Air Transport Services Group Inc (ATSG) 2017 Q4 法說會逐字稿

Welcome to the Q4 2017 Air Transport Services Group Inc. Earnings Conference Call. My name is Anara and I will be your operator for today's call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please note that this conference is being recorded.

I'll now turn the call over to Mr. Joe Hete, President, and CEO. Mr. Hete, you may begin.

Thank you, operator. Good morning and welcome to our fourth 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-K later this week.

I'm very pleased to report that we ended 2017 with substantial increases in revenues and earnings on the strength of a solid fourth quarter. Our revenues increased 42% for the quarter and 33% for the year, excluding reimbursables. Our earnings on an adjusted basis were up 73% for the quarter and 63% for the year, largely due to improved results from our airlines. Our adjusted EBITDA for the quarter was almost $81 million. Our record $268 million for the year exceeded our target of $260 million and was a 27% increase over the prior year. 2017's excellent results were aided by across-the-board growth in each of our businesses and a solid peak season service for our customers.

2018 is off to a great start. We are projecting adjusted EBITDA for 2018 at $310 million, which is a 16% increase from 2017. We are planning to spend $300 million in Cap-ex, mainly to deliver ten more converted 767 freighters this year, all of which we expect to place under multi-year dry leases. To meet the continued demand for our mid-sized freighters, we're announcing that we will acquire three additional feedstock 767-300s, two of which will be converted and available for customers late this year.

Quint is standing by to summarize our financial results for the fourth quarter and year. Rich, will add a few words on our operations and I'll close with some perspective on our outlook. Quint?

Thanks, Joe, and thanks to all of you on the call for joining us 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 described 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 are not limited to, changes in market demand for our assets and services, our operating airline's ability to maintain on-time service and cost control, the cost and timing with respect to which we are able to purchase and modify aircraft to a cargo configuration, fluctuations in ATSG's traded share price, which may result in mark-to-market charges on certain financial instruments, the number, timing, and scheduled routes of our aircraft deployments to customers, and other factors as contained from time-to-time in our filings with the SEC, including the Form 10-K, 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 pre-tax 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.

As Joe said, our fourth-quarter earnings were very strong, led by improved results from our airlines. Our ACMI Services segment was profitable for the quarter and the year as a whole, thanks to a strong peak season.

On a consolidated basis, fourth-quarter revenues increased by more than $100 million to $323 million, and by nearly $300 million for the year to $1.1 billion. Those are record totals for us since our business model changed in 2010.

Revenues from each of our reportable segments increased compared to the same quarter last year. Revenues from Amazon were approximately 44% of ATSG's total for the year. DHL revenues were 24% and the military contributed 7%.

On a GAAP basis, we had fourth-quarter earnings from continuing operations of $94.1 million versus a small loss a year ago. For the year, we earned $21.7 million, $700,000 better than in 2016.

Two major non-cash items affected those GAAP results. The largest was a $59.9 million benefit from the tax law changes at the end of last year. The other was a quarterly gain from the revaluation of our warrants with Amazon, based on the fourth-quarter change in our stock price. The warrant valuation gain net of the lease amortization incentive that is also tied to the Amazon warrants was $14.9 million for the quarter.

Adjusted for those two items and subtracting our portion of development costs from our Airbus A321 joint venture, our earnings per share from continuing operations was $0.30 diluted for the fourth quarter, up $0.11 from a year ago.

On an annual basis, our adjusted EPS was $0.90 diluted versus $0.58 in 2016. The 2017 total also excludes $0.06 per share in pension settlement charges and $1.45 per share in loss related to the Amazon warrants, both of which are non-cash.

Our adjusted EBITDA increased 43% to $80.8 million for the quarter and 27% to $267.9 million for the year. We exceeded our own EBITDA goal for the year, thanks to strong performances by all of our businesses, including substantially improved results from our airline operations.

