Q2 2024 Sun Country Airlines Holdings Inc Earnings Call and Business Update

Welcome to the Sun country Airlines business in second quarter update my name is Josh and I'll be your operator for today's call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation there'll be a question.

And answer session 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 I will now turn the call over to Chris Allen Director of Investor Relations. Mr. Allen you may begin.

Thank you I'm joined today by Jude Bricker, our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and a group of others to help answer your questions before I begin I'd like to remind everyone that during this call. The company may make certain statements that constitute forward looking statements. Our remarks. Today may include oil forward looking statements, which are based upon management's current beliefs expectations and assumptions.

The risks and uncertainties actual results may differ materially we encourage you to review the risk factors and cautionary statements outlined in our SEC filings, we assume no obligation to update any forward looking statements you can find our press release and the accompanying presentation on the Investor Relations portion of our website at IR dot com, but without that I'd like now turn the call over to Dave.

Thank you Chris Good afternoon, everyone. Thanks for joining us on the call.

Our intent today is to update our investors and analysts on our revised Amazon agreement provide a very high level look at our growth plans over the next couple of years and update our outlook for Q2.

First of all we're very excited to announce that we've entered into an amended air transport services agreement with Amazon for this agreement, we will grow our cargo fleet by unexpected eight additional aircrafts and expand extend the term of the agreement to 2030 with additional extensions possible through 2037.

Amazon has been a great partner of ours since 2019, and we look forward to continuing this relationship well into the future.

The expanded agreement reflects some countries unique business model and importantly, our diversified revenue streams and we expect our growth in 2025 to be focused on our cargo segment.

On Thursday morning, we 8-K to short presentation to accompany this call which is also available on our IR site as Chris mentioned.

Let me just briefly walk through the slides then I'll open the call for a few questions that Jude or I or others cannot can field first of all starting on page three of the presentation.

This is a look at the major terms of the agreement. We think disagreement provides some key benefits for for Sun country first of all as I mentioned.

We're expecting to take eight incremental aircrafts and we're expecting to take those aircraft in 2025.

With deliveries to us.

Our in service States, let's say starting at the end of the first quarter and extending through the third quarter of 25.

When you add the 12 aircrafts. We now have this brings our total freighter fleet to 20 aircrafts, which we hope to be at by the end of 'twenty five.

Also as I mentioned, we extended the term of the agreement. So the base agreement is extended through 2030.

And then there's a couple of extension options in there that can take the agreement all the way out to 2037.

I think really importantly is with this new agreement.

We sort of achieved balanced economics here and here's what I mean by that so we expect a on a steady state basis once fully ramped.

Towards the like I said third fourth quarter of 'twenty five that the contribution margin of the Amazon flying.

We will be basically on par with the contribution margin of our passenger flying.

On a historical basis, so by that we mean basically our 2023 passenger margins.

The contribution of that business, we expect to be similar to our Amazon business going forward. So this is indifferent between Amazon and.

And.

Speaker Change: The passenger business decided which which segment we grow and and we've achieved these improved economics.

And then really importantly.

As we look forward here from a capex perspective.

As with the 12 aircraft, we have there's no capex required to grow this fleet because of the aircrafts.

Controlled by Amazon and we operate them for Amazon.

Turning to page four.

So where are we going to grow over the next couple of years.

This is what our preliminary numbers look like so in 2025, we expect all of the growth resources that we have to be dedicated to the Amazon business. So we expect depending on exactly when the aircraft show up we expect.

Now, let's say, 60% to 65% growth rate in our cargo business next year.

And then 13% to 15% in 2026 really due to just the annualized <unk> of the 25 growth.

But this is going to necessitate as a reduction in the size of our scheduled service segment.

In 2025, which we estimate to be between 10 and 12%.

And then we'll begin growing that business again in 2026, which very preliminarily at this point, we expect to grow by 6% to 8% in 2026.

Now a lot of that reduction in 2025 flying.

Will.

We'll come and in off peak periods and be our most marginal flying so we are expecting.

Significant unit revenue improvements in 2025 for our passenger business.

We sort of think Thats really important at this point if you look at this graph that we have on the bottom of the page. What we did here is just plot ASM growth between 2023, and 20% between 2019 and 2023 and then our <unk> growth over that period as well for all of these carriers.

Speaker Change: As you would expect sort of the slower more methodically growing carriers have.

Produce outsized <unk> growth.

And that's especially the case for Sun country.

