Air Transport Services Group Q2 2024 Earnings Call Transcript

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August 9, 2024

There are 9 speakers on the call.

Operator

I would now like to hand the conference over to your speaker today, Joe Payne, Chief Legal Officer.

Speaker 1

Good morning, and welcome to our Q2 2024 earnings conference call. We issued our earnings release yesterday after the market closed. It's on our website atatsginc.com. Let me begin by advising you that during the course of this call, we will make projections and other forward looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we describe here.

Speaker 1

These forward looking statements are based on information, plans and estimates as of the date of this call. Aitch 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 the market demand for our assets and services, including the loss of customers or reduction in the level of services we perform for customers our operating airlines' 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, 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 conflicts and human health crises and other factors as contained from time to time in our filings with the SEC, including the Form 10 Q to be filed today.

Speaker 1

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, free cash flow and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG's financial position and results. These non GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website. And now I'll turn the call over to Joe Hete, our Executive Chairman for his opening comments.

Speaker 2

Thank you, Joe. Good morning, everyone. I want to spend just a moment on the leadership transitions we announced back in June. Mike Berger, previously our President, was appointed as CEO. Jeff Dominick, previously a Board member, took over Mike's role as President, while I became the Executive Chairman.

Speaker 2

Many of you already know Mike well from prior earnings calls and investor meetings. He's been with ATSG since 2018 and brings a wealth of knowledge and experience having worked for major express companies throughout his career. With a background in private equity investing in commercial aerospace markets, Jeff expands ATSG's financial acumen in the aircraft leasing space and we look forward to you meeting Jeff. As for me and my new role, I will still be heavily involved in the strategy development and the formulation of long term business objectives for ATSG. I'll turn the call over now to Mike to update you on the quarter and both Jeff and I will be available during the Q and A session.

Speaker 2

Mike?

Speaker 3

Thank you, Jill, and thank you to everyone joining the call today as well. I'm excited to be speaking to you on my first earnings conference call as CEO. I want to thank Joe Headey for his leadership and guidance as CEO after assuming the role last November and for continuing to lend us his skills and experience in his new role. I'm excited about the opportunity ahead of us here at ATSG. We have an unparalleled fleet of in demand midsize freighters going to market with our lease plus strategy, which differentiates us from our competitors.

Speaker 3

Last quarter, we communicated a key milestone, our expanded and extended flying agreement with Amazon. We will fly 10 additional aircraft they provide this year and we remain on track with prior expectations to be fully ramped up on those 10 aircraft by peak season. That will bring us to 51 767 aircraft we operate for Amazon, including 30 we leased to them. Comparisons of our financial results for the Q2 to prior year were principally affected by fewer lease 767-200 freighters as expected. Our results for the quarter did come in above our internal expectations.

Speaker 3

Also, we are encouraged to report the progress we've made on leasing available freighters. Since the end of June, we've leased 4 additional 767 freighters to external customers. CAM also has lease commitments for our first two converted Airbus 330 aircraft expected to deliver in the Q4 of the year and is optimistic about future leases of other available aircraft. All these aircraft are headed for international markets where they will facilitate global trade further demonstrating ATSG as an enabler of e commerce growth. Importantly, we continue to execute the plans we laid out for 2024 with a focus on safety, customer satisfaction and cost control.

Speaker 3

I want to thank our ATSG team for their dedication and striving towards our goals. We're on track to exceed our stated goal of positive free cash flow for the year with $107,000,000 generated through June and an expectation of additional free cash flow for the rest of the year. We are again raising our adjusted EBITDA outlook and have lowered our capital expenditure outlook for 2024. We remain focused on realizing the benefits of our business model and have the right team, the right assets and the right strategy in place. I will now turn the call over to Quint Turner to discuss our financial results for the Q2.

Speaker 3

Quint?

Speaker 4

Thanks, Mike, and welcome to everyone joining us this morning. I'll start on Slide 4, which summarizes our financial results for the quarter. Revenues were down $41,000,000 or 8% versus a year ago to $488,000,000 This was driven by reductions in both our CAM and the ACMI Services segments. In the Q2, we saw GAAP pre tax earnings of $10,700,000 down from pre tax earnings of 49,700,000

Speaker 5

dollars in the prior year period.

Speaker 4

This resulted in a diluted earnings per share of $0.11 versus diluted earnings per share of $0.49 in the Q2 of 2023. On an adjusted basis, pre tax earnings fell $41,000,000 to 17,000,000 dollars and EPS was down by $0.38 to $0.19 Adjusted EPS did improve sequentially by $0.03 from the Q1. In our aircraft leasing segment, revenues decreased 7% as CAM's fleet of externally leased aircraft expanded by 1 since June 2023. That includes 14 incremental new leases less the 13 aircraft that came off over the last 12 months and the related engine PVC revenues. At the end of the second quarter, 87 CAM owned aircraft were leased to external customers.

