Q3 2023 Air Transport Services Group Inc Earnings Call
Okay.
Good day, and thank you for standing by.
Welcome to the Q3 2023 Air Transport Services Group incorporated earnings Conference call.
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I would now like to turn the conference over to your first speaker today, Joe Payne Chief Legal officer.
You can now go ahead.
Good morning, and welcome to our third quarter 2023 earnings Conference call.
We issued our earnings release yesterday after the market closed its on our website H T. 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 described here.
These forward looking statements are based on information plans and estimates as of the date of this call.
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 car.
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, but within and outside the U S, which may be more severe or persist for longer than we currently expect.
The impact of the current competitive labor market.
Changes in general economic <unk> industry specific conditions, including inflation.
The impact of geographical events 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.
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 Joe <unk>, our CEO for his opening comments.
Thank you Joe good morning, everyone.
We appreciate you all joining us.
Before we discuss our third quarter results I would like to address the leadership transition we announced yesterday.
This change is the result of careful and thoughtful deliberation by the board of directors.
On behalf of the board I want to express our sincere gratitude to rich for his contributions to the company.
We wish him all the best.
I am honored and energized to be stepping back into the CEO role.
Having served as ATSG CEO from August 2003 to May 2020, and continue to use the board met board member after that I believe I bring a unique perspective and skill set to the position.
That aside we are operating in an incredibly dynamic and challenging market environment.
There are certain issues that are within our control and others are not but we recognize that our recent financial results need to improve.
There is more work to be done and I am committed to working collaboratively with the entire team to position our business for the future.
Despite the challenging macroeconomic headwinds.
She is an incredibly resilient organization.
With our differentiated business model diverse customer base and you meet unique competitive position I believe we are poised to capitalize on the long term opportunities ahead.
I look forward to continuing to build on our strong foundation to deliver value for our shareholders.
With that I will now turn the call over to Quint Turner to discuss our financial results for the quarter and I'll return to close our prepared remarks.
Thanks, Joe and welcome to everyone joining us this morning.
July started out in line with our expectations. Our results were impacted by macro and operational challenges later in the third quarter.
The next slide.
Slide four summarizes our financial results for the third quarter.
Our revenues grew $6 million or 1% versus a year ago to $523 million.
This was driven by higher revenue in the ACO My services and partially offset by a decrease in revenue in the leasing segment.
Our GAAP pre tax earnings were down 41 million and diluted earnings per share were 24 cents versus <unk> 57 in the third quarter of 2022.
On an adjusted basis pre tax earnings fell $36 million to $31 million and EPS was down 28 cents.
To 32.
And our aircraft leasing segment Cam pretax earnings were down $14 million compared to a year ago at $23 million.
11, 767, 200 freighters have been returned as scheduled since September 2022, including two in the third quarter.
Powered by cycle engine revenue was also reduced due to fewer 767, two hundreds and service as well as fewer cycles flown by those 200 still in service.
Additionally, the lack of aircraft sales during the quarter versus two in the prior year period negatively impacted our year over year comparison.
Taken together the effect of these items all related to our 767 200 fleet reduced pre tax earnings from the prior year quarter by $13 million.
Interest expense was $4 7 million higher than the prior year quarter.
Those items offset $7 3 million in additional lease revenue from 10 more freighters added to service.
And our <unk> services segment pre tax earnings were $12 million down $13 million compared to the third quarter of 2022.
This was driven by a mix with more military and less commercial flying.
Fewer hours over a long haul international routes for cargo customers.
FX and inflation and payroll costs and service challenges in our passenger operations.
Earnings from cargo operations together were down $6 million in passenger operations pre tax was down $7 million.
Total airline block hours were down 1% versus the prior year quarter as increased passenger hours were unable to fully offset a drop in cargo hours.
Cargo hours decreased 4% and passenger block hours, including Combi flying for the military were up 14% or $75 seven Combi operations resumed services over a transpacific route last fall.
Turning to the next slide our third quarter, adjusted EBITDA was $137 million down 16% compared to the prior year period.
On a trailing 12 month basis, adjusted EBITDA was down $39 million to $594 million.
As you can see even with the year over year decrease Kam still makes up the bulk of our EBITDA and we still consider this to be our core business.
We project 16 freighter lease deployments in 2023, including 12 767, three hundreds in our first four <unk> hundred 21, two hundreds.
Since September 2022 are in service fleet increased by six aircrafts.
The next slide details our capital spending.
Total capex for the quarter was $168 million.
Comprising $120 million in growth Capex and $48 million in sustaining capex.
As you May recall, we lowered our capital expenditures outlook for the year last quarter. We continue to expect total capital spend of $785 million for 2023 $240 million of that will be sustaining capex and 500 <unk>.
$45 million will be for growth.
The next slide covers our updates to adjusted free cash flow as measured by our operating cash flow net of our sustaining capex.
Operating cash flows decreased $30 million to a $118 million for the quarter.
And we're $600 million for the trailing 12 months.
Adjusted free cash flow was $400 million over the last 12 months that equates to approximately $6 per share based on our outstanding shares as of September 30th.
On the next slide you can see that available credit under our revolver facilities in the U S and abroad was $428 million at the end of the third quarter.
This table reflects the recent convertible note refinancing transaction, we completed as well as the subsequent share repurchases we made.
Combined we bought back nine 4 million shares over the past year with $5 4 million of those purchased in the third quarter alone.
