Q4 2023 Air Transport Services Group Inc Earnings Call
Okay.
Operator: Good day, and thank you for standing by. Welcome to the Q4 2023 Air Transport Services Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Good day and thank you for standing by welcome to the Q4 2023 Air Transport Services Group, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during this session.
Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Joe Payne Chief Legal officer.
Joseph C. Hete: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joe Payne. Good morning, and welcome to our fourth quarter and full year 2023 earnings conference. We issued our earnings release yesterday after the market closed. It's on our website at ATSGINC.com.
Yeah.
Good morning, and welcome to our fourth quarter and full year 2023 earnings conference call.
We issued our earnings release yesterday after the market closed its on our website at ATSG I N C Dot com.
Joseph C. Hete: 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 uncertainty. 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.
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.
Forward looking statements are based on information plans and estimates as of the date of this call are.
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.
Joseph C. Hete: These factors include, but are not limited to, unplanned changes in market demand for our assets and services, including the loss of customers or a reduction in the level of services we perform for customers. 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, lenders, and government agencies, the impact of current supply chain constraints, both within and outside the U.S., which may be more severe or persist longer than we currently expect, and the impact of the current competitive labor market. Changes in general economic and or industry-specific conditions, including inflation and regulatory changes. The impact of geopolitical tensions or conflict.
These factors include but are not limited to unplanned changes in the market demand for our assets and services, including the loss of customers or a reduction in the level of services, we performed for our customers.
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 lenders and government agencies.
The impact of current supply chain constraints, both within and outside the U S, which may be more severe or persist longer than we currently expect.
The impact of the current competitive labor market.
Changes in general economic <unk> industry specific conditions, including inflation and regulatory changes.
The impact of geopolitical tensions or conflicts.
Joseph C. Hete: Human Health Crises, and other factors as contained from time to time in our filings with the SEC, including the Form 10-K for 2023 that we will file this week. We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pre-tax earnings, adjusted EBITDA, and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG's financial position and results. However, these non-GAAP measures are not meant to be a substitute for our GAAP financials.
Human health crises and other factors as contained from time to time in our filings with the SEC, including the Form 10-K for 2023 that we will file this 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.
Joseph C. Hete: We advise you to refer to the Reconciliations to Gap measures, which are included in our earnings release and on our website. Now, I'll turn the call over to Joe Hete, CEO, for his opening comments. Thank you, Joe. Good morning, everyone.
And now I'll turn the call over to Joe here.
<unk> for his opening comments.
Thank you Joe good morning, everyone.
Joseph C. Hete: As you may recall from our third-quarter call, we saw some significant changes to our market environment in the second half of the year, resulting in multiple headwinds that continue to impact our financial results in the fourth quarter. These include lower demand in our leasing segment and reduced block hours in our airline operations. The most significant factor was an acceleration in lease returns over our 767-200 freighters, which reduced adjusted EBITDA by approximately $33 million in our CAM leasing segment in 2023. These aircraft were in high demand as Amazon built its own air express network starting in 2015, and even more so during the pandemic, when customers kept the aircraft in service longer than originally planned.
As you may recall from our third quarter call. We saw some significant changes to our market environment in the second half of the year <unk>.
Resulting in multiple headwinds that continue to impact our financial results in the fourth quarter.
These include lower demand in our leasing segment and reduced block hours in our airline operations.
The most significant factor was an acceleration in lease returns of our 767, 200, freighters, which reduced adjusted EBITDA by approximately $33 million and our Cam leasing segment in 2023.
These aircraft were in high demand as Amazon built its own Eric Express network starting in 2015.
And even more so during the pandemic when customers kept the aircraft in service longer than originally planned.
Joseph C. Hete: While we always anticipated the market transitioning to the 767-300s from the 200s, the market softness has accelerated that process. In addition to the lower lease revenue, we also lose power by cycle engine revenue as the 200s are removed from service, and the aircraft remaining in service fly fewer cycles. Despite the macroeconomic and operating challenges weighing on our results in the second half of the year, we leased 13 aircraft, including our first three Airbus A321-200 freighters. By now, I'm sure most of you have seen our earnings release and the guidance we've given for 2024. Quip will review our 2023 financial results in a moment, but many of the challenges he will describe are expected to continue in 2024.
While we always envision the market transitioning to the 767 three hundreds from the two hundreds the market softness has accelerated that process.
In addition to the lower lease revenue, we also lose power bi cycle engine revenue as the two hundreds are removed from service and the aircraft remaining in service five fewer cycles.
Despite the macroeconomic and operating challenges weighing on our results for the second half of the year, we leased 13 aircraft, including our first three Airbus <unk> hundred 21 200 traders.
By now I'm sure. Most of you have seen our earnings release and the guidance we've given for 2024.
Quint will review, our 2023 financial results in a moment.
Many of the challenges he will describe we are expected to continue in 2024.
Joseph C. Hete: As a result, we are taking a more conservative approach to how we provide our adjusted EVADOT guidance this year. Traditionally, our guidance has included upside potential from the expected signing of future leases and additional ACMI flying. Today we are providing a forecast of $506 million in adjusted EBITDA for this year, which only includes existing and signed future leases, net of expected lease returns. We believe this approach gives a better indicator of our expectations.
