aircraft that you have play store that are going to customers or were.

You have customers signed up.

Can you talk about it in terms of committed revenue over that timeframe like can you say.

Already committed revenue.

<unk> of dollars over the next X number of years are you able to say that.

Yes good.

A good question Helane.

We talk about.

The 20 aircraft for example that we're looking that we.

Our targeting for deployment in 'twenty three on an annualized basis.

Looking to about around $70 million.

Revenue.

For those for those placements.

And if you look at 2024.

It's a it's probably more like about.

$85 million to $90 million.

On an annualized on top of that and we have.

Rich said excellent visibility.

On that.

On those placements, we've got customer commitments that make for all.

All but.

Two or three of those.

Okay. That's hugely helpful. And then my follow up question is I think I don't know if it with you or Rick you said in your prepared remarks that.

You have inflationary cost pressure in some of your HDMI businesses.

Is that.

Reimbursable by your customers with cost pressure.

Well certainly there's escalators that are built built into our customer contracts.

We've all seen inflation it.

In recent the recent years that has outpaced I think what most folks would have.

In their contracts, but having said that I mean, I think it's important to say that when you look at AC My services.

<unk>.

It has made tremendous progress throughout the pandemic.

For Acs six airlines and what we have projected in 'twenty three for example, their contribution and.

Terms of adjusted EBITDA is about 12% higher than it was in 2021.

In 2023, now 2022 was an excellent year Ryan they had there.

There were some there were some opportunities for.

Where customers needed charter flights and things that were higher margin.

Then we might see in 'twenty three due to the macroeconomic environment.

And then of course in 'twenty three.

With perhaps less commercial opportunities you may see some of the airlines.

Participate in a government fund the craft program.

May fly there more of their entitlements. Some of those airlines may have been opting to fly commercial.

Commercial trips.

When the March when the rates being offered for those those types of trips were really high on that.

And now there may be less of those.

A slower economy in 2003, so we anticipate that omni wallets, it's going to do it is going to do well in 'twenty three but it may not have as many opportunities to fly and clean up some of the entitlement not flown by some of the other carriers.

The things that there are reimbursable.

And those <unk> agreements things like permits landing fees those types of thing fuel is a big reimbursable.

But the things that have impacted us on an inflationary basis things like travel cost because we have to position pilot all over the world maintenance costs.

For for maintenance technicians or maintenance contractors those costs have been rising over the past few years and those are built into the rates. They do get escalated as Quint said, the general agreements year to year, but it's just a matter of whether that that escalation keeps up with where the inflationary pressure may be in those different content.

And on the and on the military and the Vod tax line those those contracts are.

More akin to cost plus and so rates are adjusted.

Look back there's usually a lag right in the year. The inflation is occurring you may not get the reimbursement, but when rates are reset in subsequent years.

Those adjustments are may so thats, a risk mitigated but it.

It creates a dislocation.

Okay.

Can I squeeze in one more question.

I think rich you said that you were going to use more Boeing to do more conversions.

Hi.

Why are they going to be faster to do conversions or turnarounds given all the supply.

Stream issues they have.

Yes.

The difference between III and Boeing really is that Boeing has a full production lines still going.

Factory freighters and factory tankers and so.

Zinc they've got.

Sure to your supply chain.

And some of the other converters and some of the other lines of business that were under the <unk> hundred 21, the <unk> hundred 30, we've got multiple vendors on.

On the <unk> hundred 21 on the conversion side and of course, we do our own and then we've got the two on the on the 767. So we get we get a good view into whats going on in some of these supply change and I think we mentioned it in the prepared remarks that we saw some delays in that.

A lot of that was related to fabrication and.

In parts vendors that they use in other countries and I think Boeing just has a more captive supply chain just because they've got I believe because they've got that large production line and that supports their conversion line as well.

Okay.

I'll ask Mike they tend to be a little bit more if I can put it this way a cookie cutter so.

The work the work scopes that go into the conversion is upfront.

Our well defined and they are just more cookie cutter approach so that changes don't.

The impact of the extra delivery times, another way to say it lessens the less flexible.

Alright got it okay, alright, thanks, everybody I appreciate your time, thanks Helane.

For our next question.

Yes.

