Air Transport Services Group - Q4 2021

Transcript

Speaker 0

Welcome to the Q4 2021 Air Transport Services Group Incorporated Earnings Conference Call. My name is Vanessa, 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 session. I will now turn the call over to Mr.

Joe Payne, Chief Legal Officer of ATSG. Mr. Payne, you may begin.

Speaker 1

Good morning, and welcome to our Q4 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 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 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. It may also disrupt our workforce and staffing capability. Our ability to access airports and maintenance facilities, Our customers' creditworthiness and the continuing ability of our vendors and third party service providers to maintain customary service levels.

Other factors could also cause our actual results to differ materially from those we describe here, including Unplanned changes in the market demand for our assets and services 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 through a cargo configuration, Fluctuations in ATSG's traded share price and at 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 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 and other factors that's contained from time to time in our filings with the SEC, including the Form 10 ks 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 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 Rich Corrado, our President and CEO for his opening comments.

Speaker 2

Thanks, Joe. Good morning, everyone. 2021 was a great year for ATSG and not only for the exceptional financial results we delivered, We also laid the groundwork to grow our fleet substantially faster over the next 5 years than the last 5. And we committed to add 2 New converted freighter types to our leasing portfolio, the Airbus A330 and A321 to support e commerce customers around the world. We generated $541,000,000 in adjusted EBITDA last year, dollars 6,000,000 more than the target we shared with you last November.

Capital spending of $505,000,000 last year was well below our target and funded deliveries of a record 15 leased 767-three 100 freighters. Our airlines again achieved double digit growth in revenue block hours and improved their on time performance over 2020. This is a testament to the resilience and skill of our workforce during another year of pandemic challenges. There are many other great elements to our story and our outlook for almost $100,000,000 more in adjusted EBITDA for 2022. I'll be back to share more color after Quint reviews our financial results.

Quint?

Speaker 3

Thanks, Rich, and welcome to everyone on the call this morning. The next slide in our deck summarizes the strong 2021 results that Rich was referring to. Our consolidated revenues for 2021 Grew $164,000,000 to $1,700,000,000 That's an all time high for ATSG. Our adjusted EPS increased to $1.66 per share, up from $1.60 in 20.20. Adjusted pre tax earnings increased 11% and adjusted EBITDA rose 9%.

Our aircraft leasing company, CAM, The 3 airlines that comprise our ACMI Services segment, each delivered great results. CAM's pretax earnings increased 37% for the year And pre tax earnings for our ACMI Services segment grew by 39%. On the next slide, You can see that on a rolling 12 month basis, our adjusted EBITDA continues to accelerate, aided by a 27% gain in the 4th quarter. That improvement reflects both a faster pace of 767 lease deployments during the year, along with steady improvement in our passenger flying for both the military and commercial customers. Again, our adjusted EBITDA excludes, among other items, The changes in values of our financial instruments and the benefits of federal pandemic relief assistance for our passenger operations 4th quarter slowed somewhat to finish the year at $505,000,000 As you can see, we're continuing to separate what we call sustaining CapEx, mainly for airframe and engine maintenance, technology and other equipment from the spending we allocate to fleet expansion.

Sustaining CapEx was $183,000,000 for the year and growth CapEx was 322,000,000 Both were lower than our prior projections. Our gross spending was down due in large part to supply chain disruptions And pandemic challenges at our conversion vendor. We deployed 4 767 freighters in the 4th quarter for a total of 15 for the year. Freighter conversion businesses are running at peak capacity now as the pandemic has both accelerated e commerce driven volumes and reduced cargo space To meet this demand, 12 of our feedstock 767s and 1 A321 We're awaiting or undergoing conversion at the end of last year. The next slide is an update on our new financial metric adjusted free cash flow.

Represented by the bottom portion of each bar is our operating cash flow net of the sustaining CapEx shown on the top portion. Our GAAP operating cash flow also includes cash our passenger airlines received in federal pandemic relief grants. Our strong adjusted free cash flow of $400,000,000 last year illustrates a key point about the power of our business model. It can generate more than enough cash flow to cover our growth. As we acquire, convert and lease more freighter aircraft, we are well positioned to fund that rapid growth internally.

That will further reduce our debt leverage and make capital available for other uses. The next slide illustrates our continuing progress toward growing our fleet from internally generated funds. Our overall debt to adjusted EBITDA leverage ratio as measured under our bank credit agreements is now below 2 times. As short term rates increase in 2022, the debt restructuring we completed early last year to replace variable rate with fixed rate debt will help to mitigate some of the effect of higher rates. We continue to project double digit earnings growth from CAM's aircraft portfolio, most of which are under 7 to 10 year leases.

