Atlas Air Worldwide Holdings Inc (AAWW) 2018 Q2 法說會逐字稿

Hello. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2018 Earnings Call for Atlas Air Worldwide. (Operator Instructions) I would now like to turn the call over to Mr. Spencer Schwartz, Atlas Air Worldwide's CFO. Please go ahead.

Thank you, Dan, and hello, everyone. Welcome to our second quarter 2018 results conference call. Today's call will be hosted by Bill Flynn, our Chief Executive Officer; and me. The call is complemented by a slide presentation that can be viewed at atlasair.com under Presentations in the Investor Information section.

As indicated on Slide 2, we would like to remind you that our discussion about the company's performance today includes 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 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 2017 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.

(Operator Instructions) At this point, I'd like to draw your attention to Slide 3 and turn the call over to Bill Flynn.

Thank you, Spencer, and good morning, everyone. We're pleased to have you join us.

We announced strong second quarter growth today, and we have increased our full year 2018 outlook. Our results and our outlook are driven by market strength and increased customer demand for our aircraft and services. Our volumes and revenue grew to record levels in the second quarter. And while noncash warrant accounting impacted reported results, our adjusted net income and EBITDA were sharply higher.

We expect to continue building on our strong performance in the second half of 2018. Airfreight demand is solid and the global economy is growing. As a result of our multiyear strategic initiatives to grow and diversify our fleet, expand our customer base and enhance our business mix, we are meeting the growing needs of our customers in the broader market, driving our results and extending our leadership in global aviation outsourcing.

Moving to Slide 4. Our second quarter adjusted earnings reflected a 19% increase in block hours, and 29% increase in revenue. They also included a 23% increase in EBITDA and 71% increase in net income. Our earnings were enhanced by 2 items: A refund of aircraft rent paid in previous years and the timing of non-heavy maintenance that was expected to take place in the second quarter but will now occur in the third quarter. Together, these items added $9.9 million after tax to adjusted net income.

Without these items, our second quarter adjusted net income grew a strong 37% over prior year. During the quarter, we placed and began operating 3 additional 767 aircraft for Amazon, raising the current number to 15, as we discussed at our recent Investor Analyst Day.

In line with the schedule we announced in 2016, we remain on track to be at a total of 20 aircraft by the end of this year. In addition, we completed the acquisition of our eighth 777 freighter during the quarter and placed it into A+ CMI service for DHL Express in July. Also in July, we announced an interim agreement to enhance the terms and conditions of the collective bargaining agreement covering our Southern Air pilots. Our announcement was the result of collaborative and productive discussions with the leadership of the pilots' union. We continue on our path toward the merger of Atlas Air and Southern Air. And we remain committed to completing the bargaining process for a joint contract covering all of our pilots in a timely manner and in the best interest of all parties.

Slide 5 highlights our revised growth framework for 2018. We now expect volumes to rise approximately 19% to around 300,000 block hours, revenue to exceed $2.6 billion, adjusted EBITDA to grow to more than $520 million and adjusted net income to grow by 45% to 50% compared with 2017.

For the full year, we anticipate our maintenance expense will total about $330 million. In addition, we expect depreciation and amortization of approximately $220 million. In core capital expenditures, which exclude aircraft and engine purchases, about $150 million to $115 million -- excuse me, of about $105 million to $115 million, mainly for parts and components for our fleet. All of these amounts are consistent with our prior outlook for this year.

Looking at the third quarter, we see adjusted EBITDA exceeding $120 million and adjusted net income growing by an upper 30% to lower 40% level compared with the third quarter of 2017.

Thinking about our outlook for the third quarter on a sequential basis, if we exclude the impacts of the rent refund and maintenance timing, as previously discussed, we would expect adjusted net income in the third quarter to increase sequentially by approximately 10% to 15% compared with the second quarter of 2018. During the third quarter, we also expect our Titan dry-leasing subsidiary to renew its participation in an aircraft-leasing incentive program in Singapore. As a result, we expect to record an income tax benefit of approximately $8.2 million in the third quarter and to enjoy a reduced rate going forward.

Also in the third quarter, we anticipate a ratification bonus related to an interim agreement to enhance the employment terms and conditions of our Southern Air pilots. The agreement is subject to ratification by the Southern Air pilots in a process we expect to be completed by mid-August.

This is a good opportunity to ask Spencer to provide some additional detail about our second quarter results. After Spencer, I'll have a few additional comments and then we'll be happy to take your questions. Spencer?

Thank you, Bill. Our strong second quarter results are highlighted on Slide 6.

On an adjusted basis, income from continuing operations, net of taxes, totaled $49.7 million, which was an increase of $20.6 million over the second quarter of 2017. As Bill noted, our results reflected robust increases in block hours, revenue, adjusted EBITDA and adjusted net income. Our segments also generated substantially higher direct contribution. On a reported basis, we had a net loss of $21.1 million, which was driven by an unrealized loss of $50 million on outstanding warrants, primarily driven by a 19% increase in our stock price during the quarter as well as a special charge of $9.4 million associated with trade and engines held for sale.

