Q2 2019 Earnings Call
My name's spread and I'll be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you can tell star one if you have a question.
Please note. This conference is being recorded and I will now turn it over to Joe heel, President and CEO Mr. TD you may begin.
Thank you Brandon.
Good morning, and welcome to our second quarter 2019 earnings Conference call.
With me today are Quint Turner, our Chief Financial Officer, and Rich Corrado, our Chief operating officer.
We issued our earnings release yesterday after the market closed its on our website H.T.S.G. Inc. dot com.
We will file our Form 10-Q later this week.
Halfway through 2019 were meeting our targets and working toward a successful second half.
As focused as ever on growing markets, such as e-commerce infrastructure and transport for our U.S. troops and their supplies.
Here in the second quarter headlines.
Compared with the second quarter last year, our revenues were up 64%.
Our adjusted earnings are up 10% to 18.7 million or 27 cents per share and our adjusted EBITDA rose, 50% to $104.8 million.
Our airline operations are expanding and our leased aircraft fleet is growing.
Our network services for the Department of Defense and Amazon are up versus the prior year and we have 16 more aircraft in our operating fleet than a year ago.
Our relationship with DHL is now covered by an amended agreement signed in April that extends our 16 year role and its U.S. in mid mid east networks for at least three more years.
And we added more capacity under our senior credit facility to ensure we can deliver the aircraft and services our customers want.
Our strong start and projections of a strong peak season for the air networks. We serve give me confidence that we will achieve our full year adjusted EBITDA outlook the $450 million.
Quint is ready to review, our consolidated results and changes in our balance sheet.
Rich will cover our segment highlights and I'll close with comments on our outlook Quint.
Thanks, Joe Good morning to all of you on the call right now and to those who are listening on replay.
As always I'll start by saying that during the course of this call we will make projections or other forward looking statements that involve risks and uncertainties, our actual results and other future events may differ materially from those we describe here.
These forward looking statements are based on information plans estimates as of the date of this call and Air Transport Services Group undertakes no obligation to update any forward looking statements to reflect changes in underlying assumptions factors, new information or other changes.
These factors include but are not limited to.
Changes in market demand for our assets and services.
Our operating airline's ability to maintain on time service and control costs.
The cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration.
Fluctuations and Ats sees traded share price and an interest rates, which may result in mark to market chain charges on certain financial instruments.
The number of timing and scheduled roots of our aircraft deployments to customers.
Our ability to remain in compliance with our agreements with key customers and lenders and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q , 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 and adjusted EBITDA Management believes these metrics are useful to investors in assessing hcfcs 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 reconciliations to GAAP measures, which are included in our earnings release and on our website.
As Joe said, our second quarter results compare very favorably with our results from a year ago and our adjusted earnings Rose, 10%. Thanks to contributions from the freighters and passenger aircraft, we've added to cam's leasing portfolio.
On a consolidated basis second quarter revenues were $335 million up $131 million or 64% from the prior year.
Our acquisition of Omni Air last November was the principal factor in that game as it was in the first quarter.
The Department of Defense is Ats, these largest customer representing 36% of our revenues for the second quarter.
20% of revenues came from Amazon and 15% from DHL.
Once again, our GAAP results reflect the unrealized affect quarterly revaluations of several financial instruments.
These include noncash effects of the warrants we have issued to Amazon based primarily on changes in stock price from quarter to quarter and the effects of revaluing interest rate hedges on our bank debt.
Second quarter earnings from continuing operations were negative $26.6 million on a GAAP basis.
Versus positive 24, and a half million dollars a year ago.
On a diluted basis GAAP earnings per share for the second quarter were negative 45 cents versus positive 21 cents a year ago.
That's 66 cents variance primarily reflects a 52 cents after tax loss from warrant and derivative revaluation versus a one cents gain a year ago.
Other factors included a 10 cents increase in losses from affiliates, primarily reflecting our share of Airbus 321 development costs via our joint venture with precision.
Higher noncash charges for the non service related costs, a retiree benefit plans also were a headwind against GAAP earnings versus the prior year.
The adjusted earnings EPS, and adjusted EBITDA, We report exclude those items.
As a result, our adjusted EPS for the second quarter was 27 cents versus 25 cents a year ago.
On the same basis, our adjusted EBITDA increased by 50% to $105 million.
Operating expenses increased to $117 million or 65% was significant omni related increases in fuel depreciation and amortization and salaries and benefits.
Compensation costs also increased because of higher head count at 18 to support expanded CMR flying in the second half.
DNA overall increased 52% and maintenance increased 8% for the quarter.
Interest expense increased 11 million to $17 million, which includes the effect of higher borrowings to acquire omni.
Our larger capex budget and higher rates.
Our capital spending for the second quarter was $125 million and $217 million for the first half.
We acquired three Boeing 767 passenger aircraft during the quarter, including one we held out the freighter conversion have dedicated to omnicare in response to increase demand for passenger charter flying in the second half.
