Air Transport Services Group, Inc. (NASDAQ:ATSG) Q1 2024 Earnings Call Transcript

Air Transport Services Group, Inc. (NASDAQ:ATSG) Q1 2024 Earnings Call Transcript May 7, 2024

Air Transport Services Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Q1 2024 Air Transport Services Group, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Joe Payne, Chief Legal Officer.

Joe Payne: Good morning and welcome to our first quarter 2024 earnings conference call. We issued our earnings release yesterday after the market closed. It’s on our website at atsginc.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. These forward-looking statements are based on information, plans and estimates as of the date of this call. Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These factors include, but are not limited to, unplanned changes in the market demand for our assets and services, including the loss of customers or a reduction in the level of services we perform for customers; our operating airline’s ability to maintain on-time service and control costs; the cost and timing with respect to which we were able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG’s traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; our ability to remain in compliance with key agreements with customers, lenders and government agencies; the impact of current supply chain constraints, both within and outside the U.S., which may be more severe or persist longer than we currently expect; the impact of the current competitive labor market; changes in general economic and/or industry-specific conditions, including inflation and regulatory changes; the impact of geopolitical tensions or conflicts and human health crisis, and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q to be filed this week.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings, adjusted EBITDA, 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 Chairman and CEO, for his opening comments.

Joe Hete: Thanks, Joe. Good morning, everyone. I have a couple of positive developments I’d like to share with you before reviewing our results for the quarter. As many of you have seen, we just expanded and extended our flying agreement with Amazon to operate 10 more Boeing 767-300 freighters that Amazon will provide this year with the first one in June. The agreement includes the potential for Amazon to add up to 10 more aircraft beyond 2024. At ATSG, we are committed to providing high-quality service to our customers, and we believe this expansion of our relationship with Amazon is evidence of those efforts. The first 10 aircraft will be operated by ABX Air. This agreement for 10 aircraft will initially increase to 50, the number of freighters that ATSG will operate for Amazon, by year-end, including 30 that CAM leases.

We are now and will continue to be Amazon’s principal provider of air operations and capacity. Additionally, the amendment extends the term of the flying agreement into 2029, with the option to extend to 2034. We have adjusted our guidance for 2024 to include some benefit from the incremental flying under the agreement. The benefit factors in start-up costs as we onboard the additional aircraft and a partial year impact of the additional revenue. We expect results from this incremental flying to improve in 2025. As described in the press release and 8-K, ATSG granted new warrant incentives to Amazon and amended the terms of vested and unvested warrants they already hold. The second piece of good news is the ABX Air pilots ratified an extension of their contract over the weekend, pushing the next amendable date out until 2030.

This provides that airlines customers with significant labor stability into the next decade. Hats off to their leadership. I want to thank the entire ATSG team for their efforts as we execute the plans we laid out for 2024. We remain focused on safety, customer satisfaction and cost control. We delivered 4 converted 767-300 freighters to external customers in the quarter, and the benefit of our capital spending reductions were evident as we generated positive free cash flow, putting us in great position to achieve more of the same for the full year. As I just mentioned, we are raising our adjusted EBITDA guidance by $10 million, and reaffirming our capital expenditure outlook for 2024. Our commercial teams remain focused on opportunities for both additional aircraft leases and incremental flying for our airlines, which could add upside to our guidance.

We’re excited about these developments and believe they showcase the best of ATSG’s fundamentals. We look forward to realizing these plans. I will now turn the call over to Quint Turner to discuss our financial results for the quarter. Quint?

Quint Turner: Thanks, Joe, 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 $15 million or 20% versus a year ago to $486 million. This was driven by lower revenue in both CAM and the ACMI Services segment. In the first quarter, we saw a GAAP pretax earnings of $12 million, down from a pretax earnings of $27 million in the prior year period. This resulted in a diluted earnings per share of $0.13 versus diluted earnings per share of $0.25 in the first quarter of 2023. On an adjusted basis, pretax earnings fell $23 million to $15 million, and adjusted EPS was down by half of prior year levels to $0.16. In our aircraft leasing segment, revenues decreased 7%.