Our next question comes from Microsoft Hollywood Tourist your line is open.

Hey, good morning, guys. Thanks for taking my question.

Just I guess I guess, Richard Quinn, just looking at the EBITDA guidance next year.

The run rate I mean, it's basically the second half 'twenty to EBITDA run rate basically put you at the low end of that range.

Youre going to have more claims being serviced.

Is all of this pressure.

Coming from from <unk>.

Can you just elaborate a little bit.

<unk> operating under the impression you know.

Playing out there as maybe $4 million to $5 million of EBITDA, but just maybe can you provide some color as to the EBITDA why the run rate just kind of holds from third quarter fourth quarter, all the way through.

Yes.

Michael It's Glenn.

You are correct that the in terms of the.

Yes.

More of a headwind in 'twenty three is a CMI services, even though as I mentioned in <unk> services and 23 as you know.

Projected.

To be up versus for example, 21 and certainly a way absent the pre pandemic period in the <unk> services.

<unk> been a great.

Contributor but.

There is there is as we've always said a little bit more volatility in our business model has a great deal of stability with the Cam piece.

But there is always a little bit of volatility on the CMI services side now we like that because it's an asset light business and generally it's been a great contributor in terms of overall cash flow and as I said it has made progress.

Every year, except comparing to 'twenty two as we look at 'twenty three.

Going to be down, but still up versus prior periods. So there's some volatility around the margins on <unk> services.

That has to do with.

What we said earlier about.

Where the opportunities might lie for military flying in commercial line.

But on the Cam piece.

We talked about in our pre release, there will be some aircrafts coming back we believe.

That will create.

A pause I guess in terms of a revenue stream on those 77, two hundreds that we've put the earlier release add on.

Tam certainly in terms of there.

Earnings margins they are impacted by the rise in interest costs.

Which is certainly a factor.

And.

Of course inflation also can affect.

Investments.

What it takes to put an aircraft on the ramp and Lisa.

The lease rate has held up nicely, but similar to comment earlier, sometimes theres a little bit of a lag there.

Inflation moves really quickly because we have a lot of our growth already programmed in just like we've talked about our pipeline in 2000.

Three and 24.

What 40, some aircraft coming out and being leased.

We have a lot of that pipeline locked in.

18 to 24 months prior to when the asset comes at.

Sometimes that slice you can impact.

The annual service cost and Thats, something Cam has to deal with but we're hitting our return margins there and the businesses looks to be positioned as rich said to be the engine that will drive again in 'twenty four and 'twenty five we believe double digit EBITDA growth year over year.

But in 'twenty three.

You have you have those some returns coming back and you have the higher interest cost so theres, a little bit of a headwind there.

I don't know Mike anything.

So we view it as an investment year and the line of sight as Quinn mentioned in terms of our order book in 2023, and four and quite honestly are into 2025 on the 767 side.

Fabulous.

As we look at the engine the E Commerce engine that will drive that.

Retail sales as a whole.

From now to 2026 are going to grow are scheduled to grow by four six trillion.

In 2.2 of that is going to be in ecommerce.

As rich mentioned in his earlier remarks, we're still seeing.

Very very strong growth in the areas that around.

Around the world that we are seeing success in Southeast Asia Africa, the Middle East for example.

Are areas that we're seeing great success, with new customers as well as our existing customers in those areas and.

As we progress in 'twenty four 'twenty five.

Right in the midst of our deliveries of the <unk> hundred 30 in that investment for the <unk> hundred 30 is taking place now so.

We're really keen on what the future specifically lies in our EBITDA growth.

Getting back to that 10 plus percent as quick as Quint talks about in the upcoming years the.

The other piece that I'll just talk about this from a strength standpoint.

As retirements during the pandemic.

About 15 freighters were being retired a year at a normal a normal year, it's about 70% what does that mean that means that the demand for cargo freighters around the world as it is going to continue to add.

Add strengths. So we continue to be real positive.

Okay, just on the capital intensity of the business I mean that sustaining capex guidance is going to be up 40% to $260 million. I mean is there anything unique happening this year.

I mean, presumably maintenance part.

Overall.

Shop visits are getting more expensive, but how should we think about the sustaining capex going forward.

Yes.

Thanks, Michael it's Glenn.

Sure.

