Air Transport Services Group Inc (ATSG) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 Air Transport Services Group earnings conference call. My name is Christine 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 Joe Hete, President and CEO of Air Transport Services Group. You may begin.

Thank you, Christine. Good morning, and welcome to our fourth-quarter 2013 earnings conference call. I am Joe Hete.

With me today are Quint Turner, our Chief Financial Officer; and Joe Payne, our Senior Vice President and Corporate General Counsel.

Rich Corrado is out meeting with customers, so he won't be joining us today.

We issued our fourth-quarter earnings release yesterday afternoon. You can find it on our website, ATSGInc.com. We will file our 10-K early next week.

Our results for the fourth quarter and year were on target with our revised EBITDA guidance after setting aside the non-cash impairment charge we recorded in our airline operations.

The good news is that we have resolved all the significant operating issues that challenged us last year, completed our combi fleet upgrade and continue to work down our costs wherever we can. While we still have aircraft assets available for deployment, we are having in-depth conversations with potential customers that would cover all of those assets.

While we are optimistic about those discussions, I have learned enough over the last few years to know that markets remain very fluid, and there is every reason to remain cautious until we have definitive agreements. That's why the EBITDA guidance for 2014 of $165 million $170 million that we reported in our earnings release yesterday does not include any additional deployments from those we have today, but we expect that to change as the year unfolds.

Our free cash flow is likely to improve significantly this year. That includes more favorable trends affecting our reduced capital spending requirements and our pension plans.

Quint is ready to review our fourth-quarter results, including a discussion of the impairment charges at ATI. I will follow him with another update on major developments during the fourth quarter and offer some perspective on current and future market conditions before we take your questions.

Quint?

Thanks, Joe, and good morning, everyone.

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 obligations to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.

These include but aren't limited to:

- changes in the market demand for our assets and services;

- the level of deployments of our aircraft, and

- our operating airlines' ability to maintain on-time service and control costs.

Other factors are contained from time-to-time in our filings with the SEC, including our 2013 Form 10-K, which we will file early next week.

We will also refer to non-GAAP financial measures from continuing operations including adjusted EBITDA and adjusted pretax earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and also on our website.

Following up on Joe's comments, our fourth-quarter results demonstrate that we continue to make steady progress against our goals to improve our cash returns. We delivered the adjusted EBITDA we projected, in the $155 million $160 million range, and are more confident about the outlook for 2014, especially for strong growth in free cash flow.

Our fourth-quarter revenues on a consolidated basis were $157 million, up $16 million from the third quarter and $2 million from the fourth quarter last year. The sequential quarter increase was largely due to seasonal ad hoc flying, and from our maintenance and postal sorting businesses. Revenue was up versus a year ago, attributable mainly to additional airline operations for DHL in the US.

For the year, revenues of $580 million were down 5% from 2012. The lower revenues were due to soft international markets, and delays in deployment of the Boeing 757 combis for the military.

Results for the quarter included a non-cash impairment charge of $52.6 million to write off goodwill associated with ATSG's 2007 acquisition of Air Transport International, or ATI.

Excluding the non-cash impairment charge, fourth-quarter adjusted earnings from continuing operations were $9.7 million, or $0.15 per fully diluted share, down from $12.2 million, or $0.19 per share a year ago. Including the impairment charge, ATSG had a loss from continuing operations of $42.8 million, or $0.67 per share for the quarter.

For the year, adjusted earnings from continuing operations before the impairment charge totaled $33 million, or $0.51 per fully diluted share, versus $41.6 million, or $0.65 per fully diluted share in 2012. Lower revenues, especially in our ACMI Services segment, were the primary driver for decreased earnings from continuing operations for both the year and the quarter.

Due to its deferred tax position, ATSG does not pay significant cash federal income tax and does not expect to until 2016 or later.

Fourth-quarter EBITDA adjusted for the impairment charge and derivative gains was $44.3 million, an increase of 4% over fourth quarter 2012 and $4.2 million greater than the third quarter. We hit the midpoint of our targeted range for the year with adjusted EBITDA of $157.5 million.

Operating expenses excluding the impairment charge were down 3% from 2012, as we restructured ATI and brought costs more in line with our revenues. The major cost factors were:

- a $9.3 million reduction in wage and salary expense from 2012 levels, driven by reduced headcount;

- an $8.8 million reduction in travel costs and landing and ramp expense, due primarily to fewer international operations;

- and a $4.6 million reduction in fuel costs, aided by the introduction of the more fuel-efficient 757 combis.

Now, in our segments, pretax earnings from our leasing business, CAM, decreased $2.3 million for the year to $66.2 million, and by $1.5 million to $16.2 million in the quarter. Revenues increased by $5.8 million year-over-year to $160.3 million and $2.4 million quarter-over-quarter to $41.9 million.

Five additional Boeing 767 and 757 aircraft in service in the fourth quarter this year as compared to a year ago led to the segment's revenue growth. But the additional aircraft also yielded higher depreciation and interest costs, resulting in lower pretax income. The segment also experienced lower sales of aircraft and engines in the fourth quarter as compared to the fourth quarter of 2012.

As of December 31, 2013, CAM had 49 freighter aircraft, 20 leased to external customers and 29 to our internal airlines. CAM's revenues from aircraft leased to its airline affiliates totaled $88.7 million during 2013, an increase of $8.7 million from a year ago.

