Atlas Air Worldwide Holdings Inc (AAWW) 2012 Q4 法說會逐字稿

Good morning. My name is Tanisha 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 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Mr. Ed McGarvey, you may begin.

Thank you, Tanisha and good morning everyone.

I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our fourth quarter 2012 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Senior Vice President and Chief Financial Officer. As a reminder, today's call is complemented by a slide presentation that accompanies our remarks. If you have not already downloaded and printed a copy of our press release and slides you may do so from our website at www.atlasair.com. You may also find the slides by clicking on the link to presentations in the investor information section of the website.

As indicated on slide 2 we'd 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 they involve risks and uncertainties. Actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors relating to our business, please refer to our 2011 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 on our website at atlasair.com. During our question-and-answer period today we'd 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'll be happy to answer any additional questions that you may have as time permits.

At this point I'd like to turn the call over to Bill Flynn.

Thanks, Ed and good morning, everyone. Thank you for joining us today.

Our 2012 results highlight the resilience of our diversified business model and our ability to deliver improved margins, strong earnings and growing free cash flow, all of this in a challenging business environment. Starting with slide 3 we are executing on the strategic plan that leverages our core competencies. As a result we achieved the best quarterly and second-best second best annual operating results in the Company's history during the fourth quarter and for the full year.

Our results reflect the strength of our ACMI operations including our 747-8s. We are also capitalizing on new organizational capabilities such as our growing CMI operations, military and commercial passenger service, and expanding 767 flying, which continued to strengthen and diversify our business and financial results. In addition, we are driving enhanced operating efficiencies through our culture of continuous improvement. In an environment of global uncertainty we are very focused on controlling what we can and creating growth where we can.

Since 2009 we have reduced our corporate overhead by 14% on a block hour basis. That represents an average annual reduction of 5% per year. During this period our block hours have grown 40% or nearly 12% per year and our direct contribution has increased 45%, highlighting our ability to grow and diversify the business while managing our overhead costs. Our 2012 earnings and cash flow and our balance sheet strength are the starting point for our 2013 guidance, our return of capital to stockholders through share repurchases, and our plans to grow Atlas Air over the long-term.

To help us bridge from 2012 to 2013, I'll ask Spencer to begin with a summary of our 2012 results. After that, I'll come back and discuss our guidance, capital allocation, and long-term business strategy. Spencer?

Thank you, Bill and hello everyone.

Slide 4 briefly highlights our 2012 results. In a year of economic uncertainty, we grew revenues 18% to $1.65 billion, increased adjusted net income 17% to $127 million, delivered adjusted diluted EPS of $4.78, and generated $209 million of free cash flow or $7.85 per-share. Adjusted net income in 2012 excludes net gains that were primarily driven by an insurance gain of $0.15 per share related to flood damage in a parts warehouse during Superstorm Sandy.

Reflecting the first full year of flying by our three initial 747-8s, ACMI volumes rates and revenues all grew and ACMI direct contribution increased 29% to more than $191 million. Earnings in 2012 also included $0.09 per diluted share related to adjustments to federal income tax reserves which lowered our effective income tax rate to 36.8% for the year.

Slide 5 highlights our fourth quarter 2012 results. Quarterly revenues of nearly $453 million increased 17% and we delivered adjusted net income of $49 million and adjusted diluted EPS of $1.83 both up 22% or more compared with last year's fourth quarter. Similar to the first three quarters of 2012 we grew margins and earnings in the fourth quarter by increasing contributions from the investments we've made to diversify and grow our earning streams. These investments include our new -8, military passenger aircraft, and expanded CMI operations.

Margins and earnings also benefited from the scale and efficiencies inherent in our operations. Our adjusted results for the quarter exclude net gains, including the insurance benefit of $0.15 per share that I previously mentioned. Results for the quarter also included an effective income tax rate of 35.9% which reflected an adjustment to reserves related to federal income tax benefits claimed in prior periods that was equivalent to $0.06 per share.

Looking at slide 6, operating revenues in the fourth quarter of 2012 benefited from increases in block hour volumes in our ACMI business, our military passenger business, which generated $39 million of revenue growth, and our Commercial Charter operations. Revenues in our ACMI business were driven by our new 747-8s and increased CMI flying, partially offset by the redeployment of 747-400 aircraft to other segments.

Increased volumes in ACMI were primarily due to the continued ramp-up of 767 CMI flying for DHL and the continuing increase in 747 CMI service for Boeing. ACMI rates during the fourth quarter primarily reflected the impact of higher rates for our -8's offset by growth in our lower rate but profitable CMI business.

On average our ACMI customers flew 4.3% above contractual minimum block hours during the fourth quarter. We operate an average of 6.3 747-8 freighters and 13.8 747-400 cargo aircraft in ACMI during the quarter. Our CMI operations added an average of seven aircraft to the segment, 1.5 Dreamlifter large cargo freighters, 1 passenger 747-400, and 4.5 767-200 freighters.

In AMC Charter, revenues during the quarter declined 12% primarily reflecting a 48% decline in cargo hours and a 9% decrease in the average paid fuel price. These were partly offset by a 300% increase in passenger block hours as well as higher rates paid on 747-400 cargo aircraft utilized during the quarter. We flew 2,902 to military passenger block hours during the fourth quarter, up from 724 hours in the fourth quarter of 2011 as we combined additional 767 passenger flying with our 747-400 passenger operations.