Speaker 4

CAM's pre tax earnings were down $16,000,000 for the quarter, reflecting $9,000,000 more in depreciation, a $6,000,000 revenue decline from fewer 767-200 engine cycles and $4,000,000 more interest expense versus the prior year. In our ACMI Services segment, we reported a pre tax loss of $7,000,000 compared with a gain of $24,000,000 in the Q2 of last year. Total block hours flown by our 3 airlines were down 10% versus the prior year quarter. Our cargo airlines flew 11% fewer hours across our customers' delivery networks. ACMI Services results were also affected by a $3,000,000 increase in non cash amortization expense for the Amazon warrants.

Speaker 4

ACMI Services also experienced increased expenses for maintenance, travel and ground service rates as the average flight segment was shorter than a year ago. As a reminder, we executed an expanded agreement with Amazon announced in May to begin flying 10 additional aircraft at ABX Air in the second half of the year. 3 of these are flying now and we expect to have all of them flying in time for peak season in the Q4, when additional pilot training and transition costs will be largely behind us. The Q4 will also include benefits of seasonal peak flying opportunities and separately scheduled pricing increases under certain flying contracts. Turning to the next slide.

Speaker 4

Our 2nd quarter adjusted EBITDA was $130,000,000 down $27,000,000 from the prior year period. CAM's adjusted EBITDA decreased by $4,000,000 and ACMI Services and Other decreased by $23,000,000 CAM's decline was again driven by 767-200 lease returns and fewer engine cycles operated by the 200s remaining in service, resulting in lower power by cycle engine revenues. The decrease in ACMI services and other was driven by fewer block hours as well as increased expenses for maintenance, travel and ground services. Slide 6 details our capital spending on a trailing 12 month basis. Total CapEx for the quarter was $70,000,000 consisting of $43,000,000 in growth and $27,000,000 in sustaining CapEx.

Speaker 4

Our CapEx spending is down 64% year over year for the Q2 and for the full year 2024, we project a decline of more than $400,000,000 in capital expenditures compared to 2023. The next slide updates adjusted free cash flow as measured by our operating cash flow net of sustaining CapEx. Operating cash flow was $137,000,000 in the Q2 of this year, while that was down $55,000,000 versus the prior year period, we still generated $110,000,000 of adjusted free cash flow. Furthermore, as a result of the reduced growth spending as well as $25,000,000 in asset sale proceeds, we generated $92,000,000 of free cash flow in the quarter. This brings the year to date total to $107,000,000 On Slide 8, you can see that available credit under our bank revolver in the U.

Speaker 4

S. And abroad was $489,000,000 at the end of the second quarter as we reduced total debt by 131,000,000 dollars since the beginning of the year. Our plan now calls for us to reduce our adjusted EBITDA leverage ratio to around 2.9x by the end of this year compared with 3.2 times at the end of last year. We continue to maintain healthy liquidity with unencumbered aircraft assets of $1,400,000,000 Now I'll turn the call back over to Mike to discuss our updated outlook.

Speaker 3

Mike? Thanks Quinn. Turning to the next slide, I'd like to spend some time discussing our outlook and assumptions for 2024. Including the additional leases we signed since June, ATSG now expects adjusted EBITDA of approximately 526 $1,000,000 in 20.24, an increase of $10,000,000 from the outlook we provided in May, with the increase concentrated in the 4th quarter. The contribution from these leases was included in our original $30,000,000 of potential, but uncommitted additional adjusted EBITDA we laid out in February.

Speaker 3

We expect the 3rd quarter adjusted EBITDA to be similar to the 2nd quarter with a marked improvement in the 4th quarter. As a reminder, this forecast also excludes any contribution from additional leases not currently under contract, which could generate additional adjusted EBITDA. We continue to see more interest in our newly converted freighters, while maximizing value from the 767-two 100 aircraft that finished their lease terms. This includes utilizing 3 as spares to support additional Amazon flying. As mentioned, we are reducing our total capital spending target to 390,000,000 versus $410,000,000 we projected in May.

Speaker 3

This includes $165,000,000 for sustaining CapEx and $225,000,000 for growth. The gross spending outlook includes the completion of 17 aircraft that were in the process of conversion at the start of the year and 7 feedstock purchases including 1 additional Airbus A330 later this year. As I mentioned earlier, we generated $107,000,000 of free cash flow through June and we expect continued improvement during the rest of the year. This improvement stems largely from the $400,000,000 reduction in our CapEx spending versus a year ago. We continue to believe our midsized freighter assets will remain in high demand and our unique lease plus strategy positions us for more freighter leases and superior customer satisfaction.

