Atlas Air Worldwide Holdings Inc (AAWW) 2015 Q4 法說會逐字稿

Good morning, my name is Michelle, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter earnings call for Atlas Air Worldwide.

(Operator Instructions)

I would now like to turn the call over to Atlas Air. Please go ahead.

Thank you, Michele, and good morning, everyone. I am Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth-quarter 2015 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer, and joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer.

As a reminder today's call is complemented by a slide presentation that can be viewed at atlasair.com. You may find the slides by clicking on the link to Presentations in the investor information section of the site. As indicated on slide 2, we'd like to remind you that our discussion about the Company's performance today include some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events and expectations, and they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements.

For information about risk factors related to our business, please refer to our 2014 Form 10-K, as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights, and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides. You can also find these at AtlasAir.com.

During our question-and-answer period today we would like to ask participants to limit themselves to one principal question and one follow-up question, so that we may accommodate as many participants as possible. After we have gone through the queue, we will be happy to answer any additional questions as time permits. At this point, I would like to turn the call over to Bill Flynn.

Thank you, Ed, and good morning, everyone, and thank you for joining us today. Starting with slide 3, we had a great year in 2015. We outperformed the air freight market, and we grew earnings substantially. We also positioned Atlas for earnings growth in 2016, even before the incremental accretion from our recently announced acquisition of Southern Air Holdings, which we expect to close in the next few months

We delivered adjusted earnings of $5.01 per share in 2015, up significantly from $3.72 in 2014. We continue to see good demand from our customers for our aircraft and services. Many of our customers are outperforming the market as well. In addition to the acquisition of Southern Air, we expect our total EPS in 2016 to increase by a low-to-mid-single-digit percentage over our 2015 adjusted EPS.

Slide 4 highlights the attractiveness of the Southern Air acquisition. It is strategically compelling, highly complementary, immediately acretive, and a foundation for growth. Subject to customary closing conditions and regulatory approvals, we intend to acquire Southern Air in an all-cash debt-free transaction, valued at approximately $110 million. Southern Air as a premier provider of intercontinental and domestic CMI services. It immediately expands our platform into 777 and 737 aircraft operations, something that might take up to 18 months or more to do organically.

The combination with Southern Air is anticipated to add approximately $100 million in annualized revenues, with adjusted EBITDA and adjusted net income margins in line with ours. The transaction also provides opportunities for developing additional business with existing and new customers of both companies. The result will be a more diversified and profitable company, offering customers access to the widest range of modern, efficient aircraft.

Slide 5 focuses on our framework for 2016. It begins with our fleet initiatives and debt refinancings in 2015. During the course of the year, we added a tenth 747-8 freighter, increased our CMI operations by four 767s, reactivated a 747-400 BCF into our growing charter business, and expanded our dry leasing portfolio to include two 767 aircraft that we will also operate on a CMI basis. In addition, we refinanced higher cost debt on a number of our aircraft enabling us to reduce our cost of debt, increase our cash flows, enhance our adjusted EPS, and add flexibility to our fleet.

We will see a full year of benefits from each of these actions in 2016. Together, they provide a foundation for earnings growth in 2016, even before accretion from Southern Air, and compared with a year that included approximately $0.55 to $0.60 in adjusted EPS, driven by incremental demand that we captured related to congestion at ports on the US West Coast.

Given the inherent seasonality of air freight demand, we expect the majority of our earnings in 2016 to be generated in the second half. Unlike results in 2015, which benefited from port congestion in the first half, we anticipate that results in 2016 will be more reflective of historical patterns, with approximately 75% of our adjusted EPS in the second half of the year. In addition, we expect earnings per share in the first quarter, which is usually our lowest volume generating and highest maintenance expense quarter of the year, to be approximately 25% of first-quarter 2015 adjusted EPS of $1.03.

To provide some context regarding our first quarter outlook, we estimate that about $0.50 of our first-quarter 2015 adjusted EPS was driven by the incremental demand related to the West Coast port congestion. In addition, we earned approximately $0.20 from revenue recognized on the return of aircraft. For the full year, we anticipate that block-hour volumes, including the Southern Air transaction, will increase more than 20% compared with 2015, with about 75% of the total in ACMI and the balance in charter.