Our adjusted earnings in the second quarter included an effective income tax rate of 16.2%. On a reported basis, we had an effective income tax rate of 159.6% during the quarter, and that was principally due to nondeductible changes in the value of the outstanding warrants.

With respect to 2018, we now expect our full year adjusted effective income tax rate to be approximately 15%. Based on our current tax framework and the deductibility for the substantial investments that we have made to grow our fleet, we continue to expect that we will not incur any significant U.S. federal income tax.

Looking at Slide 7. Increased ACMI segment revenues in the quarter were primarily driven by significant growth in block hour volumes and a higher average rate per block hour. Block hours grew 19% during the period, reflecting increased 767 flying for Amazon, the startup of 747-400 flying for several new customers and the redeployment of 747-8s from the Charter segment.

Higher Charter segment revenues in the second quarter were primarily driven by an increase in volumes and an increase in the average rate per block hour. In Dry Leasing, higher segment revenues reflected an increase in the number of 767-300 aircraft throughout the second half of 2017 and the first half of 2018 as well as the placement of a 777 in early 2018.

Moving to Slide 8. Segment contribution totaled $116 million in the second quarter, a 17% increase over the prior year. ACMI earnings primarily reflected a significant increase in flying and higher rate per block hour, offset by higher heavy maintenance expense and amortization of deferred maintenance costs.

The improvement in Charter contribution during the period was primarily due to increases in military cargo and passenger demand, an increase in commercial cargo volumes and higher aircraft utilization. These were partially offset by the redeployment of 747-8 aircraft to the ACMI segment.

In Dry Leasing, higher segment contribution during the quarter primarily reflected the placement of additional aircraft.

Turning to Slide 9. We ended the second quarter of 2018 with cash, including cash equivalents, restricted cash and short-term investments, totaling $245.4 million. Our cash position at June 30 reflected cash used for investing activities, partially offset by cash provided by operating and financing activities. Net cash used for investing activities during the first half of the year primarily related to payments for the acquisition of 777 and 767 aircraft as well as conversions to freighter configuration, spare engines and upgrade kits and core capital expenditures. Net cash provided by financing activities during the period primarily reflected proceeds from our financings of 777 and 767 aircraft, partially offset by payments on debt obligations.

As a reminder, our debt has a low weighted average interest rate of 3.3%. Almost all of that is at a fixed rate, and the vast majority is secured by our aircraft assets, which have a value in excess of the related debt.

We are committed to maintaining a strong balance sheet. As the slide shows, we have grown our fleet to take advantage of great opportunities. And as you can also see, our net leverage ratio has remained fairly consistent since 2016, while we have diversified our aircraft and grown our fleet over 20%. We expect our net leverage ratio to improve gradually over the next few years as we place more aircraft in service and generate higher EBITDAR.

Now, I would like to turn it back to Bill.

Thank you, Spencer. Moving to Slide 10. We reported significant growth in the second quarter and first half of 2018, and we have substantially increased our full year earnings outlook to reflect the market strength and customer demand for our aircraft and services. We expect to continue building on our strong performance in the second half of 2018.

Airfreight demand is solid and the global economy is growing. As a result of our strategic initiatives, we are meeting the growing needs of our customers and the broader market. We are driving our results and extending our leadership in global aviation outsourcing. And we continue to capitalize on opportunities in fast-growing global markets. With that, Dan, may we have the first question, please?

(Operator Instructions) Your first question comes from the line of Kevin Sterling with Seaport Global Securities.

Bill, let me touch on your aircraft rent, you talked about it being lower this quarter than expected. Should we use that as a run rate going forward? And maybe kind of give us some nuances as to why it was a little bit lower this quarter, if you don't mind, and how we should think about it going forward.

Thank you, Kevin. It's Spencer. I think I'll take that one. We had -- I think what you're talking about is the return. We had excess rent that was returned. Is that the nature of your question?

Yes.

Okay, because rent expense has been fairly consistent. But if you're talking about the return of rent that we received. So certain of the company's aircraft leases were restructured back in 2004. And then that led to required rent payments that, over the ensuing 14 years since that time, were in excess -- that they were required, but they were in excess of the actual cash required to satisfy the underlying obligations. And the excess cash was basically building up and then was returned to us this quarter when the underlying obligations were satisfied. So that's the nature of that sort of unusual transaction. We did not know that it was going to happen when we were together for Investor Day. And then -- so it was returned to us and then we recorded it. So it's a bit of an unusual item. We included it as a GAAP item, because the rent, when we recorded the rent expense over time, was also included as rent expense on a GAAP basis over time. So when we sort of reversed it, it was treated somewhat similarly.

Okay, got you. Kind of sounds like it was just one time and obviously a good problem to have. You got additional cash back in the door. Is that right?

That's right, yes. You understand it well.

Well, you explained it well. And then just as a follow-up question, and this is just bigger picture, if you don't mind. Obviously, you guys had a good quarter, you're raising your outlook and your expectations again for the rest of the year. But Bill, if you could help us, as we think about maybe even into 2019, frame for us kind of what we're seeing now. Do you expect it to continue -- the strength to continue into 2019? And maybe if you can share some of your customer conversations, how they're thinking about the world today and even put some color or context around 2019, particularly, as we -- with all the noise that we hear regarding tariffs and trade wars and everything. If you could you just kind of help us frame maybe a general outlook for 2019.

