Air Transport Services Group Inc (ATSG) 2013 Q1 法說會逐字稿

Welcome to the Q1 2013 Air Transport Services Group, Inc. earnings conference call. My name is Dawn, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to the Joe Hete, President and Chief Executive Officer of Air Transport Services Group. Mr. Hete, you may begin.

Thank you, Dawn. Good morning, and welcome to our first-quarter 2013 earnings conference call. I'm Joe Hete, President and Chief Executive Officer of ATSG. With me today are Quint Turner, our Chief Financial Officer; Joe Payne, our Senior Vice President and Corporate General Counsel; and Rich Corrado, our Chief Commercial Officer.

We issued our first quarter earnings release and filed our 10-Q with the SEC yesterday afternoon. You can find both on our website -- atsginc.com.

Our first-quarter results were good overall, with both net earnings and adjusted EBITDA about what we anticipated for the quarter when we gave you guidance in February. We continue to expect adjusted EBITDA for the year in the $175 to $180 million range.

That's our baseline outlook, which reflects business we already had at the start of the year. But we also said that we hoped to be able to do better than that if air cargo markets improved. So far, we see few signs of that improvement on our radar. Our reading of industry reports indicates that no one else is seeing significant improvements either.

Fortunately, we still expect 2013 to be a good year, mainly because we are benefiting from cost reduction programs that started a year ago, and will continue throughout 2013.

Quint is ready to review our first-quarter results in more detail. I'll return with some additional operating highlights after that, and then take your questions. Quint?

Thanks, Joe, and good morning, everybody. Let me begin by advising you that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties. Our actual results and other future events may differ materially from those we 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, factors, new information, or other changes.

These include, but aren't limited to, changes in the market demand for assets and services; timely completion of additional Boeing 767 and 757 aircraft modifications and certification testing; the timing associated with the deployment of aircraft among customers; and our operating airlines' ability to maintain on-time service and control costs.

There are also other factors contained from time to time in our filings with the SEC, including our 2013 first-quarter Form 10-Q, which we filed yesterday afternoon, and is available on our website. We will also refer to non-GAAP financial measures from continuing operations, including adjusted EBITDA and adjusted pre-tax earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures aren't meant to substitute for our GAAP financials. We advise you to refer to the reconciliation to GAAP measures, which was included in our first-quarter news release also found on our website.

We delivered on our guidance for the first quarter, as our adjusted EBITDA increased 9.5% year-over-year. We achieved these results largely through favorable expense trends. During the quarter, we completed the merger of CCIA and ATI. We agreed to place four freighters -- three Boeing 767s and one 757 -- with DHL, and we continue to make long-term investments in our military business, purchasing the last two of three 757 combi aircraft we agreed to acquire last year.

Revenues on a consolidated basis for the quarter -- traditionally the slowest in our industry -- were $143.3 million, down from fourth-quarter revenues of $154.6 million, and flat compared to the same period a year ago. Net earnings from continuing operations for the quarter were $8.5 million, a 28% improvement over the $6.7 million we earned in the first quarter of 2012. Our earnings per share from continuing operations were $0.13 for the quarter compared with $0.11 a year ago. Our adjusted EBITDA, which excludes the continuing effect of unrealized derivative gains, was $37.3 million, a 9.5% increase over last year's $34.1 million for the same period.

Those expense improvements I mentioned included a $3.8 million reduction in our employee compensation expense, which reflects the progress we made in 2012 and early this year in reducing positions in our now-combined ATI organization. Headcount was down 12% since the beginning of last year, and pension expenses declined $1.1 million, due to better pension asset returns during 2012. Reductions in expense were offset in part by normal wage and benefit increases. With the completion of our airline merger behind us, we expect continued progress in that regard in the second half, including flight crew and maintenance positions associated with our DC-8s.

Travel expenses declined $1.3 million versus a year ago, reflecting fewer flight crews and fewer international flights.

Maintenance expense was down about $1 million. Fewer heavy maintenance checks during the first quarter this year were partly offset by higher outsourced engine maintenance costs.

