Air Transport Services Group Inc. Q1 2023 Earnings Call
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As a reminder, today's program is being recorded and now I'd like to introduce your host for today's program Mr. Joe Payne Chief Legal Officer. Please go ahead.
Good morning, and welcome to our first quarter 2023 earnings Conference call. We issued our earnings release yesterday. After the market closed its on our website H S. G. I N C 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 airline's ability to maintain on time service and control costs.
The cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.
Fluctuations in Atsg's traded share price and in interest rates, which may result in mark to market charges on certain financial instruments.
The number timing and scheduled routes of our aircraft deployments to customers.
Our ability to remain in compliance with key agreements with customers vendors.
Lenders and government agencies.
The impact of current supply chain constraints, both within and outside the U S, which may be more severe or persists longer than we currently expect.
The impact of the current competitive labor market.
<unk> and general economic <unk> industry specific conditions, including inflation.
The impact of geographical events, our health epidemics, such as the COVID-19 pandemic and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q, we will file next week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings adjusted earnings per share adjusted pretax earnings.
Adjusted EBITDA and adjusted free cash flow.
Management believes these metrics are useful to investors in assessing atsg's financial position and results.
non-GAAP measures are not meant to be a substitute for our GAAP financials.
We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website.
And now I'll turn the call over to rich Corrado, our president and CEO for his opening remarks.
Thanks, Joe and good morning, everyone.
On our last call, we talked about the headwinds facing us in 2023, and our operating businesses, but mostly at our airlines. Unfortunately, the results, we issued yesterday and our guidance change for the year as a whole showed that reduced revenues at our passenger airline omni and inflation driven costs at all of our airlines.
Our having a bigger effect than we expected.
We are not alone in this regard inflation and a softening macro economy are squeezing profitability in many sectors and especially in transport.
We have a limited exposure to fuel costs, but our personnel costs horizon, including for line maintenance workers and travel for flight crews shuttling between assignments.
That said, we are fortunate that demand for our least cargo aircraft remains strong our guidance changes were not related to Cam, which deployed two of the record 20 phrase we will lease this year at rates that meet our return requirements.
I'll be back to share more of that perspective after quint reviews, our financial results for the first quarter.
Quint.
Thanks, Rich and welcome to everyone on the call. This morning.
He just said our first quarter results show that inflation remains a key concern and it's specific impacts on our businesses were greater than they were when we talked to you in February .
Inflation is affecting all of our businesses, but the principal impact is in our <unk> services segment.
The next slide in our deck summarizes the results that rich mentioned, our revenues grew $15 million or 3% versus a year ago to a record $501 million for the first quarter.
Both of our principal segments as well as our other businesses in total contributed to that increase.
In fact, among all of our operating businesses only omni air passenger airlines did not grow its revenues versus a very strong first quarter last year.
Our GAAP pre tax earnings were down 39 million and basic earnings per share were 28, SaaS versus 67 status in the first quarter of 2022.
On an adjusted basis pretax earnings fell 26 million to $38 million and earnings per share was down 20 to 36.
Our aircraft leasing segment Cam delivered all of our segment earnings for the quarter. Its pre tax earnings were roughly flat with a year ago at $34 million, mostly due to higher interest expense and freighter deployment delays.
Our <unk> services segment, which includes all three of our operating airlines had a $2 million pre tax loss of $334 million in revenues for the quarter.
That loss at Atms services is mostly attributable to omni air passenger airline.
Which experienced sharply higher costs, and 26 million fewer revenues than it did a year ago.
Airline block hours were roughly flat versus the prior year quarter, even with more aircraft in service as scheduled flight segments were shorter this year than before.
Passenger block hours were down 25%.
Cargo block hours were up 4% for the quarter block hours for our 757 Combi operations for the military were up sharply as a trans Pacific Route was reinstated last fall.
On the next slide you can see that versus the 12 months ended in December 2022, our adjusted EBITDA was down $20 million to $621 million for the 12 months ended in March.
First quarter, adjusted EBITDA was $138 million.
Federal pad demick relief grants under the payroll support programs have had no effect on our results 2021.
On the next slide you'll see that our capital spending continues to increase principally from growth investments and our lease freighter fleet.
Sustaining capex, mainly for airframe and engine maintenance technology and other equipment grew at a slower pace.
It includes capitalized engine maintenance services for our 767, two hundreds lease customers.
Total capex was $219 million for the first quarter.
Growth Capex was $165 million up $93 million from the prior year, both to convert existing aircrafts are freighters and to buy more feedstock.
We deployed two newly converted 767 300 freighters during the first quarter.
The next slide updates, our adjusted free cash flow as measured by our operating cash flow net of our sustaining capex.
Operating cash increased $91 million to $216 million in the first quarter or $563 million for the trailing 12 months.
Net of sustaining capex of $205 million over 12 months.
Adjusted free cash flow is up $73 million to $358 million on a 12 months basis.
The cash flow gain reflects reimbursement of fuel cost from omni as federal government customers, which had been slower when we talked to you in February .
On the next slide you can see that available credit under our revolver facilities in the U S and abroad was $388 million at the end of the first quarter with an option for additional capacity subject to bank approvals.
That includes a $100 million credit facility in Ireland, we established in March.
Our capital allocation strategy continues to include share repurchases, we bought back approximately $1 million of our common shares in the first quarter after a $2 million in repurchases during the fourth quarter.
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.
Please turn to the next slide.
