Air Transport Services Group Inc (ATSG) 2010 Q4 法說會逐字稿

Good day, ladies and gentleman. Welcome to the fourth quarter and year end 2010 Air Transport Services Group Incorporated earnings conference call. My name is Channel and I'll your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would like to turn the conference over to Mr. Joe Hete CEO and President.

Thank you. Good morning and welcome to our fourth quarter conference call. I am Joe Hete, President and Chief Executive Officer. I apologize up front for a horrible cold I have, hopefully it won't disrupt any of this conference call. With me today are Quint Turner, our Chief Financial Officer, Joe Payne, our Senior Vice President and Corporate Counsel, and Rich Corrado, our Chief Commercial Officer.

We released our 2010 results yesterday and will file our 10-K next week. Both will be on our website, www.ATSGINC.com.

Our results showed the business model we have built which emphasizes wet or dry leasing our 767 freighter aircraft to maximize return on our investigated capital is working extremely well.

The results we are generating are strong, and become stronger as we apply the model's ROIC discipline to the nine more 767s we expect to deploy as converted freighters this year. They will allow us to enter more global markets, and offer combinations of our value-added services to best match any customer's particular requirements. That simple formula, and the market's appetite both for our kind of airlift capacity and for the services we can add gives me great confidence about our success in 2011 and beyond.

I'll walk you through where we stand today, and how we will fulfill our goal to do more in the future. But first, Quint Turner is going to review our results for the quarter.

Quint?

Thanks, Joe. Good morning, everybody.

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 the nine 767 freighter modifications scheduled during the remainder of 2011, the availability and cost to acquire used passenger aircraft for freighter conversion, 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 US Securities and Exchange Commission, including our Annual Report on Form 10-K, which as Joe said we will file next week.

I will also refer to non-GAAP financial measure, including adjusted EBITDA from Continuing Operations, and Adjusted Pre-Tax Earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant as a substitute for the GAAP financials, and we advise you to refer to the reconciliation to the GAAP measures, which we have included in our year-end news release which can also be found on our website.

On that topic, I need to make everybody aware that we will be posting a correction to our non-GAAP reconciliation at the end of our earnings release and it has no impact on the fourth quarter earnings or the year-end earnings we reported. It's in the nine month column, when we were comparing nine month periods, specifically the nine-month 2010 period, and actually will improve our relative performance because we compared that period to the same nine-month period from 2009. We will be reposting the corrected release to our website and reissuing that correction later today.

As Joe said, we entered 2011 stronger and better poised for growth than at any time in our history. We completed a new set of long-term agreements at the end of March, 2010 with DHL, our largest customer, which continues to grow and remains a key component of our business. Because of that, our results through the first quarter of this year, including our fourth quarter 2010 results, aren't easily comparable on a year-over-year basis to periods when we were operating under our legacy cost-plus DHL agreements, and when we were completing the wind-down of many of those former operations.

As we did in our earnings release, I'll be giving you both prior-quarter and prior-year comparables for our fourth quarter results, and I'll do my best to point out items to take into account when comparing to the prior year, due to the significant changes to our business.

We will see some prior-year comparability issues again in the first quarter of 2011, due to a number of the DHL wind-down-related items we had in the first quarter of 2010, our last quarter under the legacy cost-plus DHL arrangements.

We are looking forward, just as I'm sure you are, to this summer, when we expect to be able to report second quarter results with year-over-year comparisons on more of an apples-to-apple basis. That's when we expect to see the initial benefits of the 767s entering service this year, as Joe will cover in a moment.

With all that in mind, I'd like to reiterate that our results from continuing operations in 2010, including results for the fourth quarter, were very good. They look substantially better on a year-over-year basis if you exclude the Severance and Retention Agreement revenues we recorded as we managed DHL's wind-down of the domestic only portion of its US network operations during 2009 and early 2010. We have presented some of those comparisons after the adjustments to both pre-tax earnings and EBITDA. You can find all the details of those adjustments as I mentioned in the reconciliation table at the end of our earnings release.

For the fourth quarter of 2010, pre-tax earnings from continued operations were $20 million, up 20% from the third quarter and 13% from the fourth quarter 2009. For the year, pre-tax earnings from continuing operations totaled $63.3 million up 40% from 2009.

Net earnings from continuing operations for the fourth quarter were $11.9 million or $0.19 per share diluted, an increase of 4% from the third quarter and 15% from the fourth quarter 2009. For the year, net earnings from continued operations were $39.9 million, or $0.62 per diluted share, up 41% from 2009.

Earnings from discontinued operations were flat in the fourth quarter, compared to a loss of $230,000 in the third quarter and a gain of $1.2 million in the fourth quarter of 2009. For the year, pre-tax earnings from discontinued ops were flat compared to a positive $6.2 million in 2009. Discontinued operations include the pension expense for former employees impacted by the DHL restructuring, and severance costs in excess of our initial estimate for those employees.

