Air Transport Services Group Inc (ATSG) 2015 Q2 法說會逐字稿

Welcome to the Second Quarter 2015 Air Transport Services Group Incorporated Earnings Call. My name is Alex, 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 call is being recorded.

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

Thank you, Alex. Good morning and welcome to our second quarter 2015 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Commercial Officer.

I hope you have had a chance to review our second quarter earnings release which we issued yesterday afternoon and is on our website atsginc.com.

That release confirms what we told you in May, that 2015 is shaping up to be a very good year for ATSG. Our adjusted EBITDA, which we regard as the best measuring stick for our progress, was almost $98 million through June. That's the most we have ever delivered in the first half.

It takes dedication and hard work by a lot of talented employees to perform that well. But it also takes being positioned in the right market niche, with the right aircraft and operating capabilities and a great deal of flexibility in how you deploy them.

While long haul cargo markets are facing challenges, we are focused on the integrated and regional cargo networks that we support. Those networks are entering a new phase with growth among the established integrators and new innovative entrepreneurs entering the field. The more than 50 midsized converted Boeing freighters we own and operate are ideal components for those growing networks.

This market needs our aircraft, but it also needs our experience and expertise to maintain aircraft fleets. Delta's choice of our AMES MRO to manage heavy airframe maintenance for its fleet of more than 80 Boeing 717 passenger aircraft demonstrates our reputation for quality and efficiency.

Since we last spoke with you in May, DHL has begun leasing one additional 767-300 under a four-year term that started in June, and agreed to key terms for two others that will start in the fourth quarter. Their willingness to take the last two of those for eight-year terms is an indication of their confidence in the 767 as the right platform for their network.

Against this backdrop, we are once again increasing our adjusted EBITDA guidance to $190 million to $195 million for 2015. That's predicated on a solid second half, impacted by a third quarter that will include transition of aircraft between customers and additional scheduled maintenance headwinds, followed by a strong fourth quarter.

Quint is ready to walk you through our second quarter results. I will come back to touch on the few of these factors driving our growth, and how that is likely to play out over the remainder of 2015 and beyond. Then we will be ready to take your question.

Quint?

Thanks Joe and good morning everyone.

Let me begin by saying 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 underlying assumptions, factors, new information or other changes.

These factors include, but aren't limited to changes in market demand for our assets and services, the number and timing of deployments of our aircraft, our operating airline's ability to maintain on-time service and control costs, and other factors, as contained from time to time in our filings with the SEC, including the 2014 Form 10-K we filed in March and the Form 10-Q we will file later this 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 be a 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 on our website.

The key to the outlook Joe described, and once again the driver of our second quarter gains, is the growth in our freighter leasing business and the flexibility our differentiated business model affords us to shift our aircraft between our leasing and airline businesses as demand warrants.

Our airline operations also had a good quarter as they returned to pretax profit.

On a consolidated basis, our pretax earnings from continuing operations for the quarter increased 17% to $17.2 million, and net earnings from continuing operations increased 14% to $10.6 million, or $0.16 per share.

Adjusted EBITDA grew 13% to $51.2 million from second quarter 2014 to reach $97.7 million for the first half. Both are records for our first half and second quarter, as Joe mentioned. Our operating cash flow of $96.6 million was also our best ever first half result, and was more than we reported for all of 2013.

Consolidated revenues were roughly flat versus the same quarter a year ago, but the year-ago period included $5 million more in reimbursable expenses than we had this year. Backing up those reimbursements, our revenue grew $3.8 million, or 3% year-over-year.

We told you in May that our cargo leasing results would pick after a flat first quarter, and that certainly was how it turned out. Our CAM segment contributed $14.4 million pretax for the quarter, which was an increase of 35% from the second quarter of 2014. Even with repricing on the DHL portion of our leased fleet, and higher depreciation, the eight additional externally leased aircraft CAM has placed more than offset other factors.