Rich will cover some highlights there but the principal factor for the airlines was expanded flying during a busy peak, which included operations for our principal customers DHL and Amazon, as well as some peak season flying for other customers. Taken together, our fourth quarter block hours exceeded the prior year by 26%. Also contributing to our airline's improved performance was a reduction in year-over-year expense associated with scheduled airframe inspections.

CAM, our leasing business had a good quarter, despite lower margins than a year ago. Additional earnings from a larger leased fleet were offset by increases on the lease incentives to Amazon, higher depreciation and increased interest expense as CAM's portfolio of aircraft expanded to meet the strong demand for leased 767s.

We told you in November that starting in the fourth quarter, we would include a non-cash charge in our interest expense of about $2 million each quarter, associated with the convertible feature of the notes we issued in late September.

Because CAM bears the bulk of our interest expense, nearly all of that $2 million of amortization hits CAM's pretax results. The amortization is predictable over the term of the notes, so we are not excluding it from the calculation of our adjusted EPS.

You saw in our press release that we revised our segment reporting for the fourth quarter by forming a new segment, Ground Services, which primarily included the results of our gateway operations, postal center management services and material handling equipment support. The growth in our Amazon gateway services during 2017 triggered the requirement for segment disclosure.

Results from our Other Activities, which for the fourth quarter were primarily our aircraft maintenance and conversion businesses and corporate expense, were lower on a pretax basis, despite stronger contributions from our maintenance operations. The fourth quarter included our share of losses from our minority investment in our European airline affiliate, West Atlantic.

Starting with our first quarter 2018 10-Q filing, we will adopt the FASB's new revenue recognition standard and again revise our segment reporting structure. Under the new rules, revenues related to cost of aircraft fuel and certain other aviation-related expenses that are directly reimbursed to ATSG and controlled by the customer will be reported net of the corresponding expenses.

As we noted in our press release, had those rules been in effect for 2017, our GAAP revenue would have been approximately $290 million or lower than the $1.1 billion we reported with no changes to earnings or cash flows.

Also, beginning in the first quarter of this year, we will begin reporting our aircraft maintenance and conversion operations in a new segment called MRO Services. And the operations that had been part of ground services largely netted under the new revenue rules will return to other activities.

We spent $296.9 million on capital expenditures in 2017. That included $209.4 million to purchase eight 767 and two 737 aircraft and pay related freighter modification costs. We spent $53.3 million for required capitalized heavy maintenance and $34.2 million for other equipment.

As Joe already mentioned, we currently anticipate a 2018 cap ex spend of $300 million, most of which will be to acquire and convert 767-300s. That includes two of the 767s we intended to purchase last year plus the three we just announced. We will complete freighter modifications on ten and have one still in process at the end of 2018.

In our press release, we highlighted the 1.125% convertible notes offering completed last September, the amendment to add capacity under our secured revolving credit facility and the offloading of a portion of our pension liability to an annuity underwriter. These were key steps to de-risk our balance sheet while preserving our long-term access to attractive low cost growth capital.

As of January 1, 2018, nearly 80% of our $575 million in debt principal was at a fixed rate, with an average coupon of under 3%. We entered 2018 with $291 million available under our revolving credit facility, growing cash flows from our expanding operations and a still conservative debt leverage profile of 2.1 times trailing adjusted EBITDA.

We want to be ready to respond to major new business opportunities when they arise, but still rely primarily on our substantial cash flow to fund them while meeting our other cash commitments. That's a summary of our financial results for the quarter. Rich is ready to share some operating highlights and our market perspective. Rich?

Thanks, Quint, and good morning, everybody. From an operating perspective, we had an excellent fourth quarter and year in 2017, as both of our airline showed improved earnings resulting from higher utilization, and most critical during the fourth quarter, excellent service for our customers.

CAM, our leasing company, transitioned from completing the Amazon commitment for twenty 767s in August to delivering more freighter conversions to other customers.

