Atlas Air Worldwide Holdings Inc (AAWW) 2015 Q3 法說會逐字稿

Good morning. My name is Carol and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter earnings call for Atlas Air Worldwide. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. (Operator Instructions). Thank you. Presenters at Atlas Air, you may begin your conference.

Thank you, Carol, and good morning, everyone. I'm Ed McGarvey, Vice President and Treasurer for Atlas Air Worldwide. Welcome to our third quarter 2015 results conference call. Today's call will be hosted by Bill Flynn, our President and Chief Executive Officer. Joining Bill is Spencer Schwartz, our Executive Vice President and Chief Financial Officer. As a reminder, today's call is complimented by a slide presentation that accompanies our remarks.

If you have not already downloaded or printed a copy of our press release and slides you may do so from our website at atlasair.com. You may find the slides by clicking on the link to presentations in the investor information section of the website. 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 they involve risks and uncertainties. Our actual results or actions may differ materially from those projected in any forward-looking statements. For information about risk factors related to our business, refer to our 2014 Form 10-K as amended or supplemented by our subsequently filed SEC reports. Any references to non-GAAP measures are meant to provide meaningful insights and are reconciled with GAAP in today's press release and in the appendix that is attached to today's slides.

You can also find these at our website at atlasair.com. During our question and answer period today we would like to ask participants to limit themselves to one principal question and one follow-up question so that we may accommodate as many participants as possible. After we've gone through the queue, we will be happy to answer any additional questions that you may have as time permits.

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

Thank you, Ed and good morning, everyone. Thank you for joining us today. Starting with slide 3, we are looking to a strong finish to a strong year in 2015. In line with our earnings framework we expect to deliver significant growth in a full year adjusted EPS. And we are going into 2016 with a stronger fleet, a stronger balance fleet and stronger portfolio of customers. We continue to see good demand for our aircraft and services and as we have pointed out before many of our customers are outperforming the overall market. Our adjusted EPS in the third quarter totaled $1.23. That's up 12% compared with the third quarter of last year.

Both our third quarter earnings and our outlook highlight the impact of the initiatives we have taken to enhance our business mix, and our ability to leverage the scale and efficiencies in our operations. ACMI earnings during the quarter reflected increase in aircraft and block hour volumes. They also reflected higher crew training costs associated with our fleet growth initiatives. ACMI results were complimented by a sharp increase in charter contribution and the underlying strength in our dry leasing business. Charter earnings were driven by an improvement in yields excluding fuel and an increase in aircraft utilization.

These are a product of our diversified global network, quality of service and ability to meet the differing needs of a wide variety of commercial charter customers. During the quarter, we used a portion of the proceeds from our convertible debt offering in June to refinance higher cost EETC debt. This resulted in a charge for the early extinguishment of debt which was primarily responsible for our reported net loss in the third quarter. As we have discussed previously, the benefits from this refinancing are significant and will substantially improve our financial and operating flexibility.

And so will our refinancing of term loans for two of our original 747-8s in late October at substantially lower rates. Spencer will have more about the benefit of these transactions in his comments. During the quarter, we also acquired 1.7% of our outstanding common stock. Reflecting our commitment to shareholder value we have now bought back more than 10% of our outstanding shares over the past three years. We have a remaining authority to repurchase up to $25 million of our shares and we will manage that authority with our desire to maintain a sound balance sheet and to invest in our business for the future.

Moving to slide 4. We expect air freight to grow at a reasonable rate in 2015. As IATA reported yesterday, international air traffic, measured in freight time kilometers, has grown at a 2.7% rate in the nine months through September. We anticipate a solid peak season with a pickup in volumes and yields driven by end of year air freight demand supported by continued e-commerce growth. Slide 5 focuses on our framework for 2015. We are encouraged by our strong year to date performance. We are seeing good demand for our aircraft and services and we continue to anticipate significant growth in adjusted EPS this year.

With a superior fleet in the diversified global network we are well positioned for the peak season and for a typical sequential increase in our earnings in the fourth quarter. Consistent with our prior outlook, we expect adjusted fully diluted earnings per share of slightly over $1.50 for the quarter.

Adjusted pre-tax earnings in the fourth quarter should increase compared with the fourth quarter of 2014. We expect tax expense to be significantly higher than last year due to a benefit of approximately $0.20 cents per share in 2014 primarily related to our tightened dry leasing business. In line with our prior outlook for 2015 we anticipate that our block hour volumes this year will increase approximately 10% compared with 2014, with more than 70% of the total in ACMI and the balance in charter.