Well, sure, Kevin. There's a lot there, so let's think about it in several components. So certainly there's a lot of concern and uncertainty about what tariffs mean and where does this ultimately lead and how might it affect just the markets broadly and then how does it affect the companies that are key actors in those markets. So what we've seen, I'd say, on a somewhat positive note in the last several weeks. Mr. Junckers (sic) [Mr. Juncker] was here on behalf of the EU. It sounds like the U.S. and the EU want to find a positive path forward to resolve the tension. That's in transatlantic trade. We'll see how that all shakes out, but it kind of feels like we're in the right direction. On NAFTA, the new President of Mexico, Lopez Obrador, has commented publicly that he wants to constructively engage with the U.S. on working through the revisions to NAFTA going forward. So 2 key trading blocks for us as a country seem to be moving in a more positive direction. China's really uncertain. I was listening to some analysis today that even in the face of this potential for 25% tariffs, the discussion was, well, would -- that would likely, if were to come about, may not even necessarily be or most likely wouldn't be applied uniformly. And so it could be -- that's a major source of all of our mobile phones, that there's probably not a big tariff on mobile phones because of the larger dislocation it would have in -- with consumers and how we live our daily lives. On the other hand, there are many sources of garments and footwear around the world and perhaps those would bear the brunt of a tariff. I'm just using, by way of an example, from the analysis I heard. Phones are key to us. Low-cost footwear and garments, probably not, that's more of a -- that's more emotion. But we'll all have to see what that means. But we're -- another point that you raised. What does it mean when we think about the fundamentals of change that has happened in the global supply chains, what that means in terms of the express and integrated services. And then on top of that, layering e-commerce in and the expectations that consumers have around e-commerce. And I think those fundamental supply chain changes, and the impact of e-commerce and changing the way we live our lives and buy, all favor air. And I think through the whole level of uncertainty that exists, I think it -- that air and air supply chains have changed the way companies do business. And as a result, I think we're in a very good place as a company and the industry that we are participant in. We've diversified our business, we've diversified our fleet, we've diversified our customer mix, and we have a broad array of services. We're substantially positioned in express and e-commerce. So I think as we kind of sort through the confusion and the uncertainty raised by tariffs, I think there's a very -- we're in a very strong position as a company. And as we talk about regularly, Kevin, what are our customers saying about their business? What are our express customers saying about their business? What are the e-commerce customers saying about their business? I think we're in a very good position. So rolling into 2019, I think we continue to see good growth in demand for our services and in the market overall.

Your next question comes from the line of Bob Labick with CJS Securities.

Following up on the kind of bigger picture questions as we were talking about. The environment is very strong right now. There's that uncertainty you just touched on. But can you talk -- you added a lot of fleet this year, both in terms of short-term and medium-term leases and then going out and purchasing some more fleet as well. Can you talk about the fleet composition ahead, expectations for your growth there over the next few years and also if there are more opportunities for more CMI contracts and growth in the asset-light areas of your business as well?

Yes. Thank you, Bob. So I'll start with CMI. If we go back and look over the past several years, we've had tremendous growth in CMI overall, and we believe that, that will continue to be an important part of our growth going forward. And so what our customer is buying is really, in CMI, our ability to operate, essentially, time-definite networks for them. And that -- certainly the resources that we bring to those operations, I would say the intellectual capital that we bring in knowing how to operate time-definite networks that we operate really on a global basis, and I think there will continue to be good demand for CMI services, along with ACMI services. And of course, the beauty of CMI is we're not taking on a substantial amount of leverage, yet we get the benefit of scale because CMI occurs in the fleet types that we already operate or that we intend to operate. In terms of our fleet, it's diverse now. From 37 freighters all the way through to -8 freighters. In hindsight, we're certainly very pleased that we did diversify the fleet so that we could serve a broad array of our customers' need and -- needs, excuse me, and be a more -- even more valued strategic provider of services to them. So we will see growth in the fleet. It will be CMI and ACMI. As Spencer pointed out in his comments, we're certainly mindful and focused on maintaining a healthy balance sheet. And so CMI is really important for growth and scale effect while ensuring that -- maintaining that healthy balance sheet and gradually reducing our leverage ratio over time.

Okay, great. And then just my follow up. In terms of that fleet opportunity out there, we understand, obviously, you had some really nice information at the Analyst Day that expressed the fact that the -- particularly the freighter fleet is tight and the supply/demand dynamics are also very tight. And so can you talk about -- I think you hinted about a potential -- growing e-commerce relationships out -- as well. Is there enough opportunities for you to get more fleet to grow? Or how -- just please, kind of, talk through the fleet dynamics and the assets out there that you could potentially be using in the future.