Our pre-tax earnings in 2009 included $12.2 million in the fourth quarter and $16.7 million for the year related to our role in managing the DHL wind-down. In 2010, our pre-tax earnings included $3.5 million in the first quarter for managing the wind-down. Excluding those amounts, our fourth quarter adjusted pre-tax earnings improved by 267% versus the prior year quarter, with full year adjusted pre-tax earnings up by 109% compared to 2009.

Adjusted EBITDA from continuing operations, which excludes those same wind-down earnings, totaled $46.4 million for the quarter, up 6% from the third quarter 2010 and 41% from last year's fourth quarter. For the year, Adjusted EBITDA from continuing operations was $165.7 million, up 19% from 2009.

Upon completing the restructuring of our businesses at the end of March, we started reporting our operating results in the second quarter of 2010 under two segments - ACMI Services and CAM Leasing. Results of all other businesses are reported under other activities. Lease revenues in the CAM segment include those associated with the 60 aircraft that CAM had under lease at December 31, 2010, which included 44 aircraft leased to ATSG's airline subsidiaries, and 16 aircraft leased to external customers. Revenues from the ACMI Services segment include those associated with the DHL CMI agreement as well as those from ACMI agreements with other customers, including BAX Schenker.

CAM's pre-tax earnings for the year were $41.6 million up 83% from last year, reflecting the new DHL lease agreements at the end of the first quarter that significantly improved the number of aircraft CAM dry-leases. Similarly, fourth quarter pre-tax earnings for CAM were $13.3 million, more than double last year's total. Pre-tax earnings were up 11% from the third quarter of 2010, as three CAM-owned 767 leases started during the third quarter, and were in place for the entire fourth quarter of 2010.

Pre-tax earnings for our ACMI services segment for the quarter were $6 million up 73% from the third quarter of 2010, but down $7.1 million from last year's fourth quarter, which included $12.2 million related to our management of DHL's wind-down.

During the quarter, ABX Air began supporting DHL's transatlantic operations with a 767-300 it operates between England and the Cincinnati hub, and 767-200 service between Japan and China. For the fourth quarter of 2010, block hours for the segment totaled 25,135, up 9% from the third quarter of 2010 and 11% from the fourth quarter of 2009. Block hours increased 14% to 92,508 for the full year 2010 compared to 2009.

You may have noted an increase in our salary and benefit line versus the second and third quarter 2010 results. The main contributor was the flight crew cost associated with our growing flight volumes, including the operation of additional DHL owned aircraft as well as the onset of transatlantic 767-300, and Japan-to-China 767-200 operations. About two-thirds of the increase in the salary and benefit line is recurring expense for expanded operations, and the remainder is attributable to seasonal and other factors.

Pre-tax earnings from all other activities in the fourth quarter totaled $2.4 million, more than four times last year's fourth quarter pre-tax earnings, which included $1 million in additional overhead expenses, as specified under the previous DHL arrangement. Fourth quarter pre-tax earnings in the other activities line were down from third quarter 2010's pre-tax earnings of $3.1 million. The $700,000 decrease was due mainly to the timing of maintenance services on customer aircraft, as our maintenance subsidiary AMES recognizes those revenues only when services are completed. Gains from amortized reductions of ABX Air's employee post-retirement obligations also continued to be a factor in our fourth quarter results.

Our strong cash flow during the year again allowed us to continue to de-lever our balance sheet and add to our ability to fund our capital plans with minimal incremental borrowing foreseeable in the near term. However, we regularly review our options and capital requirements, and track credit market conditions to determine when it might be best to extend our access to debt capital beyond our current term loan facility, which has a balloon payment due at the end of 2012.

Interest expenses decreased $8.2 million in 2010 from 2009 as result of our continued de-leveraging and continued low interest rates. Interest rates on the Company's variable unsubordinated debt decreased from 2.9% in the fourth quarter of 2009 to 2.6% in the fourth quarter of 2010. A main contributor to our decreasing variable interest rate cost has been the improved pricing we have enjoyed under the terms of our term loan credit facility. That stems from the steady improvement in our debt to-EBITDA-leverage ratio.

During the fourth quarter, another $1.6 million was extinguished from the promissory note owed by ABX to DHL, leaving a $26.35 million balance on December 31. As specified in the CMI agreement with DHL, this note will continue to decline by $1.6 million each quarter until fully extinguished as we continue to perform services over the remaining term of the CMI operating agreement. Our total current and long-term debt declined by $74.9 million or almost 20% during 2010. With current quarterly EBITDA of $46.4 million and total debt outstanding at year-end 2010 of $302.5 million, the Company's balance sheet remains very lightly levered at well below 2 times EBITDA. This means we have the needed liquidity and growth capacity to add to our aircraft fleet and achieve our desired return on investment capital targets.