Speaker 3

We are focused on safe, efficient operations as we deliver our 2024 goals and look forward to an even better 2025. That concludes our prepared remarks. Joe, Quint and I along with Jeff Dominick, our President are ready to answer questions. May we have the first question?

Operator

Thank you. Our first question comes from Frank Galanti with Stifel. You may proceed.

Speaker 5

Yes, great. I appreciate you taking my question. I wanted to ask sort of about demand for the midsized freighters, what you're seeing, right? Obviously, you had more lease than you anticipated beginning of the year and last quarter. But sort of given how many of the older planes are coming out of service, how do you see the supply demand balance for that Freightor class?

Speaker 3

Yes, Frank, it's Mike. We still see solid demand for the mid wide body aircraft. We've delivered 14 aircraft in the last 12 month period. As we've announced, we've delivered 8 so far this year. And as I said, we know we're going to deliver the 2 A330s as we talked about.

Speaker 3

So we fully expect to deliver double digit aircraft by the end of this year and hope to carry that continuous momentum into 2025.

Speaker 5

Okay. That's helpful. And then sort of switching gears a little bit to the ACMI business. It looked like there were negative pretax earnings on the segment, which is worse than I had thought. Can you sort of talk about the puts and takes in the quarter on between lower block hours or more Amazon flying and then sorry, more Amazon CapEx or OpEx to get the pilots trained up?

Speaker 5

And then relative to what do you expect that on a go forward basis?

Speaker 4

Yes, Frank, it's Quint. Thanks for the question. Yes, in the biggest impact in terms of the 2nd quarter ACMI was just block hours and block hours were down. As you know, we had the final, the smaller 762s that we talked about last year that were coming back from Amazon, we got all those back right at the beginning of the quarter, the second quarter. And we had a reduced block hours flown in their network.

Speaker 4

Of course, as Mike said, we're going to begin adding aircraft, the larger 300s went 3 on and another 7 expected to come on the second half of this year. And then on these block hours, our passenger block hours were also down, of course, versus the prior year. And so those are the biggest impact. And we also had in terms of that, we had some warrant amortization with respect to the new Amazon arrangement. We had extended some of the warrants that had been previously granted to Amazon and the amortization of those is driving about a $3,000,000 impact for that.

Speaker 4

Now that said, in terms of what were our expectations for the balance of the year, We do expect ACMI Services as a segment to be profitable for the year. And again, you saw some commentary in the release, it's weighted to the 4th quarter. And there's a few reasons for that. Of course, there's always peak. There's the timing of some scheduled contractual price increases that are coming there.

Speaker 4

There's some seasonal charter opportunities, peak season opportunities. And so we do expect that for the full year ACMI Services, which is down for the first half in the loss position by about $10,600,000 to end up profitable for the full year. And I think they'll carry some momentum into 2025 with a larger fleet and some improved margins.

Speaker 2

Yes. On top of this is Joe Frank. On top of that, you got the elimination by the time we get to 4Q of all the gear up costs for the Amazon business as you mentioned in terms of pilot training, getting maintenance technicians trained up, etcetera. So that will be behind us by the time we get to the, call it, November timeframe.

Speaker 5

Perfect. Really appreciate it. Thank you.

Speaker 3

Thanks, Frank.

Operator

Thank you. Our next question comes from Sathalopoulos with SIG. You may proceed.

Speaker 3

So just

Speaker 6

a follow-up on this last point here on the pre tax contribution for ACMI. So Quint profitable in 4Q, just kind of better understand if you contextualize that, is that slightly above breakeven? And as we think about, I know there's a lot of these one time costs rolling off, but just looking

Speaker 3

at 23,000,000 you did around 32,000,000

Speaker 6

dollars 2019 pre pandemic around 32,000,000. How should we think about pretax earnings and at ACMI as a percentage of your EBITDA mix for $25,000,000 given the expanded TSA with Amazon and all these other additional aircraft that are being placed? Thanks.

Speaker 4

Well, it might be a tad early for specific 25 guidance. But in terms of the remainder of this year, Chris, it's really again the Q4 where you're going to see, I think ACMI service improving its profitability and getting positive for the full year. I think the Q3 is going to because we're still onboarding the aircraft from Amazon and we've got those transitional costs that Joe mentioned in the Q3 and that's going to be a factor. And the Q4 is when we expect to have them all on board and that combined with just the timing of sort of some annual adjustments that will take place on some of these contracts, I think will really provide a nice tailwind for ACMI Services in the Q4. I mean, as far as next year, of course, we'll be speaking to that guidance more on the next quarterly call for the full year.