Our balance sheet remains strong with net leverage under three times, putting us in a strong position to complete this year's investment plans.
Now I'm going to turn the call over to Mike Berger, Our President who will summarize the issues that have developed since September and how they are affected our outlook for the rest of the year Mike.
Thanks Quint.
Most of you are aware that our Investor day event in September we reaffirmed our 2023, adjusted EBITDA guidance of $610 million to $620 million.
At the 615 midpoint of that range that implies $320 million in the second half on top of the $295 million, we delivered in the first half.
We review the latest results from each of our businesses before the event and while we told you then about the risk around can second half lease deployments in second half outlook for our airlines, we thought our plan was still attainable.
But since then a great deal has changed in the macro environment for air cargo capacity as most of you are aware in our hearing on earnings calls and reading the trade press and the performance of our passenger airlines Omni air too.
To illustrate how those changes have affected our outlook I'm going to focus on adjusted EBITDA and show you why we are reducing our guidance by about $45 million to a range of $560 million to $580 million.
This slide shows that our prior guidance for the second half on the left the midpoint of our new guidance of $270 million on the right and some key factors behind the changes.
The vast majority of that $45 million reduction about $43 million stems from two pieces of our business.
<unk> leasing at Cam and Omnis passenger flying.
It is important to note that our cargo airlines AVX air and ATI are on track to meet their adjusted EBITDA targets for the year.
Quinn told you about the service delays and related higher cost that effect on these results for the third quarter.
Some of those higher costs are continuing.
But the main reason for on these new fourth quarter outlook is the conflict in the Middle East, which began on October 7th.
Events in that part of the world have affected on these normal fourth quarter requirements for its government customers, which typically peak in October each year.
Also on these outlook for higher margin commercial flying in the fourth quarter is lower than before.
On these third quarter results include a good July and in August that was close to plan.
Obviously, the disruptions in the Middle East were not part of our plan when we spoke to many of you in late September.
We are closely monitoring omnis progress and the global factors that drive its demand of.
Of the $45 million guidance reduction overall for the second half more than a third of it is attributable to omni.
Moving to Cam, our new second half guidance reflects issues in three key areas.
Later it related engine leasing through the end of the year plan changes and 767 200 fleet.
Including sales of those aircraft types and our current assessment of the new information, we're receiving from some of our current 767 300 lease customers outside the U S.
Cam had a strong July for freighter lease deployments, although some of our delayed from earlier in service projections. We now expect to deliver 16 newly converted freighters by the end of the year, which has three fewer than we mentioned before.
The leases of engines for 767, three hundreds which had been a significant contributor in the first half have decreased.
Quint mentioned in his remarks that the Cam had intended to sell 767, two hundreds in the second half at prices that will yield significant returns on those fully depreciated assets, we expect to sell a couple this quarter and others can 2024.
Additionally, in mid October we were contacted by certain airline customers have cam expressing that they were experiencing lower customer demand, which is negatively impacting their financial results and outlook.
Our guidance reflects appropriate adjustments to address the potential effect of that new information.
I think I speak for the entire management team is saying that we are probably even more unhappy to have to give you. This dues as you are to receive it.
Are cargo industry is undergoing rapid changes. This fall as you are hearing everywhere else. Unfortunately, we are not immune to that we still believe that our strategic direction to serve the airlines, who will remain in the express package fulfillment business will eventually yield great results now.
Now I'll turn the call back to Joe for some closing remarks.
Thanks, Mike.
To Echo Mike <unk> words, I want to add that the board believes just as strongly in our long term goals of the company to grow and achieve strong returns from leasing and operating midsize freighters and passenger aircraft.
The growth capital we have spent over the last several years plus what we will spend the next several years made sense to us even before the pandemic when freighters were the hottest commodity in the aircraft business.
I regard, our foundational assets midsize freighters and foundational customers, we lease to and fly for DHL Amazon and the military is a strong platform that will sustain the company through challenges and support continued long term cash flow.
I hope to bring back what I was probably best known for when I was CEO leveraging my decades of experience in this industry to assess all of our options to deploy our capital for greater shareholder return and best in class customer service.
One of rich grab as many talents, which is a key part of why we chose him to run the company what his insights about the markets, we serve and we're on a range of capabilities fit best.
That insight has served us well for several years, but those market conditions have changed.
Our new reality is that growth will be more difficult to achieve than before.
We faced similar periods before and I'm confident we can maintain the resilience that has been a hallmark of the company and keep them moving ahead in any climate.
The Board's view line is that we need to take a more conservative view of when and where we can best invest for the greatest shareholder return and sharply reduced our capital spending program in 2024 and beyond.
We now plan to spend $505 million in 2024.
It's down $100 million in capital spending compared to the 2024 plan provided at the end of September and down $280 million from this year's projected spend.
That new 2024 outlook is driven by fewer conversions and only essential feedstock purchases.
That includes purchases of Airbus <unk> hundred 30 aircraft will begin leasing next year.
2024 plan projected lease deployments of 14 converted freighters, including six 767 three hundreds.
<unk> <unk> hundred 20 ones and three <unk> hundred <unk> we.
We're introducing no additional 767 three hundreds for conversion beyond the seven currently in process.
As I said in the past, we always have the flexibility to not convert some of the aircraft we own until market conditions improve.
