Air Transport Services Group Inc (ATSG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Second Quarter Air Transport Services Group, Inc., Earnings Conference Call. My name is Steve, and I will be your Operator for today. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Joe Hete, Chief Executive Officer and President. Please proceed.

Thank you, Steve. Welcome to our Second Quarter Conference Call. I am Joe Hete President and Chief Executive Officer. With me today are Quint Turner, our Chief Financial Officer; Joe Payne, our Senior Vice President; and Rich Corrado, our Chief Commercial Officer.

We released our Second Quarter results and filed our 10-Q with the SEC last evening. Both are on our web site, ATSGINC.com. The results we announced yesterday validate our overall strategy of delivering strong cash flow from long-term commitments, such as our new agreements with DHL, with reduced leverage and highly valued, converted medium wide-body freighter assets.

Today we have less risk on our balance sheet, more earnings and cash flow from long-term contracts, and more go-forward opportunities than we've had before. I look forward to sharing some of that profile with you, and how we believe it represents unrecognized value, in a few minutes.

First, Quint Turner is going to review our second quarter results. Quint?

Thanks, Joe. And good morning, everyone.

As always, I need to start by advising everyone that during the course of the call, we may make projections or other forward-looking statements that involve risks and uncertainties, and our actual results and other future events may differ materially from those we may describe here. These forward-looking statements are based on information, plans, and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in the underlying assumptions or factors, new information, or future or other changes.

These factors include, but aren't limited to, changes in market demand for our assets and services; the timely completion of 767 freighter modifications, as anticipated under our operating agreement with DHL; and our operating airlines' ability to maintain on-time service and control costs. There are also other factors that are contained from time to time in ATSG's filings with the U.S. Securities and Exchange Commission, including our annual report on Form 10-K and the Form 10-Q for the second quarter, which was filed last evening.

We may also refer to a non-GAAP financial measure, EBITDA, which management believes is helpful to the investor in assessing ATSG's financial position and results. This non-GAAP measure is not meant as a substitute for the GAAP financials, and we advise you to refer to the reconciliation to the GAAP measure, which we have included in our second-quarter news release, which can also be found on our website.

The second quarter was a significant transitional period for ATSG and its investors. Our new business agreements with DHL that took effect at the start of the quarter have unlocked the value and earnings potential of our DHL-dedicated aircraft assets by separating them from our aircraft operating agreement; the Crew Maintenance & Insurance, or CMI Agreement.

Seven-year leases for 13 Boeing 767-200s deployed in DHL's U.S. network, plus a five-year CMI agreement that includes provision for our maintenance subsidiary to maintain those aircrafts for the next three years, replace uncertainty with confidence about our future relationship with DHL.

We believe that, taken together with the considerable growth opportunities ahead of us, these fundamental changes in our business make a compelling case for a higher multiple over earnings in our stock price, benefiting both the company and its shareholders.

Pre-tax earnings from continued operations rose 61%, to $15.9 million, as we implemented our new agreements with DHL. Net earnings from continued operations were up 45% year-over-year, to $9.9 million, or $0.15 per share.

Discontinued operations lost $200,000 after income taxes, versus a gain of $1.3 million in last year's second quarter when we were still operating DHL's domestic sorting network. We expect discontinued operations to diminish going forward.

EBITDA from continuing operations increased 11% over 2009's second quarter, and 15% from the first quarter, to $42.2 million. This non-GAAP measure of financial performance shows the cash-generating strength of an asset-intense business like ours. A reconciliation of second-quarter and year-to-date EBITDA to GAAP earnings from continuing operations appears on our second-quarter earnings release and on the website.

Revenues from continuing operations declined by 14% to $160.1 million from last year's second quarter, mainly because of our restructured operating role with DHL and lower employee benefit reimbursements from DHL than those made in the second quarter 2009, when we were rapidly downsizing our workforce.

Cash flow provided by operations for the first six months rose 36% to $59.5 million, helped in part from DHL payment of receivables owed to ABX Air.

We furthered our strategy to improve our balance sheet during the quarter, reducing debt by another $44.2 million. We contributed $26.3 million to our pension plan and paid down our revolving line of credit by $18.5 million, bringing the revolvers' outstanding balance down to zero.