So we expect to get back to this measured growth over the long term and our passenger business after some.

I'm pretty rapid growth in 2025.

As I mentioned lower right hand side.

We're expecting significant traffic improvement next year end.

<unk> spent a lot of growth this year and a lot of capacity added to the domestic market.

Finally on page five.

Q2 results. This is what we're expecting at this point so our previous guidance was revenue of $2 55 to $2 65.

We're tightening that up a bit towards the bottom end of the range here $2 55 to $2 57.

For the quarter fuel is coming in a bit favorable.

We're expecting operating margin to be between four and 5% for.

Speaker Change: For the second quarter, and then our tax rate and our the size of the airline is expected to be about the same as it was and we gave the original guidance.

I think also importantly to note is we're expecting and we continue to expect favorable year over year CASM for the third straight quarter. So in the fourth quarter, the first quarter and now the second quarter, we're expecting our adjusted CASM ex.

To be favorable on a year over year basis.

So that's the slides again, we just wanted to update folks on on this new agreement.

What our longer term is looking like.

Speaker Change: Happy to take a few questions.

Thank you.

Minder task 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 questions.

Our first question comes from Duane <unk> with Evercore ISI you May proceed.

Hey, Thanks, Congrats on this expansion.

Can you talk about if there are any startup costs and if there is such a thing like the network for cargo how will your cargo network.

Lineup with your existing passenger network any any need for like new potential basis.

Yes, so I think we expect some startup capex, but we expect it to be pretty minimal like for the total aircrafts.

Sort of low digit millions.

From a capex perspective, so it's it's it's very small.

We don't have final schedules, yet, we will see where where they want us to fly the aircraft were hoping.

But maybe it produces even sort of more efficient schedule since we have a greater massive aircraft from a pacing perspective again I think.

We'll sort of make some decisions on that.

As we get more clarity on.

On the schedule, which we just don't have yet.

Okay, Great and then.

I am sure some clients have already backed into this.

On the slides you gave but can you give us a sense for.

Overall kind of system block hour growth expectations.

2025, and 2026 and maybe for those same years, how we think about the mix of earnings from cargo specifically what percentage of your EBIT for example would that represent.

Speaker Change: Yes, so first of all from a growth perspective, I think it's our objective to sort of continue to grow the airline on a.

High single digit low double digit a year block hour number that total growth, maybe a little bit slower than that.

In 2025.

Mid to high single digits from our block hour perspective, with all of that and more dedicated to the cargo business. Then after that as we get back into sort of 26, its probably that high single low double digit.

Block hour growth for the fleet.

We're not going to get into a ton of the financials yet but.

As I mentioned.

We wouldn't be taking on sort of this additional flying if it wasn't as profitable as our historic.

Passenger business, our scheduled service business in particular.

So you could probably do some rough math around that it is a little bit premature for us to get into the details on the call but.

We're expecting significantly improved contribution from the cargo business going forward.

Okay. Thanks very much.

Thank you.

Our next question comes from Ravi Shanker with.

Morgan Stanley you May proceed.

Thanks, and good afternoon, everyone.

David.

Speaker Change: This happened a little bit quicker than we were expecting just given the original contract timeline. So can you just unpack a little bit off.

How long.

This negotiation taken and kind of how did it come about.

And it was a day or <unk>.

Function of some recent changes that Amazon, we're seeing in some of their other contracts or has this discussion being going on for some time.

Yeah.

Yes, I mean, I would say the discussion as to the ultimate fleet size has been going on for an extended period of time.

As to Amazons, the exact motives as too.

Why there's certain number of aircraft to certain providers, it's a little bit unclear, but specific negotiations around this particular expansion I would say are probably been underway for probably six months maybe.

Maybe a little more than that with more intensity in the last two to three months.

Our belief that.

Amazon is focused on on reliable service above all else too to serve their customers. So we.

Speaker Change: We think we've demonstrated that over the years and we've been rewarded with these additional aircrafts, we believe because of it there.

Our most important relationship at the company and we want to continue to provide that level of service as we go forward and we're just gratified that we have these additional eight aircraft to fly.

Understood and just a follow up on that point are you locked in on the fleet size or is there opportunity to expand beyond 'twenty. During the life of this contract with Amazon decides to get deeper to narrow body.

There is no lock on the fleet size.

I think we've talked before that Amazon operates 20 narrow bodies in the U S. At this point, so we expect to be operating all of those.

If they grow the fleet in the future we would definitely hope to be considered for further expansion I think that's a function of our performance, which we intend to continue to perform on.

