Air Transport Services Group Inc (ATSG) 2017 Q3 法說會逐字稿

Welcome to the Third Quarter 2017 Air Transport Services Group, Inc. Earnings Conference Call. My name is Jason, and I will be your operator. (Operator Instructions) Also, please note this conference is being recorded.

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

Thank you, Jason. Good morning, and welcome to our Third Quarter 2017 Earnings Conference Call. With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Operating Officer.

We issued our earnings release yesterday after the market closed. It's on our website, atsginc.com. We will file our Form 10-Q later this week.

I'm pleased to report that we achieved our adjusted earnings targets for the third quarter and completed our eighth consecutive quarter of double-digit revenue increases. We remain on a strong growth trajectory, thanks to our key role in air express networks benefiting from powerful e-commerce trends. With another good peak season well underway and 66 of our cargo aircraft in service, we continue to target $260 million in adjusted EBITDA for 2017, and even more growth in 2018. I'll have more to say on that shortly after Quint summarizes our results for the quarter. Quint?

Thanks, Joe, and thanks to all of you on the call for joining us a little earlier than usual this morning. As always, I'll start 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 the 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 are not limited to, our operating airline's ability to maintain on-time service and control costs; the number, timing and scheduled routes of our aircraft deployments to customers; the cost and timing with respect to which we're able to purchase and modify aircraft to a cargo configuration; fluctuations in ATSG's traded share price, which may result in mark-to-market changes on certain financial instruments; changes in market demand for our assets and services; and other factors as contained from time to time in our filings with the SEC, including the Form 10-Q we will file later this week.

We will also refer to non-GAAP financial measures from continuing operations, including adjusted earnings, adjusted earnings per share, adjusted pretax earnings and adjusted EBITDA. Management believes these metrics 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.

Our third quarter results were again very strong. We indicated back in August that those results would look a lot like our second quarter, and that's largely what occurred.

Third quarter revenues were $254 million, up $61 million or 31% year-over-year. Revenues from each of our reportable segments, and our other businesses collectively, increased compared to the same quarter last year.

Revenues from services for Amazon were 45% of the total for the quarter, up from 31% last year. In August, we dry-leased the last of the twenty 767 freighters Amazon ordered, which we also operate on their behalf.

DHL represented 25% of revenues, down from 34% a year ago. Revenues from the U.S. Military were 7% of the total, versus 12% last year. Revenues from DHL and the Military have remained fairly steady. But their shares of the total have decreased as business with Amazon and other customers, including those served by PEMCO, increased.

On a GAAP basis, we had a loss from continuing operations of $28.2 million or $0.48 per share diluted in the third quarter. That compares with a profit of $2.1 million, or $0.04 per share a year ago.

Once again, the changing mark-to-market value of the warrants issued to Amazon had a large impact on our GAAP results. This time, however, our third-quarter GAAP earnings also included a few new items that we are excluding from our adjusted earnings.

On an adjusted basis, our EPS from continuing operations was $0.22, a 57% increase, compared to $0.14 a year ago. The adjusted EPS calculation this quarter includes 9.9 million shares related to the Amazon warrants, compared with 3.3 million shares in the same period last year. Adjusted earnings after tax increased 72% to $14.9 million.

As in the prior two quarters this year, the quarterly revaluation of the Amazon warrants was the largest adjustment factor. Driven by both an increase in vested warrants and a 12% increase in our stock price during the quarter, the warrant revaluation was $27.5 million greater than a year ago on an after-tax basis. Amortization of our lease incentive for Amazon was up $5.5 million versus the prior year, also reflecting the higher share price as well as the additional vested warrants.

The largest of the new items was a non-cash pretax pension settlement charge of which $5.3 million, or $3.4 million after-tax, was charged to earnings from continuing operations in the quarter. The charge stemmed from an annuity purchased in August that will pay pension benefits to nearly 1,200 retirees of ABX Air, and reduce our exposure to future financial market fluctuations. This charge is included in the salaries, wages and benefits line in our consolidated statement of earnings and was reflected in the results of our ACMI Services segment.