Our ACMI outlook reflects expected growth in both 747 freighter operations as well as CMI flying. Our charter outlook reflects the strong presence we have in the global charter market and military demand that continues to hold up well compared with 2014 levels. It also reflects the new 747-8 aircraft that joined our fleet today. We'll use it in charter for the peak season; then we expect it to be in ACMI in 2016. In dry leasing our portfolio is expected to include two 767 converted freighters. One that will join the fleet in December, and one that will join in the first quarter of 2016.

We will also begin CMI flying these aircraft when they enter the fleet so they will benefit the ACMI segment as well. Given expected flying levels, we continue to anticipate that aircraft maintenance expense will total approximately $190 million this year. In addition, depreciation expense should be approximately $130 million, while core capital expenditures, which are mainly for spare parts for our fleet, should total approximately $45 million for the year.

Expenditures for aircraft and engines, including our new dash 8, the 767s we are converting, and several engines, are expected to be around $225 million. This is a good point to ask Spencer to provide you with some additional perspective on our third quarter. After Spencer I will provide a few more thoughts and then we will be happy to take your questions. Spencer?

Thank you, Bill. Hello, everyone. Slide 6 highlights our third quarter results. Our adjusted net income totaled $30.7 million or $1.23 per share. Earnings in the third quarter were driven by our diverse business mix including a sharp increase in charter segment contribution and underlying strength in dry leasing.

On a reported basis results during the period reflected a net loss of $12.8 million or $0.51 cents per share primarily due to a charge on the early extinguishment of debt following the refinancing of higher cost debt with lower cost debt, which Bill noted, and I will talk about in a moment. During the quarter we generated free cash flow of more than $82 million, or $3.33 per share, compared with $55 million or $2.17 per share last year. That brought free cash flow for the nine months of 2015 to $231 million or $9.27 per share. A large increase from $151 million or $5.98 per share in the first nine months of 2014.

Reported results in the third quarter include an effective income tax rate benefit of 49.3%. That reflects the favorable resolution of an IRS exam, as well as our continued reinvestment of net earnings of certain foreign subsidiaries outside the United States. Based on our current tax framework we do not expect to pay any significant federal income tax until 2020, or later.

Looking at slide 7, ACMI revenues during the quarter benefited from an increase in a number of aircraft compared with the third quarter of 2014.

This impact was partially offset by a lower blended average rate per block hour which reflected a mix effect related to increases in 747-400 ACMI, and 767-CMI, flying. Average 747 cargo equivalents during the quarter rose 12% to 21.8 aircraft while CMI aircraft equivalents increased 33% to 15.9 aircraft. We expect to continue to grow our CMI fleet and enhance our business mix. Since we don't own these aircraft the average block hour rate for these planes is less than the average rate for our other aircraft in the segment.

The change in charter segment revenues in the third quarter was primarily driven by the impact of lower fuel prices. This impact was partially offset by an improvement in yields excluding fuel. In dry leasing, revenues reflected a reduction in the number of segment aircraft following our sale of a 737-800 passenger aircraft in the first quarter of this year. Looking ahead, dry leasing revenue should grow with the two 767s that we will be adding to our portfolio.

Moving to slide 8 segment contribution totaled $84 million in the third quarter compared with $80 million in the third quarter of last year. ACMI results were affected by an increase in crew training costs as we hired additional pilots in connection with our fleet growth initiatives and by higher maintenance expense. These were partially offset by a reduction in aircraft ownership costs following the refinancing of higher cost debt related to several of our 747-400 cargo aircraft. Charter's strong contribution was driven by an improvement in yields excluding fuel, higher aircraft utilization and a reduction in aircraft ownership costs.

Results in dry leasing reflected the sale of the 737-800 passenger aircraft that I previously noted. Turning to slide 9, and our balance sheet. We ended the third quarter of 2015 with cash including cash equivalence, restricted cash, and short-term investments totaling $390 million. That compared with $331 million at the end of last year. Our cash position at September 30th reflected net cash of $266 million provided by operating activities during the first nine months of 2015,

net cash of $182 million used for financing activities which included $334 million of outflows per debt payments as well as $20 million for share repurchases, and net cash of $6 million used for investing activities.