Including Southern Air, we anticipate that aircraft maintenance expense will total about $205 million this year. In addition, depreciation expense should be approximately $145 million, while core capital expenditures, which are mainly for spare parts for our fleet, should total approximately $50 million to $60 million for the year.

At this point, I'd like to ask Spencer to provide you with some additional information on our fourth quarter. After Spencer, I will provide some additional perspective on Atlas, and then we'll be happy to take your questions. Spencer?

Thank you, Bill, and hello, everyone. Slide 6 highlights our fourth-quarter results. Our adjusted net income totaled $39.4 million, or $1.59 per share. Earnings in the fourth quarter were driven by our diverse business mix, including a sharp increase in charter segment contribution and underlying strength in dry leasing.

On a reported basis, results during the period reflected a net loss of $37.6 million or $1.53 per share, primarily due to charges associated with a previously disclosed litigation settlement. During the quarter, we generated free cash flow of $96 million or $3.88 per share, in line with the fourth quarter of last year. That brought free cash flow in 2015 to $327 million or $13.06 per share, a substantial increase from $248 million or $9.86 per share in 2014.

Reported results in the fourth quarter also included an effective income tax rate benefit of approximately 46%. On an adjusted basis, the effective income tax rate was approximately 20% for the quarter. That reflects the continued reinvestment of the net earnings of certain of our foreign subsidiaries outside the US, as well as changes in state taxes. Based on our current tax framework, we do not expect to pay any significant federal income tax until 2020 or later.

Looking at slide 7, ACMI revenues during the quarter benefited from an increase in the number of aircraft compared with the fourth quarter of 2014. This impact was partly offset by a lower blended average rate per block-hour, which reflected a mix effect related to increases in 767 CMI flying. Average CMI aircraft equivalents increased 34% to 16 aircraft during the quarter, while 747 cargo equivalents rose 8% to 23.2 aircraft.

Since our CMI arrangements don't include a component for aircraft ownership, the average block-hour rate for these planes is less than the average rate for the other aircraft in the segment. We expect to continue to grow our CMI fleet and enhance our business mix. The change in charter segment revenues in the fourth quarter was primarily driven by the impact of lower fuel prices. This impact was partially offset by an improvement in yields, excluding fuel.

In dry leasing, revenues were comparable with the fourth quarter of 2014. Looking ahead, dry leasing revenue should benefit from the two 767s that we've added to our portfolio.

Moving to slide 8, segment [in] contribution totaled $95 million in the fourth quarter up from $90 million in the fourth quarter of 2014. Similar to the third quarter of 2015, ACMI results were affected by an increase in crew training costs for the additional pilots we've hired in connection with our fleet growth initiatives.

These were partially offset by a reduction in aircraft ownership costs, following the refinancing in 2015 of higher cost debt related to several of our 747-8 and 747-400 aircraft. Charter's strong contribution was driven by an improvement in cargo yields excluding fuel, an increase in passenger flying, a reduction in heavy maintenance expense, and a reduction in aircraft ownership costs. As with dry leasing revenues, dry leasing contribution during the quarter was similar to the contribution in the fourth quarter of 2014.

Slide n9 highlights our refinancings of higher cost debt during the second half of 2015. We used approximately $113 million from our issuance of $224 million of convertible senior notes at 2.25% to retire higher rate, enhanced equipment trust certificates related to five of our 747-400 freighters. Those EEPCs had a weighted average cash coupon rate of 8.1%.

During the fourth quarter, we entered into new term loans that reduced the rates on two of our original 747-8s by 284 basis points, from 6.37% to 3.53%. In addition to reducing our cost of debt, the refinancings have reduced aircraft ownership costs, enhanced earnings and cash flows, and increased our fleet flexibility.

Turning to slide 10 and our balance sheet, we ended 2015 with cash, including cash equivalents, restricted cash and short-term investments, totaling $444 million. That compared with $331 million at the end of 2014. Our cash position at December 31 reflected net cash of $373 million provided by operating activities during 2015; net cash of $80 million used for financing activities which included $569 million of outflows for debt payments; and net cash of $165 million used for investing activities. Net cash used for investing activities in 2015 primarily related to the purchase of aircraft and engines, including our tenth [747-8], as well as rotable spare parts. These were partly offset by proceeds from investments and from the disposition of aircraft.