Commercial Charter revenues in the fourth quarter increased more than 56% reflecting a 74% increase in block hour volumes that was partially offset by a 10% reduction in average block hour rates. Higher volumes in Commercial Charter reflected the deployment of 747-400 aircraft in lieu of retired 747-200's, the deployment of an additional 747-400 freighter to support demand in South America and 747-400 aircraft from ACMI during remarketing periods. In addition we enhanced the utilization of our passenger aircraft by taking advantage of opportunities in the Commercial Charter market. Commercial Charter revenue per block hour reflected the impact of lower yields on global cargo capacity during the fourth quarter.

Moving to slide 7, segment contribution totaled $116 million in the fourth quarter of 2012, a 22% increase compared with $94 million in the fourth quarter of last year. Direct contribution in 2012 reflected higher average block hour rates in ACMI complemented by lower maintenance expense for our new -8's.

Revenue and volume growth in our ACMI Charter passenger business, as well as lower heavy maintenance expense on 747-400s versus 747-200s, which were partly offset by a reduction in the number of one-way military cargo missions, and revenue and volume growth in Commercial Charter, offset by softer yields and a reduction in return legs due to fewer one-way military cargo missions. Results in each segment were also partially offset by volume driven operating expenses. In addition, AMC and Commercial Charter incurred higher aircraft ownership costs related to the deployment of 747-400 aircraft into these segments in place of retired 747-200's.

Slide 8 summarizes the quarterly detail for maintenance expense in 2012. As we've noted in the past the timing of maintenance events is subject to change as these events are conditions-based. As we forecasted, there were no heavy maintenance events during the fourth quarter.

Turning to slide 9, and our balance sheet, 2012 was a year in which the business investments we made enabled us to grow our cash balance and lower our net leverage ratio. We ended the fourth quarter of 2012 with cash, cash equivalents and short-term investments totaling $420 million, and that compares with $195 million a year at year end 2011. The change was driven by net cash of $258 million provided by operating activities, and by net cash of $512 million provided by financing activities. That was partially offset by net cash of $548 million used for investing activities. Net cash used for investing activities in 2012 primarily related to the purchase of four 747-8 freighters, a third 767-300ER passenger aircraft for our AMC Charter operations, and a 737-300 cargo aircraft for our dry leasing business.

We also took advantage of an opportunity in the fourth quarter to acquire an additional $5.5 million of our outstanding enhanced equipment trust certificates or EETC debt, bringing the investment in our debt to approximately $7 million for the year. Net cash provided by financing activities during 2012 primarily reflected proceeds from the issuance of debt in connection with the delivery at our four -8s.

We refinanced a total of $571 million of floating rate term loans under a facility guaranteed by Ex-Im Bank during the year. The refinancings enabled us to establish fixed coupon rates on four separate 12-year secured bonds that are guaranteed by Ex-Im Bank resulting in a blended average coupon rate of 1.7%. And I'd like to remind everyone that we have no unsecured debt and that all of our outstanding debt is tied to specific aircraft in our fleet.

Excluding the acquisition of aircraft engines and related capitalized interest, our core capital expenditures totaled $31 million in 2012. Bill will provide more details on our 2013 guidance in a moment, but I'll just quickly note that we expect our core capital expenditures to be about $60 million to $65 million this year. As expected, our net leverage ratio, which includes capitalized rents was 4.3 times annual EBITDA at year-end reflecting the benefit of investments in our outstanding WTC's.

Slide 10 provides some additional perspective about our ability to generate free cash flow and grow our cash balance. As the left side of the slide illustrates, the operating cash flows from our -8's, the favorable bonus tax depreciation benefits that they generate, and the positive cash back that we have received and will receive at future deliveries has enabled us to continue to grow our cash balance. Due to the benefits of bonus tax depreciation we don't anticipate paying US federal income tax until 2017 or later.

On the right side of the slide, you see the $7.85 per diluted share in free cash flow that we generated in 2012. All of the business efforts that we've been talking about should continue to generate significant free cash flow per share in 2013 and into the future.

With that I'd like to turn it back to Bill to tell you more about our guidance for 2013, our capital allocation strategy and stock repurchase plans, and our long-term business growth.

Thank you, Spencer.

Turning to slide 11 we continue to anticipate strong earnings and cash flow in 2013. While global economic growth and air freight market conditions remain uncertain our model is working. We are well positioned to serve our customers and the air freight markets. That includes our new 747-400 ACMI service for Chapman Freeborn beginning in April. Including this contract, and the initiatives we have under way, we anticipate that our reported fully diluted earnings this year will total approximately $4.65 per share, which is consistent with our adjusted earnings and income tax items in 2012.

Earnings in 2013 will reflect strong growth from our 747-8Fs driven by an increase in a number of -8's in service compared with 2012. That growth will offset headwinds related to a total 18% reduction in military cargo and passenger block hours compared with 2012. Which, when combined with the impact of a reduction in one-way military missions on our Commercial Charter operations, will reduce diluted earnings per share by $1.19. Additional expected headwinds totaling $0.91 per share compared with 2012 include increased heavy maintenance expense, a reduction in capitalized interest, and income tax benefits that we recognized in 2012.