Sure. So yes, I think more broadly, there are opportunities. There exists an opportunity for us to acquire the fleet we need to grow the business and service our customer requirements, and we've talked about that. I think we probably had a lot of conversation about midbody or a mid-size widebody freighters and how many more 67s are out there and then what happens after that. And while there has been a -- quite a few -- have been quite a few 67 passenger conversions over time, there certainly still is a fairly large size fleet of 67 aircraft that can be converted. And the first several A330-300 converted freighters are now in service. I think there are perhaps 3 of them in service today. I think the industry broadly is learning about the 330 freighter and what it can achieve. And so in that class, I think there's certainly a growing opportunity and good opportunity with a very large fleet of 330s that are in service, more so in -- at least they -- typically the majority are in Asian markets today. But the passenger aircraft, certainly that can be converted. And there's a large fleet of 737s. If customers are looking for a smaller-gauge aircraft, the 37-800s are beginning to enter the market. I think that's an exciting opportunity as we think down the line. And then of course, we've seen substantial orders by express carriers, in particular, for long-haul, widebody intercontinental aircraft, some of those we may operate. But I think the point there is that these are the 3 largest express operators: DHL, FedEx and UPS, each of them, in the last couple of years now, recently DHL, have made substantial orders of freighters, which I would argue, conveys real confidence in the future of the markets they serve and essentially, the markets we serve.

Your next question comes from the line of Helane Becker with Cowen.

Just 2 questions. One, as you look ahead to March 29 of next year, have you thought about if there's no bilateral agreement between the U.K. and the EU or the U.S. and the U.K., how your clients would be able to use your aircraft to operate into that market -- in and out of that market actually?

So there -- yes, ultimately, I believe that there will be a bilateral agreement of some fashion. But I think we are positioned to be able to operate on behalf of our customers with the aircraft and the fleet that we have, Helane.

Okay. Yes, I mean, there may be a transition agreement. We just don't know what's going on, but you to at least prepare for that anyway. And then -- I'm sorry, go ahead.

And the U.K. is an important market for us, no doubt. The majority of our operations are much more continental rather than they are (inaudible) for sure, and so I think -- years ago, as every -- most folks on the call know, we were operating 3 freighters for British Airways before they decided to exit the freighter market. That was a good-size operation that if that were the case today, it would be more -- a larger part of our business, but it's not. And I think we think about the customers we fly for or where we fly. If you -- even where to look at the route right -- the route maps that we have in our investor presentations, while the U.K. is an important economy and certainly participate in that, it's not an anchor part of our European operations.

Got you. Okay, that's really helpful. And then on those aircraft that DHL Express ordered at Farnborough, have they talked to you at all about the opportunity that might exist flying those aircraft for them? A. And B, and I promise, last question, the little letter B is would you have the pilots available to be able to do that?

Sure. Thank you. So as I was just chatting with Bob, I thought it was really exciting on a couple of levels to see DHL move forward with an order for 14 777s, which is -- kind of follows on with FedEx' order for themselves and the substantial order that UPS has made for themselves. One of the core reasons for us to acquire Southern Air in 2016 was because they have the 777 and 37 platform. And Atlas was the 67 and 47 platform. And as we talked about a strategic move, buy versus build, we're now operating a -- 6 777s for DHL at the Southern platform, so we are 1 of 2 777 operators for DHL. So I think we are well-positioned to grow and to fly some of that fleet. I wouldn't go further than that on any discussions that we have with our customers. But I think there are opportunities there, absolutely. In terms of -- and as mentioned earlier, we're -- certainly continue to work and negotiate with our pilots for a new joint collective bargaining agreement. And I'm very confident we'd be able to serve DHL if they awarded us additional 777 flying.

Your next question comes from the line of David Campbell with Thomas, Davis and Cohen (sic) [Thompson Davis & Co] .

Really, the biggest concern I have in the long run, really the rest of this year, are rates you get for flying. It, right now, doesn't really make -- to me, it doesn't make any sense. I know IATA misses a lot of freight, it misses a lot of freight that's going on out there. But nevertheless, the capacity to carry freight -- airfreight has increased in recent months at a rate significantly faster than the revenue block hours have increased. And I don't understand why in that environment, the marketplace end up -- and then the investors, in general, are talking about higher rates for flying airfreight. Normally, when demand is growing less than capacity, the capacity will reduce your rates, but that's not happening, apparently. And so, I know that your answer here partly is partly because they're missing some of the freight, but they're also missing some of the capacity. So I -- it's very hard for me to figure out what's going on. Can you help?

Well, couple of thoughts. I think in terms of measuring the market and measuring demand, this is something we've talked about for a number of years. And in fact, we've had our own approaches to IATA to work with them and see if they can't, in their market estimates, include the parts of the market that they're not reporting on because I believe they have the data. And so that's just kind of an ongoing discussion with them. And hopefully, they'll begin to incorporate the other segments that don't get reported currently. In terms of are parties able to capture capacity, that's pretty much -- that's more finite. And that's really number of tails, and I think that's easier to track than perhaps maybe than some of the volume that's out there. In terms of Atlas and where we see ourselves, we had a tremendous quarter. In Charter, it's been a very strong performer for us for quite some time now. And so looking into the balance of the year, as we sit here, it's beginning of August, understanding the schedules that our ACMI and CMI customers are asking us to fly as well as the discussions we have with the key charter brokers and freight forwarders, who fundamentally are the charter customers for us. Last year had a terrific peak. We think this year is a very strong peak. I'm not sure we know if one is peakier than the other, so to speak. But we see ourselves in a really good position for the fourth quarter. The demand is certainly very strong for us. And if that's the outlook that -- or that's the perspective that informs our framework and outlook for the balance of the year.