It's important to note that while DHL remains CAM's largest customer, it is having increasing success placing aircraft with other operators, including some in Asia and Europe.

We are optimistic that even more of CAM's aircraft portfolio will be deployed outside North America over the next year, including some with CMI support.

We view this shifting of our fleet toward longer-term arrangements as a positive development. But temporarily, it will mean some additional cost to prep aircraft for these deployments, and some temporary loss of revenue during the transition. This will affect the third quarter, but will set the stage for a strong fourth quarter.

Our ACMI services segment had a $1.1 million profit for the quarter. Our two airlines, ABX and ATI, operated five fewer CAM-owned aircraft in their fleets, than in the first quarter.

We told you in May to expect operating improvements at our airlines as more aircraft shift to dry lease customers for longer term commitments.

But we also said that additional employee pension expense, the effects of the amended CMI agreement with DHL, and the end of the revenue benefit from amortization of the DHL note would affect our ACMI margins going forward.

ABX Air's amended agreement with DHL now transfers airframe maintenance responsibilities to ABX for the DHL-dedicated aircraft. As such, quarterly results are now impacted more by the timing of scheduled airframe maintenance. We expect the expense for scheduled airframe maintenance checks to increase by $3 million during the second half of 2015, primarily during the third quarter.

We are encouraged by the results our airlines turned in and do expect them to continue to meet or exceed their contracted service levels. But for all the reasons I just outlined, we still do not expect positive earnings for that segment for the full year.

On the other activities line, our pretax profits were down from a year ago in the second quarter, due primarily to the timing of completion of customer work. We also had increased costs for retiree benefits.

We said in our earnings release that we were buying two additional 767-300s to fulfill demand from DHL, which intends to lease them for eight- year terms beginning in mid to late fourth quarter once they complete passenger-to-freighter conversion.

We purchased one of those 767s in June, and the other in July. We also have an option on a third 300, and a lease deposit for it in hand. We will complete that purchase in early 2016.

Accordingly, we are increasing our CapEx guidance for 2015 from $80 million to $150 million, to reflect the two 300s we bought recently, plus engines, mod cost, and capitalized maintenance for our expanding fleet.

Our balance sheet remains lightly levered with unused revolver capacity of $151 million. Our debt-to-EBITDA ratio ended the half at approximately 1.6 times, which continues to qualify us for a sub-2% interest rate on variable rate debt, leaving us well-positioned to implement our balance capital allocation strategy.

Joe will fill you in on some recent business developments, his assessment of our key opportunities. and update you on the share repurchase program we launched in May. Joe?

Quint mentioned that CAM's aircraft leasing portfolio is changing not just in numbers, but also in customer mix. I told you last quarter about 767 freighter placements with three new international customers, including a wet-to-dry placement with Raya Airways in Asia, and dry leases with West Atlantic and Star Air in Europe.

Those were in addition to the three 767-300s that began operations for DHL in the U.S.; two in April, and a third that we deployed in June.

We are completing arrangements for more 767s headed for Europe, Asia, and the Middle East later this year. And others we expect to place in an emerging North American network soon. This could include up to five more 767 dry leases by the end of 2015 and others we may deploy in an ACMI basis.

All together, we have four freighters now in transition to customers for long-term arrangements to begin in the fourth quarter. While that will impact our third quarter, we expect them to be in service and our entire fleet to be at full deployment during peak season, based on our current understanding of customer demand.

Business with new customers also includes the airframe maintenance service we will provide to Delta Air Lines over the next five years for its fleet of Boeing 717s. The team at AMES has work hard to bring this important new arrangement to their expanded facility here in Wilmington, and we are eager to begin this new relationship starting in the fourth quarter.

All this customer interest indicates that something fundamental is happening in our midsize freighter market niche, with e-commerce and distributed manufacturing leading to greater regional and network demand.

More air network operators are making significant investments in midsize freighter capacity. FedEx's decision to purchase more 767-300s to replace older airframes in its global network is part of that trend.

