Air Transport Services Group Inc (ATSG) 2015 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2015 Air Transport Services Group, Inc. Earnings Conference Call. My name is Christine, and I will be your operator for today's call. (Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Joe Hete, President and CEO. You may begin.

Thank you, Christine. Good morning, and welcome to our fourth quarter 2015 earnings conference call. With me today are Quint Turner, our Chief Financial Officer; and Joe Payne, our Corporate General Counsel.

Our fourth quarter 2015 earnings release was issued yesterday after the market closed. And we issued a separate release early today announcing new agreements we reached overnight with Amazon.com for an air cargo network that will serve Amazon customers in the United States. Our fourth quarter and year included a number of major accomplishments, which I'll cover in a moment. Most important were our outstanding financial results, which included $30 million in revenue growth and a record $198 million in adjusted EBITDA for the year.

Now, in 2016, we set the stage for even greater results under new agreements with Amazon. They cover the lease and operation of Boeing 767 freighter aircraft and include provisions that grant Amazon the right to acquire a substantial minority interest in ATSG. Both our earnings release and the announcement of our Amazon agreements are available via our website, atsginc.com.

This landmark agreement with Amazon includes leases for twenty 767 freighters to be delivered by mid-2017, and related operating services we will provide under a five-year Crew, Maintenance and Insurance, or CMI agreement. In addition, we have granted Amazon the right to receive warrants to purchase up to 19.9% of our common shares over the next five years at $9.73 per share.

Based on our initial analysis of the results we can generate under our Amazon agreements and other developments in our business, we now estimate that our Adjusted EBITDA from continuing operations will be $208 million in 2016. That estimate includes $9.5 million in additional non-cash pension expense compared with 2015 and a $1.5 million reduction in non-cash revenue related to the payoff of our promissory note with DHL a year ago.

I'll provide some additional color on these agreements and our related fleet growth plans for 2016 in a moment. Quint is here to summarize our year-end results and update you on our financial position at the end of 2015. 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 and underlying assumptions, factors, new information or other changes.

These factors include, but are not limited to, the successful implementation and operation of the commercial arrangements to be performed for Amazon, which will be described more specifically in the Form 8-K we will file at the end of the week; the cost and timing with respect to which we are able to purchase and modify passenger aircraft to a cargo configuration; our airline's ability to maintain on-time service and control costs; shareholder approval of the proposed equity arrangements with Amazon to be described in the Form 8-K and also the proxy statement we will file later this month; and other factors that are contained from time-to-time in ATSG's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 10-K and quarterly reports on Form 10-Q.

We will also refer to non-GAAP financial measures from continuing operations, including Adjusted EBITDA and Adjusted Pre-tax Earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures 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 news that Joe just shared about our new Amazon agreement is certainly exciting, and puts us in great position to perform well over the next several years, presenting the opportunity for significant revenue growth and diversification. But I don't want to overlook our financial results for 2015, which were among the best we have ever recorded. We experienced both solid growth and improving margins, stemming mainly from more efficient deployment of our freighter aircraft throughout the year.

Let me take you quickly through some 2015 financial highlights before returning you back to Joe, starting with our consolidated top line and earnings results.

Consolidated revenues for 2015 rose $30 million, or 5%, to $619.3 million. Fourth-quarter revenues again set the pace, increasing 15% to $181.6 million. Excluding airline related reimbursement revenue from both periods, 2015 annual revenues rose 6% and fourth-quarter revenues rose 11%.

Our pre-tax earnings from continuing operations were $20.5 million for the quarter and $62.6 million for the year. Adjusted for our 2014 pension settlement charge, pre-tax earnings increased 13% for the quarter and 7% for the year. Net earnings from continuing operations were $13.3 million, or $0.21 per share, for the fourth quarter, and $62.6 million, or $0.60 per share, for the year.

Adjusted EBITDA increased 12% to $56.8 million for the fourth quarter and increased 10% to $198.2 million for 2015. Both are record amounts for a quarter and a year.

Operating cash flow was also a record in 2015. It grew 17% from 2014 to $173.7 million.

CAM, our leasing business, was again the principal driver of our strong earnings progress in 2015, and is poised for more good results in 2016. CAM deployed six more 767 freighters in 2015 to external lease customers, including three in the fourth quarter, for a total of 30 at year-end.