As slide 11 shows, we reduced leverage while growing our fleet. At the end of the fourth quarter, our net leverage ratio, which includes capitalized rents, was 4.9 times trailing 12-month EBITDA, including the benefit of our remaining investment in our outstanding EEPCs. That's down from 6.0 times at the beginning of 2014 and 5.4 times at the end of 2014, primarily driven by the paid down of outstanding debt and an increase in earnings. With that, I'd like to turn back to Bill.

Think you, Spencer. As I noted at the start and as reflected on slide 12, we had a great year in 2015. We outperformed the air freight market, and we grew earnings substantially. We are also positioned to grow earnings in 2016, and that will be enhanced by the accretion from our acquisition of Southern Air.

I would like to put our achievements and our framework in a larger context. What we have learned over the years is that there are ways to respond to and profit from opportunities in any environment, to outperform the air freight market, and produce attractive earnings. The key ingredients are basic: above all we focus on our superior customers, we have a modern and efficient fleet, and a solid financial structure, and we are prepared to address the unexpected that comes at us, find a way to respond effectively, and bring the results to the bottom line. That's what we are about Atlas.

With that, Michelle, may we have the first question, please?

(Operator Instructions)

Kevin Sterling from BB&T Capital Markets.

Good morning gentlemen and congrats on another nice quarter and positive outlook for 2016.

Bill, you guys recently acquired Southern Air, it seems to be a great acquisition for you. They have a 767 fleet, what's the premise behind this acquisition besides diversifying your fleet? Is it maybe to capitalize on e-commerce growth?

So there's a couple things there. Kevin, their fleet consists of 777s and they're also operating 737 freighters, so as you think about that it puts us in a position to offer our customers, or continue to offer our customers a 747 fleet, now offer the 777 fleet, and there are applications or routes and other considerations in the market where one or the other aircraft would be the customer's choice. We're growing that 767 operation and now with the 737s we can also participate in shorter -- shorter haul, smaller volume regional flying.

So from our perspective it puts us in position to offer our customers both the heavy freight operators as well as an array of the integrators. The aircraft and the services that meet their network requirements for that. The premise really is about growth.

Getting into that platform on an immediately accretive basis with an installed customer base and a solid operating platform with the buy versus build -- the organic build decision that we talked about in our press releases and that I talked about today.

A couple of other comments I will make. I think there's a very good cultural fit. Between our two organizations. Both of us are very much focused on the customer.

The principal customer at Southern is DHL. We know that customer very well. They are a very demanding customer, appropriately so, and Southern, like Atlas, has a solid track record of meeting those very high performance standards continually for Southern, so in that context we think the cultural fit, how we view the world, how we view our customers, is very much aligned and I think that augurs well for the integration that we're going to accomplish. Once we acquire Southern.

Great, Bill, thanks for the color. It does sound like a good fit and obviously diversifying your fleet and capitalize on some customer opportunities, let me take you back on that if you don't mind.

You talked about maybe supplementing some of the integrator network with some shorter haul flying, obviously with all this growth in e-commerce which is showing no signs of slowing down, you know maybe some networks get strained during peak seasons, have you been contacted by any large e-commerce companies, maybe outside of the integrator network looking for capacity? Not just during peak season but maybe beyond peak season? Maybe a more permanent solution in the future?

I didn't address e-commerce on your first question, I will take a moment to address it now. We think e-commerce is clearly -- in my view it is a game changer -- in underlying air freight demand, whatever the channel it may come through and whoever the customers may be.

Not all of the data is it yet, but our sense is that there was good growth in air freight or growth in air freight in the fourth quarter, and there was contraction in international container shipping in the fourth quarter. I don't know what the exact numbers are but I think that's relatively right. And I think that one of the explanations there in my mind is the role of e-commerce.

Because e-commerce is air freight oriented. So clearly, we are watching air freight -- I'm sorry e-commerce and its impact on air freight and integrated traffic as a key part of growth and growth going forward.

Okay. Great. Thanks for your time this morning.

Thanks, Kevin.

Your next question comes from Jack Atkins from Stephens.

Good morning, guys, thanks for the time. So just a couple questions here on the guidance. Spencer or Bill, could you provide organic expectations for block-hour growth, maintenance expense and depreciation, if we wanted to strip out Southern Air? For 2016.