It's too early to estimate our 2024 adjusted EBITDA, but what these capital spending reductions and the items that Mike mentioned earlier.
We plan to provide new adjusted EBITDA guidance for 2024 during our fourth quarter earnings call in February.
I can make one positive predictions about 2024, however, cutting our growth capex spending meets our free cash generation will be higher than it would've been under the prior plan through 2024 and 2025.
That concludes our prepared remarks, quint and I, along with Mike Berger, our President and Paul <unk>, Our Chief commercial officer are ready to answer questions.
May we have the first question.
Thank you and at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again.
Please standby, while we compile the Q&A roster.
And our first question comes from Frank Galanti with Stifel.
Yeah, Hi, thanks for taking my questions.
Thanks.
A pretty material change from.
Just a couple of weeks ago six weeks ago.
And obviously.
In the prepared remarks, you hit on a lot of it but can you sort of talk about how you're thinking about demand for the 787 300.
And 200 actually so you had mentioned seven 780 sevens or conversion I think I got that number right.
<unk>.
That seems like a change.
And even earlier this year on an expectation is that demand wane on the international side.
Can you sort of talk through those dynamics. Please.
Yes, Hey, Frank as Paul Chase here, Thanks for the question.
We'll talk about this year first and we were filling the orders this year using our existing pipeline, but in the future in 2024, and our pipeline has slowed so we're keeping an eye on that and that's one of the reasons that the business and decided to pull back on the capex. So with most of the deliveries that we expect it to go internationally sure. We're seeing some weakness there, but we're keeping an eye on it.
Okay, and then what about the two hundreds.
What sort of changed there from a demand perspective.
Expectations.
Sure I mean, the 200 dragging into fleet that we're working on songs.
Sunsetting over time, and we're really just being opportunistic about upcoming maintenance events and what we have to invest in aircraft from a capital perspective. So it's really a case by case basis on those aircrafts are working them through.
As you heard and you heard in the remarks, we do we still have to sell a car.
Couple of those two hundreds as well this year as well into 2020 as well into 2020 for Frank.
Okay. That's helpful.
And then on.
On the capital allocation front.
Joe you'd mentioned one.
You can take Capex down can you sort of talk about what.
As locked in like what kind of wiggle room do you have in 'twenty three 'twenty four to bring.
Capex down further.
And what do you think.
Sort of peak leverage ratio is.
Our comfortable getting to.
And the.
Final question on to that what do you think about share buybacks at these prices.
Well frankly, like I said I haven't had a <unk> opportunity to get my arms around all the details in terms of what's committed to what isn't committed to as I mentioned in my remarks, we always have the flexibility once we own the feedstock not to run it through the conversion process, which is where the lion's share of the dollars are spent on acquiring the actual feedstock itself. So its paul.
<unk> mentioned, we're seeing a little bit of a softening on the 767 side. So feedstock that we've committed to we're already own.
We'll just pocket and take the things like the engines, we have the opportunity to lease the engines out to other operators to generate some income.
We even have the flexibility if the demand is there to throw an aircraft or two to omni.
As for their use and of course, if somebody needs a passenger aircraft. We can always leased that to a third party as well. So we've got a lot of flexibility there, but at first blush and like I said. This is pay off right now im drinking from a fire hose so to speak.
We're able to identify a significant amount as I mentioned the over $100 million worth of Capex just from what was presented back in September to the market as far as capital allocation going forward.
Right now we're below three times from a leverage perspective, three times has always been kind of a ceiling for us we like to stay and no more than that although we may creep up just a tad here and there.
But ultimately.
Mentioned, we expect to generate free cash flow.
2024 and into 2025 as we've pulled back on the Capex spend and at that point, we'll make a determination whether the best returned to shareholders is to pay down the debt. Obviously interest rates are at the very high watermark. These days and what they work time I left three three plus years ago.
And whether that makes more sense to return the capital to shareholders.
Share buybacks.
That's very thorough I really appreciate it thanks very much.
Thanks, Rick Thank you.
One moment for our next question.
And our next question comes from Joe Atkins with Stephens incorporated.
Hey, guys. This is Greg on for Jack.
Thank you for taking my questions just wanted to kind of ask around <unk>.
I know, it's kind of early on 'twenty 'twenty four but if you could just maybe kind of frame up how firms. Some of those commitments are that you have for next year.
Maybe can you just talk to kind of the range of outcomes that you're.
Looking out as you think out towards 2034.
So.
Thanks for the question So 2024 as we said.
We're fully expecting to deliver at this point 14 freighters newly.
<unk> converted freighters the breakdown of those are 667, 5% to $3 21 to three to $3 <unk>.
We've got the feedstock secured for those and as you've heard us say at this point.
767 side.
All of those aircraft are in or awaiting conversion, so where we are in good shape on 2024 in regards to the forecasting longer term as Joe mentioned, we'll see where the market goes we'll see where that demand goes we'll see right.
The cost does but.
Long term forecasts.
From the freighter standpoint, specifically from Boeing and Airbus as we look out to the future is still robust as well as from a replacement standpoint, but.
As you can see and what we've talked about.
Our flexibility and our model allows us to throttle back some.
And produce that free cash flow that we talked about for 2024 and 2025.
Okay, great. So just kind of follow up on that to kind of pressure youre seeing on the leasing demand side in the third and fourth quarter.
It kind of sounds like you think maybe it's a little more.