And David, it's Spencer. I'll just add that if you exclude fuel, Commercial Charter yields for Atlas for the first 6 months of 2018 were above, consistently through each month, were above the yields for 2017. And if you look at the yields for this week, currently in early August, yields -- transpac yields out of Hong Kong, for example, are in the mid-3s. Transpac yields out of China start with a 4. So it's -- it continues to be a strong yield environment. That's what we're seeing.

Right, and it's not just Asia, right? I mean, our South America operations are strong, and that's reflected in our Charter market. And just other global -- excuse me, other charters we operate to other parts of the world, outside of Asia, continue to be strong with high demand.

It's just kind of amazing to hear you talk that way, and I believe you're -- absolutely, you're correct. But it's still amazing because I see Asia Pacific volumes in July or in June and July relatively flat. I mean, in terms of China, some of the China carriers actually down year-to-year in tonnage. And it's just hard to figure out in that environment how rates can be strong. But I agree, you're on the line, you know. And they are, and I just worry that they won't be sustainable.

Well, I think the other thing too, David, a lot of the capacity that's measured in the AFTKs is belly capacity, not pure factor -- not freight capacity. The orders we've seen recently are going deliver over the next 2 to 6 years in terms of what -- the fairly large orders we've seen over the past 2 years. So orders are there. I don't know the all -- the capacity isn't there yet and belly capacity is, it's real, but the greater the length of the flight, the belly capacity's going to reduce over that length. And so I think a lot of the FTKs are still nominal capacity as opposed to actual capacity measured on 12- and 13-hour flights.

Your next question comes from the line of Jack Atkins with Stephens Inc.

Bill, just going back to the comments you made earlier about the DHL aircraft order. If I'm not mistaken, sort of reading the press release about that, they're talking about those aircraft being for replacement of some older widebody aircraft, (inaudible) 747s. And given that you guys lease 12 747s to DHL, including I think 7 -400s due to Polar, I mean do you think that some of those aircraft could get returned to you at the lease expiration? I just -- How should we think about that? Because 4 of those aircraft are going to be delivered next year, I think.

Well, a couple of things. First of all, we operate 13 747s for DHL currently. Six are 747-8s and 7 are 747-400. That number is right. In terms of those specific aircraft, they're relatively young. They're pure factory freighters, nose door aircraft, and as I said, towards the younger age of the fleet of 747s and I think have substantial, attractive, competitive remaining life on the asset. The nose door is a very important feature. We tend to think of nose doors for oversized freight or pipes and things like that, that can't come through the side door. You open the nose and run it down the length of the aircraft. But in many of our operations, in fact, where we're particularly in time-definite operations, the nose door's often opened and aircraft is loaded and unloaded from both the nose and from the side door. So it's an attractive feature. The 747-400 lifts about 118 tons. And as we think about slot constraint of airports, particularly in Asia, Shanghai and Hong Kong and other key airports in China, I think it'll -- that kind of payload lift in a slot-constrained airport with 1 flight a day, 1 13-hour, 12-hour flight a day, for example, has tremendous, useful economic life for quite some time to come. So I can't comment as to what future decisions will be on fleet and fleet mix with any customer. I think these are attractive assets that will absolutely be placed and deliver excellent economic rent for us and our shareholders.

Okay, so the -- just to follow-up on that. The thought is that, if the DHL does decide to push those aircraft back to you, you think just given the strength in the underlying airfreight market, there's a home for those planes kind of going forward?

Well, I'm not going to comment as to what DHL may or may not do. But I just think very specifically, those aircraft are very attractive aircraft with long, useful life remaining on the aircraft. The new builds are 2004, for example. They're pure factory freighter. They're nose door, they perform very well. And I think overall, underlying airfreight demand will want those aircraft for quite some time to come.

Okay, Bill. And then just for my follow-up question. If we look at ACMI segment direct contribution, it was down modestly this quarter. I'm guessing that's because of higher maintenance accruals. But for the 6 months, it's only up, call it just under 5% despite a pretty hefty increase in block hours and revenue. Could you maybe help us think through sort of what's weighing on segment-level profitability there? And would you anticipate that accelerating as we get into the back half of the year?

Yes, sure, Jack. You're exactly right. It's maintenance expense. And you would expect that the -- you're exactly right, the back half of the year, you would expect those margins to improve as we incur less maintenance expense.

Okay, and I guess, going forward, you would anticipate block hour growth over time to -- block hour growth and direct contribution profit growth to be at a similar level in the segment going forward?

I'm not sure what you mean by similar.

Well, I'm just thinking if you're grow your block hours or your revenue by 10%, would you expect to be able grow your direct contribution? Again, I understand it could be quarter-to-quarter fluctuations, but over time, would you expect a similar growth rate for both of those lines?

