Air Transport Services Group, Inc. (NASDAQ:ATSG) Q2 2021 Earnings Conference Call August 6, 2021 10:00 AM ET Company Participants Joe Payne - Chief Legal Officer Rich Corrado - President and CEO Quint Turner - CFO Mike Berger - Chief Commercial Officer Conference Call Participants Jack Atkins - Stephens Frank Galanti - Stifel Stephanie Moore - Truist Securities Chris Stathoulopoulos - Susquehanna Operator Welcome to the Second Quarter 2021 Air Transport Services Group, Incorporated Earnings Conference Call. ...

Financial Performance - Consolidated net losses from continuing operations were $5.7 million for Q3 2020, compared to net earnings of $105.1 million for Q3 2019 [81]. - Total revenues from continuing operations for the three months ending September 30, 2020, were $458.7 million, an increase of 6.3% compared to $431.0 million for the same period in 2019 [90]. - Adjusted pre-tax earnings from continuing operations were $42.2 million for Q3 2020, an increase of $13.7 million compared to Q3 2019 [88]. - Adjusted pre-tax earnings from continuing operations for the three months ending September 30, 2020, were $42.2 million, up 48.3% from $28.5 million in the same period of 2019 [90]. - The company reported a pre-tax loss of $53.4 million for Q3 2020 due to the re-measurement of financial instruments related to warrants granted to Amazon [81]. - The effective tax rate from continuing operations for the three and nine month periods ended September 30, 2020, was 202% and 43%, respectively, affected by warrant re-measurements and other adjustments [106]. Revenue Sources - Revenues from Amazon.com Services, LLC comprised approximately 29% of consolidated revenues for the nine months ending September 30, 2020, up from 21% in the same period of 2019 [77]. - The U.S. Department of Defense accounted for 33% of consolidated revenues during the nine months ending September 30, 2020, down from 36% in 2019 [80]. - External customer revenues from continuing operations increased by $38.1 million, or 10%, to $404.1 million for Q3 2020 compared to Q3 2019 [88]. - Revenues from external customers in the CAM segment totaled $51.4 million for the three months ending September 30, 2020, compared to $42.0 million for the same period in 2019, reflecting a growth of 22.4% [96]. - ACMI Services revenues increased by $28.0 million and $86.9 million during the three and nine month periods ended September 30, 2020, respectively, totaling $300.2 million and $872.0 million compared to the same periods in 2019 [98]. Operational Changes - The Company recognized $21.7 million in government grants from the CARES Act during Q3 2020 [86]. - The Company has leased 14 Boeing 767 cargo aircraft to DHL, which accounted for 12% of consolidated revenues in the first nine months of 2020 [80]. - The Company executed leases with Amazon for nine of the ten Boeing 767-300 aircraft, with the last delivery in Q4 2020 [77]. - The company added eleven Boeing 767-300 aircraft to its lease portfolio since October 1, 2019, contributing to revenue growth [96]. - As of September 30, 2020, CAM had 69 aircraft under lease to external customers, an increase from 58 aircraft in the same period of 2019 [96]. - CAM expects to complete the conversion of three passenger aircraft and one remaining purchased freighter aircraft during the fourth quarter of 2020 [97]. Expenses and Costs - Salaries, wages, and benefits expense increased by $17.9 million and $65.7 million during the three and nine month periods ended September 30, 2020, respectively, driven by a 20% increase in total headcount [104]. - Depreciation and amortization expense increased by $3.8 million and $15.6 million during the three and nine month periods ended September 30, 2020, reflecting incremental depreciation for new aircraft and upgrades [104]. - Fuel expense decreased by $5.0 million during the third quarter of 2020 but increased by $6.5 million for the first nine months of 2020 compared to the same periods in 2019 [104]. Cash Flow and Financing - Net cash generated from operating activities increased by $116.1 million to $423.3 million in the first nine months of 2020 compared to $307.1 million in 2019 [109]. - Capital expenditures for the first nine months of 2020 totaled $394.3 million, including $273.4 million for the acquisition of eight Boeing 767-300 aircraft [109]. - The company expects total capital expenditures for 2020 to reach $485 million, primarily related to aircraft purchases and freighter modifications [110]. - As of September 30, 2020, the company had $61.1 million in cash balances and a revolving credit facility with $445.7 million of unused capacity [112]. - The company issued $500 million in senior unsecured notes with an interest rate of 4.750%, maturing on February 1, 2028 [109]. - The company drew $80.0 million from its revolving credit facility in the first nine months of 2020, compared to $70.0 million in the same period of 2019 [109]. - The company anticipates financing future capital expenditures through current cash balances, operating cash flows, and the Senior Credit Agreement [110]. Risks and Challenges - The company anticipates potential supply chain disruptions affecting aircraft conversions due to the coronavirus pandemic, which may impact future operating results [97]. - The company is required to maintain collateral coverage equal to 115% of the outstanding balances of its term loan and revolving credit facility [112]. - The company is subject to covenants under its Senior Credit Agreement, including limitations on additional indebtedness and maintaining a minimum collateral coverage [112].