We are maintaining our projection for full year capex spend of about $475 million, mostly to acquire and modify more seven six sevens for deployment through next year.
Joe will talk more about that shortly.
Also we added $100 million of credit capacity, when we amended our credit facility in May to continue our fleet development program.
With our growing EBITDA, we expect to maintain a comfortable debt to EBITDA ratio under three and a half times through the balance of the year.
That's a top level summary of our financial results for the quarter riches ready to share some segment highlights rich.
Thanks, Clint and good morning, everybody as Joe said, our principal aircraft leasing an airline operations are off to a solid start this year and even better results are anticipated in the second half.
Hmm I services on a pre tax basis earned $1 million in the second quarter up half a million from a year ago that performance was of course led by on these contributions which began last November .
Pre tax earnings at AC My services were lower than the strong first quarter results due to the timing of major maintenance events, including engines and fewer block hours for the DMD in the second quarter.
During the second quarter, we incurred approximately $3 million and ramp up costs for expanded second half flight operations for Amazon.
And we expect approximately 4 million more of those costs in Q3 as well.
We do anticipate sequential improvement in earnings remain CMI services in the third quarter and significantly improved segment earnings in the fourth quarter when ramp up will be complete and scheduled airframe maintenance is like.
On the hiring front, we have hired over 70, new pilots as well as technicians and other employees to fully support CMO and AC My operations. This year and allow us to continue to provide exceptional service to our customers.
We amended the collective bargaining agreement with our ATM.
Pilots, a year ago, with new wage and benefits packages, but we remain in contract discussions with our ABX air pilots.
Cam our leasing business had a good quarter.
Revenues net a warrant related lease incentives increased 27% due mainly to five more converted 767 freighters in service versus a year ago.
Kim also had a full first half of revenues from the 11 passenger aircraft that are acquired from omni and lease back to them.
Cams pre tax earnings rose, 8% to $17 million from the prior year quarter. That's net of 5 million more and allocate in interest expense and 8.2 million more for depreciation than a year ago much of it omni related.
Kim had 56 cargo aircraft leased to external customers during the second quarter to more than the prior year.
11, 676 Sevens, we're awaiting undergoing conversion to freighters at June Thirtyth, including three passenger 767 acquired for conversion during the second quarter of 2019.
One of them was deployed in passenger service with omni at the end of July in response to strong second half demand for charter passenger lift we have seen increased interest from airlines, who operate the 737 Max.
And do believe that discontinued grounding has created additional charter opportunity.
We expect all of our aircraft to be fully deployed during peak season, but the steps required to get all of our aircraft ready for peak will include readying. The seven six sevens in staging now for redeployment.
Results of our maintenance and conversion businesses previously reported via the MRO services segment I. Once again included in other activities, our consolidated revenues with omni, meaning they are no longer large enough to require reporting as a separate segment.
Pre tax earnings for other activities net of intercompany transactions are up $1 million to $4 million versus the prior year.
External maintenance results remain on track, partly offsetting the loss of our sort Center management services for the U.S Postal service last fall.
Amazon notified us during the second quarter that they will be in sourcing the manager to eight gateway facilities, where we supported independent contract employees the transition of our responsibilities to the Amazon at these facilities will be completed this month.
We have also gained some logistics work, including managing and staffing Amazon's gateway operation in Charlotte and the aircraft fueling and maintenance responsibilities for material handling and ground equipment and Wilmington.
Amazon now operates a regional here have here currently involving eight of our 767 aircraft.
The core competencies of our logistics group make it a virtual Swiss army knife, which can add value for the customers who lease and operate our aircraft.
Our service remains best in class for our largest customers and we get consistent positive feedback regarding not only our service quality, but also our ability to adapt to rapidly changing needs and respond with predictive solutions to improve service.
Our customer first service culture spans all of our service providers and we feel that this differentiation, particularly in the express in ecommerce segment will continue to reward us with growth going forward.
That completes a summary of our operations for the quarter and with that I'll turn it back over to Joe Thanks Rich.
In fact, all of our business units are performing well, thus far and from an operating standpoint are mostly on track with our plans for the year.
In April we lengthened our six year of 16 year relationship with DHL by extending leases and operating agreements with them for 11 aircraft for another three years.
Three of our other 7673 hundreds are ordered leap lease to DHL for even longer terms.
When we announced our agreement with Amazon in December for 10, more at least seven six sevens and lease extensions for the 20, you had already lease them, we expect to deploy five each in the second half of 2019 and 2020.
That Amazon's request, we have changes scheduled to release them 676 Sevens this year and four more in 2020.
In late June Cam deployed the first of the six.
The second one entered service in early July and the third is due later this month.
The three others will be in service by peak season.
We also told you made it we have agreed to at least at least 476 sevens to EPS in 2019 and potentially another in 2020.
All under six year terms.
In addition, we will be supporting EPS during peak with additional 767 capacity under short term arrangements as we have done in past years.