As I said earlier, we had hope to begin 2023 on a path to deliver better results as measured by adjusted EBITDA than the $640 million, we delivered last year.
But thats clearly not where we stand today.
We have reduced our 2023 adjusted EBITDA guidance by approximately $40 million.
And our adjusted EPS guidance by about 30.
To levels more consistent with the results that we believe our businesses can achieve in the current environment.
As Quint said inflation is driving up costs throughout the company. Our peers are reporting the same pressures on their own margins in our case, the most dramatic effects on the operating cost of our airlines and higher interest expense.
The cost of those services has been growing at double digit rates over the past two years.
And above what we had budgeted at the start of the year.
We also pay passenger airlines to move our crews to the next assignments. For example on these cost for flight crew transport, reflecting fare increases that the traveling public is also facing.
More than 35% per cycle in the first quarter versus a year ago.
Throughout the company our businesses are engaged in efforts to address inflation and cut costs line maintenance travel and other procurement costs as well as right sizing personnel requirements to business volumes are areas of focus.
Within our <unk> services segment Omnis first quarter results were down including lower revenues from both commercial and government customers.
Those results were affected by the appetite of other passenger airlines to participate more fully in the defense Department's craft program. This year.
Many flew missions in the first quarter that omni had flown in earlier periods.
Even if omni as total Dod block hours do not increase significantly this year it expects to benefit from better pricing under its Dod contracts starting in October .
On these flying also consists of charter awards from other government and commercial customers that had bids based on real time cost.
We anticipate that those assignments will cover any shortfall in craft line.
Our cargo airlines fly under long term CMI agreements, which include annual price adjustments.
Some of which will occur this quarter.
Trolling costs between CMI Escalations has always been a focus of our airlines.
Ongoing inflationary trends have only magnified that imperative.
That along with their ability to win peak season, and other limited term contracts throughout the year are essential to our margins in that business.
Please go to the next slide.
We told you last time that our fleet investments will increase over the next two years based on strong demand for our freighters.
Many airline customers, mainly overseas have made commitments to lease our cargo aircraft as they complete conversion.
We expect to deliver 14, 760 sevens and six <unk> hundred 20 ones to customers this year.
The main constraint on our ability to do so our extended conversion turnaround times that our vendors and certification of our Airbus <unk> hundred 21 freighters.
Resolving the international regulatory issues for the <unk> hundred 21 have taken longer than expected. The U S. FAA has already certified the <unk> hundred 21 based on our design. We are working directly on final remaining issues with regulators elsewhere.
Pending a resolution of this issue we intend to take a measured approach to our <unk> hundred 21 freighter program, which could reduce our 2020 for capex.
That's a situation we will monitor throughout the year and make adjustments as appropriate if circumstances changed.
We have heard from some investors to question, whether the stepped up capital spending we will need to convert and deploy the number of freighters. Our customers. One is the most prudent use of capital.
We agree that our 2023 capital budget of $850 million, including $590 million for fleet growth is substantially more than we have spent before.
Despite the economic environment, we fully expect to earn double digit returns on the growth capital, we invest which has long been our benchmark commitment.
Greater demand does not support our expected returns we have the flexibility to significantly reduce our planned growth investments in 2024, and beyond and reallocate that capital in favor of debt reduction more share repurchases or other alternatives.
It's clear to us as well as many of you that under our current stock price multiple we can create additional value through share repurchases.
Our decisions about capital allocation will always be driven by what creates the most value for shareholders.
Please go to the next slide.
Our new guidance for 2023 projects adjusted EBITDA of a range between $610 million to $620 million in 2023, and adjusted EPS of $1 55 to $1 70.
While we faced challenges in 2023, we expect our earnings and cash flow growth to resume in 2024 and beyond from fleet investments and higher lease rates. We will continue to have a strong balance sheet a leadership position in the mid size freighter leasing market with large express and e-commerce customers and the strong backing of.
<unk> and our credit facility and debt Securities.
Our employees are prepared to execute against all of our 2023 plans with a goal to generate long term superior returns for our shareholders.
That concludes our prepared remarks, quint and I, along with Mike Berger, Our Chief strategy Officer are ready to answer questions May we have the first question operator.
Certainly one moment for our first question.
Yes.
Our first question comes from the line.
Jack Atkins from Stephens Your question. Please.
Okay, great. Good morning, guys and thanks for taking my questions. So I guess, if we could maybe start quint I just just to make sure everybody is kind of positioned correctly, you're thinking about the cadence.
Within the framework of your guidance I mean, how are you thinking about it.
Proven and earnings or EBITDA sequentially.
How do you break down the EBITDA guide between sort of maybe first half second half can you maybe give us some framework to think about that.
Sure Jack.
Thanks.
Yes, it is second half weighted.
Is the way the way we are projecting right now in terms of thinking about the segments.
The second half improvement a lot of that is driven in the ACI services.
Segment.
Cam is.
More of a sort of a steady.
Fairly steady EBITDA contribution.
With growth as we can.
Moving through the year, but <unk> services I believe the second quarter will be.
Some modest improvement, but more of the improvement is in the second half if you think about omni.
Omni its busiest time sort of June through October typically.
And that drives some of that and of course, the cargo carriers as they head into peak season and as additional aircraft are added and we've got some customer aircrafts coming on for.
For example on the ACI fleet.
The drivers of that and that balance.
So EBITDA wise.
We're looking at some some improvements certainly in the second quarter.