Now 22 was I think what we say 187. So you can see it came in a little lower 23.

It's higher than that 200 sort of trend long term trend line, mainly because of the timing of some engine overhauls.

We maintain a pool of engines for some of the lessees.

One of the engine types.

And.

It's just based upon their shop visit their expected shop visit timing.

<unk> got more of those this year.

Correct inflation as we've said.

I don't think any of us can probably think of any costs.

<unk> effect, but it has more to do with the timing of scheduled maintenance as to why we're looking at a higher number for capex.

Okay that makes sense and then just the last one if I may any any update on your.

Kind of contracts with your pilots just kind of watching the news here of seeing what's going on at Fedex. How are you kind of handicapping or thinking about that risk.

So we.

We've got pilot contracts open are amendable, I should say with both ATI on.

The cargo side and on passenger operator omni.

And both of those contracts are have been in negotiation.

Both sides are meeting.

Multiple times per month, now and trading information and going forward and so things are progressing.

It just based on where they are individually and they're both in different places but.

We don't believe that will we will get to anything very quickly.

Okay, we have always taken the position that we'd need a pilot contract that pays the pilots well enough that we.

Can retain and attract pilots.

But also gives us the cost structure if required that we compete for business.

And we've always been able to two.

Make those two positions.

Physicians meet.

At some point and we will continue to pursue the contract negotiations with that perspective.

Okay perfect. Thanks, guys.

Yes.

One moment for our next question.

Our next question comes from Frank Galanti with Stifel. Your line is open.

Yes, hi, Thank you for taking my questions I wanted to follow up on that last question on pilots.

Can you sort of talk about availability of pilots.

<unk>.

Have you.

Considering the kind of new EBITDA guidance.

And expectations for lower block hours.

And thats sort of alleviate some of the pressure.

From.

Pilot perspective.

Can you talk about how variable that cost us with block hours.

So couple of things one is that we've been.

Able to attract pilots.

Without a problem over the past year.

And any.

Attrition that we've had we've been able to stay.

Stay ahead of the curve in terms of getting the training done and getting them able to be able to.

Fly and preserve all of our schedules and et cetera et cetera. So that's been a good thing our average hours away over the minimum of the new pilots coming in.

So we're in good shape as far as.

As far as the pilot situation goes but in terms of the variability of pilot cost as it relates to block hours.

The pilot cost.

Is really.

It's under contract so.

Although the pilots who will go through the.

Increased their pay as they go through scale.

It doesn't really change that much on an average cost basis per block hour.

And the contracts that we have.

There are escalations that address.

Cost on an annual basis.

That's right yes.

As we look forward at the placements for aircraft.

As Mike commented you know most all of these are going internationally. So we don't anticipate.

Operator.

Through the airlines, so I think what over 80% or something or international placements into 'twenty 384.

So that will to your point it won't drive a demand for additional pilot, it's more about keeping pace with that attrition that rich right and if you look at just the next two years are going to be 40 airplanes, we're putting out and you look at the diversification, we're getting away from some of our larger lessees.

Great story, because we've got stability, we've got visibility to cash flows and we've got a differentiated business model going forward into different parts of the world.

That's helpful.

So I wanted to ask about the.

707 200.

Can you sort of talk about.

In the press release and expectation.

At the end of 'twenty, three being down eight claims.

Can you just talk about the age and efficiency interest in that platform.

And then kind of second part of that.

And last year, you took in house the engine services for that plane and you sort of talked about $40 million to $45 million of EBITDA contribution from that.

<unk>.

Where does that sort of stack relative to what you expected in 'twenty two versus 'twenty three.

Sort of the changes in net.

Yes in terms of the last part of that question and I don't know if Mike It's Mike jump in the first part on the two hundreds.

Your question about.

The engine is.

Yes for 'twenty two it was right around the $40 million that we talked about at the beginning of the year when we gave guidance.

In terms of that EBITDA contribution remember there was kind of a step up there because we ended our long time PVC agreement with.

Provider and we went to the pooling.

Structure that we have now where we essentially.

We overhaul, we maintain that full of engines and make it available to less easy to operate the aircraft. So on a 23 versus 22, there won't be much of a change in other words, it's not a big driver of incremental EBITDA.