As previously agreed, we paid down $15 million of the promissory note owed to DHL upon the completion of the put sale of ABX Air's DC-9 and Boeing 767 freighter aircraft during the quarter. Proceeds received from the aircraft put sales for the quarter totaled $29.7 million.

As I've explained before, the remaining balance of the note owed by ABX Air to DHL, which was $29.5 million at the end of June, will be amortized on a monthly basis, so it is extinguished at the end of the initial five-year term of the operating CMI agreement, without requiring cash payments. During the second quarter, $1.5 million was extinguished from the promissory note.

Lowered debt and interest rates decreased interest expense for the quarter by $2.6 million, compared to the second quarter of 2009. The variable interest rate on the company's unsubordinated debt was 3.2%.

We made segment-reporting changes this quarter to reflect our new business structure with DHL. We report operating results under two segments now, ACMI Services and CAM Leasing. All other operations are reported under Other Activities.

Lease revenues generated from the Boeing 767 Freighters operated in the DHL domestic network now fall under the CAM Leasing segment. The revenues generated by the CMI Agreement with DHL are reported under the ACMI Services segment.

Pre-tax earnings from CAM Leasing was $9.8 million, up $4 million from the same period a year ago, reflecting 13 additional aircraft under lease since June 30, 2009. Seven Boeing 767-200 aircraft were leased by DHL at the beginning of the quarter, and two more by the end of the quarter, and a tenth in July.

Also in July, CAM delivered a second Boeing 767-200 to Amerijet, bringing to 15 the number of aircraft CAM has leased to customers external to ATSG, including five outside the DHL network. That brought the total number of CAM-leased aircraft to 53 at the end of the quarter, including 13 aircraft leases outside the company, up from four a year ago.

ACMI Services revenues were $138.8 million, down $36.2 million from the second quarter of 2009. Revenues generated by the DHL agreement fell $57.5 million, based on removal of the aircraft lease component and transferring it to CAM, and because of significant year-earlier reimbursements for employee severance and retention benefits. The decline in revenues was offset by a 12% increase in block hours flown, including increased hours operated for our customers in Europe, the Asia Pacific region, and the Caribbean.

ACMI revenues also included $2.6 million for ABX's short-term agreements with DHL for 767 aircraft supplied under bridging arrangements, pending mods and execution of leases for the remaining 767's required for their U.S. network. In the second quarter 2009, similar short-term arrangements with DHL generated revenues of $3.7 million.

Pre-tax earnings for the segment were $4.1 million, off approximately $200,000 from the second quarter of 2009. Again, the decline was mainly due to the shift of DHL-related revenues from ACMI Services to CAM.

Revenues from other activities in the quarter were $22.7 million, up 69% from $13.4 million in the second quarter 2009. Pre-tax earnings from this segment were $3.8 million, up from $2.1 million from last year's second quarter. The favorable results reflect increased revenues from facility maintenance services, lower costs associated with our U.S. Postal business, our aircraft maintenance business, and gains from lower post-retirement obligations and lower overhead costs.

Capital expenditures for the first six months of the year were $58.3 million, compared to $31.4 million for the first half of 2009. We completed modification of three aircraft in the first six months of 2010, compared to two in the same period last year. The breakdown for capital expenditures included $43.8 million for the modification of seven aircraft, $11 million for heavy maintenance, and $3.5 million for other equipment costs.

We continue to project total CapEx for all of 2010 at $114 million.

Our effective tax rate for the quarter was 37.6% compared to 30.7% for the second quarter of '09. We reported a deferred tax benefit of $700,000 in the second quarter '09.

Again, we don't expect to pay federal income tax until at least 2013, other than certain alternative minimum taxes based on our deferred tax assets.

Now, I'll turn the call back to Joe Hete for his comments. Joe?

Thanks, Quint.

The earnings pace and balance sheet foundation that we're now on is dramatically stronger than a year ago, as Quint described. The real news, however, is not so much about how well we're performing now, but whether what we're delivering is sustainable over the long term.

The answer to that question is "yes". I'm confident the second-quarter results are sustainable, and I expect to see us build upon them moving forward. Let me tell you why.