In September, we recorded a $400,000 after-tax gain related to our offering of $258.75 million of convertible senior notes and related hedge transactions. I'll provide more color on that offering and the associated accounting treatment of our hedge transactions in a moment.

And finally, we had a third-quarter non-operating loss of $602,000 after tax, related to our share of the Airbus A-321 joint venture with Precision Conversions that we began during the quarter. We expect to continue to have quarterly non-operating costs from this affiliate through development and approval of the supplemental type certificate for cargo conversion anticipated in 2019.

Our adjusted EBITDA increased 27% to $65.9 million year-over-year, which was up $1.8 million sequentially. That equals $187.1 million through 9 months, up 20% from the same period last year. Adjusted pretax earnings increased 58% to $24 million for the quarter, driven by significantly improved financial results from airline operations. The adjustments are detailed in the pretax earnings summary table in our press release.

I noted that our ACMI Services segment lowered the pension settlement charge on our continuing operations. Excluding that item, pretax earnings for ACMI Services improved by $24 million for the first nine months of 2017 versus 2016.

That includes breakeven pretax earnings during the third quarter, excluding the pension settlement charge, compared with a $9.7 million loss in the year-earlier quarter. Net of reimbursables, ACMI Services revenues rose 6%, largely on the growth in CMI operations for Amazon since the third quarter last year.

CAM, our leasing business, had an excellent quarter due to increases in its leased freighter portfolio and related engine leasing and maintenance revenues. Pretax earnings rose 21% as CAM's externally leased freighter fleet grew by nine to 47. Eight more aircraft were in modification at September 30 for delivery later this year and in 2018.

Our other activities also remained on a strong growth pace during the quarter, with revenues up 45%, and up 80% to external customers. Earnings declined, however, due to the shift of Amazon's air network hub operations from Wilmington to the Cincinnati regional airport back in May, and due to timing of completion of certain aircraft maintenance services.

Cash payments for capital expenditures were $218.8 million through nine months of 2017, mainly for the purchase of passenger aircraft and costs to modify them into freighters. That included $159.4 million for the acquisition of five Boeing 767-300 aircraft, and two Boeing 737-400 aircraft and associated freighter modification costs; $36.2 million for required heavy maintenance, and $23.2 million for other equipment.

We expect capital expenditures in 2017 to total about $335 million, of which, $265 million will be aircraft purchases and modifications. That assumes payments for five more 767-300s in the fourth quarter for conversion and deployment next year.

As many of you are aware, in late September, ATSG sold $258.8 million of 1.125% convertible notes which are set to mature in October 2024. Separately, the company entered into hedge and warrant transactions that are generally expected to reduce potential share dilution associated with the bonds convertible feature until and unless ATSG's stock price exceeds the strike price of $41.35, a 75% premium to the closing price of our shares on September 25. The net cash proceeds from the convertible offering after buying the hedges, selling warrants and paying the transaction fees, totaled $234.7 million, the majority of which we applied against our outstanding secured revolving credit facility.

Until shareholders approve an increase in the company's authorized share count at next year's annual meeting, the notes can only settle in cash. After shareholder approval of additional authorized shares, the company may elect to settle its obligation and cash, shares, or a combination thereof.

We were very pleased with the strong buyer interest in the financial markets, as reflected in the low coupon rate we achieved in the investor mix. The 1.125% coupon, along with the proceeds associated with the hedges, warrants and transaction fees, will result in an effective cash financing cost over the life of the instrument of approximately 2.5%. We have been paying 3.25% on our revolving credit facility. We view the seven-year duration, low fixed coupon and additional flexibility provided by this unsecured instrument, to have improved an already strong balance sheet.

Beginning in the fourth quarter, we will include a non-cash charge in our interest expense associated with the amortization of the convertible feature. We expect that non-cash charge to approximate $2 million each quarter. Due to its predictability, we do not intend to remove it from the calculation of our adjusted EPS.