Quint noted that our projected capex spend for this year remains at $475 million, which is up $182 million from 2018.
A portion of that is for increased capitalized maintenance cost Romney aircraft.
But most of it is to expand cams portfolio of 767 leased aircraft.
I expect that we will be able to place a minimum of 10 more seven six sevens for the full year 2020.
That includes four more 767 is already committed to Amazon and the one we expect to lease to EPS next year.
We are in good shape for feedstock.
We arrange with Jetrion last year to purchase 20 767, most of them formally in service with American Airlines.
We have purchased five of our jet trend allotment so far.
Last week, we contracted to purchase three other seven six sevens from M&A was one to be acquired in 2020.
We're continuing to make progress with our JV partner towards FDA approval of an STC for the Airbus Athree hundred 21, 200 passenger to freighter conversion.
We continue to expect that approval by the middle of next year and anticipate investing 6 million more in the second half of this year into the venture.
Cam continues to assess the market for Athree hundred 21 feedstock in anticipation of STC approval in production.
Possibly beginning late next year.
Like those of you who analyze the air cargo space, we're still getting plenty of calls asking about the effect on Ats G.
The current global trade disputes.
Our response remains unchanged, we don't sell space, our midsized freighters flying time definite regional networks not in the long haul lanes moving manufactured goods.
And we get the bulk of our cash flow and return on investment from long term aircraft leases with much of that lease demand coming from customers expanding their ecommerce and express networks.
Government entities now comprise more than 40% of our total revenue, which even further immunize us from the effects of trade disruptions and economic cycles.
In short, we do not face any significant exposure from tariffs or other trade negotiations.
That doesn't mean, we can't be impacted by other items, including customer changes to their network flight operations, including the DMD.
Also smaller regional air cargo operators, sometimes struggle when market shift.
But we have built a business, which can generate sustainable growing cash flows over the long term not just where the market conditions are stable.
That differentiates us from our competitors and will continue to create shareholder value.
That concludes our prepared remarks, Brandon we're ready for the first question.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad, if youd like to be removed from the queue. Please press the pound sign for the hash key if you're on a speakerphone. Please pick up your handset first before dialing once again if you have a question. Please press star one on your telephone keypad.
And from Stephens, we have Jack Atkins. Please go ahead.
Hey, guys. Good morning, congratulations on a great quarter here.
Thank you thanks.
So rich let me if I could start off with with a question for you and just kind of Dovetailing on on Joe's comments there at the end of his prepared remarks, but.
Could you could you just maybe talk about.
You're what you're seeing and hearing from customers.
With regard to.
Interest in an incremental aircraft leases from here obviously.
We saw there.
Amazon pulling in aircraft forward into 2019 and yes.
Good morning, another plane for 2020 and could you just talk about what you're seeing and hearing.
Generally in the marketplace and has anything change in the tone of your customers over the last.
Three to six three to six months I mean, I think that's clearly a concern for folks and from what we're seeing in your business, that's not having an impact but would just be curious if you're picking up on any changes in town.
No Jack in fact, we see the market is for the what we do very is very strong in all in all geographies within which we currently lease aircraft.
If you look at the United States, we've already talked about we're deploying this year, we've got a significant portfolio already committed for next year.
And then we've got demand talking to existing customers and new customers in the far east.
We're talking to customers in the middle East the only places a little bit of weakness is Europe , but.
But even there there are there are carriers looking for aircraft. So again, if you think about the market that we have and we talked about this a lot over the years and that is we fly these airplanes in regional markets.
And we fly for express carriers and companies and companies that provide ecommerce fulfillment in those markets.
Going very strong look at look at EPS is second quarter results say, 30% growth in their express business, 30% growth as large as they are is extremely significant so we see the market is very strong we're bullish on the market. We've acquired some more feedstock. This year, we think will have no problem deploying all the aircraft that were.
Going to produce next year going forward.
Okay. That's that's very encouraging and I guess, just kind of following up on your comment there on sort of the market I mean, when we think about Amazon who is obviously a major customer speeding up their supply chain and going from two day Prime to one day Prime that obviously has a ripple effects across the rest of the market and as you guys think about the potential market opportunity.
I Wonder, how you want to slice and dice it but.
Particularly within the domestic market for domestic express capacity over the next five to seven years.
To me it seems like there is quite a long runway there, but just would be curious to get your take on.
How you see the market developing over the next.
Over the next several years because it doesn't seem like the need for for express capacity is doing anything but going up.
No again.
It's a good observation Jack if you look at if you look at the growth.
Again as you look at the growth of Amazon.
And you look at the penetration of e-commerce into the retail segment of the United States as well as an example.
You know, it's probably 12% to 13% that's it and you look at the retail the retail environment Thats struggling you still see a lot of close or closures of brick and mortar stores with that business transitioning over to online.
So all those signals and all the things that you read about.
We see on the aircraft front, we're hearing from customers.