Capital expenditures for the year were $110.7 million, compared to $101.2 million in 2009. Our capital expenditures included $74.8 million in 2010 versus $69.9 million in 2009 for the acquisition and modification of aircraft. During 2010, we purchased three Boeing 767-300 aircraft and completed six cargo modifications for 767-200 aircraft compared to five in 2009. 2010's capital expenditures included about $30 million for required heavy maintenance and $6 million for other equipment.

We project total cap-ex for 2011, including maintenance cap-ex of approximately $30 million, to range from $170 million to $200 million. Where we fall in that range will depend on whether we invest in a 757 Combi aircraft program to replace the DC-8 Combis we operate for the US Military. If the military does not solicit bids, or we are not awarded the 757 Combi business this year, we would expect to be at the lower end of the range, around $170 million.

Our effective tax rate for continuing operations during the quarter was 40.6%, but for the full year was 37%, compared to 31.7% for the third quarter 2010, 41.6% for the fourth quarter 2009 and 37.8% for the full year 2009. The effective tax rate for the third quarter 2010 was reduced by $400,000 by the recording of a deferred tax benefit. We anticipate that 2011's effective tax rate will be approximately 37.5%.

As we like to remind you, our story is made a little more compelling because of our deferred tax asset position, aided by our continued investment in our 767 fleet. We do not expect to pay federal income taxes until at least 2013, other than certain alternative minimum taxes.

A key driver of our strategy remains the cash generated by our businesses. Net cash generated from operations was $112.3 million, versus $103 million in 2009. That included defined benefit pension payments into the asset trust of our frozen pension plans of $36.6 million, along with the payoff of operating liabilities and payments for employee wages, severance and benefits impacted by the wind-down of many of our operations for DHL here in Wilmington.

To sum up, I think we are well positioned to grow our business today and to leverage our strong balance sheet for future expansion. Now I'll let Joe tell you about our operations and what we see for the future. Joe?

Thanks, Quint.

No matter how you slice it - and Quint just gave you lots of options - our 2010 results were solid, and clearly gained momentum as the year progressed.

We have nine months of reported operating history under our belts since the completion of our restructuring at the end of first quarter, and 11 months overall. The changes we have made in just that short amount of time are significant enough. But if you reflect on where we were at this time two years ago, when our stock was trading for $0.20 per share, and our future with DHL was in question, "transformation" is about the only word that describes it.

To recap Quint's overview, 2010 marked the start of a new strategic focus for ATSG. In effect, we unlocked the value of our aircraft assets, more than doubling the cash flow associated with the 767 fleet deployed under the legacy cost-plus agreement with DHL, even before you begin to consider the contribution provided from our other value added service offerings.

The lease return on our fleet is now clearly displayed in the results of our CAM Leasing segment, which owns almost all of our aircraft and allocates them via leases wherever the risk/reward ratio would guide us.

Two-thirds of our 2010 pre-tax earnings from continuing operations, and even more of our adjusted EBITDA, came from CAM. How well we can perform begins with the acquiring the right aircraft at the right price, managing the conversion process carefully to minimize our downside risk and placing it where the market says we will find the best return. The flexibility of the model we have built, our extensive experience with aircraft conversions and our choice of the 767 as our key asset allows us to do that.

Following that formula, we went from a system that granted us a total achievable margin of less than 3% on 90% of our revenues under the old DHL agreements to one that lets us earn significantly more, if we work smart enough and provide our customers excellent service. We believe we can continue this success over many years, given how many experts see air cargo networks taking more volume from traditional international supply chain networks built around costly warehousing, mode transfers and timing risk.

We see our primary role as efficiently allocating our key assets in a global market where we are a leader-the expanding market for converted, medium sized freighters-as well as a flexible single-source provider of a long menu of services in support of those assets.

That's the new ATSG, in brief. Now, let me bring you up to date on our progress since we set this new approach in motion in the second quarter of last year.

The big news on that date was our new agreements with DHL, under which we would lease them more than a third of our Boeing 767s-thirteen of the 36 cargo 767s we owned at that point -- after selling five back to DHL and the assumption by DHL of five others, which had operated under capital leases.

Of those 36 we had 10 that required conversion to full freighters, with standard cargo doors, and other new features. At year-end 2010, four of those 10 had been completed and delivered for a total of 30 full 767 freighters. That included 11 of the 13 we promised to DHL, all of which we operate in the US network under the CMI agreement struck the end of March last year.

Of those 30 767 freighters, 16 were deployed at the end of last year under long-term dry leases to external customers, and 14 were in ACMI service via one of our own airlines.

That's also where we stand today with regard to the deployment of the 767 aircraft we owned on April 1st of last year. Under our agreements with DHL back then, we granted them several slots in the middle of the conversion schedule for our 767s, in the event they chose to convert some of the 10 they received from us. They put four of the five capital lease aircraft they received from us into the conversion schedule last fall, which pushed deliveries of our remaining aircraft into 2011.