Joe will have more to say about CAM's 2016 fleet investment plan, which includes the purchase, modification and deployment of four more 767-300s this year, three of which we will lease to Amazon during the fourth quarter. Those are in addition to the two we already had in mod at the end of 2015 for deployment in the first half of this year.

CAM's pre-tax earnings increased 4% for the fourth quarter year-over-year and 8% for the full year 2015. CAM's operating costs consist primarily of preparing aircraft for deployment, and depreciation on its aircraft assets. Our depreciation and amortization line, primarily related to the growth of CAM's fleet, increased 16% or $17 million to $125.4 million in 2015.

Our ACMI Services segment sharply improved its performance in the fourth quarter, with pre-tax profits more than doubling versus fourth quarter 2014. That excludes the pension settlement charge we took in the fourth quarter last year. Our loss for the year in this segment was half of what it was in 2014, excluding the settlement.

Our airlines, ABX Air and Air Transport International, delivered exceptional service to both new and continuing customers during the peak holiday season. That service, with support from our logistics and maintenance businesses, includes the rapid ramp-up of the Amazon trial air network in the fall that currently includes five of our 767s.

Utilization of our dedicated ACMI fleet remains high in 2016. ABX launched CMI service for one additional CAM lease 767-300 for DHL in February. We expect our airlines to add to their operating fleets as the year progresses.

As we mentioned in our earnings release, we expect our non-cash pension expense to increase significantly in 2016. That factor, along with last year's changes in our DHL agreements and the non-cash revenue effect of the maturing of our DHL note, will offset much of the financial progress we would otherwise achieve from operating more aircraft with our airlines. Taken together, the two non-cash items will create an $11 million headwind in a year-over-year comparison of pre-tax earnings and EBITDA.

On the Other Activities line, strong revenue growth, including a 30% increase in revenues from external customers, reflected more volume in the postal centers we manage and for handling services for other customers. Maintenance services for external customers also grew, including heavy maintenance services for Delta Air Lines under a new agreement that commenced in October. Pre-tax results declined as higher maintenance related earnings were offset primarily by a smaller actuarial credit in 2015 from prior year changes in employee benefit plans.

Our cap-ex cash spend for 2015 was $159 million, slightly below our guidance of $165 million last November. We acquired four 767-300 aircraft in 2015 and deployed two of them before the end of the year. The third was deployed last month and the fourth will go to a current customer in April. All four will be leased under multi-year arrangements, including three with eight-year terms.

We expect to invest about $290 million in our business this year, of which $215 million is for growth and the remainder for maintenance cap-ex. That's $10 million more than we had in our earnings release last night. The difference is for equipment we will acquire to support the Amazon air network, which we weren't prepared to include until the deal was signed.

Our growth investments will include the expenditures to complete modifications of the two 767-300s in process at the end of 2015 as well as the expenditures to place four additional 767-300s in service by the end of 2016. These investments are well within the scope of our current cash flow outlook and credit availability.

Our debt-to-EBITDA ratio at the end of 2015 was a conservative 1.6 times as a result of strong operating cash flow coupled with debt repayment during the year. The interest rate on our variable rate debt is 2.2% as we enter 2016. We expect our leverage ratio to rise during 2016, as we continue to invest in the growth of our business and in share repurchase.

Joe is eager to tell more about our 2015 achievements and our brighter cash flow outlook for 2016 under our new Amazon agreements. Joe?

Thanks, Quint. Before I talk about the tremendous news we issued this morning, I want to echo Quint's comment that we had a great year in 2015, with very good financial results and a number of significant achievements that give us great confidence about 2016, even before the contributions we anticipate under our new relationship with Amazon.

Those 2015 achievements include an amended set of agreements with DHL that extended our relationship as their key provider of North American air support through March of 2019. Those agreements effectively doubled the number of contracted months for our dry-lease 767s in DHL's network and extended CMI services for the 767s we operate for them. We also began to dry-lease the DHL aircraft that they operate outside the U.S., with two 767-200s deployed with their affiliate airline in the Middle East.

Freighter deployments in 2015 included three more placed offshore, one with Raya Airways and two more dry-lease deployments with West Atlantic, our European affiliate. West Atlantic now operates three of our 767s.

We accelerated our fleet development program by acquiring four more 767-300s in 2015, all four contracted with dry-lease customers.

We established a strategic pathway into the China market last September via minority interest in a joint venture that will operate a new cargo airline from a base in Tianjin. The venture will launch intra-China cargo service using the Boeing 737 freighter in the second half of this year. We expect it to develop an appetite for our 767s in 2017 and beyond as its volume expands.