We wouldn't have thought two years ago that we would be leasing airplanes. The us but here we are.
And so you know trying to keep up with this growth trying to get enough assets going forward.
Customers that need seven six sevens.
Athree hundred 20 ones in the future.
No we're very bullish on the market.
Okay, that's great and just last one for me and I'll jump back in queue, but I guess this one's for quick.
A quick when we think about capex needs looking out into 2020, and I know you guys Im sure formulate your budget for next year or just beginning that process. So I'm not looking for formal guidance, but.
As we sort of think about the 475 this year.
The plan I think is to convert and put into service 10 planes next year.
I guess, how should we be thinking about the capex needs for the business, just maybe corporate brackets honored or just sort of a rough ballpark.
Next year, if the plan is to convert in place 10 plays into service what would what would the capex requirements for that for the business be next year under that scenario.
Well Jack.
Again as you noted we're projecting in terms of.
Deployment plan, a very similar year to what we're seeing this year.
And it.
We will enter the year with I think 11 aircraft.
And.
In March we already own the airframe. So we've got to complete those but we will we do anticipate taking some more of the X. American fleet next year.
In terms of additional airframes, and so I think it will be.
You know, it's still a pretty significant capex year, and 2020 down somewhat.
Certainly because we've we've been in terms of filling some of the orders, including the U.S. order you know we've been pretty aggressive about our acquisitions of airframes. This year. So I would expect a lower number but.
It won't be.
North of certainly north of 300 million next year.
Well north of that.
Closer to probably 400 mill as just a place holder for now, but we'll of course give you updated guidance on that as we get farther along in the year.
Okay. That's helpful, but I mean, you've been you've been a north close to 400 mill would still imply.
You know some some pretty nice free cash flow generation next year, not that's just kind of what I wanted to get some more color on so thats helpful. Thanks again for the time guys really appreciate it sure. Thanks Jack.
From Stifel, We have David Ross. Please go ahead.
Good morning, gentlemen.
Hey, Dave if you think about the.
As you think about the plane additions going forward.
The call for 10 more next year doesn't factor in any Athree hundred 20 ones.
But you said that there's a possibility.
I guess the certificate is approved.
It could be entering the fleet is.
As early as the second half of next year is that correct.
Yes, Dave I mean, the right now the target is to have the SDC approved.
By the end of the second quarter of next year.
Production would start off relatively slow in terms of gearing up multiple lines to produce the converted freighters and of course, there's the feedstock question.
With the issues with the 77 Max.
As that continues to.
Go down the road down the rails further what it already has yeah, that's certainly going to keep some of the potential feedstock tied up and of course right now is keeping feedstock prices pretty high but we would expect the potential acquisitions of feedstock aircraft.
By the latter part of next year.
Unlikely that we would have any converted into service at that point, but certainly we'd be looking to to do some acquisitions of the feedstock and get that program started.
And would they mainly be converted in Tampa.
We're looking at that as a go to option at this point in time got folks down there meeting today. In fact are today Tomorrow just to review what the potential is to set up multiple lines down there so that certainly high on the list.
And when you think about the plane type versus 767 model that's prevalent in e-commerce today.
Is that.
And.
I guess do you think about incrementally or is the competition with the 767.
For those customers are on certain routes, where theyre thinking about either or.
No that would not be a competitor to the 767.
We look we look at on two fronts. Obviously the reason we liked the airplane is just because of the cubic capacity associated with it.
And so essentially equivalent to a 757 give or take give or take a percentage or two of cubic capacity.
But a significantly lower operating cost and when you look at the potential marketplace out there. If you just say well, okay, let's assume for a moment theres not any growth that would require those assets just look at the number of 757 freighters are in the marketplace today between Fedex as DHL and a couple others I mean, you're talking about well over 200 aircraft of 757 type.
Now that these would be replacements for so anything that you would get from a pure growth standpoint.
Would be additive to that so we see it as a very strong market, it's not dissimilar to when we jumped into the 767 way back in the late Ninetys as an ideal candidate for the express market and now that same thing applies the same process.
I'd it applies to the 321 for the E Commerce and express markets.
Thank you and then quint on the Capex side.
How much would you consider the capex to be replacement Capex.
Not typical maintenance capex and not growth capex, but any planes that are.
Maybe coming out of service and you're replacing it with a new plane for a long term contract or is that minimal right now.
It's fairly minimal I mean, there could be as many as a couple airplanes that we elect and keep in mind, Dave when we when we take one on aircraft out and we really only taken I think the 1767 200 freighter out so far it's an elective saying I mean, we do it based upon the opportunities that are in front of us theres nothing that requires us to put the airplane.
Out of service, but it may be that the demand for the larger 300.
Causes us to say, hey, it's a better investment rather than maybe do some maintenance on a 200 to go ahead and take it out of service Cannibalized and gypsum and other parts and then invest in the three hundreds which of course carry with them a higher EBITDA production.