As a result, we are taking a more conservative approach to how we provide our adjusted EBITDA guidance this year.
Traditionally our guidance does include the upside potential from the expected signings of future leases and additional CMI flying.
Today, we are providing a forecast of $506 million and adjusted EBITDA for this year, which only includes existing and signed future leases net of expected lease returns.
We believe this approach gives a better indicator of our expectations.
Joseph C. Hete: We'll also outline drivers we believe could provide upside to that. Given our expectations for continued market challenges in 2024, we are aggressively reducing our capital spending outlook, and I am committed to generating positive free cash flow this year. I'll discuss the specifics of our capital plan for 2024 after Mike gives you some details on our adjusted EBITDA outlook, but the key is that we are budgeting $410 million, down $380 million, nearly half of the 2023 levels. With that, I will now turn the call over to Quint Turner to discuss our financial results for the fourth quarter. Quint? Thanks, Joe, and welcome to everyone joining us this morning.
We will also outline drivers, we believe could provide upside to that.
Given our expectations for continued market challenges in 2024.
We are aggressively reducing our capital spending outlook and I am committed to generating positive free cash flow this year.
I will discuss the specifics of our capital plan for 2024. After Mike gives you some details on our adjusted EBITDA outlook, but the key is that we are budgeting $410 million down $380 million nearly half of the 2023 levels.
With that I will now turn the call over to Quint Turner to discuss our financial results for the fourth quarter.
Thanks, Joe and welcome to everyone. Joining us this morning, I'll start on slide four which summarizes our financial results for the quarter.
Quint O. Turner: I'll start on slide four, which summarizes our financial results for the quarter. Revenues were down $16 million, or 3% versus a year ago, to $517 million. This was driven by lower revenue in the ACMI services segment, partially offset by higher revenue in our leasing segment. In the fourth quarter, we saw a gap pre-tax loss of $16 million, down from pre-tax earnings of $61 million in the prior year period. The 2023 GAAP results include a non-cash $24 million settlement expense associated with the partial termination of a previously frozen pension.
Revenues were down $16 million or 3% versus a year ago to $517 million.
This was driven by lower revenue in the <unk> services segment, partially offset by higher revenue in our leasing segment.
In the fourth quarter, we saw a GAAP pre tax loss of $16 million down from pre tax earnings of $61 million in the prior year period.
2023, GAAP results include a noncash $24 million settlement expense associated with a partial termination of a previously frozen pension plan.
Quint O. Turner: This resulted in a diluted loss per share of $0.24 versus diluted earnings per share of $0.50 in the fourth quarter of 2022. On an adjusted basis, pre-tax earnings fell $45 million to $20 million, and EPS was down 35 cents to 18 cents. In our aircraft leasing segment, revenues increased 18% for the fourth quarter and 6% for the full year, reflecting the benefit of a full year of revenues from six 767-300 freighters leased during 2022, as well as partial year revenues from 10 additional 300s and three Airbus 321s released in 2023. CAM's pre-tax earnings were down 34% for the quarter and down 23% for the full year. Interest expense and depreciation were $6 million and $5 million higher in the fourth quarter of 2023, respectively.
This resulted in a diluted loss per share of <unk> 24.
Versus diluted earnings per share of <unk> 50 in the fourth quarter of 2022.
On an adjusted basis pre tax earnings sales 45 million to $20 million and EPS was down 35.
To 18.
And our aircraft leasing segment revenues increased 18% for the fourth quarter and 6% for the full year, reflecting.
Reflecting the benefit of a full year of revenues from six 767, 300 freighters leased during 2022 as well as partial year revenues from 10 additional three hundreds and three Airbus <unk> hundred 20 ones released in 2023.
Cam's pretax earnings were down 34% for the quarter and down 23% for the full year.
Interest expense and depreciation were $6 million and $5 million higher than the fourth quarter of 2023, respectively.
Quint O. Turner: For the year, the reduction in CAM's pre-tax earnings was primarily due to $33 million less in aircraft and engine lease results related to 767-200 freighters. That was over 90% of the decline in CAM's annual pre-tax earnings versus the prior year. As of year-end, 90 CAM-owned aircraft were leased to external customers, one fewer than a year ago. Additionally, 10 767-200 freighters were removed from service during the year.
For the year the reduction in Cams pre tax earnings was primarily due to $33 million less in aircraft and engine lease results.
Related to 767 200 freighters.
That was over 90% of the decline in Cams annual pre tax earnings versus the prior year.
As of year end 90, Cam owned aircraft were leased to external customers one fewer than a year ago. Additionally, 10, 767, 200 freighters were removed from service during the year.
Quint O. Turner: In our ACMI Services segment, pre-tax earnings were a loss of $2 million, down from $26 million in the fourth quarter of last year. This was driven by unfavorable revenue mix impacts and fewer block hours flown for the military. In the fourth quarter, block hours flown to the military were down 24%. This represents the lowest fourth quarter military hours since 2017. On a combined basis, the total block hours flown by our three airlines were down 4% versus the prior year quarter.