Turning to our segment results, our leasing business, CAM, had pre-tax earnings of $16.9 million for the quarter, flat with a year ago. CAM incurred additional expense to place and support a larger fleet of Boeing 767s and 757s, including additional depreciation expense. CAM's revenues increased $1.1 million from 2012 to $39 million. Over the past 12 months, CAM modified and deployed three 767-300 freighters, leasing them to our airlines. At the end of the quarter, CAM owned 47 aircraft available for service. Twenty of the CAM-owned aircraft were leased to external customers and 27 to our affiliate airlines. Aircraft added to the fleet were more than offset by the retirement of five DC-8 and 727 freighters.

ACMI Services reduced its pre-tax loss by 34% year-over-year to a loss of $5.4 million. Lower personnel costs, including lower pension expense and the reduction of airline-related headcount by 26% since the beginning of 2012, were the principal factors. Revenues were also flat for ACMI services. Airline block hours for the segment were down 13%. Revenues declined less than block hours, because aircraft used for international routes in 2012 were replaced by four additional aircraft placed in DHL's US network for shorter express routes.

First-quarter results from our military combi operations remained stable compared with a year ago. However, as I said during our last conference call, we expect to bear approximately $1 million in flight transition costs for crew training and proving runs in the second quarter, as we phase in our 757 combis.

Pre-tax earnings from our other business activities, which include our maintenance MRO and postal operations, were $2.2 million, up from the first quarter a year ago. External customer revenues for those other businesses were $13.6 million, an increase of 5%, as Postal Service revenues were up $2 million over last year.

First-quarter net cash flow provided by operating activities was $30.7 million, down from $43 million in first-quarter 2012. Increased pension contributions and lower payments from DHL were the principal factors.

Capital expenditures for the quarter were $59.4 million, versus $46.8 million for the first three months of 2012. Most of that was for the two Boeing 757 combis we bought in January. We said in February that we expect CapEx for the year to be about $110 million, compared to $155 million for 2012. So, as planned, we spent over half of our current capital budget in the first quarter. Joe will comment more on that shortly.

As of March 31, we had drawn $194 million against our revolving credit facility to fund our CapEx plan. You may recall that the limit on the revolver was increased by $50 million to $225 million last July, with the potential of an additional $50 million in capacity subject to lender consent. Even with our additional revolver borrowing, our financial position remains quite strong. Our debt-to-EBITDA ratio at the beginning of 2013 was 2.3, which qualified us for a continued low interest rate of 2.5% on our revolver during the quarter.

Before I hand the call back over to Joe, I want to reaffirm our confidence in the 2013 outlook he shared earlier, but I also want to highlight a few factors that you should keep in mind as you adjust your own models for second quarter and beyond.

I mentioned that we are looking at some increased expense in the second quarter -- approximately $1 million related to the certification and deployment process for our 757 combis. In addition, we will see a significant impact starting in this quarter from further escalations on our 767 engine maintenance contracts.

We will also perform two more C-checks in the second quarter than we had in the first. Those items together will increase our maintenance expense by approximately $2 million in the second quarter over the first quarter. Interest expense decreased by $400,000 in the first quarter because of the expiration of certain interest rate swaps, and the interest rate on the senior credit facility decreasing to 2.46% from 2.58%. But we expect higher interest expense on our increased debt going forward.

Joe is standing by to cover our operations and our outlook for the rest of 2013. Joe?

Thanks, Quint. In the first quarter, we demonstrated once again that our business model works. We showed that we can grow our earnings and invest in our business even as the markets run their course. A big part of that model is the long-term external lease, which supports 20 of the 47 aircraft we own today. That strong source of cash is a principal reason we have the financial strength and stability to endure the ups and downs of the air cargo business when others are falling by the wayside.

We also benefit from having great relationships with strong customers such as DHL, and our combi relationship with the US Military's Air Mobility Command. Our communications with both remain open and frequent, and we are confident of our role in their planning.