Sure, Jack, I can do that. So let's -- for maintenance, Southern should add approximately $20 million, approximately, so if you look the slide that we showed, if you backed out [$20 million] you would see that Atlas' maintenance, organic maintenance is lower, expected to be lower in 2016 than it was in 2015. As far as depreciation and capital expenditures, they are fairly small for Southern, they are primarily a CMI operator or they are a CMI operator and so we have some rotable parts and they have a small amount of depreciation, so neither of those impacted our forecast for those amounts dramatically. Sorry did I miss another piece of your question?

Block-hours.

Block-hours. I'm sorry. So block-hours for 2016, Southern should add approximately 25,000 to 30,000 block hours to our number.

Okay, that's really helpful, Spencer. Thank you. Then I guess sort of thinking about the second half guidance for a moment, it looks like just with what you said in the press release, roughly $0.25 is what you imply, $0.25 or $0.26 for the first quarter, kind of $1.05 for the second quarter, and then about $3.85 in the second half of the year which is up roughly $1 year-over-year from what you earned in 2015. Could you maybe take us through the puts and takes in terms of what is driving that significant increase in earnings?

Obviously, you deferred some maintenance expense, or pulled forward some maintenance expense from 2016 or the 2015, you have Southern, what are some of the other factors driving that in your model from a fundamental perspective?

Sure. Sure. Jack, it's a great question. So looking at 2016 versus 2015, let's say a few things, first it's heavy maintenance. As you pointed out, and as I mentioned a moment ago, we expect heavy maintenance to be lower in 2016 for Atlas excluding Southern. So we expect that to be lower, we will enjoy that benefit.

We added a 774-8, as you know our tenth 747-8 late in 2015, so we will enjoy a full year of that flying. So there's a pretty significant incremental benefit there, of course we get hurt because we don't benefit from the West Coast port congestion in 2016 but the 747-8 flying, the lower maintenance certainly contributed to that. Obviously Southern's earnings contribute to that. We also have lower return conditions from our dry leasing business.

Okay. Thanks again for the time.

Thank you.

Scott Group, Wolfe Research

So just a follow-up on that question, I want to think more about the first half of the year a little bit. So the guidance of call it $0.25 to $0.26 in the first quarter and implied of more than $1 in the second quarter, so we typically don't see that big of a ramp from first quarter to second quarter, is there -- even if you include Southern Air starting in the second quarter -- is there something unusual that is hurting the first quarter or something different coming from a seasonality perspective in the second quarter to help kind of bridge that 1Q to 2Q ramp?

Sure Scott, I know it's your role to take a look at several previous years and quarters and try to come up with how things have looked in the past. And we obviously understand that. I think from our perspective, we do our best to take a look at what we think the first quarter is going to look like, what we think the full year is going to look like regardless of what the past looked like.

I can say with regard to the first-quarter of this year, just to talk about that in a little bit more detail, if you look at the first quarter of last year, if you're sort of doing that, you back out the West Coast port congestion benefit, which was about $0.50 in the first quarter, there's a little bit in early second quarter as well. So you back out the first-quarter, we had an incremental about $0.20 related to aircraft that were returned. There's a heavy maintenance -- heavy maintenance is a little higher in the first quarter of 2016 than it was in the first quarter 2015. And there's a few cents of other items.

So you had to put all that together. Those are the big variance drivers when we look at it. If you go back to the first-quarter of 2014, that reflected -- so the first quarter 2015 as I just talked about, you had the return of aircraft, you had the West Coast port, changes in heavy maintenance and so forth, if you go back to the first quarter of 2014, that reflected a substantial number of unflown ACMI block hours. If you recall that was a pretty unusual quarter for us.

We received payments in connection with a customer's return of aircraft in that first quarter of 2014 so it's hard to say what normal is. But 2014 and 2015 certainly had their issues. And we think our estimate for 2016 is our best estimate at this stage. And so that is my way of trying to reconcile it versus the past -- the first quarter over the past couple of years if that helps.

Okay. That is helpful. And second question, in terms of normal annual contracts -- ACMI contracts up for renewal, is this a fairly normal year? Or is this light or heavy year? And can you comment if you've already kind of re-signed all those contacts coming up for the year?

Yes. It is really a normal year for us. That's pretty much as much as we want to comment, because contracts renew throughout the course of the year, and so our expectation around renewal of those contracts and other placements we have off around the market are all reflected in the framework we provided.

Okay. Perfect. Thank you, guys.

Thank you.

Helane Becker, Cowen and Company.

