Atlas Air Worldwide Holdings, Inc. (AAWW) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day. And thank you for standing by. Welcome to the Atlas Air Worldwide Holdings First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised, that today's conference is being recorded. I would now like to hand the conference over to our speakers, Atlas Air. Please go ahead.
Ed McGarvey: Thank you, Ajay, and good morning, everyone. I'm Ed McGarvey, Treasurer for Atlas Air Worldwide. Welcome to our first quarter 2021 results conference call. Today's call will be hosted by, John Dietrich, our Chief Executive Officer and Spencer Schwartz, our Chief Financial Officer.
John Dietrich: Thanks, Ed, and hello, everyone. Welcome to our first quarter earnings call. On behalf of all of us at Atlas, I hope that you, your families and friends continue to stay safe, as we progress towards brighter days ahead. I want to again thank all the frontline responders and essential workers around the world for their efforts. We're encouraged by the distribution of vaccines. Yet at the same time, we're disheartened that the path to recovery continues to be prolonged in many regions of the world, particularly in India. We operate frequently in that region and are actively engaged with multiple customers and organizations to support relief efforts. We're also pleased, to see so many others both within and outside the industry stepping up to provide critical support. I'd also like to thank our more than 4,000 employees for their incredible dedication and contributions. We're continuing to take wide-ranging precautions to protect our employees and our operations, to ensure we're able to safely transport the goods the world needs. Our team continues to work tirelessly doing our part, to keep the global supply chain moving. This pandemic has certainly highlighted the important role that airfreight plays in the global supply chain, and how it brings essential goods to market with unmatched speed and reliability.
Spencer Schwartz: Thank you, John, and hello everyone. I'd like to start by discussing the change to our segment operations and reporting, and then we'll move to the next slide and I'll discuss our great first quarter results. On prior earnings calls, we've talked about the blurring of lines between ACMI and Charter, and how these agreements have become more similar over the past few years. As our long-term Charter business grew significantly during 2020, the similarities became even more pronounced with both our ACMI and Charter businesses, now including contracts of a long-term nature.
John Dietrich: Thank you, Spencer. Moving to slide 9. And as I mentioned, we're off to a very good start in 2021 and are seeing continued business momentum in the second quarter. Our team continues to capitalize on the current airfreight environment, while delivering safe high-quality service for our customers. We look forward to finalizing the new joint collective bargaining agreement with our pilots and we'll continue to take every precaution to protect our world-class team of employees and our operations to ensure that we can continue to transport essential goods around the world. At this point operator, may we have the first question please.
Operator: Your first question comes from the line of Bob Labick of CJS Securities. Your line is open.
Bob Labick: Good morning. Congratulations on the performance and a very attractive guide for Q2 as well.
John Dietrich: Thank you, Bob.
Bob Labick: Hi. I wanted to start with -- just trying to get a sense how much of the strong first half performance relates to spot or ad hoc flying versus contracted ACMI and long-term charter, kind of, take-or-pay contracts? I'm trying to get a sense of the, kind of, sustainability and recurring nature of the contribution in the first half.
Spencer Schwartz: Sure, Bob. So about 60% to 65% of our flying now is in what was traditional ACMI. About 20% is now in long-term charters. About 10% is with the US military, about 5% is flying around South America and only about 5% or 6% now is what was traditionally, kind of, ad hoc spot market. So it really has become a very small percent of our overall business, and so approximately 94% of all the flying is on a dedicated aircraft.
Bob Labick: Got it. Great. And then just looking to the second half and 2022 then with that in mind other than the pilot labor information that you'll get by the end of this year -- pilot costs what are the biggest variables you're thinking about for the second half and for 2022 since so much of your flying is, kind of, already locked up?
Spencer Schwartz: Yes. Really, of course, we're in the middle of a pandemic. So there are a lot of uncertainties related to that and what that might mean overall. Based on everything we're seeing, we feel pretty good about the space that we play in and the continued strength of the airfreight environment. But there are plenty of uncertainties out there, as you know. Other than that, it's really supply/demand, impact on yields, operational challenges the amazing work that our team does to overcome those operational challenges. Those are really the big items.