You may have noted the comments in our earnings release The expiration last fall of CAM's power by cycle arrangement with Delta for maintenance of engines on the 767-two 100 aircraft we We decided to offer those lessees a new service that provides them access to a pool of engines that we are responsible for maintaining Under new pay by cycle arrangements, CAM will play a more active role in making sure engines are available to its customers under a structure that is more efficient for lessees and improves CAM's margin opportunity. Maintenance costs for engines provided to the pool will be classified as sustaining capital expenditures and depreciated as the engines are operated. As a result, our sustaining capital outlays for engine maintenance will increase along with our adjusted EBITDA. For 2022, we expect the contribution to our year over year growth in adjusted EBITDA will be between $40,000,000 45,000,000 Most of the nearly $100,000,000 increase in adjusted EBITDA we are forecasting for 2022 will impact our bottom line. Strong growth in earnings from our airline businesses in particular, along with the momentum of our leasing returns from CAM will yield approximately $2 in adjusted EPS for 2022, a 20% increase over last year.

This projection includes the adoption of new accounting rules pertaining to our convertible debt. The change effective this year Raises our 2022 adjusted diluted share count by 8,000,000 shares and will reduce our pre tax interest expense by approximately $8,000,000 With that summary of our financial and operating results, I'll turn it back to Rich for some comments on our operations and outlook. Rich?

Speaker 2

Thanks Quint. Our earnings release lists a number of key 2021 operating accomplishments and what was a very good year for ATSG overall. Let me highlight and provide some additional color on a few of them now. Our record 15 external leases and deployments of Boeing 767-300 freighters Plus three releases of 767-200s was a true success story. You may recall that 11 of them released to Amazon along with CMI assignments for our airlines to fly them.

Those 11 deliveries completed an order of 12 That Amazon placed with CAM in June of 2020. We now apply 46, 767s for Amazon. That includes 4 they own or lease from others and prefer to place with our ATI airline to fly. Later this year, Amazon may assign us to fly more of its freighters. We continue to be very proud to be the largest provider of leased cargo aircraft and flight services to Amazon.

Earlier last year, the FAA certified our joint ventures design for passenger to freighter conversions of Airbus A320 1,200 aircraft. We follow that with the conversion and delivery of the first A321 freighter based on our design. CAM will convert and add 2 A321-200s to its leased freighter fleet later this year and at least one more in 2023. In August, we announced the commitment to acquire 20 conversion slots for Airbus A330-300s, a new aircraft type, slightly larger than our Boeing 767-300s. Next year, our A330 conversion vendor will induct our 1st feedstock aircraft for conversion for delivery in 2024.

Already, we have deposits from customers for 14 of the 20 A330s that we have previously I'm confident by the end of this year, our order book will include customer commitments for all of the first 20 A330s we plan to deploy. In light of that strong customer interest for an aircraft still 2 years away from delivery, we have boosted our conversion slot commitment by 9 to 29 A330s for delivery over the next 5 years. Those additional A330 conversion slots Means that CAM now has slot commitments for more than 70 passenger to freighter conversions, including 35 767-300s, which remain the preferred aircraft for e commerce driven air networks. Our order pipeline includes customer commitments for all of the We will deploy this year and more than half of those in our leasing plan for 2023. We already own and have scheduled for conversion all of the 21 and especially in the Q4, our passenger air operations for the military and commercial customers rebounded significantly from 2020 levels.

That included more scheduled air operations for the military, but also Omni Air's significant role in America's rescue of Afghanistan evacuees last summer We expect Omni's performance to roughly match its 2019 pre pandemic levels. And finally, Our 2021 negotiations with DHL led to a set of agreements this month to extend and expand our 18 year Commercial relationship. That included a 6 year extension of our CMI operating agreement through April of 2028 and another 6 years added to leases for 5 of the 767s we fly for that. DHL was our principal customer when we became a public company to provide great service within DHL's U. S.

Network. Those are a few of the operating and commercial successes that helped us generate record financial results this year and will continue to contribute to our results for several years to come. They are also a major reason we were able to set a new adjusted EBITDA target for 2022 of $640,000,000 or about 18% more than we generated in 2021. The target assumes the 9,767 and 2 A321 lease deployments I mentioned earlier, strong growth Both our cargo and passenger airline earnings, a gradual easing of pandemic restrictions on our workforce and access to certain airports as the year progresses. We also expect capital spending of about $590,000,000 including $200,000,000 in sustaining and $390,000,000 in growth CapEx.

Much of that 2022 CapEx growth budget will be for Stock purchases and conversion costs for freighters we will deploy next year. In summary, I'm confident that 2022 will launch ATSG On a path to deliver strong continuing cash flows from our superior business model and concentration of the aircraft our growing customers need. That will allow us to self fund most of the fleet expansion targets and still adopt a more diversified capital allocation strategy when cash return restrictions expire in September. That concludes our prepared remarks. Quintin and I along with Mike Berger,

Speaker 0

And we have our first question from Jack Atkins with Stephens.