Unlike our former profile, ATSG's results will increasingly be driven by our CAM Leasing business, whether through aircraft placed with one of our three airlines or to customers external to ATSG. That new profile gives us a steady stream of cash flow for extended lease periods, typically five to seven years, against our relatively low-cost yet growing wide-body freighter asset base. This assures investors that their capital is not just well protected, but will also be earning strong returns over time.

That does not suggest that our airlines or other businesses will fall behind. In fact, our results from the operating portion of our DHL relationship, the CMI Agreement, achieved our expectations for the quarter, which we indicated could return margins greater than the 2% to 3% we earned under the old agreement, assuming we met our service-quality targets.

Our other operations in ACMI Services also achieved targets and are on track to do even better in the second half, thanks in part to the implementation of the full terms of the Collective Bargaining Agreement at ABX Air on April 1, and also an amended CBA with our Capital Cargo International Airline flight crews that we reached last week.

As you know, ABX Air began the quarter by transferring seven of its 767 freighters to CAM, which in turn leased them to DHL, consistent with our goal of unlocking aircraft values through direct leases. In addition, four other ABX Air 767s that had previously been earning ACMI returns at ABX Air, subject only to depreciation expense, were also transferred to CAM and then leased back to ABX Air at higher market lease rates.

Those transfers had the effect of maximizing CAM's margin and reducing ACMI Services margin by about $1.4 million during the quarter. We think that approach makes good sense because it reflects the real-world alternatives we have for deploying our aircraft within our own fleets or our customers' fleets, and will help us to make the best allocation decisions in the future.

Our results in other activities, as Quint mentioned, reflect not just the solid performance of our operating businesses in maintenance, postal services, and facility maintenance, but also the positive effects of lower overhead, as well as reductions in our post-retirement obligations.

The new DHL contracts have impacted us in ways that aren't necessarily apparent from a simple run-down of their terms. They have removed the confining limitations of cost-plus returns with market-rate, market-reward structures, for both our aircraft and our operating services. That framework has already had a significant effect on how our businesses and our staff manage and work together to minimize overhead and maximize returns and customer satisfaction.

Safety and service remain top priorities, but keeping costs in check and seeking out opportunities for complementary support services is clearly a company-wide mission as well.

Across ATSG, more than 85% of our consolidated second-quarter revenues, and a similar percentage of our EBITDA, came from either contracts with remaining terms of three years or more, or from short-term renewable agreements with customers we have served for three or more years.

That level of future cash-flow predictability, coming at the same time as our loan balances and benefit obligations are declining, suggest that we can generate low-risk growth for years to come, absent another dramatic change in the economy or other unforeseen issue.

As revenue diversification remains a priority, we remain focused on expanding our relationships with customers in growth markets all over the world that need what our 767s can deliver. The longer range of our 767-300s is expected to give us new and expanded market opportunities along routes like Miami to Brazil, China to Australia, and transatlantic routes like those we're serving for TNT.

Based on our projected investment in these aircraft, we fully expect to be able to deploy them at rates that deliver the double-digit, unleveraged return on capital that we have targeted for our 767-200s.

As others expand their fleets of large freighters, primarily for economically sensitive trans-Pacific and Asia-to-Europe service, our focus will remain on providing 767 aircraft, along with options for an array of operating support, to customers in rapidly-growing, regional air-cargo markets. We can customize a dry or wet leasing solution, depending upon the specific opportunity, with a menu of service options unique in the market.

Customers for our aircraft and services will include those airlines in growth markets around the world that remain relatively inaccessible by train, truck, or ship, and that depend on spoke connections feeding into the world's largest air-cargo hub airports like Hong Kong, Frankfurt, and Miami.

We think that those regional markets are underserved today, or served with older, less-efficient aircraft that are prime candidates for replacement. They are the focus of our ongoing marketing and business-development efforts aimed at achieving the most profitable placement of the 13 additional 767 freighters we will be deploying through 2011.

At the same time, we will continue to provide the contracted military flying we do today via our DC-8 Combi and freighter aircraft, which is unrelated to the volatile shifts in troop deployments and equipment deployments in Iraq and Afghanistan.

As I've said before, we already have either long-term lease or ACMI commitments for all 30 of the 767-200 standard freighters currently in our combined fleets. Customer interest in remaining aircraft to convert, including the three Boeing 767-300 ERs we are buying from Qantas, which will begin entering revenue service early next year once they complete modifications, remains strong.