CAM's in-service fleet at year end consisted of 42 767 freighters, four 757 freighters and three 757 combis. The fourth 757 combi entered service for the military last month, and CAM's seventh 767-300 freighter will enter service later this month.

ACMI Services had a pretax loss excluding impairment charges for the fourth quarter of $4 million, an increase of $1 million over the fourth quarter 2012's loss. For the full year and excluding the impairment charge, the pretax loss was $25.6 million, an increase of $11.1 million versus 2012.

The increased loss in 2013 was primarily due to lower revenues, down $34.5 million for the year and $3.7 million for the fourth quarter, but up $7.7 million sequentially from the third quarter.

Excluding the impairment charge, operating expenses for ACMI Services declined $15.1 million for the year, despite a $3.6 million increase over 2012 in costs for non-reimbursable airframe maintenance checks. The lower expenses were helped by the consolidation of ATI and CCIA operations, which saw a 28% reduction in airline-related headcount since the beginning of 2012.

As we have shared with you in prior quarters, the main challenges in improving the profitability of our ACMI Services segment have been centered throughout the year at ATI. The phase-in of our 757 combis was slower than we had projected, resulting in lower military revenues and higher than anticipated costs while we continue to operate the legacy DC-8's and completed the FAA requirements associated with the combi fleet transition.

While we have continued to make sequential quarterly progress and ATI's results have shown steady improvement, the recent termination of support for DHL's Mideast network and the continuation of a flat cargo environment led to our decision to write off ATI's goodwill in the fourth quarter. Additionally, we have recently noted an increase in customer interest to dry lease 767 freighter aircraft, which may limit ATI's access to those aircraft as we look forward.

While a greater number of dry leases would be good news from a consolidated corporate perspective, it may negatively impact ATI's access to aircraft going forward. This forward view of likely asset allocation, including potential aircraft placements with West Atlantic, was also a factor in our ATI impairment analysis and resulting charge.

Billable ACMI Services block hours for 2013 were down 13% from 2012 on reduced ad hoc charter flights and fewer international cargo flights. Revenue rates per block hour for non-military customers were up on additional express routes the airlines picked up to replace the loss of international routes. The shorter express routes yield higher block hour rates than the longer international routes.

At the end of the year, the ACMI Services fleet consisted of 48 in-service aircraft, including 29 leased internally from CAM, six leased from external providers, and 13 CAM-owned 767 freighters which are under lease to DHL and operated by ABX under a CMI agreement. Currently, the business segment has five aircraft that are underutilized. We are seeing new opportunities open up for these aircraft, primarily in the dry lease market.

Pretax earnings from our other business activities increased to $12.2 million from $11.7 million last year, with additional volume processing for the U.S. Postal Service and a $1.5 million increase in aircraft maintenance revenues from external customers. Fourth-quarter pretax earnings were unchanged at $3 million versus the prior year. Revenues for the fourth quarter were up $3.6 million to $34.1 million, and increased $4.9 million for the year.

The new hangar in Wilmington is expected to open during the second quarter of 2014. Construction progress was slowed by the difficult winter in Ohio. Once opened, the new facility will give us more room to take on additional third-party work, including heavy maintenance for larger aircraft such as 747's and 777's.

Despite taking a non-cash impairment charge during the quarter, our total balance sheet equity improved by 23% in 2013. The largest factor was a $135.3 million reduction in our pension obligation, which generated a related after-tax improvement in our book equity of $86.2 million. The decline in our pension obligation was driven by higher discount rates on the liability coupled with continued strong investment returns. Rising interest rates coupled with our disciplined approach to funding over the years will enable us to reduce our 2014 pension and cash contribution by approximately $21 million versus 2013's contribution level.

Net cash flow provided by operating activities for 2013 was $94.4 million, down $16.2 million from 2012. Higher pension contributions, lower payments received from DHL and lower operating profitability were the primary factors.

Capital expenditures for the year were $112.7 million, roughly in line with the $110 million we projected to spend. The bulk of our capital spend was for fleet modernization, including two 757 combis we bought in January 2013; modification costs for the newest 767-300s; and the startup of construction of the new hangar in Wilmington.

Looking to 2014, capital expenditures are planned to be down by approximately $53 million from 2013 levels. The majority of our projected $60 million spend will be for scheduled heavy maintenance checks, the investment we already made in January in West Atlantic, and the completion of construction of the new hangar in Wilmington.

Given these factors, we are projecting significant improvement in our free cash flow in 2014 versus 2013. Taking the $21 million reduction in our pension contribution and adding capital expenditure reductions of $53 million, we would expect $74 million, or about $1.16 per share of free cash flow improvement in 2014 just from these two items.

As Joe told you a moment ago, we also expect EBITDA to improve in 2014 by approximately $10 million to a range of between $165 million and $170 million.

Our current debt-to-EBITDA ratio of 2.4 as measured under our credit agreement qualifies us for a low rate of LIBOR plus 2 3/8% throughout the first quarter of 2014. During 2013, we drew $80 million from the revolving credit facility to fund capital spending and make debt principal payments of $54 million, while $6 million of the principal balance of the DHL promissory note was extinguished.

Assuming we hit the 2014 EBITDA and CapEx targets I have mentioned, and that we utilize most of our free cash flow towards reducing our revolver debt, we should end 2014 at a debt to EBITDA leverage of under 2 times, which would further reduce pricing under our primary credit agreement.

That's the summary of our position at the end of 2013, certainly a year of many operational and market challenges but one that ended with ATSG having its strongest balance sheet ever and poised for significant improvements in free cash flow.