That was sort of that.

Changing that.

Structure from 'twenty, one to 'twenty late 'twenty, one to 'twenty two that drove that.

$40 million increase in 'twenty two.

So.

Pretty much.

Stable contribution in 'twenty three versus 22 from the engine piece.

In regards to the first and the first part of your question about the demand for the 767 200.

We have seen is still very very good demand for the <unk> for the airframe.

And as Richard mentioned in his opening remarks.

We certainly will have some opportunities to sell some of those airframes as well as re lease up.

Out to the marketplace. So as we as we view those opportunities and we'll kind of have our choice. If I can put it that way to pick and choose what's best for us as we get those returns couple that with the engine program. The pool of engine is that Quintin mentioned.

That we still feel that they are still steadily feel that see.

Strong request and strong demand for that aircraft.

Great. Thank you very much.

Again, ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered who wish to move yourself from the queue. Please press star one again when a member for next question.

Okay.

Our next question comes from Howard Rosencrans with VA. Your line is open.

Yes.

Hi, guys. Thank you for thank you for taking the question.

Yes.

I guess I just wanted to understand the.

I mean, obviously the market is having a different reaction to what you are saying.

Okay.

In terms of one of the prior speakers commented on quote great story.

So I just.

Simplify in terms of the growth Capex.

You've got <unk>.

$600 million in 'twenty three.

And it sort of implies about $600 billion in 'twenty four is that sort of related to again just to oversimplify without the breakdown between <unk> and <unk>.

The Airbus equipment.

Our sensibly, we're talking about the 27% and $30 million.

Per.

Im sorry Howard.

Cut out there, yes, I have completed the question.

That's probably are we talking about 2000 $7 million to $30 million per aircraft.

<unk>.

Again, whether it flows in as working capital or flows it is but basically in terms of the capex is that what we're effectively talking about it and then I want to ask you to follow on.

Well, we've talked about that range in terms of the 767 three hundreds.

For what.

On investments look like.

Put them on the ramp in reasonable shape right.

Alright, okay.

And it's pretty much the same ballpark for the Airbus rates is that fair to say.

Yes in terms of it depends upon the Airbus.

Right.

And rich you said in the past I think of the narrow body $3 21 is about two thirds.

<unk> done about two.

And then the 330 is about 20% larger.

700, <unk> 300.

So at the end of the day at the end of the day. It all washes out to about the same thing so that so that leads me to my real question here. So.

The market is suggesting or.

The investment community. However, you want to look at it is suggesting that.

That now the returns that you're going to generate are not going to be the returns that you have generated historically and I guess just to speculate this a lack of comfort with the.

With the customers' visa.

The customers like Amazon and DHL and Fedex.

Let's say for the sake of conversation.

Yeah.

E Comm growth on an international basis is not as pronounced exactly.

That's going to impact that we assume more euro CMI, which is the <unk>.

Which is more of the volatility side of the business, but as long as we get the Cam placements, there and as long as they're taking them then we get the return on the Cam side and let's face. It that's the lion's share of the cash flow since your debt is going up so much over the ensuing couple of years.

To me I, just wanted to and I think for others just wanted to get a higher level of comfort that the that the.

Very good.

Buyers that we're now going to be doing business with our sharply accelerated we'll be able to.

Comfortably perform.

Perform in line with the way you're Goliath.

Let's say domestic or global players have have performed.

Yes, no. It's a good question I'm glad you asked it because we've made that we've made this.

We handle a similar question in the past about some of the smaller lessees that we have.

A couple of things one is that several of the lessees that are prominently positioned to take whether it's <unk> hundred $21 760 Sevens <unk> hundred <unk>.

Also fly for express companies or fly in express network that multiple companies may participate in.

For example, cargo jet up in Canada.

We've also got some large companies in this portfolio that will be taking airplanes internationally DHL is in line for both 760 Sevens and <unk> hundred <unk> from now through 2026.

You've got a company Asl, that's based in Ireland, but has several.

<unk> all over Europe . They are the largest <unk> operator in Europe , and they fly for multiple express companies and they have very strong agreements.

So and then you've got a company like riot in Malaysia, which is going to be taking <unk> hundred 20 ones and there are currently a 767 customer they fly for DHL. So when you look at these lessees, they're diversifying us globally and although they may not be your household name of DHL EPS are Fedex.