While our freighter aircraft are the foundation of our business, one of our strongest points of differentiation from our peers is the multiple value-added services we can provide. Our bundled strategy includes maintenance, technical support, crew training, certification, and logistics to enhance the customer's value while improving our returns.

That approach will augment the strong lease cash flow we expect on the aircraft themselves over the next several years. The leaders of our ATSG businesses have embraced it and are continuing to come up with ways to add new services to the mix.

In the meantime, we will continue to execute the plans we have outlined before, capturing both the strong contracted cash flow and the growth that will accrue from both additional modified freighters coming on stream and older ones now operating under even better margins.

That will continue to be the driver of our results for many months to come. We think that the combination of strong commitments of future cash flow via leasing, shrinking leverage, and attractive aircraft assets is a mix that more investors will come to appreciate as we build our case through quarter after quarter of solid returns.

Now Steve, I'm ready to take some questions.

Yes, sir. (Operator instructions). And your first question comes from the line of Helane Becker with Dahlman Rose.

Thank you very much, Operator. Hi, gentlemen. Just have a few questions. On the -- so as we look forward, the model that you have in the second quarter is kind of where we're growing the rest of our earnings off of, or our outlooks off of? Is that right, Quint?

Yes. I think it's the-- it's a pretty good proxy for what's ahead, Helane. You know, as Joe said, I think we intend to build on that, and we've got a lot of assets, you know, between now and the end of 2011, as he mentioned. You know, the 767 freighter fleet will grow by 13, or around 50%, compared to where it was the beginning of second quarter.

Do you have sort of a sense of quarter-by-quarter, how many aircraft you're taking delivery of?

Well, we're going to be -- in terms of the 767-200s -- we expect to place three into service the remainder of this year. I think perhaps all three of those will get in during the third quarter. The last one might be early fourth. But then, in terms of the 2011 period, you know, we've got six more 767-200s coming online. I think most all of them will be online, what, Joe, by the third --

End of third quarter.

End of the third quarter. And then we've got the three Qantas aircraft that will be modified the first of those three, I think, we'll -- we'll -- we are targeting into service, what, April-- March, April?

March timeframe.

And, you know, the next two, then, will be kind of second and early third quarter.

Yeah, they're 120 days apart for the modification.

Okay. It would-- if you can sort of put that somewhere on your web site, that might be somewhat helpful in terms of when we should, you know, think about taking the revenues in for those planes, you know, for the quarterly spends for next year.

Right. For the balance of this year, Helane, you know, one of the things that's changed is DHL, as we mentioned on previous calls, has acquired four of the 767-200's that we previously had on capital leases. They are starting the modification of those aircraft. And so our spend in that regard is going to take a hiatus while they put their four aircraft through that modification process.

Okay. All right. Thank you. And then the only other question I had was with respect to the -- to what your customers are seeing in terms of percentage, or maybe load factors -- I know that's kind of the wrong word to use, but can you say -- or maybe minimum hours, are your customers flying more or less than the minimum hours? Can you tell whether or not they're experiencing this, you know, economic growth that people are talking about?

I think the answer to both is -- or across the board, Helane, whether it's in terms of load factors, utilization, et cetera, the answer is yes, they're all seeing growth, and in some markets, rather significant growth. So across the board, you know, which is help fueling that demand, is within the network operators, both DHL and BAX Schenker, they're seeing increased volumes and looking for potential expansion of their networks, as well as the ACMI customers that we have around the globe, whether it's TNT or DHL, as well as our Miami base is seeing a marked increase in demand for the utilization of the aircraft.

And then do you get paid based on sort of an hourly rate so that if they fly more than their minimum, you'll get a positive revenue benefit?

Yeah. And every contract is different on the pure ACMI ones, Helane. So when you look at the -- if you're talking something outside the DHL network, for example, there is an hourly rate that goes with the additional flying. Some have minimum contracts that it covers, and it's a fixed rate for the aircraft. And, of course, in the DHL network, you know, since they lease the aircraft, our ability to leverage that in a large way, if they do additional flying, is somewhat less than we see in the pure ACMI marketplace.