And then a third and four.
Yeah.
More of that.
As we as we finish off the year.
Got it but I mean, if you did 100, let's say 38 billion in the first quarter in EBITDA. The guide at the midpoint 615.
You sort of you said second half improvement.
Just kind of roughly speaking like what percentage of the EBITDA.
Full year EBITDA would you expect in the second half of the year. Just so we can kind of think about that.
I would say.
Around that for you here quickly okay I can.
I can move on and then we can come back to that.
If that's okay. That's okay. So I guess sure.
Richard Richard Mike.
You sort of think about that.
The pipeline of demand for that.
The core part of the business here, which is mid size freighter leasing whether it's the 767 380.
<unk> hundred 30.
Have you seen any sort of change in customer demand in the last few months with with everything that's been going on in the economy any anything that would make you think that folks are getting a little bit less confident in there.
And expectations around.
<unk>.
Jack Jack we haven't seen any erosion to the order book.
At all in 2023.
<unk> 24, and if you look at it our three <unk>.
That we've talked about now for several quarters.
We still have over 20 commitments with deposits on those is and we start inducting. Those later this year or first couple will go into induction so when.
With those new aircraft coming in we still we still see a very very solid and bullish market.
And when we look at.
The industry forecast as a whole.
The big Boeing forecast in the cargo FX forecast when you look at even further or much broader view 10 to 20 years or so.
Those those continue to be very very strong in regards to.
The medium wide body.
Needs for the industry close to 900 over the next.
20 years or so so short term to answer your question, specifically still very solid no erosion.
And from an industry broader view still very very bullish.
Jack This is Rick just a couple of other points to add onto Mike.
Interesting data from CRM.
Involving freighters that during the pandemic.
During a normal course of a normal year Theres about 70 freighters that are retired each year during the pandemic that was only about 15.
And so youre looking at 165 airplanes over that three year period that.
May it would have been retired.
Different sizes, right and so theres been a pent up demand for right sizing aircraft and for replacing older airframes with newer airframes going forward on top of the fact that ecommerce growth.
It's better outside this country, then certainly it's growing inside this company country. If you look at the order book.
Quickly on the 787 side of that as an example.
For 2023 11 of the 14 aircraft that will deliver this year there to your existing customers that already lease airplanes from us. So we've got we've got ongoing regular dialogue with these folks and we're real confident in the in the order book for 2023.
<unk>.
Jack just circling back on your question on the cadence on EBITDA, yes, the second half.
It was about 54% of the total.
So sort of.
$46 54 split between the two halves okay.
Okay.
Kate that Quint and I appreciate that.
Sort of the thoughts on the outlook. So I guess when you put it all together I mean, the stock is down about.
40%, 45% so far this year alright, if you go back and kind of.
Benchmark the reduction in EBITDA, the bottom end of your guidance versus where the street was before for 'twenty three I think it's about a 13% reduction.
So.
Pretty aggressive move down here.
The stock is the stock is not a vote of confidence I guess on the Capex plans as you sort of think about both this year next year, So I guess.
Richard.
You don't want to make a knee jerk reaction to sort of how the stocks trading, but <unk> got a $1 one.
Billion dollar market cap, and you're spending $600 million or so on growth Capex I mean at what point does it do you think about.
Sort of other alternatives for your capital to sort of better align.
Your cash flows with.
But.
Supporting the stock here.
We haven't seen it this cheap since 2016.
Yes, well first off.
But prior to that prior to this quarter we thought.
Just for the guidance that there was an overreaction.
The stock and that it should have been higher before we got to.
This quarter's results and look we do have flexibility going forward.
In terms of dialing back on Capex for 2024.
We've got different scenarios and everything we do have customer commitments.
For.
Just about all of that the freighters that are coming out in 'twenty four as well.
And backing off on any of that it would be a significant decision. We believe that if you look at the book.
Freighters that were going to put on in 2023, they will deliver a little over $70 million in revenue in 2024.
And we have a high conversion of adjusted EBITDA to revenue on the leasing business. So we feel that this is this is a good use of capital the lease rates are something that we're focused on right now, particularly for 2024 to make sure that we have the right returns for those airplanes and we think we are staying the course at this point in time, but again we.
Do have flexibility should we need to adjust.
Okay, Jack the adjustment in the guide is strictly related to <unk> services.
Cam.
Cam.
Investments are generating the returns are there.
We expect.
And if that if that.
It doesn't.
Somehow that were to change yes, as rich says, we do have some flexibility to reduce our capex spending and at the same time.
We understand.
How attractive our own stock is as an investment.
At these prices.
So that isn't lost on us so the capital allocation is always going to be done with an eye towards what generates the best value.
And we.
We think there is value creation.
Through directing capital to both.
Share repurchase and growth.
The headwinds we faced this quarter have been strictly limited to the <unk>.
<unk> services segment.
And at least on the revenue side this quarter, it's more related to our passenger flying which we referenced in the release.
We do think that there.
That is going to improve as we move through the year.
We also mentioned the inflation.
<unk> continues to be an issue for us.
But there are adjustments in the contracts that are in our airline path.
That should should help that as well as the.
The cost control measures at all of our subsidiaries are undertaking right now.
Okay, and maybe one other final quick question and I'll hand, it over I don't want to hog, all the questions, but I guess.
You sort of think about the valuation of the company today, an enterprise value basis.
Relative to your asset value and the value of the cash flow of the company.