The good news is that, as we announced last November, those four DHL aircraft have been added back into the US network as they completed conversion and ABX Air is flying them and AMES is maintaining them today under amendments to our CMI and maintenance agreements. That's a strong indication both of DHL's regard for the services we provide and to the growth of DHL business in the US.

Of the six remaining 767-200s out of the 36 we had a year ago, two will complete conversion later this month and in April, and will be leased to DHL to complete our commitment of 13, which in turn will release for ACMI service two others that ABX Air provided under temporary arrangements.

Also, we announced last November one other 767-200 that had been in ACMI service with another customer will be leased this month to Amerijet, marking the third such aircraft we have leased to them, all for seven-year terms.

While this is good news, I should point out that we had expected to deliver the third 767 more than a month ago. We discovered a maintenance issue while preparing the aircraft that delayed it several weeks and cost around $400,000 to fix.

Bringing you up to the end of this April, we will have deployed 32 of the 36 767-200s we had last April, with 19 operating under long-term external leases and the remaining 13 in ACMI operations via our airlines. Of course, for almost all the 19 we lease externally, we also provide additional services. That runs the full gamut from complete CMI support, as provided for DHL, to heavy maintenance services via our AMES subsidiary, to engine power by the hour access. In fact, every one of our dry-lease customers is using at least some of our incremental services.

Several weeks ago we announced the dry-lease arrangement for one more of our 767-200s with RIO airlines of Brazil, and said we are in discussions with them for a second leased 767-200.

Assuming completion of that second RIO agreement, we will have customer commitments for all but four of the 767-200s that we will have available by the end of 2011. I am pleased to report to you that based on our discussions with several potential customers, we are confident that we will have commitments for all those additional aircraft, well before they are ready for service.

As you know, we purchased three other 767s, the larger range 300 series, from Qantas last summer. The first of those three is expected to enter revenue service in May, and the other two during the second half of the year. We are very close to being able to announce wet-lease agreements for two of those aircraft, and hopefully that will come out in the coming weeks.

I am also pleased to announce that at the beginning of February, we also began operations for DHL in the Middle East with a 767-200 aircraft between Bahrain and Afghanistan. At that point, we will have four 767-300s in operation, including one we acquired as an operating lease from a third party that has operated since November in trans-Atlantic service for DHL. Adding in those four 300s, but excluding the four DHL owned 767-200's we are flying under the CMI, we will have a total of 40 767 aircraft in service by year-end, 39 of which ATSG owns.

A key differentiator for us with some other airlines is we own all of our aircraft, save the one 767-300 on operating lease, and the four DHL owned 767s, for which our operating lease cost is immediately reimbursed by DHL under the CMI agreement. Our off balance sheet debt is very minimal.

Finally, we have reserved options for conversion of the four Boeing 757s with configurations and deployment subject to the resolution to the Air Mobility Command's decision by this next generation Combi, or mixed passenger freighter aircraft. We have contracted to purchase one 757 aircraft for modification, as we noted in an 8-K we filed on February 17.

We are the AMC's sole source for Combi airlift today via four DC-8s we operate for them into remote based locations around the world under one year agreements. Any 757 based Combi airlift opportunity with the AMC would be subject to competitive bidding likely including other providers. If the military does not decide to shift to 757 Combi aircraft in the future, our 757 conversion options allows us to convert any 757-200s we acquire into a standard freighter format, similar to the two we own and operate today via Capital Cargo. Our CapEx budget for 2011 includes a provision for some of these potential 757 aircraft purchases and conversion costs, which would extend into 2012.

I've stated that we intend to maintain a balance between long-term external dry-leases, of between five-to-seven years in duration and shorter-term one-to-three-year wet-leases for our aircraft. While the current direction of our deployments indicates a tilt toward dry leasing, it's really a reflection of how we see both customer demand and the dynamics of our highly cyclical industry, where air cargo demand tends to rises rapidly in the early stages of an economic recovery and levels out while other sectors are still climbing.

We want to make sure that the capital we invest in our aircraft and related assets is still earning a very good return, but we will not chase the extra dollar that going shorter might bring if it exposes us to a near-term change of economic direction. Our business model affords us the flexibility to adjust to either opportunity.

The most significant element of our value added service menu of course is our offering flight crews and maintenance support on a defined fee CMI, or Crew Maintenance and Insurance basis. Offering full CMI service was a key element of our new DHL relationship, giving them more visibility and control over their cost structure by fixing the price they pay for operation of every aircraft we fly for them, including the four 767-200s that they own but have entrusted to us.