We also signed a new multi-year heavy maintenance agreement with Delta Air Lines for its fleet of more than 80 Boeing 717 passenger aircraft, with service that began in October. That agreement validates both the 2014 expansion of our hangar capacity in Wilmington and our decades of experience servicing similar DC-9 airframes.

That's a wrap-up of our progress last year, which by itself has positioned us for another good year.

Our key agreements with Amazon will lead to a minimum of 20 leased 767 freighters from our CAM leasing affiliate to Amazon. We also executed an air transportation services agreement, commonly known as a CMI agreement, covering Crew, Maintenance and Insurance services provided by our airlines to be effective April 1. And finally, we agree to provide certain hub and gateway services to Amazon. The final component is an investment agreement that grants Amazon warrants that, if exercised over the next five years, would enable them to own 19.9% of ATSG. We are pleased to partner with Amazon to support each of our business objectives as we move forward.

We are prepared to share the key factors you need to understand and assess how our new agreements will affect our own results and investments going forward. But we will defer to Amazon all discussions about how our assets will be utilized in their business.

By the end of 2016, we will deploy fifteen of our 767 freighters with Amazon, including twelve 767-200s and three 767-300s. That includes the five 200s already deployed in the network and seven other CAM-owned 200s. The net effect of these and other changes this year will increase CAM's externally leased aircraft portfolio by 14 this year to 44, including redeployments of four returning from other external dry-lease placements. Those 44 leased aircraft will represent more than 80% of our projected fleet of fifty-three 767s in service at the end of 2016.

In 2017, we will lease five more of 767-300 freighters to Amazon by mid-year, for a total of eight 300s. CAM owns or has contracts to purchase all eight of the 300s. The 767-200s will be leased for five years and the 300s will be leased for seven years.

The CMI agreement includes a pre-defined monthly fee per aircraft, plus a variable component tied to aircraft block hours and cycles operated. Pricing is subject to specified annual escalations over the five-year period.

The equity agreement to be described in our 8-K includes warrant grants to Amazon for the purchase of ATSG shares over the next five years at a price of $9.73 per share, the closing price of our common shares on February 9, 2016.

The warrants will be granted in three tranches.

The first grant is for approximately 12.8 million shares of ATSG, of which 7.7 million shares vest at signing and the remainder will vest as we deliver the last eight of the 20 aircraft.

The second grant would include approximately 1.6 million shares that vest two years from now.

After four and a half years, the third tranche will be issued to true-up Amazon share of GAAP diluted shares at that time to 19.9%. Amazon will retain the opportunity to exercise all of the vested warrants within five years of the signing of the agreements.

ATSG has 75 million authorized shares today. The board will submit a proposal for shareholder approval at the next annual meeting of ATSG shareholders in May to increase the number of authorized shares by an amount sufficient to accommodate the warrants, and for other corporate purposes.

Quint gave you a preview of our investment plan for 2016, which is based on solid demand for our aircraft and services from customers seeking the competitive advantages that regional air networks offer, utilizing the efficiencies and flexibility of the midsize aircraft we operate.

We expect to invest approximately $290 million to maintain and expand our fleet this year. A part is related to required maintenance of our fleet, but the majority is for expansion, which would total $215 million for the year.

During 2016 and early 2017, we will acquire and complete conversion of at least five more 767-300s for Amazon, not including demand we seek to fill for other customers. This stepped-up investment is directly tied to our positive outlook for cash-flow generation in 2016 and beyond.

As I said at the outset, our Adjusted EBITDA from continuing operations for 2016 is expected to be approximately $208 million, including the non-cash pension expense and revenue effects highlighted earlier. Together, we expect those items to offset about $11 million of what we would otherwise expect in Adjusted EBITDA this year.

Our strong cash-flow and balance sheet continue to give us the flexibility to create value for shareholders through both continued investment in growth and through the share repurchase program we started last May. We spent $10.3 million to acquire 1.1 million shares last year and spent another $1.8 million to acquire nearly 180,000 shares year-to-date in 2016.

While our capital commitments are increasing, they are justified by the returns we expect to generate from the additional assets and quality service we will deliver over the course of our relationships with quality, fast-growing customers like DHL, Amazon and others.

Today, we have multiple opportunities to grow our business, both at home and abroad, while maintaining the superior service that has been our hallmark. We intend to update you regularly as we pursue and capture the best of these very attractive alternatives.