At what point does it make sense to maybe think about private market valuations and what an infrastructure bond or somebody like that would be willing to evaluate ESG, yet if the public equity holders won't value.
Company appropriately.
Well Jack this quint, we certainly understand the question.
And we have looked at our valuation or public valuation and when you look at what the company produces in terms of.
The cash flows.
<unk> EBITDA.
Kind of the way we believe that.
Somebody from the outside to look at it is when you think about our leasing EBITDA, which is the majority of the company's EBITDA.
Yes.
<unk>.
Four five.
Over $400 $400 million to $500 million of EBITDA and you put a multiple on that is P firms often do now now leasing multiples tend to be higher.
Hi.
Eight plus but if you put something even lower than that on there which to be very conservative.
And do the same with our <unk> services EBITDA.
Which last year was I think over $200 million. This year, obviously is going to be down.
And <unk> services and airlines multiples tend to be lower.
And so again put a conservative multiple on that as well as the other businesses, the MRO and logistics businesses.
And then of course reduce the debt, but I think what gets lost is we have.
500, plus million dollars of assets in process the assets, we havent conversion thus.
The 27 aircrafts that as rich described have customer contracts waiting on there.
If you just simply assume that it cost at what our invested dollars are.
Again take out the debt take out something for Amazon warrants.
How we think of it and when we look at it that way and spread it over our per share value.
We get a valuation thats conservatively closer to 30 than it is 'twenty and certainly.
Yes.
We're even below that as we speak here so to us.
Appears your point is well taken that the public valuation it doesn't seem to be given credit for the assets that are.
And process, those 27 aircraft and even at a conservative multiple on our on our EBITDA for our leasing entity. We've got a lot of long term leases and cash flows that we can we can look at as well as contracts for the assets in process <unk> could be.
<unk>, a very attractive valuation secondly.
Our current public valuation.
Yes.
We have looked at it in that fashion.
Alright, well, thank you for going through that Quint I appreciate it thanks guys.
Thanks, Doug.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Helen Becker from TD Cowen Your question. Please.
Thanks, very much hi, guys.
So just a question on the ATI pilots that contract is open and they've been very aggressive and very vocal about wanting more money they've talked about.
Service issues, and and attrition rates and I'm wondering if you could just give us an update on what's happening with that and how youre thinking about covering the cost of a potential increase.
Sure I'll ask rich thanks for the question.
It's not unusual for.
For labor unions to put out press releases in regard, particularly around.
Benchmark earnings calls and.
And play out Labor relations in the media, we don't think that's fruitful on our part I can I can comment on the service quality of ATI, which is outstanding.
And.
As an example, we get paid a bonus.
We're making service with our customers and they made the bonus.
Two months out of this year, so far so we're in pretty good shape. We're in really good shape in may so far as far as service goes.
There has been through attrition, we've talked about crew attrition.
On other earnings calls it's prevalent in the industry is common between our three airlines, it's a situation that we're managing.
We're still able to attract crews with a good amount of experience and a good amount of flying hours well over the minimum.
And train them and get them into the into the network to be productive. So we're in good shape as it relates to moving forward with crews, but it has raised our cost and thats one of the inflationary cost pressures that we have when you have when you're training pilots to replace pilots that are tripped.
<unk> got an unproductive resource while youre going through that training period, which is anywhere from 70 to 90 days. So it has impacted our cost situation.
As far as the Union agreement goes and the costs going forward.
The the kind of the.
Negotiation is now in mediation and entered mediation both parties agreed they had taken it.
Terms of alpine in terms of ATI had taken the negotiation as far as they could take it.
By themselves and that's now in mediation, so there'll be going through and iterating contract issues et cetera.
As it relates to the cost side of that we have always maintained.
In the past when we've negotiated union agreements and for this union agreement as well that we need.
Pricing, our contract rates and benefits that that allow us to attract the best pilots, we possibly can while also focusing on the fact that we need to be competitive and we need to be able to compete for business.
And the HDMI segment of flying.
<unk> two parameters are still still guide our decision processes in this in this fashion I can't really comment on the on the amount of increase or that going forward, but.
But like I said, it will play out over the course of <unk>.
Probably at least the rest of this year.
Given that the contract isn't mediation. Okay is there are there any accruals in the guidance for for any increases.
And I remember, how you guys normally do that.
Yes, we don't.
<unk>.
Yes.
The contract or the amendment resolutions of waves.
And as you know.
That's nothing we ever.
Amit.
Sure.
But typically we're not expecting a contract resolution.
For a while yet it just based on past history, and usually it takes longer to work through a mediated process.
So as we as we get closer we see whats going how things are shaping out.
Appropriately.
Yes.
Record, whatever we need to but.
Quint.
That's pretty standard some airlines will not accrue until they have a better sense of what the contract is going to look like and and and some accrue a little amount. So I just didn't remember how did you guys stood at.
I wanted to ask you about the 12 760 sevens that were due to.
To come up for renewal. This year I know four were released three we're not going to be because you were going to use those aircraft because theres time on the engine. So you could use them for other customers. What's the status of the other five do we do we do we know that did I Miss something there.
<unk>.
Yes, I mean, what we said previous adding still goes well and we would look to re lease or sell the.
The other five.
Okay has anything happened with those yet.
Well right now there is still.
Brian That's right now there is still the right now there is still in operation.
But we've got.
Commitments to sell for the for the returns as we progress through the end of the year.
Okay.
<unk> is the.
