Air Transport Services Group - Q3 2021

Transcript

Speaker 0

Welcome to the Third Quarter 2021 Air Transport Services Group Incorporated Earnings Conference Call. My name is Daryl, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer I will now turn the call over to Mr. Joe Payne, Chief Legal Officer.

Mr. Payne, you may begin.

Speaker 1

Good morning, and welcome to our Q3 2021 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 describe here.

These forward 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 the following, which relate to the current COVID-nineteen pandemic. The pandemic may continue for a longer period or its effect on commercial and military passenger flying may be more substantial than we currently expect, caused disruptions to our workforce and staffing capability, including through our compliance with federally mandated COVID-nineteen vaccination and testing requirements, caused disruptions in our ability to access airports and maintenance facilities and adversely impact our customers' creditworthiness or the ability of our vendors and third party service providers to maintain customary service levels. Other factors that could cause ATSG's actual Results to differ materially from those indicated by such forward looking statements 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 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 With customers, lenders and government agencies, the impact of current supply chain constraints both within and outside the United States, which may be more severe or persist longer than we currently expect the impact of a competitive labor market, which could restrict our ability to fill key positions. Changes in general economic and or industry specific conditions and other factors as contained from time to time in our filings with the SEC, including the Form 10 Q we will file on Monday.

We will also refer to non GAAP financial measures from continuing operations, including adjusted earnings per share, adjusted EBITDA and adjusted free cash flow. Management believes these metrics are useful to investors in assessing ATSG's financial condition and results. These non GAAP measures are not meant to be a substitute for our GAAP financials, and 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 Rich Corrado, our President and CEO, for his opening comments.

Speaker 2

Thanks, Joe. Good morning, everyone. You just heard Joe mention that we're disclosing for the first time this quarter Another non GAAP metric in our financial reporting, adjusted free cash flow. It's part of a broader set of disclosures to help us highlight the power of our business model to our shareholders and to help many of you who tell the ATSG story to prospective investors on our behalf. The earnings release we issued yesterday includes a summary of our GAAP cash flow statement along with a breakout of the sustaining portion of our total capital expenditures.

As Quint will discuss shortly, supported by the slides accompanying our remarks, significant cash remains after funding those essential payments to maintain the assets we already operate. Our business model's highly visible future cash flows afford us many We generated a record $153,000,000 in quarterly adjusted EBITDA, our traditional non GAAP measure and put nearly all of it back into the business to keep it humming and stoke our growth engine, midsize freighter leasing. We have placed 13 Boeing 767s into external customer leases since September 2020. Our airlines again achieved double digit growth in revenue block hours versus the prior year and we're strongly profitable with improved margins. Omni Air was a notable contributor to those gains due in part to its supporting role and Operation Allies Refuge, the U.

S. Component of the evacuation of Americans and at risk civilians from Afghanistan. Omni has completed 79 missions and transported over 20,000 passengers in this effort. I know I speak for everyone at ATSG and expressing our gratitude to the Omni team for their courage and dedication in completing these vital missions. There are many other great elements to our Q3 story and are now stronger outlook for adjusted EBITDA through the end of the year.

I'll be back to share them after Quint reviews our results in more detail. Quint?

Speaker 3

Thank you, Rich, and welcome to everyone on the call this morning. Our consolidated revenues grew a substantial 15% for the quarter to a record 466,000,000 Both our aircraft leasing and airline businesses delivered outstanding results with gains of 22% and 10%, respectively. Revenue growth reflects the impact of 13 more freighter aircraft leases and a related increase in CMI flying by our airlines from freighters we are leasing to and flying for Amazon. Our Defense Department revenues were also strong due in large part to the Afghanistan evacuation missions we flew through September. Block hours flown for the Department of Defense increased by 81 or 7 percent compared to the Q3 of 2020.

3rd quarter adjusted EBITDA of $153,000,000 was up 22% from a year ago and up 20% from the record $128,000,000 we generated in the 2nd quarter. Again, these gains reflect our additional 767 leases and flight operations for Amazon and also leases of our 767-300s On Slide 4, For the trailing 12 months ended September 30 this year, our adjusted EBITDA increased to 508000000 from $481,000,000 at the end of the Q2 of 2021. We project for the full year 2021, We will produce adjusted EBITDA of at least $535,000,000 In the year ago period Reflected on Slide 4, adjusted EBITDA benefited from additional passenger charters to recover Americans during the pandemic. As a reminder, our adjusted EBITDA excludes the benefits of federal pandemic relief assistance under the payroll support program for all periods shown. On Slide 5, our capital spending for the Q3 has roughly plateaued at an annualized rate of about $545,000,000 but remains above our prior run rate.