That's the summary of our financial results for the quarter. Joe is ready to share some outlook comments. Joe?

Thanks, Quint. As I said earlier, our third quarter was comparable to the good second quarter that preceded it, with very similar revenue and adjusted earnings results. We are on track to have revenues of more than $1 billion this year, which will be a record for us since our business restructuring in 2010.

Our ACMI Services operations are making steady progress toward profitability. The $5.2 million pretax loss it reported for the quarter, was nearly all due to the impact of the settlement charge that we took to annuitize benefits payable to our airline retirees, and to a limited extent, weather and customer network changes.

We're optimistic that ACMI Services can finish in the black for the year as a whole after a good fourth quarter, excluding the pension-settlement charge. One step toward that goal was another award from the U.S. Military for the services of our 757 Combi aircraft through the fiscal year ending in September 2018. ATSG has provided its global network service to the military for more than two decades.

I want to thank our airline, maintenance and logistics teams that kept our aircraft in the air and on-time during the hurricanes in Texas and Florida, and during other severe weather elsewhere.

We didn't miss a single assignment in Texas as Hurricane Harvey rolled through there. In Florida, Hurricane Irma cost us about $600,000 across our ATSG businesses. That included downtime at PEMCO's MRO operations in Tampa, plus missed CMI and ACMI service in and out of Florida, most of which were canceled at our customers' request.

We're fully staffed with flight crews for the level of service our customers anticipate and we expect significant fourth quarter increases and variable CMI revenues from aircraft fully deployed in our customers' expanding air networks during the holiday season. We even added one 767-300 to our ATI airline fleet to support superior service reliability for our CMI customers.

CAM is delivering solid results as its leased aircraft fleet expands and customers deploy them. That includes the last of the 20 Amazon aircraft we delivered in August.

We are continuing to purchase more 767s this year for conversion slots we have reserved through mid-2018. We expect to complete deliveries of five freighters in the fourth quarter, including two 737s going to West Atlantic, plus at least eight 767-300s next year. I won't rule out more fleet investments later in 2018, although the number will depend on customer commitments.

And our other businesses, including our AMES and PEMCO MROs, are tracking more scheduled aircraft maintenance work from Boeing and Airbus aircraft operators, including major passenger airlines.

We expect more profitable growth in 2018 and beyond, as air freight claims a bigger share of overall cargo volume to achieve ever-faster e-commerce deliveries.

As we talk about our growth, investors often ask about the cost and future return on additional 767 conversions, given the tightening market conditions.

As the world's largest owner and operator of converted 767 freighters, we have a decade of achieving good returns from leasing them by acquiring the right aircraft at the right price and flying and maintaining them in a manner that adds more value to the customer.

We think that those advantages, plus the range of operating and technical services we have to support them, make us the leading candidate for anyone seeking additional converted 767s to build out their own networks.

At the same time, we see opportunities in the narrow-body converted freighter market, including the niche that PEMCO was serving with 737s for customers in China and elsewhere, and the demand for somewhat larger narrow-bodies that our new conversion joint venture with Precision will pursue with the Airbus A321. But for the near future, we will focus mainly on the midsized freighter market, where we expect good growth to continue for many more years.

Quint mentioned the pension annuity and the convertible debt offering, two significant transactions we completed during the quarter that are designed to keep our balance sheet strong, lower our risk, and assure our access to capital as additional opportunities come our way.

As of today, we have customer commitments to lease all but two of the 11 freighters that will become available between September 30 this year and the same date in 2018. Contributions from additional leased freighters next year, plus a full year of returns from those we deployed in 2017, make it clear that 2018 will be another year of solid growth, following our projected 23% increase to $260 million in adjusted EBITDA this year.

We continue to deploy most of our free cash flow in the fleet expansion, and expect that will remain the case in 2018. In the meantime, our stock price has risen significantly year-to-date, which we think speaks to your support for our capital allocation decisions.

We did not repurchase shares during the third quarter, but remain open to doing so on an opportunistic basis while we also explore new ways to support the growth story that we think is still in its early stages.