Higher higher lease rates, so it's not even replacement it's not a one for one because you're getting an asset back that has a higher cash generating potential.
And then when you look at the 2020 is.
Is there any need to replace much of the fleet or is it still humming along and all that capex is pretty much going to be for growth.
Again, it's elective, but I would say over the next couple of years, you may see two or three two hundreds that we elect to as I've said invest in a higher production 300 asset.
And bring them down.
But that would.
Sort of a guesstimate, but that would be a.
I guess place holder.
Hi, Thank you very much.
From Cowen and company from Cowen and company, we have Helane Becker. Please go ahead.
Hey, guys, it's actually as Conor Cunningham on for Helane.
I appreciate the comments on the on the trade dispute resolved from guidance certainly suggests that your inflated from out from all the issues there but.
I just wanted to come at it from a different angle, maybe you can talk about what surprised you as a result, the trade dispute. It actually seems like you might be benefiting from shifting trade flows just interested on your thoughts there.
No we really haven't.
Seen utilities I guess, it's really hard to tell what benefit were seeing from that because of the type of line that we do is network line. So.
If there is more packages in the in the plan on the planes get higher utilization as a result in the routes that were flying.
We havent been asked on the.
We have very few charter resources available and they tend to be.
No not available over consistent carriers because of.
The way, we fly so havent seen much I have heard anecdotally just.
Things that come into the charter desk.
Where tariffs in that have popped up in the us on seafood and some other things have resulted in Canadian routes picking up.
More.
Volume going to China and to other parts of the world. So there are some things that are changing a little bit but doesn't really come into play with our business.
Okay, and then just on the kind of aircraft next year. So.
As you said already five of which are currently are likely spoken for I think in the past you've talked about like 12 to 14 being able to induct by 12 to 14 aircraft annually, depending on conversion flat.
Can you just see what can you just speak to like what the cost for your customers might need to see it be closer towards like the 14 to 15 range next year on the market.
Yes, so the five or not lightly committed they are under agreement okay.
So those are under under agreement for deployment for next year.
And.
When we talked about the 12 to 14, we were talking about the feedstock we have.
And the potential slots that we could get to to allow us to deliver that many aircraft. The question. We got last quarter was how many what's the most you could deliver in 2020 and Thats. The answer that we provided will we believe based on the pipeline and the customers that we're talking to will have no problem deploying the additional five and ill.
As we said we believe there is an upside there potential depending on what the market looks like so we're again, we look at the demands being very strong.
Due to be halfway through 2019 and have half of our 2020 fleet already deployed.
I think.
It is a good statement of where the market sits right now.
Yes, Okay and then.
I think you mentioned in the prepared remarks that you you're talking to new customers in the far East I'm. Just curious on maybe you can provide some makeup of what they are they traditional express kind of companies are are you seeing more demand on the e-commerce from an e-commerce players. Thanks again.
Good question they happened to be.
A couple of them are.
Fly.
Express networks and a couple of them fly for.
Other companies that have express networks. So it's the same type of flying that we do but it's in.
It's in geographies that.
You know, we don't have operating with already but but where our assets.
You know represent a good economic platform through which to to do it too.
Leverage their deliveries the.
You look at.
Companies like DHL DHL has a large contracted base around the around the globe and they have a lot of different operators that fly for that so.
We currently leased to one in Malaysia that flies for DHL.
And they're they're also looking at the growth profiles, well, that's right Airways in Malaysia.
Okay do you actually think that there what's the probability that you think that they move forward on these contracts.
'cause it more favorable than not or just just curious thanks, well I guess that were.
Very favorable on deploying our assets, where we deploy those.
We will be where we can get the best return on the asset so.
And it's great to have choices in terms of customers.
Okay I appreciate it.
Thanks Tyler.
From Susquehanna, we have Chris Stephanopoulos. Please go ahead.
Good morning.
And Im wondering if you could give us any additional color on the Max grounding and the opportunity that rich mentioned in his prepared remarks.
While the new I think everybody pretty much knows it.
The airlines that are impacted by the Max grounding.
It's a matter of what we have in the way of available capacity through omni with there.
It's in the CNS as they focus on the passenger market.
We did as we noted in our remarks.
Take one of the American aircraft and deliver to omni as as a growth asset so that they can employ it in.
That kind of replacement lift.
But right now of course, nobody is going to commit to anything that's a real long term generally you are talking about three to six month contracts.
To replace their seven third grounded 730 sevens.
Okay and.
Your release, you talk about not having or you suggest that you don't have a lot of exposure to payload sensitive business models, which I look at it.
Charter, but I don't think you've ever really sized up what your exposure might be too.
The chart charter market or shorter term.
Leases.
We we don't do much charter because we don't have consistent assets available if we do charters, it's a one off.
No no fly from here to Cambodia with.
And then try to get a load coming back.
Not.
Two or three month assignment or.
We don't put up airplanes on the schedule basis, we don't sell block space.