And our <unk> services segment pre tax earnings were a loss of $2 million down from $26 million in the fourth quarter of last year.
This was driven by unfavorable revenue mix impacts and fewer block hours flown for the military.
In the fourth quarter block hours flown for the military were down 24%.
This represents the lowest fourth quarter military hours since 2017.
On a combined basis, the total block hours flown by our three airlines were down 4% versus the prior year quarter.
Quint O. Turner: Turning to the next slide, our fourth-quarter adjusted EBITDA was $130 million, down 20% compared to the prior year. In 2023, adjusted EBITDA was down $79 million to $562 million. Of the decline in adjusted EBITDA, CAM decreased by $9 million, and ACMI Services and other declined by $70 million. CAM's decline was driven by $33 million less in adjusted EBITDA related to 10 767-200 lease returns and fewer block hours flown by the 200s remaining in service, resulting in lower power by cycle engine revenue. Again, the decline in ACMI services and other revenue was driven by lower block hours in our airline operations and a lower margin revenue mix.
Turning to the next slide our fourth quarter, adjusted EBITDA was $130 million down 20% compared to the prior year.
2023, adjusted EBITDA was down 79 million to $562 million.
The decline in adjusted EBITDA.
<unk> decreased by $9 million in Acm's services, and other declined by $70 million.
Cam's decline was driven by $33 million less in adjusted EBITDA related to 10, 767, 200 lease returns and fewer block hours flown by the two hundreds remaining in service, resulting in lower power bi cycle engine revenues.
And the decline in <unk> CMI services, and other was driven by lower block hours in our airline operations and a lower margin revenue mix.
Quint O. Turner: Slide 6 details our capital spending for the quarter and past 12 months. Total CapEx for the quarter was $212 million, comprising $151 million in growth CapEx and $61 million in sustaining CapEx. As Joe mentioned, we are projecting substantially lower capital expenditures for 2024, which he will address in more detail in a moment. The next slide updates adjusted free cash flow as measured by our operating cash flow net of our sustaining capex. Operating cash flows increased $54 million to $128 million for the quarter and were $654 million for the trailing 12 months. Adjusted free cash flow was $435 million, up 52% versus last year. On slide 8, you can see that available credit under our bank revolver in the U.S. and abroad was $358 million at the end of the fourth quarter. We've bought back approximately 7.4 million shares over the past year, all within the first three quarters. Our balance sheet net leverage ticked up to 3.2 times.
Slide six details our capital spending for the quarter and past 12 months.
Total capex for the quarter was $212 million comprising $151 million in growth Capex and $61 million in sustaining capex at.
As Joe mentioned, we are projecting substantially lower capital expenditures for 2024, which he will address in more detail in a moment.
The next slide updates adjusted free cash flow as measured by our operating cash flow net of our sustaining capex.
Operating cash flows increased $54 million to $128 million for the quarter and were $654 million for the trailing 12 months.
Adjusted free cash flow was $435 million up 52% versus last year.
On slide eight you can see that available credit under our bank revolver and the U S and abroad was $358 million at the end of the fourth quarter. We bought back approximately seven 4 million shares over the past year all within the first three quarters.
Our balance sheet net leverage ticked up to three two times.
Quint O. Turner: Turning to the next slide, I'd like to spend some time discussing our outlook and assumptions for 2024. Then I'll turn the call over to Mike Berger, our president, to discuss the market environment. For 2024, we expect adjusted EBITDA of $506 million, down approximately 10% versus the prior year. We also project adjusted EPS in a range of $0.55 to $0.80 diluted for 2024, reflecting higher depreciation, interest expense, and income tax. This only includes the two 767-300 freighters we have already leased this year and two others for which we hold signed leases for delivery later this year. It also assumes the return of seven 767-200s from Amazon and three 767-300s when their leases expire later this year. Please note that this adjusted EBITDA forecast excludes any contribution from additional aircraft leases or other new business not currently under contractual commitment.
Turning to the next slide I'd like to spend some time discussing our outlook and assumptions for 2024, then I will turn the call over to Mike Berger, our president to discuss the market environment.
For 2024, we expect adjusted EBITDA of $506 million down approximately 10% versus the prior year.
We also project adjusted EPS in a range of 55 to eight cents diluted for 2024, reflecting higher depreciation interest expense and income taxes.
This includes all of the two 767 300 freighters, we have already leased this year and two others for which we hold signed leases for delivery later this year.
It also assumes the return of seven 767, two hundreds from Amazon and three 767, three hundreds when their leases expire later this year.
Please note that this adjusted EBITDA forecast excludes any contribution from additional aircraft leases or other new business not currently under contractual commitment.
Quint O. Turner: We believe upside exists from these opportunities, which our commercial teams are aggressively pursuing. On a combined basis, we believe these opportunities could provide $30 million in additional adjusted EBITDA should they materialize, driving our potential adjusted EBITDA to $536 million. Now, I'll turn the call over to Mike to discuss the outlook and the operating environment in more detail, and Joe will follow up with the capital spending outlook. Thanks, Quint.
We believe upside exists from these opportunities, which our commercial teams are aggressively pursuing.