CAM delivered four new conversions in the fourth quarter three 767s and one 737. That included the first of three 767s to Northern Air Cargo and one each to Amerijet and Cargojet.

I cannot emphasize enough how all of the ATSG family of companies stepped up to deliver in the fourth quarter. The majority of our business that we fly supports express parcel and e-commerce business. We delivered our best service at the most critical and challenging growth period for our customers.

ABX Air and ATI delivered excellent service and our MRO aims supported the airlines with line maintenance, which is so critical to reliability.

Lastly, our logistics operation facing significant peak growth adapted and expanded to meet the challenge of the season.

We are extremely proud of all of our employees from package sorters, to aircraft mechanics, to flight crews, to the management teams that work with our customers and employees to plan and execute a successful peak season.

As we saw in the express carrier wars of the 1980s and '90s, the companies with the best service performance survived. As we expand our company to compete for more e-commerce and express business, service quality will be the key. We intend to build on our service leadership position with our experienced employees as our point of differentiation.

One new development this year is the tentative agreement we reached earlier this month, with the pilot group at ATI for a four-year amendment to our collective bargaining agreement. The new terms are being presented to the ATI pilots, who are expected to review and vote by the end of March. We regard it as a fair agreement that addresses many issues of concern to both the pilots and the company.

We are continuing to work toward a new amendment to the CBA with our ABX pilot group as well. While it would be great to end 2018 with a new CBA in place for both airlines, we have made less progress with the Teamster represented ABX pilot group. We look forward to a deal at ABX that allows both of our airlines to remain the best choice for our principal customers.

With that, I'll turn it back over to Joe.

Thanks, Rich.

The three additional 767 aircraft purchases we announced yesterday are the best way we can tell you that we are very positive about the economy in general and the express network portion of the air cargo business that we serve directly. They will join the other 767s and one 737 as sources of incremental growth this year.

We have customer commitments for six 767s this year including one we delivered in January, all of which will be straight dry leases. An agreement for a seventh is being finalized. We have both single and multi-aircraft interest for the remaining three.

We do anticipate that most of our 2018 dry lease customers will utilize some aspect of our maintenance capabilities. Our principal focus with customers is always on a long-term aircraft lease with the option for additional services.

For the last few years, we have had to tell prospective lease customers that a 767 order placed today cannot be delivered for one year or more. Our aim is to be able to deliver an aircraft sooner when a customer calls.

We are aware, of course, that our industry is cyclical and that consumers' willingness to spend can shift as well. But a significant part of the demand we are supporting today is driven more by increasing e-commerce fulfillment than by aggregate air cargo demand.

These patterns are emerging more slowly in some parts of the world, but the demand for our type of freighters and express networks is clear. We are determined to remain the #1 source of dedicated midsize freighters to help our customers meet their own growth and customer service objectives.

With an ear to the market, we are expanding our aircraft type offerings within the midsize niche, to offer models that can efficiently serve smaller markets.

That's why we have teamed with Precision, to develop a converted freighter variant of the Airbus A321. That type combines the operating efficiency of a smaller narrow-body like the 737, but with a cubic capacity of the larger narrow-body 757 freighter. Once approved, we intend to make investments of our own to provide A321s to customers.

We also mentioned in our release that our board has approved a $50 million increase in our authorized share repurchase limit to $150 million. We will remain a steady, opportunistic share repurchaser.

Our strategy remains to maximize cash flow and invest to where we can find the highest return. For now, that's primarily to invest in the very same attractive aircraft assets that have made us so successful thus far and delivered the substantial shareholder return that we have all enjoyed the last few years.

That concludes our prepared remarks, Operator. We are ready for the first question.

We will now begin the question-answer session.(Operator Instructions) And our first question comes from Jack Atkins from Stephens.

Thanks for taking my questions. And congratulations on a real strong end to 2017.

Thank you.