Over the last several years we have transformed our Company and developed a diversified business model. As a consequence we expect to overcome these headwinds and deliver earnings per share consistent with 2012 with strong free cash flow generation. We anticipate a sequential increase in our quarterly earnings throughout 2013. Market growth this year will be seasonal and second half weighted. And we expect that over 60% of our maintenance expense, estimated at $193 million, will be incurred in the first half of the year. As a result our earnings should begin at a marginal level in the first quarter with about 75% coming in the second half.

Our block hour volumes should total approximately 185,000 hours in 2013. An increase of more than 32,000 hours compared with 2012. Forecast block hour volumes in 2013 reflect our decision to temporarily park one Company-owned 747-400 converted freighter in mid-February. The aircraft is unencumbered and this will allow us to reduce costs and enhance Commercial Charter profitability.

ACMI segment flying should account for about 133,000 hours or 72% of expected block hours in 2013. With about 33,500 hours or 18% in Commercial Charter and 18,500 hours or 10% in AMC Charter. Passenger flying should account for more than 10,000 hours in AMC in 2013. Based on anticipated deliveries and placements in the first half of 2013, for our two remaining 747-8's, the average number of -8's in service in 2013 should increase to more than 8 from 4.3 in 2012. In addition, ACMI customers are expected to fly 3% to 5% above contractual minimums for the entire year.

As always, our guidance will be affected by a number of factors. They include economic growth in international trade flows, air freight market demand, aircraft placement opportunities, military demand, and the number of one-way mission awards, and overall Commercial Charter market demand and rate. Our guidance for 2013 excludes the accretive impact from prospective share repurchases that we will implement this year.

We are also assessing a recent court decision that may enable us to reduce our effective income tax rate in 2013. We expect to complete our assessment and report on its outcome by the time we announce our first quarter earnings in early May. We will also update our annual guidance as we regularly do each quarter.

Moving to slide 12, our capital allocation strategy demonstrates our commitment to creating, enhancing, and returning value to our stockholders. Cash in excess of our business investment and balance sheet maintenance requirements will be available for share repurchases which will be immediately accretive. The timing and amount of our repurchases will be based on market conditions. Reflecting our strong balance sheet and cash flow we intend to begin actively purchasing shares this quarter.

Looking at slide 13, we have transformed and diversified our business model. We have build a resilient Company with strong earnings and cash flow and a solid balance sheet. We are committed to returning capital to our stockholders and we are also committed to growing our Business for the long-term. Towards that goal we are leveraging our competencies, industry leadership, and deep understanding of our markets to deliver value to our customers and stockholders.

We have a disciplined approach to business growth. We will evaluate potential opportunities for adding incremental aircraft that provide our customers with the most efficient assets to meet their needs. We will explore opportunities to expand our tightened dry leasing platform through investments in aircraft with lease commitments attached. And we will continue to develop our operating capabilities.

Moving to slide 14, our initiatives have enabled us to improve margins, increase earnings and grow free cash flow despite a difficult economy. Air freight remains a vital element of the global economy and we are well-positioned to super serve our customers in the air freight markets. We anticipate strong earnings and cash flow this year. With a solid balance sheet we are also well positioned to actively return capital to our stockholders as well as invest in our future growth.

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

(Operator Instructions)

Helane Becker.

Thank you very much operator, hi guys. Just a question with respect to -- two questions actually with respect to the share repurchase program and the 787's. I'm sorry, the 747-8's. The first question is I think in the past you've had a share repurchase program. And you haven't really completely executed on it. So what's different this time that would make you -- I think you had an authorization of about $100 million and you only did $19 million. So what's going to accelerate that program?

Sure, Helane. It's Spencer. We are committed to supporting the stock, we're committed to supporting it over the long-term. I think you'll see that we will file our 10-K, our annual report on Form 10-K very shortly and that will end sort of blackout period we are in. Our Company's trading window will then open which will allow the Company to buy its stock and I think you'll see in pretty short order just how committed the Company is. When we file our 10-Q for the first quarter, obviously we will disclose in there and I think you'll see the Company's commitment and you'll see that over time.

If I can add, Helane, as well, when we were authorized that repurchase, that was back in 2008, and it was at the beginning of the fourth quarter, and we did enter the market or in the middle of the fourth quarter we did enter the market and begin to repurchase shares, but as we were in that process, you'll recall the market collapsed coming out of Asia almost 30% in terms of demand with what was going on in the financial environment. We had our order book in for the 747-8's and within a matter of really a few short weeks the ability to obtain financing for those aircraft pretty much became very uncertain. PDP financing disappeared in the market. And so at that point, while we were authorized and we had commenced share repurchases, the whole environment changed and we opted to cease from share repurchases and preserve capital cash in that market environment to have that cash available to us and as we came later to understand what the financing market would be. Where we sit today, as we talked about I think in the prior calls or meetings we've stress tested our cash balances, we understand what our growth plans are. We're in that position now I think as Spencer commented on the last call with the Board's concurrence, reenter the market and begin actively repurchasing shares and that I think is important perspective as to what was then and where we are now.

Okay. That's incredibly helpful. Thanks, Bill. The other question I have is just on the 747, I think there were two on the ground recently. Now one is going into service that you just announced a new customer for last week. And so that's the one that's left on the ground is the one that you're talking about is the Company-owned plane that's parked? Is that the right way to understand it?

We have no aircraft currently parked.

Okay.