The lower section of each bar shows the portion of our capital spending that we have allocated to growth, which consists mainly of feedstock aircraft purchases and freighter modification costs. The upper portion of the bars show spending what we call sustaining CapEx, which primarily includes scheduled aircraft maintenance and engine overhauls, Technology improvements and other non aircraft spending. As shown on the slide, approximately 2 thirds of our total capital spend is for growth and 1 third for sustaining our operating assets. For the full year 2021, we project Total capital spending of $530,000,000 $335,000,000 for growth and $195,000,000 of sustaining capital. The next slide, Slide 6, shows adjusted free cash flow, which is our operating cash flow net of the sustaining CapEx I mentioned a minute ago.

Unlike our adjusted EBITDA measure, our GAAP operating cash flow includes cash received under federal pandemic relief programs for passenger airlines. We did not receive any such cash in the 3rd quarter, but did receive payments of $83,000,000 in the first half. That difference, along with other variances in our working capital, reduced our accelerating cash flow trend for the trailing 12 months ended in September. The bottom portion of each bar shows a significant adjusted free cash flow our business produces. For each trailing 12 month period shown, adjusted free cash flow has exceeded 330,000,000 which is capital potentially available for growth investment, debt repayment and other uses.

Spending for fleet related growth has roughly equaled our adjusted free cash flow for the period shown as we believe that investments tied to fleet expansion represent optimal use of that adjusted free cash flow in today's hot market for midsized freighters. In future periods, we expect our adjusted free cash flow to increase as we execute additional long term leases and expand customer operating agreements. Slide 7 illustrates how the significant cash flows our businesses have enabled us to expand the size of our owned aircraft fleet, while reducing our debt to EBITDA leverage. In other words, our business self funds significant growth. Our current debt to EBITDA ratio, as defined under our senior secured credit agreement, stands at 2.2 times, down from 2.9 times at the end of September of 2020.

The 122 aircraft CAM owned at the end of September, including aircraft staging for release and awaiting freighter mod, speak to the strong overall returns we are earning, while at the same time delevering on an owned fleet now twice the size that it was 5 years ago. With that summary of our financial and operating results for the quarter, I'll turn it back to Rich for some comments on our operations and outlook. Rich?

Speaker 2

Thanks, Quint. We couldn't have picked a better time to put the cash generating power of our business strategy on full display in our reporting as our businesses are performing as well as the pandemic constrained economy will allow. Record revenues and adjusted EBITDA for the quarter year to date are the rewards of substantial fleet and other growth investments that Quint just outlined and the dedication and skillful execution by our people. And we can make a stronger case than nearly anyone in the transport sector that the future cash flows from our long term relationships and business agreements with blue chip customers are undervalued in today's market despite being highly visible. All of that aside, we still face challenges related to the pandemic, particularly in our passenger operations.

The good news is that we anticipate Omni's passenger charter operations to continue to make progress, but expect 4th quarter passenger operations, including ATI's military combi to yield results similar to last year's Q4. Like others, We are immune to supply chain challenges. We had planned to put 16 or more converted 767s on lease this year. It has recently become clear that supply chain constraints impacting our freighter conversion lines will keep us 1 aircraft short of that mark in 2021 with aircraft sliding into 2022. Even with this delay, deploying 15 converted 767-three 100 freighter aircraft and releasing 4767-200s will be a yearly record and represents a remarkable achievement for the teams that made it happen.

We're taking steps to expand our freighter conversion capacity in multiple ways, including our commitment to convert and lease 20 Airbus A330 aircraft starting with the 1st lease deployment in 2024. We're also adding Boeing as an additional conversion source for at least 4 767s with the first induction scheduled for August of next year. Additionally, we will continue to convert Boeing 767 aircraft with our long time conversion vendor IAI. Altogether, We have secured access to 70 conversion slots for Boeing 767-300 as well as Airbus A321 and A330 aircraft over the next 5 years. We are continuing to find willing customers for all of our midsized freighters that we can deliver.

Our order book for Boeing 767-300 freighters is full until late 2023. We already have significant customer interest in both the A321 and A330 platforms. CAM has already purchased the first A321 It intends to convert at PEMCO's facilities in Tampa and deliver to lease customers in 2022. We also have other operating accomplishments worth celebrating. ATI's customers are benefiting from a series of upgrades at its flight control That are reducing fuel consumption.

The 17% increase in revenue block hours at all of our airlines is great news, but it's important to note that those gains would not have been possible without our airlines' ability to attract and select new flight crew personnel from an outstanding pool of talent and get more than 100 of them trained, certified and ready to fly those assignments when our customers needed them. Our Logistics Services business has worked hard to be a reliable partner for Amazon for the ground and fuel services it needs to match the rapid buildup of its fulfillment network. That includes the opening of a new gateway facility in September in Nashville and continued support Amazon's gateway facilities in Charlotte, Tampa and here in Wilmington, Ohio. Earlier this year, Our AIMS Aircraft Maintenance business announced a new multiyear agreement with United Airlines for heavy maintenance work on its Airbus A321s and several of its Boeing aircraft types.