Speaker 4

Hey, great. Good morning. This is Cameron Hoagland on for Jack. Thanks for taking my question. So first one to Quint, would you mind walking us through the accounting changes Here on maintenance expense, I read that as recurring, but just wanted to confirm that.

And also for the share count from convertible debt, What share count is that guidance assuming? Thank

Speaker 3

you. Sure, Cameron. I guess in terms of the I'll do the last one first, I The share count has to do with the accounting changes required for convertible debt The impact on our share count and of course that took effect right out of the gate in 2022, will be to add About 8,000,000 shares to the denominator. It's essentially the if converted method. You're assuming that you satisfy The debt with shares and so forth.

And it will remove about approximately an $8,000,000 annual Non cash expense that was going through interest expense also. So you've got those two effects. The net effect is a headwind for EPS because of the increase, the 8,000,000 As far as the and I think your The first part of your question was pertaining to the new engine service that we're putting forward for the 767-200 engines. Is that correct?

Speaker 4

Yes, for capitalizing those expenses.

Speaker 3

Right. For many, many years, we Had those engines under a power by cycle arrangement with Delta TechOps and that contract terminated kind of at the end of Q3, beginning of Q4 of last year. And under that Accounting treatment for Power by Cycle, the way we were essentially passing through to the lessees who wanted to take advantage of that Sort of piggybacking on that agreement and leveraging the scale of engines that we had in that contract. And then we had recognized some Margin on that sort of a markup on that pass through power by cycle. That contract came to an end and so we made a decision when we We manage those engines and move them to a pool that we can make accessible to lessees.

It provides us an ability To better manage that more efficiently for them and also provides margin opportunity for us. And of course, the 767-two 100 over time, we may take some of those aircraft out of service and cannibalize the engine. So it also allows us The ability to make rational decisions about how we manage the engine Modules to get the best life out of the engine. It will also extend the fleet life for the 767-200. So we made that strategic decision.

So we're no longer in a power by cycle arrangement. So going forward, we will be responsible to maintain That engine pool and the cost that we incur as engines go through the shop will be capitalized and depreciated. And what we've disclosed in the earnings release is given that now we'll be depreciating Those costs and no longer paying a power by cycle fee, it will have an impact on depreciation and Our EBITDA because we'll add that back. It also is accretive to our earnings and as I say provides more margin Opportunity, although there's a little bit more risk, we'll have more CapEx to maintain those engines. Some of those engines The positive part of that is we're no longer paying that cycle charge to Delta as those engines fly.

And so We believe certainly that over the long pole, that's a cash flow accretive And a margin opportunity for us that we didn't have under the prior arrangement. In the short run and this year, we will have CapEx though, Because we'll like any new venture, sometimes there's an upfront investment. So we'll have a number of shop visits that will occur this year. So our CapEx We'll go up and we've shown that as sustaining CapEx And our guidance here and so it will be reflected in that adjusted free cash flow stat, it will be taken out of operating cash flows. You could probably argue that that's somewhat of a growth investment too because it is a new business line, but we looked at it More conservatively, a sustaining CapEx.

So we wanted to tell you because it is a change from And it happened late in the year. So year over year, it's a number of engines. It had a pretty big impact on EBITDA given that it happened so late last year. You've got about 60 or so engines that suddenly moved to this time this other Treatment in terms of how we're approaching making them accessible to lessees. And so of our growth in EBITDA, It's about $40,000,000 to $45,000,000 It will depend upon, of course, how many cycles the lessees fly because they will pay CAM On a per cycle basis and so forth.

But it's it gives them a lot of flexibility. They can draw on the pool. So we're excited about being able to offer that new service. Maybe I'll just

Speaker 5

add that we own the lion's share of these engines that exist out there. And as Quint mentioned, I'll just emphasize, It's a huge advantage for our customers to have this pool of resources as we continue to fly The 767-200, which just remains to be a great airplane for us.

Speaker 4

Thanks for the color there guys. Really appreciate that. And if I may ask a quick follow-up. In the guidance you gave, you said The passenger flights have returned to a pre pandemic 2019 like level in the coming year. Where are things Today versus that run rate and what is driving that outlook?

Thank you.

Speaker 2

This is Rich. The DoD portion of Omni's business is pretty much back up to pre pandemic levels now. There's a few places that they're flying a little bit differently to, In terms of the volume of business, that's come back. As it relates to the commercial, we saw a really good, come back in the 4th quarter Related to charters for cruises, related to the commercial passenger opportunities, A lot of bold charters for football games, those types of things. So it was very encouraging to see that.

They're also getting, inquiries And for bids for additional ACMI lanes for standard Commercial airlines that may have fleet needs that don't line up with what their fleet currently looks like, Maybe because of the way that they're managing their assets because of the pandemic. So given the commercial activity that we're seeing with Omni, We think we're comfortable that they'll have a good year and certainly a growth year over 2021. And we're projecting that they'll have a year that's fairly similar to 2019.