Net cash used for investing activities in the first nine months of 2015 primarily related to the purchase of aircraft and engines including our new dash 8 as well as runable spare parts. These were partly offset by proceeds from investments and from the disposition of aircraft.

Slide 10 highlights our recent refinancings of higher cost debt. During the quarter we used approximately $113 million from our issuance of $224.5 million of convertible senior notes at 2.25% in June to retire higher rate, enhanced equipment trust certificates related to five of our 747-400 freighters. The EETCs had a weighted average cash coupon of 8.1%. In addition to reducing our cost of debt, the refinancing reduces aircraft ownership costs, increases fleet flexibility and enhances cash flows. It is also immediately accretive to adjusted earnings per share beginning in the third quarter which has been incorporated in our framework for the year.

We expect similar benefits from the refinancing of higher rate debt on two of the original 747-8s delivered to us in 2011. In October we entered into new term loans that reduced the rates on those aircraft by 284 basis points from 6.37% to 3.53%. As part of our effort we refinanced only the remaining outstanding principal in these aircraft and all other items remain the same. Slide 11 shows that at the end of the third quarter our net leverage ratio, which includes capitalized rents, was 4.8 times trailing 12-month EBITDAR.

That includes the benefit of our remaining investment and our outstanding EETCs. That's down from six times at the beginning of last year and 5.4 times at December 31st, primarily driven by the pay down of outstanding debt and an increase in earnings. In connection with the delivery of our new dash 8 we borrowed $125 million under a 12-year term loan which will not have a significant impact on our leverage. With that, I would like to turn it back to Bill.

Thank you, Spencer. As I noted at the start and as reflected on slide 12, we are looking forward to a strong finish to a strong year in 2015. In line with our earnings framework we expect significant growth and adjusted earnings per share in 2015. With a stronger fleet, a stronger balance sheet and a great portfolio of customers, we are confident about our business as we look to 2016.

We continue to see good demand for our aircraft and services, we have a strong and dedicated team, and we are well prepared to leverage our competencies and market leadership to capitalize on market opportunities and to continue our focus on longer term business growth. With that, Operator, may we have the first question, please?

Certainly. (Operator Instructions). Your first question comes from the line of Jack Atkins from Stephens. Your line is open.

Good morning, guys and thanks for taking my questions.

Hi, Jack.

You know, if we can maybe start off with the ACMI segment. The direct contribution profit was a little bit softer there; you were I think down 13%. Block hours were up 14% though. It sounds like you had some additional costs as you were ramping the new aircraft. Could you walk us through the puts and takes and what was going in ACMI in the quarter and would you expect that to continue?

Sure, Jack, it's Spencer. We think it is important when you look at ACMI that you can't really look at any one particular quarter and make a determination about that segment. ACMI earnings are influenced by customer flying levels, the timing of when maintenance is required, crew costs including training, placements, etc. It is important, I think, to point out as you asked, we expect both a sequential increase in ACMI direct contribution in the fourth quarter of this year, as well as an increase over the fourth quarter of the prior year.

So we don't expect this trend to continue I think is the important point. Crew training, as you pointed out, you are exactly right. We have been growing our ACMI segment as you know and in order to achieve that growth we needed to add more crew and therefore we incurred some crew training costs of generally a short period of time to catch that up. Once operations start, there is crew training that's required. We saw the impact of that on ACMI. We also saw an increase in maintenance expense in the third quarter versus the third quarter of last year. Those things had an impact. But again, that happens from time to time. We don't expect that to continue.

Thank you for that additional color there. Bill, you noted in your prepared comments -- it was also in the presentation -- that you are confident about 2016. Could you maybe give us a little more color on what that means for the directionality of earnings? There's some puts and takes this year. You had the very strong first quarter because of the West Coast ports. Then you have planes coming in the back half of this year (inaudible) as well as interest expense. Could you walk us through some of the puts and takes which could be driving earnings next year?

In terms of the detailed color that I think you are asking for, we will provide that on our full year earnings call when we report in February, but a couple of things. I think it is important first of all to step back and think about the model, and I will build on the comments that Spencer just described in the ACMI question you had. Our core business is ACMI. 70% of our flying. ACMI and CMI. As we look forward we think there are good opportunities to grow ACMI and CMI, and that model performs very well and has performed well for us.