Speaker 4

That work will be completed in

Speaker 2

the AIMS hangar facilities in Wilmington and Tampa. And finally, AIM's PEMCO division completed delivery of its 2nd Boeing 730seven-seven 100 Flex Combi and received an order for another. PEMCO also inducted the first of what we anticipate will be many Airbus A321s for conversion to freighters. Those are a few of the operating and commercial successes that helped us generate record financial results this year and will contribute to the results for several years to come. They are part of the reason why we are able to an increase in our financial guidance for 2021.

Our adjusted EBITDA is now expected to be at least $535,000,000 this year, ahead of the $525,000,000 target we set last February. I expect ATSG's business to post Strong positive free cash flows net of our sustaining CapEx spend for years to come. That concludes our prepared remarks. Quint and I, along with Mike Berger, our Chief Commercial Officer, are ready to answer your questions. May we have the first question, operator?

Speaker 5

Thank you. And our first question is from Jack Atkins from Stephens.

Speaker 6

Okay, great. Good morning and congrats on a great quarter guys.

Speaker 2

Thanks, Jack. Thanks, Jack.

Speaker 6

So I guess maybe first if we could talk about The guidance for a moment and the increased outlook for 2021, Quinn, I don't know if you want to take this, but maybe if you wouldn't mind kind of walking us through some related to the Afghanistan withdrawal in the Q3, but it sounds like that maybe the ramp in expected underlying military demand was maybe a little bit below expectations. I guess if you could just kind of help us kind of walk through all the different puts and takes there from a high level, that'd be helpful.

Speaker 3

Sure, Jack. It's certainly true that the Afghanistan evacuation Added some revenue opportunity at Omni during the Q3 and that is a part of it. However, the expenses necessary to satisfy those opportunities were also probably higher than folks might expect. We had to pay some premium pay certainly to the flight crews and the flight attendants Who worked those flights? Sure.

So, from an EBITDA perspective, it wasn't as big a driver as some might suspect. I think that we've seen and we saw it last quarter, the second quarter, we saw it in the third quarter and expect it to continue In the 4th, we've seen improvement in our airline ACMI operations.

Speaker 4

We've

Speaker 3

You look for efficiencies as you grow in size in those networks. We're also seeing some improvement certainly With Omni, in terms of the commercial passenger business, it's still constrained with the pandemic effects. But As you guys who've been watching college football and things know, things are a little bit more normal. We're seeing some signs I'm live there and that's helped. And of course, CAM and the deployments that we talked about the 40 Plus percent earnings increase in CAM over the prior year quarter.

CAM is doing an outstanding job of delivering on its lease commitments for customers with a record number of leases put in place. And again, these are long term agreements. So that is all helping to come together to allow us to bump our guidance.

Speaker 2

Jack, I would also Add to that, I think it's important to note that we have put in, if you recall, we talked about a lot of technology improvements and operational improvements that we were working on, and those are starting to bear fruit now. We put a continuous improvement program in about 1.5 years ago and did a large supply chain optimization program across the enterprise to leverage the full scale Buying power of ATSG for all the individual entities and that's bearing fruit. We've implemented New flight scheduling planning and following as well as crew optimization scheduling software at the 2 cargo airlines. And so that is starting to allow us to be more efficient with our crews. And so when you look at the better performance by the airlines, It wasn't all volume related.

There was a lot of hard work by a lot of people leveraging technologies and projects that are helping us become more efficient and productive.

Speaker 6

Okay. So that's really helpful. Thank you for kind of walking us through all that. I guess maybe For my next question here, the 70 conversion slots that you guys have secured over the course of the next, I believe you said 5 years, Rich. I guess Two questions there.

1, could you maybe provide us some visibility into how many of those you think are kind of already spoken for, you feel like you've got visibility into sort of have demand for those. And then secondly, kind of within that broadly, could you talk about types of customers that are you think those incremental 70 planes will be going to over The next 5 years, are these going to be large sort of enterprise level customer contracts like we've seen over the past 5 years? Or do you think they're going to be Smaller type contracts with kind of one off customers. I was just kind of curious if you maybe break that down a bit for us.

Speaker 4

Yes, Jack, it's Mike. I'll take that one. We really see it as a continued combination in regards to The type of customers that we project these aircraft to go to, certainly, you've heard us over the last Several quarters talk about the expansion globally and the push into other regions of the world, and we'll continue to build upon those customers. And they certainly are part of our order book today. So the Astros, Zorayas, the Sky Taxis of the world, They will become bigger customers for us, no question in the future.

