Air Transport Services Group, Inc. (NASDAQ:ATSG) Q4 2023 Earnings Call Transcript
Air Transport Services Group, Inc. (NASDAQ:ATSG) Q4 2023 Earnings Call Transcript February 27, 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 Q4 2023 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 turn the conference over to your first speaker today, Joe Payne, Chief Legal Officer.
Joe Payne: Good morning, and welcome to our fourth quarter 2023 earnings conference call. We issued our earnings release yesterday after the market closed. It's on our website, 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 described 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 reduction in the level of services we perform for customers; our operating airline's ability to maintain on-time service and control costs; the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price and in interest rates, which may result in mark-to-market charges on certain financial instruments; the number, timing and scheduled routes of our aircraft deployments to customers; our ability to remain in compliance with key agreements with customers, lenders and government agencies; the impact of current supply chain constraints, both within and outside the U.S., which may be more severe or persist longer than we currently expect; the impact of the current competitive labor market; changes in general economic and/or industry-specific conditions, including inflation; the impact of geographical tensions or conflicts, human health crisis and other factors as contained from time-to-time in our filings with the SEC, including the Form 10-Q we will file next week.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings, adjusted EBITDA and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials. We advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our website. And now I'll turn the call over to Joe Hete, our CEO, for his opening comments.
Joe Hete: Thank you, Joe. Good morning, everyone. As you may recall from our Q3 call, we saw some significant changes to our market environment in the second half of the year, resulting in multiple headwinds that continue to impact our financial results in the fourth quarter. These include lower demand in our leasing segment and reduced block hours in our airline operations. The most significant factor was an acceleration in lease returns of our 767-200 freighters, which reduced adjusted EBITDA by approximately $33 million in our CAM leasing segment in 2023. These aircraft were in high demand as Amazon built its own Air Express network starting in 2015 and even more so during the pandemic when customers kept the aircraft in service longer than originally planned.
While we always envision the market transitioning to the 767-300s from the 200s, the market softness has accelerated that process. In addition to the lower lease revenue, we also lose power by cycle engine revenue as the 200s are removed from service and the aircraft remaining in service fly fewer cycles. Despite the macroeconomic and operating challenges weighing on our results in the second half of the year, we leased 13 aircraft, including our first three Airbus A321-200 freighters. By now, I'm sure most of you have seen our earnings release and the guidance we've given for 2024. Quint will review our 2023 financial results in a moment. Many of the challenges he will describe are expected to continue in 2024. As a result, we are taking a more conservative approach to how we provide our adjusted EBITDA guidance this year.
Traditionally, our guidance has included upside potential from the expected signings of future leases and additional ACMI flying. Today, we are providing a forecast of $506 million in adjusted EBITDA for this year, which only includes existing and signed future leases, net of expected lease returns. We believe this approach gives a better indicator of our expectations. We will also outline drivers we believe could provide upside to that. Given our expectations for continued market challenges in 2024, we are aggressively reducing our capital spending outlook and I'm committed to generating positive free cash flow this year. I'll discuss the specific I'll discuss the specifics of our capital plan for 2024 after Mike gives you some details are on our adjusted EBITDA outlook.
But the key is that we are budgeting $410 million down $380 million nearly half of the 2023 levels. With that, I will now turn the call over to Quint Turner to discuss our financial results for the fourth quarter. Quint?
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 $16 million or 3% versus a year ago to $517 million. This was driven by lower revenue in the ACMI Services segment, partially offset by higher revenue in our Leasing segment. In the fourth quarter, we saw a GAAP pretax loss of $16 million down from pretax earnings of $61 million in the prior year period. The 2023 GAAP results include a noncash $24 million settlement expense associated with the partial termination of a previously frozen pension plan. This resulted in a diluted loss per share of $0.24 versus diluted earnings per share of $0.50 in the Q4 of 2022.
On an adjusted basis, pretax earnings fell $45 million to $20 million and EPS was down $0.35 to $0.18. In our Aircraft Leasing segment, revenues increased 18% for the fourth quarter and 6% for the full year, reflecting the benefit of a full year of revenues from six 767-300 freighters leased during 2022 as well as partial year revenues from 10 additional 300s and three Airbus 321s we leased in 2023. CAM’s pretax earnings were down 34% for the quarter and down 23% for the full year. Interest expense and depreciation were $6 million and $5 million higher in the fourth quarter of 2023, respectively. For the year, the reduction in CAM's pretax earnings was primarily due to $33 million less in aircraft and engine lease results related to 767-200 freighters.
That was over 90% of the decline in CAM's annual pretax earnings versus the prior year. As of year-end, 90 CAM owned aircraft were leased to external customers, one fewer than a year ago. Additionally, 10 767-200 freighters were removed from service during the year. In our ACMI Services segment, pretax earnings were a loss of $2 million down from $26 million in the fourth quarter of last year. This was driven by unfavorable revenue mix impacts and fewer block hours flown for the military. In the fourth quarter, block hours flown for the military were down 24%. This represents the lowest fourth quarter military hours since 2017. On a combined basis, the total block hours flown by our three airlines were down 4% versus the prior year quarter.