All of our aircraft -- all of our aircraft our operating. We have no aircraft parked. The last time we had aircraft parked was back in 2008-2009. We temporarily parked some 200. Then as the market recovered and really rebounded, we pulled them back out of -- and put them into operating status. So in our fleet we have 24 747-400's. 21 are pure factory freighters and 3 are converted freighters, and of the 3 converted freighters we own 1 totally unencumbered. That's the one we're temporarily parking, right now. The other two we leased in several years ago. We needed the capacity, the 747-8's were late in the delivery. Those two they are operating -- those two will be returned at their end of lease which occurs in '14 and ' 15.

Oh, I got you. Okay.

And based on market conditions if there's a very strong growth in demand later in the year, we can certainly bring the aircraft back into service. In addition to parking we're taking up costs and avoiding costs, doing both. Our calculus was that was a better bottom line outcome than pushing additional capacity into the Charter market. And being unencumbered, a very low cost to be able to do that.

Okay. Got you. Understand. Okay. Thanks for your help.

Thanks Helane.

Jason Ursaner, CJS Securities.

My question's really on the financial guidance. It's very specific for an internal forecast in terms of the total earnings and you're extremely specific in calling out the headwinds totaling $2.10. So I'd just like to try and similarly understand how you are internally breaking down the variables on the positive side of the equation between the -8's, reallocating the 400s, and the expanded LCS and DHL programs to get back the other positive $2 in guidance.

Jason, it's Spencer. You're right, we were pointing out that there are certain headwinds that we are facing coming into 2013. But there are -- the business continues to be strong especially the -8's. And the contribution from the -8's is really quite large. We've talked about for the first year of their flying we've talked about the $0.04 per share for the -8's. That generates tremendous profitability. We expect that we will have at least eight -8's flying in 2013. So that's tremendous.

We also as you know have increased our 767 flying for DHL. That business continued all throughout 2012 and then we'll have a full year of that flying in 2013. Boeing continues to ramp up its 787 production so the flying that we do on a CMI basis for Boeing, flying the Dreamlifters, that will continue as Boeing continues to ramp up their production. So all of those things and the -8's contributions should generate really strong returns which offset those headwinds.

Okay. And my follow-up, you mentioned that $0.04 per month number. Without any type of breakdown, it at least outwardly doesn't appear that it's quite adding up there. So I'm not losing sight of the earnings and cash you're generating from the planes. I guess a question of whether that original view truly is still valid and it's just the temporary friction of reallocating the planes, or has something fundamentally changed at this point and the idea of that increase in normalized earnings power on a flat fleet base, that's it just isn't materializing quite to that magnitude given the tonnage environment and the rates in utilization you think you can achieve on those assets?

Sure Jason, if you look at the profitability in our ACMI segment, you see the tremendous profitability in that segment. We absolutely are earning what we talked about. The earnings from the -8's in their first year of operation did approximate $0.04 as we had talked about per plane per month. And so you can absolutely see that in the -8 profitability. As with more experience, with the -8's, confirmed, the approximation of $0.04, in years -- the next few years the -8's will need a seat check as three of them will need this year and line maintenance continues to increase over time. And so the first year does approximate $0.04. Years two through four are more like $0.035 to $0.038 per plane per month. And those are tremendous, tremendous earnings that we are really excited about.

Okay. Great. Appreciate the commentary. Thanks.

Thank you.

John Godyn, Morgan Stanley.

I wanted to follow-up on some of the questions about guidance because I've been getting some questions from investors about some concepts in 2013 and how you've thought about them. Three keep coming up. Seasonality in air cargo in the back half of the year, conservativism on military and sequestration, and just thoughts on product launches. Of course last year on seasonality, you guys baked in a normal seasonal uptick in the back half in particular in the fourth quarter and to no fault of your own, it did come in a little bit weaker. Just curious how you're thinking about seasonality in the 2013 guidance. Do you have any impact on sequestration? And do you have any impact from some of these product launches that sometimes create upside to guidance? Just your thoughts there would be helpful.

Sure, John. This is Bill Flynn. I think market seasonality is -- you look back over many, many years, the commercial market I mean, that's a pattern that repeats itself pretty much year over year, quarter over quarter. With some exceptions of course, when we had this huge downturn in 2008, and then when we've had one or another product launch at the end of first quarter, has peaked that. But from the commercial perspective, our guidance supposes a normal seasonal pattern over the four quarters of the year. This last fourth quarter had a peak. It wasn't as peaky as perhaps some expectations were including our own, based just on the sheer number of product launches that were queued up there coming into September and October. But November and December performed reasonably well considering the season.

In terms of the military guidance, sequestration, clearly none of us know if it's going to happen or not. However, we do have troops on the ground. And they need to be supported and they need to come home. And so while sequestration may happen, I think the impact immediately there would be more on systems, on orders, on civilian workforce, at least is what I've been able to read and discern. But 68,000 troops are in Afghanistan. They need to be supported. The president said 34,000 are coming home.

The military does need commercial lift to both support those that are there and remain and bring those home as well as the retrograde cargo. And the withdrawal of 34,000 is fairly consistent with what has been discussed for some time now and generally reflects the kinds of assumptions that we've put into the roughly 8,000 hours of cargo and 10,000 hours of passenger. Question now would be the timing. It seems like most of those troops come home in fourth quarter this calendar year. That remains to be seen. As we gather better intel and updates from the military itself, we'll of course update those numbers on our successive calls, but we did in fact consider a draw down and that's reflected in the 20% or 18% to 20% year over year change.