We're also excited about the opportunities that we New opportunities and new customers in those parts of the world as well. In regards to the enterprise type customers, Yes, we certainly believe that the e commerce growth is going to continue to drive the market for our big enterprise customers. So we continue to see a large you'll see a combination of both, and the engine continues to be The e commerce and e commerce that are driving the integrators as well as the regional players. So in regards to how much We have in regards to it. 2022, we have previously said that Our order book from a conversion standpoint will be at least 10 767s.

As we look out further into 2023 at this point, We've got visibility and probably close to somewhere between in the high teens to somewhere in the high teens 2020 3 deliveries based on that. And as Rich mentioned earlier, our 330 conversion slots Start in July of 'twenty three and run through December of 'twenty five. So our first 3:30 deliveries will be Very early in January, starting in January 24. So that gives you some insight in regards to how it looks. Very helpful.

Speaker 2

I'd also say, Jack, that as far as customers for those airplanes, we're pretty much booked through the middle of 2023 in the 767 All 3, 2021 A321s, have customers that we're working with right now. So as far as it's not just the slots and I should say we also have feedstock for the 767 through the Q3 of 2023. So we've got feedstock, we have slots and we have customers. So 2022 is looking closed out and 2023 We're finalizing things for that.

Speaker 4

And just one final thing, I mentioned the slots in terms of 330s, but The customer interest in regards to getting customers actually assigned The 330s has been very, very strong. We've been at industry conferences over the last month or 2. We'll go to another one here, Rich and I, Rich and I in Austin and Istat in a couple of weeks. So the conversation and discussions around the future aircraft, specifically the 330 Or even stronger than we thought, so we're extremely excited about the future of that aircraft.

Speaker 6

Okay. That's very, Very helpful. I guess maybe for my last question before I turn it over. I know you guys historically have sort of thought about pricing your assets relative The cost of capital, right, you're trying to achieve a specific level of unlevered return on invested capital and then Looking to boost that with additional services that you can add on after that, but just given the high level of demand that you guys have been seeing now for quite some And the visibility you have in demand looking forward. How are you thinking about The per unit economics of these aircraft moving forward, is there an opportunity to sort of move the needle higher just given The level of demand we're seeing for your assets specifically looking out over the next several years.

Speaker 2

Yes, it's a good question, Jack. As far as the market goes, we deal with all different types of customers. Some are very large And we'll take large blocks of airplanes at a time, as you know. Others will take medium blocks. And then we have smaller customers that tend to do business With our larger customers in other parts of the world, Mass Air is a good example down in Mexico, they fly for DHL, Sky Taxi in Europe applies for DHL, Just some examples.

And so there, when you look at the kind of the negotiating leverage side, it doesn't Even though these are smaller companies, they have to have a cost structure that can compete for that same type of business. So we've been able to ratchet rates up a little bit. Keep in mind that when you're negotiating a lease term, how long the lease is, whether it's an 8 year lease, a 7 year lease or a 10 year lease, will impact the lease rate per month. And so a lot of times, customers will want to extend the To get a better lease rate, but we've been able to get ratchets up a little bit, particularly on, releases and extensions. In the past, pretty much when you gave an extension to a customer, you take a haircut on it because there was a benefit The company not having to have the aircraft come back and be down for 2 to 4 months while you recheck it and get it ready for another customer So but now, with the demand out there, customers are hanging on to aircraft a lot longer.

They're renewing their leases ahead of time, and the rates are firming up on those renewals. So that's all good news.

Speaker 6

That is good news. Okay, I'll turn it over. Thanks again for the time.

Speaker 4

All right, Jack. Thanks.

Speaker 5

Our next question is from Lane Becker from Cowen.

Speaker 7

Thanks, Daryl. Hi, everybody, and thank you very much for the time. Well, first of all, thanks for adjusted free cash flow. That's very helpful, and I appreciate that. And then for my question, I have two questions.

One is with the amount of flying you did for us Moving people out of Afghanistan and so on, how should we think about the DOT revenue going forward? I'm assuming we're not going to have as much And just kind of wondering how to think about that.

Speaker 3

Yes. I think, Helane, this is Quintin. In terms of the 4th quarter, I think we said we're expecting a 4th quarter similar to what we saw in the Q4 of 2020. As far as changes in the DoD longer term in terms of the volume of military flying, What we've seen in the past is that when theaters change, it doesn't necessarily have A large impact on the actual volume of flying because troops move from theater to theater And the rotations of those troops still take place. Training exercises move around, but ultimately that Our experience in the past has been that our omni's experience is that it hasn't made a real significant difference over the long pole.

But you don't as we've said in the past, we don't get as much visibility, right, as On the passenger side with the DoD as we would, for example, with scheduled cargo network flying for our other customers.

Speaker 7

Right, got you. Okay, that's very helpful. And then my other question is on AIMs. So I think you mentioned, about United and I guess how many outside customers could they have? Because they also do some of your in house maintenance, I think.

So How big can they get as non ATSG customers?