Proceeds towards the timing and the proceeds included in the guidance and is the timing I mean, you must know the timing.
Yes.
But it will be in the second half.
Third and fourth quarter sort of split between those quarters and it is in the guidance okay.
That's very helpful.
Thank you yes. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of.
Frank Galanti from Stifel. Your question. Please.
Yeah, great. Thanks for taking my questions I wanted to follow up on.
Thinking about the business as two separate entities.
Right you have got Cam the leasing on term contracts much more stable right.
Our public peers.
Not in the cargo are trading at 910 times Air lease Aercap and even if you look at Atlas Air Takeout.
Doing that kind of split you had about 885 times on the leasing side.
And then the question really gets down to two parts. One is it reasonable to think about the company as two entities like that it seems to me that they are inherently intertwined as the main reason the leasing business is so large is the value added <unk>.
Services through the <unk> business and then a second part of that is long term Acu my margins and so we saw the pandemic those margins jumped 456%.
But if you look through the history those were.
Just breaking even.
And negative for a couple of years.
Can you sort of talk about those two components.
Is it reasonable to think about the businesses separate and then AC my margins on a long term basis, what gives you confidence that those shouldn't go back to <unk>.
Zero.
They should stay at 45, 6% or where do you envision that in the medium term.
Thanks Frank.
I'll start here.
The ratio of join in here, but.
Historically on the <unk> services segment and first of all we do we do bifurcate. That's why we report them separately in segments right. So we think of the businesses the leasing business separately.
From the airline ACM IOP.
And the <unk> services piece tends to be more asset light.
The capex side of our business is the leasing business buying feedstock converting the aircraft et cetera.
The.
The margins that we had historically look to achieve on the CMI services piece.
As a whole.
<unk> between there.
It's sort of a passenger omni carries a little different than the other two but generally speaking it had been in that 5% to 10% range and youre right that during the pandemic. There were there were some opportunity certainly that you were available.
Due to shortage of capacity or in the case of omni sometimes world events that drove some of the demand.
That allowed for improved over those traditional mark.
But we do think that that asset light business over the long term can produce.
Attractive contributions to our overall cash flows and margins it doesn't drive a lot of capex.
And Youre right that.
Some of our large leasing customers Amazon and DHL also.
On the experience and the capabilities of our cargo airlines and that does make our business model is unique.
But I don't we.
When you say intertwined I think regardless.
Yes.
Our customers, who need the midsize freighter to handle the ecommerce growth in express growth, they're going to need that.
That converted mid sized freighter capacity.
And that would be required anyway, having the capabilities, though too.
So use our operating services and our MRO services, we think is a value add for them and it's a value add to our cash flows now there is more volatility with the AC My services.
Segment.
And I think the omni piece is probably.
Less less visible what the future demand as some times.
For obvious reasons, they're large customers our largest customers the government and the Dod.
And that can be <unk>.
<unk>, sometimes to project now that has been.
Worked and worked well for us for several years really since we bought them and this quarter. We did see some reduction in that fly and youre right that cost pressures inflation pressures can affect a CMI services more but over time, we expect to see an inflation worked in.
Two our revenue streams through our contracts and we do have long term contracts.
Omni contract structure.
Escalation points built into it but in the short run there can be dislocation and cost rise rapidly and you don't get.
Just months until contract anniversaries and things like that.
Are your margins suffer in that interim period, but over the long haul we expect those to adjust and we should be able to achieve targeted margins on our <unk> services segment over the over the long run and it will contribute to our overall ATSG cash flows on top of those leasing streams, yes, I think the other thing I'd add.
Add to that Frank is that.
It is where the largest.
Dry lessors to Amazon were the largest dry lessor to DHL.
We also fly a lot of the airplanes that we lease.
So all the airplanes, we leased to Amazon in most of the airplanes that we leased to DHL. It's a unique strategic advantage that we have to be able to pair the flying with the leasing.
And augment the returns on top of the lease with flying piece of it and so that strategy has played out well for us over the in the past now what we've done.
In the last couple of years is really focused on the dry leasing business and a global.
Gross plant and so a lot of what's coming in 2023 and 2020 for our leases of aircrafts that are going on outside the country, where we won't have necessarily an operating role in those.
Airplanes and so it's like a diversification if you will of the strategy. So that we're leasing these aircraft to two other operators.
Lot of these operators happened to fly for DHL.
Our Fedex.
Or Amazon and other parts of the world, So theres still augmented and supported by strong.
Strong customers that are paying for the airplane. So we think it's a good strategy and it's allowed us to diversify into a situation at the same token I will also say a big growth.
<unk> for us during the pandemic was flying.
Just in the CMI asset light only basis.
Sure.
Airplanes that our customers have given to us and I think the accounts up over 15 now I think it's 17 between our two large.
Network providers in the U S in the U S.
So that's an area, where obviously, we wouldnt be flying those airplanes, if we werent confident in our ability to.
To be profitable, but those with that business and so we look at these.
Cost pressures that are going on right now is something that we will cycle through.
And an address.
Yeah.
That's super helpful. I really appreciate that.
I wanted to dig in.
Question on maintenance costs.
So I think.
Yeah.
Some of the negative reaction in the stock and the investors I talk to is around the large jumps in sustaining cash flows I know, it's sort of not the focus of this call is over the last call but.
Wanted to think through that from a.
Mike.
When I look at the.
I don't know just sustaining capex.
On a trailing 12 basis relative to assets.