On a combined basis, we believe these opportunities could provide $30 million in additional adjusted EBITDA should they materialize driving our potential adjusted EBITDA to $536 million.
Now I'll turn the call over to Mike to discuss the outlook and the operating environment in more detail Joe will follow up with the capital spending outlook.
Thanks, Quinn as you just mentioned, we see opportunity for upside in our 2024 forecast before I do that let me set the table by walking through the key drivers of our expected results. The biggest drivers of the decrease in adjusted EBIT forecast of $506 million.
Mike Berger: As you just mentioned, we see opportunity for upside in our 2024 forecast. Before I do that, let me set the table by walking through the key drivers of our expected results. The biggest drivers of the decrease in adjusted EBITDA forecast of $506 million versus the 2023 actual amount of $564 million are lease returns of 767-200s and the effect of higher costs and lower block hours in our airlines. The return of the 200s results in a $55 million decline in the leasing-related EBITDA forecasted versus 2023 due to lower 767 lease revenue along with lower PVC-related engine revenue. Almost all of the remaining 200s have a number of years of useful life remaining.
Versus the 2023 actual amount of $564 million or lease returns of 767, two hundreds and the effect of higher cost and lower block hours and our airlines.
The return of the 200 resulted in a $55 million decline in our leasing related EBITDA forecasted versus 2023 due to lower 767 lease revenue along with lower PVC related engine revenues almost all of the remaining two hundreds have a number of years of useful life remaining.
Mike Berger: When we spoke to you last quarter, we noted commentary from some of our lessees experiencing lower customer demand, which was negatively impacting their financial results and outlook. As a reminder, that was primarily related to international demand. Since then, we've seen some improvement in the leasing demand in international markets, particularly as it relates to the mid-sized freighter market that CAMS serves, in particular.
When we spoke to you last quarter, we noted commentary from some of our lessees experiencing lower customer demand, which was negatively impacting their financial results and outlook. As a reminder, that was primary related to international demand.
Since then we've seen some improvement in the leasing demand in international markets, particularly as it relates to the midsize freighter market that Cam serves in particular, we've seen some more <unk> hundred <unk> released in recent months. Furthermore, we are seeing more 83, <unk> hundred 21 deployments, especially in <unk>.
Europe and Asia.
With regard to the <unk> hundred 20 ones. We recently received <unk> approval for our freighter conversion design are now able to release these aircraft into the European market.
We continue to see the <unk> hundred 21 logical replacement for older generation narrow body aircraft like the 757.
We are also seeing encouraging signs in the 767 market as one of our customers recently extended to 767 200 leases into 2025.
We will continue to stress the operational capabilities cost efficiencies and reliability of our aircraft types as Quint said, our outlook assumes only loans leases currently under customer commitment.
As the market normalizes further we are well positioned to take advantage of opportunities beyond these commitments now.
Now I will turn the call back to Joe <unk> for our Capex plan.
Thanks, Mike.
As mentioned, we now expect total capital spend of $410 million, a reduction of $95 million from our 2024 expectations on our third quarter call.
And that's down $195 million from the forecast we gave you at our Investor Day last September.
Drilling down we now expect $165 million for sustaining capex and $245 million for growth.
The expected $330 million reduction in growth Capex versus 2023 reflects fewer feedstock purchases and freighter conversions that our prior plan.
The expected $50 million reduction in sustaining capex versus 2023 is driven by fewer expected engine overhauls and 2024.
The growth spending outlook includes the completion of 14 in process freighter conversions and the acquisition of nine additional feedstock aircraft.
Those include five Airbus <unk> hundred <unk> that we committed to purchase several years ago.
Looking ahead, we expect to see a further decrease in growth Capex in 2025.
Our reduced spending outlook for 2024 is expected to meaningfully improve our cash generation and we are targeting positive free cash flow for the year.
Despite these challenges I am confident in the demand for our mid sized freighter assets over the long term and the strength of our lease plus market strategy.
Furthermore, our fleet investments position us to remain a leader in mid sized freighter leasing and will allow us to deploy more freighters as market conditions improve.
That concludes our prepared remarks, quinine, along with Mike Berger, our president and Paul <unk>, Our Chief commercial officer are ready to answer questions.
The first question.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for our questions.
Our first question comes from Christopher <unk> with Susquehanna Financial Group you May proceed.
Hey, Good morning. This is Anthony on for Chris Thanks for taking our questions.
Your full year 24, adjusted EPS or EBITDA guide implies a 10% year over year decline I know you mentioned some of the puts and takes of that but how should we think about peak flying versus EBITDA.
EBITDA decline for this year.
How should we think about your EBIT.
David.
Sure.
Thanks Anthony.
It's quiet in terms of.
The EBITDA decline year over year.
You've got the <unk>.
Cam piece.
Which.
As.
As we mentioned the big factor there was the 767 200 reduction.
And we talked about versus 23 or 24 guide has an impact just on the 770 200 roughly.
Roughly a $55 million decline.
Just on the on the campus.
And so.
Cam is going to be down year over year.
In total and adjusted EBITDA.
And at the sort of the.
The top of the range and how we gave sort of the five or six and then we said there was upside.