Speaker 2

So it's a good question because we're this is Rich Lane. Thank you. It's a good question because we are constantly balancing that internal versus external revenue as it relates to the AIMS profile. Generally, they we have demands, particularly the CAM puts on them and then the other the airlines have See checks, etcetera, and sometimes there's things that only AIMs can do. For example, they're the only MRO in the world that will do an out pressure bulkhead as far as we know.

And so we have some of those from time to time. So we tend to populate the specific needs Our own airplanes where we know it's more beneficial for AIMs to do those airplanes. We do send some of our airplanes outside due to allowing AIMS to optimize external customer views. So when we get a customer like United that has a multiyear Deal for us, it's a very predictable amount of revenue and cash. And so we optimize around that.

We've got other deals such as with Frontier down at Ames in Tampa. And then we have conversion lines that are Dedicated for the A321 and right now for the 737 down in Tampa. Those conversion lines will probably shift by 2023, we'll have a 2 A321 lines most likely up in Ames and we'll probably back off on the 737. But so it's really when we look at our annual plan, it's what's on the docket for C checks and odd maintenance items. Some special work done to the airplane or they want us to help them put the aircraft on their certificate.

All those things we can do, it's captive And we prioritize that with our MROs for CAMP.

Speaker 3

But in terms of total MRO capacity, it's Kind of limited based on facility space.

Speaker 7

Right. I got that feeling. I was getting that feeling from Rich actually. Okay. Thank you, Doreen.

All right. Well, thanks very much. We'll see you in a couple of weeks.

Speaker 2

All right. Thanks, Elaine.

Speaker 5

Our next question is from Frank Galetti from Stifel.

Speaker 8

Yes, great. Thank you very much. And thank you for Breaking out the adjusted free cash flow and that sustaining CapEx number, that was very helpful. I want to dig in on that a little bit. Last quarter, you had said, I guess my question is on maintenance CapEx side that it was closer to $160,000,000 a year.

I just wanted to kind of get clarification around that, versus kind of the $195,000,000 guidance today or I guess for 2021. Are those numbers kind of different? Was asking a different Or is this kind of a higher year than normal? And I guess the real question is, what does that number look like generally going into the future? And previously you had said that it was scale kind of linearly with plane additions.

Can you give us a sense, how to think about that on a per plane basis?

Speaker 3

Yes, that's a good question, Frank. If you look at what is in that sustaining, we wanted to put growth, Make it as pure as possible with just feedstock purchases plus conversion. And then This what we're calling sustaining is primarily what you would call maintenance CapEx, which is Heavy maintenance on airframe that's scheduled and engine overhauls, etcetera.

Speaker 2

But it also

Speaker 3

includes Some of the CapEx that we invest here to Rich mentioned some of the technology improvements that we've invested in, IT and so forth. And so from year to year, from period to period, like for example, we've significantly Upgraded, revised some of our big systems around here, whether it's flight, dispatch or maintenance, we've made some investments in that, which thankfully we're pretty much at the end of I think at this period, that cycle is kind of over. But that I think is responsible for the little bit higher Maintenance or sustaining CapEx guidance that we've given at $195,000,000 I do believe that the And timing of scheduled maintenance can have an impact from period to period. But in general, I think kind of the 160 $180,000,000 number is a good number for our fleet driven maintenance CapEx on an annual basis. And the thing about our business model is as the fleet grows, because we lease these aircraft out For the most part, to external lessees, they are responsible for the maintenance during the life of the lease.

So, you think about our business model, the maintenance or the sustaining CapEx will not grow in line with the fleet because for the most part, that's the lessee's responsibility. So

Speaker 4

you're going

Speaker 3

to see an expanding adjust Over time, you're going to see the adjusted free cash flow ATSG produces go up as we build out CAM's portfolio of leased aircraft. It's not going to drive substantial maintenance CapEx. Now we will have in terms of engines, we will have some more CapEx as we enter next year associated with some of the 767 engines that had previously been covered under power by our agreements. So that will have some impact. That's more of an accounting thing than it is a cash flow thing because we won't be paying for the power by cycle Expense for the maintenance of those engines, instead we'll be capitalizing those overhauls.

And so you'll see that have some impact. But The good thing about our model is it shifts maintenance responsibility largely to our customer.

Speaker 8

Okay. That's really helpful. And then I wanted to ask on Capital commitments for 70 slots For conversions you guys have booked. And obviously, Part of that CapEx requirements is going to be feedstock and not all of that feedstock Assets have been purchased. Can you sort of give us a sense for how much that total CapEx is?

What's sort of happening to feedstock pricing today. And then from a holistic perspective, what how does that sort of break out on an annual basis? Is that Expected to be funded with internally generated cash flows. And this is a big question, but What does that look like then on a debt basis for the company? What level of debt is Yes.

What are you guys comfortable with?