So Jack, it depends on the block hours themselves and it depends upon whether it's A+ CMI, whether it's CMI only. It depends whether it's on a 76 versus a 74 or 777. So they all have different earnings characteristics. But otherwise, yes, taking that into account, then those things should move in tandem.

Your next question comes from the line of Chris Stathoulopoulos with Susquehanna.

Just going back to some of the comments on Farnborough, there were, in addition to the DHL order, they were several other high-profile orders. I think CargoLogicHolding put in an order for 29 777s. So I'm just -- wanted to get your thought on whether you think freighter supply is coming on too fast here.

Well, I think a few things. So I don't -- haven't seen specifics as to when, for example, CargoLogics freighters may deliver. Our understanding, it's 2 to 6 years. And I think that it was not a firm order or contract. It was an LOI, but don't want to comment on any one customer. I don't have that insight on their business. But there certainly will be, I think, 2 things. I think we'll continue to see long-haul intercontinental demand growth as much across the 3 key areas: airfreight, e-commerce and express. There are a number of older freighters that simply are going to retire. As I mentioned a moment ago, our freighters, I believe, the 400s are at the younger end of that spectrum. There are already freighters out there who are approaching well beyond the 25 years in age. And so I think we will see freighter retirements. The BCFs will retire, the 400BCFs will retire as well. So I think the combination of growing demand, fundamental changes in the global supply chains -- in global supply chains and customer buying and e-commerce and aircraft retirement will absorb a lot of the capacity that's coming in.

Okay. And then my follow-up, with regards to Amazon. I know you don't typically give a lot of color here. But could you give us a sense of how the network is maturing, perhaps how many points you're flying now and whether there's some predictability to flight planning? And maybe said another way, do you think we're at a point where it would make sense operationally to bring on additional aircraft?

Chris, we don't comment on individual customers. What we said about Amazon is we're at 15 aircraft, on '6-7s, and 5 more this year. We fly 2 points in and out of Cincinnati. The operation is going well, but we're not in a position to comment beyond that about Amazon.

Your next question comes from the line of Scott Group with Wolfe Research.

Is there anything about the BSA with DHL that prevents them from returning aircrafts? Can you maybe talk to that? And then is there any way -- and I totally understand your point, Bill, but is there any way to think about the profitability of a 400 on ACMI versus a 777 on CMI?

Well, again, it's a lot of specific detail about DHL that we're not going to comment on. I think if we step back, we're going to celebrate our 10-year anniversary with DHL this year in October. We started with 6 aircraft for DHL. We're now at 41 aircraft for DHL across our business segments: ACMI, CMI and in Titan. I think it's a very important strategic relationship. And I think in some of the earlier comments I made, I think the 777s are a growth opportunity for Atlas through our Southern platform as we run it prior to integration and the new joint collective bargaining agreement. I believe the 47-400s have great demand and provide a great service for DHL and our other customers.

And Scott, it's Spencer. I'll just add. I think it's been said, but I'll just add. We are excited about the DHL order, the DHL announcement. As Bill said, there are only 2 operators of the 777s for DHL. We are one of them. We expect to grow with DHL. We've grown. As Bill said, we're celebrating our 10-year anniversary. We've grown from 6 aircraft to 41 aircraft with them, and we expect that partnership to continue. And it's a long-standing terrific partnership and we look forward to going it even further.

Okay, and then I want to ask about the guidance. So obviously, great second quarter results. But if you -- it looks like you're not really raising the second half guidance, if anything, maybe slightly lowering second half. Maybe just -- can you speak to why that is and why you think we're going to have lower third quarter than second quarter EBITDA? That's somewhat atypical.

Yes, Scott, we actually -- I think the full year guidance is slightly higher than what we previously guided to. So it is -- assuming you take the beat in the second quarter and add it for the full year or just if you look at the second half on its own, I think it's slightly higher than what we previously guided to. And then with regard to third quarter, I think Bill -- if you're asking about sequential, I think Bill talked about that. And sequentially, you sort of back out those somewhat unusual items and timing that we had for non-heavy maintenance events, and you see the 10% to 15% sequential growth. If you look at third quarter on a year-over-year basis, you see terrific growth over the prior year.

Your next question comes from the line of Steve O'Hara with Sidoti.

Just on the, I guess, the contribution of Charter to the business going forward. I mean, it seems like direct contribution from the segment's been very strong this year, very strong growth, it's increased the second half of the year or second quarter as well. I mean, do you expect a more balanced business going forward in terms of the contribution from Charter versus ACMI? How do you think about that, I guess, going forward?