That concludes our prepared remarks, Jason. We're ready for the first question.

(Operator Instructions) And our first question comes from Jack Atkins from Stephens.

So Joe, I guess, let me just start with you. And you've brought up returns on incremental investment opportunities. And I'm just sort of curious if you could maybe flesh that out a little bit in terms of your thinking there. Are you seeing the conversion costs and end-of-service costs on these midsized 767 freighters sort of coming back in line to what you guys have historically targeted? And if not, are you seeing customers' willingness to maybe pay a bit more than they have historically to make sure that everyone is getting the appropriate return out of that asset?

The conversion cost itself, Jack, is pretty much a fixed price. I mean, we have that pre-negotiated for any additional conversions we will do, at least through the end of 2018. But it's really about the feedstock pricing at this point in time and it's still a pretty tight market from that perspective. Again, different customers have different preferences in terms of whether they're willing to accept, say, a 1988 vintage aircraft versus, say, a 1995 vintage. Some will pay up, some won't. It's really dependent upon the individual customer and their view. And if you look at a newer, younger piece of feedstock, you're going to have probably a lower maintenance cost as they are usually willing to pay up a little bit for something that's a younger airframe overall. So we continue to look at the market to see what the customer preferences are and where pricing is for that feedstock at this point, but it's still a little bit on the tight side.

Okay. Got you. Shifting gears to the A321 joint venture, which I think is pretty exciting as you look out into 2019 and beyond. Curious if you could give us an update there. I think you and your joint venture partner have signed a launch customer for that aircraft. And I guess, how should we be thinking about that impacting the P&L? And when would you expect that to start showing up in 2019? Could it be a meaningful contributor in 2019? Or is it really more beyond that, I guess?

Yes. I think if you look at it from the standpoint of the costs associated with the -- developing the STC with Precision, and of course, our launch customer, as you mentioned, is Vallair, you're going to be looking on the order of magnitude of maybe about $2 million to $2.5 million a quarter potentially for our share of those costs, at least through the part of 2018, and should start to taper off, we believe, in early '19. You probably won't see any significant contribution from the actual sale of the conversions of 321s probably until the latter part of 2019. If it gets done sooner, that would be great, but these things are pretty long drawn out projects to get the appropriate certifications, especially when we're going for both the FAA and EASA at the same time. So I would see the 321 being a contributor to the latter part of 2019.

Okay. That's helpful, Joe. And then last question, I'll turn it over. Could you give us an update on the joint venture progress in China? It seems like that hit some snags which is not totally surprising. But just curious where that stands? And are there some other options that you guys could perhaps pursue there to give you access into that market over time?

Yes, Jack, this is Rich. Thanks for the question. As we've reported last quarter, the joint venture is more or less stalled in regulatory approvals. In fact, I'm heading over there next week to meet with our joint venture partners and we are discussing other alternatives and other options within China. But keep in mind, the PEMCO acquisition that we made earlier in the year was a significant entry into China, because they already had an established business. They have over 75% market share in the 737 conversions within China. A lot of those were 737-300s, which are starting to get into their latter years. And so one of the things we're working on now with PEMCO, as we've announced, is the 737-700 FlexCombi, which will also have a freighter component to it. And that will be a direct replacement opportunity for all of those 737-300s within China. So we feel like we've got a strong opportunity in business in China now as an entry, but we're still committed to the strategy that we initially set out on with the joint venture partners, which is to get an operating platform within China similarly to what we did with West Atlantic in Europe.

Our next question comes from Helane Becker from Cowen and Company.

So just a question on the 767s. I know Boeing is talking about potentially on redoing the line, reopening the line. And I'm just wondering if you would have interest in new 767s.

No. We don't see the value for, at least in our business, in terms of going after a new freighter, the returns just aren't there. The converted freighter pretty much does the same thing as a brand-new one at basically a third of the cost. So it just doesn't make sense for us to get into that line of business as far as going for new ones. There are a lot of rumors out there as to whether they're going to open the line up again. But until such time that Boeing puts out an announcement that says we're actually going to do it, I guess, we'll just take a wait-and-see attitude.