Speaker 4

All right. Thank you. Appreciate the color there. I'll turn it over. Thanks again for the time and congrats on the great quarter.

Speaker 3

Thanks, Cameron. Thanks, Cameron.

Speaker 0

And we have our next question from Frank Galanti with Stifel.

Speaker 6

Yes, great. Thank you for taking my questions. I wanted to start On the conversion slots, in the press release, it indicated that all of the 22 deliveries were, I guess set for customers and most into 2023. I just wanted to get an update on what How that's changed in the last couple of months? Have you been seeing progress on extending Those deliveries past mid-twenty 23.

And then I guess a second part of that is Of those customers who are interested in using leasing aircraft from you guys, can you give a sense for From a high level, what type of customers those are from a geographic or end use perspective? Any color there would be helpful.

Speaker 5

Yes, sure. So our geographic concentration of our deliveries Continues to be very broad based. We will see new customers as well Existing customers, from a geographic perspective, some will be in the U. S. And North America.

Other parts will sprawl out to Europe as well as into the Nordics for the first time for us. So we continue To see that expansion from a geographic standpoint, which is one of our initiatives to expand further globally. We've guided to the fact that all of our deliveries for 2022, 9767s and 2 A321s, our book is complete. We have The volume share of our 2023 book order book completed as well, but we do anticipate to still deliver More air converted freighters in 2023. The A330 will start delivering in 2024.

And we see, as Rich mentioned in his comments, Very, very strong demand for that. We've mentioned we've got 14 of those initial 20 not only under LOI but with deposits. And we firmly believe, as Rich says, that all 20 of our initial slots will be completed by the end of 2023 Excuse me, by the end of 2022. And that's the reason why we went out and secured the additional slots. So we're And that will take us all the way out through 2026.

Speaker 6

Okay. That's really helpful. And then taking a look at CapEx, so you guys guided about $590,000,000 in 2022. And it Sounds like feedstock has already been purchased for most of those conversions in 20 2, 2023 that we just talked about. I guess just wanted to get a sense for timing and composition of that CapEx and really with a view towards the 2023 and beyond, how much CapEx Of that $390,000,000 growth and $200,000,000 sustaining, it's sort of accounted for with those Airplane purchases.

I guess another way of asking it, have those planes been paid for yet or will they be paid for in 2022, 2023? And then I guess, how do you think about growth for sustaining CapEx Going out into the future past 2022?

Speaker 3

Sure, Frank. This is Quinn. In terms of 2022's guidance For the growth CapEx, that $390,000,000 that includes actually buying 767-three 100 feedstock aircraft. Remember at the end of 2021, we had a dozen that were in conversion. So we're putting what 9 767s online this year.

So you Delivery commitments. We'll be buying airplanes though for 2023. So we'll have we plan to buy We also have made our first Our secured access to our first feedstock for the A330. We have deposit on the first five of the 20 aircraft. Now those aircraft won't be delivered and we won't finish paying for them until 2023.

So they'll be part of 2023's CapEx budget, as Mike mentioned, the first conversion inductions on that line are mid year next year. July next year, yes. And so Those are some of the pieces along with, of course, the ongoing conversion costs Of aircraft that are going through the lines to complete their passenger freighter work Make up the lion's share of that growth CapEx this year. As far as sustaining CapEx and what that might look like Going forward, you can see it's up a little this year. And of course, we mentioned, we a minute ago talked about the investment we'll be making And the maintenance of some of the engines that we'll put in a pool for certain of the lessee access.

So that took it up a little. We've been in the sort of the 180 range last for a while and that's we're saying 200 In 2022, I think that there still may be some engine shop visits related to that type that Impact the first half of twenty twenty three, but then it should that should fall off and abate. And in our business model, the sustaining CapEx really does not grow absent that's engine Change was something that's a little unusual because it has been in place for years. But Just leasing additional airplanes and growing CAM's leasing portfolio does not in and of itself have much impact in growing our sustaining CapEx because The lessee is responsible to maintain the aircraft during the life of the lease. And so I I don't expect sustaining CapEx to really change much once you look out past 2023.

We'll of course add aircraft, at least 330s, 321s and more 767s. But Under those contracts, we won't be responsible for the maintenance. The lessee returns it at the end of the lease in a like for like maintenance condition.

Speaker 6

Okay. That was really helpful. Thanks for the answer and congrats on a great year.

Speaker 0

And we have our next question from Helane Becker with Cowen.

Speaker 7

Thanks very much operator. Everybody, and thank you for the time. Just a couple of questions. On the 14 of the new aircraft that are committed. Are any of those new customers that you could talk about?

Speaker 5

Half of them, Helane, this is Mike, are new customers. We will shortly put out Some press releases about who those customers are. I mentioned in the CARBFAX late yesterday That where the geographic areas were across Asia, Southeast Asia and into Europe. But There are the makeup is about fifty-fifty right now in regards to new customers and existing customers.