Sure, Steve. So you're right. Charter's been very strong. We talked about the yields before. The yields for the first 6 months of the year have been over the yields for the first 6 months of last year. It's been a very, very strong market with great demand. So you saw that improvement sequential from the first quarter to the second quarter in Charter. As we move forward, of course, the fourth quarter in Charter is usually the strongest quarter of the year in that segment. And this year, we expect that to continue. We took 2 -8s, as you know, and moved them from ACMI -- sorry, from Charter to ACMI, so that has a slight impact when you look at things on a year-over-year basis. But otherwise, we think that fourth quarter for Charter is going to be very strong once again. The other thing I would just add, if I may, for a moment. So Charter's really changed over time as well. It typically was a strong burst of activity in the fourth quarter for peak, typically out of Asia, as consumer electronics were -- particularly, were launched with fanfare and kind of market expectation. That's changed. Consumer electronics still come out of Asia. And when new products are launched, they certainly use quite a bit of Charter. That tends to be year-round now and less and less holiday centric. And then the other thing that's changed is that Charter's really a 52-week business for us, serving diverse markets beyond -- certainly Asia's key, an important part of it, but other markets as well. And so the level of Charter activity on a year-round basis is growing as well, and that's a great change for us. And we're in a great position to serve that market on a year-round basis as well.

And Steve, I'll just add. I realized that you also asked about ACMI. And so as the year progresses, we expect that our earnings in ACMI will continue to do well. And we do flying, as you know, for the integrators in the fourth quarter. And so that should really improve as well.

Okay. And then on the, I guess, the utilization within ACMI. I think it was down a little bit and, I mean, is that just because of the mix of aircraft within the ACMI business now?

It's actually -- we had some more maintenance, some heavy maintenance. And so -- heavy maintenance does two things: One, it increases costs because we have to pay for the heavy maintenance. But then also, the planes are down, and so we had three incremental calendar-based C checks for 747-8s during the quarter compared with the second quarter of '17. And so not only does it -- again, not only does it impact costs, but it also impacts downtime when the check is performed. And so because we had three incremental, that had an impact on utilization. Otherwise, utilization was good.

Your next question comes from the line of Dave Ross with Stifel.

So it's a pretty good airfreight market, as everybody knows. What do you think different, though, about Charter segment today versus back in the 2008 to 2010 period when the Atlas had contribution margins in the 20s and even sometimes in the low 30s?

I think it's what Bill talked about. It is -- it's a changed market. It's a year-round market. Behaviors have changed, the global supply chain has changed. It used to be so heavily dependent on peak fourth quarter flying when yields would be very strong. We would incur losses sometimes for the beginning parts of the year and then we have earnings at the end of the year in Charter. And now Charter makes money more evenly all throughout the year with better margins throughout the year, as opposed to just waiting for that fourth quarter volume.

Was there less military business back then? Was it not half the business at the time?

No, 10 years ago there was more military business. Yes, in fact -- well, cargo business. And so when we look at military numbers now, what's changed? Two things have changed there. Back 10 years ago, our military business was strong because we had OEF and OIF. And then as President Obama took office, he even surged troops into theater. But we were only a cargo carrier at the time. As we saw the market -- we all expected, of course, the market was going to come down and change in the military, we moved into military passenger so we could take advantage of, really what I would call the ongoing, regular non-conflict flows, non-conflict-based flows of passengers to our bases around the world. So military was -- particularly the cargo was much stronger 10 years ago than it is now.

And then just to follow-up on a comment you made earlier about peak season ahead. You expect it to be another strong peak. And then you'd have regular dialogue with your customers and talk to them about the schedules that the CMI and ACMI customers asking you to fly. How are those schedules shaping up to be different this year than last year? Are the discussions around, we need more aircraft for longer, we need more aircraft for a short period of time, it's going to start earlier, it's going to go later?

Yes, well, I -- a couple of things. We've just simply grown our ACMI and CMI business, right? Even in this year, we've had growth. Certainly in this year, we've had growth. And customers are talking about very high levels of utilization. That's why we run the maintenance programs we do in the first half of the year, so we have the aircraft ready and able and fit, so to speak, for high levels of utilization in the late third and fourth quarters. E-commerce has driven demand such that it runs right up to Christmas internationally and domestic. So we're -- again, we're planning for another very strong and terrific peak just like we saw last year. And it's not just ACMI and CMI customers, it's the discussions we have with our freight-forwarder customers and our charter broker customers as well.

Your next question comes from the line of Kevin Sterling with Seaport Global.

My follow-up question got answered regarding maintenance, so I'm good.

(Operator Instructions) Your next question comes from the line of Chris Stathoulopoulos with Susquehanna.

Just want to go back to a comment that Bill made around the 767 feedstock. You were saying that there is aircraft out there, but we've been hearing post the Amazon deal that the stock is tight. But a few months back, I think there was some talk in the press about United potentially looking to replace around 50 767s in their fleet. So just if you could give us a little bit more color on what you're seeing out there on feedstock as this is a sort of popular aircraft with the e-commerce guys?

Yes, it certainly is a popular aircraft and a very good aircraft and a very good converted aircraft. So there's a couple of things going on. Certainly, there are -- there is the '67 to 787 changes that are going on in fleets, passenger fleets around the world. Some of that is a bit on hold, I would say, right now, because of the issues with certain engine types on 787s that need to be worked through. But overall, there's -- our view is there's an array of 767s available. The -- our fleet is predominantly a GE or CFM6-80s (sic) [CF6-80s] . There are Pratt & Whitneys out there. We operate Pratt & Whitney aircraft as well. So yes, there's a good brisk demand for the aircraft type. I still believe that -- I do believe that there are quite a few 767s in the market suitable for conversion from passenger to freighter. United's an example of aircraft that could be coming to market to provide that feedstock. And again, I'll come back to the A330-300 conversion, that's a very promising conversion as well. There are hundreds of A330s in service today -- 300s that are, I believe, suitable for conversion so there may be, at any one time, some tightness in the market. But I think if we take the longer view, there's good feedstock out there to serve the demand for that 50- to 60-ton freighter.