Joe will now guide you through the events in the fourth quarter and year and discuss our long-term business opportunities. Joe?

We wound up 2013 where we expected to be after recalibrating our outlook at midyear. We are starting 2014 with renewed optimism, an excellent balance sheet and improving free cash flow picture.

Even as the volume-sensitive portion of the freighter segment of the air cargo market remains weak, we are seeing signs of significant shifts in the market that favor our type of lift. With five of our 767 freighters and soon to be a sixth available for deployment, we are in position to capitalize on that demand and benefit from the $20 million to $22 million of annual EBITDA those assets can generate. As I mentioned previously, our 2014 guidance range of $165 million to $170 million does not assume contributions from any additional asset deployments.

The issues that faced us over the course of 2013 -- retraining crews to fly our more concentrated fleet of 767's and 757's; retiring our DC-8's; and getting our 757 combis certified and operating despite the sequester, are now behind us. We now have a fleet that averages less than five years post conversion with an average remaining useful life which we believe is north of 15 years. The 767's and 757's share some commonality, which gives us a bit more efficiency in crew levels and reduces our maintenance and inventory costs. The 757 combis, in particular, have already proven to be the reliable and fuel-efficient aircraft that we and the military knew they would be.

The year ended with a second $4 million consecutive-quarter increase in adjusted EBITDA to $44.3 million from $40 million in the third. That got us to $157.5 million for the year. It was achieved despite less holiday season ad hoc flying than we had in 2012, but the strong fuel savings contributions from our 757 combis. The last combi entered service in February, and feedback indicates that the US military is pleased with their performance.

We got some disappointing news from DHL late in the year that it would be phasing out the three 767's that ATI was operating in their Mideast network. All three were returned by the end of February, although DHL picked up one other 767 in November. We also placed two others under our unique wet-to-drive program, which as an ACMI agreement envisions a later conversion to a dry lease at the customer's option.

Those changes leave us with five underutilized aircraft. Our final 300 is due to enter service later this month. With the capital investments already behind us, we look forward to placing most if not all six of these aircraft in long-term agreements and continue discussions with interested customers that would accomplish that goal.

The termination of those 767's in the Mideast was part of the case leading to our decision to write off the remaining goodwill associated with ATI. The outlook for ATI's 757 business remains positive. The combi is a unique asset for the military and ATI retains a separate identity in the bidding pools to serve the government's supplemental airlift needs. ATI also operates four 757 freighters in DHL's domestic network. We have recently noted significant increase in securing 767 aircraft under dry leases, which could lead us to allocate more of our own fleet now leased to our airlines toward long-term arrangements with outside dry lease customers.

In our other businesses the outlook is brighter as we prepare to open our new maintenance hangar here in Wilmington. The new facility that we are leasing from the local port authority will almost double our maintenance capacity, add new services and let us work on larger third-party aircraft including 747's and 777's. Our sort center management service for the U.S. Postal Service also continues to yield good returns and we expect to renew our existing contracts later this year.

Our forecast for adjusted EBITDA in 2014 is $165 million to $170 million, which at its midpoint represents a $10 million increase from our actual 2013 results.

We are looking forward to a year that is significantly different from the last two, when the economy was more uncertain and we faced both merger and fleet transitioning risks that proved to be major challenges. Neither of these are factors today, and some of the opportunities we are pursuing would lead to multiple aircraft deployments.

But also as a year ago, our 2014 plan includes no EBITDA contribution from aircraft awaiting new assignments. Some of these opportunities may not implement until later this year, so they are unlikely to be major contributors to our 2014 results. Also it is important to keep in mind that our ACMI customers continually evaluate their requirements, and that could lead to changes that would offset additional deployments.

On an external dry lease basis with no CMI support, six 767's would add approximately $20 million to $22 million in EBITDA on an annualized basis.

The market outlook that we described last fall, a market that is improving despite slow demand growth, is essentially where we are today.

There is good evidence of more balanced capacity to demand in certain regions and for certain aircraft types. Cargo lanes and carrier alliances are shifting in ways that may increase mid-sized freighter opportunities in the Mideast, Europe and especially in Asia, where express package networks like those in the West are forming and adding mid-sized fleets as commercial and industrial centers become more widely distributed.

But even if the general market climate hasn't changed significantly, our ability to respond to it has. For the first time in our 10-year history as a public company we have a fleet that is unrivaled for its scale within our mid-sized ACMI dry lease niche, has over a decade of remaining useful life and payload ranges and load configuration flexibility that make our aircraft eligible for a wide range of missions.

Our differentiated business model includes every component of the complex set of requirements it takes to support a partner, freight airline, a global logistics network, a freight forwarder or a direct shipper.

Most of you have seen the news that Cargo Jet, which has dry leased two of our 767 freighters since 2008, was recently awarded a contract for mail service in Canada that will require significant expansion of its freighter fleet by early next year. We have been discussing this opportunity with them and we hope that they will choose us to provide a portion of their incremental new lift.

You are also aware that in January we acquired a 25% equity interest in West Atlantic, a company based in Sweden that operates throughout Europe. One of West Atlantic's airlines is working with us on a program to add 767 freighters to its certificate. We look forward to a long and mutually rewarding partnership with an organization that shares our culture and commitment to high-quality service for some of the largest and most demanding cargo networks in the world.