So let me just start off first with the three 767s that you discussed last night in the press release. In terms of feedstock purchases, are you starting to see some -- some loosening up of feedstock there? And just sort of curious what you're seeing from a price-point perspective, in terms of all-in conversion costs and how that's trending versus where that number has been historically. And I would love to get Rich to also comment on, the types of customers that are sending in inquiries for your assets?

From a feedstock standpoint, Jack, obviously, we've always focused on as making sure that we have the aircraft going to service at the price that meets our return hurdles based on what we think we can get from the market at that point in time. So it's still not what I would call a market that has plenty of available assets out there, but you just keep looking and hunting and pecking to see what you can find. And we came across these three and then there's couple more that we've got our eyeballs on at this point. So we'll continue to feed the pipeline of feedstock out there. Pricings, again, like I say, you could get an airplane any day of the week, so to speak, if you are willing to -- price is no object, but that's not the way we view the marketplace. So that's kind of the feedstock update and I'll throw the rest over to Rich.

Hi, Jack. I think the market for this airplane, the 767, has historically been the integrators. And most of the demand that we're seeing are from customers that either fly for integrators or fly express business supporting integrated, as part of a different network and so we continue to see that. We had a couple of inquiries from logistics companies looking to build small, two to three-aircraft solutions, I'd put it that way, to solve a time and distance and speed issue they may have related to either production lines or distribution. Those happen every once in a while; I wouldn't call it a trend, but it is an unusual event that we have seen pop up over the last couple of quarters.

That's helpful. Shifting gears to the guidance for a moment. Just sort of curious, some of the assumptions that are baked in there, do you all have the new ATI tentative agreement in the guidance for 2018 in terms of the incremental expense there. And then Quint, what are you assuming for block hour growth in terms of your ACMI Services in 2018?

In terms of the ATI tentative agreement, as we mentioned in the release, I think the expectation is a vote in late March. So sort of the impact that we -- our view of the impact of that from call it, you know, second quarter forward is baked into the guidance that we provided.

Okay, that's good.

So --.

And then in terms of the block hour expectation. I know the, looking at the plane count, year in, year out versus year-end '17. It looks like you are going to have fewer aircraft flying with ACMI or in charter. Just sort of curious, how we should be thinking about block hour growth?

The placements this year are going to be dry only for the most part. So we're not operating the aircrafts, so you're kind of at a steady state going forward, as we move through 2018 in terms of the hour utilization.

Okay, that make sense. Last question, I'll hand it over. I noticed yesterday, you all announced the hiring of a new Chief Marketing Officer. Could you maybe talk about what you hope that that new position brings to the organization kind of going forward?

Jack, that's actually the Chief Commercial Officer position; it's actually one we had prior.

Okay.

That's the job that I had held before moving to Chief Operating Officer. It took a bit of time to replace that person. But essentially, what the role does is, it manages the full marketing and sales function across the portfolio of companies of ATSG, with the main goal of bundling solutions for airlines and other customers to present the portfolio in a solution set, as opposed to coming to ATSG for one service at a time.

And our next question comes from Helane Becker from Cowen.

It's actually is Conor Cunningham for Helane. Just a quick follow-up on Jack's questions on the guidance. Do you care to share how much the ATI contract will cost you in 2018 or maybe just like the expense overall? And then on the four aircraft that are currently not assigned or not leased out yet, are those contemplated in the 2018 guidance?

In terms of the ATI impact, we really don't want to give specifics on that. As I say, we baked in our view of that as well as any offsets that we would expect to receive in terms of revenue -- on the revenue side for those cost increases, but we have baked it into the guidance. As far as -- I'm sorry, the other question?

The other question is related to the remaining aircraft that are not under contract. We've got multiple parties interested in the aircraft, some parties are interested in multiple aircrafts. So we're very confident, we'll have those deployed as they become available. And some are to existing customers and some are to new opportunities. Quint Turner^But we have baked, as we said two of the three into our guidance. We expect to have 2 of those 3 in service late in 2018.