I also want to express appreciation to the FAA for their cooperation in reviewing and approving our airline merger. Despite many other items on their agenda, we got great effort and attention to our issues, and completed the process roughly when we expected to. That great working relationship has also carried over to our 757 combi certification. We started our first proving runs with the 757 combis on Monday. We are hoping to complete those runs and achieve certification to get the 757s in service before the maintenance cycle on one of our remaining DC-8s expires. If that doesn't happen, we have a backup bridging plan to cover the combi routes.

In every other respect, we have a less intensive fleet development program than in years past. One of our last two 767-300s has completed mod, and our fourth 757 freighter is due to begin service very soon. That 757 joins three 767s we added to DHL's US network over the winter as replacements for the 727s we retired at year-end.

As we said on our last conference call, given that we have a few 767 aircraft that are underutilized today, we have no plans to acquire any more right now. The exception to that plan would be a customer willing to commit to a long-term lease for an aircraft type from us that we don't have available in our fleet today.

As Quint said, our operations are benefiting from positive expense trends that extend beyond the merger synergies. When we are able to put more aircraft in the sky for more hours, the cost structure we are developing should push our margins up even higher than before, when we were supporting the overhead of three separate airlines. Job One remains, of course serving the customers we have today. And in that sense, we are doing an outstanding job, especially now that our legacy freighters, the 727s and DC-8s, are retired.

We continue to earn incentive awards for superior performance under our CMI agreement with DHL, and for some of our other agreements with incentive clauses as well. Our mechanics and flight operations staffs are now able to focus on only two aircraft types that are closely related, and airframes that have, for the most part, been extensively renovated and upgraded within the last five years. Less unscheduled maintenance, better on-time performance, and soon-to-be two-person crews in all our cockpits, means a big improvement in operating margins as we deploy more aircraft.

Our Chief Commercial Officer, Rich Corrado, is here just back from some major industry conferences and customer meetings, where he got a fresh perspective on the market outlook. He will be available to take your questions, but I don't think I'll be stealing his message to tell you that we are continuing to see very strong interest in our aircraft assets and in our operating expertise, but also reluctance to make commitments.

Rich is continuing to pursue all avenues to build operating hours for our fleet and crews, including block space agreements between paired-up customers and ad-hoc flying when available, which has resulted in a 21% increase in ad-hoc revenues in the first quarter versus a year ago. Rich's marketing efforts are putting our name and capabilities in front of every potential customer around the world, and we continue to hold substantive conversations with many of them.

In the meantime, we will continue to execute the plans that will bring us approximately $5 to $6 million in merger synergy benefits this year. We have already captured work force efficiencies that allowed us to drop 26% of the positions in ACMI Services since the first of last year, and that process is accelerating now that that the merger is complete. As that process unfolds, and as we reap the benefits of increased merger efficiencies, additional expense reductions, and leverage the investments we have already made in aircraft assets, I remain confident that we can achieve the baseline EBITDA targets we outlined in February, and do even better than that if our current deployment opportunities take off.

With that, I'll open the floor to your questions. Dawn?

(Operator Instructions) Helane Becker, Cowen.

Just a couple of questions. One, Joe, the language you used in your comments about the capital return, I know you guys have talked about it in the past. But I feel like this is the first time you've actually put it in writing in a press release like this.

Well, Helane, from the standpoint of capital allocation, as we said, right now, we've got assets that are sitting idle, as we put in the press release. And so, as we start to de-lever the Company going forward -- because we don't have any additional commitments at this point in time and don't plan on making any -- then one of the options, obviously, is to return some capital to shareholders or just accelerate the pay-down of debt, for example.

Right, right. So, yes, so that's kind of a good guy -- as I'm fond of saying -- a good guy event. Just for a balance sheet question, so, given what you just said about not acquiring any additional assets and so on, would you have to revisit the goodwill allocation on the balance sheet at some point?