Confined to the challenges we're seeing in the market today and as long as things don't deteriorate too too much into next year. You think you can kind of hold the line on where youre at and get.
Get all these points out the door.
Yes. This is <unk>.
Yes, I do believe that's the case.
Got it thank you.
Yeah.
Okay.
One moment for our next question.
And our next question comes from Helane Becker with CTD Cowen.
Thanks, very much operator, hi, everybody. Thanks for the time.
Just a couple of questions in here can you address the delays.
Hi.
One of your biggest conversion firms and.
Yet many of their employees have been called to service. So how can you be confident that youre going to get aircraft out on time.
And from there.
That's it really.
Good question, and let me start by saying.
The folks have been.
Credible to work with Vince.
This event has happened in early October.
We have really consistent and daily and I say multiple times a day communication.
With our partners at II in Tel Aviv.
Theyre doing a heck of a job in terms of.
Im going to work.
And getting the job done and we see and we see that.
Consistent basis, so where we're really confident helane that the numbers that we have presented today in terms of the aircraft for 2023 and 2024.
We're going to see and we see that working and delivering aircraft has recently.
His last week and this week. So it's a fair question, but I can assure you.
<unk> II has stepped up and has a very very difficult time.
And been extremely resilient to produce and go about their business.
Okay, that's great that's great to hear.
The other question I had was.
I think <unk> returned three aircraft to you recently is that included in the numbers that you gave us for returned aircraft and B since some of your issues seem to be related to some of your newer international customers do you have.
And I don't mean to be nasty about this but do you really have the expertise to grow beyond your core business or do you need to bring in more talent to be able to assess risk.
So that you don't get a lot of aircraft back when the market turns.
Yes, So let me address the mass situation Namath piece first.
To be clear they haven't to date returned any aircraft.
And in fact.
They were actually scheduled to taken any additional aircraft as.
As recently as a short time ago, So we fully expect.
Them to honor their commitments to the leases.
And thats, our keeping our communication to them.
In regards to the international expansion.
We've talked about that international growth for.
For some time now.
Then when we look out to the future growth of the industry and see where that growth is going to come from clearly all the data.
Suggests very strongly.
Is going to come very well from Southeast Asia East Asia Central Asia.
And across other parts of the World and that's where that's where we've been focused on in regards to the talent piece of it.
Really an excellent question.
We've had a lot of discussions internally about that.
We're building up that component of our Cam business to ensure.
That that we address that.
You may have heard and remember that we opened up the Irish entity of last year.
We really have a big focus now of hiring some folks within the next six months or so that will be based outside the U S to address some of those concerns that you just mentioned, but make no mistake about it a big part of our future is international and.
And we are a global organization, we're looking forward to that growth going forward.
Okay. That's very helpful and then for my last question.
Tier point about Investor day, which was September 27th being yes.
Sure of what you were seeing in the business I mean.
I don't mean to be stupid, but how can that be how can you not know that you were missing the quarter.
That close to the ended the quarter I mean, I know that youre going to close the books. After September 30th Thanks couldn't have just fallen apart and three days to your point you were seeing the decline in the business.
You've talked about it during investor day about.
Being aware of what was going on we saw we heard had heard from Fedex late August we knew that UBS had issues, but.
How did you not like figure out that things were.
Not that robust.
And then when you did how could you not have.
St.
Prior to last night.
Well Helane this is Glenn.
In terms of the quarter. We started out ahead of plan in July.
In August.
It was a bit worse, but we were.
Not materially away from plan at the end of August.
And truly in September.
Had a.
As we mentioned in our press release, we had some service challenges with omni they had a very atypical quarter in terms of service delays.
And that can and did lead to a.
A lot of cost overrun in the travel area as well as the <unk>.
My crew and overtime.
And.
That was in terms of the third quarter and I'm not talking about the second half guidance, but just the third quarter that was a.
A significant downturn in their September resolved and that what we did not have that visibility.
Certainly at Investor Day.
The other source of the third quarter Miss was primarily can and.
And Cam.
As we've said in prior quarters, one of the things. They are working through is the disposition of some 767, two hundreds that have come back.
And that's in or selling some of those aircrafts.
And those sales were being worked and anticipate it to be done by the end of the quarter in fact right up until the very last day in some cases of course, you are relying on the buyer and the other party to carry through with the transaction.
Okay.
And they are still working towards those transactions, but the timing of getting those executed did not occur during the quarter and that was a yes.
No that was over $5 million Cam item just in the third quarter.
So we had we.
We have truly a lot of the deterioration in the third quarter occurred late in the quarter and we did not have that visibility at the time.
And.
We had of course mentioned in the earnings release.
Israel conflict.
Assessment of some customer news that we received in October all of that occurred subsequent to the quarter, which impacted our second half guidance that was not known to us at the end of September.
So I don't know if that I know it is.
It's quite a change and I understand the question, but truly there were a lot of developments subsequent to investor day, which impacts our guidance.
This is Joe obviously, obviously, that's a question that myself and the rest of the board members have asked a number of times in terms of how can we go out at that point in time.
And while Theres reasons for all of it we don't find acceptable and as Mike noted in his comments that it was more difficult for us to have to bake that kind of news to the market as.
As opposed to you hearing it so rest assured that that is the top of the list of getting back in terms of where the numbers, we put out a credible to the market and not something that you have to pay to question going forward.