That includes our prepared remarks, Christine. We are ready for the first question.

(Operator Instructions) And our first question is from Kevin Sterling of BB&T Capital Markets. Please go ahead.

Hey, good morning guys. This is Chip on for Kevin, how are you?

Hey, Chip, good.

Congratulations. Looks like a great deal. The additional aircraft for Amazon, where are those coming from?

Well if you look at our fleet today, we're operating five of them for them today.

Right. Where are the additional 15?

Yes. The additional 15 would be, four returns that will be upcoming from current dry-leases and three that we had in other ACMI operations, and then we will buy eight 767-300s to fill out the additional 15.

Got you. Got you. And then, thought I heard you say that, that 20 was a minimum, so this can be upsized apparently?

Well, obviously, if the network is successful, we would hope that there would be some additional expansion opportunities there, but we defer that question to Amazon.

Got you. Got you. And I know Amazon, sometimes they are a little tough on their pricing, but what kind of margin or EBITDA contribution can we expect from these aircraft? And how that -- as compared to your current leases?

Well, Chip, this is Quint. As you know, we have a sort of ROIC target for our investments that return -- unlevered return threshold of 10% or more on these aircraft. And certainly, that's a discipline that we strictly adhere to. We think it results in an attractive price for our customers, certainly, coupled with the flexibility that a lease provides. But it also achieves our targeted ROIC. So I hope that addresses your question enough there.

Okay. It does and we can chat off-line. So will this, in any way, impact your ability to provide capacity for the new China JV?

No. Actually, it's part of our capital budget. We anticipate at least one 737 acquisition for the China JV in 2016. It's been noted many times in the past, we're lightly levered, and of course, we do that with a mindset that when opportunities like this come along, that we have the capital base to be able to meet the customer's requirements. And here is a perfect example of maintaining that conservative balance sheet until the right opportunity comes along. So --

Got you. Got you. And then on the warrants, could you just recap that again? You ran through that and I think I may have missed some of that. If you could please recap that?

Yes. And Chip, of course, realizing you want the detail now, but I will tell you we will file an 8-K on Friday that will have sort of the detail that I think you're looking for. But as Joe mentioned, there's kind of -- think of it is as sort of three tranche issuance of warrants. The first issuance is at the date of signing, the effective date, there's roughly 12.8 million warrants that are issued, of which about 7.7 million of those vest immediately and are exercisable. All these warrants that we talk about are exercisable by Amazon for five years from the date of signing of these agreements.

And so the 12.8 million, with 7.7 million vest, the remaining 5.1 million vest over the course of the placement of the leased 767-300s, which are the last 8 of the 20 leases. And those aircraft are kind of deployed starting in the fourth quarter through the middle of next year. And then two years from the date of signing, there'll be a second tranche of warrants, which is roughly 1.6 million warrants. Those will be issued two years out and vest immediately, and then, of course, they have an exercisable period that will have three years left on it, right to the fifth anniversary of the signing.

And then the third tranche is -- will be dependent upon sort of the true-up to that 19.9%. And that will occur four and a half years from the date of signing, and then, of course, those warrants will be exercisable only for six months to that fifth anniversary. The amount of warrants in that third tranche, of course, will be impacted by our share repurchases that have occurred over the four and a half year period, as Joe mentioned. We continue to believe that share repurchase is a good way to provide value to the shareholders, and we intend to continue the program that the board initiated with the authorized program and probably update that as that program matures. And it will be dependent upon that as well as share issuances that will occur.

For us, share issuances are typically limited to shares that are issued for incentive plans to management and so forth. I think, historically, we've probably issued, I don't know, 400,000 or 500,000 shares a year associated with those plans. And so the net of that, along with the warrants, after giving effect to the warrants, will be trued up to the 19.9% midyear at year four and a half.

Okay. All right. Very good.

More than you may have wanted to know.

I won't ask you to repeat that. Okay. And then the funding for the Amazon planes, how are you guys funding these purchases?

Well, as Joe mentioned, we've got a balance sheet, and I know it was a source of a lot of discussion last year that it -- maybe we weren't at an optimal capital structure with our leverage being so low, and of course, we knew we had a lot of things potentially in the works that were attractive growth opportunities. And so as Joe said, we are going to rely on that liquidity that's on our balance sheet as well as the strong cash flows generated from the assets that are currently deployed and it will be deployed. And we believe while leverage ratios will increase, it will be still very, very comfortable for us to be able to afford the investment in the additional 767-300s that Joe talked about a moment ago.