If you look at our charter contribution in this quarter, there was a lot of negative sentiment in that market, yet we had a very strong charter performance this year, in that market. So, I think it should tell the story that we are able to take our assets, put them to work, identify the customers, build on solid long-term relationships with the key freight forwarders and charter brokers, and drive a good, solid result in charter. And then as you look to dry leasing, that has the annuity-like performance to it. Our confidence stems from that, Jack, that we have the right assets. That we can move our assets between ACMI and charter as makes sense.

That we have a stronger fleet. We have the new dash 8. We have more CMI operations as we will take on two more at the end of the year. And as I said there is growth available to us in both. If they are the right opportunities in our tightened dry leasing business we will do those. I think it is the platform we've built, the impact of the scale and efficiencies that we have. And as Spencer talked about, there certainly is going to be the benefit of the lower financing costs given the recent transactions that we have been able to enter into.

Thanks again for the color and I'll jump back in queue.

Thank you.

Your next question comes from the line of Helane Becker, from Cowen. Your line is open.

Thanks very much, Operator. Guys, thank you very much for the time. So my question is really with respect to the peak shipping season. And maybe you just answered this, but you guys seem to be seeing better results than your peer group, and I'm wondering if that's the strength of the fleet specifically, or how you're outperforming everybody else?

Well, thank you, Helane. A couple things. When we look at the charter market, revenues appear somewhat off compared to prior year, but we really need to think about fuel because there is an offset in fuel as Spencer talked about. So far this year when we net out that fuel difference in our charter business, we are seeing rates that are equal to or slightly better than prior year. So the question then is, as you are looking forward to the fourth quarter, what is our sense of how that is going to be in the fourth quarter? We are now into November and so we have October behind us.

Where we are with our charter fleet and with our charter customers, we are essentially sold out for the year. We have reserved some capacity that we feel confident we can sell but we want to see how much more yield might be out there available to us. Coming in through October our net yield 2015 over 2014 is equal to or better than. So we think we are well positioned for this peak. It is like anything as we talk about our portfolio of customers. It is certainly our ACMI and CMI customers, but it's also our freight forwarders and charter broker customers.

We have programmed charters in place; we have long-term relationships with them. You saw the numbers that we talked about: we are looking to slightly better than $1.54 for the quarter. Somewhat in the face of that $0.20 tax headwind that Spencer talked about.

Right, okay. Thank you. I just had one other question with respect to pilot crew training. Is that behind you now so that headwind won't be there in the fourth quarter, or does that still continue into next year?

So, you know, we always do recurrent pilot training. Our pilots come back to the schoolhouse for their recurrency. But, in this context we have had to hire an increased pilot workforce because we have taken on more aircraft. We had to hire in advance of the delivery of the dash 8s. We need to hire in advance and train in the context of the two 767 CMIs. And we have been operating at a higher ops tempo, a higher daily utilization than we had before. We needed to hire additional pilots for our existing fleet over and above the ones that are -- the deliveries just because of the higher ops tempo that we're experiencing in the fleet. That can be lumpy. When the aircraft come in, as three aircraft are coming in roughly about the same time, that's a bit lumpy. We did have to bump up crew training. That will normalize going forward.

Great. Thank you for your help. I appreciate it.

Thank you.

Your next question comes from the line of Scott Group, from Wolfe Research. Your line is open.

Hi, thanks. Good morning, guys.

Good morning, Scott.

So just I know you gave some initial kind of color about 2016 but I want to ask a couple additional items. Any initial view on how we should think about maintenance expense next year given the bigger fleet? And then, when do you think is a realistic timeline to have the dash 8 placed in ACMI service?

Sure, Scott. With regard to 2016, as Bill said, we will provide a more detailed outlook and framework, as we typically do, during our February call. At this time of the year we are still going through, finalizing everything for 2016, so we are not in a position yet to talk about maintenance for next year. That is obviously one of the big variables for next year. But as Bill pointed out, we are confident about 2016. We will have an additional dash 8, we'll have two more 76s. We will have lower financing costs. We added a 747-400 during the year so we'll have a full year of that next year. So we are feeling good as we go into 2016. So I haven't answered your maintenance question. We need to do that during our February call. The second part of your question, I'm sorry was?

Just when you expect to have the dash 8 in the ACMI.