Our business model affords us the flexibility to tailor our approaches to each of these opportunities. One example is our work with a global enterprise about a turn-key regional network that would support their more aggressive distribution goals. We also offer ways to let customers test the viability of the 767 with wet-2-dry arrangements.

We can also invest in ventures that anticipate the introduction of mid-sized freighters into new routes, sometimes as replacements for smaller freighters in their fleet.

That was the case with our $15 million minority investment last year in West Atlantic, which led this year to West Atlantic's commitment to two 767 dry leases with CAM. The first of these 767s began service in March. The second one is scheduled to enter service with West Atlantic in September, and perhaps the third during the fourth quarter.

We think that our West Atlantic partnership serves as a good model for our next phase of growth. We aim to invest with growing commercial enterprises and well-connected financial partners to help them attack e-commerce and other express oriented opportunities in their own region, where they have established relationships and local knowledge.

In Asia, air cargo networks are highly dependent on smaller, narrow-body freighters to maintain point-to-point coverage among principal manufacturing centers. But many operators tell us they see a need for the range and payload capacity of midsize freighters like our 767s to carry fulfillment volume as their economies become more consumer-driven.

The additional lease freighter deployments already in the works for 2015 are very encouraging, and key to our raising our adjusted EBITDA guidance for the year to a range of $190 million to $195 million. That may seem conservative based on our first-half pace, but we estimate that the combined impact of lost revenue from fleet transitions at CAM, and added maintenance expense both at CAM and in our airlines, means that third-quarter EBITDA could be $5 million to $7 million below our second quarter run-rate. Assuming we meet our deployment targets, we expect these issues to be behind us in the fourth quarter when our fleet is at full deployment.

I'm even more optimistic about next year, anticipating a full year of returns from the aircraft we are deploying now and perhaps others under new ventures like those I outlined. We will still insist on multi-year lease commitments that meet our rate of return hurdles as we assess opportunities and consider investments in additional aircraft. As I said before, I don't want to miss a new business opportunity simply because we didn't have an aircraft available.

I know many of you are curious about the progress we're making in executing the share repurchase program we began in May. Since we last spoke, we spent $3.9 million to repurchase shares, including $2.6 million in May and June. We will continue to repurchase shares consistent with our goal to maximize the value of your investment in ATSG.

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

(Operator Instructions) First question comes from Kevin Sterling with BB&T Capital Markets.

Thank you. Good morning, Joe, and Quint. Quint, real quick, I think you said new CapEx guidance is $150 million for this year, is that right?

Correct.

Okay. How should we think about 2016? Have you guys start thinking about that? Could we see a similar level? It sounds like you guys just see a lot of opportunity in this midsize market. And Joe, you said you don't want to miss an opportunity. Could we see a similar level of CapEx in 2016 as you continue to grow your fleet?

Of course, Kevin, it's going to depend upon what opportunities surface, because I think Joe said a minute ago, we don't want to miss a good opportunity because we don't have an aircraft available. But that said, we're going to look to maintain the discipline of getting a multi-year commitment, of course.

I would say, based on the customer interest that we've had and the environment that we see right now for our equipment type, that there will be growth opportunities next year. So, I would expect, while we're not giving specific CapEx guidance for 2016 at this time, that you'll see a number that certainly exceeds $100 million next year. And if you get above that, it's just going to depend. It's going to depend upon what we're hearing from the market.

Yes, that's very helpful. Thank you, Quint. Real quick while I've got you, how many ACMI block hours did you fly in the quarter?

Overall, Kevin, for the quarter, in terms of total revenue block hours, it was 15,380.

Okay.

And that's down slightly from the first quarter. But remember, block hours don't necessarily drive what we do because so many of our aircraft, the ones we fly in ACMI basis, are dedicated to specific routes. We don't get a lot of that upside stuff in regard to extra sections and above minimum hours.