John Dietrich: Yeah. And Bob if I could add to that, we've talked a lot through 2020, about COVID related and pandemic related movements, which are still continuing. But we're also keeping a close watch on overall economic conditions. And as I said in my comments, what lies beyond the pandemic. IATA came out with some statistics pretty recently to show that the economy and economies are recovering. And we're going to be watching that closely. Our inventory levels are down. We expect manufacturing to want to get back to full strength, which it's not right now. So those are beyond the pandemic, some of the things I'm looking to -- and an important variable to keep an eye on.
Bob Labick: Super. Thank you very much.
John Dietrich: Thank you.
Operator: Your next question comes from the line of Helane Becker from Cowen. Your line is open.
Helane Becker: Thanks very much operator. Hi everybody. And thank you very much for the time.
John Dietrich: Hi. Halane.
Helane Becker: I just have a couple of questions. As you think about the aircrafts over the next bunch of years, you're taking these four last Dash 8s. And I guess you'll fly them like, 30 years or 40 years. So maybe this isn't a question you have to think about too soon. But how are you thinking about aircraft replacement for some of the older 747-400s maybe?
John Dietrich: Yeah. I'll start with that. And it's important to remember that the 747-400 is still a great airplane. And still well within its useful life. And the models that we have are on average 2020, 2022 build. And if you look at the lifeline, you just described it for the 747-8 that still applies to the 747-400. So we expect that the 400 will continue to be a workhorse, in the years to come. And I would say similar to our comments on the 747-8, overtime we also think there's -- as some of the older ones start to retire. And what I mean by that is the less productive ones which are likely to be the converted, passenger to freighter. 747s those will likely retire earliest. I would say that pure freighters are going to have scarcity value overtime with its payload range capabilities as well as its nose loading capability. So we feel really good about the 747 into the future both, this 400 and the Dash 8. Now, that said, there are also some great airplanes out there. The 777 is a great airplane, the existing freighter fleet and looking forward to the converted 777 as well as other aircraft types. Airbus is talking about the A350. We're going to be looking as we always do at all fleet types. But with the 747 is kind of the backbone of our operation.
Helane Becker: Got you, okay. That's very helpful. And thank you for that. And then, the other question I have is, you gave your pilots a pay increase in May of last year?
John Dietrich: Yes.
Helane Becker: And now you're -- it's so good to see that, you're making progress on this contract, glad that it's hopefully coming to an end, or maybe a beginning, depending on how you want to think about it. Would -- as May one came and went this year would -- is not giving them another raise this year just holding off, because you think you're close to getting an agreement before year-end that would encompass pay that would cover this year?
John Dietrich: Well, Helane, there's a lot in that question. And I agree with you. We're pleased to see this negotiation coming to an end. And I can't say it is coming to an end. The arbitration is now complete. And we have specific dates, where the post-hearing briefs are due. The arbitration completed on April 1st, two weeks of hearings. And it is coming to an end. And the arbitrator has committed to us to get to an outcome as soon as reasonably possible. We're hoping it's within a 60-day time period. There was a large record that was submitted. But it is coming to an end and we're pleased about that. So there's nothing to prevent us from continuing dialogue with the union. Our representatives have been in touch with each other through the process. But the arbitration procedure that we've been pushing for so long in terms of bringing this to a conclusion, it's happening and we expect to result. I can't give you a specific date, but we expect it in the second half of the year.
Helane Becker: I heard you say that on the call. Okay. Well, thank you very much. And that was quite a quarter, congratulations.
Ed McGarvey: Thank you.
John Dietrich: Thanks, Helane.
Operator: Your next question comes from the line of Stephanie Benjamin from Truist. Your line is open.
Stephanie Benjamin: Hi. Good afternoon.
John Dietrich: Hi, Stephanie.
Stephanie Benjamin: I wanted to touch in on the long-term Charter business. You had really strong success last year locking in some of these incremental longer-term Charter contracts. So just love to hear an update on really the demand you're seeing for these types of contracts this year as well as maybe the types of customers. And if the momentum from 2020 has continued through 2021? Thanks.