Sure. Sure. Sorry. The dash 8 we took delivery today, and that dash 8 will operate for us in our charter segment initially. There aren't many dash 8s operating the way we do in our charter segment, so that aircraft does really well for us. So we are excited about placing that dash 8 in charter. We will take advantage of that. We expect longer term that the aircraft sometime during 2016 will be placed in ACMI. But we are not that concerned about it. It's going to do really well in charter and it will find a home like our other dash 8s. All nine of them placed very profitably with long-term customers and ACMI and so will this dash 8.

Perfect. And just last question, just want to make sure I understand the commentary on the fourth quarter guidance. ACMI profitability should be improved year-over-year. Charter it sounds like with yields that are flat to up ex-fuel and just lower fuel, charter contribution should be positive year-over-year and we have the lower interest expense and kind of the only offset there is the higher tax rate? Are there any other big moving parts we should be thinking about that explains kind of the slight drop in earnings you guys are talking about? Is it just the tax rate or is there anything else there?

Good question. As Bill talked about earlier we expect pre-tax income will be greater in the fourth quarter of this year than the fourth quarter of last year. All of our segments, the earnings should be improved over the prior year. So on a pre-tax basis. That's the thing to focus on and that's a great thing. We expect ACMI will be up. As I said, I agree with you. We expect to see charter up. Dry leasing will be pretty similar, but perhaps could be slightly up. We have the $0.20 tax item that we've talked about and that relates to a benefit that we recorded in the fourth quarter of last year related to our tightened dry leasing business. We got a lower tax rate in Singapore. It went from 17% to 10%.

That was a one-time benefit to catch up with that rate. We obviously won't be seeing that in the fourth quarter of this year. I think the key things for the fourth quarter of this year is last year during the fourth quarter we had a bit of an impact from the start of the West Coast port disruption. So prices were starting to increase as a result of that. Maintenance expense should be lower in the fourth quarter of this year. We expect that volumes should be up during the fourth quarter of this year and we are placing the tenth dash 8 in service and we have the additional 400 that we talked about.

Fuel decreased towards the end of last year but it is decreasing during the fourth quarter of this year as well. And so you put all that together. Pre-tax income we think will be higher. We certainly expect pre-tax income will be higher. We are harmed a bit by the tax benefit we enjoyed in the fourth quarter last year.

Thank you, guys.

Thank you.

Your next question comes from the line of Bob Labick, from CJS Securities. Your line is open.

Good morning.

Welcome back, Bob.

Thanks. Happy to be back. Wanted to focus a little on ACMI. You mentioned earlier the revenue per block hour was shifted by a mix towards CMI, which helps in return on assets and things like that. But on a go forward basis can you give us a sense of is this the normal mix going forward? How should we think about revenue per block hour as additional fleet moves happen over the next few quarters?

Sure. Looking at the rate per block hour during the third quarter as you said there was a change in mix. We had increased CMI flying. Our aircraft equivalents were up four aircraft, over 30% above the third quarter of 2014. So we went from a little over 12 to a little over 16. We have been growing our CMI business which naturally has a lower rate per block hour because we don't own the aircraft.

We have continued to grow that, and the rate per block hour is also highest for dash 8s, so in periods when we add more dash 8s than other small aircraft type, the rate per block hour generally goes up. And in periods when we add more 400s and 767s, in periods when more of those are added to ACMI, the rate per block hour generally goes down. It really is a mix affect. And it depends what is happening during any particular quarter. We are not all that concerned about it because we understand the mix impact, but I know it is something you all look at. But again, when we are adding four aircraft, growing our CMI business by 30% in a particular quarter, it is something we expect to see.

Great. And then just maybe shifting to capital allocation, obviously you bought some stock during the quarter. You have very substantial free cash flow. Can you talk about medium term capital allocation goals, the balance between repurchases, more aircraft, and then the desire to continue to grow CMI at the same time, which doesn't require as much capital?

Love CMI, yes. When it comes to capital allocations we try very hard to have a balanced approach. Our cash prioritization continues to be three primary areas. We want to maintain a strong balance sheet and have a strong cash balance. We want to continue to invest in assets that our customers want that are modern, efficient aircraft that our customers want, and then we also want to be able to return capital to our shareholders. So we really have been focused on trying to do all of those, and we know it is very difficult to please everyone, but we have been trying to do all those things. Our cash balance is very, very strong. We have been paying off debt. Our net leverage ratio has been declining.