Well, yeah, I mean, I think the other thing Joe you might want to think about is how everybody reports up to you.
So that you don't get the surprises in the board doesn't get surprised at the end of quarter like this because your stock is down 25%. So you've got a lot of rebuilding to do just in from a credibility perspective in the market going forward as it's now going to be easy to get that 25% back.
Got it.
One of those things like I said Thats top of my list of things to focus on Helane, That's point number one.
Okay, well thank you.
I don't know if I should say will come back to that.
No.
Careful what you ask right.
Jos Thanks for the time thanks.
Thanks Helane.
One moment for our next question.
Okay.
Yes.
And our next question comes from Christopher <unk>.
A lateral uplifts with Susquehanna financial group.
Thank you operator, good morning, everyone.
So Joe your comments around growth more difficult to achieve.
Mike's comments around what Sal.
Got it.
Pointing the challenges within air cargo.
Yes.
I'm still having difficulty parsing out what's temporary what's going to persist here.
How much of I.
I understand perhaps what happened with the second half, but essentially now we have a double guide down with 2024 guidance at risk. So how much of this is.
Kind of cyclical slowing here within air cargo you talk about some international wins, perhaps slowing what's operational or having issues here with pilot attrition is it something else is it weather geopolitical supply chain you spoke to.
I just want to understand of course, and then within Kim rising interest rates depreciation, we all understand that but just if you could help kind of put it into into two buckets here because there's a lot obvious here to digest, but.
The magnitude of the Smith and what is being viewed as.
To guide Downs is significant so if you could help just sort of frame the moving parts.
Before I turn to before I turn it over to the other members of the team obviously I think it kind of falls under the category of all the above all the above are the things you listed out there.
It's no secret that the macroeconomic conditions around the globe are more challenging these days and as we have said in the past our customers' customers are at the Amazon and DHL is of the world. So as you see decreasing bulk cargo volumes around the globe, that's going to have a trickle down effect to some of our lease customers.
But I think Quint noted in his remarks or Mike.
If you look at our core cargo business with the Amazons of DHL is of the world that portion of it is pretty stable.
So with that as a backdrop you can see that if <unk> got to smaller operators around the globe to support them and conditions are not really good from a total macro perspective, then that's going to have that trickled down effect, so with that I'll turn it over to Mike and Paul to further comment.
Yes, let me try to unpack the market piece, a little bit more Chris for you. So.
No.
<unk> market demand has certainly softened in the slow there is no question about it.
We have the.
The flexibility within the in our in our order book, if I could put it that way.
As the market faced challenges in 2023, we have the ability to bring 2024.
Leases in customer leases forward to 2023 and that was due to the strength of our order book that you've heard us talk about now for some time.
Given that as we pull stuff forward. Obviously, we then took the opportunity really.
You've heard this hearing her as I said earlier to really demonstrate the flexibility in our model and throttled back style. Some of our growth in 2024, specifically around the 767.
It will allow us to reduce our capex dramatically in 2024.
Which ultimately will lead to the free cash flow that was referred to earlier.
As it relates to the <unk> hundred 21 of the <unk> hundred 30.
We just inducted our first <unk> hundred 30 into conversion a couple of weeks back.
We still fully anticipate to deliver the 300 <unk> hundred <unk> in 2024 that we talked about.
And from this year, we still will deliver for <unk> hundred 20 ones and five next year. So the overall demand specifically.
We just had the ability and flexibility in a volatile to shift things around throttle down on the Capex in terms of some of the conversion cost that.
That will help us on a go forward basis, yes, Chris isolate as false ACI would like to reiterate just a couple of things that <unk> said earlier.
Unfortunately, with some of this pullback in demand it allows us the opportunity to look at the assets. We have differently. So we are looking at aircraft that are sitting there arent being converted to pull those engines often deploy those assets, so, allowing us to do that but I would also like saves and conversations with customers. There are plenty of customers, who have noted the macroeconomic environment, who intend to do business with us.
In future solution on their side look better so there's still there's pent up demand as well so I feel pretty confident.
On the labor piece you spoke in prior quarters about elevated levels pilot attrition. If you talk to that and also plans around our hiring for next year.
Yes, I mean pilot attrition is a problem throughout the industry, but we're not immune from it by any stretch the imagination were still managing to bring people in the front door. The key is to keep people from going out the back door, but when you've got other airlines offering significant hiring bonuses et cetera.
That becomes a challenge, but the airplanes are still moving everyday we do have some service failures occasionally because of finally got waylaid someplace or took ale, but we're still managing to move the aircraft as according to their schedule. So that hasnt been an impediment to the business overall, obviously, we've got an ongoing negotiation with ATI.
As I said earlier I'm still drinking from a fire hose. So I haven't had a chance to dig into it in great depth.
The negotiations are under the auspices of the National Mediation Board. So theres no ability for pilots to walk out until you go through the whole mediation process.
<unk> been down this road many times in 40 plus years. So we've got a lot of experience in terms of.
You worked through these issues at the end of the day, you've got to have a contract that works for both sides.
So if you've got.
The union side, asking for Fedex or UBS wages are industry, leading.
And thats not in the cards from what we get from our customers and Thats just not something we can agree to so the key obviously in the end is finding a happy middle ground between their demands and our needs.
To keep things on the rails.
Okay follow up here I know.