It's about a $20 million decline.
Versus that <unk>.
Of that range for 2004.
Yes.
And of course, some of the upside as Cam that's in that $30 million that we side between the 506 and the <unk> 36.
As far as the Airlines segment.
It's a.
Again, the 767 200 removals.
And year over year, one of our airlines.
<unk>, we're still operating some longer routes related to the pandemic and those ended in the first quarter.
And.
It's about.
Alright.
The AVX piece.
Is down certainly again at the top of that range.
About a.
A little shy of $20 million, it's a revenue decline right because of the block hours are down.
Year over year.
And the other two airlines are pretty flat.
Great that's great color. Thank you.
And then in terms of the margin.
Can you speak a little bit on the expense side. So you have to.
767, 200 returns less revenue on the power by the hour contracts, but how should we think about some of your expense buckets for this year are you expecting any notable increases anything moving kind of inflation plus.
Well.
Some of the bigger buckets.
Salary and wage contract labor kind of expense.
We're actually predicting a.
A decline.
On that.
Those costs versus 'twenty three.
Naturally with some lower flying volumes and so forth.
Plus some measures we've taken to sort of.
Increase the cost efficiencies were expecting.
Head count to be flattened down depending upon the subsidiary company.
So there youre looking at.
Decline.
It's $20 million to $30 million call it.
On the maintenance expense line.
Again, you've got a decline anticipated.
Some airplanes of course coming out of service.
And.
There you are looking at roughly at least our forecast is for about $24 million decline year over year in the on the maintenance expense line now keep in mind that also include some cost of goods sold that are mro's handle that the offset is in the revenue line.
And then.
Another big one of course is depreciation and amortization and there we will see some increase.
Coincidentally, it's about the same as the decline in maintenance so figure about it.
$25 million to $26 million increase on the DNA line.
Anthony This is Joe.
Follow up on what Colin said Youll, if you think about the way our contracts are structured with Amazon for example, with the two hundreds versus the three hundreds Amazon's responsible for a lot of the heavy maintenance on the 300 side.
So the maintenance expenses that we book relative to operating those aircraft is smaller than what you'd see with the two hundreds. So it's 200 has come out of service you will see a corresponding drop in the maintenance expenses related to that on top of the.
Loss of the Doctor offset partial loss of the cycles and lease payments on the on the aircraft. In total is quite mentioned if you look at the two hundreds overall, which LNR P&L, which are flying for Amazon. The revenue piece of its down about $60 million year over year, just for that that portion of the business.
In terms of the color. Thanks.
I was going to say to add in terms of the interest line of course.
That is up as well some of that is a function of course of the average interest rate.
Change year over year.
And of course will depend upon what happens to some degree with with interest rate going forward through 'twenty four.
We anticipate.
North is a little north of $20 million increase in total interest the cash interest piece of that though is only up about 10 or 10 or $11 million of that.
The last piece of that would be just some targeted cost cutting that will that will take place within the businesses and we've already.
Done that that one of our Oregon at one of our companies.
Alright.
Great. Thank you very much final question here.
Terms of the <unk> expense for this year, you mentioned the decline Im guessing youre not anticipating any labor agreements being signed this year.
Can you speak to if you're expecting any for next year.
This is Joe again from the Labor standpoint, no. We don't anticipate that we will we have an agreement with any of our open collective bargaining agreements, whether it's with pilots or flight attendants. This year.
As you can.
Would expect there's a stark difference in terms of what the expectation may be on the parts of the <unk>.
The union side of the equation versus what the company believes it can afford theyre all being handled under the auspices of the National Mediation Board.
We haven't had any negotiating sessions. This year for example get with the ATI side of the equation. We have had one with the omni pilots and with the omni flight attendants.
So far this year, but we don't anticipate that any one of those contracts will get settled out this year.
We'll probably roll into 2025.
Great. Thank you very much.
Thank you.
One moment for questions.
Our next question comes from Ian Zaffino with Oppenheimer You May proceed.
Hi, great.
Can you just let us know how much how many few hundreds are now in service.
And what your expected returns are throughout the year.
Either number of aircraft or dollar amount.
<unk>.
Yes, thanks for the questions Paul Chase here 14, aircrafts that will be in service.
By the end of the right by the end of the year in the budget already reflects the aircraft that we expect to come out this year.
Okay.
And can provide the amount or just.
Youre, giving us the net amount.
Well there are 772, hundreds that we anticipate would be removed one in April I think for for Amazon's correct and the number of Paul quoted.
In 2014 is what we anticipate having operating at the end of.
2000, 422024 and.
I think in terms of the anticipated future removals of two hundreds.
We sort of had this.
A lot of aircrafts associated with Amazon and based on the cycle age of the aircraft that came out.
Last year and of course, the seven early this year, but those 14.
By and large have.
Plenty of plenty of light in terms of their cycle as we don't anticipate.
The rate of removals over the next few years to be more than two or three.
Sorry.
Spread out during that timeframe.
Okay great.
And then just as a follow up maybe more of a philosophical question here, but yes.
Stocks at below 13 box your book value is 21 decent depreciation adjustments on the three hundreds.
Probably at $28 or so.