I mean, we look at the goodwill balance each quarter, Helane, just to make sure there's no impairment of the balance and so forth. As you know, we have taken impairments over the course of the last several years a couple of times. There's no reallocation of that, per se. The goodwill that we have on the balance sheet is related to ATI and to CAM, and it stems from the transaction at the end of '07 when we purchased them. And we review it each quarter to make sure that the balance is supported by the past and future cash flows from those entities.

Okay. And then do you have a target for either debt or net debt that you would want to get to?

Well, in terms of a target, I mean, certainly, we have, as every company would have, we have forecasts that would project where we're going to be on that. I think in terms of a target, we're quite low in terms of our leverage today. And, as we've said, given that we don't have these capital commits significantly beyond as we look forward, we expect to see our net debt leverage continue to decline -- unless we were to find an opportunistic use of our capital to invest in an asset that perhaps we don't have today, or there was some synergistic transaction that made sense to us, et cetera. I mean it looks like we're going to produce free cash flow that should result in a continuing decline in our leverage.

Right. Got you. And then just one last question and then I'll turn it over. In terms of pilots, I know you had some pilots on furlough. Do you still have pilots on furlough? Or can you just talk about the rate at which they're retiring?

Yes, in terms of the pilots, obviously, we have two air carriers now. And, of course, the merger of Capital and ATI will ultimately result in a further reduction of some of the flight crews. But if you go back to -- ABX probably has the largest group of furloughed pilots at this point in time, Helane. I mean, when you think back to when we started the DHL wind-down, we had, I think, 800 active crewmembers somewhere around that period of time. Today, we currently have active, call it, around 230 to 250 at ABX.

We've probably got about 125 crew members that are still on furlough, ballpark figure 150. The ABX guys have a seven-year recall right; whereas the ATI guys, I believe, have a five-year recall right. So we've still got quite a few of them on furlough from a retirement standpoint. Obviously, the change from 60 to 65 allowed people to hang around a bit longer than what originally was planned for.

Right now, today, I think if you look at everybody that was 60 and above, that number is probably 25 to 35, I think. So, it will be a while before we flush that pipeline. Now, the guys that are on furlough may have been employed elsewhere that we're not aware of at this point. So, until we try a recall, you never know.

Got you. Okay. Well, thanks very much. Thanks for your help.

Jack Atkins, Stephens.

Thanks for taking my questions. So, I guess first off, if we can maybe just talk about the -- or kind of dig into the overall demand environment a little bit more. You talked about having increased customer inquiries coming in for your assets. Could you maybe talk about what's holding your customers back from ultimately committing to taking additional aircraft? Just sort of curious sort of what the major hang-ups are for some of these customers.

I'll let Rich Corrado handle that one, Jack.

Jack, it really depends on the geography and the type of customer. But I'd put them in two basic areas. We've got a couple of customers where we've agreed to pricing, signed LOI's, and we're working through regulatory approvals. And so, those are taking some time to do. They're making progress. They're moving, albeit slowly. So we've got two or three potential aircraft should those approvals be affirmed and the agreements moved forward.

The other is just a general cautiousness in the market. World trade is flat, demand is soft and capacity is up. All of the industry reports are coming out echoing the same information. And so people are very cautious. We've agreed to pricing -- you know, general pricing on certain assets in different parts of the world with several customers, and they're just cautious on pulling the trigger.

With the overcapacity situation that's hit the general cargo industry over the past -- really, it's been evolving for two years now -- and with demand being down, it creates a situation with cargo yields where there's just some, in addition to the uncertainty, they're just too low. So, in some markets, they're waiting for the yields to come back before they pull the trigger, and in some markets, they're waiting for growth.

The other thing I should say is, our prospects take the form of both growth and replacement. And we have half -- about 50% of our pipeline is replacement aircraft. And a replacement situation is for an older aircraft, such as an A300-B4, or in some cases, a larger aircraft where they are looking to downsize. In those cases, there is a notice period that has to be given. And so they want -- they take a much more stringent evaluation point before pulling the trigger on terminating their current agreement with another provider. So, a bit of a mixed bag, Jack, in terms of the market; but overall, I would just characterize it as continually cautious.