Great. Thank you, very much. I'll let someone else ask questions.

Okay.

And your next question comes from the line of Kim Zotter with Imperial Capital.

Good morning.

Hi, Kim.

Good morning.

Just a few questions for you. First off, could you discuss the service you provide to the military? You mentioned it's unrelated to troop movement, so I just want to get a better understanding.

Yeah. The primary focus of the flying that we do for the military is with the Combi aircraft, and the Combi being is it's got roughly 30-plus passenger capability in the back of the aircraft, and main-deck freighter capability in the front. It services some out-of-the-way points as kind of supply line, so the markets that it has traditionally serviced are some of these island locations markets where the U.S. has military installations, both in the Pacific and the Atlantic, and it really isn't connected in any way, shape, or form to the activity that's occurring in the Middle East.

In the Middle East, you obviously have much larger troop and equipment movements than you would have with what the Combi aircraft can provide.

In addition to that, both ABX Air and ATI operate pure freighter service for the military. Usually it's with the 767 or the DC-8, and it is not connected into the Middle East activity, either.

Okay. Thanks. So can you talk about the customers who are actively looking at the 767s, you know, whether it's the ones you purchased from Qantas or your other upcoming deliveries, and kind of directionally, how do the rates compare to your current contracts? And kind of the follow-on even, how many contracts come up for renewal this year and next?

Well from the standpoint of the 767-300s, obviously, we have not even finished the modification, you know, selected a modification vendor and concluded negotiations at this point in time. As Quint mentioned, right now the first aircraft would be targeted for the first quarter into service, or the end of the first quarter of next year. So we're talking to customers today from both a dry-leasing perspective as well as an ACMI perspective.

As far as customer contracts that are up for renewal, you know, depending upon the -- DHL, for example, are longer term with the dry leases, the BAX Schenker deal is -- is kind of an annual renewal, 2-year renewal on their contract, and everybody else is going to run the gamut from a 1-year contract to a 2 1/2-year contract, terms-of-renewal process. So there's always a constant flow of renewals that's coming at us in any way, shape or form. But none of them are the-- of the ilk that you would get a handful of aircraft back at one point in time.

Okay. And the rates, directionally, I guess, how do they compare to what you're seeing, you know, with contracts you have currently locked in?

Right now, rates are holding solid. I mean, with the lack of available lift capacity, a lot of aircraft were parked in the 2008, 2009 timeframe, and many of those will not be returned to service just because of the expense to do so. So we're seeing a nice firming up of rates on a go-forward basis because we do have available lifts in a market where the demand exceeds the lift capability.

Okay. I guess just a couple of quick modeling questions for Quint. How much do you expect to spend on pension contributions and debt principal payments in the back half of the year?

Well, Kim, in terms of the pension, the back half is significantly lighter than the front half because we had -- you know, when we negotiated our deal with the ABX Air pilots, and -- and also in conjunction with the distribution of the severance proceeds that happened last December, you may recall there were some proceeds aimed at the pilots, and we put a significant portion of that, over $30 million, into the pension plan. We agreed to make a contribution, which we did do on April 15th, of $25 million towards the defined benefit plan for the ABX pilots.

The full-year contribution's around $36 million, and I think we had made, what, about $30 million or so -- $26.5 million thus far. And so, you know, you're looking at $9 million, $10 million the second half of this year.

Okay.

You know, on kind of a normalized rate, going forward, -- and, again, there are some variables that can cause it to fluctuate, as you know; but it's generally speaking anywhere, from, you know, $15 million to $20 million annually, is what you would see going forward, kind of the 2011, 2012 timeframe.

In terms of the debt amortization, we had the DHL payment, of course, which was contractually stipulated. We've got roughly about $17 million for the second half of the year, split between our term loan, our asset backs, and some miscellaneous stuff. And then, of course, the DHL note, as we mentioned in the opening remarks, continues to amortize without a cash payment. And essentially every month, that reduces by about $517,000. And so we've got about $3 million that'll roll off of that note in the second half without requiring cash. So cash debt principal of $17 million, and then sort of non-cash debt amortization of $3 million for the second half.

All right. Thanks, guys, for taking my call.

Thanks.