And I know, we've only had this for a year. So it's kind of hard to look back historically, it's been about 8% in 'twenty, two and $2 60 number on a go forward basis, that's a 10% is that.
Like is this an outsized year.
Is the way to think about sustaining capex it basically all capex.
Minus growth Capex sustaining capex.
And so that it's sort of it's going to be lumpy, but if you looked at it you'd say oh, 9% of assets is really the normalized.
Number yes, we're going to have a bigger maintenance events because of engine.
Right, we didn't do engine overhauls last year, but we can do engine overhauls this year.
And the next year theres going to be sort of a little bit of reprieve as sort of 9% of assets. The normalized number right. Because there is a difference between sustaining capex. It the way you report it in a normalized maintenance Capex number can you sort of talk about that does.
That difference and what that number would be on a go forward basis.
Yes, Frank I'll take a shot at it here.
The spike in 2023 sustained capex is associated with the timing of some engine overhauls.
For the.
<unk> engines that are part of the pool that we offer to lessors.
Those came out of a.
Powered by cycle agreement with Delta, a while back and we established this pool, but there was a sort of.
Yes.
A larger number of engines that was going to require overhaul and this is this is that timing. So I do not anticipate the $2 60 to be the norm.
We've talked about.
More like 200, and you can see over the longer over the longer pole and you can see looking back it's been under $200 million.
Month look back what really drives our sustaining capex to increase.
Would be if we had more aircraft.
That we were responsible for the maintenance on and in our business model. The growth is going to be leased to external lessees and they're responsible for that maintenance. So as cam grows its fleet.
We do not anticipate significant growth and sustaining capex.
The airlines do that themselves have some spare capability for aircraft that they have for their CMI agreements and they are responsible for the maintenance for those aircrafts, but that doesn't increase significantly.
As does our leased fleet externally leased fleet that we have no maintenance responsibility for and so we don't expect sustaining capex to really grow much over time, there may be some growth due to inflation et cetera, but there is nothing really dry.
And it fundamentally.
And the growth Capex that we report is strictly feedstock plus.
Plus conversion cost. So you are right that the <unk>.
Everything else, we're putting in that sustaining alive and that does include some smaller items that are subsidiaries may.
Have to do.
Payers and maintenance that they have to do on large items hangar maintenance things like that but.
That may fall into that category in some smaller pieces of equipment, but generally speaking we don't expect that to go up.
Significantly over time as we grow.
Perfect very helpful. Thank you very much.
Okay.
Thank you one moment for our next question.
And our next question comes from the line.
Christopher Stoffel Atlas from <unk>.
Susquehanna Financial your question please.
Okay. Good morning, everyone.
Quint I just wanted to understand here exactly.
What's included in this revised EBITDA guide for this year.
I'm trying to get a handle on what potential downside risk there could be to this guide. So if you could kind of if you could walk us through.
How we should think about it you CMI block hours through the balance of the year and.
Particularly omni.
And then remind us with Amazon how much visibility do you have into their flight schedules as it sort of month by month or do you already know what youre going to be flying in the second half.
By extension peak.
Two what's the assumption in terms of Cam.
Placement renewals three it sounds like there is some <unk>.
Provision for their and asset sales.
Doesn't sound like there's anything and therefore pilot crew. So just want to understand sort of the building blocks.
As we think about this revised EBITDA guidance for this year. Thanks.
Thanks, Chris.
Yes, obviously, there is a lot of detail in our in our projections, but.
Just sort of in terms of a little bit like Jack Atkins question to start off in terms of sort of the cadence of.
What we anticipate.
The hours in the Aoc <unk> services segment.
More of the variability is associated probably with omni in those <unk>.
Because they have more of a seasonal pattern with flying.
Things like troop rotations, and so forth a lot of those taking place.
Starting in the summer months, and then extending into the fall.
And so.
For their hours, we have assumed some some grow through that period and then their fourth quarter after.
Sort of the latter part of the fourth quarter. It drops off again and then on the the cargo carriers typically their hours.
Are going to grow as we progress through the year.
Based upon the normal sort of peak seasons that you have for shipping in the various customer days that the customers have but in terms of the number of aircrafts that theyre going to be operating.
It's pretty it's pretty stable year over year.
We are going to get some customer aircraft, but there may be a few aircraft that come out we talked about some of the retirements and so forth. So that part is pretty stable.
As far as the Cam.
<unk>.
We expect.
Please eight we put two aircrafts.
We leased two aircrafts in the first quarter I think we expect six in the second quarter.
Two of those are already leased two of those we did in April and then we have the other 12 aircrafts that we project to lease that external customers in the second half.
Fairly evenly split I think third quarter might have a little bit more than four.
And so that that's that's some of the.
Some of the cadence I guess in terms of how we're looking at.
The drivers as we move through the year.
I'm, sorry, with <unk> question on the 760 Sevens.
The older two hundreds with Amazon is there, but that's included in the guidance, whether those are renewed or ourselves.
Yes, I mean, it's not I mean, that's in the second half I mean.
The aircraft will either be sold or re lease those five as it come out, but it would be pretty late in the year.
The aircraft is not it's not a huge number either way its not like it.
A significant driver.
Okay.
Okay, and then Amazon Amazon has added three aircrafts that we believe that.
If they will.
Okay. Mike go ahead.
Yes, we've talked about the extensions.
About what we're going to do with the 200 as a whole.
And the retirements and the sales piece of it.