Okay, great. Thank you, Rich, for that color there. And then, Joe, on the fourth-quarter call, you all noted that your 2013 EBITDA guidance range could have, call it, 8% to 10% upside if you're able to achieve your own internal placement goals. I was wondering if you could maybe give us an update on if the magnitude of that upside has changed, now that we're over four months into the year. Just -- I guess I'm just curious if -- to find out where we are versus your own internal goals of placing those four underutilized aircraft.

Yes, Jack. As far as the growth potential above our baseline, we're kind of -- where we're at today, as Rich mentioned, people being slower to pull the trigger. Some of the opportunities that we thought would start, call it, mid this quarter, later this quarter, are sliding, call it, 30 to 60 days to the right. So, the potential to hit that 8% to 9% has been tempered somewhat by that delay in implementation.

Okay. Okay, thank you for clearing that up. And then last question for me and I'll jump back in queue. Quint, when you were talking about the incremental expense associated with the combi flying to the personnel expense, typically, your salaries and wages line decreases a little bit sequentially in the second quarter from the first. Were you saying that you expected that to be up $1 million sequentially? Or just that you expected $1 million of extra costs associated with that particular item?

It was more about the item, Jack. I think the -- what drives that trend is, of course, you get some maxing out on your Social Security percentage, you know, your payroll FICA and things like that, are still going to be positives in terms of that trend in that line item. I would -- you know, I'd expect that line item to be perhaps down slightly from where we finished the first quarter. Now, if it wasn't for that $1 million, obviously, we'd see more of a -- you know, what you'd typically see, which is a pretty good drop in the second quarter.

Yes, kind of what we're wrestling with, Jack, is that the actual merger completion was probably about six weeks behind what we originally anticipated -- four to six weeks. And then, of course, that's driving -- or kind of pushes the ability to get the combi on certificate, which gets us into position where we can restart retraining the DC-8 crews to fly the combi, and then leverage the base of 767, 757 crewmembers to increase the efficiency part. So there is a little bit of a bump in the second quarter as a result.

Okay, okay. Thanks for the time, guys. I appreciate it.

Kevin Sterling, BB&T Capital Markets.

Joe, how should we think about the $5 to $6 million of merger synergies you talked about? And in particular, I'm asking how quickly can you capture some of those synergies?

I think you'll see the lion's share of that take place in the second half of this year, Kevin. Again, the key driver there is now that we've got the merger done, we can get rid of some of the, call it, the overhead functions that were duplicative between the two airlines. But now we've got to go through kind of that flushing of the pipeline in terms of re-jiggering the flight crew numbers to match up with the fleet as it is today. So, it will take us probably through the early part of the third quarter to flush the pipe on the pilot piece of the equation. So the latter part of the third and a lot of it in the fourth.

Good, thanks. Are you seeing any feedstock even though you may not really be looking? And if so, are you seeing pricing become more attractive as the market remains soft? And I know Aircastle kind of indicated that they're seeing pricing become attractive. Just curious what your thoughts are.

Not being real active in the market at this point in time, we obviously are apprised from time to time when people do have assets available, but I wouldn't say that we've seen what I would call any kind of significant softening in the pricing associated with any assets that are out there. That delay in the 787 because of the battery issue kind of put people behind the power curve. We know a couple of customers, for example, that had planned to divest themselves of some of their 767s that are still having to hold onto them because their deliveries got shoved out a few months.

I mean, one of the things, Kevin, we do is, of course, appraise -- we do annual appraisals in connection with our bank facility. And actually the values on the 767s, for example, the 200 and 300, have held up very well, even in a down market. You know, so as Joe says, the delays in 787 program and the just lack of supply of those aircraft in the market have actually resulted in keeping the price of the aircraft up. And it's standing up pretty well, even in this sluggish economy.