What are you guys doing or how are you thinking about a way to maybe close that value gap.
I'm going to lead to ask another question. Thanks.
Okay.
Good question, but like I said I'm not sure there's a silver bullet in terms of giving you an answer in that regard obviously our performance over the last 12 to 15 months call. It hasnt been what it should have been in terms of revising guidance downward a couple of times certainly that's had an impact on the price of the stock. If you look at the overall transportation sector as nonrecurring.
Are you talking about fed ex UBS trucking company shipping companies everybody's down on their forecast with you the actuals for 'twenty, three and then down on forecast for 2024.
So there's not a lot to point to in terms of the near term in terms of the market starting to come back, but I think the key is is that we're well positioned going forward with the assets that we have the investments we've already made to be able to react quickly if and when the market finally turns around whether that's 'twenty four 'twenty five.
Where we start to see a rebound in that respect so from our perspective, it's two things obviously market being key but the other one is execution on our part in terms of better performance overall, that's been a focus of mine since I came back in November to have better execution on the part of all the operating units.
A more conservative approach in terms of the capital spending as evidenced by the significant reduction until we talked about earlier on the call and from a capex standpoint. So I think all those things combined are more balanced capital allocation strategy going forward after generating some free cash flow puts us in a better position to start moving the stock back up where it should be.
Okay. Thank you very much.
Thank you.
One moment for questions.
Okay.
Our next question comes from Helane Becker with TD Cowen you May proceed.
Thanks, very much operator, hi, gentlemen.
One question just a follow up on the pilot negotiations are there any accruals that you are taking in anticipation of an agreement or will it all be reflected in one quarter. After negotiations conclude and there's an agreement.
I think <unk> noted earlier I think we're a ways off from coming to a final agreement in terms of where that will finally land is anybody's best guess in between I can tell you. If you look at the ATI side. For example, it's about $70 million in pilot salaries for the year.
Depending upon what you want to target as what you think the expected expected settlement would be you can calculate a number using that as a baseline.
From the negotiation standpoint, so it's going to have obviously, a negative impact to the bottom line, if and when we finally get an agreement.
I'm just not prepared at this point to comment any further in that regard.
Okay. That's helpful.
Based anyway.
And then I think you said on the.
Amit.
Youre doing fewer hours for the military how should we think about that.
Fiscal 'twenty four.
Yes, if you look at omni who over the last starting in 2022 2023 was down about 11% year over year from the military hours perspective.
Looking forward to 2024, because military doesn't give you a lot of advanced notice in terms of what the expectations are we basically flatline that from an hours perspective for our 2024 plan. So if it rebounds to normal levels or what what we've seen in the past as normal levels, obviously that will be a significant significant upside potential for the <unk>.
But as Quint said, if you look at the fourth quarter numbers. For example, we haven't seen numbers that low since 2017.
It tells you is we are aware of.
Where things are with all the turmoil going on across the globe that the military is kind of keeping everybody in position.
Alright got it and then my final question and you kind of answered desk on lease expirations.
So is this like a peak year for lease expirations, and we should think about like $25 26, and beyond being the two to three or five year versus.
10, or 12, a year and then it feels like last year was also a big year for lease expirations.
Yes.
Mike as we mentioned on the on the 200.
The group that we mentioned on the Amazon the seven on the seven will have 14 remaining in service as we stated by the end of the year.
We anticipate two or three over the next couple of years on the 200 side.
We are expecting three.
Lease returns.
I am sure it's explorations not returns on the three hundreds this year as well too will come very late in the year the back half of the year and we've already had one so you.
You are correct that we had an abundance of.
Lease expiry in the last year or so.
Okay, but then it returned to a more historic level.
Correct.
Okay, Alright, Thats really helpful. Thank you.
Thanks Helane.
Thank you.
One moment for questions.
Our next question comes from Frank Galanti with Stifel. You May proceed.
Yeah, great. Thanks for taking my question. So I wanted to follow up on the ATM business.
Typically flying for the Dod.
So amit role in that.
Is it.
Is the number of block hours down because of pure demand from the government or is that.
Right.
An indication that there is other cargo operators, taking the block hours that otherwise would have went to ATSG and from a strategic perspective is that.
Given there's been a couple of negative margin quarters does it make sense to maybe fly one or two claims.
To sort of protect the downside and obviously experienced less on the upside can you sort of talk through strategically. Thank you through that decision.
Yes, Brian This is Joe from the military side remember the cargo piece of it is such a small piece of our overall business. We have one airplane that does one or two trips a month potentially over two to Asia, It's really about the passenger side of the equation.
From the standpoint of demand from the military of what we've seen it's down overall.
For everybody that participates in the craft program, we don't keep tabs on the cargo side of it since we're not a big player there.
We don't have the large wide body aircraft.
To participate on the cargo piece of the military business, but in terms of putting aircraft down obviously from the standpoint of carrying an aircraft you don't need there is a significant expense attached to just maintaining that aircraft. So we're looking at our fleet allocation overall.
On the R&D side of the business as we said when we acquired omni way back when in 2018, one of the things that we looked at was the fact that they did use the 767.