We recently purchased, added a dash 8 today; we're adding two 767s that will soon come out of conversion. We continue to look at additional other aircraft if they make sense for our business. And as we talked about and as you just said, we repurchased over 10% of our Company back in the last few years. So from our view point we think we are being very balanced when it comes to capital allocation.

Thank you.

Thank you.

(Operator Instructions). Your next question comes from the line of Jack Atkins, from Stephens. Your line is open.

Great, thanks for taking my follow-up, guys. I was curious about the military business and your outlook for that over the next 12 months. The new military fiscal year just started. Can you give us some insight into your expectations there?

Yes, sure, Jack. This is Bill. As we talked about at the one or two of the calls before that we saw military demand stabilizing, and that's essentially as we see it today. The hours this year will meet our expectations which is a high rate of flying than we had in 2014. And we think the level we are at now in 2015 will continue through 2016 at least.

Okay, Bill. Thank you for that. On the housekeeping side, Spencer, what exactly should we be modeling for a tax rate in the fourth quarter, just so we have that number?

I can give you what we expect for the full year.

What's assumed in the fourth quarter guidance I guess?

I don't have that at my fingertips. For the full year on an adjusted basis we expect a 28% tax rate.

No, that's fine. We can back into that. That's fine. And then in the dry leasing business it looks like with the 767s you are going to have dry lease through Titan and then you're going to have a CMI in the ACMI segment. Why break it out that way versus having it all in the ACMI segment which you do for the 747s?

Sure, thanks, Jack. So two things. It is important to bear in mind that of the two that are delivering one will be fairly late December and one will be January. So in terms of the impact, the majority of that impact or that impact really is a 2016 level. The reason we've bifurcated the two here is because they are two different contracts. The contract on the aircraft in Titan is much longer term, and the CMI is a shorter term contract.

Makes sense. Thanks again for the time.

Thank you.

Your next question comes from the line of Scott Group, from Wolfe Research. Your line is open.

Hi, guys, thanks also for taking the follow-up. Just a couple of things, Spencer, just for the model. With the latest round of financing, how should we think about interest expense and the capitalized interest lines going forward?

Sure, Scott. Capitalized interest we really don't have very much of that anymore. That's very, very minimal. There is a tiny amount here and there sometimes for a capitalized engine and that sort of thing. Otherwise, that has really gone away. It is a much bigger item when we had the big dash 8 order coming. But with regard to interest expense and interest income we paid down higher yielding debt, about $155 million that had an effective interest rate, a book interest rate of about 13%, a cash coupon rate of 8% and that interest goes away which is terrific.

We took on the convertible and that's $224.5 million. That has a rate of 2.25%, and so we will add that interest expense. And the pass-through certificates we have, some of those got paid off as a result of us paying off the EETCs. That was approximately $90 million and we lose that interest income. All of that nets to approximately for 2016 about an $0.18 benefit to earnings after tax.

That's helpful. On the military question that Jack just asked, did your team share change at all in the new fiscal year?

We are actually not in the new fiscal year yet even though you would think we are. The FY15 contract was extended through the end of this calendar year, Scott. So, the FY16 military contract is only going to be nine months, January 1 to October 30, and that has to do with some different considerations that the military had. We are at about a 58% entitlement for both cargo impacts. That's pretty stable to where we were. That has not moved very much this year nor next. But it did 2014 into 2015.

Perfect. And lastly as we think about 2016 is that a normal year from a typical placement in ACMI or higher than normal, lower than normal?

It is a normal year, Scott.

Perfect. Thank you, guys.

All right.

Thank you.

Your next question comes from the line of Nathan Hong, from Morgan Stanley. Your line is open.

Hi, guys. Thanks for taking the question. I kind of just wanted to ask you about Asia I guess more specifically on China. Clearly, I think we are still seeing growth in the region though of course at a slower pace. So I was wondering how Atlas is positioned from that perspective. Can you actually talk about if there has been any changes as to how you are flying across your network in response to the slower growth out of Asia?

So a couple things. In terms of our ACMI customers because that's their networks, their networks continue to operate as they think makes best sense for them. DHL, our largest customer, has increased its capacity in and out of China. It increased its capacity on the ACMI operation that we operate for them in both Trans Pacific and intra Asia. DHL continues to have very strong volume and earnings growth and I'm sure they will talk about that when they provide their next call. Quantas has talked about growth in their cargo business. We operate a Trans Pacific network for Quantas from the US into Australia, north to China. And then a Trans Pacific eastbound network for them.