(Operator Instructions) And your next question comes from the line of Adam Ritzer with CRT Capital.

Hey, guys, how's everything going?

Good, Adam.

Good.

Just a big picture. You guys are pretty confident that this quarter's EBITDA numbers are, you know, 85% plus, you know, in the bag, going forward. Is that correct?

Yeah. And, in fact, Adam, the -- the EBITDA number's probably a little north of 85 percent.

Okay.

I mean, the revenue is kind of around 85%.

Okay. So, I mean, we're looking at, you know, a $160-, $170 million run rate, and you're pretty confident on that. Now, on top of that, you have at least 12 or 13 more planes coming on, you know, as you went over with Helane. What -- I mean, are those still looking at $2- to $3 million of EBITDA apiece? If I look back on my notes, that's kind of what I had. Is that kind of correct?

Are you talking about an annualized basis, Adam?

Yes.

On a per-tail basis, if you look at the 767-200s, for example, you know, there's a 15-year life on those aircraft, and the -- the cost for those is -- costs $17 million or $18 million for the modifications. So you've got, you know, roughly $1 million a year there, a little bit of over that. And then, of course, whatever the contribution is from an operations perspective. If you do anything other than a dry lease, which would be on an ACMI basis, and then factor in what you want to say is the margin, if we dry-lease the aircraft -- and from what we've said previously, if the market is $250,000 to $275,000 -

$250,000 to $300,000 for the 200s; and then the 300s, you know, is $350,000 to $400,000 a month. So, you know, as you say, Adam, if you take the middle ground, if you take $275,000 on the 200s times 12 months, you know, on the dry-lease basis, that's pretty close to your -- your EBITDA annually.

Okay. So, again, you know, $2 to $3 million apiece is another $25 million, $30 million a year of EBITDA, you know, when those 12 planes all come into effect. So you're kind of confirming what I'm thinking. So that's on top of what your run rate is now. So now, we're getting to a $200 million-a-year EBITDA run rate, you know, by -- call it by the end of 2011. Is that reasonable to look at?

I think that's reasonable.

Okay. And out of that, your interest expense was roughly $20 million. Annual maintenance expenses, you know, or what, $50 million?

Maintenance CapEx?

Yeah.

Maintenance CapEx is around $30 million.

$30 million, $35 million. That range.

Okay. So, you know, you're paying no taxes which is a wonderful thing, obviously. So we're talking at some point in time, you guys are going to be on a $150 million a year, free-cash run rate, X any remodels, based on my math. You don't have to confirm that, but that's kind of what you're saying. What are we going to do with all of that money at that point in time? I know you -- you know, if you could find more deals like Qantas and things. But at some point in time, I mean, this is a great problem to have.

That it is. And one piece you did leave out, Adam. You have to think about-- obviously, there's the debt repayment and the pension piece as well. And as Quint mentioned earlier, the pension funding right now is, you know, for a couple years is in that $15 million to $20 million.

Okay. But that's -- you know, out of that kind of cash flow, that's pretty meaningless, and any debt pay-down obviously accrues value to the equity holders as well?

Right.

Okay. So, I mean, are there -- what else is on top of this? You know, besides the 12 planes you mentioned, are there other things on top of this that you're-- that I'm not including -- or that you guys are looking at doing?

Well, we're always looking at where we can deploy our capital that gives us the return margins that we expect, which, you know, that gets -- ultimately accrues to the benefit of the shareholders as the stock price goes up. So we're looking at things all the time. There's nothing we can talk about at this time that's, you know, we can say is a definitive program for reinvestment of that capital, other than looking at, you know, continuing to build upon the 767-300 fleet, above and beyond what we've started with the Qantas acquisition.

Okay. I mean, at some point in time, if the market continues to value your stock at what -- you know, three times EBITDA or some kind of huge discount to your comps, do you guys go in there, return capital of shareholders? Do you buy back stock? I just don't understand why people don't seem to get the story here.

Well, in terms of the stock buyback, I mean, there are some restrictions, you know, in our-- in our current credit facility as well as in the DHL note. Even though it's sort of amortizing --

Right.

-- you know, without cash, there's still restrictions there now. You know, as we've discussed in the past, that's not to say there's always -- potentially, those can change; but they do exist today.