For the bulk of their military business, and we view that as a feedstock opportunity for converting to cargo at some point in time, but the key is is that when the military calls you need to be prepared to respond accordingly, we've always prided ourselves on being the number one provider and are.
Asset class types for the U S military and so we feel we feel it's our obligation to be able to have sufficient assets to be able to respond but.
Rest assured we're constantly looking at the fleet composition to see if there is an opportunity to reduce the overall cost.
I just think it's important to also understand that omni is flying.
Not only the entitlements provides over its entitlement, which is traditionally has as well.
But the overall demand is down.
Okay.
Okay.
And then I wanted to ask on sort of guidance.
And sort of what's changed from a messaging perspective.
<unk> now called out some planes available for lease I think of 2014.
Are you assuming that those claims are not going to be leased.
Historical guidance would that have been.
You would've come out with $30 million to $40 million and you would've assumed most of those would have been at least like what sort of changed from our conversations with customers perspective.
On those planes available for lease in sort of a messaging from Hfc's perspective, alright.
Alright, it's Paul here I think in the past the methodology would include.
Profitability.
Leases and a stronger market and as we saw in 2023. The market has been softer. So we wanted to do is take a more conservative approach and use leases that were already locked up.
With customers and deposits and then have upside going forward as Joe mentioned in his earlier comments.
Yes. So Frank for example, the 506 as we said assumes four 767 300 leases two of which have already been put.
Put in place.
This first quarter and I think maybe a third that could is likely probably in March and so other than that.
We have and in that $5 six number included.
Contribution.
Additional leases even though.
Paul So as we continue to pursue those and we believe that.
There's a good chance, particularly as the market normalizes to make good on some of those and we also have returns that we mentioned we have what three 763, hundreds I think coming just to the natural ends of their current leases.
And there is potential to re lease those aircraft, but in that in that.
The starting point of five or six we haven't we haven't assumed that so that's certainly part of that upside potential.
Of that $30 million that we spoke up in there and there will be some depreciation in our EBITDA numbers already factored in on the assets, but obviously if the revenue comes along it will be.
Nothing but improve the overall EBITDA.
Company.
Got you.
Then.
Last question, if I could squeeze it in.
So I think the investors will appreciate the.
The ability to generate free cash flow this year, but can you sort of talk about where you plan to spend that use that free cash flow.
Is it sounds like it doesn't want to be into incremental.
Asset.
Yes in terms of what we expect to generate this year there'll be a nominal amount, we're not talking about significant free cash flow generation, but the first priority is going to start delevering a bit you saw in our release, we're about three two turns at the end of the year in terms of our debt. So.
So we want to pay that down and give us a little more flexibility, but then we'll be able to build on add significantly as we roll into 2025 preliminary look we have a 2025 is the capex spend will come down probably an additional 10% or so as we sit here today.
As we mentioned earlier, we've already procured a lot of the feedstock from a conversion standpoint, that's going to be the biggest driver looking into 2025 and of course that will be driven in large part by what we see in terms of market conditions and demand for the for the assets.
Great. Thank you very much.
Thank you. Thank you.
One moment for questions.
Our next question comes from Adam Ritzer without all the capital you May proceed.
Hey, Joe how are you dealing and welcome back thanks Adam.
Couple of questions for you.
What was omni EBITDA in 'twenty three I think you said it was down 11%, but how much did they actually generate.
Hello, David.
Adam has been around long enough to know that we don't talk about each particular airline individually what I can tell you overall as you saw on the <unk>.
Our earnings release as the overall EBITDA for the airline services side of the equation was down from 2022 gone from two.
$209 million roughly to $156 million from a from an overall.
Omni still was significantly positive we expect about the same level of contribution in 2024 from the omni piece of the business actually the largest decline on a year over year basis.
Going into 2024 will be with AVX because of the number of 767 two hundreds they were operating on behalf of.
Amazon and say, where the biggest they took the biggest hit in that regard, but I mean, we're anticipating is going to be about the same level of contribution as this year.
Okay understood.
One of the slides in there. It mentions you have 23 planes.
Leading her in conversion.
So I guess, if you have 23 awaiting if.
If you die.
Leased all of those up.
Much upside is there beyond 30 million you mentioned.
Again, not all of those are going to be an availability into service in 2024 and as Paul already answered. The expectation is that we will get some of those into service I think it's 14 aircraft in total they're going through the conversion process today, they are coming out at various points in time in the year, but if you were able to lease everyone.
As it came out it's probably on the order of magnitude of call it $10 million to $15 million of additional EBITDA because of the timing as to when they when they actually complete the conversion in Canada available for lease.
Okay.
Hello year basis, right. That's just for fiscal 'twenty four 'twenty four right right I get it.
It.
Of the 24 growth spend.
Can you I think you said some of that is for <unk> III <unk> ordered but can you break that down like how much of that do you actually need to spend with all of the <unk>.
Wayne sitting there.
Well, if you look at it from the peer growth perspective of the number I talked about earlier.
From that standpoint, it's about.
Call it $250 million in terms of growth spending and then the balance of it is in sustaining capex for 2025.