Speaker 4

But I think ACMI Services is going to make headway next year assuming contracts and business volumes are remain in place as they are today, we would expect it to improve. As you know, they've had to absorb some aircraft coming back, with the 767-200s. And those are all back now on those CMI contracts. So I think they're set to make progress on a go forward basis.

Speaker 6

As we think about and come up with our own bottoms up analysis using all the fleet stats that you've given here for our 20 5 enterprise EBITDA. Is it fair to say that ACMI as a percentage of enterprise could fall somewhere between, call it, 25% 30% of adjusted total EBITDA for next year?

Speaker 4

Yes. I think so. Yes, absolutely.

Speaker 6

Okay. And as a follow-up here, with the outlook here for lower interest rates, how should we think about, I guess, lease rates or if you want to speak to, I guess, lease factors into 2025? Thank you. Or lease rate factors. Yes.

Speaker 6

Thank you.

Speaker 3

In regards to the rates, as I've mentioned on a number of calls, we've seen 767 specifically, lease rates be very, very stable over the last several years. We haven't seen much fluctuation at all through the different cycles that we've undertaken over the last few years. In terms of the lease rate factors, that can vary a little bit based on the feedstock costs, depending on different aircraft types as we go. Aircraft availability specifically around the 330 have been generally higher based on some of the issues that Airbus has had getting their new product in the 350 into service. But overall in general, rates have stayed very, very constant.

Speaker 3

Okay.

Speaker 6

And if I could just slip in one more here. I think you have 4 open labor deals, 2 on the pilots, 2 on the FAs between ATI and Omni, just where are we on negotiations and sort of any sort of timelines we should look for? Thanks.

Speaker 2

I think as I said on previous calls right now, we don't expect to have the pilots are the primary drivers from a cost standpoint to get any agreements until sometime in 2025. Negotiations continue to progress under the auspices of the mediation National Mediation Board. So it's that's baked into our numbers. We look into the Q4 where we don't anticipate having any additional costs as a result of settling up any of those labor agreements.

Speaker 3

Okay. Thanks, Jeff.

Operator

Thank you. Our next question comes from Michael Ciarmoli with Truist Securities. You may proceed.

Speaker 7

Hey, good morning guys. Thanks for taking the question. Good morning.

Speaker 5

Just to stay on that

Speaker 7

on the labor front with the pilots, is there any increased disruption there? Are you seeing any turnover from pilots? I mean, I think you called out crew training costs. But is that a factor or any kind of headwind on expenses there from that just overhang?

Speaker 2

No. In fact, the attrition has dropped off markedly since last year, almost down probably about 50% from where it was a year ago, which reduces our turnover costs. But we do have the gear up costs associated with the additional Amazon tails baked in there. As far as disruptions, no disruptions relative to cruise. I mean, everybody's doing the job they're supposed to do on a day in, day out basis and moving the airplanes on a timely basis for our customers.

Speaker 3

Okay. And I think it's worthwhile just to reiterate, the amended deal that we got with ABX Air through 2,030. We're really proud of that deal as well as establishing what our expectations are going forward.

Speaker 7

Got it. Got it. Okay. And then, just generally on the cargo market, I mean, you talked about ACMI and the block hours. Are you seeing any pressure just with the continued increase of passenger planes in that underbelly storage?

Speaker 3

Not from a belly standpoint, we don't see any pressure. Keep in mind, the majority of our customers and specifically our main customers fly within the major integrator networks. So when they're flying networks, they don't have a tendency to get the variability piece of it from a seasonality standpoint and available capacity standpoint. So we've seen very much stability in that side of the business.

Speaker 7

Okay. Last one for me. I don't know if I missed it. The $25,000,000 of property and equipment proceeds, what did that stem from? And should we expect any more of those in the second half of the year?

Speaker 4

Yes. Michael, it's Quint. There were 5 airframes that we sold aircraft, couple of 300s and then 3767200s that made that up. And keep in mind, like the 300s, those are unmodified. We were monetizing.

Speaker 4

As you know, we had some assets that were not in conversion that were sort of a weighting conversion. So we were opportunistic and took that opportunity to move some of those. And as we've been saying, we've had customers interested in buying some of these 7 600s that came back. And some of those customers, of course, will continue to procure engine power from us, which is good. So we monetize some assets.