You know, all those-- all those allocation-of-capital decisions are down the road for us, Adam; and, you know, as you say, they're good problems to have.

You know, the nice thing about the balance sheet and our liquidity position is that we're going to get a lot of growth potentially with the additional aircraft coming online, and we're not going back out into the high-cost debt market to fund it. I mean there is-- we have nothing drawn on our revolver of $75 million. And we have-- you've seen what our cost of debt is; it's quite low. You know, our covenants and our -- our leverage in the balance sheet is -- is, you know, two turns of -- of EBITDA, roughly. So, we have the luxury right now of being able to move towards growing our productive asset base without having to go deep into the debt market.

Right. And all the remodels are basically, you know, internally financed right now, right?

Correct.

Correct.

Also, the -- also, the Qantas 300s.

Right. Okay. I -- I don't understand it, but I'm glad you confirmed, you know, my thinking. Is there any -- are you guys talking to any other investment firms about picking up coverage on the company? Maybe we just need to get the story out and have more people understand what's going on.

We are making a big effort to do that and have been, Adam, since even -- well, certainly as soon as we could announce the DHL restructuring of the contracts and agreements with DHL. We have, Joe and I have met -- oh, I've got a list in front of me here, but I don't want to rattle them off, but many investors, many of them have gotten into the stock. We've also talked to, I will say anywhere, you know, five to ten analysts, and, you know, I can tell you that, you know, we have got a lot of strong interest from several analysts in covering the company. And I think you'll see our coverage expand --

Okay.

--during the balance of this year.

You know, Adam, to that point. I mean, this is really the first good view that the market has of what the new restructured company looks like on go-forward basis, as we've said in our release. It's been a little cloudy, foggy over the last couple of years, but I think what we've-- what we've done with the second quarter results is -- is something to build off of on a go-forward basis in terms of how you look at the company.

Right. The last, you know, 18, 24 months, like you said, was a little foggy. You really had to do a lot of work to understand what you guys had. And now it gets easy. Now, the analysis is, you know, it's fairly straight-forward. So -- okay. Great.

The other thing I would tell you is that, you know, for example, next week, Joe and I are going to be in San Francisco at the BB&T Conference, having some one-on-one meetings with investors; and so if there's anybody out there who's in that area and has an interest, you know, that -- I encourage them to contact BB&T--

Okay.

-- and you know, as we've done in the past, we'll have a deck of some road-show slides -- that we'll put out on Tuesday morning.

Well, I guess this is a lot better than a year or so ago. I don't think you would have anybody that wanted to meet with you. Correct?

Well, I wouldn't go that far.

Okay. I would have met with you.

But there's a lot more these days.

Right. Okay. Guys, I really appreciate it. Thanks a lot.

(Operator instructions) And your next question comes from the line of Jonathan Fite with KMF Investors.

Hi, guys, how you doing this morning?

Jonathan.

Good.

Two quick questions for you. I just want to confirm the second quarter numbers don't have any S&R -- S&R recognition in them. Is that correct?

That's correct, Jon.

And as far as the airport lease cost, do we have a full quarter of a non-reimbursed lease cost numbers, or where do we stand with that?

No. That transition occurred June 2nd, so since we only had one month out of the quarter of the increased lease rate that we will be paying to the Clinton County Port Authority, as compared to what we were incurring with the agreement we had with DHL.

And can you just go disclose what the quarterly or annual run rate lease cost for that would be?

Yeah. The -- you know, the Clinton County Port Authority has disclosed that info, but it's $3 million a year in lease expense.

Okay. Great. Thanks guys. Great quarter. Keep it up.

Thanks.

And that concludes the Q&A portion of today's conference. I would now like to turn the call back over to Mr. Joe Hete for closing remarks.

Thank you, Steve.

As we said in our news release, the fog that obscured the cash-generating potential of our businesses and assets is gone. We're now clearly delivering the results we promised from a much lower risk profile. Our second-quarter cash flow represents what we believe is the performance model for ATSG for some time to come, with growth stemming from more 767 freighters, new business, and new value-added services for customers.

We will continue to work very hard to make sure we deliver on the commitments, and look forward to talking with you again in the fall, when our third quarter results are in. Thank you, and have a quality day.

And thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

Good day.