Speaker 7

Okay, that's helpful. Thank you. And then the other question I have on since you're not responsible for fuel, is there a lag time On your contracts between when fuel goes up and when you bill?

Speaker 3

No, it's really small, Helane. This is Quint. The way our contracts are structured, there's not a lot of float that we're at risk for. And as you know, we don't take the actual fuel risk that under our arrangements the customer pays for the fuel.

Speaker 2

And our customers Pay us the fuel bill very quickly.

Speaker 7

Okay. All right. That's helpful. And then the other question I have is On omni and the level of business that you mentioned they're doing for the DoD, Do you have any thoughts about the article that appeared recently in Intercept and The accusations that people are mistreated.

Speaker 2

Yes. So The article that was in there was some gross exaggerations as it related to the treatment of passengers and these are Flights that we do for government agency, for ICE. And It's important to note that Omni's, I think they did 3 flights for ICE in 2021. It's less than 1% of their business. And it's a tiny amount.

And those flights, of course, we have we control the safety on the flight. So We do have flight attendants on the flight and obviously we have flight crews on the flight. But the passengers are have oversight Of government employees. They're there for the safety of the flight and of the passengers as well. But that article was a gross exaggeration of the treatment of the passengers.

Okay.

Speaker 7

All right. Fair enough. Thank you.

Speaker 2

Thanks, Elaine. Thanks, Elaine.

Speaker 0

And we have our next question from Stephanie Moore with Twist.

Speaker 8

Hi, good morning.

Speaker 3

Good morning, Destiny.

Speaker 8

I wanted to touch on maybe more of a high level discussion Our conversation, it looks like obviously the demand for your leasing services remains quite strong. You clearly have locked up the Maybe just if you could walk through some of those puts and takes that would be helpful. Thanks.

Speaker 2

Yes. It's a good question, because when we're stepping into new aircraft types, We want to get the same return that we've gotten from the 767. And so we've done a lot of financial modeling around that and a lot of market Discussions and analysis to see that we're able to get the same return for which is 10% unlevered minimum for those new assets. And what can we get for the 767s that are either extended leases or new leases We have been trying to test the market and move pricing up. And to some extent, It really just depends on who the customer is and how they evaluate the aircraft.

Most airlines when they're evaluating the performance, the economic performance of an aircraft. They look at all the costs associated to running it, what their Place segments are going to be and then they look at the tonnage they're going to handle and break it down to what's the cost per kilo to run their network using these aircraft. And so So all that said, the way the market is flowing today is our releases and extensions are going at the same rate, which isn't usual Or higher in some cases. And the under normal circumstances when the market is less I guess, I should say. You usually take a small discount when you extend the lease because it's in the best interest of both parties to extend.

We save a lot of downtime of the airplane and potentially some maintenance costs. So we're looking to get a good rate of return That meets or exceeds our historic on the 767 and we feel pretty good about it right now.

Speaker 3

Yes. This is Quint. Stephanie, I'd just say that the demand environment that is helping us sell aircraft so far in advance with the pipeline visibility we It is naturally a plus for what you can get in terms of return In our lease rates, I mean, as Rich says, we've been we've seen airplanes that have come off lease renew At or better than what we had what the prior lease had been. And certainly, There continues to be really strong demand for the midsized freighter and That's a good thing for our lease rates. We don't that said, we don't get into specifics because as you know, that's Our discipline is 10% or better, but I think we all understand that current e commerce growth is driving Conditions that make it possible to get upper movement in terms of lease rates.

Speaker 8

Got it. No, that's really helpful. And then I wanted to follow-up to the first question about the impact The accounting changes that you've highlighted, thanks. Thank you for giving the I guess the impact to the share count from an EPS standpoint, but Maybe you could help us think about what how we should think about it from maybe just a valuation standpoint and if we are including those incremental 8,000,000 shares or are those being hedged? Just If you could walk us through that, that would be great.

Thank you.

Speaker 6

Yes. I mean, we have

Speaker 3

as you know, WACC, when we did it, we did a bond hedge To make the dilution the impact of any share dilution even less likely. I think we bought up that It would have to be a 75% or so premium over what we were trading at the time, which memory serves you right, we were at 21 So it's like before you could even possibly see any share dilution, it would have to be in the, I believe, the low 40s. And then it's our choice, right? How we settle that and it's a relatively small slice of our overall debt capital, $259,000,000 out of about $1,300,000,000 or $1,400,000,000 And it matures in October of 'twenty four. Actually, I think Truist was involved with that.

So you guys probably are across the hall there. They know all about it. But Likely next year, we'll take a look at that. We could put that in our revolver without any trouble at all. And of course, our revolver, we're paying just a Over 1% for our variable debt, which is about the same as our coupon is on that convertible debt.