We certainly can earn better profit margins each time a leased customer chooses us as their operator or maintenance provider. Of course, that opportunity only pans out if we adequately control our costs. Toward that end, it's important to remember that the principal amendments to the ABX Air pilot labor agreement we signed in 2009 didn't go into effect until the new DHL agreements were signed at the end of last March. We also reached new wage agreements in 2010 with pilots at Capital Cargo International Airlines and put a more competitive wage structure in place in our maintenance unit in May of 2009. All have added significantly to our competitiveness along with the capability of our aircraft and crews.

The real bottom line of our story is that if you need what our 767 freighters can do -- and they can do a lot, given their ability to haul 100,000-pound pay loads across many international routes, or operate just as efficiently as a domestic regional freighter -- we're by far the number one provider, and really the principal source of dedicated aircraft of that size.

Many potential customers know us for our 767 fleet and more are beginning to appreciate the other competitive advantages we have. The contract flexibility and suite of services that surround each of our aircraft for which we can offer customer customized solutions are unique to ATSG.

One set of complementary services, our aviation ground equipment and logistics support, including fuel management were restructured last month and combined in a new entity, Logistics Services Inc. We have also further refined our go-to-market messaging and launched a new advertising campaign in major industry trade journals.

Certainly, the 767 is our primary growth vehicle, but the 757 is also an important companion asset. It is fuel efficient and reliable, compared to older generation narrow body aircraft. But if you have a very limited utilization requirement, or you can't afford a more expensive asset, we can also bring a 727 or DC-8 to bear at very attractive rates.

As I said in our news release, our goals for 2011 are not just the deployment of the aircraft we have, but also finding feed stock aircraft that we can buy and convert to freighters. We have very strict criteria, which makes the search more difficult. But we won't bend on our commitment to achieve the unleveled return on invested capital we have promised the market and manage our risk.

We have been very successful in acquiring and managing the conversion process to date, including the three 767-300s we purchased last year, that I expect to enter service after conversion at a cost below their fair market value.

As a final note, I know that many of you are closely following fuel prices and anticipating where some payload shifting between modes might occur. While I won't say we're immune at certain higher fuel price levels, I will say that most of our customers went through that analysis back in 2008, and the portion of their cargo that is going by air today is unlikely to shift to the extent that they would remove an entire aircraft from their networks. On the contrary, we think we could see more demand for our 767's if fuel prices force airlines to park more of the less efficient aircraft in their fleets.

With that, I would like to conclude my remarks and take some questions from investors on the line.

Thank you. (Operator Instructions).

Thank you. (Operator Instructions). Helane Becker, Dahlman Rose & Co.

Thank you very much, operator. Hi guys, thanks for taking the question. I just have a couple of little things. One, do you have a schedule for when those nine 767s are coming into service by month?

Essentially, Helane, you can figure one aircraft a month through the balance of the year, starting in the second quarter.

Starting in April?

Yes.

And then on the reconciliation, are you going to do it by quarter for the last year?

You're talking about the non-GAAP reconciliation?

Yes, sorry.

We can publish a quarterly reconciliation, and we will on the web site. Probably when we update the one column on the non-GAAP schedule in the earnings release, it will just be that nine month 2010 column for comparison.

Okay. That would be helpful.

We'll publish the quarterly on our web site.

Okay. Great. And then just, Quint, on the line item called "rent." Is that aircraft rent, or is that for that one plane, or is that facilities rent?

It has both in it, Helane. We have the facility here in Wilmington. Which we, as you know, right now we're the sole tenant of, and it also includes the operating lease rent for the 767-300 that we started in November.

The other thing that's in there, Helene, is if we have to do some sub-service with the aircraft, which we had to do a significant amount of in the third quarter as we went through some of the maintenance related issues that we talked about in our third-quarter release.

Okay.

And we've got the DHL aircraft that we will be leasing that they own, because we do a lease with them, it's reimbursed, but it goes through the rent line item.

Okay. And then that maintenance issue that you had on that one plane that was in the first quarter, how will that be treated in the first quarter numbers?

That will be expensed, Helane.

Okay. Then the last question -- thank you for all these answers -- and then my last question was just risks with respect to this issue that comes up from time-to-time when oil prices sky rocket and Bax's DC-8s, have they come back to you with any plan, or idea, or a thought to re-look at their use of that plane?

We have started discussions with them. They are in a very -- I would say preliminary -- stage at this point, Helane, in terms of upgrading their fleet. Clearly, fuel prices will be one key driver, but the DC-8s are getting really long in the tooth at this stage, so maintenance costs can also weigh into that as well. So, I would anticipate as we go through 2011 that the discussion will get a little bit more detailed in terms of what options might be available to them, for at least some of fleet modernization program.

Great. Okay. Thanks very much for your help.

You're welcome.

Alex Brand, Sun Trust Robinson Humphrey.

Good morning. This is Sterling in for Alex today.

Hey, Sterling.

Joe, did I hear you correctly that the CMI on the four DHL planes has already -- you have already begun flying under CMI for those?

Yes, we had two of them, Sterling, that we did last year, then we geared up with the flight crews, et cetera, for the second two over the last two months.