Got you, okay. And Joe, it sounds like you guys are definitely bullish on your place in the market, the midsize freighter aircraft. Is that outlook, based upon customer conversations? What you see in the marketplace? I guess kind of general, frame it up for us, kind of what you're seeing from customer conversations, data points you look at regarding your outlook for the back half of the year. It does sound like you're seeing some strength. And lastly, do you have enough aircraft available to fill all these commitments?

Kevin, I think - I'm going to lateral to Rich in a second, but I think if you look at DHL, for example, this morning they were talking about being up over 11% in their revenue, so as our key customer certainly they are seeing some uptick in the market that we serve. And I'll give it to Rich to address the rest of it.

Kevin, the answer to your question is both. What we see in the market just from a data standpoint as Joe mentioned, the DHL announcement, and if you've looked at UPS's report earlier on the quarter, they noted that their air volume was up 5.5% on an international basis, and that's compared to what the global market is, floating between 2% and 3% right now.

Over the past few years, the express carriers have outgrown the general freight business. And that looks to continue as e-commerce growth around the world continues to accelerate, particularly in the emerging economies.

Our asset class is heavily leveraged towards networks, and express operators. So when you look at that and you look at also the conversations we're having both with the integrators and also airlines that fly network, or airlines that fly for the integrators in other parts of the world, they are all talking about additional capacity going into next year.

Thanks, Rich. Very helpful. Joe, I think you mentioned other potential multi-year commitments for aircraft, are those with new customers or existing customers -- or maybe it's a combination of both?

Combination of both, Kevin.

Okay. Great, and lastly the Delta maintenance win, congratulations on that. Are there more opportunities out there like Delta? And if so, do you need to expand your facilities even further to accommodate this growth?

There are definitely other opportunities out there, and those would require an expansion of our current facilities here in Wilmington. The nice thing about the Delta win is it gives us basically, call it three lines of consistent work, and we'll pretty much take up the available capacity. We always want to have a little bit of flexed capacity in your hangars for work that may take a little bit longer than you anticipated, or something that pops especially with a fleet our size. But to get another big one like that, which there are potential opportunities, we would perhaps be looking in for some more infrastructure.

Got you, okay. Great. Thanks again for your time and congratulations on a nice quarter and outlook.

Thanks, Kevin.

Our next question comes from Jack Atkins from Stephens. Please go ahead.

Hey guys, good morning. And thanks again for the time. So, I guess just thinking back on Kevin's question there. Congrats on the big win with Delta. And it looks like the investments in that maintenance business are really starting to pay off. Could you maybe talk from a bigger-picture perspective about how we should think about the margin profile? I'm not asking for that specific customer, but just in that, in that maintenance MRO business, what sort of operating margins should we be thinking about, or profitability metrics should we be thinking about with that business?

Of course, Jack. As you would guess, in terms of - we opened up that new hangar just over a year ago, that adds to the fixed cost components. So getting a win like this certainly helps to defray that cost as well as spread the rest of the overhead in the business.

But when you look at the MRO business, you're in this single digit, high single digit mode. But as you add incremental business, it's going to be in the, call it, 10% to 12% range, because of that fixed cost absorption that you get with the expanded amount of hours you can build out.

Okay. Makes a lot of sense. Seeing a significant amount of demand for the 767-300 asset, Joe or Rich, could you maybe talk about what you're seeing out there, just in terms of pricing for that asset, mid-terms of lease rates. Are you seeing lease rates expand just given how much demand has picked up in the last, call it, 12 months?

The demand hasn't really impacted the pricing situation too much. Most of the deployments and the discussions are very specific, particularly when you look at the new acquisition of assets. Those are very specific conversations about the specific builds and what the aircraft may look like and so the margins impact on that. But there's been no pressure on the pricing at this point.

Okay. And then, we're seeing Joe, as you alluded to earlier, more folks getting into the 767 lease game. You've got another competitor I think that's recently bought two planes for conversion. How should we think about the all-in cost to purchase the passenger 767 and convert it to a freighter? Is that still running in that $20 million to $25 million range, or are we seeing any cost creep there?