Youre not ready to give guidance for next year here, but if we look at the exit rate.
For this year, we annualize that it gets us to around 540, if we compare that to I think the low end of the guide you gave a few weeks ago, that's kind of a high teens growth.
Quint, maybe if you could talk a little bit about the puts and takes as we think about.
We hope to put our models today, whether this is a wholesale revision are some fine tuning of 14 aircraft. If I understood correctly, we have elevated depreciation interest rates lease rates positively are moving higher but it sounds like there was some slowing within cargo just if you could help frame the puts and takes as we think about.
EBIT for next next year. Thank you.
Thanks, Chris Yes.
First off in terms of the guidance revision right because you asked about that earlier you know.
Much of that carries over how you think about it.
Around.
More than 40% of that.
Call It $45 million guide down since the end of September.
It is related to omni and it's not due to any loss of customers or business.
It's due it's due to a couple a couple of factors first off third quarter, and we mentioned they had an unusual service quarter, which drove a lot of cost in.
In terms of delays.
Because that drives that additional travel and crew crew costs that I mentioned earlier that was a big piece of their miss for the quarter. The fourth there fourth quarter portion of the guide down is related more to and we mentioned in the release.
Really situation and we believe will impact some passenger requirements.
Omni has a.
Typically a very busy October.
And with the with the onset of the conflict occurring early in October and looking through the remainder of the quarter. We just feel like that may.
It had the effect of deferring some of their business until later periods and it's difficult to predict whether that will be by the end of the fourth quarter or spill into the first quarter, but it is not a.
Like they lost some piece of business that will never occur or some customer. So I wouldn't say that the omni piece of that $45 million is a systemic thing that you should think about necessarily for next year.
Then the other pieces of that guide down of course, primarily our Cam.
And the largest piece of cans and it's similar to the I would put it somewhere a little north of 40% of that.
And the pieces of that are the 767 200 sales, which we had targeted for the second half I mentioned, we mentioned they didn't sell any in the third quarter and they have some slated as Mike indicated for the fourth quarter, but as you might expect we've tried to take a conservative view on that because the timing is proven.
To be difficult to pinpoint in terms of the other party tied up for sale.
And then we've seen some reduced flight of the 767, two hundreds that we provide engine power to customers for.
And so the combined effect of that is.
And it is probably more than half of the.
Mccann's piece of the guide down is related to the 770 200 and then they have had some later start ups of new leases 767, three hundreds than we had anticipated.
And some of that is related to that softness in the market. We believe we've got the master <unk> and other customers that are feeling the pinch.
And aren't perhaps as in a quite the hurry to take the airplanes as it would be in a more robust macro environment and so that's that's a piece of that as well as well as our view again trying to be conservative on the realization of a customer revenues from some of those folks.
Through the fourth quarter, and we've tried to take a reasonable.
Estimate of that.
And in terms of our revised guidance.
Those were the biggest pieces of the $45 million guide that as.
Now as far as the 24.
Outlook, Joseph Joe and Mike spoke about the Capex reduction which of course.
It's much easier for us to revise at this point, because we know what.
As Mike said, we're not going to refill the conversion lines. Once the airplanes are produced NII, so that will reduce our 2000 and for Capex.
And and we know what feedstock from is we have so we've looked at that and said we're going to bring our capex down.
Now that doesn't mean, that's where we necessarily stop we're continuing to scrub that and we're going to look for more opportunities to lower.
The expenditures there.
As we move forward I'm sure Joe in particular will be we'll be looking at that very close to get my read.
In terms of the adjusted EBITDA to revise the guidance. We gave at the end of September for 24 because of.
The situation in Israel.
The customer and macro market softness that we mentioned we want to.
Let that play out further and update that guidance in February.
But that said we.
We are confident that the adjusted EBITDA.
That we put forward for 24 will be higher than our 23.
We've guided to.
And we look forward to in February once we have had some of these events.
<unk> to evolve you know updating the market further.
Have enough we.
<unk> visibility into 24, certainly to say is it will improve upon 20 three's resolved.
Yes.
Just wanted to highlight one thing that Quinn mentioned, specifically around omni is that.
Troop rotations will take place.
We just from a timing standpoint can't can't predict that piece of it.
Okay Alright.
Alright.
Okay. So if I hear you the sort of base case risk adjusted view, if you will.
EBITDA for next year is higher.
Then, let's say the midpoint of yes for today's revised guidance.
Correct.
Okay and last one on the powered by cycle contracts, how many of those sort of pandemic era contracts are rolling off this year.
Well the what I was speaking of was related to the 787 200.
G powered engines and we maintain a pool you may remember when our previous arrangement for power bi cycle ended with the supplier, we instead and went to a pooling concept, where we would make that power available to lessees for 77, two hundreds so we have.
We provide that availability and customers pay us by the cycle on that.
And we maintain that pool of engines, which you can expect is that 767 200 fleet comes down our capex spend to do that will likewise come down.
But what we have seen is as we are paid by the cycle. We've noted this year that sequentially each quarter. We've seen those airplanes that are still out there with customers flying fewer cycles and I think that is an indicator that there.
Perhaps some softening market because there arent there and there's many.
<unk> taken place not as much perhaps for those customers volumes or a reason to fly the airplane and so that has impacted.
As I mentioned.
The EBITDA from the 200 fleet that can give us.
But.