Our strong financial position continues to set us apart in the eyes of customers at a time when so many other carriers are disappearing or combining. We intend to protect that strength by using some of our free cash flow to pay down our revolver debt and increase our flexibility to respond if an attractive strategic or commercial opportunity arose.

But as we have said for more than a year, any additions to our current fleet would be considered only in connection with a signed multiyear agreement for the use of those aircraft.

If our forecast proved to be correct, we will end 2014 with significant incremental cash to invest. We hear from many of you about ways you believe it ought to be allocated, including stock buybacks and dividends. We are not opposed to that idea or dismissive of the analysis that supports it. We think that rewarding patient, long-term shareholders who have endured a lot of volatility in the value of their ATSG shares over the years is a worthwhile goal and might even attract new investors to the company.

We have always said that our business plan is unique because it rests on a solid foundation of long-term external leases for more than 40% of our owned aircraft fleet with supplemental returns from operating and servicing them. As I talk to you today, we're looking at new business potential that could push the externally leased portion of our fleet to more than 50% a year from now. Most of these would be with solid customers that themselves have strong long-term revenue sources.

The year ahead looks brighter than the one just ended, but not just for ATSG but the global economy and air cargo business. We intend to compete hard but fairly for our share of the markets we serve. And in everything we do, we will act in ways that merit your confidence in our ability to manage ATSG for the long-term benefit of its shareholders.

That concludes our prepared remarks. Christine, we are ready to take the first question.

(Operator Instructions) Kevin Sterling of BB&T Capital Markets.

And could you guys dig a little bit deeper into your guidance assumptions? I think it's loud and clear you are not assuming any additional deployments, even though you are having some, I think, constructive conversations with Cargojet. But maybe talk a little bit about what the guidance includes from a cost savings perspective and maybe maintenance opportunity after Wilmington expansion, so if you could dive a little bit deeper into your EBITDA guidance, I would appreciate that.

Kevin, as you recall, when we adjusted our guidance after our second-quarter results last year, when we revised it downward by $20 million we said $10 million of it was one-time. So if you look at where we finished up 2013 at $157.5 million, if you add $10 million back to that one-time piece, you are at $167.5 million, which is in the middle of the range where we are at today.

As we look forward into 2014, one of the things we also said when we revised that guidance was that the amount of additional synergies we would gain from the combination of ATI and CCIA would be pretty minimal from that point going forward. And so not a whole lot of improvement reflected in these numbers as a result of that combination.

At the same time, you are always seeing costs go up across the board in everything else that you do. And in a tight market like it is today, you can't necessarily pass on 100% of those cost changes to those customers.

And then finally, the other thing you take into consideration is, while we lost the three aircraft that we referenced from DHL in the Middle East, they were pretty high-utilization aircraft, (inaudible) in excess of 180 block hours apiece. And when you look at what the redeployment of those three equivalent assets was, the utilization is a lot less than what we were seeing there, so you get a little less of the absorption of the overhead pieces and such associated with the airline operations.

When you look at the hangar piece, as we noted, the weather, which I think everybody on the Eastern or Northeastern part of the United States has experienced this year, has put us behind by a couple months in the construction. And so right now we are not forecasting being able to start utilizing that hangar facility until May, when originally it was the February-March timeframe.

And of course, the minute you open the doors you are not going to have it full. So, while you will see a ramping-up of the business level in the hangar, so when you look at the expenses that occur right away in terms of the rent expense, etc., the training we will have to do for employees, you will experience that through the -- call it the second quarter and early part of the third quarter. And then as you get further into the year you will start to see some net benefit from a bottom-line perspective as a result of being able to start utilizing it more fully than you do the minute you open the doors.

Okay, great. That's very helpful, Joe. And you touched on DHL returning those three planes to you. Was that the end of a contract that wasn't renewed? Or was it an early termination?

And maybe along those lines, was DHL looking for capacity in other regions? Just kind of shifting things there?

When we took over that business in the Middle East, we took it away from another carrier who has since gone out of business. And what happened is, as the whole Middle East theater has wound down, a lot of the volume that was driving the need for that lift was in support of the military, so to speak. You had mail going to troops and things of that nature.

So what we actually saw was that the volumes dropped to the point to where the three aircraft that we had over there were actually replaced by two aircraft that are operated by DHL themselves. They had a couple of surplus assets of the A300-600 fleet acquisitions that they did over the last couple of years, and so they deployed their own aircraft in place of ours in the Middle East.

Okay. Thanks. And it sounds like you have had some success in placing three 767s including one with DHL. Do you see that market picking up a bit? Are you seeing other opportunities for placement, as this could be a key driver of potential upside to your EBITDA forecast? Could you talk a little bit about how much you are seeing regarding 767s in the market?

Yes. I think when you look at it, I think the level of activity that we've seen this year in terms of customer interest is much greater than what we have seen in years past. As we have mentioned, two of the aircraft that we have deployed in place of the DHL Middle East aircraft were of the wet-to-dry nature, so that's why the utilization is a little bit lower because they are testing the water, so to speak. So there's opportunity there for that to transition over to a dry lease, although we didn't reflect that transition in our guidance that we gave for the year.

But I think overall, we are much more encouraged by the level of activity we are seeing in the marketplace. Even when you put something like the Cargojet opportunity to the side for the moment, even some of the other customers we've been talking to and customers who have been with us in the past are talking about potential expansion opportunities.

Okay. Your ACMI business -- that's trending in the right direction, Joe, improving for two straight quarters. Do you expect to reach profitability in the first half of 2014? When should we at least maybe expect to see breakeven in this segment?