John Dietrich: Yes. Thanks, Stephanie. We're seeing strong interest from these customers. And in early -- in when some of these contracts were being entered into as I described in a prior call this is a new customer base and some lessons learned from the pandemic and perhaps overdependence on passenger belly capacity. But what many of our customers are seeing and learning is that main deck freighters is very attractive. And to be able to secure that capacity is important both within this pandemic environment, but also beyond. So we've seen strong interest and are excited about that. It's a whole new customer base. And as Spencer pointed out that they are more ACMI like contracts because they have term associated with them and all or many of the attributes of ACMI. And as I mentioned in my remarks, we're not only seeing new agreements entered into, but extensions of existing agreements. So that's all kind of responsive to your question about the interest. I also think there's going to be some post pandemic lessons learned about the attractiveness of main deck freighters on a dedicated capacity. Some of our customers already recognize the benefits of real-time inventories and moving product around rather than carrying large inventory that may or may not sell. And I think airfreight will be a key component of that in the post pandemic economy.
Spencer Schwartz : And Stephanie, it's Spencer. I'll just add very briefly to John's comments there. That we now have dozens of these long term contracts. During the first quarter, we had four contracts that were extended. We had two that either added aircraft or added rotations and we had one new customer for two years. And the vast majority of these contracts go into 2022 and '23 some go into 2024. And the majority are on the sort of fastest-growing trade lanes and they probably will not be operated by returning passenger aircraft.
Stephanie Benjamin: Great. Well, thank you so much for all the color.
John Dietrich: Thank you.
Operator: Your next question comes from the line of Chris Stathoulopoulos from Susquehanna International Group. Your line is open.
Chris Stathoulopoulos: Good morning. Thanks for taking my question.
John Dietrich: Hi, Chris.
Chris Stathoulopoulos: So Spencer, John, so with the change in reporting here can we interpret this year that the changes here in ACMI are more structural or permanent in nature? Meaning are you no longer prioritizing or pursuing short-term Charter business? And then if so how should we think about whether it's -- however you want to quantify it EBITDA margins or EBITDA dollars or free cash flow through the cycle now given the change in the duration of the contracts there? Thanks.
John Dietrich: Thanks Chris. I'll start in terms of your prioritization question. The ACMI model is very attractive. It provides secure assured revenue streams. And some of what we're seeing as we talked about the long-term Charter agreements are more ACMI like. Another element of the long-term charters is sometimes Spencer mentioned dozens of these agreements is our ability to pair customers and get full utilization out of the aircraft by combining customer demand versus a typical traditional ACMI, which is fully dedicated full-time use of the aircraft. And I think there's demand and desire for both and it allows us to offer partial aircraft for the remainder for another customer. So that's worked quite well for us in our network planning on a global basis. So, from a prioritization standpoint, those two, the ACMI and the long-term charters, are certainly the kind of deals we like and will secure on a long-term basis. But, we also are able to flex our capabilities to take advantage of -- amount of fleet that we keep aside for ad hoc charter. There's no doubt. And that's allowed us to deliver a lot of these results. And that's really always been the case, because we know there's a consistent level of interest, both in good times and in challenging times for the spot charter market.
Chris Stathoulopoulos: So, should we think about this as generally accretive or positive for free cash flow? And that -- if so, that you would look to direct that capital towards the order book or when the PSP restrictions expire returning capital or pursuing other activities.
Spencer Schwartz: Yes. Chris, with regard to -- sort of two parts of that question I think. There was a capital allocation question and then there was kind of a free cash flow question. Our free cash flows, you can see, have really been strong and have continued to stay that way. As far as capital allocation, you've seen that our net leverage ratio is down at the low-2s. We're continuing to use our cash to strengthen our balance sheet, pay down debt and to pay for the 747-8 pre-delivery payments. We take a really disciplined approach to deploying our capital and we set aggressive return targets. Our focus continues to be on growing the business while generating returns that are above our cost of capital, and at the same time maintaining a strong balance sheet. Right now, we have CARES Act limitations, that don't allow us to either put in place share repurchases or to put in place a dividend program. It's something that the Board is always considering and when those restrictions are gone that's something that the Board will have to determine at that time. But at the moment, it's not really a consideration at this point. We just can't.