So the likelihood we'll actually issue shares to satisfy it is very tiny. And so I would almost say non existent. So but the accounting rules nonetheless that take effect require you to reflect the underlying shares in the denominator, Sort of the most conservative way, I guess, to show its impact on EPS. And so that's the 8,000,000 shares, Which was the underlying share amount that back up to 2 $59,000,000 in debt. So we put that in the denominator.

There's somewhat of an offset and we don't we no longer have to show an interest charge Of about $8,000,000 and the net effect on the EPS adjusted EPS is about $0.05 a quarter or so. So $0.20 call it for the year.

Speaker 8

Got it. Well, thank you so much.

Speaker 2

Thanks, Stephanie. Thanks, Ed.

Speaker 0

And our next question comes from Chris Stathoulopoulos with Susquehanna.

Speaker 9

Hey, good morning. Thanks for taking my questions. So, Clint or Rich, in the $640,000,000 guide for this year, What's contemplated in terms of fleet utilization? So you don't report your absolute block hours. So we can't get to kind of like a weighted average utilization rate there.

Just curious if you could help frame us how you're thinking about your Overall fleet utilization and then how much ad hoc flying is also contemplated or included in that 640 guide? Thanks.

Speaker 3

Sure, Chris. I'll take a shot at it. First of all, the reason we don't highlight block hours is because We do a lot of network flying, right? The CMI flying, they're sort of medium range. And so what drives our revenue and our results And in fact, our contracts, typically we're being paid more for the resources, the Supplying the aircraft and the crew and the maintenance and so forth and spreading it over a while we do it, we do look at it that way some.

Sometimes spreading it over a block hour total is not as meaningful as it would be if these were long haul freighters, Transpacific type schedules. These are flying shorter hops. But we take the schedules that we That our customers are asking us to fly and we of course bake those into The drivers in our revenue contracts when we do the budget. And so what's behind the $640,000,000 is basically Our CMI fleet, which as you know grew substantially in 2021, we put I think what was 13 airplanes on for Amazon and we put on 3 or 4 for DHL as well. So we're reflecting that.

We're reflecting what we typically would expect to see maybe in peak, but the customer is It has the flexibility to change schedules during the year. So it's not like those can't change based on customer wishes. We're basing our projections on what we're currently flying. We anticipate getting some additional aircraft Into the Amazon CMI this year, I think as many as 3 and those are aircraft they would supply. It's not once we'll be leasing to them.

So we bake that in as well. And to the extent hours drive our revenues, that's what we put in our plan.

Speaker 9

Okay. So if we back out this 40 45 from this new maintenance agreement. That gets you to an implied EBITDA of around 10%, which I'm guessing your fleet is Probably not perhaps close to but not a pre pandemic utilization. And so that 10% actually within that light is pretty good. Is that With where your order book is here and the move and the introduction of the A320s, is 10% The right way to think about this now through the next stages of the recovery or through a cycle versus what you've done in the past has been Sort of mid to high single digit?

Speaker 3

You mean as you think about 2023 versus 2020?

Speaker 9

Yes. I mean the 10% to 15%, I realize There's a lot of different things at play here, but you do have a very full order book and you have the A320s coming in. So is 10% to 15% a fair sort of rate that you believe that you can sustain here through the cycle?

Speaker 3

Yes. Remember, you're on a bigger and bigger base every year, right? And when you think about The impact on EBITDA, if you're talking about growth on the EBITDA stat, remember because of the timing of the termination of The prior engine contract, there's year over year sort of an outsized jump, right, related to that. So you'd be talking about It's a I think 10% is maybe how you would think of it sort of as a more normal, but it will depend on the opportunities, If the market stays hot like it is, we're adding new platforms, we're adding The Airbus platforms, the number of aircraft we could lease, instead of being more like 10, it can be more like 20 In some of those years, it's the timing of delivery of some of those aircraft. You talk about the 321s The 2, they're coming late in the year, right?

So, it always depends upon timing of delivery when you're comparing 1 year over another. So there's a whole host of factors. But I will tell you that one of the drivers that I think maybe the Folks may not have expected, I mean, and as we've been saying it, is the momentum in leasing that we've had And also improvement in our ACMI Services segment year over year is driving a lot of our EBITDA growth. And I don't know if the market had appreciated that. Certainly, the pandemic has sort of been harmful to the ACMI Services segment, particularly omni.

And so we are getting, as Rich said, we're coming out of that And we hope for further moderation in those effects for 2022. So that's been a big plus. The combi flying, we think there's some further improvement that we're projecting in the second half Related to some of the destinations that the 757 combis fly into, that will be helpful for us. So that will help us in 2023. If that happens, you'll get a year over year That will be helpful for that.

So there's a whole host of factors. I mean, if you want to Make some assumption. I would point you more towards the 10% than 15%. 15% is pretty hard when you're A significant base. Now if the market is really hot and we increased the leasing that can help push us closer to that.