Speaker 3

Let me help you out a little bit on that if I can't, right? You're right.

Speaker 2

It's kind

Speaker 3

of a broad But the slot commitments are Typically involve putting deposits down to secure slots, but then those deposits are part of your cost of conversion when you induct the airplane. But where you put them at risk obviously is if you wanted to And so we don't want to talk necessarily about what specific Conversion providers have required in terms of deposits, but we account for those expenditures as capital expenditures When we put down the cash, when we make the deposits and it becomes effectively part of the end of service and conversion cost of the aircraft because when you induct it, it just gets applied to the cost of the conversion. So hopefully That answers that. In terms of commitments, you're right. I mean, the timing of capital expenditures

Speaker 8

for our

Speaker 3

Aircraft investments for CAM are going to be more driven by the timing of feedstock purchases. And you see us at the end of this quarter Already with, I believe, 15 767s that we have purchased feedstock for and those are in some stage of conversion, either in or awaiting conversion and 13/21. So that's already in our CapEx that we've reported for those aircraft. And then in future years, of course, we'll as Mike and Rich commented, we've already secured feedstock commitments to take aircraft to fill a large portion of these 70 slots, particularly for the 767, in the future years. We've negotiated conversion pricing and so forth.

As far as how it impacts our debt or our debt leverage as we think About how we expect to grow our fleet. I mean, as you've seen with our business model, we have delevered while growing our fleet. One of our slides illustrated that quite clearly. And I think that with the adjusted free cash flow that we produce, We expect to continue to build out and grow our operating cash flow, our EBITDA and our fleet size without really adding debt to any significant degree because the model simply produces that much adjusted free cash flow. It's a great situation to be in because as we said in our remarks, the business self funds significant growth.

Speaker 4

Yes. In regards to the cost of the feedstock, I'll maybe take you through that piece of it. We've Rich had mentioned that we've identified or acquired feed That takes us through certainly through 2022 and almost all of 2023. On the 767 side, Feedstock remains a little bit tight from a market standpoint and that's really driven by the market demand And how the growth of the entire market is going. So there's really been, I would say, stability and pricing for 767s, Really from before the pandemic in 2019 through the pandemic In 2020 and really still stable from a as we totally come out of the pandemic.

So From that standpoint, feedstock prices have been relatively Solid for the last couple of years. In regards to the A330, we haven't purchased any of those yet, but we continue to look at feedstock because feedstock is Very playful. And so we think those feedstock costs on that aircraft over the next couple of years

Speaker 8

Great. I really appreciate the answers. Thank you very much.

Speaker 5

Our next question is from Chris Thethalopoulos from Grahana.

Speaker 9

Hey, good morning, everyone. Thanks for taking my question. So If I look at the focus here and the disclosure on free cash flow, The time you spent in your prepared remarks on the balance sheet and also the out year guidance on the slots, Having followed you for a few years now or some time, if I put these together, I mean, are you signaling that perhaps this year is The next chapter for Cam and perhaps the enterprise as a whole as Amazon and its order book is fully appreciated by the And just assuming, I mean, where you're at next year, 128 aircraft at the end of the year. I mean, if I put these points together and make some modest assumptions around the slot conversions, Could

Speaker 2

Cam be

Speaker 9

a top 15 lessor by mid decade or so? Meaning, is it reasonable to assume that we could see Somewhere in the low 200s on an active fleet by 2025, 2026. Thanks.

Speaker 2

Yes. I mean, based on the amount of slots we have and the amount of airplanes we already own, over the next 5 years, we should be Close to 200 airplanes. I mean, we already, over the past few years have been the largest lessor of freighter aircraft. I mean, there's a lot of large passenger lessors that acquire large blocks of airplanes and they're just in a different business than we're in. There's a few larger freight lessors that are also passenger lessors like GECAS as an example, and they just merged as well.

But so our goal is to maintain our leadership position In the medium range, medium wide body freighter market globally, we're there now, and we intend to stay there. And everything we've done, Acquired our slots, got into the A321, now the A330, is to maintain that position. We feel it's driving Good returns for our shareholders and that the growth prospects in that segment because it's been powered by the e commerce growth globally, That's still in a very low penetration compared to general retail. It's going to have strong demand for years to come. And we think we're very well positioned at this point to continue to ride that wave.

Speaker 9

Okay. And then, Quinn, could you just remind us as we look out past well, as we look at next year and through 2025 with these slots here, How we should think about ballpark EBITDA per aircraft considering now that you're going

Speaker 2

to have a bit of

Speaker 9

a different mix here with this move to Airbus. Thanks.