No I realize that but I'll get to 50, how many claims is that I mean, you have so many sitting there that are on lease why are we not cutting growth capex down to as little as possible.
As I said mentioned earlier, Adam, but we're going to play it by ear in that regard I said, we initially targeted to a 10% reduction from where we're at this year.
It could go lower it could go higher depending upon what the market demand is at this point in time, but there are certain fixed commitments that we have that we can't avoid in terms of whether its a conversion or a feedstock purchase theres a couple of aircraft in a way.
We have contracts to acquire in 2025, but again it all goes back to what we think we can avoid if the market isn't there.
What we can respond to if the market is.
Okay. So the 250 for this year how much.
Contractually obligated under that $2 50.
Almost all of it almost all of that Adam.
Yes, 24, there's actually nine aircraft that.
Feedstock airplanes that we some of the commitments to buy those were made as much as two years ago.
So we've got $44 76, and five <unk> hundred 30 feedstock aircraft that will be purchased in 2024.
And then you've got to complete conversion of the aircraft.
That are in process because as we told you last quarter that just that makes sense.
To not interrupt those conversions midway through but to the extent that.
We can.
Pause that production we have.
<unk> baked that into the budget that we're giving you already.
Got it and last question for 25.
Do you have obligated contractually for growth Capex, I think Joe said earlier, it would be down about 10%.
But of that let's say 200, how much of that is contractual that you can.
Not get out of it.
We don't have a good answer for you right now Adam Blake said part of it is is we peg. This number part of it is obviously the obligations that we can't avoid and some of them are related to what we think the market will respond to but overall, it's a reduction from where were at in 2024.
Got it okay. Thanks, very much I appreciate you taking my questions and good luck. This year. Thank you. Thanks Adam.
Thank you.
One moment for questions.
Our next question comes from Christopher <unk> with Susquehanna Financial Group you May proceed.
Hey, Thanks. This is Anthony again for Chris Thanks for taking the follow up.
Could you expand on what the opportunities for additional flying Intel's does that kind of peak season related or opportunistic short term flying and what types of airlines are shippers what this involves.
Yes sure. Thanks for the question Anthony.
Most of the opportunities will exist in the passenger charter flying so what typically happens in the summer.
<unk> different parts in the EU or in Asia carriers will be looking for additional lift and that's where.
You can come in and help in fact, they have done that many times in the past so predominantly exists on the passenger side for short term opportunities by short term I would define those as anywhere from a month to three months, sometimes those get extended but thats, primarily where the opportunities exist.
Additionally to that we see around peak flying around the holidays.
Eligible seasons that type of stuff, we've had omni tends to do very well in that space as well on the charter side and.
And on the and on the cargo side Youll see some some shorter versions of that for mothers day, and then of course during peak season in December some of the larger integrator customers asking for additional list.
Okay.
Great. Thank you very much and I guess final question in the.
In your guidance for this year, how much if at all are you kind of anticipating.
A macro slowdown either in the United States or more globally.
Can you give us a.
A magnitude or a ballpark that youre kind of thinking about.
We hope we've already seen.
Great.
Yes.
Talking about.
How the rate of passenger flying for our second second largest customer.
<unk> has.
Has trended compared to like 2017, you have to go back to 2017, So we havent as Joe said, we've assumed a pretty flattish.
Look on that piece of the.
ACI offline.
And we talked about.
The leasing side, where we've only assumed.
Already.
Executed contracts in effect for those four 767, three hundreds in terms of growth. So I think we've been pretty tried to be.
<unk> certainly in that respect.
So beyond that we haven't.
Assumed further.
Significant degradation on the macro side, if you think about it on the airline.
Operations side, which is going to be the.
Primary or where there might be some upside or downside most of the assets are most of the flying we do I should say is relegated to the Amazon network and the DHL network, which basically those are time definite networks. So to speak. So we don't anticipate there is a lot of volatility there other than what we've already baked in which is the removal of the 767 two hundreds.
From the Amazon network.
At the same time, we will be adding back one additional Amazon owned tail sometime I guess, maybe later this quarter beginning of the second quarter that we will add into the to the ATI fleet. So it should be pretty stable from the cargo side of our operations.
Great. Thank you very much.
Thank you.
Thank you I would now like to turn the call back over to Joe <unk> for final comments.
Thank you I have spent my entire.
Tire business career with this company, including the two decades since we became an independent public company in 2003.
Except for 2008, when Dhl's decision to shift from direct competition in the U S Express market nearly left us without a customer for our entire air cargo fleet.
<unk> has never faced such a rapid shift in customer demand as occurred during 2023.
Since returning as CEO last November I've taken steps, we have discussed today to reduce spending on fleet expansion and rightsize, our airlines to do their own changes in demand yet.
That isn't enough, we will do more to match the scale of our business to the growth environment and drives us back to being the free cash flow generator that we used to be.
But I'm also an optimist during.
During my career long term demand for cargo aircraft has only increased.
No that appeal of shopping online will require more aircraft lift to fulfill their orders around the world and I intend to work with the great people of ATSG everyday to put us back on track as quickly as possible.
Thank you and have a quality days.
Okay.
Thank you for your participation you may now disconnect.
Okay.
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