Okay, great. And one last general question. Joe, you highlighted the strength of your relationship with DHL and how important that is, and DHL continues to grow. Are you still in conversations -- you've got a lot of your planes with DHL -- are you in conversations with them, maybe taking additional capacity? Because now with the UPS/TNT merger off the table and maybe some of the issues TNT is having, particularly in Europe, and DHL maybe a beneficiary of that, are you having -- I mean, maybe is DHL looking to you for some additional capacity? Is it something you could comment on or maybe just some general trends?

Well, I think DHL has had -- based on the conversations we've had with them, they had a pretty good first quarter out there. I know they haven't released their information yet. So I think there will be a pretty good sign. But when you look out, we are always having conversations with them from a strategic perspective, trying to understand what their requirements are. And of course, since they are our largest customer, we always want to make sure that we give them a high priority, in terms of when we do have assets available. And it's always helpful to know in advance when they are going to need one of those assets, as opposed to just popping up later on.

Right. Okay. Well, thanks so much for your time and congratulations on a nice quarter in such a challenging environment.

Thanks, Kevin.

Stephen O'Hara, Sidoti.

Could you just talk about the hangar facility? How that's progressing and how we should think about that going forward?

The hangar facility, Stephen, will be online, call it, the end of the first quarter of 2014. Right now they're still doing groundwork out there. We haven't seen anything really come above ground yet -- relocating utilities, et cetera. But the latter part of this year we'll probably be in a position where we'll have to start doing some hiring in anticipation of opening the doors, call it April of 2014.

Okay. And I mean, so, we should expect the -- this is a maintenance facility, so I mean, in terms of the maintenance operation, that's going to become a much more -- or maybe not much more, but a bigger part of your overall revenue?

Yes, it would. In terms of the square footage, it allows us to open up a couple more lines of business. One of the things we are restricted with today is floor capacity, call it. So, it essentially doubles the ability in terms of the fixed maintenance lines that we would have, once we open the doors on that facility.

Okay. And then you had mentioned -- and I think Helane had highlighted, about the returning cash to shareholders. And I think in the past, there was an issue with the cashless amortization of the DHL note. Is that -- what's the size of that note now? And has that changed at all?

Well, every quarter, of course, the amortization on that note is about, I think, $1,550,000 or so, Steve. And so the balance right now -- it matures at the end of March of 2015. It will be zero by then. So, you can kind of work backwards, but it's going to soon be under $10 million here.

And by the end of the year, I think it's at $7.8 million roughly.

Yes. Yes. So it's getting to be -- it's fast disappearing here.

So when you look at it as a percentage, you obviously -- the note calls that 20 cents on a dollar. So, as we get -- that note gets smaller, relative to whatever size of potential buyback or dividend you would pay, it becomes a smaller and smaller percentage versus that 20%.

Okay. Okay. So there -- but there hasn't been any change with that kind of issue? Okay. All right, thank you very much.

Jonathon Fite, KMF Investments.

Just want to marry some of the comments you made about the air freight market with your fairly bullish EBITDA outlook for the remaining quarters. If we look at your current adjusted EBITDA and compare that to your full-year outlook, it looks like we're basically implying a ramp of about $10 million or so per quarter for the remaining quarters? And so I'm trying to marry that with some of the comments around signings or continuing to push 30 to 60 days to the right -- you know that kind of implies that your outlook might even be higher or a higher ramp in the back half.

But can you just kind of walk us through how you get there from here? I mean, I know you specified some incremental synergies that are expected. But you're also pointing to a fairly stable, if not slightly weaker, freight demand environment. So I'm just trying to understand, are there unutilized planes that are expected to contract in the coming months to get us there? Or are you expecting kind of incremental new planes to come onboard? If you can just help us walk from our current EBITDA to the $175 million, $180 million outlook, that'd be great.

Keep in mind, the $175 million to $180 million, we said that that was based on aircraft that were currently under contract when we started the year essentially. So when we say that we had four aircraft that were underutilized during the first quarter, that $175 million to $180 million assumes that those four tails still stay underutilized, as we transition through the year. And we would still have two more 767s that weren't reflected in the first quarter that will come out of modification. If we deploy those, that's where we get the 8% to 9% upside.

