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Air Transport Services Group, Inc. (ATSG)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 was softer year over year but operationally stable: revenue fell 3% to $486M, GAAP diluted EPS decreased to $0.13, and Adjusted EBITDA declined 8% to $127.3M amid ongoing 767-200 lease roll-offs and lower engine power-by-cycle revenues .
  • Management raised 2024 Adjusted EBITDA outlook to ~$516M (+$10M vs Feb guide) on the back of an expanded Amazon flying agreement adding 10 767-300s in 2024; Adjusted EPS guidance remained $0.55–$0.80 and capex remained $410M .
  • Amazon agreement extends flying to 2029 (with options to 2034) and includes 2.9M additional warrants; 50 total Amazon-operated freighters expected by year-end 2024 as ABX Air onboards; start-up costs partly offset the 2024 benefit, with greater uplift expected in 2025 .
  • Liquidity and balance sheet remain resilient: $404M revolver availability, ~$1.4B unencumbered aircraft assets, leverage <3.2x, with positive Q1 free cash flow of ~$15M; capex is down ~50% YoY and targeted positive FCF for 2024 remains on track .

What Went Well and What Went Wrong

  • What Went Well

    • Expanded and extended Amazon relationship: 10 additional Amazon-provided 767-300s to start in 2024, flying agreement extended to 2029 with option to 2034; 2024 EBITDA guide increased by $10M on this catalyst .
    • Labor stability: ABX Air pilots ratified an extension, moving the next amendable date to 2030; this supports staffing ABX for the Amazon expansion .
    • Capital discipline driving cash flow: Q1 operating cash flow $126M, Adjusted Free Cash Flow ~$96M, Free Cash Flow ~$15M; capex down ~50% YoY with 2024 capex reiterated at $410M .

  • What Went Wrong

    • Leasing and ACMI headwinds persisted: CAM pretax down $21M YoY on 767-200 lease returns and lower engine cycles; ACMI posted a $3M pretax loss as total block hours fell 3% and cargo network mix shifted to more domestic routes .
    • Profitability pressure: GAAP pretax fell to $12.4M (from $26.6M), Adjusted EBITDA fell 8% to $127.3M, driven by lower 767-200 PBC revenue and higher depreciation and interest expense .
    • Demand softness in certain areas: Department of Defense passenger demand below normal at Omni; cargo block hours -3% YoY; A321 demand affected by global 737 freighter oversupply and V2500 engine issues .

Financial Results

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$523.1 $517.0 $485.5
GAAP Diluted EPS (Continuing Ops)$0.24 $(0.24) $0.13
Adjusted EPS (non-GAAP)$0.32 $0.18 $0.16
GAAP Pretax Income ($M)$23.5 $(15.6) $12.4
Adjusted Pretax Income ($M)$31.1 $19.8 $15.2
Adjusted EBITDA ($M)$136.6 $129.9 $127.3
Adjusted EBITDA Margin %26.1% (calc from $136.6/$523.1) 25.1% (calc from $129.9/$517.0) 26.2% (calc from $127.3/$485.5)
Consensus RevenueN/A – S&P Global data unavailable
Consensus EPSN/A – S&P Global data unavailable

Segment revenue and pretax contribution (Q1 2024 vs Q1 2023)

SegmentQ1 2023Q1 2024
CAM – Total Revenue ($M)$112.0 $105.5
ACMI Services – Revenue ($M)$334.1 $323.8
Other Activities – Revenue ($M)$110.6 $109.0
Elimination – Internal ($M)$(55.7) $(52.9)
Customer Revenues ($M)$501.1 $485.5
CAM Pretax ($M)$34.2 $13.4
ACMI Pretax ($M)$(2.4) $(3.5)
Other Activities Pretax ($M)$0.7 $2.3

KPIs and operating metrics

KPIQ1 2024
Revenue block hours YoY-3%
Cargo block hours YoY-3%
Passenger block hours YoYFlat
Operating Cash Flow ($M)$126.4
Adjusted Free Cash Flow ($M)$96.0
Free Cash Flow ($M)$15.2
Capex ($M) – Total$102 ($72M growth, $30M sustaining)
Revolver availability ($M)$404
Unencumbered aircraft asset value ($B)~$1.4
Net leverage (bank)<3.2x
CAM aircraft leased to external customers90 (end of Q1)
In/awaiting conversion (units)24 (13 767s, 6 A321s, 5 A330s)
Newly deployed in quarter4 converted 767-300 freighters

Drivers of the quarter (why)

  • CAM’s decline: 767-200 lease returns and fewer engine cycles reduced PBC revenue; higher interest and depreciation (each +$5M YoY) further pressured CAM pretax (-$21M YoY) .
  • ACMI mix: More domestic vs international cargo flying and three fewer aircraft drove block hours down 3% and a $3M pretax loss; Omni demand from DoD remained below normal but improved vs Q4 .

Guidance Changes

MetricPeriodPrevious Guidance (Feb 2024)Current Guidance (May 2024)Change
Adjusted EBITDAFY 2024~$506M ~$516M Raised by ~$10M
Adjusted EPS (diluted)FY 2024$0.55–$0.80 $0.55–$0.80 Maintained
Capital ExpendituresFY 2024$410M (incl. $245M growth) $410M (incl. $245M growth) Maintained
Potential UpsideFY 2024+$30M adj. EBITDA from leases/flying not yet contracted Additional leases/flying still possible; Amazon start-up costs $6–$8M dampen 2024 benefit Narrative updated

Assumptions and context:

  • Guide assumes start-up of 10 Amazon-provided 767-300s by Dec 1, 2024 with >50 new pilots at ABX; excludes yet-to-be-contracted leases/flying .