Okay. And then just on the hurricane impact again. I got a lot of questions on that this morning. So the only impact you really saw was the $600,000 that you highlighted, right? There was no impact from Harvey in Texas.

No. We didn't really experience any loss on the Texas side. If you look at the amount that we lost because of Irma, about half of it was from PEMCO having to shut its doors for a couple of days and part of the roof came off, but it really didn't impede the operations once people were able to get back to work. And of course, we have a couple of freighters that are based in Miami that fly down into the Caribbean. And those were the ones that were impacted from the ACMI side of the equation.

Next we have David Ross from Stifel.

A question on the different plane types at CAM, the 767 and the 737. I would assume the 737s generate less revenue on a dry lease? Or are there pretax margins, the same, better, worse than the 767s?

They're very similar. It's just as you say, Dave, it's about roughly a third the investment. So you can pretty much factor all the metrics down by that amount versus the 767.

Okay. And then looking at the CAM segment. Why did average revenue per plane jump up 15% year-over-year when the number of planes only went up about 3%? So I was curious what the variability was.

Right. I mean, we had -- of course, we did have more aircraft when you look at the amount of leases that were out there, but we also had some contribution from revenues and leasing spare engines as well as maintenance revenues for CAM's customers that contributed during the quarter. And some of that is dependent a little bit on timing. It can be a little bit lumpy in terms of when those items impact the results.

Okay. And then in the other activity line as well, doesn't look like there's much of a pattern or seasonality to those numbers. You talked about having a mixture of maintenance revenue and cargo handling. What would be, I guess, the rough percentage breakdown if you were to look at that line item? Is it mostly cargo handling with a little maintenance? Is it mostly maintenance with some cargo handling? And how do you look at that?

Yes. Certainly the mail and package handling piece is about, it's the majority of the total customer revenues. Aircraft maintenance, modification and parts sales would be roughly about 20% of that. And then the other services that are covered in that line, such as ground equipment and facility, are much smaller percentages. But I would say the vast majority of that is the mail and package handling services we do for Amazon.

A big part of that, Dave, is the cost-plus arrangement for our handling the Gateway operations for Amazon. So as they open new locations and new aircraft come into play, but that's on a low fixed single-digit margin. As opposed to on a comparable year-over-year standpoint, remember, we were running the hub operation here at Wilmington as well as those gateways a year ago.

Yes. The other thing to keep in mind there, Dave, is that for the maintenance piece, we recognize those revenues when the projects -- customer projects -- are completed. So some of that, again, is impacted by the timing of completion of those projects. So for example, at the end of third quarter, I think there was a relatively large amount on the balance sheet for projects that were yet to be completed but will be completed in the fourth quarter for the maintenance group. So for example, those contributors will show better results in the fourth quarter, whereas as Joe mentioned, on the logistics piece, the package handling piece, which is the majority of the revenue, it's pretty much a steady, low single-digit-type contribution that we get out of that.

Okay. You go from, say, about $90 million in revenue in the first quarter, jumps up by $25 million and then comes back down by $20 million. It's probably going to jump up, I guess, again in the fourth quarter due to more flying similar package handling...

And remember, that included in there was the transfer of the main hub operation for Amazon. We had it in Wilmington up until May, and then that was transferred to Northern Kentucky, Cincinnati hub operation, so we lost that piece. At the same time, some of the Gateway operations improved the number of -- the level of operations in those facilities, the origin points in the Amazon system. And of course, we've also got PEMCO this year, which we didn't have last year. So there's several contributors there that make up that other activities.

So is $100 million a better run rate than $120 million on a quarterly basis?

I would say yes.

Okay. So I know how you were looking at it in terms of the volatility, and should it be smoother or is there some seasonality that it's supposed to make...