Okay. Great. Quint, the commentary on salary expense was very helpful. I just want to make sure that I understand. Approximately, one third of the sequential difference from the third quarter was due to seasonality and other factors?

That's correct, Sterling. Again, we are approximating. But for example, the postal hubs we operate, we get -- remember we have the three postal hubs that are in our other activities line. You get seasonal volume, as we know, around the holidays that that labor has to handle.

Right. I'm just trying to understand when we think about what to expect, at least in the first quarter of next year, not really any new aircraft coming online, if I understand correctly, other than the CMI. Can we look at a sequential decrease of roughly $2 million in the first quarter, or is that being too aggressive relative to your expectation.

You're talking about the salaries line?

Yes, on the salaries.

Yes, I think you'll see some decrease in that line item in the second quarter, although as Joe mentioned we did continue to gear up some flight crews for the last two of the DHL owned aircraft in the early part of the first quarter.

At the same time, Sterling, we are gearing up flight crews as I mentioned that the first two 767-300s will go into a wet lease operation, at least is anticipated to once we get the agreements inked, and of course the gear-up time for flight crews, just for a crew, is 60 to 90 days, but when you go through the upgrade process, it almost doubles that time period. So, we'll be seeing some costs in the first quarter that relate to aircraft coming online in the second.

Okay. Got it. Joe, the 757 Combi conversion program -- the prepared comments were very informative there -- but with the one aircraft, you've already contracted to do a conversion on, if the military does drops their plans to re-bid that DC-8 contract, what do you do with that 757? Is there demand with the CCIA stuff that you already mentioned?

Yes, we would put it through a standard freighter conversion. There are opportunities to place that with some of our current customers who have a desire to utilize the 757. Certainly it also would function as a potential upgrade to a 727, if fuel prices continue to escalate the way they have and it could replace a DC-8 if it was a light segment for one of our customers that had less than a full DC-8 load.

Would there be any plans or possibility of going ahead and doing more of the 757 Combi conversions ahead of any re-solicitation from the military?

No, as far as the Combi conversion itself, Sterling, the only thing we've done to date is start the engineering and design process. We actually haven't done any touch labor on the aircraft themselves.

Right, Sterling, this first aircraft won't be converted to Combi unless we know the solicitation is out. And we won it. And we got the bid. As Joe said, absent that, you plug it in as a standard freighter modification with the prospects that he mentioned.

Great. Just one last one. Long-term debt went sequentially from about $277 million to $265 million. You mentioned $1.6 of that was the write down of the DHL promissory note. What else was a factor in reducing that long-term debt?

Each quarter we amortized the term loan piece of our debt capital, which is about $6.75 million dollars. Then there is amortization of, we have seven asset-backed loans related to seven 767 aircraft. Those loans mature like in the 2016 timeframe and they were sort of 10-year facilities when they were established and there is amortization each quarter on those. And when you see the footnote in the K next week, Sterling, it'll be pretty obvious which pieces of the debt did what. That's the driver in the decline in the principal.

Thank you very much for the time, gentlemen.

George Pickral, Stephens Inc.

Good morning, everybody.

Hi, George.

Joe, just so I'm clear, you're taking nine planes this year, right, you've two going to DHL, you've got one right now going to RIO, possibly one more. That leaves you with five more. You mentioned three 767-300s you are close to an ACMI agreement on.

Two. 767-300s

Sorry, two. Are those 300s part of the nine that you're taking this year or are those in addition?

Part of the nine.

Part of the nine. So, assuming you lock those up, you've already got five and you said RIO will likely do a second one in the fall. You got call it six of the nine, already locked up for the year. Is that right?

Close.

Okay. Thank you. I just wanted to make sure I'm thinking about that the right way.

And then, Quint, you mentioned your debt to EBITDA levels -- how comfortable you are with them and that they may be a little low -- what level are you comfortable taking that to in the intermediate term?

Well, of course, Joe is probably more comfortable at a higher leverage ratio than I am, but certainly, George, you're correct, we are really lightly levered, presently. If the opportunity -- again, we have pretty strict discipline on our return on invested capital --but if the opportunity were there, certainly I think our balance sheet -- for example, back when we did the CHI acquisition at the end of '07, I think we were closer to three, three times EBITDA level. So, we could easily, if the opportunity were right, lever the company more, 2.5 to three times certainly would not be out of the question.

Okay. And then my last question and the follow-up to that, it's kind of a big picture question. Given the delays in the 787 and given that airlines are flying their 767s longer, can you talk about the quality of the planes available on the market, or the quality of the planes that are going to be coming online if and when the 787 gets finished?