Your next question comes from the line of Howard Rosencrans with VA.

I'm just trying to reconcile a couple of the comments. Heavy -- the -- you indicated we have sort of a push out of -- I got this and was -- maybe it was contradictory or at least to me. The quarter was excellent, you had a nice beat on EBITDA, et cetera. But you pushed out heavy maintenance or some of the heavy maintenance to Q3, which takes Q3 down, however, at the same time, if I understood, you just commented that heavy maintenance negatively impacted the second quarter. And I guess, that's sort of connected to the ACMI direct contribution margin being only 19% in the second quarter, so down 400 bps year-to-year. So if you guys could reconcile that, I would appreciate it.

Sure, Howard. It's Spencer. So there are a few different types of maintenance expense that we typically talk about. So there's heavy maintenance, non-heavy maintenance, which is auxiliary power units or APUs, thrust reversers and landing gear overhauls. And then there's line maintenance, which is sort of a variable expense. Every time a plane lands, it needs some things done to it. And so I think you're mixing up a few of them. So within our -- the press release and in our earlier comments, there were some non-heavy maintenance, which is, again, APUs, thrust reversers and landing gear overhauls, and they moved from very, very late in the second quarter, literally within days, very late in the second quarter to very early in the third quarter. So it's just a matter of days, but unfortunately, that crosses quarters. So that impacts the -- positively impacts the second quarter and then negatively impacts the third. So we wanted to make everyone aware of that. And then when I was talking before about the utilization and I talked about the 747-8s and their C checks, that is heavy maintenance, so different types of maintenance. I hope we weren't contradictory.

Yes, I'm sure it was me. So the second quarter was negatively impacted by 3 C check heavy maintenance and is that what negatively -- is that what accounted for -- or a good portion of what accounted for 400 bps decline in year-to-year ACMI direct contribution?

Yes. So when you look at year-over-year, heavy maintenance, yes, it increased on a year-over-year basis. And so that did have an impact on the ACMI profitability and margins. We had -- on a year-over-year basis, we had two incremental CF6-80 engines overhauls. And then, as I said, we had the 3 incremental 747-8 C checks and then, line maintenance, that's okay. We just had higher flying, and so line maintenance was up. But the overhaul -- the engine overhauls and the -8 C checks, yes, had an impact.

So we're not going to get -- so we don't "get that back" at any point in the second half or even if we look at '19, we're not going to -- there's not -- we don't get that back?

Well, it's just -- these things are -- the C checks are calendar-based and so it depends when they're due. And so we -- those that were just -- went through their check, they won't need another one for a couple of years. And then the engines are based on cycles. So it just depends how many takeoffs and landings that they have. And now they've gone through an overhaul, they're good for a while, years and years.

Your next question comes from the line of Jack Atkins with Stephens.

Just a couple of modeling questions for Spencer. Let's see here. Could you tell us where the rental refund fell in the -- I guess from a segment perspective and in the P&L in the quarter?

Yes, Jack. So it fell into other non-operating, and so -- and it's not in the segment results.

Okay, that's great. And then the deferred income tax benefit that you're expecting for the third quarter, is that included in your net income guidance for FY '18? And I have a follow-up question on that.

Yes, it is included. The program that we're in, in Singapore, we expected the change -- it's basically a program that has a sort of finite life and then it gets renewed. And so we expected that at the beginning of the year, when we provided our guidance, also on Investor Day when we provided guidance and certainly today as well, also including the changes with regard to the Southern Air pilots that we expected on Investor Day and today, certainly.

Okay, got you. And so that deferred tax, does that flow through the tax expense line? Because I noticed in the press release, you're saying you expect a full year tax rate of 15%, which is consistent with the last couple of quarters where you didn't have that benefit. So do you just expect a much higher fourth quarter rate? I'm just trying to understand how that all works together.

Yes. It's a good question. It does flow through the income tax expense line. And it's just a matter of how our earnings are that, obviously, the earnings are smaller in the beginning of the year and then are greater at the end of the year. And so it just depends what discrete items there are and the impact that they have on our earnings throughout the year. So our rate was 16.2% this quarter. We expect it'll be 15% for the full year. And then next year, without that discrete item, you would expect that -- the rate to go up a little bit. But then we'll also enjoy a lower Singapore rate overall on an ongoing basis.

At this point, we've reached the end of the Q&A session. I'll turn it back over to the presenters for closing remarks.

Well, thank you, Dan. Spencer and I would like to thank each of you for your interest in Atlas Air today and for sharing your time with us and certainly for your questions throughout the call. We look forward to speaking with you again soon. Thank you very much.

This concludes today's conference. Thank you for your participation. You may now disconnect.