There will be some seasonality on the Gateway side with the peak season coming up, but -- in the postal side as well, so you'll see some. But as Quint said, one of the things that you see is a lot of things from the maintenance side of the equation will get hung up on the balance sheet until such time that projects are completed. And if you look at that segment, of course, half of that $600,000 we talked about earlier was because PEMCO was shut down for a few days which had a negative impact on the results for that segment during the quarter.

I'm certainly glad that got back up and running quickly.

Yes, and everybody came through in fine fashion.

Next we have Kevin Sterling from Seaport Global Securities.

As we think about utilization with some of your large customers, I think in Q2, it dipped a little bit and maybe a little bit in Q3. Have you seen that utilization -- those utilization levels pick back up here in October and early November?

Yes. If you look at the block hours, Kevin, second quarter to third quarter, as we mentioned on our August call, the things were actually down a bit second quarter versus first. And of course, they stayed that way through the third quarter in total in terms of block hour utilizations. But as we moved into the September time-frame, which is traditionally when you start to see growth overall even going back to our days as a sub of Airborne, we start to see the block hours pick up. Peak season schedule went into effect, or will go into effect this week, and so we should see some significant increase in the overall block hours for November and December.

Okay. So with the strong peak season, you -- obviously, you're definitely seeing that -- those levels pick up, is that fair to say?

Yes.

Okay, cool. And then how many block hours, you mentioned block hours, how many ACMI block hours did you guys fly in the quarter, if you don't mind sharing that with us?

It was 22,155 block hours in the third quarter.

Okay. So an increase of, I guess, roughly 8%. Is that...

Yes, on a year-over-year basis, yes, about 8%.

Okay. And Joe, you had mentioned in your prepared remarks -- I'm really encouraged to see ACMI Services being in the black now. As we think about ACMI Services for 2018, assume -- should we assume continued profitability in that segment in 2018 as well?

Yes. We look forward to -- like we say, we've got through the gear up for the Amazon side. And not to say that is somebody else came along, or Amazon wanted to increase markedly per utilization, et cetera, where we would have to do a lot of hiring and training and we would not want to see that as a positive. But overall, we look at 2018, we expect to see continued profitability in that segment going forward.

Obviously it would a good problem to have if Amazon or anyone else to you for some additional lift, right?

It definitely would.

So speaking of that, let me just ask you your big picture. You've mentioned rolling out more fleet investment in 2018. I think you're taken delivery of three in Q4, and then, I believe, eight in 2018, and maybe even have more above and beyond that. So the calls that you guys get today, kind of given the tightness in the market and where we are, are you getting calls from existing customers calling to say, "Hey, I need more lift," or maybe it's the new customers, "Hey, I'm looking to enter into the ACMI or CMI arrangement with you." New customers you've never talked before. Could you share with us maybe some of those discussions you're having and the opportunities that you see as you think about 2018 and beyond with maybe new customers and even existing customers?

Yes, Kevin, this is Rich. Thanks for the question. Yes, we're seeing both, actually. A lot of the deployment that we've got in 2018 is with existing customers, although we are on schedule to deliver two aircraft to a new customer in Asia. But we're getting calls not only from airlines, but from non-airline companies that are looking to put up aircraft in a network situation that we've never got calls from before of some logistics companies. Additionally, there were some companies -- some airlines, I should say, in parts of the world that had been retrenching on their freighters. They had been parking them, the larger ones. And they also had midrange freighters and it looks like they're going to be adding to their midrange fleet. So they're putting up a network, if you will, or solidifying a network in different parts of the world, while at the same time, getting out of the longer-range freighters going forward. We've got a couple of customers in that block. So we're not only getting new airline customers inquiring about the 767, we're also getting non-traditional participants, if you will, from the logistics space looking in. And we've got very strong demand from our existing customer portfolio.

That's just great and exciting. So Rich, let me explore that a little bit more. When you say non-airline customers, I assume with what Amazon -- what you guys are doing for Amazon, it raised awareness, if you will, in the logistics community and really, everyone else. Are those people taken notice as to kind of the service and the value-add that you're providing for the likes of Amazon, calling you. Maybe don't need something that big. But those opportunities, is that what you're talking about? And maybe, like you said, getting calls from those nontraditional airline companies, kind of something that you're doing with Amazon? Something similar?