It's easy to talk about the quality if there was something to talk about, but there is really not a whole lot out there available at this point, George. That's exactly the reasons you pinpointed was the delay in the Dreamliner. But certainly when you think about how we modify one of the aircraft, we factor the condition of the aircraft into our cost as we look as to whether it makes a good conversion candidate or not. You can get one that has all the time run off the engines and the air frame is pretty ragged out, but if you factor that in accordingly, that's the kind of price you're going to offer for it. But the real difficulty today is not related to quality or anything else, it's just pure availability is the problem we are dealing with.

Okay.

One thing, too, George, is although when aircraft first come out on the market, logic would say some of the older aircraft that come out sooner, whenever they go through a conversion process, as we've discussed, you completely readdress the structure of the plane and, as Joe said, by the time it gets out the other side, it's not -- doesn't resemble what it did before. The other thing is, in terms of cycle time on air frames, remember that the cargo business does not typically involve a lot of cycles. So, you know, even if you buy a higher cycle air frame, you can operate it for years and years in the cargo environment because you are not flying as many take offs and landings typically in that business.

The fact that they are being over-flown now could be a positive for you all when they come up for purchase?

We might acquire it cheaper and still get a lot of life on the cargo side out of it, I think that's fair.

That works. Thanks for the time, guys.

Kevin Sterling, BB&T Capital Markets.

Good morning. How are you doing?

Good.

Let me follow-up with George's question about what you're seeing in terms of passenger aircraft. I know you said there is no availability. If I can touch on pricing for the few aircraft that might be available, what are you seeing in terms of pricing for used passenger aircraft? Because I've heard FedEx is in the market bidding up the price for 757s. Could you touch a little bit on pricing?

On the 757, clearly it's a seller's market. That makes it difficult to deploy the 757 as a replacement, for example, in the BAX network. The modification cost for a 757, call it $5 million, as compared to $12 million for a 767. But when you look at the acquisition of the asset itself, pricing on 757s is still north of $10 million, for anything that's halfway decent. So, you got an into service cost under that scenario of, call it $16 million for a 757. And we're putting our 767-200s in service today for about $17 million.

So, as long as FedEx keeps talking about that they want to go -- What is it? -- 120 plus aircraft of the 757 type, I think the 757 market is going to be really strong from a pricing standpoint if you're a seller. On the 767 side, as we touched on with George, there's just not a whole lot to look at today that's available that you can say you've got good comps. We're scouring the marketplace with people that we know that operate them or own them. For example, ANA, who we have a long-term relationship with because we bought their 767-200 fleet, they're the launch customer for the 787. And they're talking about not starting to release any of their aircraft until as late as 2013, even though they expect to start taking deliveries of the 787 later this year.

Okay. Thank you. That's great color. Could you tell me what your ACMI block hours were in the fourth quarter? You may have mentioned it but I didn't get it. Could you repeat that.

Yes, it was 25,000 and change. Hang on a minute, Kevin. See if I can locate it here. 25,135 and that was up 9% from the third quarter. So I didn't give you the third quarter number, but I guess you can back into it.

We can, yes, thank you. That's great. Thanks. Let's touch on your Brazilian market that you are entering into with RIO. How would you describe that market today?

Right now, we get the most level of interest in terms of aircraft availability. As I said, RIO was operating the 727 today. Essentially with the 767 going into their fleet it will double the capacity of the current aircraft that they operate, going from a 22-ton to a 45-ton aircraft. We are seeing a lot of interest in ACMI operations. The difficulty we have is that is the 767-300's marketplace and that was a key factor in us deciding to jump into the 767-300 because it gave us the additional legs and pay load to go down into the southern part of Brazil.

Okay. Great. If we look at the world map, you're talking about possibly future freighter conversions and growing your fleet. What other markets would you like to penetrate that you're not in right now? Could you shed some light on that?

As I said, there are two key markets we want to focus on going forward, because I think we've got a significant presence in the Latin American, North American corridor. Certainly China is at the top of the list as manufacturing moves further inland there, we think the 767 makes a great feeder aircraft into your gateway operations, whether it's in Japan or Hong Kong. We have the one aircraft today operating between Japan and China for JAL, basically servicing DHL as the end customer.

And of course the other market we would like to penetrate is the Asian, Middle East sector. As I noted in my comments that we did start flying for DHL out of Bahrain into Afghanistan with a 767-200 in February. So, we're starting to get there but there is certainly a much bigger marketplace yet to be tapped for the 767 in those two particular sectors.

Okay. Great. Thanks so much for your time today. Joe, I hope you can shake that cold.

So do I.

I just hope I don't get it.

Steve O'Hara, Sidoti.

Hi. Good morning.

Hi, Steve.

I was wondering, if I recall, there was an issue with the pipeline for conversion. Is that still an issue today? If somebody came and offered you five 767s, how long would it take to get those through conversion.

Well certainly we've got the modification pipeline at IAI locked up at least through call it the start of the fourth quarter of this year. But, as it stands right now, because we don't have any available feed stock, it's somewhat wide open moving into 2012. If we did have the aircraft available, first one we probably would see available for revenue service would probably be in the January time frame.