No. I think the into-service cost, at least for the asset types we want to put in place, and everybody has a different view as to whether they want to buy a 2000 vintage airplane or a 1990s vintage airplane -that's going to make a big difference in the acquisition of the feedstock portion of it.

The cargo conversion itself is still going to be basically, call it by the time you do everything, $14 million or so into service. So $25 million is a good target for us in terms of an into service cost. If you look back historically, Jack, when we first got into the 300s we were in that $28 million to $30 million range, so now we're like $25 million.

So, feedstock prices have come down a little bit, but there's always going to be a floor into that because the airframe itself isn't necessarily worth all that much - $1.5 million maybe $2 million. It's really about the engines.

Okay. And have you begun seeing more feedstock become available given the production of the 767, or is that still fairly tight?

It's not extremely tight, but by the same token it's like, we're always looking for an asset that fits our certain cost profile for an end of service perspective. As we noted in our remarks is that we've gotten a deposit on a third aircraft that we will take delivery of in very early 2016, there is one or two more that we may be able to grab from that group, but it's not like there is plethora of assets available out there.

Okay. All right, makes sense. And then, I know you guys purchased a little bit of stock back in the quarter, I would've thought it would have been perhaps some more given the commentary earlier this year. How should we think about CapEx for fleet growth versus buying back stock. Clearly you're seeing a lot of demand for your assets, but I'm just curious how the - has the capital allocation thought changed over the course of last couple of quarters?

Well, Jack, this is Quint. As we said before, we take the approach of a balanced strategy. And when we've got a market where we're seeing a lot of customer demand, and a lot of chance to make long-term placements of our CapEx investments with these leases, we certainly have a little bit of growth bias.

But that said, we also intend to allocate capital to share buyback. And I would characterize this past quarter, we're basically just getting into the program. Remember, we weren't in April, we started after our last conversation with you guys in May. And through three months we purchased almost $4 million.

So you can see we're probably on even on that basis on something north of $15 million annualized clip. That would assume, perhaps, that we don't buy any blocks, which is always also a possibility.

So again, it's the flexibility that our balance sheet and the current demand environment offers us is really a great situation to be in, because our balance strategy - each avenue is a good one in terms of creating value.

And Jack, I think as we mentioned - commented the last quarter, that if you look at the trading volume that we have, at max we could probably only support $20 million to $25 million based on the average daily volume. $20 million to $25 million worth of acquisitions in year. And as Quint said, we're kind of on a pace of $15 million to $16 million if you just take the three months we experienced to-date.

Okay, okay well that's great and then last question from me. When we think about just sort of the global macro you're seeing, certainly some pockets of strength globally. But then we're seeing a fair amount of capacity growth in excess of global FTK growth.

I'm just sort of curious, how you guys view the world in terms of -- do you think that we may see some overcapacity creep back into the global airfreight market and are you and all concerned that this could create maybe some headwinds next year for you guys?

Yes, Jack this is Rich. From our perspective, the capacity growth that you see in the quoting both PAX belly space growth as well as freighter growth, in terms of that profile is more on the long-haul lanes.

The belly growth in particular they're citing in the 777 and the 787. Those average five- to seven-hours stage lengths, the 767-200 averages about two hours, and the 300 globally including other fleets is about three hours. We don't compete in those lanes where you see excess capacity.

Okay.

In that perspective, we don't really look at that metric as indicative of what the demand may be for our assets. We tend to be focused more on regional markets and integrated profiles.

Okay. That makes sense, thanks again for the time guys.

Yes, thanks Jack.

Our next question comes from Steve O'Hara from Sidoti. Please go ahead.

Hi, good morning.

Good morning, Steve.

Just a quick question, it looks like in terms of the -- you used to provide kind of a breakdown between internally leased aircraft and ones that were externally leased. It looks like that's kind of changed.