Financial Data and Key Metrics Changes - In Q3 2020, ATSG reported a 10% increase in revenues to $404 million compared to the same quarter last year, driven by more leased aircraft and increased ACMI, CMI, and charter operations [10][13] - Adjusted earnings increased by 48% to $0.44 per share, while adjusted EBITDA rose 15% to $126 million compared to the previous year [10][14] - The company experienced a GAAP loss from continuing operations of $6 million or $0.10 per share due to a noncash loss related to outstanding warrants issued to Amazon [13][14] Business Line Data and Key Metrics Changes - The ACMI Services segment earned $19 million on a pre-tax basis, up from $4 million a year ago, despite a significant reduction in commercial passenger flying [16] - CAM, the aircraft leasing business, reported pre-tax earnings of $20 million, an increase of $2.4 million from the prior year, with external revenues increasing by 22% [17] - Revenues from other activities were down, resulting in a small pre-tax loss for the quarter, primarily due to lower margin revenue mix and higher corporate expenses [18] Market Data and Key Metrics Changes - The pandemic has significantly impacted passenger operations, with commercial passenger operations down 80%, while combi flying for the military increased by 50% [16] - Demand for 767 converted freighters remains strong, with expectations to deliver at least 15 more 767-300s next year, including 11 to Amazon [11][22] - The company anticipates a strong demand for freighter capacity extending into 2024, driven by e-commerce growth and reduced belly freight capacity from passenger airlines [40][42] Company Strategy and Development Direction - ATSG is focused on continuous improvement processes, investing in technology to enhance productivity and safety for employees [20] - The company is exploring M&A opportunities in adjacencies that align with its business model, including airlines and logistics companies [44] - The company plans to maintain its conversion capacity for freighters and has secured slots for 2021 and 2022, ensuring it can meet demand [60] Management's Comments on Operating Environment and Future Outlook - Management expressed increased confidence in growth for 2021 and 2022, citing strong customer demand for leased aircraft and long-term contracts [29][30] - The company expects adjusted EBITDA for 2020 to be around $490 million, consistent with initial guidance, despite pandemic-related challenges [25][79] - Management noted that the MRO segment is rebounding, with expectations of improved prospects as commercial passenger airlines begin to recover [34][65] Other Important Information - The company has seen a significant increase in interest for 767 freighters from international customers, indicating a growing global market [22][40] - ATSG is actively managing its labor force, with no current issues in hiring qualified pilots or maintenance technicians, despite the pandemic [55][56] Q&A Session Summary Question: Outlook for 2021 growth - Management is more optimistic about growth in 2021 and 2022 than previously, with strong demand for leased aircraft and long-term contracts from customers [29][30] Question: Impact of the pandemic on profitability - The pandemic has negatively impacted commercial passenger flying, but cargo operations have performed well, mitigating some losses [31][32] Question: Labor negotiations at ABX - Progress has been made in labor negotiations, with optimism about reaching a competitive contract for pilots [38] Question: International opportunities - Both U.S. and international markets present growth opportunities, with increasing interest in 767 freighters globally [39][40] Question: M&A strategy - The company is looking for M&A opportunities that align with its business model to diversify revenue and profit [44] Question: Feedstock availability - Currently, there are no issues sourcing aircraft to meet demand, with a focus on acquiring fleet segments from airlines [51][52] Question: Pilot hiring and retention - The company has not faced challenges in hiring qualified pilots, and retention has improved during the pandemic [55][56]