So now with Southern, what percentage of your revenue will DHL be, and was DHL supportive of the acquisition?

Sure. Helane, it's Spencer, hello. With the -- our 2015 revenue related to DHL was about 24%, when you add Southern into it for 2016 it should be about 27%. So still, while we realize it's a large number, still clearly a minority.

And obviously, we wouldn't be pursuing this transaction if our largest customer and their sole customer was not supportive of the transaction. So, yes, we are moving forward and DHL is happy with it, we are happy with, as Bill said, it makes great sense, the acquisition.

Great. Got you. And then for my follow-up question, is there a size that you get to where you are too big or where it's hard to source aircraft? Or how do you think about long-term growth prospects either through acquisition or organic growth?

Helane, we have a pretty solid track record, we could stand her today and look back and see how the Company has done. So not so long ago, maybe sometimes it seems that long ago, I think we were at a low of 24 operating aircraft. And today plus Southern we will be in the 60s in terms of operating aircraft.

Now what was important there was to diversify. I don't know that we would have grown from 24 to 66 aircraft if they were all 747s. The diversification from the 747s to add the 767s, and now we have 777s and 737s, to add passenger, and that adds as well as CMI operations because not all the aircraft are ours and we haven't had to acquire all that aircraft -- I think to speak to the business model diversification that we've continued to pursue, we believe air freight is right at the center of the global economy. We believe it is -- the underlying demand, I should say, is right at the center of the global economy. It is growing.

Earlier questions today, I think underscore how e-commerce will continue to catalyze growth. And then we've also built out a complementary earnings stream in Titan, which is our dry leasing business, more of an annuity like earnings stream, our focus there is freighter centric where we think we are competitive and may have an advantage in terms of our knowledge and insight of the underlying market overall.

So I don't know that there's a cap to growth but it has to be smart growth, not growth for growth's sake. We will do this, we will continue to grow in a balanced view, understanding what the opportunities are, what return should be for our investors. The kinds of investments we should make. All the while maintaining a healthy balance sheet, and as Spencer and I always talk about, maintaining our dial on leverage so we that don't put the company in a risk position.

And continue to maintain that healthy cash balance and generate the kind of free cash flows that we have, I think a good track record of producing over these past several years. It's a long answer, but it was a question that invited a longer answer.

No, it was a very well thought out answer and I appreciate your time, thank you.

Bob Labick, CJS Securities

Good morning, this is actually Robert Magic in for Bob. What is the expected timing of placing the 747- 8 into a long-term ACMI contract, and what are the rates relative to existing contracts?

So we will place the 747-8, you're talking about the tenth aircraft, we expect to place that into ACMI. What I can tell you right now, we're operating in our commercial charter business and we are earning very attractive returns. Returns on that aircraft that are commensurate with our returns on ACMI, so that's commensurate of slightly better. That's attractive for us.

So we'll, we expect to place it, we'll place it into customer operations in ACMI at some point and it will be consistent with the other ACMI rates that we enjoy on our current nine 747-8s that are placed.

Thanks, and direct contribution margin, not just dollars but both, have come down in ACMI. We know that revenue per block-hour is significantly impacted by mix, particularly with more CMI. Why is margin continuing to decline and what should it look like going forward?

Sure, Robert. As I mentioned, earlier, it's primarily driven by increases in crude costs. We are, as we talked about, we've been growing our fleet. So as we grow our fleet, in advance of growing our fleet, we need to grow our crew and train our crew. So there's a cost of doing that. And so our ACMI earnings were brought down by the increase in crude costs.

Our fourth-quarter ACMI did show, our contribution did show sequential increase as we noted during the last earnings call. Even with incremental maintenance expense and even with incremental crew training, if you exclude the impact of the crew training, ACMI contribution and margins would have increased year-over-year for the fourth quarter. So it's really being driven by that. And if you would ask where that is headed, the crew training we think should level off probably around the middle of this year, subject to any other growth initiatives, and that leveling off is included in our framework that we've provided for 2016.

And the point you're making, Spencer, is that we have to hire crew in advance of aircraft coming on board, because they need to be there on the roster before we can fly. We've have had a number of aircraft additions.

Absolutely.

I appreciate the color. Thank you.

(Operator Instructions)

David Campbell, Thompson Davis & Company.

Just a question on Southern Air, when are you assuming the acquisition takes place?