Chris Stathoulopoulos: Okay. Thank you, and then just a follow-up question. Just wondering if you could give some color on what you're seeing with respect to supply on some of your key routes. It looks like we're starting to see some indications of long-haul commercial wide-body flights being added back and areas like Latin America, looks like we could be heading back towards pre-pandemic levels in the next few months. So curious, I realize your network is pretty complex, but if your maybe top three or five lanes, what does that dynamic look like currently and then how are you thinking about that for the second half? Thanks.
John Dietrich: Yes. Chris, we're really not seeing that at all. In fact, as I mentioned in my remarks, it's slow to recover, borders still remain close. Now, I also believe there will be a significant appetite for the passenger carriers to get their aircraft back up and running. But there are a number of dynamics there that still favor airfreight, including some of the aircraft that are -- passenger aircrafts that are being used as what's called freighters. Once passenger traffic returns, a lot of that capacity is going to come out of the market. And they're also likely going to come out of major cargo trade lanes and back to passenger service trade lanes. But it's been slow and we expect it's going to continue to be slow. So, we're not necessarily seeing what you're describing. I think there's a lot of -- there is going to be a lot of attention given to the passenger carriers to get back up and running and tout some of the improvements. But, right now what we're seeing on the demand side is not within the timeframe you're talking about. And reasonable minds can differ on when it will return to pre-pandemic levels, but I'm not one who believes it's going to be in the next few months at all.
Chris Stathoulopoulos: Okay. But the routes I was referring to was on Latin America. And overall, the number of flights coming back are still small. I was just curious if there's been any route that's -- where you've seen a -- perhaps a marked difference versus a few months ago?
John Dietrich: No, not really.
Chris Stathoulopoulos: Okay. Thank you.
John Dietrich: Sure.
Operator: Your next question comes from the line of Scott Group from Wolfe Research. Your line is open.
Scott Group: Hey, thanks. Good morning guys.
John Dietrich: Hi, Scott.
Scott Group: So I want to go back to the segment reporting, because when I look charter margins have never been higher ACMI margins have never been lower. And I mean charter rates are what three times as high as ACMI. So from a financial standpoint, they still look and feel very different. So I'm just struggling with what should the longer-term margins of this segment look like?
Spencer Schwartz: Yes. Thanks Scott. We don't think they are that different anymore. As we talked about the businesses have been becoming more and more similar over time and we as a company we view and manage them as one segment. It's not something that just transpired during the pandemic. That the two segments have been converging for a while now. As we talked about in our sort of opening comments, they both have long-term and short-term nature to them. Even ACMI has pretty significant short-term arrangements in it as well. Both provide similar services, we exchange aircraft between them both fly similar routes, carry similar goods even same staff support all of them. There was also a challenge from a cost allocation standpoint keeping the two separate, because we record our maintenance for the most part on an as incurred basis. So in a quarter where we incurred maintenance, that maintenance may have been allocated to either ACMI or to charter. But then the flying for the full year may have been -- the quarter where the maintenance was allocated may have been disproportionate to how the whole years' worth of flying may have performed. And so for example, you're talking about historically ACMI margins being lower. And there were times when ACMI would get allocated a disproportionate amount of maintenance, for example, even though that's not the way the year would have necessarily played out. It's just the way that we allocate and we consistently have allocated that way. So it presented problems that way. And it harmed one segment or the other segment. It's just better to look at the two of them together at this point we think. So you are asking about a long-term -- yes, sorry go ahead.
Scott Group: Yes. Yes. I understand why you're consolidating. I'm just saying, I'm struggling with how to think about what this combined segment should look like over time now.
Spencer Schwartz: Yes. So we've entered into these long-term charter contracts now, so they're starting to look a lot more similar in that regard. These contracts as I said go into 2022 and 2023 and some go into 2024. So they're starting to act a lot more like traditional ACMI. So over the next number of years, I think, you'll see those margins kind of normalize for both. And as John talked about those long-term charter contract customers, they're really getting the taste of what it is to have dedicated aircraft capacity and to be able to operate their networks having that committed capacity. And we hope and expect that this is here to stay and those customers are going to want to stay in those arrangements and extend them even longer.