Okay. So there is not kind of a backlog building behind you guys, then?

No, unfortunately, like I said, it's a lack of feed stock, Steve.

Yes. Okay. Then, I mean, everything seems like it's going according to plan. I guess what keeps you awake at night?

Right now this cold. From that standpoint, obviously there is a lot of stuff going on in the Middle East, with the turmoil over there, from a political standpoint which has two impacts. Obviously it's going to drive fuel prices, which it already has to a higher level. As we noted, we were somewhat immune to that in that our business model, we don't have any fuel risks, so to speak. But certainly as fuel prices go higher, it can cause people to pull back on the amount of stuff they want to move via air, so there is a little bit of exposure there. Then of course it's just a pure matter of how far reaching does all that turmoil go and what impact does it have on the global economy as a whole.

But I mean with your long-term contracts and your relatively conservative balance sheet, you guys feel like you're in a pretty good position?

I think the nice thing about our business model, is we have a lot of aircraft that are tied up in networks. We're the network provider for DHL, the largest in the US. We're the provider for Bax Schenker in the US, and of course we have a number of assets with TNT and their European network, and DHL's European network as well. In network operations, you have to go from point A to point B. There is an airplane there because you can't cover and meet your service requirements any other way. If the payload drops, we have less exposure to an aircraft coming out of service than what you would see in a pure ACMI environment. Thank you very much.

Adam Ritzer, CRT Capital Group.

Hey, guys, how are you?

Hi, Adam.

I wanted to talk about 2012. Clearly we have 2011 pretty much lined up and you're talking about no available feed stock past the end of this year. So, what do we do? I have you doing $125 million of free cash on a maintenance basis, no cash taxes. What are the plans after this year?

Certainly going into 2012 with the nine aircraft that we have coming into service, call it the last nine months of the year, you'll get the full impact of those from an EBITDA cash flow perspective in 2012. There is the potential for the 757 Combi upgrade. If we don't get that bid then we'll re-deploy at least the one aircraft that we have today and lease the second sometime in 2012 in an ACMI operation.

I've got confidence that sooner or later we'll find an asset that worth our investment that meets our criteria, a couple of the 767-300s through 2012. It's still early in the game yet.

Okay. So, it's a matter of picking up a plane, one or two here and there, meeting your 10% to 15% requirements, et cetera, and that's where the spending goes. If you can't find anything, what do we do with all this cash? I mean it's a great problem to have, but what do you do?

Eventually, we will find something. So it's a matter of you have to sit on it for a little while. I guess you do in terms of waiting for the asset to become available. There's other places we can deploy that cash as well, in terms of say we do have an unfunded portion of our pension that we can put some of that additional -- if we have free cash available -- put that it into in there and then reduce that liability exposure and get a better return than have it sitting on the balance sheet.

Okay. So, you're pretty confident that you have a 12 to 18 month window here and some planes are going to slip through the cracks. Pick up some here and there and it's not going to be a problem deploying all this cash at a higher returns?

I think Quint has a lot of confidence in my ability to do that.

You seem to be doing it the last five years. You seem to find the planes here and there. Okay. That sounds great. Thanks a lot. You guys have done a great job the last two years.

Thanks, Adam.

Howard Rosencrans, Canaccord Adams

Howard Rosencrans, Hi, it's Howard Rosencrans, Quint. The prior caller just asked exactly the same questions that I was going to. So, I thank you and congratulations.

Thanks, Howard.

(Operator Instructions)Adam France, 1492 Capital

Good morning, guys.

Good morning, Adam.

One quick question to get my thinking straight over here. You talked a little bit about preliminary discussions, upgrading planes with Bax. Where is the overall Bax agreement which I thought we were getting near the end of that life? Has that been renewed or what can you tell me about that?

The current pricing agreement expires March 31, Adam. We're trying to get a meeting scheduled. We started those discussions back in October and have gone back and forth and hope to be able to wrap that up in the coming weeks.

Okay. Great. Thank you for your time, guys.

Take care, Adam.

There are no further questions.

Well, as I described earlier, we are a transformed Company, much simpler and easier to understand since our restructuring, and simpler still by the second quarter.

We're pleased that the growing list of analysts in the investment community and recognize the power of our business model that are now following the Company. Many of those analysts have noted the significant cash flow generation, as reflected in our EBITDA, a characteristic we believe will become increasingly evident as we continue to generate targeted returns with the additional aircraft we have scheduled during the last three quarters of 2011.

We think that cash flow really represents the power of this Company, and the power of our business model to generate it is a primary reason why ATSG was the third best overall performer of any stock listed on a US exchange over the last two years. And outperformed its closest peer company by a five-fold margin during 2010 alone. We believe that it still remains undervalued on a relative performance basis today.

Thanks to all of you for your continued support and confidence in ATSG. Have a quality day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.