Now, the lion's share of that improvement comes through cost improvements in terms of the operations and with some of the things we've talked about on this call, in terms of rightsizing the pilot group, et cetera, and flushing out the balance of the duplicate overhead costs, as a result of the consolidation between ATI and CCIA being a big contributor. But the -- when you look out, it definitely is back-loaded in terms of where you would see the EBITDA being generated, because we do get everything quote/unquote right sized later this year.

So that just -- I just want to play back what I heard. So, the four plus two, or six kind of effectively underutilized tails, you're not assuming any of those get deployed in order to hit the $175 million to $180 million exit? Is that right?

That was part of the base plan, yes.

Okay. And just kind of to understand, as you guys start to look at capital returns, is it simply a function of the amortization of the DHL note that makes that a more interesting opportunity now, versus where the stock was 40%, 50% lower nine months ago? Is that kind of the only constraint that you guys have been looking at?

Jonathon, the other constraint was, remember, we bought the combi's recently. And we had to lever up to do that. And if you look at where we started the year, we have a $225 million line of credit, and we were pretty close to maxing that out. I think we started the year with letters of credit within about $12 million or so of maxing that out.

And so, to us, it made a lot more sense to -- given that our CapEx was front-loaded this year -- to pay -- to regain some flexibility by paying our line down and de-levering. And that, to us, made the most sense as we thought about the first half and even into the second half of the year.

Now, once we've done that and regained that flexibility, you know we'll -- again, looking at our future commitments -- we'll take a hard look at the best use of our capital, just as we've said we will. And certainly returning cash to shareholders is one of those options. As coincidentally that note continues to shrink, which isn't a bad thing, because if we reach a point in time when we need to do that, that may soon be a non-factor. And as it stands today, basically would add a 20% cash premium, call it, to whatever we did, for example, if we were buying back shares.

Have the returns on the CapEx for those combi's been sufficient in your mind in relation to maybe retiring shares south of $4.00 a share?

Well, it's kind of a moot point at this point, Jonathon. We bought those combi's. So, in our view, modernizing that fleet and protecting that long-term revenue stream was a much better use of our capital than -- I assume you're talking about something like a dividend or a share buyback.

All right, fellows. I appreciate your time today. Thanks so much.

Adam Ritzer, Pressprich.

I guess getting back to Rich's comments about assigned LOIs. I think he said there's -- you have two to three signed LOIs for aircraft. Can you explain the timing of that, how long it takes to go from an LOI to where a customer actually takes control of the aircraft and you start getting lease revenues?

Really, that depends on the part of the world it's in and the regulatory environment that you need to go through, and whether or not the aircraft type that we're proposing has flown in that country before, it's been certified in that country before. So depending on all those things, you may need to get the aircraft certified. You may need to get routing authority certified and some other regulatory approvals. So there's a number of things that might need to occur. If we are not touching the United States, then generally, we're going to have a pretty involved regulatory process that we need to go through.

Right. I understand. Is it a month? Is it six months? Can you --?

Adam, each case is different. And just the fact that somebody signs an LOI is no guarantee that it's going to ultimately result in a definitive agreement. The LOI basically lays out the terms, and in many cases, you need that document just to get the regulatory process started. So, for example, one of them we've been talking to the folks for basically just shy of a year now, trying to work through some of the regulatory type issues. So -- and then you get other ones where we could sign an LOI next week and 30 days from now, the airplane would be flying. It's all relative to each individual case.

Okay. Okay, I understand. Getting back to your CapEx, I think you said you spent about half your CapEx in Q1. The other $50 million or so CapEx, when is that going to be complete?

Most of that will be in the, call it, second quarter and early third quarter. We have another 767 that's just finishing mod now, so that money will be spent in the second quarter. We have the last of the 767-300s in modification today. It comes out in the third quarter. So the final payment on that one will be in the third, and then you have the routine maintenance CapEx stuff that occurs throughout the year. So, the majority of it will be spent by the end of the third quarter.