Okay. Well very good, I have a few additional questions, but I will follow-up offline. Thanks, guys.

Thanks, Chip.

Thank you. Our next question is from Helane Becker of Cowen and Company. Please go ahead.

Thanks very much, operator. Hi, gentlemen. Thank you for the time. Joe, did you have to get approval from DHL to do this Amazon agreement? Or is that not related?

No, they're not related. There's no requirement for us to get DHL's approval in terms of -- however, obviously, we advise them of what the opportunities are there. Our position is, is that potentially, there are some synergy opportunities between the two companies with us being kind of the neutral in the middle. So we think it would be beneficial for DHL; obviously, they have been our primary customer for a long time. We expect to maintain the same relationship with them going forward. And this is just another opportunity for us to provide better service and more competitive costs for all of our customers.

Great. And then can Amazon buy shares in the open market or are they limited to your warrants?

I'll defer that to Joe Payne.

Hi, Helane. Actually, they would be limited to the warrants. They would not be able to buy in the open market.

Okay. Thank you. And then, Quint, on the pension plan, I'm not sure I fully understand the contribution, because somehow I thought you were close to being fully funded. So could you just explain that to me?

Well sure, Helane. The funding level is still quite good and comfortable. But what has happened when you have the sort of the non-cash GAAP expense, which because our plans are frozen, is affected by a couple of factors. One is the discount interest rate applied to the obligation, which is reset each year-end. Now that actually -- the interest rate ticked up a little bit, as you know, compared to the end of 2014 to the end of '15. So that was a good guy for us and would have, in and of itself, lowered our non-cash expense that goes through the income statement.

However, the other factor that affects our expense is the asset returns in the pension trust. We target about a 6.25% long-term rate of return on our asset portfolio. And last year, I think, even though we've had a number of years where we were double digits, last year, as you know, the market, particularly at the end of the year, turned down. I think the portfolio had actually a loss of about 3%. So that has to be recognized and factored in to our non-cash GAAP expense for pension.

The net result of those two things results in a year-over-year increase in the pension for non-cash expense for pension that we would anticipate '16 versus '15 of about $9.5 million just for the pension.

Okay, great. Thank you.

Now I will say, as we report first quarter and start reporting for '16, we are strongly considering, because these plans are frozen, they're really not driven by our operations, including that noncash expense as an adjustment item out of our EBITDA, going forward, because it's really impacted more by interest rates and market returns than it is anything operationally. And you can probably see that added to our non-GAAP adjustments.

Okay. And then, separately, can you contribute shares to the plan rather than cash?

No.

Okay. All right. And then my last question is with respect to the Cap-Ex budget -- you talked about the aircraft portion. And if I just do the basic math, I know you guys say you like to keep the all-in cost of conversion, acquisition and so on to, what, $20 million to $30 million roughly per aircraft? But if you do the division, it's kind of $40 million per aircraft. So have costs gone up or does that include aircraft that you've not yet acquired but have targeted?

Well, it essentially includes -- Helane, it includes aircraft that -- we'll have four aircraft that will be in modification at year-end that aren't reflected in our year-end fleet numbers. And of course, those will be the aircraft that would be delivered to Amazon in 2017.

Okay. And then on the aircraft that come up for renewal this year, is it just limited to those few that you mentioned that are going from one customer to Amazon?

Yes. The ones that we've already referenced, the four, are all the ones that would come this year.

Okay. And do you have to do any modification work on those aircraft?

No. You don't do any modification but you got to transition the aircraft back from the lessee's maintenance program to our maintenance program, but that's not a major consideration.

Okay, great. Okay. That's all my questions. Thank you very much.

Thank you, Helane.

Thank you. Our next question is from Jack Atkins of Stephens. Please go ahead.

Hey, good morning guys and congratulations on both, good quarter and the announcement.

Thanks, Jack.

So I guess first of all, just to kind of piggyback on Helane's last question, with those customers where you are transitioning capacity from them to Amazon, any sense for what they're going to be doing for airlift capacity? Or are they going to be looking for other providers? Or is that something you guys can help them with?

No. One of the eight customers is Cargojet in Canada, and of course they have been expending their fleet by doing their own acquisitions of 767-300s and turning back the 767-200s. The other one is Amerijet, and Amerijet will be the one that would take the 767-300 coming out of mod in April, and the last one was the one that we had with Star Air in Europe, which they also took a 767-300 to replace it, that they had on lease from I think it was Euro Atlantic, if I remember correctly.