I think from a targeting standpoint, Kevin, assuming that we don't get any change in the level of business that we have today, it's really all about asset deployments. When you look at ATI, for example, they have got some 767s that they are utilizing in this wet-to-dry opportunity, which, like I say, are not generating the level of revenue that they might in another environment.

And so when you look at it from going through the course of the year I think you get to the point by the end of the year, based on our current plan, where we are pretty close to breakeven by the end of the year.

Okay, great. And then also could you provide some color in regards to West Atlantic? We are starting to see some pickup in Europe. What are some potential opportunities regarding West Atlantic and maybe placing some aircraft there?

Well, as you know, the operation today in Europe -- we fly a couple of aircraft for TNT, for example, so they would certainly be an opportunity for West Atlantic to deploy assets over there. Right now the target is for them to take delivery of an aircraft from us in May and hopefully have it on the certificate and flying within 30 to 45 days thereafter from a shakedown standpoint. So we are seeing a higher level of activity in the European theater. And then, of course, anything that would come up there would in all likelihood go to West Atlantic, since they are based there; they wouldn't have the costs associated with transportation of crews, etc., across the pond in order to support that business. But Europe definitely is one of the areas where we are seeing some improving market conditions.

Got you. And how about potentially with UPS next year, too, in Europe? Is that an opportunity for you?

We don't talk about opportunities specific like, of that nature.

Okay. Hey, that's all I had. Thanks for your time this morning and really do like the free cash flow generation. So take care.

Jack Atkins of Stephens.

So I guess, just to go back to a couple follow-up questions on the ACMI segment for a moment, Joe, it sounds like you are seeing increased customer preference on the dry lease side. That takes some utilization and some overhead absorption, I'm guessing, away from the ACMI segment. So I guess, when you think about the mix shift that you are seeing internally with your business, how do you right size or adjust your overhead at your subsidiary airlines to match that level of deployment?

Well, remember, Jack, one of the burdens, as we've said in past calls, that the -- if we have an asset that comes through the modification process, for example, that doesn't have a regular customer, we will put it on one of the air carrier certificates so that at least we can garner some revenue for ad hoc opportunities and shorten the timeframe for somebody to actually put that aircraft in service for a customer.

So when you look at the ACMI segment, they are carrying a burden, so to speak, of assets that didn't have contracts attached to them. So if they are able to deploy those on regular contracts, that's going to help them absorb their overhead. It's going to help them absorb the costs of the asset that they are carrying.

Conversely, if that same asset we find a dry lease customer for it, they are going to basically lose the burden of carrying that asset, the maintenance costs associated with it, and some of the support activity. So it's really a balancing act between where we are at today, which is assets that are underutilized, versus getting them fully utilized either under the ACMI business or under a dry lease.

Okay. That makes a lot of sense, Joe. Thanks for that color. And I guess the last couple questions for me are just on the housekeeping side. Quint, I was wondering if you could maybe give us a little bit of insight into the expectations around maintenance expense in 2014. I know, now that you have the DC-8s retired, that should help things from a maintenance perspective. But you are taking more assets onto your network. So how should we think about maintenance expense in 2014 or maybe just changes in the rate of growth here?

Well, in terms of increases, and one of the things that's in that line item, Jack, is engine maintenance. And we have seen -- we've commented on this somewhat in the past -- higher costs in the support of our 767 engines, our GE engines. And that is a -- and they tend to operate on short routes, hour-to-cycle ratios that are pretty small. So that tends to drive costs up over what it would be if they were on longer legs. So we are going to see pressure on that line item from the engine piece.

And in terms of the heavy checks, which are the other big component of that, those should be down. We've seen in 2013 -- we had some very heavy phase checks like -- we call them the C-20 checks, which tend to be more man-hour intensive, more material intensive. And so, from that standpoint they only come up every so many years; they are calendar-based. And so this year I think we are getting a bit of a respite from some of those heavier checks.

And so I think in the combination of the two, you might see some small change, some small increase. But I don't expect it to be real significant year-over-year.

Okay. Okay, that's helpful. And on the depreciation side of things, my guess is you will see maybe another small step up in depreciation expense when you take that last 767-300 out of modification. But is this $25 million-$26 million run rate level -- is that a good D&A level to be assuming going forward?

Yes. The other aircraft that entered service, of course, was the combi, the final combi that went online in February. And so that's -- when you look at the fourth quarter, Jack, we had, I believe, one of the 767's that entered service in the fourth quarter of 2013. We will have one more later this month, and then the 757 combi.

So you have got three aircraft. You could take your fourth-quarter run rate and assume kind of three aircraft and you can add it to that as we move forward. And of course, the capitalized maintenance that we do also gets amortized in there, but that's pretty much not too spiky one way or the other.

Okay, okay. And then the last question -- and I'm sure this will be disclosed in the 10-K when it's filed. But could you guys comment on the purchase price for your minority stake in West Atlantic, just what that was?

Yes, it will be in the 10-K. And it basically was in the mid teens, Jack.

Okay. And then on that, as far as your equity interest, would you expect that to be accretive to earnings in 2014?

Yes, we do expect that to be accretive.

Okay, okay. Thanks so much for the time, guys.

Steve O'Hara of Sidoti & Company.

In terms of the maintenance facility first, you are in talks with potential customers and all that. You guys have a pretty good understanding that there is enough to at least start off with a decent utilization on that facility?