Speaker 4

And as far as in the future, we'll be opportunistic, but as you know, it's something we don't typically that often do.

Speaker 7

Okay, perfect. Thanks guys. I'll jump back in the queue.

Operator

Thank you. Thank you. Our next question comes from Ian Zaffino with Oppenheimer. You may proceed.

Speaker 8

Hey, good morning. This is Isaac Salzin on for Ian. Thanks for taking all the questions. Can you just provide a brief overview on the timeline of conversions as we move to the rest of the year? I know you mentioned the 2 A330s are expected to be converted in the 4th quarter.

Speaker 8

But could you also just touch on the 767s? And maybe how do you think about the timing of those with respect to the demand outlook and potential for additional leases? Thanks.

Speaker 3

Yes. Thanks for the question. We expect to deliver, as I said earlier, a few more aircraft from a 767 conversion standpoint. We're still actively converting aircraft with II in Tel Aviv. And we see the continuous demand for more 767s on a go forward basis into 2025.

Speaker 3

We've often said and we still firmly believe that the 767 is the heartbeat of our company. And we will continue to convert 767s as they're in demand.

Speaker 8

Okay, understood. And then as a quick follow-up on the passenger block hours or just flying at ACMI. Could you I think you mentioned a little bit in prepared remarks on Omni. Maybe you could just help us understand where things are there as far as military flying and activity for them? Thanks.

Speaker 4

Yes. In terms of the omni hours, as we said, I think the passenger block hours were off versus a year ago by about 4% or so. However, on a sequential basis, they're not anything like that. They're doing a bit better than that on a sequential basis, actually being up on a sequential basis versus the Q1. I think that the exercises, as you know, that's the visibility is always a little bit tougher on the Omni flying.

Speaker 4

However, it is, Q3 is usually not a bad quarter for them. Their busiest month is in October, typically for the timing of exercises, but then they tend to fall off after that. And so it's a more normal pattern. We're getting to that point of the year where there's a contractual increase with the government's fiscal year beginning in October, and that's going to be helpful. So I think we're expecting it to be relatively stable the second half of the year, similar to the first half.

Speaker 8

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from Ben Rubinstein with Robotti and Company. You may proceed.

Speaker 7

Good morning. Thanks for taking my question. So at the Investor Day last year, you talked about you had a slide that showed the estimated carrying value of your claims being $350,000,000 less than the market value. I'm just curious where that stands today.

Speaker 4

That was based upon what the cost to convert aircraft is adjusted for the average age since conversion and taking into account the useful life post conversion, which is about 20 years plus. And actually the cost to convert has gone up since then. Like a lot of things, inflation has affected that. So to produce that fleet of aircraft today has gone up, only gone up since Investor Day. And so as Mike stated a minute ago, the midsize freighter is still in demand as the big driver for that is e commerce growth and network flying is where those aircraft are deployed.

Speaker 4

So I don't think that's really changed. Of course, the aircraft have aged a little since September and that depreciation will also be impacted. But if we ran that calculation again today, I don't think that has changed.

Speaker 7

Okay, thanks. And then just on the converts, the converts due in 2029, is there any willingness or ability to repurchase those?

Speaker 4

I guess in terms of buying the Converse back or buying stock after Converse I mean, what are you

Speaker 5

asking? I

Speaker 6

mean, if you could buy them back at

Speaker 7

a discount, why not do that? I'm just curious if that's something that you guys thought about.

Speaker 4

Yes. I mean, I guess anything is possible, but those aren't that would have to be something that both parties would want to do and it would be a negotiation obviously.

Speaker 7

Yes. Thank you.

Operator

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

Speaker 3

Thank you. I want to express my appreciation to all of our employees across the ATSG Companies for all the work they do every day for our great company. I also want to give a shout out to all of our customers. Our teams are super focused on delivering customer satisfaction every day. Since the start of the year, we have emphasized we must execute on our 2024 plan and regain the trust of our investors and shareholders.

Speaker 3

Very simply, we must do what we say we're going to do. No excuses. We have raised full year guidance to continue to look for growth opportunities and drive further incremental free cash flow. We are executing on this by still growing in our core leasing business. As you heard, we have delivered 8 newly converted freighters so far this year and provided an optimistic view for more deliveries by the end of the year.

Speaker 3

Our lease plus strategy is unique and brings a powerful solution to the market. We will continue to grow our global presence that is underpinned by connecting key economic and market indicators. In closing, I will say that we're pleased with the improvements we have made so far in 2024 and we have more to capitalize on. Let me be clear, we're not done by any means. Thank you and have a great day.

Operator

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

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Air Transport Services Group Q2 2024
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