Speaker 3

Well, You're jumping out there, Chris, and it's a good question in terms of how far forward you're looking. We've talked about the 767, right, for a long time about what and Rich gave you what some of the Variables are in terms of how we think about pricing based upon on term and so forth. But The 767, just for the lease before you think about value added services, It's probably $3,750,000 to $4,000,000 On an annual basis, In terms of revenue and if you think about the EBITDA margins on our lease, it's probably over 90% On just the leasing income. If you think about the 330, the 330 It's 15% to 20% larger than the 767 in terms of cube capacity and so forth. So 15% to 20% larger.

So you're probably looking at a similar increase over those numbers in terms of what You would expect to produce on the 330 side. The 321 is kind of, what, 2 thirds the size of a 767-300. Dorence, you can jump in here.

Speaker 4

No, I

Speaker 2

was saying that the investment and the lease on the A321 21 is going to be about 2 thirds of what we get on a 767-300.

Speaker 4

Yes. And we target,

Speaker 3

as you know, Chris, an unlevered return in excess of 10% On incremental CapEx investments that we make to build out our fleet, and certainly, we are beating that in today's market. And then you look to add those value added services. It all depends upon how many of those services our leasing customers want to buy.

Speaker 9

And then one more question. The 4 slots at Boeing here, I was just curious why the move You've typically done the conversion with IAI. Is that just because of capacity or perhaps you got a little bit better

Speaker 4

Yes. This is Mike. We it was solely driven based on ensuring that we meet our customer commitments. That's been our theme. Rich reemphasizes it all the time when he's out speaking.

If we say we're going to do something, we're going to do it. And just this allowed us really to ensure that we meet those commitments Starting in 'twenty three. So these four slots that we secured with Boeing, 2 of them will be for next year, 2 of them will be for 'twenty three, But all the airplanes will be delivered in 2023 at this point. So that's the nature of it. There are certain Places in the world, if I could put it that way, where the Boeing freighter plays better for a variety of different reasons.

So it gives us incremental flexibility and opens up even more opportunities to diversify our customer base and to ensure that we're, like I said, meeting the commitments of our customers.

Speaker 9

Great. Thank you.

Speaker 5

Our next question is from Stephanie Moore from

Speaker 10

Hi, good morning. Congrats on a great quarter.

Speaker 2

Thanks, Stephanie. Thanks, Stephanie. Thank you.

Speaker 7

You just touched on this

Speaker 10

a little bit in terms of the return profile of these new leases and kind of targeting at least a 10% return. It sounds like Exceeding that, but maybe if you could just to break that out a little bit further and just walk through the math between procuring, obviously, The feedstock and the depreciating and really how we could back into the return profile of these leases. And as a follow-up to that, what's the opportunity for these returns to maybe increase over time? Just your thoughts overall in the long term. Thank you.

Speaker 3

Yes. Stephanie, of course, we don't necessarily because of As Rich says, there are some variables involved. We don't necessarily get into detail in terms of pricing strategy. But for example, I can tell you, if you take CAM's if you take the assets CAM has on its books, the pre not net book, but Investment cost and you look at what CAM is getting on those in terms of EBITDA, for example, Inside of CAM, it's getting about a 12% return on an annual basis on its investments. And of course, CAM isn't the operating pieces of our company.

It isn't the airlines. It isn't the MRO. So that's where those additional services are sold. So if you think about we've talked about the cost of a 767-300 To put it on ramp in leasable condition, it can vary, obviously, depending upon the age of the aircraft, etcetera. But you're probably looking Somewhere around $30,000,000 to put 1 on ramp in leasable condition.

And we look To earn an unlevered return on that $30,000,000 on an annual basis over the life of the asset, which we believe is 20 plus years, in excess of 10%. And as I mentioned, we're exceeding that based on the demand for these midsized cargo aircraft in today's market, and we expect to exceed that over the long haul. So, as we said a minute ago, the investment cost for a 321 is going to be less. It's a smaller aircraft, What reached about 2 thirds the size of a 300. So you could say it's going to be somewhere probably in the neighborhood of $20,000,000 Put it on ramp.

And then you think about a 330, it's going to be 15% to 20% larger than that. So you can Take that $30,000,000 up some, right, in terms of your investment costs, but our return targets remain the same on those investments, And we expect to achieve or exceed those over the life of the asset.

Speaker 10

Great. No, that's really helpful. And then just a house I'll ask you a housekeeping question for me. And I'm sorry if I missed this earlier, but I believe you said that You were you kind of locked in at least 10 new leases for 2022. I believe you mentioned that is that iTEAM's number for 2023, what I'm sorry, I just missed the color around 2023.

Speaker 4

Yes, that's correct. We're still anticipating at least 10 in 2022 in the high teens somewhere 2018, 2019, at this point in 2023, Stephanie.

Speaker 10

Got it. Well, that's it for me. Thanks so much.

Speaker 2

Thanks.

Speaker 5

And our next question is from Jack Atkins from Stephens.