But theres no hard cap or anything like that.

Thanks, Ed.

Speaker Change: Yes.

Thank you.

Our next question comes from Helane Becker with TD Cowen you May proceed. Thank.

Thanks, very much operator, hi team.

I'm, assuming this is going to be operated the same way as the existing is with no additional pilots required or anything like that.

Speaker Change: Just integrated into the existing business.

Yes, I mean, it will be integrated into the existing business just exactly the way. It is now I mean, we won't have a segregated.

Amazon pilot core or anything like that the strength of the model is diversification and cross utilization. So we expect to fully.

To fully.

We continue to be doing that into the future.

We'll need more pilots just because we're growing so whatever growth resources, we have as we move into 'twenty five they're going to be dedicated to the cargo business.

And then we'll get back to scheduled service growth after that but we will need more pilots because of the airlines bigger.

Okay. That's very helpful. Thank Steve and then my other question is I don't know if you can answer this right now but it's.

On the warrants.

I didn't see anything in the document yesterday that talked about warranty changing so can you maybe walk us through the value of the agreement and.

Speaker Change: Or did you issue more warrants and I just missed it in my in my reading.

You didn't miss anything.

Helane, we did not we didn't issue any more warrants as part of as part of the agreement.

Speaker Change: And so how should we okay. So then the value of the warrants just star.

Same as they were.

Before as if this change didn't occur is that how we should think about it.

So this is the way that.

At a very high level the warrant agreement works. So we granted Amazon a certain number of warrants in 2019, when we signed the original deal and Thats accessible you can get that number right.

Those warrants vest based on the amount of revenue that we get from Amazon.

So it's fair to say that the vesting of those warrants.

We'll go faster.

Because we're getting more revenue, but the number of absolute warrants issued is unchanged. That's how I would say it now.

Divest fairly slowly.

Continue to vest fairly slowly, but at a at a bit more rapid rate than they have been.

Okay. That's hugely helpful. Thanks, Dave.

Okay.

Thank you.

Our next question comes from Michael Lindenberg with Deutsche Bank You May proceed.

Shannon: Hi, there this is Shannon on for Mike. Thanks for taking my question.

Two separate one.

On the revenue guide down I know, it's very slight this quarter for the second quarter, but is there anything we should read through to demand on that or is it mostly just from an overly competitive landscape.

Speaker Change: Yes, I think some of the fare pressure that we saw.

And talked about on our first quarter call essentially continues I mean.

There's been a fair amount of capacity added some of it by us.

Theres been fare pressure I think.

<unk> of both capacity.

And just a sense of maybe just a general slowdown we are slight weakness in demand.

For sort of.

Our consumer.

Planes are full fares are down a bit so.

Just sort of lower end of the range.

Yes.

Speaker Change: Okay.

The capacity the patent.

Capacity backdrop as you go through the rest of the year. That's improved so we're kind of at Max capacity year on year growth into the second quarter and 10%.

Overlap on our network and then that improves in the back of the year dropping into the low single digits.

Thank you Anne.

For my second question on future uses of free cash flow generation and I know that this one contract is definitely going to be are you planning for a new share repurchase program or accelerated debt Paydown I know that your balance sheet is in great shape, but anything on uses of cash here would be helpful.

Yes, as we mentioned are.

Our capex burden is a lot less in 'twenty four than it was in 'twenty three and we expect it to continue to low into 25 and 26.

We bought back.

Probably 12, 10 to 12, 13% of our float and the last year and a half or so.

We sort of exhaust the last of the.

Authorized buyback in March.

As we sort of look at the back half of the year look at the revenue backdrop.

The revenue backdrop, we'll make some more decisions on that.

But it's fair to say that.

With our surplus cash.

<unk>.

It's either going to be more share buybacks.

Or maybe some debt paydown, but we havent firmed up on that yet.

Speaker Change: Okay.

Thank you.

Thank you.

Our next question comes from Scott Group with Wolfe Research you May proceed.

Hey, Thanks, guys. So I just wanted to follow up on the comments around contribution margins getting in line with passenger I'm guessing. There is some of this is apples and oranges, but in the K you.

About in 2000 and.

In 2023.

Passenger operating margins were 14% and cargo was negative five.

Is that sort of Directionally. When you talk about contribution margins is that directionally the way to think about it that there is like a 20 point improvement in cargo margin to go from.

In line with passenger.