No, it's not -- nowhere near that size or scale, Kevin. I mean, keep in mind the scale that Amazon has is significantly larger. I think the next, somewhere around 10 or 15 e-commerce companies globally don't equal the size of Amazon from a package and volume standpoint. Now these are companies that are in businesses that have specific supply chain flows and needs in a much smaller portfolio where they're looking for a captive solution as opposed to relying on your traditional belly space, or trying to buy space on main deck freighters. So looking for more of a dedicated solution mainly to pick up service and dedicate service in a -- more in a supply-chain dedicated to a manufacturing or distribution environment.

I got you. So kind of as this growth in airfreight and, if you want to call it, the need for speed and the express service offerings, companies are coming to you guys looking for ways that they can participate and capitalize on some of the dynamics we're seeing in the market. Is that fair to say? Is that right?

Yes, that's a good summary.

Okay. And Joe, last question. You talked about, obviously you guys are excited about growth you see in 2018 and the opportunities. Is there any way you possibly maybe just ballpark growth opportunities? Are we looking at 20% plus in potential EBITDA growth for 2018? Anything you can ballpark there for us as you think about all the opportunities you have on the horizon?

Well, Kevin, as you know, we usually give our guidance for '18 when we do our year-end results. So stay tuned for late February or early March.

Next we have Steve O'Hara from Sidoti & Company.

Based on a question earlier, maybe I missed a comment, but -- I mean, the returns that you're getting from your investments, have they declined because of the scarcity asset? Or are you able to pass that along to customers?

Yes. One thing to keep in mind is the assets we're putting in service now, we were -- as we've said in the past, pretty proactive in terms of locking up access to this, the aircraft that we're taking even now. And so I think that those were acquired certainly at a value that perhaps didn't reflect some of the appreciation that we've seen in feedstock since then. So we do expect to achieve our returns certainly on all the aircraft that we will place into service into next year, Steve. In terms of beyond that, I think what Joe was saying is simply that the feedstock may be such that some customers may have a desire for a little newer feedstock which will require a little bit of a higher entry cost. And that can be handled in a lot of ways with the customer. Sometimes you may get those aircraft leased for a longer period of time, or they may simply pay more for the same duration of lease. But in either case, we have an ROIC target that we are -- we strictly adhere to in terms of our investments into those aircraft. And we do...

Okay. So you're passing that along? I'm sorry, I interrupted you. Go ahead.

No, I was just saying we expect to continue to achieve it.

Okay. All right. So I mean, I can understand if some customer wants 20 aircraft or something like that, maybe you wanting to discount or something like that. But I guess, on a ones and twos here and there, you're trying to pass those costs along in either three -- is it a more secure lease? Or a longer-term ACMI agreement? Or would it be more similar to the A-plus CMI arrangement?

Well, you get a variety. But I think a lot of the customers that, once you get outside of Amazon and DHL that we have interest from for aircraft, it's typically just a dry lease. We may not be operating, although typically, we are extending maintenance services to those customers and other support services. But the operation for the most part for these customers is -- they're handling that.

Okay, okay. And then -- now I know you'd -- I think you would not really been too receptive of the restarting of the 767 line or didn't seem to see any benefit. But would it benefit you in that maybe feedstock will become more available if a carrier could get their hands on a newer 767 or parts and engines and that kind of thing? Does that help? Or is that already plentiful?

I think if you look at that, Steve, first and foremost, if they do startup additional capacity for building new 767s, you're probably looking a couple of years out before you start seeing delivery of those aircraft. So there would be a period of time in between where people, if they still had a need, would have to go to the converted freighter side of the equation. But I think you're talking about two different markets there in terms of what we lease to people on a converted-freighter-basis versus somebody that has the capital wherewithal to afford to buy new ones, as I've mentioned earlier, and almost 3-X as much. So if you look at a FedEx or a UPS, they're the kind of people who might buy new. Potentially, I guess, Amazon could. But in this segment that we play in, it's still going to be the converted freighter.