Turning to the next slide. Our fourth quarter adjusted EBITDA was $130 million down 20% compared to the prior year. 2023 adjusted EBITDA was down $79 million to $562 million. Of the decline in adjusted EBITDA, CAM decreased by $9 million and ACMI Services and Other declined by $70 million. CAM's decline was driven by $33 million less in adjusted EBITDA related to 10 767-200 lease returns and fewer block hours flown by the 200s remaining in service resulting in lower power by cycle engine revenues. Again, the decline in ACMI Services and other was driven by lower block hours in our airline operations and a lower margin revenue mix. Slide 6 details our capital spending for the quarter and past 12 months. Total CapEx for the quarter was $212 million comprising $151 million in growth CapEx and $61 million in sustaining CapEx. As Joe mentioned, we are projecting substantially lower capital expenditures for 2024, which he will address in more detail in a moment.
The next slide updates adjusted free cash flow as measured by our operating cash flow net of our sustaining CapEx. Operating cash flows increased $54 million to 128 million. for the quarter and were $654 million for the trailing 12 months. Adjusted free cash flow was $435 million up 52% versus last year. On Slide 8, you can see that available credit under our bank revolver in the U.S. and abroad was $358 million at the end of the Q4. We bought back approximately 7.4 million shares over the past year, all within the first three quarters. Our balance sheet net leverage ticked up to 3.2 time. Turning to the next slide, I'd like to spend some time discussing our outlook and assumptions for 2024. Then I'll turn the call over to Mike Berger, our President, to discuss the market environment.
For 2024, we expect adjusted EBITDA of $506 million down approximately 10% versus the prior year. We also project adjusted EPS in a range of $0.55 to 0.80 dollars diluted for 2024, reflecting higher depreciation, interest expense and income taxes. This includes only the two 767-300 freighters we have already leased this year and two others for which we hold signed leases for delivery later this year. It also assumes the return of seven 767-200s from Amazon and three 767-300s when their leases expire later this year. Please note that this adjusted EBITDA forecast excludes any contribution from additional aircraft leases or other new business not currently under contractual commitment. We believe upside exists from these opportunities, which our commercial teams are aggressively pursuing.
On a combined basis, we believe these opportunities could provide $30 million in additional adjusted EBITDA should they materialize, driving our potential adjusted EBITDA to $536 million. Now, I'll turn the call over to Mike to discuss the outlook and the operating environment in more detail. Joe will follow-up with the capital spending outlook. Mike?
Mike Berger: Thanks Quint. As you just mentioned, we see opportunity for upside in our 2024 forecast. Before I do that, let me set the table by walking through the key drivers of our expected results. Biggest drivers of the decrease in adjusted EBITDA forecast of $506 million versus the 2023 actual amount of 564 million dollars our lease returns of 767-200s and the effect of higher cost and lower block hours in our airlines. The return of the 200 resulted in a $55 million decline in the leasing related EBITDA forecasted versus 2023, due to lower 767 lease revenue, along with lower PVC related engine revenues. Almost all the remaining 200s have a number of years of useful life remaining. When we spoke to you last quarter, we noted commentary from some of our lessees experiencing lower customer demand, which was negatively impacting their financial results and outlook.
As a reminder, that was primarily related to international demand. Since then, we've seen some improvement in the leasing demand in international markets, particularly as it relates to the midsize freighter market that CAM serves. In particular, we've seen some more A330 leased in recent months. Furthermore, we've seen more A321 deployments, especially in Europe and Asia. With regard to the A321s, we recently received the EASA approval for our freighter conversion design and are now able to release these aircraft into the European market. We continue to see the A321 as a logical replacement for older generation narrow body aircraft like the 757. We've also seen encouraging signs in the 767 market, as one of our customers recently extended two 767-200 Leases into 2025.
We will continue to stress the operational capabilities, cost efficiencies and reliability of all our aircraft types. As Quinn said, our outlook assumes only those leases currently under customer commitment. As the market normalizes further, we are well positioned to take advantage of opportunities beyond these commitments. Now, I'll turn the call back to Joe Hete for our CapEx plan.
Joe Hete: Thanks, Mike. As mentioned, we now expect total capital spend of $410 million a reduction of $95 million from our 2024 expectations on the third quarter call, and that's down $195 million from the forecast we gave you at our Investor Day last September. Drilling down, we now expect $165 million for sustaining CapEx and $245 million for growth. The expected $330 million reduction in growth CapEx versus 2023 reflects fewer feedstock purchases and freighter conversions than our prior plan. The expected $50 million reduction in sustaining CapEx versus 2023 is driven by fewer expected engine overhauls in 2024. The gross spending outlook includes the completion of 14 in process freighter conversions and the acquisition of nine additional feedstock aircraft.
Those include five Airbus A330s that we committed to purchase several years ago. Looking ahead, we expect to see a further decrease in growth CapEx in 2025. Our reduced spending outlook for 2024 is expected to meaningfully improve our cash generation and we are targeting positive free cash flow for the year. Despite these challenges, I am confident in the demand for our midsized freighter assets over the long term, and the strength of our lease plus market strategy. Furthermore, our fleet investments position us to remain the leader in midsize freighter leasing, and will allow us to deploy more freighters as market conditions improve. 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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