And as Quint and Rich mentioned those are those are in the forecast already.
Okay.
So my follow up.
In the prepared.
Prepared remarks, Vince you talked about growing earnings and free cash flow next year.
I just want to understand that the assumptions here because we have uncertainty around the approval of these new Airbus aircraft growing odds.
Recession.
We have two open pilot contracts, we have elevated attrition levels.
Maybe it's a way to think about it.
We have given us a lot of detail on your order book through mid decade, and so if anyone wants to.
Think about building out an EBIT bridge or discounted cash flow is the way to think about this.
Really just taking.
Your pandemic peak EBITDA per aircraft discounting rate accordingly to where we see lease rates are and then adjusting at the margin for contracts.
And inflation I, just wanted to better understand that.
The assumptions in this kind of what sounds like.
Growth for next year, given all the pressures you're seeing in the business and macro uncertainty.
Thank you.
Well the biggest driver is what we talked about with the resort are booked through 2024.
Again.
Chris and we don't want to get into.
Trying to.
We go through the.
Great detail to model on this call but.
But.
That is going to drive as it always desert Cam being the biggest part of our EBITDA that's going to drive.
Yeah.
That will help offset some of the cost inflation that we've seen and theres other steps that we're taking at each of our subsidiaries are airlines that are subsidiaries in particular too.
Adjust adjust for cost, but there is always.
There's always uncertainties and every business.
We had been through a period here, where we've had more inflation higher interest rates as a factor we havent talked about that and certainly that that's been something that has escalated in the last 18 months pretty significantly right. So.
These are things you always have to take into account.
And just just for clarity on the 321 side.
Just so we're all clear and aligned.
The 320 ones that we have.
For delivery this year.
We're not facing any regulatory issues, they all be leased to customers.
That followed the FAA certification. So yes. So that's so that's no that's no issue for the for 2023.
And in fact, the ones that we have scheduled in 2024 also.
Aligned to the same so we don't have any regulatory issues on the 320 ones that.
We have planned for delivery right now in 2023 and 2024.
Chris as we said in our release just the annualized.
Revenue from the 20 aircraft that will put on this year next year, it will generate in excess of $70 million.
The EBITDA margin is quite high.
990 plus percent.
The confidence level of that is really strong and we've seen great. We've seen a lot of stability in our conversion houses <unk>.
<unk> heard us talk about.
Increasing the conversion sites with our with our Boeing locations as well so the throughput in order to deliver on those 20 aircraft.
As very solid not only from a conversion standpoint, but as we've mentioned.
From a customer standpoint as well.
Okay. If I could just squeezing one more just remind us of the orders that you have out there through mid decade.
How many of those are spoken for and do you have also.
The feedstock that you need because of what we're hearing is airlines holding on to older aircrafts.
Nate.
Longer than they typically would be production issues with the.
With the Oems. So curious how much of your book is spoken for through mid decade.
Do you have all the feedstock that you need to have to execute on the plans you have in place through that point. Thank you.
Yes, I think as we break this down by each aircraft type.
So if you look at the.
If you look at the 767 300.
We.
Quint had mentioned earlier the 27 airplanes that we've got.
As work in process that includes <unk> hundred 20 ones.
As well.
We buy feedstock 767 was our feedstock airplane that was scarce and remains scarce and look when you're looking for feedstock airplanes and you find a good airplane at the right price.
We've been acquiring those because if you let that go you don't know if youre going to get on an airplane.
Mostly to when Youre going to induct it we always try to match.
As close as we can.
The same year of induction too when we acquire the airframe where required through for most converters to have an MSN number a serial number for an aircraft six months prior to induction. So there is a lag there.
Out of those 767, I look out right now 34 slots through.
The end of 2024 and.
We've got customers for all but three of those slots right now and then if I look at the <unk> hundred 21 keep in mind, we own.
<unk>.
We're involved in a joint venture for the FTC, but we also own a main conversion house for that.
Our PEMCO conversions, which is part of Ames in Tampa.
And so we've got.
We've got 11 aircraft.
In Q right now and we own the slots, so and as we spoke earlier.
We'll look to make decision about expanding or retracting further on the <unk> hundred 21, depending on how these regulatory issues get worked out.
The issue is there is the Asa approval and.
So there's a lot of aviation authorities that follow ASUR and Theres a lot that followed the FAA when Mike says that were okay, but the ones. We've got its because theyre going into regulatory environments, where the FAA is the common.
Benchmark that they follow you also were down to one issue and it's an issue that in working with the asset they have given us a pathway to get it approved it's just about doing the work and then what the unknown is how long it takes them to evaluate and approve that.
So we'll wait to see how that goes before we articulate anymore future.
Slots.
And aircraft on the <unk> hundred <unk> out through 2028, we've got 30 slots.
The first 20 olive customer assignments.
We've identified some feedstock.
I think.
We're in the process of acquiring the first one which is going to go into conversion in the fourth quarter.
So again real strong demand for that going out quite a ways.
Terms of the <unk>.
Order book I Hope I answered your question, just maybe a drop more in the 330 since.
It's going to be a huge part of our future.
<unk> next year, if I look from a delivery standpoint based on the 30 slots at the time of that we have with them over the next few years.
We estimate that we're going to have about 65% of all the <unk> hundred series that are converted from a market standpoint.
We will be it will be our conversion slots I talked about just the the breadth and depth of the industry as it looks out over the next several years in terms of the freighter demand. So if you think about.