Speaker 9

Okay. And the 130, the active fleet at the end of this year, the 130, I think back in November, You had suggested that you could do kind of a teens growth on that, which would imply around 145 to 2023. Is that Still the right way to think about the active fleet for next year?

Speaker 5

Yes. Chris, it's Mike. Yes, spot on. We think that's still very accurate.

Speaker 9

Okay. Thank you.

Speaker 5

You're welcome.

Speaker 0

And our next question is from John Kim with Dreyfus.

Speaker 10

Hey, good morning. Thanks for your time. Appreciate all the granularity around guidance. As you alluded to in the last question, obviously, you're layering in 11 new leases this year. Can you talk about You may provide the guidance for 2022.

Can you talk about the exit run rate of 2022 from an EBITDA perspective?

Speaker 3

That's a good question, John. It will be Above what we've guided to for the full year. How's that for guidance? I don't know that I've Given a whole lot of thought to the as I say, some of those Good guys that we are looking for are in the second half, although by and large the EBITDA that we expect this year It's more evenly spread between first half and second half than we saw in 2021. We do expect improvements sequentially In the second half, and what's driving that is, of course, the timing of the leases lease deployments And also that Combi flying that I mentioned a minute ago.

And so it's going to That will push the exit run rate higher than $640,000,000 but I don't know that I can I would want to at this point give you some specific that will depend on some other It may be a little premature? Maybe we talk about that later in the year at one of these calls when we've got Even better visibility on everything.

Speaker 10

Fair enough and understood. You made some comments early in the call And highlighted your leverage positions pretty strong right now. And obviously, You've got a high degree of visibility into your growth for 2022, 2023 and beyond And the ability to repurchase shares beginning in Q3, have you guys begun to think about quantifying what a share Repurchase might look like, I know you have to play a little poker here with the market, but would be interested in your general thoughts on that.

Speaker 3

Yes. We've been looking at

Speaker 2

a number of ways as far as capital allocation goes. And certainly, as I put in the remarks that we're looking forward to having the restrictions removed from us so that we'll have We haven't made any decisions yet, but we're looking to continue Evaluating towards a balanced capital allocation strategy that would be certainly Include returning capital to shareholders in the future.

Speaker 10

Great. Thank you.

Speaker 0

We have our next question from Howard Rosenkranz with Value Advisory.

Speaker 11

Hi, guys. Thank you very much. I just I joined the call a little bit. I just want to get a quick clarity on the $45,000,000 then I have or the $40,000,000 to $45,000,000 then I I have a quick follow-up. So the $40,000,000 to $45,000,000 is sort of flowing in.

It was previously now it's going to be hitting our EBITDA whereas previously it was sort of swapped in prior?

Speaker 3

Yes, Howard, this is Quint. Of course, we went through that in some detail in an earlier question, I'm not sure I can be as eloquent again. But I'll take a whack at it. Yes, the previous Contract that we had that covered the vast majority of our 767-200 engines It was with Delta and it was a power by cycle arrangement. And we extended that to lessees if they wanted it.

Not all of them Used it. Some of them wanted to be responsible to take care of the engines during the lease themselves. But we extended that to our lessees and we there was some Markup on that, that CAM recognized. And so that qualified as PBC. That came to an end Yes, right around the start of Q4, terminated.

It had been in place for years. And we could have extended and renewed, but we looked at our options and we said, hey, There's an opportunity here to more efficiently manage this engine maintenance at the CAM level. And so we've transitioned it to Providing lessees access to a pool of engines, that we are responsible to keep maintained and available. And as we do that, we'll capitalize those visits. We don't have an arrangement, a powered by Cycle arrangement with any vendor to do the maintenance, we're doing it on a time and material basis.

And so when those go through the shop, They'll be capitalized and they will depreciate over the engine's life. Right. And so If

Speaker 11

I could just I appreciate the elucidation. Just from a more simplistic standpoint, though, in essence, on a sort of free cash flow from what you would generate standpoint, We've really it seems to me and if I'm wrong, I'll just take it with you offline. It seems to me that we've sort of just Moved it from one bucket to the other, I mean, you would still be guiding to a great year of like $600,000,000 But the after but the free cash flow effect of it seems unchanged. So it seems like with the old accounting Not with the old accounting, but if you were doing it the same way, you'd really be at about $600,000,000 Again, if I'm wrong, I'll just take it offline.

Speaker 3

Well, if you want to look at it, if nothing had changed, that's probably correct. I would I'd say that we believe that there is cash flow positive opportunity and certainly margin opportunity From this change and it's also beneficial to our lessees and it extends the life of that aircraft type Yes, to be more actively managed.