Okay. Okay, that all makes sense. And then just also to clarify, is the conversion price still in that $25 million range? Or has that changed at all? Just to --

No. It's in that $23 million to $25 million into service cost.

Okay. Okay. And then as far as year-end leverage, you talked about the leverage ratio ticking up, where would you expect your leverage ratio to be at the end of 2016?

It will be north of -- certainly, north of two, maybe ticking up towards 2.5, Jack, I think is a good target.

Okay. And then in terms of the puts and takes for the guidance for 2016, could you just kind of walk through that one more time? Both the non-cash items and just what's driving -- what's the puts and takes there, just to kind of summarize it?

Yes, Jack, it's Quint. I guess as you think about 2016, as we mentioned, we, of course, had two aircraft in modification at the end of '15 that, as was mentioned in the earlier remarks, one of those went into service for DHL in February. The other one will go into service actually for Amerijet in April.

There's of course additional aircraft, four other aircraft. One that will be placed in the third quarter to a new customer in dry-lease, and then the last three will go to Amazon. Those are all fourth-quarter placements kind of the October, November, December kind of placement. So there's only, call it six months' worth of contribution out of those last three aircraft.

So when you think about Cap-ex versus EBITDA, you do have some back loading of the EBITDA contribution because we're ramping up, we're building -- building out their requirement. And then of course, we still have liquidity for other customer needs should they come along, whether that be DHL or anyone else. So there's always, as we've done every year, we'll update that as we move along.

So those will be positive contributors to EBITDA growth. We mentioned the headwinds associated with primarily non-cash items, those two items, the pension, which we said was $9.5 million year-over-year when you think about sort of the '15 EBITDA versus '16, that's a bad guy of about $9.5 million. And then the fact that, in the first quarter of '15, we matured or fully paid off, if you will, even though it was a non-cash item as well, the DHL note. And that was a contributor to revenue in that first quarter of '15 of about $1.6 million.

So together, call it $11 million from those two items all non-cash, but yet hits the EBITDA line.

Got you. Okay.

Jack, when you look at the gearing up that we're going to have to do to support the aircraft to support Amazon, obviously we're going to have to be hiring flight crews back, doing all the training, obviously there will be costs that will incur, startup costs call them, to bring those aircraft online on our certificates.

So when you think about it, you got to look out into 2017 to where you see the full benefit of the aircraft going into service, and of course at this juncture, we really don't have much insight as to where the aircraft are going or how much they're going to operate, which we expect to start seeing now that we've got these agreements inked.

Yes. So consistent with past, Jack, we'll update that as we become -- as we get more information about the utilization of the fleet, the date you may want to target.

Okay, makes sense. Just a couple of more questions on the guidance. In terms of thinking about, Joe, to your point, the full run rate, earnings power of the business, at least exiting '16, is there a way to think about sort of how to -- and you quantified this before, sort of what a EBITDA run rate you expect to be on exiting 2016? Would you guys feel comfortable talking about that?

No. It's a little premature for that, Jack.

I think we will --

Maybe what's baked in to your guidance for the fourth quarter?

Jack, it's again, I think if we talk about where we're at for the fourth quarter we're really answering your question. And I think we'd like a little more time to digest that and to also get a little more input from our customers.

But I think, Jack, if you recall, most of the EBITDA is generated by the assets themselves and we've given you ranges in the past in terms of what the lease rates are, and these are market lease rates -- granted, because of the volumes are going to be on the low end of that. So you can make assumptions in that regard as if you could come on one aircraft a month, and then use that as your jumping off point. From an operations perspective, we've always talked about the fact that the ACMI side is a single-digit margin. Again, we don't have any utilization data at this point in time, other than the current five that we operate. So you can just take your best guess at that piece of it.

Okay. Okay. And then last two questions and I'll turn it over. Will the warrants go into diluted share count immediately, even though they're not vested? How should we think about diluted share count this year?

Well, in terms of the GAAP diluted share count that you see in the filings, I mean -- yes, I mean, there's an application of the treasury stock method that will occur to that. And so, we're still, of course, working through the details of that and we'll be sitting down and going through that more with you. But it's fair to say that the treasury stock method as well as share repurchase will impact that treasury stock GAAP diluted share count.