That is the natural replacement in the future of the 767 and controlling that.
Majority of the conversion slots you.
You can see that our order book is already filling up 20, plus so the future in.
In terms of the expansion into 'twenty 4567.
Are these.
Plus start producing converted freighters.
Is the reason why we're so bullish and optimistic about the future in the coming years.
Okay Andy.
The <unk> approval is what I was referring to but it sounds like that at this point.
There's a good portion of that book through mid decade.
Spoken for has pretty solid plans.
Just for clarity of the ASR.
Actually the only relates to the <unk> hundred 21 has nothing to do with the 330 <unk> already have approval.
Okay.
Okay got it alright, thanks for the time.
Thanks, Chris.
Thank you one moment for our next question.
Yes.
And our final question for today comes from the line of Michael <unk> from <unk>. Your question. Please.
Hey, good morning, guys. Thanks for taking the question.
I just spoke of is trying to figure out here.
These headwinds.
Rising maintenance cost inflation interest rates I mean, these aren't new so the pressure on <unk>.
You gave the guidance.
Late February .
You were talking about omni being down less than 5% for the year in terms of hours I think you called out down 25% in the first quarter.
I guess what changed so rapidly.
To drive that erosion in profit that wasn't already known.
Yes.
I think into the first quarter, Michael the bigger.
Impact on.
On the block hours reduction, although the cost pressures.
And then more than what we had.
Rejected in terms of what we're seeing we've seen some of the.
The cost like return maintenance.
<unk>.
On a per cycle basis.
Over 20% travel.
To position and fly cruise flight attendants et cetera.
Increased significantly.
For the the guidance change big.
Big piece of it is on the revenue side and particularly in omni we knew and we said on the last call that we expected some of the other government Flyers to fly more.
Title than what we had seen previously because the macro environment wasn't presenting as attractive opportunities for them to take their pilots and fly them for example for cargo or commercial customers.
<unk>.
We've actually seen.
More of that even than we had anticipated and that affects omni quite significantly omni is sort of the has been sort of a go to carrier and flowing a lot of the excess.
And in excess of their entitlement. Additionally, taking some of the missions at others passed.
So that is.
A very large driver of this but the cost side and the cost pressures.
Our also.
We are.
Prevalent in the first quarter for omni <unk>.
First one is the type of flying that they were that they got.
Resulted in a drop in their hour to cycle ratio Bye bye bye about an hour.
So.
To put that in other terms there is there versus their plan their cycles were up 200, but theyre block hours were down so.
What that what that means is they've got 200 more stops that involves maintenance and catering and all the things that go along with that.
When you when you have a cycle it drives your maintenance cost and so it was just an unusual situation.
Omni believes that going forward that there arent a recycle ratio will return back to us.
Normal thing they did handle a type of flying that.
That is not going to be prevalent moving forward.
The other thing is is.
As a passenger charter a CMI airline the way omni had staffed and keep in mind. They had a very good year in 2022, and they were never at full staff, while they achieve full staffing at the end of 2022, where they had the right amount of pilots and the right amount of flight attendants for there.
For their fleet and then when the flying dropped in the first quarter.
And Youre at full staff, it's where you see that debt.
Erosion now.
Part of their go forward plan is to fix that and they're already gotten pretty far along and doing that in terms of right sizing the.
The staff across the operating side too to the type of flying that they are going to be doing a projecting going forward. So that's one of the cost benefits. We think we'll begin to see in the second quarter.
Got it Okay, and then just the capital spending plans.
You've got $89 million in cash on the balance sheet.
Are you planning on exhausting the revolver by year end or how should we think about.
Maybe the cap structure exiting this year.
Well we.
We have about I think on.
On a current revolver, we have access to about $390 million or so.
And.
That.
That in of itself I think would get us this year, which would take care of this use needs, but we also have access.
Two additional.
Should we need it through an accordion feature et cetera, and so.
Our leverage ratio is still.
Expected to remain under three times as we finished the year. So we're not highly levered.
And so that isn't.
Access to liquidity is in a.
Problem for us.
Okay. Okay, and then just quint can you remind us how much of the debt is floating presumably the revolver and I'm, assuming drawing down.
Drawing on that line.
Yes, it's about 40% of it Michael about 60% of the space.
Okay.
Perfect Alright, thanks, guys.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to rich Corrado for any further remarks.
Thanks, Jonathan.
For more than a decade freighter leasing has been the foundation of our strategy all of our other businesses serve to extend our core leasing relationships with services that add value and supplement our overall returns that strategy has.
<unk> been successful and will remain our strategy for the future.
Paid off over time and significant returns of this Boeing 767 freighters.
That remain the core of our fleet.
Because our airlines operate on an <unk> or CMI basis their returns.
Not depend on ticket sales are stable fuel prices, but they are vulnerable to inflation in the short term and a customer decisions about how.
And when and how far they fly sometimes as is happening in our passenger airline business. Both factors converge in a way that affects our results.
Our leasing returns of both stable and growing the 20 aircraft that were scheduled to deliver in 2023 will contribute over $70 million increase revenue next year with a high adjusted EBITDA conversion.
Our customers indicate that volumes will improve in the second half and we look forward to finishing the year strong while continuing to keep our freighter investments consistent with the shareholders with the returns our shareholders have come to expect from your investment in ATSG. Thank.
Thank you for your participation in today's call and stay safe.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Yes.
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Okay.
Good.
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