Well, when you say start off, probably you are talking about a 90-to-120-day gear up to when you get -- don't forget we've got to go through a lot of training, set up tooling equipment, etc., that you can't get into the hangar until you've got the certificate of occupancy going. But by the time we get to the latter part of the third quarter and fourth quarter I would expect to have some pretty decent utilization in that facility.

Okay. And then just on the free cash flow and your uses for it, I know you guys -- I guess I'm just wondering; it doesn't seem like your balance sheet is over levered right now. It seems like where the industry is, maybe you would rather be over utilized than underutilized on the fleet. I'm just wondering -- it would seem like a reduction in the share count would be more accretive than a debt pay down, given that you don't appear to be over levered. I'm just wondering if you could just expand on that a little bit.

Yes. And I do believe certainly our leverage compared to others in our space is quite low now. And when we talked about using our free cash flow, perhaps putting it in the revolver, again, remember, Steve, that doesn't mean it's gone. That just means it's parked there and we are getting some arbitrage on the rates.

You also know that one of our covenants in our primary credit facility would require us to be under 2 times leverage in order to -- after giving effect to any return of capital to shareholders. And so what we are saying, I think, is that, certainly, we recognize that as a viable option for the use of our cash flow. And we are not at all dismissive of perhaps the benefits if our share price, we believe, again, sustains at a level that we think going to recognize the value to using that cash flow to reduce the share count.

We are on track to very shortly be in a position where the bank covenants would not be an issue. Of course, the DHL note which we have all talked about is getting smaller and smaller each month and will pretty much be gone by the end of the year other than, I think, about $1.5 million, $1.6 million.

So I get your point. Don't mistake commentary we made about putting the cash in the revolver to be analogous to spending it on CapEx or something else. I think we've said we will be very selective about any of that. We are going to look for long-term commitments before we would think about doing that. And obviously, our balance sheet is strong and getting stronger.

Okay. And in terms of the outlook -- so if you are deciding on CapEx, do you assume a normal attrition rate on the book of business that you have now, when you go to look to buy aircraft?

Yes. Really, and I think Joe said in terms of our guidance, we have assumed pretty conservatively, I think, in terms of our view of our current book of business and our potential deployments, as he mentioned, are not in there. And what we have said is, with underutilized aircraft already owned, we are not going to expend our CapEx without a requirement and a long-term customer commitment for something that we can't fill out of our own inventory.

And so our CapEx for 2014 -- we are projecting about $60 million versus $112 million or so in 2013. Remember, the $60 million includes that mid-teens investment in West Atlantic that Joe mentioned. We did that in early January. And so what you are left with for that other $45 million is pretty much the maintenance CapEx, the hangar, the completion, the construction of the hangar. Those are the primary elements of that. So it's a pretty bare-bones CapEx plan for 2014, aside from our equity investment that we made, which we feel very good about.

Equally so, Steve, I mean, in terms of the level of activity that we've seen, we could fairly quickly find ourselves with -- in a position where, in all the assets that we have idle today could be fully deployed. And at that point in time, depending upon what other additional demand might there, we would be in a position potentially to actually go back to the marketplace and look for potential asset acquisitions. I mean we were just going to take it on a month-by-month basis, I guess, is the guidance.

Yes. Okay. But at that point you could -- and so if you have a position where you have less aircraft, you could probably maybe, as contracts come up then pricing goes up, maybe, depending on what demand is and supplies in the market, I guess.

The key thing to remember is, as Quint said, when you pay down the revolver, that availability hasn't gone away. We can pull that back at the drop of a hat. And so in the meantime, as Quint said, you play the arbitrage and not pay the interest costs and ride that one for a while.

Okay, that makes sense. And then just last one -- in terms of the DHL aircraft, to me this seems a little bit positive just because maybe six months ago these aircraft would have remained underutilized, quote-unquote. Is this a little more positive that you are able to place them? Am I reading that right?

Yes. Like I said, I think, as I said in my remarks and commented on this Q&A section as well, as we have seen more activity this year than we've seen in quite some time, I'd say almost two-year period in terms of the level of interest. And we are not just talking passing interest. It goes to as deep as with existing customers and new customers as well.

Okay. Thank you very much.

Adam Ritzer of R.W. Pressprich.

Could you talk a little bit more about Cargojet? You said -- obviously, they have got a big deal with the Canada Post. They have to expand. How many planes might you think they need over the next couple years? Could you give us some more details on that?

Well, essentially what Cargojet -- they have got the Canadian Post contract. And what they have said is they are going through a fleet modernization process, replacing their 727's with 757's. And they want to expand the number of 767's they have out there. Obviously, we are not going to discuss any specific dialogue we're having with them at this point in time. But I think in the marketplace they have talked about adding -- increasing their 767 fleet to 6 to 8 aircraft in total versus the 2 they have that they lease from us today.

Okay. So you are talking 4 to 6 on the 767s, possibly, and replacing 727's. How many 727's do they have? Do you know?

Off the top of my head I don't recall specifically. It's a pretty good number. Now whether --

Okay.

-- they replace them all on a 1-for-1 basis, I don't know. I know they have already picked up at least one, if not 2, 757's from somebody else, from other lessors, at this point in time. But what their actual final replacement ratio would be, I couldn't say.

Okay. Sounds like a good opportunity. Could you talk, getting back to the DHL, planes that were returned -- can you tell us if they have any more planes that are coming off lease this year?

In terms of aircraft that we are operating for them that they have coming off of lease?