And also -- but I can say, Jack, that we certainly judge this deal to be very cash-flow accretive to our shareholders. There will be some non-cash effects of the warrants. For example, we will amortize the value of the warrants against our GAAP results. It will be a reduction of revenue, right, just the warrant itself has a value that's amortized. And we will be -- in the first quarter and speaking more definitively about that, but there will be some non-cash effects that flow through our P&L results. So in these calls throughout '16, we'll have some more adjustment items to get down to the cash performance of the business you have asked.

No. Absolutely, it makes sense. I just want to make sure that everyone's thinking about that correctly. Okay, and then last question, I'll turn it over. The D&A expense for 2016, is there something we could use for modeling purposes there?

Again, you can just use the fourth quarter, annualize that and take the additional aircraft that we bring online. I said we got one in April - or one that came in February, one in April, one in July, and then one each in October, November, December. Those will be the primary contributors to the D&A side.

Okay. Thank you.

Thank you. Our next question is from Steve O'Hara of Sidoti & Company. Please go ahead.

Hi, good morning. Congrats on the agreement.

Thank you.

So I guess I'm curious as to maybe how the agreement came to fruition. I mean, is this something you were kind of pinging Amazon on or based on maybe some publicly well-known issues with one of their providers? Or is this something that just kind of maybe came to you?

It just kind of came to us, Steve.

Okay.

Obviously, Amazon, if you had questions about their view of that, that would have to be -- those questions would have to be posed to them.

Right, right. Okay. And then, just so I'm clear, I want to -- I mean, I know you've gone over this a few times, but in terms of the maybe incremental 767-200 or 300s, can you just tell me, incrementally, how many you're buying maybe specifically for Amazon? And then maybe if you're buying any to kind of have some, let's say staging, if you will, for customers that might come after? It sounded like you had -- you kind of -- your demand commentary seems pretty positive, too.

Yes. In terms of the 200s, obviously, we own all those today - have for a number of years. On the 300 side of the equation, as we mentioned, we already own and/or have contracts to purchase the feedstock necessary to fill out the Amazon requirement of eight 300s. And in addition to that, we do have under contract a couple more opportunities for purchasing a couple of 767-300s. However, they wouldn't be available to a customer until 2017. Essentially, the modification line at IAI is filled up for 2016, and of course we are occupying the better part of it for the early part of 2017 as well.

Okay. And then -- so on the Cap-ex, it was -- did you say $211 million for aircraft? Is that what the number was?

$215 million, which includes some equipment to support the aircraft, so call it for aircraft and modification, et cetera, $205 million and another $10 million for support equipment.

Yes. And that includes, Steve, the fact that we'll have aircraft in modification at the end of '16, that are slated for 2017 revenue deployment.

Right, right. Okay. And then is there a way to -- I know you noted that you thought there might be expansion opportunities. I mean, is there a way to quantify how much capacity they currently use?

We won't talk to that, Steve. We don't have any insight to that.

Maybe with the five that you have, do you know what percentage of their U.S. lift you occupy?

We have no idea.

Okay, okay. And then just -- I'm sorry, quickly on the share count. Do we assume kind of that you add the 7.7 million in and then you buy -- use the cash to buy back the stock at the market price to get more of the diluted share count, is that the right way to do it?

That's the treasury stock calculation that you're describing, yes.

Right. Okay. All right. Thank you very much.

Thanks, Steve.

Thank you. And our next question is from Adam Ritzer of Pressprich. Please go ahead.

Good morning. I just had a handful of questions, maybe you could help me figure out. I guess, on the growth Cap-ex, you're saying it's about $205 million. And you say you have four planes, which is roughly $100 million. Does that also include four more planes you're anticipating to buy and re-mod later this year?

Yes.

Yes.

Okay. So after that you would, at this point in time, you'd have the whole Amazon deal fulfilled?

No. With the four that we had in mod at the end of the year, remember, there will be 5 more that would be delivered in 2017, so we'd have one more that would enter modification for that program in 2017.

Okay. So it would be a little remainder into 2017. Okay, so I was just confused, the $200 million was really almost eight planes.

Yes. I mean, we think about it, we had one aircraft that went to DHL in February, so we had the modification costs associated with that at least a portion of the modification cost. We had another aircraft that we bought and put into the mod line in December that will come out in April, so we had most of the modification cost for that aircraft in 2016. We have the aircraft that we bought and will put into service in July of this year, we'll have the full load on that. We have three that we will give to Amazon in the fourth quarter, we'll have the full load on those and then we'll have the four that are in modification at year-end. Obviously, we would have the purchase done at that point, portion of the modification cost done and then we also have deposits that we will put down on aircraft that will be delivered in 2017 as well as the deposits on the modification slots to cover those aircraft.