Yes, David, we think closing will happen really within the next couple of months. It's subject to normal regulatory approval, but given the size of the transaction relative to Atlas and some other considerations, it's really the DOT process, we don't have a required hard Scott reveal filing here, so its on the less complex and more complex side of those approvals, so we think in the next couple of months.

But you've estimated revenue block-hours and revenues and so forth, I just wondered --

That assumes April 1.

Assumes April 1. And did you give us the block-hours for Southern Air? I can't remember.

Yes, I said for 2016 approximately 25,000 to 30,000 block-hours.

That's right.

So, again that's three quarters, and so if you wanted to annualize that, it's a fair approximation for the full year.

And what happens to Southern Air in the first quarter, which you of course won't have in your numbers, but is that a breakeven quarter for them normally? Or is it worse than that?

Southern is a CMI operator and it's not probably appropriate for us to talk about their Q1. But the nature of the operation which is CMI serving DHL and express operations tends to be flatter than perhaps our business because of our other ACMI customers, our participation in charter, sometimes the variability of military. They are flatter through the year than we are.

Right. Right. And, Bill, do you have any insight into the first-quarter tonnage market in the international markets? I know that March of course is the key month, but February is distorted by the early Chinese New Year, do you have any way of looking through all of that and seeing whether the first-quarter will be consistent with your assumed, I guess, above for the roughly 2% growth for the year?

You raised all the right points, Lunar New Year in February distorts the quarter a bit so you really need to look at the full quarter or at least the year over year basis, weave February and March together because of where Lunar New Year is. So January essentially met our expectations overall. February we are just now -- and really this week is kind of when everyone in China is back to work after at least week or so of holidays associated with Lunar New Year.

Our outlook for -- sitting here knowing what we know about the balance of this month and in March, we think we're pretty much on target to obviously hit the numbers that we talked about this morning for the quarter and feel good about the trajectory for the balance of the year. Probably -- it will have a much, we can be more precise about some of the different markets after we get past Lunar New Year and talk to you about it first-quarter results.

I'll just add, Spencer, just a little bit more color. You know, the 2% to 3% that you talked about clearly I think is right around the range that everyone is seeing. China continues to grow. The express providers, the express business continues to grow certainly fueled by e-commerce. Our customers are benefiting which means that Atlas is benefiting.

Clearly we are seeing growth in automotive and in fashion which is, and the fashion piece somewhat consistent with the growth in e-commerce. Those are some of the biggest areas we are seeing grow.

The problem with e-commerce is it is pretty lightweight -- lightweight shipments. So it doesn't have as much impact on tonnage is that a good --

That is right. Burns less fuel then, too. 7 pounds per cubic foot versus maybe 10 pounds per cubic foot in terms of heavy freight. So all of the volume gets consumed and paid for our ACMI customers and in our charter market as well. But it's a little later on fuel burn as a result of the different density.

Right. And the last question is, do you see any changes at DHL good or bad stemming from their continuing profit problems? There's been rumors, too, that Deutsche Post might consider taking that out of their operations? What's your feeling about that right now?

Well I would look where you and everyone else on the call would look, and that would be at the reports that the parent company puts out. And the report on the segment basis, and I think DHL express, who is our customer, has reported very strong results year-over-year-over-year for some time now. I think they will continue to grow. They will talk about the prospects when they release results in upcoming I guess.

Right. Right. Okay, thank you.

Geoffrey Dancey from Cutler Capital Management.

A couple of questions for you, first I was hoping you could refresh my memory on what your long-term leverage targets are?

Sure, Geoffrey. So we don't really provide any sort of long-term target, instead, what we do is we take a look at each investment that we make. Every investment that we make we take a look at what the expected NPV and IRR will be, we take a look EPS accretion, the quality of the investment, the contribution towards our overall strategic goals. We don't focus on any particular leverage.

But if you look at slide 11, which we provided today, you can see our overall net leverage coming down while our fleet size has been growing. And from a capital allocation standpoint since I think the two are really, really tied together, from a capital allocation standpoint, you know we have been committed to creating, enhancing and returning value to our shareholders. We really focus on having a balanced approach.

So we maintain a strong balance sheet, and we talked about how we refinanced some higher cost debt with lower-cost debt, we maintained a really strong cash position. We invest in the business. We acquired our tenth 747-8, we acquired two 767s, so we continue to invest in our Business. And we returned capital to shareholders. We Repurchased 1.7% of our outstanding stock last year which brought our total over 10% over the last three years.