I'm just wondering just on the -- currently where is that today versus maybe what your expectations were earlier in the year. And then maybe what's the duration on that dry lease portfolio?

I mean it would seem to be that let's say an improving ratio of dry lease to internally leased would be more consistent with maybe less volatility going forward and maybe greater surety of earnings and cash flow streams. Could you just talk about that briefly?

Steve, if you -- in terms of the earnings release, I think there is a table, it would be the final table there, that kind of summarizes the status of the fleet and where we think that's going to be at year end.

And of course we update that each quarter, but at the bottom of that table there's a couple of line items for the aircraft that are externally dry leased. We've separated out those that are dry leased and have an additional CMI agreement that goes along with that from those that are simply dry leased and operated have directly by the external operator.

So for example, at the end of June, you can see we had 29 - 13 that were leased without a CMI and 16 that were leased with the CMI, those being the DHLs. And then we give you sort of a range of where we think that will be at the end of the year.

And you're correct that when you compare that to the, where we stood at the end of 2014, you're seeing an increasing percentage of our fleet being put out on these long duration dry leases. Of course, the DHL aircraft, the 16, those generally were four year leases. Remember, we extended those forward from the end of March?

So those go through March of 2019, I think that the last the one we did in June goes just a month or two again those into June of 2019. And then as we mentioned, we're going to place a couple of additional aircraft with DHL in the fourth quarter that will actually be eight-year leases.

So you're correct that you're seeing the tenure of these leases increase. And that's -- we view that very positively for all the reasons that we mentioned.

Yes, I think another significant thing to note about the weak dry leasing portfolio. If you look at from the beginning of 2014, probably two-thirds of our aircraft released to DHL, 13 and 20, and now by the end of year we'll be closer to 50-50 in terms of what's dry leased and DHL and what's dry leased to other operators.

So I think we've made some significant headway in terms of diversifying the leasing portfolio outside of our largest customer. And that's including the fact that they're growing from 13 to potentially 18, 19 by the end of the year.

And we did get two aircraft back from one of our lessees during the quarter, Steve, and those were two of the four that we mentioned that are going through transition. But they're going right back out in the fourth quarter on long-term dry leases.

So the tenure for those will extend as well. But as we noted in our comments, we've got four aircraft in transition, which says we're taking a bit of a haircut in the third quarter from a revenue standpoint, because we're no longer getting any revenue from those four tails.

And then we've got maintenance work for both the aircraft operated by our carriers plus those. So that's going to have, as we noted in our comments, that $5 million to $7 million negative impact on our third quarter results versus our second quarter run-rate.

Okay. And then just, so I'm clear on the number, kind of maybe comparing it to maybe the previous terminology. So ACMI/ charter at 23, that's kind of the internally leased number. Is that right?

That's correct.

Okay. And then, I mean just based on kind of what you're providing in terms of your business update and so forth. I mean it would seem that 2016 would be a pretty good year relative to 2015 with the delta of the additional DHL and the aircraft going back out again that you just got back. What maybe are the offsets that would temper my enthusiasm there?

That's a wide open question, Steve. I don't know, like I say, from our standpoint as Rich noted and Quint both, we got more of our assets out on longer-term agreement. So that's always been created kind of a floor for us in terms of where our EBITDA goes. But as we look ahead barring some global economic issue, everything seems to be lining up pretty well for 2016.

Right, I mean -- I think we'll enter the year --as we said the fourth quarter we expect to be fully deployed. There's always some shifting of aircraft between customer opportunities.

But if you recall Steve, as we headed into 2015 we had sort of some non-cash headwinds, pension costs were up, we had the transition of the DHL agreement, the cessation of amortization of the note which was contributed to our revenue.

And so really when you look at, for example, our trailing 12-month EBITDA, is a little north of a $193 million adjusted EBITDA. And we're guiding this year to $190 million to $195 million, and while that looks flat it's actually quite an improvement given some of those non-cash headwinds. And as we head into 2016, we won't be, our DHL agreement is in place, those things are behind us. And to the extent certainly that interest rates hold where they are, we'll probably see an improved situation with pension expense next year.