When we have extra aircraft in fact, we usually stages as the spare and one of our express networks to enhance service and usually those aircraft get used by the companies that were staging them floor and we get additional revenue on the aircraft that way, we think thats a much better deployment of that asset in terms of supporting our larger customers, such as DHL and Amazon and getting the incremental revenue in that way versus.
Having assets in the commercial charter market, Chris If you look at it for a period from my perspective, we have 475 sevens that we fly on an AC my basis with DHL.
We have one that's with a another customer on the West coast.
And then we have a couple that are tied into the military outside of that everything else is either part of a dry lease with the Sia Meyer just a pure dry lease so our exposure is virtually nil.
Okay, and then last one if you could give us an update on the labor talks with a bx fair enough.
If you're seeing any signs of labor disruption similar to what a competitor recently pointed out thank you.
<unk> as a credit to the guys at AB ex even though we're going through a protracted negotiating period. They continue to move the aircraft, we're not seeing any kind of game playing or.
Increase in site called T calls mechanical issues anything of that nature that theyre doing what they've always done which is which is move the aircraft on time and for all intents and purposes. They are the best in class four out of our airlines in terms of the cargo sector.
Right now were scheduled to go back and mediation in September .
Well hopefully we'll continue to make some progress we did a little bit the last time around.
Sides have been working back and forth exchanging ideas. So hopefully, we'll we'll we'll see some progress on that front and of course as you know we have both.
Omni, which already have collective bargaining agreements in place.
Thank you.
Thanks, Chris.
From Seaport Global we have Kevin Sterling. Please go ahead.
Good morning, Joe Quinn Rich Kevin.
Hey, congrats on a really nice quarter.
And I'm going to apologize upfront because.
Just because I would have bonus you. So if I ask a question that you've already answered. Please tell me.
So as we think about then quit it's probably for you have to think about your EBITDA guidance for 2019 implies roughly call. It 230 232 million of EBITDA for the back half of this year. It sounds like Q4 is going to be stronger than Q3, because of heavier second half flight schedules, but for modeling purposes Quint, how should we think about that break down I'm not looking for specific dollar figures.
Right.
Yeah.
60% of your that EBITDA in Q4, and 40% in Q3 or 55 45 can you help us just for modeling purposes is to make sure. We're on the same page.
Yes, Kevin Thanks for the question I think if you look at Q3 and keep in mind, we've got as we've said our asset additions are coming.
Skewed towards the later half.
And of course fourth quarter always has some peak for cargo in it.
I would think about Q3 as if you look at our Q1, which was a strong quarter.
I think we did what a little over 113 and adjusted EBITDA that we have said that we expect some continued ramp up costs and third quarter.
Right and I think we estimated around $4 million. So if you think of that first quarter and then layer on had it had those ramp up costs.
You're just a bit below the 110.
Level, that's kind of where we see third quarter.
And of course fourth quarter is makes up the difference and you can sort of see what the relationship is you're right. We have what about 230 year or so and the and the back half.
Okay. Thank you so much that's very helpful.
And with your military flying with omni while down sequentially.
Sumit looked like it was in line with your expectations, how should we think about military flying for Q3 and Q4 do you have some visibility there.
Well, if you look at Ami Q3 will.
Hopefully be a little bit stronger than what the second quarter was it but Q4 is there light quarter. So when you think about our business model works on the cargo side for Q4 is always peak.
From a military standpoint, it's probably the lowest quarter of the year, but if you look at it sequentially from our military business were down about.
700 hours from the first quarter.
So we're down about 9%.
If you look at on a year over year basis second quarter last year to second quarter of this year. We are actually in total not just omni, but also card counting the cargo side, we're up about 4% on total military flying now there is some mix issues in there depending upon on the pack side of the equation as to whether you're flying with omni a triple seven or 767, but the numbers still or are pretty strong year over year.
Gotcha. Thank you very much and last question here, Joe assuming you get the Epay Epay certification for the Airbus Athree hundred 21 converted freighter and mid 2020.
When do you think we could see that aircraft, possibly in your fleet is it 2020 2021 realistic and are you beginning to get some customer indications or some interest from customers.
For this type of aircraft.
I think in terms of being in our fleet, Kevin probably be 2021 would be the earliest in terms of the aircraft actually being available for operating purposes, but I think if you look in terms of any significant contribution it would probably be out in the 2022 timeframe.
From a customer perspective, yes, I mean, the folks at precision that are due in the marketing side of the equation or are talking to a lot of people out there. There's a lot of interest in the aircraft that I said, it's got ideal characteristics for the market, where it is today with the yield.
Lack of density call it in the e-commerce .
Segment.
And of course, the operating cost compared to a 757 or significantly less so it's I think it's we're going to be well positioned with that aircraft type the alternative to what would be a 737 800, but that 77 800 is about 25% less cubes than the 321. So if you're looking at something to that replaces an existing 737 400. For example, the 320 ones ideal from a growth standpoint, as well as a replacement for the 757, So we're pretty excited about.