Speaker 11

I get it. But I want to jump back to what you said about the CMI, which I think is great because I certainly beat you up enough about it offline. The what you're because the CMI over the years has been, As I don't hesitate to tell you horribly inconsistent, but it seems to me you're really making It seems to me you're really making a very positive statement with a high degree of confidence Well, certainly, there's

Speaker 3

last year, we added all these airplanes. So you had a lot of start up costs as you often do when you're bringing on crews and so forth, opening maintenance stations and so just for growth like that. This year, we said Maybe up to 3 going into the Amazon agreement. So there's more stability, which I think allows for more efficiencies And also the scale that these operations have grown to. We renewed our DHL contract.

We expect to see some growth opportunities With that in place and a 6 year crew agreement that one of our airlines, ABX, executed At the beginning of last year, so there's a whole lot of good things going on in the CMI and also the recovery from the pandemic in the PACS line for Omni, Which is all stacking up to make conditions right for year over year improvement in that segment.

Speaker 2

And Howard, we've done I think we've talked on previous calls, we've also done outside of the scale that Quint has mentioned, We've done a lot of work with the airlines and with our MRO in terms of improving supply chain, efficiency, so that we're Taking advantage of the full buying power of the enterprise versus sub optimizing. And we've done a lot of other things with flight planning With some other predictive maintenance technology programs and some other things to actually improve both our efficiency And that will lead to improved profitability. And we're already seeing results of our Our investments in 2021, so we're looking forward to a more efficient aviation situation going on in the future.

Speaker 11

Okay. I guess I think if this is really the inflection point on CMI, this is a long overdue game changer For your multiple as will the return of capital be. So thank you very much.

Speaker 3

Thanks, Howard. Thanks, Howard.

Speaker 0

And we have a follow-up question from Chris Stathoulopoulos with Susquehanna.

Speaker 9

Hey, thanks for taking my follow-up. So Quinn, I think on the last few calls you've used the term self funding model and I feel that it's sort of underappreciated here. If we look at all the sort of the puts and takes here, eventually the spread here between the market value, book value or the residual value on these 67 is going to go the other way. But you are attached to customers like DHL and Amazon and You do have the A320s slowly working into the fleet. So when you talk about the self funding model, Which again I think you've used now in the last 2 or 3 calls.

As we look at your free cash flow back Through 2010, depending on where you are in the order book cycle, it's gone positive, negative. So should we kind of interpret that as you Believe that you can sustain positive free cash flow through an order cycle or an economic cycle and If so, outside of buybacks here, which it sounds like you have 7 or so months to figure it out, how we should

Speaker 3

When we published the stat a couple of quarters ago, adjusted free cash flow and separated our CapEx in The sort of non discretionary or sustaining CapEx versus the growth or discretionary. We did it to further highlight That aspect of our business model, it does fund tremendous growth. I mean, when you look at The trailing 12 month basis, dollars 400,000,000 that is available to allocate. And of course, none of the allocations are mutually exclusive. You can allocate those towards growth, which we do have a bias when the market is there and the returns Good.

And that's the environment we've been in. But when it is self sustaining like that and funding the growth and your debt isn't going up Or in the case of last year, even declining. You can see and one of our slide shows the fleet growth And yet the debt is going down. So that's clear that this business funds growth. But that means that your caps your leverage ratio is going to decline And it allows you to look at the use your balance sheet to create value in a number of ways.

We've been constrained from doing that certainly with the CARES restrictions on the grants that we participated in and that Changes later this year, I think Rich said a minute ago, we was asked about have you been looking at different ways to create value that might include Return of capital. And certainly, we always have that as a part of a balanced strategy. It's just we haven't been able to. We think the valuation of the company hasn't doesn't reflect a lot of the Improvements that we've had in terms of our leasing book and the cash flows that you can That we have visibility on, they go out for years. It's funny we get the question sometimes about M and A.

Do you look at M and A? And I think we answered like, well, we certainly want to know about what's out there, but it's rare that you find something that Is either a value or strategically fits into your model. But if we were looking for something, it would look a lot like us because we're not We don't believe we trade at a multiple that really reflects the value of the business. And I think you can take that to mean we believe our shares are certainly a bargain at the price they're at. And so when we're able to, I think that'll And hopefully, the market recognizes that value and we all hope for that, right, that we see share price more appropriately reflect And so we'll have to take a look at that, but we do believe returning cash to shareholders is smart as part of A balanced strategy to create value.

Speaker 9

Okay. Thank you.

Speaker 0

And thank you. We have no further questions. I will now turn the call over to Rich Corrado for closing remarks.

Speaker 2

Thanks, operator. I'd like to close by again recognizing the employees of ATSG for their outstanding commitment to safety The most highly valued companies achieved the goals they set for themselves. Year after year, we hit or exceed our performance targets because the vast majority of our results come from expanding base of long term leases and contracts. We belong among the highly valued companies whose value is not based on just what they say, but on the ability to deliver superior performance year after year.