So there's some -- there's a lot of positives as we look into 2016 although none bigger than having the fleet largely deployed.

Okay. And then so the adjusted EBITDA does not include or maybe doesn't back out the pension amortization, I guess, or whatever it is?

No. We have not included that as one of the adjusting items historically.

Yes. And I'm sorry, and what's the differential between that and the cash payment or the needed cash payment?

It's about probably $7 million or $8 million.

Okay.

We have roughly, I think a $6 million cash contribution and we have a small credit from the pension expense, although a smaller credit than we had in 2013, which is the headwind I'm talking about.

Okay, okay. All right, thank you very much.

Thanks, Steve.

Our next question comes from Adam Ritzer from Pressprich. Please go ahead.

Good morning, guys. Thanks for taking my call. Could you maybe give us a little more specifics on the MRO deal in terms of what kind of revenue it could generate? I know you mentioned it's lower margin. Maybe revenue, and also is this going to require any additional working capital to be purchased, parts, spares, and things like that?

Not a lot from a working capital standpoint, Adam. When you look at the business itself, like I said, it doesn't start until the first airplane shows up in October -- latter part of October this year.

But if you look at it from a revenue standpoint, it's probably in the $15 million to $20 million range on an annualized basis. And as I mentioned earlier from a margin standpoint, generally the MRO overall is high single digits. As you add incremental business you can get up to the low double-digit, 10% to 12% range on the incremental piece of it.

From an asset standpoint, the hangar was already in place. I mean so from that standpoint we might buy a little bit of tooling. Ironically enough is one of the reasons I think one of the reasons we got the business, at our peak we operated 74 DC-9s. And so we had a lot of DC-9 expertise and maintenance stands and things like that, and the 717 is just basically a newer version of DC-9. So we had a lot of equipment we just took out of mothballs so to speak, and cleaned it up and put in the hangar.

Okay. Sounds good -- a little extra return on the investment in the hangars.

Could you maybe -- I guess maybe some more for Quint. Could you kind of run through the breakdown of your CapEx? I think you said it's going to go from $80 million to $150 million? And I know there's two planes in there, but what the other $70 million is? And you also said 2016 is certainly going to exceed a $100 million. Maybe you could walk us through those numbers.

Well 2016, I probably don't want to go through in detail again. That was a just a projection based on sort of looking forward and based on the customer demand, which we believe is pretty strong right now. Other than the one aircraft that Joe mentioned we have a deposit on. Even on that airplane I guess we are not strictly speaking committed to follow through and buy it, but we don't have any firm - I guess what would say commitments to purchase additional airplanes in 2016. So that was just a sort of view, Adam, based upon strong customer interest.

In terms of the 2015 CapEx, you recall we purchased aircraft that we have been leasing I think in February. That was one. We mentioned the - and the change from our earlier guidance of $80 million to $150 million. When you think about that, that's a big driver of the two aircraft that - we purchased one in June, and one in July - that will modify and least two DHL under eight-year agreements, and we expect to deliver those during the fourth quarter. That was probably, call it $50 million or so of that increase.

The other portion of that the biggest portion of the other $20 million is related to engines. And we have -- as we look into 2016 we have some scheduled removals coming up, and so we tried to take advantage of what's on the market in terms of what we believe are good deals to in effect act now to avoid having to spend those dollars in 2016 based upon the quality of engines that we could buy on the market. And that's probably, call it $12 million.

And then the other $8 million is also probably related mostly to engines, and it has to do with as the growing fleet and having to procure some additional spares and also the experience we have had on some overhauls, which have been a bit higher than what we had built into our baseline budget.

So that's kind of that increase in guidance of $70 million. Mainly the two aircraft that we are getting for DHL, as well as those engine-related expenditures.