I'm not sure Chris if you were asking about our own power bi cycle arrangements that we have with suppliers to maintain other engine types or you were just focusing on that.
Comments around 787 200 PBC.
Not the two hundreds overall I'm guessing that you did.
There were some contracts that were put together early mid phase of the pandemic and I'm just curious how many of those are rolling off at year end.
Well I mean, the the other engine engine types. The other aircraft types and the engines that power them, we don't maintain a pool of engines under the lease to customers is typically responsible for the maintenance of those engines throughout the life of the lease now we ourselves.
Powered by cycle arrangement with an outside vendor to take care of our engines.
No.
For the 787 300 GE power fleet.
And I believe we've entered into one with II for the PW 4000 drive the product Pratt engines, but that's different than us offering a product to a customer that's us buying from a supplier so I'm not sure which side of the PVC or youre getting out there.
Thank you for the color.
Everyone.
One moment for our next question.
Yes.
Okay.
Our next question comes from Howard Rosencrans with value Advisory.
Sure.
Hi, guys. Thank you for taking the call.
Second.
Hello, guys.
Second half looks like the midpoint of your guidance is $270 million.
Just trying to.
Based on it so.
The omni part is largely the middle East.
Is that the is that the big change there.
Thus far in the fourth quarter Howard from that would be.
On the second half obviously that happened in October so thats in the fourth quarter, yes, that's the biggest impact on on it.
Okay, and the rest of the stuff is lower demand or the absence of the engine sales just to just to summarize right.
Yes, I mean, we went through some of the.
Puts there a minute ago present right okay.
Having a little trouble processing in my 40 years in the business I never saw this happen.
The.
So the 270 <unk> the midpoint of the guide should be the absolute absolute you already communicated your you expect that.
That the guide you'll introduce were.
Or that.
Stents I believe 2024 will be higher than 2023, so, but but just to take the bear just to take $270 million as a second half number you have some anomalies you have some you have all of these factors so sort of a worst case scenario is.
That.
Is that that suggests that you're.
$545 50 is the absolute bare bones, just so we can understand what what sort of a bare bones number there is out there.
Well I think I think when we said it would be better we were talking about for our full year 'twenty three so the full year 'twenty three guide.
Is higher than 500, Florida right. So we're talking about our guidance for the full year.
23, Okay. I thought you were talking about 24, when you made some when you made some comments about 24, okay. Maybe maybe ibs. We are we're saying 20 fours will improve upon 20 three's full year adjusted EBITDA.
Yes, okay.
That was the point I was making was just trying to understand what the.
Okay.
Obviously, there seems to be a lack of filter of information that's going on.
At the company so.
Alright, well.
Thank you very much for your time and certainly good luck to all of US. Thank you. Thanks Howard.
One moment for our next question.
And our next question comes from Michael Cerasoli with tourists to securities.
Hey, good morning, guys. Thanks for taking my questions.
I guess could you just maybe elaborate a little bit on how Israel is directly impacting omni.
At Investor Day, I know the focus was on a potential government shutdown. It sounded like all flight activity was booked and locked in for the end of the year.
Obviously, the U S doesn't have any direct exposure, but I would think regardless to true rotation movement would be good for omni so what's exactly happening with Israel.
Well.
I'll take a stab at it and let others join in Michael is quite a bit.
Again, and we refer to them as passenger requirements, obviously, we're not going to go into a law.
A lot of detail on what omni, maybe maybe hearing directly from their customer, but just in general I think the Israeli conflict caused a.
And atypical.
Interruption to what would normally be their busiest periods that being in October and as I as we remarked earlier.
We do not believe that over a longer stretch of time, it will be a negative impact to omni because.
Those passenger operations will occur it's just difficult to say.
Whether they will fall inside the fourth quarter or will they will extend beyond that and you are correct that in many cases.
World events have resulted in additional revenue opportunities for omni.
Norm.
Only have to look back at.
The Afghanistan withdraw.
NATO situation near the Ukraine.
And some examples so.
<unk> remains.
I believe kind of.
Japan is not the linchpin carrier for commercial passenger moves for the Dod and we fully expect that to continue.
Omni.
Is that.
As.
Demonstrated that.
While there is more volatility they can also.
Do very well.
In those situations, so we're not saying that's changed.
Okay.
The possibilities are lower now we're not say okay, yes.
<unk> got to understand the military is going to do their contingency planning in a cautionary like I said anything that they do in that regard. This is not something thats defaults to the public.
But eventually as Quint noted troops have to move normally October is a busy month, because rotating troops and our troops in it out before the holiday season, but when you've got a crisis boiling like we have in the middle East is one of those things where everything kind of has to take put out be put on hold.
Until you can better assess the situation and what potential ramifications are.
Got it got it and then just on the.
I get it on cutting capex, and it's going to improve cash flow, but this is now multiple cuts to capex and I guess whats sort of a direct formula you can give us because as we look out now I mean, the 25% EBITDA guide, it's obviously moved but how much does the lack of growth.
Opex spending impact the EBITDA generation that we were originally going to stay.
Well Michael.
Again, there is of course in addition to the.
Cam segment, which is where.
The EBITDA drivers from Capex spend there is the CMI services and we've spoken a lot about.
Some of the things we're all of them.
Israeli situation and.
And.
That is the reason we're deferring 24 is Capex guide to next year, but.
I think that next year the aircraft that come out as.