And there is clearly a lot going on in the company with the 767 expansion and the 737 and the A321 projects. Just trying to get a sense for how you guys might grow the company over the next several years? Can you just talk about how many aircraft you are currently comfortable with taking each year, assuming that the feedstock and conversion slots are available?

Well from those taking aircraft every year. I mean, I think we've traditionally said that anywhere from four to six airplanes are easy fit within our cap budget without even expanding our need to borrow additional funding. When you got an EBITDA of $300 million plus, you've got some headroom there and we've got a lot of flexibility with our capital structure at this point in time. But when you get into other aircraft types, it's a matter of how much is the market demand still out there for the 767, but what we see is a lot and the reason we made the investment in the 321 is some narrow-bodies are going to need to come into the marketplace. The 757s that have been in the cargo space to-date are getting long in the tooth, they'll need replacements in time. And if you look at the 321, it fits a great spot in the cargo business, because as we said, it's got the operating cost characteristics of a 737, but the cubic capacity of that 757. So we're targeting 2019 for certification of the 321 mod, and we expect to utilize that aircraft platform to grow the company in the outgoing years.

Okay, great. And then one last one. Rich, we appreciate the update on the ABX pilots. Does the lack of a pilot agreement there kind of hinder you from growing the Amazon business past 20 aircraft? And if it doesn't hurt Amazon, does it hurt you at all from just adding new customers at any level? Great, thanks for taking the questions.

Well, in terms of the Amazon piece, I don't think it's going to hinder our ability to grow with Amazon. Obviously, our ability to grow with Amazon is going to be contingent on Amazon wanting to grow airplanes. And so we're looking forward to the next opportunity they may have in that perspective. Obviously, with ATI having a tentative agreement and if that gets over the goal line that that would be a positive, very positive for ATI as their other two airlines, ABX an ATSG airline, and Atlas, do not have tentative agreements or collective bargaining agreements that are set. So that's a positive for us going forward, just from that perspective. So labor stability is something that all of our customers want, but at the same time they are growing and they have to get those needs filled and where -- whether we have full agreements or not we're standing by to provide service. We had an excellent fourth quarter as it relates to providing services even with the labor environment that we're in. Our crews, our flight crews and the rest of the company as I said in the talk, did an excellent job and continue to do with an excellent job for our customers.

Next question comes from David Ross from Stifel

First question, just walking through the aircraft in service, because you show an increase in dry lease without CMI of fourteen through eighteen, its fourteen more aircraft in 2018 and then CMI down by one. Can you just talk about the moving parts there that's driving those changes and whether there's an opportunity to take some of those dry lease without CMIs and convert them to include CMI?

Yes, I mean the bridge kind of David on that is of course, there are ten aircraft newly converted, that will come out this year. We've got one aircraft that is leased with a CMI right now that's operating into Honolulu that will transition to all dry for Northern Air Cargo. So that gets you to eleven, and then there's a couple of airplanes that are coming out of sort of the ACMI charter space that I think essentially will end up in the Mideast flying for DHL. After bumping through the ranks there is some swapping along the way of 200s for 300s in the DHL network, but incrementally we end up with a couple of dry leases in the Mideast for 767s. And then of course we've got one 737 that goes into service for March for our affiliate West Atlantic in Europe and that's the fourteen aircraft that you see in the increase in the dry-only category.

And then of those ten newly converted most of them are placed within -- the ones having a dry lease in place, you are just assuming that they're going to be dry leased?

We are, but there is a chance that one or two of those also goes to a customer who will need CMI service. That's sort of the easiest assumption to make as a dry only at this time.

Okay. And then moving on to the ACMI segment had a nice boost in earnings in 4Q finally. Should it be profitable all year in 2018 or is the new ATI contract going to mute some of the upside to earnings this year?