Yes. I mean, again, I'm pretty familiar with your story, obviously. I don't think you ever mentioned that DHL was going to return three planes. Did this come out of the blue? The other analyst asked a question about were these terminated early. I'm just wondering if DHL has other planes that all of a sudden they could return or terminate leases?

No. On the ACMI side DHL always has the flexibility with the ACMI piece -- remember, these are not the dry lease aircraft that they have domestically. These are on ACMI operations. They have basically a 60-or-90-day out clause in many cases with those particular assets. And so what they ended up doing on the Middle East aircraft, as I mentioned, was essentially replacing our aircraft with their own, albeit on a smaller number of aircraft required, just because of the falloff in volumes that they saw.

Okay, so they have to give you a 60-90-day warning, and that's about it?

Yes, for the ACMI piece.

Right.

Dry leases go out through 2017-2018.

Got it. In terms of the pension, you said it's going to be down $21 million from 2013. Can you tell us what it was in 2013, or what it is going to be in 2014? And what is the potential to possibly defease this whole plan? I know in the past you said at a certain level you might just annuitize that. Could you talk about that a little bit?

Yes, Adam. This is Quint. In 2013 I think the cash contribution in the pension plan was roughly, call it $26.5 million or so. We have some nonqualified plans and qualified plans. But the biggest part of that, almost 95% of it, is for the qualified. And contrast that in 2014 with the contribution that we are expecting to make of around $5 million or $6 million, $5 million or so on the qualified plans.

So the net positive is like -- I think it's $21.4 million or so. And so a big swing there. Certainly the plans, as you mentioned, with the discount rate at long last having gone up are very -- look very well funded. We actually have an asset on our balance sheet now that you might have noticed rather than a liability for those qualified plans.

Yes, I saw that. That's great.

So they are actually over 100% funded. But as you mentioned, in order to defeas them and look for a counterparty to take the annuity, usually it requires even a lower discount rate. And usually I would say you've got to be overfunded by something like 20% or so, 15% to 20% before you are overfunded enough where you could simply do it without some additional cash contribution.

Got it. Okay.

And as we said, our pension is very sensitive to movements in interest rate. Now, we have been on the wrong side of that until 2013. But a 50-basis point movement can move that liability something like $50 million plus.

Just to clarify, I think Quint said lower discount rate. I think he meant higher discount rate in order to get the defeasance of the asset.

Well, the other party wants you to do it at a lower discount rate actually.

Right.

But a higher movement in the discount rate in 2014 -- to your point, Adam, it wouldn't take much to get to a point where the over funding is 15% to 20% and you are in a position to simply get the thing off your -- hopefully, get it off your balance sheet.

We actually have two plans. And so a potential also would be that, depending upon the level of funding, you might do one and not the other.

Right. Okay. And obviously, every quarter I have to talk about buybacks or else I wouldn't be doing my job here. But you guys talk about an arbitrage on rates. One thing all the shareholders can obviously see is an arbitrage on the stock price.

For example, you got -- the stock is trading, on my estimate, about 5 times EBITDA. You guys are -- you buy aircraft, you lease them hopefully, it's about 7 times EBITDA. We talk about cash returns. You are paying about 4% on your debt.

The free cash yield on the stock, by my math, is 15% plus. So I'm just wondering if you have to wait for this DHL note to be gone, I don't really -- you've talked about buying back stock in your last couple of presentations. That seems like a great arbitrage. Why pay down 4% debt if you could get a much higher yield on free cash return on your stock? Maybe you could talk about how you look at that?

Well, as I said, Adam, from the standpoint -- and we fully expected you to fulfill your requirement to talk about the buyback. So --

Right.

So no surprise there. From the standpoint of -- as I said, it's something we are going to assess on a month-to-month basis. And like I say, playing the arbitrage -- yes, that's not going to be a game changer in terms of our share price or anything else. But a dollar saved is a dollar saved in the interim, and we will assess it on a month-by-month basis in terms of where we are at.

You are right; the DHL note in that right now by the end of this year, it's down to $1.6 million. We still have the covenant with the banks that say we have to be less than 2 times after effect. And I think as Quint said in his remarks, we should be below 2 by the end of the year based on the guidance we gave in terms of EBITDA run rate.

So I think, as we move further into 2014, obviously we are going to have much more clarity in terms of what the requirement is for additional assets, what our deployments are, do we need to spend some capital in terms of buying some additional assets? I think you said it yourself that the potential opportunity with Cargojet, for example, if we had a 757 pop up, might be a good use of some of the capital as well.

So lots of moving pieces this year, but the good news is that they are all positive pieces this year. As opposed to last year, there was a whole lot of stuff going on, none of which we could say was really a bright spot other than the pension.

Okay. So you -- obviously, Q1 you had some capital outlays with the West Atlantic, finishing up your hangar. So you don't necessarily have to wait six months or to the end of the year to possibly do a buyback; you can look at this month-to-month and I'm not saying you're going to do anything, but you don't have to wait is what you are saying.

Yes. And keep in mind the other thing we have to do, obviously, is get in front of the board and basically put a plan together and get the board approval for all that stuff, which hasn't been done to date. So our next board meeting is in May unless we wanted to call a special board meeting just for that particular reason.

Okay. I appreciate it. And good luck. Thanks a lot.

Seth Crystall of R.W. Pressprich.

Just a couple of follow-up questions. On the CapEx you said that estimating $60 million for the year. You have kind of said the $15 million was for the West Atlantic, was leaving $45 million for maintenance in the hangar. Could you break that out, like what your maintenance CapEx is annually?