As Mike said 14, or 15 aircrafts will still drive.
Significant EBITDA.
There will still be some headwind from 767, two hundreds being removed from service.
At the same time.
And he talked about 14 or 15 aircrafts I think eight of those are Airbus aircraft.
That come out next year and I think so we're still going to have significant.
EBITDA contribution from newly converted aircraft that go on lease.
But we're going to we're going to hold off on the total EBITDA guide until we've had a chance to see how some of these other factors.
Lay out.
But where we are.
We're confident that it will exceed 20 three's actual escape the EBITDA contribution of an asset is basically only a fraction of what the capex spend is for that similar assets. So it takes years to get that that cash back in terms of leasing the aircraft out so near term it will have a minor impact on the EBITDA, but.
But a significant impact on the Capex spend.
And Joe last one for me and I hate to go here, but back to <unk> line of questioning.
We can literally monitor in real time flight operations I, just I mean, what what what are you guys not seeing I mean, I would think you could see your power by the cycle on a daily basis Youre quite operations on a daily basis, the block hours on a daily basis.
I mean, it just seems like there was a failure of internal controls here.
If you are seeing all these trends in real time, and we've been hearing and talking about the macro slowdown per month.
I just it just.
Doesn't really square to me I don't know if you guys. If you just werent monitoring that data or werent looking at it but it just yet.
Just seemingly there.
It seems like there was something that should have been jumping out and flashing bread, especially on September 27th.
In part Youre correct.
In that regard in terms of but it's not an internal control it's more.
Understanding what the ramifications are of a delay for example, one omni had an aircraft that was down for three days you know in airplanes down for three days, but the part that wasn't connected was the fact that you had to put up two or 300 passengers in the middle of nowhere I think it was in Guam was worthy aircrafts waylaid and it got nailed there for three days so it's the.
Downstream ramifications out of everybody knew the airplane mechanical for example, as far as your power by the cycle thing goes the users of the two hundreds turn in their hours at the end of the month, we don't get a daily recap from them that the absolute two hours yesterday in five hours a day before at the end of the month you totaled up what the utilization was so you really wouldn't have visibility.
<unk> into the PBC portion of it.
The utility, but all Youre doing is forecasting what you saw previously.
Okay, Okay got it.
Alright, thanks, guys.
Thanks, Michael.
One moment for our next question.
Okay.
And our next question comes from Chris <unk> with Susquehanna.
Hey, Thanks for getting me on here I'll keep this quick just if you could walk us through.
Cash.
Total liquidity, including revolver.
Debt maturity and also just remind us the pilot open contracts, whether those were embedded in the out year guidance. Thank you.
Yes.
Sure Chris.
In terms of the last question first I guess.
While it open contracts of course, we're not giving guidance, we're not refreshing our 24 guidance, but if youre asking if we had it included at the end of September Yes, we did when we when we when we talked to the market, but today, we're not refreshing out your guidance on the expense side, but.
When we do it will end.
Those stats.
Status of the pilot agreements.
As far as the liquidity.
Action and of course, Theres, a slide in your slide eight which kind of lays it out but we have a revolver.
But.
And so I believe a $1 1 billion capacity revolver that we've got an undrawn unused capacity of over 400 million on.
Our current leverage ratio after including.
The unsecured portion of our debt which is.
Our new convertible $400 million convertible due in 2029.
As well as the remains of our convert we did in 2017, that's $54 million that matures next year.
And an unsecured bond debt that matures in February of 2000 $28 million to $580 million.
Taking that into consideration and looking at the leverage ratio, where currently levered at I believe it was like $2 eight eight times.
Our trailing.
Peter.
And so.
Still conservatively levered.
With with some reduction in EBITDA.
We will be around three times Levered and.
And we might even slightly go above it depending upon how that comes out but with the reductions in capex that we spoke about.
There is not a.
There'll be the ability if we choose to allocate capital to Delever there'll be an ability to do that as we look to the next couple of years I mean, as we said in our remarks.
The cash flow of the business produces from the base of leases. We have you think about 75% for more of our revenue is through <unk>.
Amazon and DHL and the department of Defense.
That stable cash flow.
Continuing to generate a lot of.
Capital that can be allocated to delever should we choose to.
I think you said in your Investor Day, you had more than $1 billion and half of available unencumbered aircraft collateral there's been some movement.
Which would be a positive given your 787 exposure on values is that number give or take around one and a half of unencumbered collateral is still the right way to think about it.
Yes.
Okay all right. Thank.
Thank you.
This concludes the question and answer session I would now like to turn it back to Joe <unk> for closing remarks.
Thank you Sean.
To our stakeholders, we get it receiving the news we reported yesterday after an upbeat outlook in September is hard to accept we.
We need to restore your trust by making all of the commitments. We know we can keep.
Many of you on today's call know me and the fundamental cash generating power of the business at the ATSG team and I built over many years, so investing for growth and shareholder return.
I agreed to return as CEO to guide the company through the next phase of its development, which will require us to focus on maximizing returns on the aircraft assets. We have today, while taking a more measured approach to investing for new ones.
Yes, I've already told our employees that are welcome all their ideas to make us stronger and advised our customers that our commitment to best in class service remains the basis for everything that we do.
Thank you and have a quality day.
This concludes our conference for today you may now disconnect.
Okay.
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Okay.
Good.
Okay.
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Okay.
Thank you.
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