It's not quite that linear, but I think if you do sort of off the top of my head. If you do kind of that rough math.

Youre going to get pretty close to what we would expect the steady state improvement to be in the bottom line, let's say by 2026.

The issue and why it doesn't maybe not show up that way in the in the financials is we allocate overhead some of that overhead is allocated based on the number of aircrafts. Some of it is based on block hours. So it may not sort of appear exactly that way, let's say once we get into 'twenty six but the overall magnitude of the let's say the contribution to.

The overall airline from the math Youre roughly doing in your head, it's probably not that far off.

And so when you think about the <unk>.

Net of a.

A lot more cargo next year.

Yes passenger right.

Some accretion from from less off peak rate is the net of it in your mind.

Our margin in 'twenty, five and 'twenty four.

Our preliminary looks are substantially better margins and 25% and 24 yeah.

Yes.

Okay helpful and then.

Any way to just put some directional color on that.

RASM accretion comment on the passenger side.

We say in the presentation here and part of this is let's say, let me say it this way, let's say all else being equal because.

Speaker Change: Clearly a lot of what's happening in the revenue environment is not directly sun country related and it's just the backdrop.

But if we're looking at a total reduction in <unk>.

Block hours on the order of 10% to 12%.

It probably translates into.

RASM improvement on the order of let's say high single digits, let's say eight to 10 kind of a number.

And again this is ex <unk>.

The outside environment just a.

Pull out a lot of unfavorable capacity or a lot of unfavorable flying.

Okay got it and then I just wanted to make the point 25 will be special because the airplanes for cargo start to show up in the second quarter.

Our first quarter will be benefiting from growth.

We're going to grow 10% of our block hours does black hours will be allocated in the scheduled service in the first quarter and then.

Speaker Change: Our scheduled service will be reduced in the second through fourth quarters. So we have the seasonality benefit.

Cargo growth in 'twenty five in addition to what they've talked about.

Your point is your Q1 Thats always your seasonally best doesn't see any of the reduction.

Passenger.

Yes precisely.

Lockhart.

Seasonal mix for scheduled service and 25 will be better than it did in 2012.

Yes.

Okay, and then just last one if I can just near term.

Just given the Q2, how should we think about just the normal seasonal Q2 to Q3, if you have any.

Initial thoughts there.

Normal seasonally between the two quarters.

Speaker Change: To go back and look historically, probably not that much different.

Speaker Change: September is the <unk>.

Worst month for the company, so maybe a touch worse.

Let me sort of seasonal two to three.

Helpful. Thank you guys.

Thank you.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced one moment for questions.

Our next question comes from Christopher <unk> with Susquehanna Financial Group you May proceed.

Good morning, So two questions just if you could remind us with the CMI leases, whether their utilization minimums and then also the visibility into flight schedules for Amazon So as it were.

You get schedules weak month of just how much visibility do you have into what a typical month or quarter flying in utilization might look like thank you.

Yeah, let me take the.

The first part.

Speaker Change: The CMI leases and then Greg can talk about the second part. So there is no utilization minimums, but the contracts the contract is structured in such a way that.

There is both a per aircraft and a block hour component to how we get paid so functionally there sort of a minimum because theres simply a per block hour number per aircraft number.

Which kind of serves as the floor.

Speaker Change: So Greg on the schedule for them on the schedule Frac crews as Greg.

Get those schedule as much in advance we actually have the opportunity to work with Amazon to make them more efficient.

So I think we're probably talking four months out as we're working through schedules. So we get a lot of advanced notice on those so we would probably expect the first scheduled with the new aircraft and at some time in the fourth quarter.

Okay. So next time this year than you would have at least an early read by call. It August.

That time frame for what peak might look like peak season.

You mean, you're talking about for like when we get our first look at the new Amazon schedules.

Right. So for instance, if we're fast forward next.

Next August at this time July you would have at least a kind of a preliminary flight scheduled for Amazon with what fourth quarter peak flying or fourth quarter utilization might look like.

Yeah, So I think like three to four months before the quarter starts.

Okay, great. Thank you.

Okay.

Thank you I would now like to turn the call back over to Dave Davis for any closing remarks.

Thanks, everyone as I said at the top of the call. This is an exciting time for us.

A lot of good things happening at the airline and we appreciate.

David M. Davis: Everyone, joining and we'll talk to you again after our.

David M. Davis: For our second quarter earnings announcement.

Thank you. This concludes the conference. Thank you for your participation you may now disconnect.

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