Speaker 6

Great. Just Just a quick follow-up here. The vaccine mandate has been a major topic of discussion, I think, over the course of the last couple of days certainly, but I think over the course I'm just curious if you think that's going to have any sort of impact on either your Work groups, your labor force in general or productivity, that's something that you guys are kind of keeping an eye out for as this kind of goes into effect early next year?

Speaker 2

That's a great question, Jack. It's people Which is a little sleepover, right? The problem with this vaccine mandate that when it came first came out, there was very little to no guidance from the government when they first put The 2 executive orders were signed, one regarding government contractors, which a lot of our operations fall under and That will be managed by OSHA for companies that have more than 100 employees. And so we have been working With our companies, particularly with the unions in negotiating terms under which they would get vaccinated, We've been compensated we've allocated compensation for that, and we've also, incented our own not our own employees, but non CBA covered employees to get vaccinated Well, so we've had a plan even before these executive orders to get the population vaccinated, but it's been Really difficult to figure out how to look at some of our businesses, for example, logistics, which has some postal contracts, and They sort mail for the postal service, but they also have Amazon Gateways that are completely separated from the government contracts. And then here in Wilmington, all of our where most of our companies reside, although some of our companies like CAM as an example is not technically government contractor, but they're in the same building and facility as our 2 airlines that are.

And so under the guidelines, the brand new guidelines that were just issued Earlier this week, they are now considered CAM is now considered impacted by the government piece of this. So we've been shucking and jiving and bobbing and have been trying to figure out exactly how to execute on this thing. But right now, we feel really good. Our guiding principle has been 2. 1 is safety Always, and that's been since the start of the pandemic.

And the second one for the Q4, in particular, has been business continuity. And that's the guideline that we've been marching towards with which each individual one of our companies as they tackle the requirements of the government Going forward, I can say right now because we run a we've been doing surveys that's ongoing and it's how an employee We can get the incentive piece for getting vaccinated. And we've had over 80% of our employees respond. And out of those employees, the ones that haven't, they have I think it's until the they've got another 2 weeks, I think, before To respond and still get the incentive. And if you look at folks that are vaccinated or planning to get vaccinated are One shot of a 2 shot or have some type of medical or religious exemption, 92% of the folks who responded are covered.

We feel really good about that. All of the companies, the airlines and the MRO And logistics have committed that they believe that business continuity will be strong in the Q4. And so we're real confident that we're And so it's been a I'm probably telling you how to build a watch when you ask me what time it is, but This has been a real focus of all the leaders in the company and have done a fantastic job. I have to say Managing their individual populations to get to the point now that we're confident that we're going to have we're going to be able to service our customers Without any disruption in the Q4.

Speaker 6

Okay, that's fantastic. Thanks for that detailed response, Rich. Really appreciate it.

Speaker 2

Thanks, Jack.

Speaker 5

We have another question from Chris Stathoulopoulos from Susquehanna.

Speaker 9

Thanks for taking my follow-up here. So obviously, you haven't had to make the adjustments to your workforce similar to Your passenger peers here, but curious if you're seeing any pressuring along the pressure, excuse me, on the FTE line and What you're seeing in your hiring class for pilots? And then also where you are on the contract talks with ALPA for ATI and IBT on Omni. Thanks.

Speaker 2

Yes. So in terms of attracting pilots, we're still in great shape. Airlines are growing. Omni's got a soft spot right now, but we haven't had a problem attracting pilots, which is good. We're managing any attrition due to retirements and those types of things.

We've got Yes. Still ATI is a very fast growing airline, and so that's what pilots want to work for an airline that allows them to improve their career quicker and move from a 1st officer to a captain. So we've had very strong response to when we put out a class for training To add, crews for all of our airlines, which has been solid. In terms of where the negotiations stand, both ATI And Omni, crew agreements, pilot agreements are amenable right now, and both are really at the beginning They're in Section 6 bargaining. They're covered by the Railway Labor Act.

And so these Things generally take a long period of time. Right now, they've defined kind of the process, the negotiating process and the cadence of meetings. And so they're meeting 3 times, 3 days each month to go through that. Really just working on the agreements now, haven't gotten into working on accruals Some other things haven't got into the compensation side of it yet, but they're working together well, both airlines and Cost structure and a good and a compensation program that allows us to continue to attract The best pilots in the business.

Speaker 9

Okay. Appreciate all the time today. Thank you.

Speaker 8

Thank you, Chris.

Speaker 5

And I would now like to turn the call back over to CEO, Rich Corrado, for closing remarks.

Speaker 2

Thank you. This holiday season, the demands on logistics networks and the companies that operate them are greater than we've seen ever before. The people at the front lines of these networks will be under even more stress than COVID has already imposed. Our people We'll rise to the challenges they always have, while keeping safety first. I ask you all we'll be back with you again in 2022.

Thank you.

Speaker 5

Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating and you may now disconnect.