Scott Group: And then I don't know if you can help with this but maybe you can. So the 6% of the business that's ad hoc is there any way to say sort of what percentage of the earnings that's representing now? And then the 94% that you think about as more longer-term now, are the rates on that 94% all fixed, or do those still move based on market conditions? I just want to understand the business there.
Spencer Schwartz: Sure. So, as far as do the rates move, so for the US military for example, that's a cost plus contract. So, if costs change, then that could certainly change, the flying we do around South America, we fly a loop around South America. So those rates do change over time. The 6%, obviously those rates change. The long-term charters and the ACMI typically those rates only change, when those contracts come up for renewal.
Scott Group: Okay. All right, thank you guys.
Spencer Schwartz: Thank you.
John Dietrich: Thank you, Scott.
Operator: We have a follow-up question coming from the line of Chris Stathoulopoulos from Susquehanna International Group. Your line is open.
Chris Stathoulopoulos: Hey, thanks for taking my follow-up. So just getting back to my first question and then perhaps getting it Scott’s from a different angle here. Should we think that, perhaps if you want to look at it on an EBITDA margin that you're still -- is this overall at a corporate level, a high-teens kind of 20% business through the cycle here with these changes, and the fact that you're moving a fewer missions on spot?
Spencer Schwartz: Yeah, absolutely. You can see the growth in our segment margins. And if you just look at the past year, you can just add the two ACMI Charter together or you can look at them separately whichever. But when you look at 2020 versus 2019, and now you see 2021 versus 2020, you can see the growth of those margins with these long-term charter contracts. And we look at, as John talked about before, we look at each and every arrangement, each and every schedule and network and we're trying to piece them altogether. And if we can successfully do that as we have done, then we'll see -- we'll continue to see really strong margins. And you can see that our utilization, when you look at our utilization, it is up tremendously. And our group has really been focused on increasing that utilization. Our 747-8's utilization has increased, 747-400's. And both of those in traditional ACMI utilizations increased. Our ACMI customers flew 16% above their minimum guarantees during the quarter. Commercial Charter utilization was up. The only utilization that was down was the US military, which is understandable, given the circumstances, and that's on the passenger side, that is. So utilization has been really strong which is driving those strong margins.
Chris Stathoulopoulos: Okay. And a follow-up any color on or update on the Amazon business. What the active fleet count is route served, or if you could perhaps frame, how it's been growing what's left on the order book and where we are with the next tranche of warrants? Thanks.
John Dietrich: So the operating fleet we're at 17 767s and eight, 737-800s, so that's 25 total airplanes operating for Amazon. Those are all up and running. We brought on I think the last three towards the tail end of last year. Working closely with Amazon. I'll let Spencer comment on the warrants. But it's a great relationship. It's a great customer. They're continuing to grow and diversify their providers and we're going to be in their competing as best as we can for the business. And we appreciate the business that they give us. So we're up to 25 airplanes right now.
Spencer Schwartz: And I'll just briefly comment on the warrants. So Amazon exercised warrants in October and January of this year -- October of last year and January of this year. So we issued about 2.6 million shares. But in doing so, because they exercise on a cashless basis, they actually sort of surrendered or canceled about 4.9 million shares. So from a -- an existing shareholder equity dilution standpoint, there's a lot less potential dilution there. As far as warrants outstanding, there are about 338,000 shares worth of warrants that are vested warrant B that is and no warrants C shares have vested. Any remaining vestings are tied to revenue paid to the company. So Amazon vests based on revenue that they paid to the company.
Chris Stathoulopoulos: Okay. Then Spencer any plans to apply for PSP3? Thanks.
John Dietrich: I'll answer that one. We have no plans to apply for PSP3.
Chris Stathoulopoulos: Okay. Thank you.
John Dietrich: Sure.
Operator: And there are no further questions over the phone line at this time. Presenters may continue.
John Dietrich: Great. Thank you operator, and thanks to all of you for your great questions. On behalf of all of our employees, Spencer and I would like to thank you for your interest in Atlas Air Worldwide. We appreciate you sharing your time with us today. We hope that you and your families stay safe. And we look forward to speaking with you all again soon. Thanks so much.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