In terms of new product launches I don't know if we have any better visibility than really anyone else. Samsung and Korean products seem quite strong. Apple is teed up for some successive increases as they look to defend and perhaps gain market share and Microsoft as well. So I think we'll see a steady stream. What we have seen since the beginning of the year was from a seasonal perspective good demand through January leading up to Lunar New Year.

And I would say that's just kind of seasonally stated. It's a very hard year-to-year comparison until we get through February. Lunar New Year last year was January 23. There was a very low level of activity in China from the end of calendar new year through Lunar New Year. The factories really didn't get ramped up, we really didn't see a lot of activity until late February and into March.

So far, leading up to the holiday, seasonably good demand. Yields were in the $3.50 plus which is very good for January or early February timeframe. This is holiday week. We don't have full clarity of what's going to happen coming out of it, but our expectation of reasonably good demand up through quarter end. If that's helpful.

That's very helpful. Can I just follow-up on two things you mentioned? On seasonality, you did mention that last year had a little bit of a peak, just wasn't as peaky. When we think about the normal seasonality that you've baked into 2013's guidance, should we use 2012 as a proxy for seasonality or are you thinking a multi-year average, maybe one that assumes a return to some of that peakiness?

Yes, I think that's probably a good way to think about it but our guidance reflects two things. One, it certainly reflects the seasonal nature of the market and the nature of our flying, whether it's ACMI or in the Commercial Charter market. But it also reflects how we look to schedule maintenance, although maintenance is conditions-based, we look to calendarize and schedule maintenance so that in this weaker demand in the first quarter leading into second, we want to do as many of our checks, as many of our engine overhauls, as well as put our crews through training. And so the other perspective is if you were to look at Atlas over a number of years, 65% to 70% plus earnings in the second half versus the first half of the year is quite a normal pattern for us over many years.

Got it. And you mentioned the idea of visibility. I think the prior question ahead of me just noted that you have more specificity in your guidance this year. You did move to this point estimate $4.65 versus the greater than construct that you used to use. Just thinking through that -- maybe over thinking it, are there reasons to believe that this year you have more confidence in guidance in your ability to issue a point estimate than you have in the past? Or is that just sort of a change in the semantics and we shouldn't read too much into that? Thanks.

A couple things. We provided very granular visibility on the impact of what we called the headwinds. What we're really talking about there in the first instance is the decline in military demand which is not new. This is something we've been talking about for several years on the calls, in our one-on-one meetings and certainly in our investor days, but it has an impact. And we certainly want to illustrate very specifically what that impact is. And then of course the other $0.91 we talked about which is maintenance and some one-time effects. One-time benefits we had for example from tax.

But we wanted to point that out, first of all to show the strength of the model and it gets back I think to the earlier questions of well are the -8's really performing? If they weren't, there's no way we would be able to overcome $2 plus headwinds. It just simply wouldn't happen. But they are. And Spencer, in terms of the point, $4.65 reflects we're in February. It does also reflect the market uncertainty that exists. We've seen some green shoots in demand, but there are green shoots. We're not calling an inflection point at this point. There are other -- hopefully, if political resolve happens -- occurs here in the US to get through the sequestration debate and put some more certainty back in the markets, and similarly in Europe, which are key demand markets for air freight.

Got it. Thank you.

Scott Group, Wolfe Trahan.

Thanks, good morning guys. I want to start with, on the maintenance side, and if you can -- I understand the headwind in 2013. Can you give us any initial thought or sense on how that may look in 2014 in terms of more or fewer maintenance events that need to happen? I guess I just want to understand if this is a one-time-ish kind of headwind or could we be thinking about a similar headwind that we need to overcome in '14? One thing within the maintenance, it looks like line maintenance is down 10% per block hour. Is that something that should be ongoing? Or is that kind of a one-time benefit this year?

Sure. Scott, it's Spencer. Let's see. A few things. For 2013 let's start there. We had talked previously that we had three engine overhauls that's that moved from 2012 into 2013 when we lowered our block hour guidance during last earnings call. And so those three overhauls moved from the fourth quarter of '12 into 2013. And -8's need a seat check every couple of years so our first -8's will need a seat check in 2013, so you see the impact of that. We also put in place the five passenger aircraft. And those will need a seat check this year so that's some of the reason why you see the increase in heavy maintenance.

So just overall our block hours are increasing. Our fleet is increasing. And therefore, line maintenance should continue to increase. On -- you talked about line maintenance per block hour and that has to do with adding more -8's. So they have lower line maintenance requirements early. We added 767's that similarly have lower line maintenance early. So it's a matter of our fleet, changes in our fleet, the larger fleet, the more block hours, and I think you had asked the question about into 2014, so in 2014, those -8's that we placed in service in 2012 will need a seat check. So you should think about that. And then as far as -- as far as engine overhauls, that's really based on cycles. How many takeoffs and landings and so that depends on each and every engine specifically.

So it sounds like there may be more seat checks next year, but it's too early to know if there's going to be more engine overhauls next year?

We haven't yet guided to that. So --

Okay. When would be the first D check on a -8?

Eight years.

Okay.

Yes. So they need a seat check every two years. And engine overhauls at about 5.5 years. And then a D check after eight years.