Financial Data and Key Metrics Changes - Revenues increased by 13% to $378 million, with adjusted earnings per share rising 74% to $0.47 compared to the previous year [9][17] - Adjusted EBITDA increased by 20% to $126 million for the second quarter and 14% to $250 million for the first half [9][17] - The company reported a GAAP loss from continuing operations of $105 million or $1.78 per share basic, primarily due to the impact of warrants and an impairment charge [14][15] Business Line Data and Key Metrics Changes - The ACMI Services segment earned $20 million on a pretax basis, up from $1 million a year ago, with increased aircraft operations and block hours [18] - The leasing business (CAM) reported pre-tax earnings up 18% to $20 million, with external revenues increasing by $10 million to $50 million [20] - The aircraft maintenance business experienced a decline due to external customers parking aircraft, leading to reduced service volumes [20] Market Data and Key Metrics Changes - 72% of first half revenues came from three largest customers: Department of Defense (32%), Amazon (29%), and DHL (11%) [13] - The company noted a significant increase in demand for freighter services due to reduced belly freight capacity from passenger airlines [41][42] Company Strategy and Development Direction - The company plans to expand its freighter aircraft dry leasing, with an order from Amazon for 12 more 767s, enhancing cash flow through 2021 and beyond [10][26] - The company aims to convert charter flying into ACMI or dry lease plus CMI flying over time, while maintaining a focus on long-term returns [24][49] - The company is looking to complete its Airbus A321 freighter conversion initiative, with expectations for FAA certification in the fourth quarter [27][68] Management Comments on Operating Environment and Future Outlook - Management expressed confidence in the long-term growth of express package transport due to changing consumer behaviors driven by the pandemic [23] - The company anticipates adjusted EBITDA for 2020 to be at least $470 million, despite challenges in the second half due to lower passenger demand [12][29] - Management acknowledged the potential for increased free cash flow in 2021, with a projected reduction in capital expenditures [30][45] Other Important Information - The company received $75 million in grant funds under the CARES Act to offset reductions in passenger operations, with ongoing recognition of these funds through 2021 [11][16] - The company has available revolver capacity of $408 million at the end of June, with total debt to adjusted EBITDA declining from 3.6 to 3.25x [18] Q&A Session Summary Question: Guidance for 2020 and differences from initial projections - Management explained that the initial guidance was impacted by the pandemic, but strong first-half performance led to an updated expectation of at least $470 million for the year [32][36] Question: E-commerce demand and outlook for freighter assets - Management noted that demand for freighter assets is expected to remain strong due to increased online shopping habits, with major customers operating at peak levels [39][41] Question: Impact of available passenger feedstock on costs and cash flow - Management indicated that while there is available feedstock, prices for 767s remain stable, and they foresee increasing free cash flow in the coming years [43][45] Question: Demand in new markets and customer payment issues - Management confirmed that they do not foresee collectability issues with customers, as most are high-quality and prompt payers [61][62] Question: A321 conversion and capital allocation plans - Management discussed plans for A321 conversions and indicated that capital allocation will focus on long-term investments and potential M&A opportunities [66][72]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________________________________________ FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period June 30, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 000-50368 ____________________________________________________________ ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________________________________________ FORM 10-Q ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period March 31, 2020 ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 000-50368 _____________________________________________________________ ...