Earnings Call Themes & Trends

TopicQ3 2023 (Prev-2)Q4 2023 (Prev-1)Q1 2024 (Current)Trend
Amazon relationshipCore domestic e-commerce support; operations on track N/A beyond baselineExpanded: +10 767-300s in 2024; flying extended to 2029 (option 2034); ABX to operate; total 50 by YE Strengthening
767-200 fleet/PBCReturns and lower PBC pressured CAM; pretax -37% YoY 2024 headwind: -$55M EBITDA tied to 767-200s Continued pressure; fewer cycles and returns drove CAM pretax -$21M YoY; stabilization expected as cliffs pass Headwind moderating into 2025
DoD/Omni passengerService issues in late Q3; inflation and mix hit margins DoD customer demand down; ACMI pretax -$2M in Q4 Omni below normal but improving vs Q4; ACMI pretax -$3M; cargo hours -3% Improving sequentially
Capex & FCFCapex cuts planned for 2024/25; focus on FCF 2024 capex $410M; positive FCF targeted Q1 positive FCF ~$15M; capex down ~50% YoY; 2024 capex reiterated Executing
A321/A330 pipelineFirst A321s deployed; planning A330 feedstock N/AA321 demand impacted by 737F oversupply & V2500 issues; strong A330 interest; Asia/Central Asia pipeline robust Mixed: A321 constrained; A330 strong
Liquidity/leverageRaised convert; cash use for buybacks Liquidity strong into 2024 $404M revolver availability; ~$1.4B unencumbered assets; leverage <3.2x Stable/healthy

Management Commentary

  • “We are raising our adjusted EBITDA guidance by $10 million… Our commercial teams remain focused on opportunities for both additional aircraft leases and incremental flying for our airlines, which could add upside to our guidance.” – CEO Joe Hete .
  • “CAM’s decline was driven by 767-200 lease returns and fewer engine cycles… ACMI Services and other was driven by better performance at our MRO operations.” – CFO Quint Turner .
  • “The second piece of good news is the ABX Air pilots ratified an extension… providing significant labor stability into the next decade.” – CEO Joe Hete .
  • “We remain optimistic on the demand outlook for our midsized freighters over the long term… focused on operational execution and cost control as we position for … recovery.” – CEO Joe Hete .

Q&A Highlights

  • Amazon deal mechanics: Initial 10 aircraft to ABX by YE 2024; potential for 10 more later; minimum 200 block hours per tail per month; includes additional warrants for Amazon; warrants part of value negotiation .
  • Staffing and carrier choice: ABX selected to facilitate faster pilot onboarding under new contract terms; ATI constrained by left-seat availability and higher premium pay dynamics .
  • 767-200 PBC economics: Only 767-200s use PBC pools; revenue declines are impactful as associated expenses are largely depreciation; remaining fleet expected to stabilize after recent “cliffs” .
  • Omni/ACMI outlook: DoD demand slightly improved vs Q4; broader ACMI cargo hours down due to network mix and fewer aircraft; management still sees long-term value in Omni .
  • Balance sheet: ~$1.4B unencumbered assets from fresh appraisals; leverage under 3.2x; free cash flow generation expected to stabilize leverage with potential deleveraging as EBITDA improves in 2025 .

Estimates Context

  • S&P Global consensus estimates for Q1 2024 revenue and EPS were unavailable via tool at time of analysis due to a data mapping issue (GetEstimates returned no data for ATSG). As a result, we cannot quantify beats/misses versus consensus for this quarter.

Key Takeaways for Investors

  • Amazon expansion is a near-term catalyst: 10 added 767-300s in 2024 and term extension to 2029 underpin network relevance and drove a $10M guide raise; expect larger EBITDA lift in 2025 as start-up costs roll off .
  • 2024 remains a transition year: 767-200 revenue headwinds and ACMI mix pressure keep profitability below 2023, but management’s capex cuts and operating discipline are translating to positive FCF and stable leverage .
  • Leasing demand is bifurcated: A330/767-300 demand improving, while A321 faces temporary headwinds from 737F oversupply and V2500 engine issues; watch for incremental placements through 2024 as upside to guidance .
  • Balance sheet flexibility intact: $404M revolver availability, ~$1.4B unencumbered assets, <3.2x leverage provide capacity to fund growth and manage timing of aircraft placements .
  • Labor stability reduces execution risk: ABX pilot contract extension to 2030 supports timely Amazon ramp; ATI/Omni negotiations continue but management does not expect deals in 2024 .
  • Monitor sequential trajectory: ACMI/Omni activity improving from Q4 lows, and 10 Amazon tails should progressively add block hours in 2H24, setting a stronger base for 2025 .

Appendix: Additional Details

  • Q1 2024 GAAP results: Revenue $485.5M; Operating Income $33.0M; GAAP pretax $12.4M; GAAP diluted EPS $0.13 .
  • Q1 2024 non-GAAP results: Adjusted Pretax $15.2M; Adjusted EBITDA $127.3M; Adjusted EPS $0.16 .
  • Non-GAAP adjustments include customer incentive amortization, non-service retiree benefit components, and derivative/warrant revaluation effects, among others .

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