Okay. And then I guess the thinking is you use some of your excess cash at that time to pay down some of your revolver. So, beyond that, that's pretty much about it, I would guess, right?

Yes, unless, as we said in our release, if we have a definitive commitment from a customer for additional assets. For example, we've got idle 767s today, but a 757 requirement may pop up, because the four that we own, excluding the combis, they're all essentially under contract today. So it will depend on what other opportunities are there, and we'll weigh those against the other option, which is returning capital to shareholders.

Right. So, getting back on that, I realize how the DHL note works. Is there -- what do you have in your current bank agreements? Does anything prevent you from paying a dividend, buying back stock? Are there limitations based on those agreements in place now?

We would need to be under two times leverage debt to EBITDA after giving effect to whatever return of capital we were contemplating. And so, right now, we're not below that. As we said, though, as we begin to pay down our revolver, pay off some of it, then we'd quickly de-lever. So, the timing actually that we described, Adam, puts us toward the end of the year. Again, we think that flexibility is something that becomes more -- given the front-loading of the CapEx, more an option to us late in the year or as we look into 2014.

Great. Okay. That's all I had. Thanks very much for your time.

Thank you. Our last question comes from Harrison Wreschner from Andalusian Capital Partners.

Just a couple of questions. In terms of the, I guess, relationship with your lenders, and you talk about that covenants, I'm assuming, being that these are hard assets behind it, do you have a pretty good relationship with your lenders? If you felt that you wanted to get a little bit more aggressive or needed some covenant relief, or ability to open up another RP basket, do you think you'd have that ability at a reasonable cost?

If we needed a reasonable amendment, yes, we certainly have an excellent relationship. Most of the lender group that's in our refinance deal that goes into 2017 is also the ones that were in the original deal, back in 2007.

When we redid our credit facility, we were oversubscribed to the tune of about 50%, yes. So we've got a great relationship with our banks.

All right, great. So hopefully, there won't be any issues there if you guys do decide to get more aggressive one way or the other. Another question in terms -- I'm curious -- you have two to three planes under LOI. What -- an LOI, as you point out, is kind of before regulatory, but what's the general -- if I wanted to think about conversion factor? I'd assume international is probably the lower conversion factor on LOI to someone who takes the plane and go. Is LOI, in this industry in your business, a very significant item? Or do you sign LOI's all the time and nothing comes from them?

No. We don't sign them all the time. They are generally a good indicator of a specific amount of interest. And generally what follows that is a lot of work on both companies' part towards formalizing the agreement and a lot of work towards the regulatory piece. You know, it's an indicator that there is serious interest in the aircraft and that pending all the other things coming forward with it in the market staying up. I mean, sometimes the market softens while you're in the process of going through this type of thing. In fact that happened to us last year with an opportunity in Asia.

I've seen customers walk away from large deposits as well. So it's indicative that there is interest in the assets and there is interest in the opportunity, but there's a lot of work that still needs to come forward before the deal comes to fruition

Have you ever been shot down on these planes due to regulatory hurdles?

Shot down in terms of --?

I.e., the deal never going through because of regulatory hurdles? An LOI was signed, agreed upon, and regulatory hurdles were a problem?

Not that I can recall.

Okay. Are there any deposits on these planes -- you signed an LOI -- were there any deposits down?

We have deposits on a couple of planes.

Okay. All right. Well, that sounds like it's all moving in the right direction. Great quarter, and thank you guys very much.

All right, thank you.

Thank you. I will now turn the call back to Joe Hete for closing remarks. Please go ahead.

Thank you, Dawn. Tomorrow is our annual meeting here in Wilmington, so I hope I will see some of you there. If not, Quint and I will be back on the road again over the next few weeks. We offer a significant reward to investors over time from the strong cash flows we can generate for more lightly levered assets than many of our peers, supported by a solid base of long-term leases. When you look at ATSG as a pure play asset allocator with a good margin enhancement program underway, we think we have a very compelling story to tell. So, thank you for your time and have a quality day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.