So it's been a really balanced approach. We've been bringing down our debt, increasing our fleet, and we've had a really balanced capital allocation approach throughout.

Okay. So I -- and you're guiding here expecting to pay down $40 million of debt per quarter. So you should see these ratios continue to decline. So I guess the question is, how far -- how much further do you want to take down that leverage ratio? What do you think is appropriate versus I guess buying back more stock?

So my next question is on the cash, the $444 million available on the balance sheet, how much of that do you think is excess that would be available for say acquisitions or repurchasing of stock as opposed to being used for the Business or for debt repurchasing, debt pay downs?

Sure, Geoffrey. We have internal numbers about where we think our minimum cash balance is. It's not something we share externally. And really, as I mentioned before with regard to capital allocations, we really focus on those three key areas. We want to have a strong balance sheet, we want to continue to invest in the business, and return capital.

We have been very focused on that, as you know or as we it is talked about. We're buying Southern which should close in the next couple months, that's about $110 million. So that's great use, gets us entry into two new platforms, two new operating platforms, five 777, five 737s to start, and really allow us to continue to grow those platforms. That's what we are all about.

Great. And then my last question, in regards to that Southern acquisition, I know you're not assuming any debt or taking any debt on it sounds like. Is that something you've considered and is it something that you would consider going forward, and if you could just comment on the current environment for financing.

Sure. So with regard to Southern, absolutely, we looked at all available options to acquire Southern. Taking on debt, and then what type of debt, whether to issue equity, whether to use cash or whether some combination of all of those, we looked at all of those things. We felt we had an appropriate level of cash that we could acquire Southern with available cash. And we thought that made the best sense for our investors.

It makes it immediately accretive and it comes to us with no additional debt, no impact on our net leverage ratio. So certainly we did consider all the options and we think this was the right approach.

As far as the second part of your question was, to really talk about the kind of financing markets or that sort of thing. I think we have been quite fortunate. The blending market really understands the strength of our underlying credit.

We have been quite fortunate. We have been able to refinance higher-yielding debt with lower yielding debt. As we talked about earlier, we refinanced some 747-8, we refinanced some 767-400, really lowers our aircraft ownership costs, allows us to have a more flexible fleet. So the financing market remained strong and remains open to us.

And rates have spreads? Can you comment how that has evolved with additional case in the high-yield market?

Yes, the spreads have come down. You saw that we refinanced higher costing debt with lower costing debt, and so therefore we've been able to take advantage of the current environment. It is a really good time to finance aircraft right now. And we have been taking advantage of that to both finance aircraft and also refinance prior transactions that had a higher rate.

As we talked about in the fourth quarter alone we refinanced two of our original 747-8s. They were at a rate of 6.37%, we refinanced those at a rate of 3.53%. We have really been able to take advantage of lower-cost financing.

All right, that is great. Thank you for taking all my questions.

Thank you.

Steve O'Hara, Sidoti & Company

I was wondering, just on two quick ones, it looks like the Q4 fight refi should be pretty beneficial for 2016. Could you just talk maybe, I don't know if you mentioned this already, what's the impact year-over-year? What's the expectation for the impact of the refi on 2016 versus 2015?

And then second, on the acquisition of Southern, what type of integration cost do you expect? And then synergies and -- I don't know if there's union differences and how long that takes as well. Thank you.

Steve, I'll take the first part of it. Which is, we have the convertible note, and we use the proceeds from the convertible note as you know to pay down some higher costing 747 EEPC debt and then we refinanced the two 747-8s. And so, I think if you look at it together, taking a look at our net interest expense, net of interest income, in 2015, it was about $84 million, in 2016, we think it will be about $6 million lower.

So you can see the impact there. We also added a tenth 747-8, and so therefore that then increased our debt. But taken altogether, we expect about $6 million lower or less interest expense in 2016 versus 2015.

This is Bill, Steve, on the second part of your Southern question, the primary deal rationale on the acquisitions of Southern is to acquire their platform. They come to us immediately accretive, they have an excellent customer platform in DHL someone who we know very well.