Etihad has talked about growth in their business and their business and the networks we fly for them under ACMI certainly include Hong Kong and China. And BST, who is a Chinese freight forwarder and for whom we operate a dash 8, while not publicly traded, is certainly growing and expects to continue to do so in this export-led economy. Our charter growth in this third quarter, our third quarter charter growth, the military contribution was stable year-over-year. So the growth in charter was commercial and that was predominantly Asia. When we say Asia we mean Hong Kong and China for the most part.

I think we are very well positioned. We are positioned with our ACMI customers. Most of them are public and they talk about what they are doing and how they are growing and how they are positioning. And then of course our charter numbers are not exclusively in and out of Hong Kong and China, but largely because that's where the largest freight market is.

That's great color. And maybe for Spencer, just a quick question on your leverage ratio. Obviously you have done a great job at taking that down over the years. I'm just wondering if you could give us your updated thoughts on where you think leverage can go going forward and whether or not you have a target out there? Thanks.

Sure, Nate. I guess perhaps selfishly I just want to point out that not all debt is created equal. In looking at our debt it is really, really low rate debt. It is generally collateralized by a modern efficient aircraft tail. I understand that we all as financial people are focused on these things. I just want to point out our dash 8s are financed, all 10 of them have a combined rate of about 2.8%. That's debt that you and I would take any day of the week.

We have continued to un-encumber our 747-400s with a big pay down. We took on 2.25% debt to do that. I think that's really a very smart transaction. I stand behind that. I realize it is a little selfish and biased, but not all debt is created the same. We have continued to lower our net leverage ratio. So for us it really depends on what makes sense for the business. We will take on additional aircraft.

We will take on debt associated with additional aircraft when and if it makes sense for our business and when we think there is an appropriate business case to take on the additional aircraft. We've been very fortunate that the financing markets really understand the strength and the quality of our business and our earnings and the credit that we are.

I think that shows through and all the recent financings that we have done. We are comfortable with our leverage, and we look at it on a plane by plane basis. We don't have a target. We look at it on an acquisition by acquisition basis. We look at the NPV and the IRR for a particular aircraft. Will it be accretive to EPS? Who is the customer? Is it a good investment? Does it contribute to our overall strategic goals? Those are the kinds of things that we look at. I know it is a long winded answer, but we don't have a sort of specific target.

That's great color. Definitely appreciate your time. Thanks.

Thank you.

Your next question comes from the line of David Campbell, from Thompson Davis and Company. Your line is open.

I'm a little behind because I was late getting on the call and then I got disconnected, and so I have been on and off the call. There's a couple things I wanted to know about and first of all the seasonal peak in your opinion, is it as strong as a year ago beginning in late September?

We are definitely in peak season, David. We talk a bit about yields leading up to where we are now earlier on the call. Maybe you heard it or not, but when we strip out the fuel impact, the yields that we have been experiencing so far are equal to or better than last year. That's Atlas, our charter business. That's what we are talking about. We expect that to continue through the balance of the peak for Atlas. There is a peak.

We are certainly experiencing a peak. Others may not or haven't felt it yet, but we are. And net of fuel, we are seeing yields equal to or better. There may be a little bit of tapering in December and that tapering on a year-over-year basis would only be a result of -- that's when the West Coast port stoppages first started to be felt and fuel was dropping and as a result of that, yields were a bit higher, I think.

Overall we are in peak and that's informed an earnings framework of slightly better than $1.50 that we've put out there.

Yes, well the $1.50 includes a higher tax rate. What's the tax rate expected in the fourth quarter?

Sorry, David. I don't have it at my fingertips and someone else asked the same question. The adjusted tax rate that we expect for the full year is about 28% for the full year.

28%? I can figure it from that.

I think on a quarter over quarter basis Spencer you talked about a $0.20 per share benefit that we had in Titan last year? That's part of that tax headwind.

I picked up that you are getting a new dash 8. Is that an 8 that you bought from somebody else?

That's a new dash 8 that delivered this morning from Boeing.

That's in ACMI?

We said that we are putting it at the charter right now because very strong yields. We will enjoy very strong yields on that dash 8 in charter and then next year we will put it into ACMI as we have all of the other nine aircraft. The arbitrage here is to use it in charter right now.