Excluding revenues associated with CAM’s 767-200 engine power program, segment revenue would have been flat. Since March 2023, CAM leased 12 additional Boeing 767-300 and 3 Airbus A321-200 freighters, but saw returns of 16 767 freighters, including 12 767-200s. CAM’s pretax earnings were down $21 million for the quarter, reflecting a $7 million decline from fewer 767-200 engine cycles and $5 million more in both interest expense and depreciation versus the prior year. Additionally, 4 767-300 converted freighters were deployed to external customers during the quarter, while 1 767-300 and 3 767-200 freighters were returned. At quarter end, 90 CAM-owned aircraft were leased to external customers, 2 fewer than a year ago. In our ACMI Services segment, we reported a pretax loss of $3 million compared with a loss of $2 million in the first quarter of last year.

Total block hours flown by our 3 airlines were down 3% versus the prior year quarter. Omni, which was a topic of particular interest on the last call, performed better than budget in the quarter, but continued to see demand trends below normal levels from its largest customer, the Department of Defense. Turning to the next slide. Our first quarter adjusted EBITDA was $127 million, down $11 million compared to the prior year. Of the decline in adjusted EBITDA, CAM decreased by $13 million and ACMI services and other businesses increased by $2 million. CAM’s decline was 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 increase in ACMI Services and other was driven by better performance at our MRO operations.

Slide 6 details our capital spending on a trailing 12-month basis. Total CapEx for the quarter was $102 million, consisting of $72 million in growth CapEx and $30 million in sustaining CapEx. Our CapEx spending is down 50% year-over-year for the first quarter, and we project a decline of more than $380 million 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 $126 million in the first quarter this year. That was down $90 million versus the prior year period, which was stronger than usual due to recovery of a $67 million fuel receivable from the Department of Defense. Excluding this item, operating cash flow would have decreased by $23 million compared to the prior year.

On a trailing 12-month basis, adjusted free cash flow was $368 million in March, up slightly from the comparable period ending March 2023. On Slide 8, you can see that available credit under our bank revolver in the U.S. and abroad was $404 million at the end of the first quarter. We continue to maintain healthy liquidity under that facility with unencumbered aircraft asset values of $1.4 billion. Now I’ll turn the call over to Joe to discuss our updated outlook.

Joe Hete: Thanks, Quint. Turning to the next slide. I’d like to spend some time discussing our outlook and assumptions for 2024. Including the increased Amazon flying opportunities announced yesterday, ATSG now expects adjusted EBITDA of approximately $516 million in 2024, an increase of $10 million from the outlook provided in February. Similar to our prior guidance, this forecast excludes any contribution from additional aircraft leases or flying opportunities not currently under contract, which could generate additional adjusted EBITDA. This projection assumes a start-up of 10 Amazon-provided 767-300 aircraft prior to the end of the year and takes into account projected start-up costs associated with bringing them into service, as well as adding over 50 pilots at ABX Air.

The contribution from this expanded agreement was included in the $30 million of potential adjusted EBITDA we laid out in February. As mentioned, we continue to expect total capital spending of $410 million this year, with $165 million for sustaining CapEx and $245 million for growth. The gross spending outlook includes the completion of the 17 aircraft that were in process of conversion at the start of the year and the acquisitions of 4 additional feedstock aircraft for the remainder of the year. At our current capital spending levels, we continue to target positive free cash flow for the year. We remain optimistic on the demand outlook for our midsized freighters assets over the long-term and the strength of our business strategy. We are focused on operational execution and cost control as we position ourselves for the eventual market recovery.

As the market leader in midsize freighter leasing, we are well positioned to deploy additional aircraft to meet our customers demand. That concludes our prepared remarks. Quint and I, along with Mike Berger, our President; and Paul Chase, our Chief Commercial Officer, are ready to answer questions. May we have the first question?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Helane Becker with TD Cowen. You may proceed.

Helane Becker: Thanks very much, operator. Hi, guys.

Joe Hete: Hi, Helane.

Helane Becker: So I just have two questions really. One is, congratulations on the pilots, getting that deal done. I feel like I ask you that question every quarter like what’s going on. And you always say, we’re talking, but we’re not in a rush, and then you got this deal done. So congratulations on that, but what prompted it to get done – to finally get done?