Okay. But I mean, in terms of -- might it shake some loose down the road from maybe a passenger standpoint where maybe a passenger operator says, "Hey, there's a new one out there, I'll take that." As opposed to operating...

No. I don't think if they started up, I don't think they're going to do with a passenger out because they're going to be cannibalizing some of the business associated with the 787. It would strictly be from a freighter demand perspective. Keep in mind, the military tanker, which is the program that is kind of a pacing item here, is basically a freighter with the ability to refuel airplanes at the same time.

Okay, Okay. And then -- okay. In terms of the aircraft commitments you have right now, I think you expect to have eight in mod or waiting mod by the end of the year. And you don't have any firm commitments or any -- I mean, do you have any -- how many do you have lined up maybe for 2018 right now?

As far as traditional acquisitions? None beyond the eight we referenced already.

Okay. And would you be surprised -- and my guess is you'd be surprised if you didn't make any in '18. But do you see -- is there a range you think is relatively comfortable from a CapEx standpoint where you -- if you bought less than three or more than 10, you'd be surprised, something like that?

Yes. Kind of we said in the past, Steve, is we look at the marketplaces. We anticipate that there would probably be somewhere around four to six additional tails a year that we would anticipate, we'd be able to place into the market. But obviously, we're going to take that as a go. Again, it's still got to go back to, can we find the feedstock at the price that we -- hits our price point as for as the returns on our capital once we get the thing through the modification process.

And next we have Chris Stathoulopoulos from SIG.

I was wondering with your competitor Atlas and the situation they're having with their pilots and the alleged work slowdown. Having gone through that with ABX last 4Q, if you could give your perspective on that. But more so, if there's a potential to pick up some share there, or if any of the customers, DHL and Amazon have approached you about service levels?

If they did, we wouldn't talk about it anyways. We don't discussed what the current business climate is with our potential customer -- with our existing customers. Certainly, the strike we had last year was something we don't anticipate a repeat of this year. And while Amazon has had its issues -- or Atlas had its issues with its pilot force. To our guys credit, our guys continue to fly the airplanes day in and day out and maintain the service levels we expect to give to our customers. All of us are in negotiations at this point, both ABX, ATI and Atlas. So we're just going to continue to go through the process. They're all under the auspices of National Mediation Board. And as was noted last year, the strike was determined to be an illegal strike at that point and we don't anticipate, as I said earlier, having the same thing occur again this year.

Okay. And then the eight planes in mod by this year-end, how many deals are locked in? And what's the timing of deployment with those?

There's six -- this is Rich, by the way. There's six aircraft out of the eight that have signed agreements and cash deposits down. The other two -- and two of those deliver -- two deliver in the first quarter, three deliver in the second quarter, and the remaining three deliver in the third quarter. And the two that we have that are available deliver in the third quarter. And we've got multiple airlines interested in those two. I'm very confident we'll get those deployed hopefully by the end of the year.

Okay. And last one, my apologies if you gave this before. What was the block hour trend for the quarter and above minimum flight times?

On a quarter-over-quarter basis, the block hours were flat. Over the third quarter last year, we were up 8% overall.

Okay. And do you have a number for in terms of flying above the ACMI or CMI minimums?

No, we don't have -- none of our contracts have the minimum guarantee, so to speak, attached to it to where if we fly above minimums it changes things. Ours is predicated on a -- for our large customers, a fixed plus a variable. So the more they fly, the more we get the variable piece, but there's no minimum guarantee.

We have no further questions. Mr. Hete, you can give your closing comments.

Thanks, Jason. We're looking forward to a good fourth quarter with more aircraft in our fleet and customer schedules that will keep them busy throughout the holiday peak session. Rich and Quint are leaving shortly for New York where they will offer more perspective on our third quarter and outlook at the Stephens Conference tomorrow. Thanks for your support, don't forget to vote today, and have a quality day.

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