Got it. But it's really the timing in terms of why the $200 million looks so big and it's only four planes that's really eight, with a little hangover timing on the mod delivery, that whole thing. Okay, I get it.

So let me ask you this. In terms of the warrant deal, with the free cash flow you should generate this year and next, clearly you'd have enough money to pay for the fleet expansion. Why do the warrant deal? Was this something that you proposed to them? They wanted to do as part of the agreement? Could you help me understand why you need all this cash and diluting - you know, the additional dilution?

Well I mean, clearly, the other party wanted and views this, I believe, as an important relationship. And that interest, I think, is not atypical of how they have approached things with other partnerships that they also saw as something that made sense for them on a long-term basis. And so it was included in the deal.

Clearly, all that had to be factored into our view of whether this is a real positive deal for our shareholders. And as we said earlier, we believe it's accretive from a cash-flow standpoint to our existing shareholder base and certainly changes the dynamic of our revenue structure in terms of diversification. And Amazon, of course, is a fast-growing company, as you know, Adam. And so we believe, taken in totality, that the deal we struck is very beneficial.

Okay, so it's really more about a long-term relationship because you don't need this cash to do this deal, right?

No. We don't get any cash until the point in time that they would exercise the warrants, Adam. They essentially have five years to exercise the warrants.

Okay. So it's really, like, "Look, guys we want to be in bed with you for long term. We need 20 aircraft now." Like you say, the size of Amazon, who even knows how big this thing is and how much more equipment they could use down the road, okay.

So my last question has to do with the leverage. Quint, you mentioned you might get up to two times, 2.5 times. That would imply -- I'm using like $220 million of EBITDA ex these noncash charges,2.5 times that would put you in over $500 million. Now how is that possible?

Well, again, we're just giving a range. We're not signing anything that we will definitely be at this point. But as you know, there's a lot of flexibility in our alternatives for providing value. And so I think we are trying to take that into account.

When we When we do the CapEx, then you not only have that, then you've got the investment we'll make in our China in our JV, we'll be buying back shares, which will be a use of cash as well. So I mean, ultimately, we're just kind of taking our best guess in terms of where we're going to end up at the end of the year in terms of the leverage ratio.

Okay, right. So maybe a moment in time if you had to buy a bunch of planes very quickly, you had to invest in China, et cetera, it might start pushing up at the higher end, but over a period of 12 to 24 months. As the cash flows come in, it would obviously come down dramatically. Is that a good way to look at it?

If we stop investing in additional growth assets.

I know that's never going to happen. So but that's fine. Okay. Thanks very much guys. Great job on the Amazon deal, and we'll talk soon. Thank you.

Thanks, Adam.

Thanks, Adam.

Thank you. And we have a follow-up from Helane Becker of Cowen and Company. Please go ahead.

Sorry, guys, just a quick. Does Amazon get a board member?

Under the terms, once they had exercised sort of a 10% position, and Joe Payne, you chime in here if you need to, but they would have the ability to nominate a board member to the ATSG board.

Okay, one not two?

Just one.

It's okay. Thank you. That's all I wanted to know. Thanks, guys. Thanks for taking the follow-up.

Thanks, Helane.

Thanks, Helane.

Go ahead.

Yes. I will just add, Helane, that until such time as they do and we're going to file an 8-K as we had indicated on Friday giving more detail, but just to give a fulsome answer to your question, until such time as they do exercise warrants that gives them a 10% ownership, they would have a right to have a board observer. But it will be a non-voting.

Okay. Thank you. Thanks for that clarification.

Sure.

And I will now turn the call back over to Joe Hete for closing remarks.

Thanks, Christine. I hope you're as excited as we are about the outlook of your company's future under this new set of agreements with Amazon. We will be sharing more details about the agreement and the rest of our business in our 8-K and 10-K filings later this week and also in the proxy materials we will distribute at the end of this month. As you review them, please keep in mind that the full execution of the Amazon agreements we signed this morning will depend on your support of a proposal to increase a number of our authorized shares at the annual meeting in May.

In the meantime, we will be focused on executing the major investment program we outlined, pursuing new opportunities and at the same time, continuing to deliver great service to all of our current customers.

Thanks, and have a quality day.

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