Yeah Okay.
Great. Thanks for your time today.
Thanks, Kevin Thanks, Kevin.
And once again, if you do have a question. Please press star one on your telephone keypad.
From V.A., we have Howard Rosencrans. Please go ahead.
Yes, yes.
Hi, guys. Thank you.
Yes.
Thank you I don't want to get too too often minutia I just want to make sure although.
Sure certainly baffled by.
Five to stock before and after so maybe I'm missing something you made some sort of comment.
About.
I guess, what the Amazon in terms of moving back and moving forward.
Our fleet Delevering and you mentioned something I believe about Amazon doing some in sourcing and then.
Which I guess had some.
No <expletive> negative and then you were going to add some logistics for them. So.
Maybe just.
Touch more color to the extent you can provide in Taiwan.
So items.
Sure Howard.
On the moving forward and back its recall that the commitment from Amazon was 10 airplanes in the initial.
The thought structure that was four or five to be delivered in 2019 and five to be delivered in 2020.
What's changed on that as we will be delivering six and 2019 and four and 2020. So thats the how the aircraft to fly it still 10 airplanes, but the mood one forward due to their.
Volume needs.
On the Gateway logistics side, we we have we had agreements have still have agreements till the end of the month.
To handle eight of Amazon's gateways, but we do that on a contracted basis. So we manage the process that we hire independent contractors actually do the loading and unloading.
And we do it on a cost plus basis and so those eight.
Locations are going to be in sourced by Amazon and we're losing that business now it's a very small margin. So it's not a significant.
Amount of business that we're losing.
Thats being replaced by you won't see any impact because on the in the numbers because as being replaced by other business that will roughly be about the same and that business is here and some of its here in Wilmington, where we're doing.
Some of the ground.
Ground surface equipment, we're doing the maintenance on that we're doing for them and the winner and we're doing the material here handling equipment maintenance for the large sort building that they have operating right. Now in addition to that we opened a new gateway that were handling directly and others were hiring our own employees to do the sortation the loading and unloading of the airplane and those two business segments of growth will will will offset the loss of the gateway business.
That that they are in sourcing.
Got the fact that you're moving the Amazon.
Fixing foresee taking one more more this year and one less next year does that.
Increase fee associated startup cost to you mentioned that you absorb three in Q.
Three and we'll absorb four and in Q excuse me three in Q2, and we will absorb four in Q3 is that heightened by the goal.
Well the pull forward of one aircraft for Amazon.
Yes, so the aircraft.
The aircraft, we already had in our plan to convert and deploy.
It happened to go to Amazon because of their business needs, but what's what's increasing our cost versus our original plan was the need to crew that aircraft.
And so we had to hire complement of.
Pilots for its also a little bit of increase maintenance cost.
And with the cost that we're talking about when we say we're ramping up his training cost for crews that is significant but we don't get any revenue those crews on generating revenue until it fully trained and in the aircraft and so thats why when Quinn had noted that in the sequentially in the third quarter in the fourth quarter, our AC My operations.
Will we will show improved results as a result of those crews that are currently in training actually getting out and flying aircraft and generating revenue.
Okay, I apologize if I'm missing your answers so if the fact that you're adding.
The fact that you're pulling forward one of the aircraft.
For Amazon is that having a short term.
Negative impact on.
Be it let's say or.
Q3 in particular just to get to.
So that maybe you get more positive benefit in in 20 cents fuel have have less.
That's that's my question.
Yes, yes, so that that will have increased crew training costs in Q3 to deploy for that aircraft that additional aircraft that were adding.
In Q4.
Okay, but that will only increase that will decrease.
Decreasing 20 would be your prior expectations, yes, Sir.
Correct on the crew training front and ramp up costs, but it will increase the revenue because aircraft will be out there and Amazon's network flying for the whole year, whereas right now we anticipated to 2020 aircraft would be back loaded similar to what 2019 was so we'll actually have one airplane platform a lot sooner.
Okay, and you mentioned.
Yes, I, just sort of hopped over maintenance as its no longer rate.
Hey, guys its no longer material, you're not going to break it out et cetera.
You Didnt.
Provide us much much commentary in that regard but.
I thought okay.
Obviously, you're a much bigger company now but.
Yeah.
I thought that the maintenance product that that that maintenance business had some pretty compelling prospects to to grow nicely, particularly since you were looking into getting the.
Into doing Airbus et cetera.
So I am just wondering what your thoughts are if we go out a little further.
Get accreditation for for for Airbus.
I am just curious your old their MRO Division Act to you is that.
B.
Can that generate some.
I don't know $510 million or something.
I think at one point I envision there was going to be a $15 million to $20 million EBITDA contributor maybe a few years out so could you give us any sense since its still longer a broken out segment.
Howard in terms of the MRO side I mean, there's there's two two primary pieces to it one is the heavy maintenance side, which requires the anchors et cetera. Then there is the line maintenance piece most of the line maintenance is focused on the the internal airlines the affiliates.