Okay. That's helpful. And then wanted to talk about the ACMI fleet and the placement there. So in fourth quarter you had 20.5 total ACMI with the -8's and the 400s. Can you give us a sense of what's in the guidance for 2013 with two more -8's coming and the Chapman coming in, should we expect that the ACMI fleet increases by three over the year or are there -- are these net new placements coming or do they replace 400s that might be coming out?

Right. So we're looking to 20 plus units in ACMI this year, Scott. We are not more specific than that. I think it gets back to my comment on the market. And does the market inflect or not this year? That's the number that's at this point embedded in our guidance. More than that, at this point I would say is competitively sensitive as well. So we've got 20 plus in our guidance.

And we'll clarify that obviously as the year goes on.

Okay. I guess just with that can you just talk of is this in terms of the normal placement cycle, on the 400s, is this a normal, heavy or light year and any visibility you have on that?

I think all we've said, Scott, this far is that it's a fairly normal year. As far as placements go.

Okay. And last thing if I can on the military side, do you view this as a good run rate, 2013, or do you see based on the draw downs that we heard yesterday that that could come down again in '14?

Well, that will come down again in '14, Scott. We've been pretty clear about that even in investor days. Our tables showed '14 coming down as well. I guess the variable that we don't know yet is how many troops remain in Afghanistan after '14. And is it 6,000? Is it 20,000? It's always -- demand is boots on the ground based. Right now, current planning calls for about 138,000 troops in the Pacific. Our best sense is between Europe and Central Command, right now it's something like 45,000 troops. That's subject to change.

And then post Afghanistan, the military's discussing this notion of a rotational combat brigades, rotational training. So while reducing some of the number of numbers overseas, the idea is that brigades, groups will travel from the US, go overseas to training locations, spend 90 days there and come back. So that's still an unknown. It's not really defined, sequester and all those things that are deficit reduction that are in front of us, so I think the numbers we've talked about for '14 today I think are the right numbers that we've put out there. I don't have them off the -- just in front of me but it does show a decline from '14. This is obviously in flux and as we learn more from the DoD and from transportation command, which is the customer, we'll certainly advise you and our investors. That's kind of the thinking we have today.

Okay. Appreciate that. Thanks a lot for the time, guys.

Thanks, Scott.

Sure, Scott.

Jack Atkins, Stephens.

Thanks for the time. To start off, if we could maybe just touch on the Commercial Charter segment and we've seen a fairly significant decline in direct contribution profit per block hour there due to the increase in two-way flying for the military. Just curious, to get your perspective on where you think per kilo rates in Charter need to go to get us back to prior levels of direct contribution profit there. You mentioned $3.50 a kilo so far in the first quarter. We're trying to think about the right way to think about where rates need to trend over time there.

Jack, rates are part of it, but it's overall supply demand. And so we need demand to improve. We need the situation in Europe to resolve itself. We need stronger demand coming out of the United States. We need stronger exports out of Asia. All those things would lead to good Charter capacity. I think it's that the demand that is really the key element at play there.

Okay. And then Spencer, just to follow-up on a couple of specific items on the guidance, what are you all assuming around demand for the Dreamlifter/787 in 2013 given the production issues that Boeing has faced or just the issues with the aircraft there? And then what's the right tax rate to use for modeling purposes in 2013?

Sure, Jack. Boeing has more than doubled the 787 production. They've increased the rate from two planes per month to five per month. We are told the program remains on track to further increase the build rate to seven per month in the middle of this year. And 10 per month by the end of this year with a further subsequent increase as we move into 2014. We're obviously aware, as everyone else is, of the grounding of the 787s. We have not seen an impact on the build rate thus far. And as far as Boeing tells us, the production rate that I just talked about is what we're seeing.

And then you asked a good question about the tax rate. And so I think excluding the one-time item that we talked about, I think it's fair to assume in your model about a 38% effective income tax rate for 2013. And then as we talked about, there is this large one-time item that we are currently assessing. And then we'll provide some more updates during the next call.

Okay. Great. One last housekeeping item for me. You had about $6 million in other income in the quarter. Just curious, Spencer, if you could give us any color on what exactly was in that line?

Sure. The big item is the insurance gain that we had talked about. And so we had a flood during Superstorm Sandy at a parts warehouse at JFK. And that storm resulted in some damage at our warehouse. And some damage to both 747-200 classic parts as well as some 400 parts. And we had an insurance recovery that was greater than our costs and our book value and therefore we recorded a gain of $6.3 million. And that gain is in other income.

Okay. Thank you for the time.

Thank you.

David Campbell, Thompson Davis and Company.

Thanks for taking my question. Is there a way that you can quickly give us the average number of aircraft per type that's in your forecast for 2013?

We've said about eight 747-8s on an annualized basis or eight on an annualized basis in my comments, David. We had 21 of the 747-400s and we have 2 747-400 BCFs because we have temporarily parked 1. In terms of the 767 fleet, we're operating three 767-300 passenger planes primarily in military but also in commercial passenger Charter. Five 767-200 freighters that fly domestically for DHL on a CMI basis. Those are at lower hours of utilization as we discussed before.

We will commence flying two new 767-300ER freighters. These are on a CMI basis for DHL and their international routes. We have the LCF, the Dreamlifter, that is increasing through the year supporting the build rate that Boeing has announced of 5 aircraft per month at the beginning of the year, 7 by midyear, 10 by year-end. And that will -- we've said around 100 to 108 hours of flying per aircraft that's built. We have two 747-400 passenger planes that principally fly for the military and do some charters and we continue with the CMI operation that we provided SonAir, which equates to about one aircraft equivalent. That schedule is fairly static. And that's the fleet that we've got deployed in the guidance in operating for this year.