Joe Hete: Well, Helane, I think there is two things. One, the ones you’ve asked about previously was the ATI pilots, which we are still in mediation with them, in fact, had the mediation session last week. This is actually the ABX pilot group, which had a CBA which ran through 2026 – 2027. One of the challenges that they had obviously, they were the ones that had the strike back in 2016. And so they had a hole they had to dig out of. And the leadership finally came into realization that, you know what, maybe there is a better way to approach this than the traditional, let’s go after the company kind of thing. And came to us with an offer to extend the existing agreement to give potential customers some comfort that they wouldn’t experience any labor disruptions in the future. So that’s kind of what kicked it off, and we’re able to get something done. Realistically, I know you’re going to find this hard to believe, but got it done in 3 days.

Helane Becker: So it can be done. If there’s a will behind it, it can be done.

Joe Hete: Yes. I say you have to have realistic expectations on both sides of the table. Obviously, we had to give some stuff up. And obviously, they had back from what others think the market is for our type of business. We’re not in a passenger airline. We’re not a FedEx or UPS. We’re in a different marketplace altogether. When people put their minds to it, they can come to an agreement that works for everybody.

Mike Berger: Helane, it’s Mike. I’ll just add to that. They’ve also done a fabulous job over the last several years. presenting themselves at industry conferences. Normally, you will not see airlines and unions represented at the industry conferences, whether it be Cargo Facts and ISTAT, and they’ve done a really nice job of rebranding themselves in a very positive way. And I think this is an example of the fruits of their labor.

Helane Becker: That’s really helpful. Thanks. And then just my follow-up question, and it’s completely unrelated. On the aircraft that you got back, what are you going to do with those? And are there – is there – are there or is there more aircraft that are coming back this year that we should know about?

Paul Chase: Hey, Helane, it’s Paul Chase. Good morning. With respect to the aircraft that come back, we’re marketing – just depending on where the aircraft are in their cycles – maintenance cycles, we’re either marketing those for sale or re-lease. We have several opportunities that we’re looking at today. With respect to aircraft coming back this year, we expect two more aircraft back in 2024.

Helane Becker: Are those 300s or 200s?

Paul Chase: Yes, ma’am. Yes. And we’re marketing those for sale, at least – sorry, 300s, I misunderstood your question. I’m sorry, those are 767-300s.

Helane Becker: Okay, alright. That’s really helpful. thank you.

Joe Hete: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Frank Galanti with Stifel. You may proceed.

Frank Galanti: Great. Appreciate taking my questions. I wanted to ask on sort of the Omni business. Obviously, I think it was sort of the major contributor to that sort of negative pretax earnings for that segment. Can you talk about what sort of expectations are for that seasonally maybe from a margin perspective? And then what expectations are sort of after the repricing at the sort of end of September?

Joe Hete: Yes, Frank, from the standpoint of Omni, obviously, as we’ve talked about on the prior calls, the amount of utilization by the Department of Defense has been down versus where it was in prior years. There was a slight decline versus first quarter of last year, but not nearly as significant as what we saw in Q4. As we look into the second quarter, things look to be picking up more so in the Omni side of the equation. And from the standpoint of the first quarter results, it wasn’t necessarily Omni that was the contributor to the loss that we experienced. Cargo hours, for example, at ATI, were down 9% on a year-over-year basis. So it’s a combination of all the above, but we still believe that Omni has a lot of longer-term benefit for us.

And like I said it has, in the last 12 months, underperformed where they had traditionally, but they far exceeded our expectations in terms of what they’ve generated in terms of cash flow and profitability at the time we made the acquisition back in 2018.

Frank Galanti: Okay. That’s helpful. And then thinking about sort of – Quint, you commented that there’s about $1.4 billion of unencumbered assets. Is that a book value calculation? Can you comment on where you think market values are for your fleet relative to book value? And then what the sort of comfort level is at the current debt load and expectations for leverage going into the future?

Quint Turner: Sure, Frank. Yes, in terms of the values that we talked about there for unencumbered asset value, that’s based on appraisals that are done annually under our senior secured bank facility. That’s something we do with the bank group each spring, and so that’s a pretty fresh appraisal. And actually, of course, the values, as you might expect, depending on the aircraft type, they can – they differ between, for example, a 767 or an A321 or a 763 versus 76 200. But the values in general, of course, our fleet is predominantly 767-300, and they’ve held up well. Keep in mind that the asset value is largely driven by the conversion of the aircraft. Over half of the value is in the conversion itself. And our 767-300 fleet is pretty young in terms of years since conversion, and it’s still the most chosen midsized freighter around.