Sure. Definitely a time to use it now. That's a very good use of the plane. Spencer, you mentioned something about $250 million of new debt, new convertible debt? I must have misunderstood that.

David, in June we issued $224.5 million of convertible debt at 2.25%. We used the vast majority of the proceeds of that issuance to pay down EETC debt. We refinanced 8.1% debt with 2.25% debt, essentially.

I remember that now. I remember that. Can you estimate interest expense in the fourth quarter?

I took Scott Group earlier through that map. I can take you through it later. I don't want to take everyone's time on that. I went through the puts and takes earlier with Scott.

Like I said, I was in and out of the conference call.

That's okay. I can do it with you later.

I will let somebody else have it. Thank you.

Thank you, David. Hope you are feeling better.

I am feeling better. Thank you very much.

Your next question comes from the line of Steve O'Hara, from Sidoti and Company. Your line is open.

Hi, good morning. I am joining the call late as well so if somebody has asked this already I apologize. Just maybe on the free cash flow outlook for 2016, based on deliveries you have currently planned it would seem, I believe which is minimal at this point aside from maybe the 767, but I think that was already purchased. It would seem like you have a pretty good free cash flow run rate going into 2016 even if you have a tougher comp in 2015. Is that the right way to think about it?

Sure. We will obviously talk more about 2016 during our next earnings call. The types of things I think that will play into that, if you take a look at our free cash flow for the nine months this year it is up tremendously over the prior year.

It is 927 year to date versus 598 year to date this time last year. So it is growing tremendously. I think some of the things to think about as we go into 2016 and we will obviously talk more about it during our next call, Lunar New Year is a bit earlier next year, see what impact that has. We have an additional dash 8 which we've talked about. We're taking delivery of today and we will have a full year of enjoyment with that aircraft next year. We are taking on two 767s that we will have both being dry leased as well as operating at CMI. Those are additions for next year. We have the lower financing costs that we've talked about. We brought back a 747-400 during this year and so that will operate for a full year, next year.

We don't have the benefit of the West Coast port congestion in 2016, presumably. And we had some Titan return conditions that we enjoyed this year that presumably we will not have next year. And then maintenance, we will see how that plays out. We're in the process now of determining what we think maintenance will look like next year. And so we don't have a number on that yet. Those are the types of things to think about as we head into next year.

When it comes to free cash flow we've been pretty pleased with what we're generating.

Okay. So it sounds like 2016 headwinds thus far that you're willing to go into are more benefits that happened in 2015 rather than issues with 2016.

Absolutely. Yes. We completely agree with that, Steve.

If you talked about this already, I'll just wait for the transcript. On the 7-400s versus the dash 8s, did you talk about your plans in regards to the newfound fleet flexibility and maybe your desire over the next few years to transition the fleet?

We're taking the test. We're really excited to have it. The aircraft are performing very well for us which means they're performing very well for our customers. Even in a period of much lower fuel cost, frankly, that really tees up the dash 8 very well for our customers. We believe we have growth in our ACMI business and that means growth with the 747-400 pure factory freighters. Over time, if we continue, and as we would continue to take on more dash 8s there's an inflection point where we would begin to move 400s out of the fleet. It's not one for one. It's not always an additional add.

There's flexibility with the EETCs or the convertible debt and the retirement of these EETCs greatly enhances our ability to do that where and when it makes sense. And then, just another aspect of fleet flexibility that we didn't talk about, I think there was some concern when we brought back one of our BCFs from parking. And then we shed another BCF but brought one back at the same time under much more flexible terms.

Those have been a key part of driving the results that we've had in our charter segment. BCFs go in the charter, they're very flexible, we could park if we need to. We can return if we want to. But that's been a key part about having that capacity available to us in this past quarter, the third, this current quarter, the third. We'll manage. That's some real flex in our fleet as well. There's short term flex and these two BCFs which are very good for charter. And then the mid-term flex around the 400s now that we've addressed the EETC overhang, if we want to call it that. And it gives us better options to think about the fleet going forward.

Okay. Thank you very much.

Presenters, we have no further questions. At this time, I will turn the call back to you for any closing remarks.

Thank you, Carol. Spencer and I would like to thank all of you who are on the call today for your interest in our Company and for your questions. We very much appreciate your sharing time with us today and we look forward to speaking with you again soon. Thanks.

This concludes today's conference. You may now disconnect.