Is it an average of four LGF Dreamlifters? Or less than that?

No. It's less than that. It's less than that, David, because while there are four Dreamlifters and all four are on our certificate, we're flying, as we said, we're at five a month. That's about 550 hours of flying going to 1,000 -- 1,200 hours per month by the end of the year, so it's ramping up. But really only gets to around the four aircraft equivalents as you get towards the end of the year. Full aircraft equivalent as you get to the end of the year.

Okay. Thanks. Last question is a year ago, I think you did better in the first quarter than you expected at the beginning of the quarter and I think that was because of commercial demand at the end of the quarter.

It was, David. That was new product launches in March. March was a very -- March was perhaps the only month in 2012 where the total air freight market showed growth on a year over year basis.

So the likelihood of that happening this year is relatively slim? Or still relatively unpredictable?

I think it's uncertain, David. If you talk to the freight forwards and brokers and other cargo operators, I think all of us are waiting to see the ramp-up that occurs after this week as production can recommence after Lunar New Year in China and Korea and particularly elsewhere in Asia.

But generally, it feels better than it did a year ago excluding new product launches. It just sort of feels better in that region. It feels like business is trending up rather than down.

It does feel better. And that was what I was saying when it's seasonally good demand -- Lunar New Year timing is something that needs to be factored in. And I think what we've said is we've seen green shoots but not necessarily confirming an inflection point yet. But it does feel better. We just need to see how sustained it is and if these political issues that we have here and economic issues here and in Europe resolve themselves. And provide some more certainty to consumers.

Right. Okay. Thank you very much.

Thanks, David.

John Mims, CBR Capital Markets.

Thank you, good afternoon, FBR. Thank you for the more detailed guidance for '13. This is really helpful. Bill, if we start looking first at Commercial Charter, the 33,500 block hours that you've got, an increase of a little north of 50% year over year. I think I'm right in assuming some of that comes from increased round-trip and more back haul that was supplanted by the military one-way business. But can you comment on what that will do to overall yield if you're going back across the pond on a Charter basis?

The reduction in military overall, military cargo demand overall is going to at some point have to affect the market. Because we've had a 10-year period now of high levels of military cargo flying, high percentage of one-way flying as a result of that, particularly in the years really leading up to the last six months. Which positioned a lot of aircraft capacity into Asia as an inexpensive carryover from CENTCOM. That capacity is fundamentally disappearing. A lot of that was 200s and they are getting parked. It's now certainly more 400's but the military demand is just going to continue to contract, so at some point, if the Charter market rates will have to reflect the two-way nature of that flying. And I would expect that at some point yields will have to increase to reflect the positioning flights in because I don't know if I want to call it a subsidy but the effect of that subsidy will be gone. So I think over time that has to recover or be reflected in Charter markets on the transfer side.

Right. Yes. When I think of a per kilo rate basis, you think of maybe the US to Asia being about 30%, 30% to 35% of the Asia to US type of traffic. Do you see that same thing in these Charter rates or are some of these hours just pure deadhead ferrying empty planes to position to be loaded?

Well, for our business and for anybody else who is operating a Charter in a round-trip basis, certainly poll the market to see what cargo's available and look to carry that cargo over. And we do. We're not ferrying dead empties or rarely do that but the other operators would be doing the same. I think demand from the US to Asia is increasing and improving as well.

Our Charter business, though, I think the important thing to point out our Charter business isn't just trans Pacific. We have solid Charter operations into South America which are much more balanced because finished goods are coming south into South America with agricultural and perishable products coming north, flowers and produce and fish. We have good demand into the Middle East particularly supporting oil and resource exploration which we are not saying that one-way flights are gone. Our one-way flights may as the military withdraws, increasingly become commercial one ways into Middle East-Africa and then ferry from there. And we certainly do operate charters as well in and out of Europe. So I think that's another added perspective on our Charter business combined with what I think over time will have to be increasing net yields in that trans Pac market.

Sure. Fair enough. Just as a follow-up on the CMI side of the business, I'm not looking for real guidance here and I know you can't give it even if you really knew -- but when you look at the entire broader pool of potential CMI deals that are out there, number 1, is there any new business wins baked into your assumptions for '13? Or when you look even longer term, over the next three or four years, is the opportunity for ripe closable CMI deals, is that somewhere in the ballpark of 10,000 block hours on an annualized basis or is it more like 20 or 50 or 100? Can you give us some sense of how large the CMI side of the business could become over time?

Yes. Not sure I'm going to guide that specific further out, but look, I think we believe there are real growth opportunities in CMI. A couple years ago, we didn't have any aircraft in CMI and now we've got a real fleet of aircraft in CMI. Our diversification into the 767 platform increases our ability to bring on new CMI customers because I believe there are CMI customers in the 74 platform, as well as now we have the opportunity to serve other customers or more business with current customers in the 767 platform. And I believe those opportunities will grow and we will deliver them as we move through this year and into the next several years. In terms of our guidance, it does not include any incremental CMI placements or opportunities other than what we've described already. The 767s, five 200s and two 300s that we fly for DHL, the Boeing growing run rate that we have in the LCF, and of course the continuance of the goal.