You know, Seth -- and I apologize; I don't want to get too detailed on it. But basically $30 million of it or around $30 million of it is maintenance. And on the hangar side I think we've got, what, about $8 million or so that's in this year. So there's $38 million of the $45 million.

And then you have some tooling and spare parts and that, yes.

Right. You replace rotable components that come back beyond economical repairs, so you have to replace some spare rotable parts, aircraft parts and some odds and ends there that make up the rest of it.

Okay, great, thanks. Also on the pension expense, understanding that that is going to come down significantly in 2014, currently does that -- that runs through your income statement, your pension expense?

Correct.

Some of it is in DO as well.

Keep in mind, Seth, the significant change is in the cash, not in the expense. Right? The expense change year-over-year is much smaller than the $21 million bogie we talked about.

Right, that was my question. So with the $21 million, your pension expense on the income statement is probably not going to change dramatically?

It will be down somewhat. But offsetting that you've got some increases in terms of the retiree medical that we amortize through there. And it was pretty low in 2013 so it's not a huge player, but the big change is in the cash side. And that comes from how well-funded the plan is, as we discussed a minute ago with, I think, with Adam.

Okay, great. Okay, that's it. Thank you.

Andrew [Perinik] of [Bestone] Capital.

Just a quick question to close the loop on the pension. What exactly was the amount of pension expense that ran through the income statement in 2013?

It was about, I think, altogether around $2.5 million or so.

Okay, thanks. And just to follow up on some of the commentary that was made earlier in the call and the discussions on some of the underutilized plans right now, I think there was a comment made that that can come -- that if they came in some of those would come in towards the end of the year?

Well, they would be back loaded. Here we are through March already and we haven't inked any agreements with anybody in terms of relative to the baseline guidance that we gave. So you've always got to look at it from the time if, for example, I announced agreement for a dry lease tomorrow, it would be some period of time before the lessee took the aircraft. And similarly for an ACMI operation. So you're really looking that any additional deployments would be heavily weighted towards the back end of the year as opposed to the first half.

Okay. So just looking at some of the sensitivities as we kind of look at potential -- as we get towards the back half of the year, obviously it was belabored pretty heavily on the call that there's a somewhere around $22 million of potential incremental EBITDA that comes through if they get leased. If I heard correctly, the hangar portion of the $40 million or the $40 million-$45 million ex the West Atlantic purchase is about $30 million of maintenance CapEx, is the real kind of maintenance CapEx to use. And pension expense will be somewhere I would imagine, in going forward, this is like $5 million to $6 million or $5 million to $10 million the right range to think about that, that will run through the cash flow statement?

It will be less this year, certainly, than what it was in 2013 because of the changes in the rates. If you look at it, as we have seen, there's volatility there, depending upon what the rates do and what the market returns on the assets are. If you look back over the last several years, Andrew, it would probably be in that, call it $3 million to $6 million range.

Okay. And you will have an interest expense that will be probably lower than $15 million by the end of this year. And can you just remind me what the mandatory amortization is on the term loans?

In terms of the mandatory principal, it's in the low $20 million. It's around $23 million. The term loan, which is one little piece of the debt -- I assume you are talking about principal repayments?

Yes.

On the debt, under our asset backs and everything. I think altogether that's about low $20 million. And in terms of the term loan, we have a term loan that's a piece of that, where we pay that 10%. That term loan was originally $150 million. That's the biggest piece of the $20 million something, low $20 million, $22 million-$23 million, somewhere in there is the principal payment.

Andrew, just to clarify, too, the additional EBITDA would be generated if we deployed the underutilized assets today, that $20 million-$22 million is annualizing.

Is for the annualized. Got it. Okay. And no cash taxes until 2016, federal cash taxes. And if we are looking at a DHL, you said if you were to elect not to prepay that, of only about $1.5 million by the end of the year, we are kind of, on reading, at least by my math, before the principal payments of potentially $130 million of free cash flow on a run rate basis by the end of the year and even factoring in a low $20 million principal repayment on the debt, somewhere between $110 million and $120 million of free cash flow run rate by the end of this year?

Yes. Again, if you are putting maintenance CapEx, principal repayments, interest -- I don't know how you are treating cash interest expense there, but you are below $100 million, if you throw all that against the EBITDA.

I'm talking about, though, if you were -- if things break right for you guys and you get the incremental EBITDA based off of 2014 using a run rate at the end of the year going forward 12 months after that.

You are assuming the deployment? The extra EBITDA deployment?

Yes.

(multiple speakers) the right pieces, Andrew, in terms of what you rattled off. So (multiple speakers)

Okay. So that's like a 25% to 30% free cash flow yield?

Yes. You are north of $100 million, certainly, if we deploy those aircraft as we exit 2014.

Okay. I just wanted to make sure my numbers were right. Thanks, guys.

We have no further questions. I will now turn the call back over to Joe Hete for closing remarks.

Thanks, Christine. Our results for 2013 and our outlook for 2014 represent continued strong cash returns from a business model that has proven its resilience against tough conditions that have hurt many in our industry. The investments we've made and the strong value of the assets we acquired give us further confidence in our ability to pursue new relationships with customers focused on the financial strength of their key suppliers and business partners.

We look forward to a year with more of our aircraft deployed with customers under long-term agreements, and improving cash flows from them and our other businesses. Thank you and have a quality day.

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