They fly for those people. So the credits that they represent are very strong in relation to.

Just a general airline.

Thats out there. So we have a lot of confidence we do a lot of betting.

Of airlines in terms of what they're going to do with.

What they're going to do with the airplane and so we have a general understanding another one I forgot to mention was.

Maersk is taking we'll end up with five five airplanes from us they've already taken three there's two more to be delivered to them and of course <unk> is one of the largest if not the largest ocean company.

In the world and so those are the types of customer we've got.

And so we're very confident in the cash flows that we'll be receiving from these customers.

Just wanted to make just just to bring a little bit more color to it Howard.

Our partner one of our partners in Africa.

Astral Astral Airways was just named cargo cargo airline of the year for that region Rich mentioned right. They were named E Commerce airline of the year in Southeast Asia.

And just a little bit further detail on <unk> star they've been the provider.

Provider of EPS in the European network for literally for over 30 years. So.

The vetting goes the vetting is very diligent.

And understanding their business plans and how theyre going to succeed is also very important but as rich said as well.

Specifically is in line to take several aircraft over the next few years, that's a fixed side as well as the 330.

So Howard you mentioned, how the market views and in contrast, with what we're saying and of course.

We don't we're not second guessing antibody or in the market, but it is a little frustrating I mean like.

When we look at somebody looking just at a quarter for example.

And even this quarter.

I think we had a tax item, where we adjusted our state tax apportionment based on where the aircraft fly which stage III fly over because they have different tax rate so you're.

Run that so we had something that was probably three to five.

In the fourth quarter, well, that's kind of the difference between the consensus.

Our 53.

We hit our earnings.

We hit our targets that we set in February of last year for full year EBITDA.

And of course, we've talked at length about.

The visibility we have to sustainable structural growth in our leasing business, which is as you point out the source of the majority of our cash flows and will be under long term agreements for many many years and so we feel very fortunate.

To have that in front of us.

As I mentioned, there's a little volatility around the edges with our asset light AC fly, but even they have made tremendous progress since the pre pandemic period and even since 'twenty one.

Capex wise the leasing business requires capex.

That comes from that comes with that territory, we get but with the placements of 20 aircrafts this year and more than that in 'twenty four and the first of the 300 <unk>, we essentially have locked in growth for three years four because even if you pull.

Pull back on investments after 24, the placements you make and 24 are going to drive substantial EBITDA growth and 25.

And so we feel very fortunate about that and we hope that investors focus on that long term in and recognize that we've now demonstrated that our model performs well under different.

Different economic cycles, having gone through the pandemic coming out of it and even.

The slower growth that we've guided to in 2003.

Contrast that with other transportation companies and you can see that there truly is a stable base.

<unk>.

Here that we feel very fortunate to have as part of our business model.

Well thank you for.

Thank you Victor.

Hi.

And I appreciate it. Thank you for all the incremental color I think you need to dedicate more time to.

Those were going to come off or that you were going to.

Which was going to extensively lead to as somebody else comment did a flat run rate of of the base core EBITDA. So I think there is there is a greater understanding and I can assure you that the market commentary is not based on weather.

Whether or not you've made or missed.

Fourth quarter by a penny here or there. Thank you.

Thanks Howard.

I'm not showing any further questions at this time I would like to turn the call back over to rich Corrado for any closing remarks.

Thank you Kevin.

We've long discussed the resiliency of our business model with freight of leasing is the foundation and value added services that make us unique and differentiated from any other competitor in the world.

We have no peers and what we do many air transport services companies have struggled through the pandemic trying to get back to a 2019 baseline.

Still the visibility we have the cash flows from our freighter investments with waiting customers over the next three years gets us right back onto a 10% EBITDA growth trajectory in 2024 and 2025, just based on the leasing commitments alone.

More fortunate market conditions could also lift our other services delivering even higher returns.

Once again atsg's resiliency as demonstrated through the most challenging of times as we drive our results for 2023 and beyond we remain a great investment for stability.

Rose.

High visibility of future returns thank.

Thank you all for your interest in ATSG and please stay safe.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q4 2022 Air Transport Services Group Inc Earnings Call

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