Right. Very helpful. Just to add on to that, then I'll let it go, the 133,000 block hours for ACMI, approximately how much of that is CMI versus pure ACMI?

We haven't provided that level of clarity in the guidance. In particular, we've not done that. The CMI component is a component of our ACMI business for accounting and reporting purposes. We do not break out that segment separately. We don't need to for accounting and reporting purposes. We think that for competitive reasons, we just don't want to show -- we don't need to and also don't want to show the CMI business in that level of detail.

Okay. That's fair. I was trying to get a better sense about revenue per block hour but your fourth quarter in that business is a pretty good run rate going forward? If you balance out the -8 as well as the CMI which comes in at a lower revenue per block hour but a higher return, --

Yes. I think yes. I think you're seeing that. We'll also add two new -8's this year. Obviously -- and so that will play into it. And then we'll have a full year of flying with the DHL 767s that are flying domestically. And then we will be adding the two 767-300s with DHL that will fly internationally.

Okay. That's very helpful. Thank you so much for the time.

Thank you, John.

Ross Taylor, Somerset Capital.

I wanted to get your feelings on a couple of issues. One, there's growing talk that the US needs to actually create an Africa command with troops as opposed to simply headquarters. Is that something that you see an opportunity? You've had conversations with the Defense Department about at this point?

Thank you, Ross. We have had discussions about an Africa Com, or the Africa command, and obviously the discussions and interests got certainly heightened with what happened in Libya and what's going on in Mali. I didn't know that DoD planning is really that clear on Africa Com yet. I was answering a question earlier about military demand. I think there could be an opportunity there. I think military planning just needs to get further clarified on that. The DoD is beginning the process of what they call their quadrennial defense review, the QDR. When that process is completed, that will drive, in their parlance, the requirements that ultimately translate into lift.

I think what we need to understand or what I certainly want to understand better is this notion of the rotational combat brigade which will be an intrinsic part of training going forward and see what kind of demand that will create for both cargo and passengers. As well as understand how many troops remain in Afghanistan post-draw down and also then in the related region Turkey, Kuwait or wherever, plus Europe. And then as we get that, I think will be in a much better position to describe what a post OEF command looks like. That said, I think we're very well-positioned. We have the right mix of freighter aircraft and passenger aircraft, our position with the military, the quality of the service we provide, I think we're well positioned to maximize what opportunities will be there. As we get more clarity around those, we'll be better able to describe them.

Okay. Also in the past there's been some talk about you guys bringing your expertise to the Chinese domestic market not so much as a flyer of cargo but more as a logistics planner and partner. Has there been any moves in that direction?

So certainly we want to look at regional markets and the China domestic air freight market is an important market and should grow quite considerably. Our first moves in the China domestic air freight market have been the two aircraft we have in Titan 737-300 leased to China Postal, 757-200 freighter leased to Shanghai which is part of China Cargo overall. We talked about our growth plans going forward. Titan is certainly a part of the growth plans. One way to participate in China domestic growth is through dry leasing as opposed to operating given the cabotage laws and the restrictions there.

So I think there's a couple of opportunities there. One would be dry leasing. It's not just China domestic. It's China regional. Flows in and out of China, in and out of the market. And a number of the flights that we operate for DHL are in fact intra-Asia flights. Segments of the long haul intercontinental flights that we're flying, segments of the 67 flights that we're operating, and we'll continue to evaluate what opportunities exist in China and/or other regional markets, and the move into the 67 creates new opportunities for us.

And how long -- what type of growth rate would we expect to see and therefore should we assume that you'll put capital into additional 67's?

I think what we've said is we've got -- as we're looking at our capital allocation plans, we're certainly committed to returning value to our shareholders through stock repurchases which we'll be executing this year. In terms of the 67's whether we go out and acquire more 67's or we expand 67 through CMI, I think both could be on the table. And we will certainly look -- I think the other point I made, though, that's important for our investors that if we purchase and as we may purchase aircraft for Titan, our initial plans are to purchase aircraft that are attractive, that yield good returns and already have an existing lead stapled or attached to it. We're not speculatively buying aircraft and we're not going to speculatively buy aircraft for Titan.

Okay. Great. Lastly I'd like to comment on the buyback, you seem to be indicating that you are much more confident and comfortable with the model you guys are operating. And that's allowing you to feel that you should be more aggressive in a buyback. Am I wrong in that read on you?

I think we're very confident in our business model. We've described that. I think we've got several years now of the model performing. Performed in '08 and '09, it performed in 2011 and '12. As the markets contracted we've grown and we've placed aircraft. Spencer earlier talked about this notion of a stress test or a pressure test on our cash balances making sure that we don't -- that we not only have the cash we need to operate the Company but over and above should there be a real economic headwinds, enough cash to run the Company and thrive. We're there. We've modeled what we think our investments need to be going forward, and so over and above that we do have cash available for share repurchases. We are confident that we do and that's why we're moving forward with them at this time.

Okay. Great. I appreciate the vote of confidence you guys have in the model. You and I have had this conversation a lot. I think it's a very difficult model for most of Wall Street to follow and to value.

Thank you, Ross.

Thank you.

And this is all the time we have for questions. Thank you for participating in today's conference call. You may now disconnect.

Thank you, operator. Let me just say I'd like to thank all of you for your interest in Atlas Air Worldwide. We appreciate your participation today and we certainly appreciate your questions and we look forward to speaking with you again soon. Thank you.