But you're always limited in terms of the heavy maintenance side of the equation by year hangar capacity per se. So when you think about growth if you're operating at Max capacity within the square footage that you have available to you.
It's going to level off in your growth is going to be more born of what efficiencies you can bring to the table and what rate increases you can get out of your customers. So we would not consider the MRO side to be a high growth part of our business like the leasing side is obviously, but it's a good stable portion and always serves as a.
Nice additive to our Cam leasing business, because it does give us the flexibility to.
Move aircraft around more effectively than if we had to wait for third party due to perform heavy maintenance checks et cetera, as we transitioned aircraft back and forth. So it's it's one of those things it's kind of a needs of the business for us at this point in time.
We're still going to continue to generate as you said earlier $5 million to $10 million worth of.
Bottom line benefit.
But going to 15 or 20 years is probably not in the cards unless we go out and build some more hangar space.
Well I guess I meant through external and I get a little confused between internal and external I thought the I thought if I, assuming you get all your Airbus certifications I thought there was a bigger opportunity on an external basis, but maybe you're saying you're you're space limited up.
Yes, I know, it's looking like Thats one of the reasons were assessing it Howard to see what makes the most sense for the utilization of the space. We have so stay tuned.
Okay any thoughts on whether you will reallocate capital or go for a slight you're less than three and a half times and you are going to drop down further next year, particularly with a lower capex next year.
What are the prospects you'll go assess fee.
Okay, returning some capital to shareholders.
Buying back stock I think you've done.
And you've got some of that in the past.
Just wondering what your perspective is on it. This time, maybe you could remind us as to sort of the prices you paid when youre buying in some of the.
The sort of issue to Amazon stock, which are now again issuing more of in that new deal.
Yes, I mean, Howard as Quint as you as you mentioned, we've done stock buybacks in the in the past I know, we did a large buyback I think it was in 2016.
From.
At the time, our largest shareholder.
And I think it was what 13 13, seven or so that we bought about 3.8 million shares if I recall and we you know we have that as we've said as a as a way to.
Create value for our shareholders, we've been in a growth cycle and riches described what our opportunities are but to the extent that there is a.
Any slowing of of.
Of growth or at least a reduction in capex that creates more opportunity to look at.
We believe that.
As an accretive way to get value to our shareholders. So you're right. It will be an option that becomes a greater option for us.
Assuming that.
Capex needs decline.
Okay, well you suggested pretty confidently that they work so.
Okay Alright.
Thank you so much for your time I appreciate it.
Thanks Howard.
And from Susquehanna, We have a follow up from Chris Stephanopoulos. Please go ahead.
Hey, Thanks for the follow up I was wondering if you could just remind us of the.
The mechanics around the military business.
I believe the business goes on the government's fiscal calendar, which is October through September or thereabouts and weather.
Also give some color what you're seeing around.
Passenger flying for the military where a competitor also recently announced that things were a little slower than expected. Thanks.
Yeah, Chris.
You're correct that the government fiscal year's October Onest through September Thirtyth.
When you look at the military flying as I said with omni.
A lot of it is determined by whether you're flying a 767 or in our case, a triple seven which obviously generates more more revenue than the smaller seven six and atlas's case, it's a 747 versus 767 and I think what Atlas ended up seeing was a decline in the 747, because even though the hours might be the same if you replace them for seven hours with the seven six theres going to be a revenue decline.
Well, if you look at ours, and we don't give a breakdown per se, but as I mentioned earlier, if you look on a year over year basis in the second quarter, we were down about 1.5% on total packs up block hours with with omni.
Okay fair enough.
Final question, if you could give us any color around how we should think about head count.
Growth for this year.
I think last year or.
December you finished just.
Hair under 4000 is kind of mid to upper single digit growth the right way to think about it. Thank you.
When you look at it from a growth standpoint, Chris the obviously as rich mentioned earlier, we've got the.
Charlotte hub that we.
Startup rare, it's fairly gateway for Amazon, it's not a large facility.
Per se so it's not going to be big numbers driver, where we're really seeing the growth is on the airline side as we put in our in our opening remarks, we've hired over 70 flight crews year to date just at a tie.
In order to be able to meet the Amazon scheduled requirements for the latter part of the year.
So you're not talking big numbers, unless we were to have.
In a position to open up additional gateways et cetera, but I would see growth on from people standpoint.
150 to 200 people Max.
Okay. Thank you.
And no further questions at this time I'll now turn it back to Mr. Gd for closing remarks.
Thank you Brandon.
Most of our colleagues in the air cargo industry are focused on what's happening in China and other markets affected by tariffs and economic uncertainty.
That's not the case with us the vast majority of our businesses with customers that need what we provide regardless of how the trade winds blow and whether the economy grows. We hope you appreciate the cash flow visibility our model provides and how can carry our shareholder value higher in the years ahead.
Thanks for joining us today and have a quality day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.