And it creates that growth platform in 777s and 737s that we can go out and offer to current and new customers and serve perhaps more markets as a result, and that's what we really learned by ramping up the 767, that it catalyzed growth for the Company that we wouldn't have necessarily achieved if we simply continued to offer the market a single platform. There are some synergy and there will be some cost to achieve that synergy, but this is not a synergy driven transaction, synergies are relatively small. We have not disclosed those.

In terms of the complexity of integration, all integrations have some degree of complexity. We think that this is on the less complex as opposed to a more complex type of integration, and we'll want to get on that shortly after we close.

In terms of labor, both of our pilot groups are represented by teamsters. The same local, 1224, so in terms of airlines coming together we don't have different representation groups. It is the same.

It's the IBT and it's Local 1224, so that's I think a good thing in terms of that context. Our goal is to merge Southern into Atlas, we will amalgamate Southern into Atlas, and at the end of that process there will be one collective bargaining agreement and all pilots will be Atlas pilots.

Okay. And then maybe just on, I think you gave your CapEx outlook for let's say -- I guess it was more of a maintenance CapEx rather than aircraft and engines or something, and I'm just wondering, if pretax income is almost $170 million in 2015, you don't pay cash taxes, depreciation is $145 million in 2016, taking out $50 million or $60 million in CapEx, it would seem like you have a pretty good runway for free cash flow this year. And I'm just wondering, maybe why that isn't more the story or is there something -- maybe a fleet transition that you're contemplating or need to get done or something like that? Thank you.

Sure, Steve. No, our free cash flow has been incredibly strong. I think it's something that the market seems to be underestimating. But as we said, we delivered $13.06 per share of free cash flow in 2015 and the increase from the prior-year was $9.86 was primarily due to operating cash flows.

And so we expect in 2016 results to be somewhat similar to 2015, again outstanding free cash flow. So yes, we agree with you. Very strong free cash flows.

Okay. I mean, in terms of aircraft CapEx, there's nothing planned right now, so there's a possibility that CapEx -- I mean even at $100 million I think it's close to $10 a share it seems --

We have no commitment at the moment. There are no sort of big commitments related to that, no.

And I'm sorry last one, do you have a buyback in place now and maybe what is the size of it?

As far as buybacks, we generally talk about those after they happen. And we have shared that we've purchased over $10 million -- I'm sorry 10% of the company back. And I think the other thing I would say there, Steve, is that we have a $25 million remaining under our board approval for share repurchases.

Okay. Thank you very much.

Jack Atkins, Stephens.

Thank you for taking my follow-up question. On the charter side of your business, could you speak to the military piece of that and how that performed in the fourth quarter? And what is your outlook for that business moving into 2016?

Thank you, Jack. Our outlook coming into 2016 is for a fairly stable 2016 over 2015, the similar mix of cargo versus passenger hours. Spencer do you have the hours there for 2015?

Sure. For 2015 AMC hours were approximately 22,000 hours.

Okay.

So something in that order of magnitude is what we know now in terms of the kind of forecast we are getting from AMC.

We expect 2016 to be similar to or perhaps slightly better than 2015.

Okay. That's helpful. And then, last question, I know you have had a lot of question on Southern Air, but could you speak to -- is there any seasonality within the Southern Air earnings stream? When you think about the lease structure in terms of the aircraft at Southern Air leases, and then leases back out to DHL, are those lease terms matched up in terms of links or are there any sort of overlap or staggering there? Could you maybe just give us some color?

So I mentioned earlier, I think an earlier question about Southern, it is a currently, a 100% CMI operation so the customer provides the aircraft. Because it is essentially CMI there's not as much seasonal or quarter to quarter variance at Southern compared to ours because of the different -- they are essentially in one segment with one predominant customer, we are in many segments, so we've got more quarter to quarter volatility because of -- well, not volatility -- we have more seasonal results given the nature of the markets, the different segments that we are in, and timing of heavy maintenance.

And Jack, it's Spencer, I will just add that Southern's earnings, their block-hours and their associated earnings, generally do ramp up as the year goes on. And they are certainly higher in the fourth quarter but as Bill said, that variability is -- (multiple speakers)

Okay. That is great. Thanks again for the time.

Thanks, Jack. Okay.

I have no further questions at this time.

Okay well thank you, Michelle, and to everyone on the call, thanks again for taking the time to be with us today. Both Spencer and I certainly appreciate your interest in the company, and we look forward to speaking with you again soon. Thank you very much.

Thank you, everyone, this concludes today's conference call. You may now disconnect.