Got it. So 2016 you're basically looking the $100 million kind off the cuff is -- your $35 million or so maintenance, one other purchase so that gets you to $60 million, and it looks like you're thinking about one more purchase. That kind of gets you to $100 million or something like that.

Remember maintenance CapEx for us is in the neighborhood of $40 million to $50 million a year. And so when you're talking about a $100 million or $100 million plus, you are not talking about too many aircraft over and above that couple of -

Right, its two additional something like that over maintenance. Okay, got it. Okay that's all I had, I appreciate it and nice work.

And we have a question from Vikas Tandon from Bastogne. Please go ahead.

Hi guys, congrats on the quarter and no comments from me on the balance sheet, I promise. So, couple of quick questions. I know you guys are walking a little bit, but Joe or Quint when you're walking through the 3Q headwinds, kind of the $5 million to $7 million, I know you said there's kind of four aircraft in transition, and then the maintenance spending. What's kind of the right way to think of that for us? Is it kind of right to break it down sort of $3 million as you sort of said is the maintenance, and kind of $3 million to $4 million of lost EBITDA from planes that you're transitioning to long term leases?

The aircraft, in terms of lost revenue while they are going through the transition is probably more like the $3 million. And then the maintenance itself in terms of the specific differential between quarters was about $3 million in the C-check costs itself, and then you got, except we said $5 million to $7 million, so that puts you at $6 million.

Okay. Got you.

Think about the second quarter run rate - as you read in our press release, it's $51 million, plus we had a one-time deal, $2 million on an insurance settlement, that gives you run rate of $9 million from an EBITDA perspective. And take that number off of there.

Okay. Got you.

Just so kind of fair warning, you analysts out there, we do expect third quarter, then, the revenue will be impacted by that. But then fourth quarter we look at pretty strong, right? Because by then we expect the transitions to be in place and the maintenance that - we do maintenance in the third quarter, so that we can have maximum availability of aircraft for the fourth quarter.

So that maintenance line in the income statement relative to second quarter we expect Q3 to be up as Joe says $2.5 million to $3 million.

Okay, got you. But as we sort of think about kind of your run-rate going forward, the lost revenue, that's kind of one-time. Sort of a good thing, right, because we are transitioning planes to long-term leases? And the maintenance I guess, it's just lumpy throughout the year. Is that the right way to think about it?

I think exactly the right way to think about it, and you are right. We do view the pause in revenue really as a just ultimately a good thing, because of the transition to these long-duration contracts.

And then on the new contracts with DHL it sounds like you're kind of spending a roughly $25 million a plane and I know you bought the one in June, was that roughly about $25 million that has already hit the balance sheet that we have seen?

It's all in the same ballpark if you take $1 million or so.

And I know in the past when you guys have done 767-300 it has been around $350,000 a month as a lease rate. Should that kind of -- what we should be thinking directionally?

It's the combination of the tenure. The lease for example with the DHL, as Quint noted. We have got an eight-year lease so you're going to get a lower lease rate for that length of commitment on an asset. So of course a part of it is the creditworthiness of the specific customer. So it's always going to be in a normal environment, that $300,000 to $350,000 depending upon which customer.

Okay, that's perfect. I was trying to figure that out. And then the last thing I'll ask, and because it wouldn't be me if I don't ask a little bit of about the share repurchases. Can you just remind us.

Isn't that a balance sheet item?

Well, sort of. I gotta try. Could you just remind us on the 10b-5? I know you guys are in the 10b-5 - what is your volume limitation? Is it a hard and fast rule on what you're volume limitation is on what you can buy?

There is no really hard and fast other than the percentage of 25% of the average daily trading volume.

Okay, got you. Perfect. Congrats on a very, very strong quarter and strong progress going forward.

Thanks.

We have no further questions at this time.

We are trying to convey in our remarks today that these are exciting times at ATSG, with good returns this year and growth initiatives that will take us into new markets. As we roll out these initiatives, I know you will share our confidence in ATSG's future and the shareholder returns we can generate.

Thank you and have a quality day.

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