I think first and foremost, I always look at the fourth quarter because we shut down our heavy maintenance lines to make aircraft available to customers of additional peak capacity, so if you look at the fourth quarter, you are generally going to see a $4 million to $5 million drop in the maintenance expense related to heavy maintenance on the aircraft during that quarter compared to the previous three. So that obviously is a benefit in the fourth quarter, plus the additional flying that we see every year for peak season purposes. So as you move through 2018, we expect the ACMI segment to be profitable but at more muted levels than what we saw in the fourth quarter obviously for the first three quarters of the year.

And then last question on the A321 development costs. You talked about those in the past, but you mentioned earlier in the call that they were I think excluded from the adjusted EPS numbers, are those development costs also excluded from the 2018 guidance?

In terms of EBITDA, yes, they are. Yes, it's a non-operating entity of course until they receive certification for that cargo modification. And so as a non-operating entity, we have excluded them from our non-GAAP guidance.

Okay. If it were included, would it impact the CAM segment the most or the ACMI or other?

Well, as we said, the potential, I guess benefit to ATSG from the 321 could span across the segments at some point. We expect --

Right but if we expensed the development costs -- where -- what segment would they fall into.

CAM -- yes because it's a sort of an asset into the potential CAM portfolio. So it would be CAM.

Okay, that's about $2 million a quarter?

Yes.Right.

Next question comes from Kevin Sterling from Seaport Global Securities

Congrats on the quarter. I got to say, I have been following you guys a long time and to see almost an $81 million EBITDA quarter is quite impressive, so congrats on that.

Thanks, Kevin.

So, Joe, let me -- as I think about guys are -- you're working to ratify the ATI agreement. Tell me in the past when one union has kind of ratified an agreement, does that help set a precedent for the other union possibly getting a deal done? Should we see something similar going forward -- now that you're assuming the ATI pilots ratify it? Will it help, I guess helps out a precedent to get a deal done with the Teamsters? Maybe tell us what's happened in the past when one union ratifies one agreement and another one yet to do so.

Kevin, I can't venture a guess on that because -- realistically when you think about it, the last time we went through this ABX had their agreement done in the end of 2009-2010. ATI, I think was in the basically the same ballpark as far as when theirs were in. And the dynamics in the business were different. A lot of it is driven by what's the current climate from the business overall. Is it a growing business? Is it a downturn? And pilot availability, it seems to be rearing its head although we've had no problems attracting new pilots into the fold. In fact, we've got more resumes than what we need to look at, at this point in time. So those dynamics are going to change based on timing and everything else. So I hate to venture a guess in that regard. From a logical perspective, you would think it would.

I got you. That's helpful, thanks Joe. Kind of sticking to that as we think about the -- you said your new guidance includes higher wages related to the pilot contract. Just remind us, I believe your contracts have inflation escalators in there, just can you help remind us how you're able to pass along some of the cost increases -- are you able to pass along the majority, most of them. Does it potentially catch-up after couple of years. Is there any way you can kind of help us walk through that as we think about wages going up and your ability to pass those along?

Kevin. In terms of the contracts there were fixed escalators in there, but the amount we are talking about with the ATI pilots is certainly going to exceed what we had in the way of escalators. But we don't really want to get into talking about our specific contracts with our customers in terms of how they would be impacted at this time.

But generally, I mean, I guess just generally speaking, do have obviously inflation escalators in those contracts to cover rising cost?

Yes.

And then lastly, your Delta engine maintenance contract, I believe you move that from kind of amortizing that business to now it's hitting operating expenses, and so I guess, we'll get a full year of that in 2018 in operating expenses. Can you quantify the annual impact to EBITDA that might have in 2018? I know, it's a good business and good opportunity, but just given the accounting change, is it possible to quantify the impact in 2018 to EBITDA?

Yes, I think when we entered into the agreement, when was that in the third -- July 1. We put -- we said in that quarter commentary that we expected a $6 million to $8 million annualized impact. And Kevin, in course what you're talking about is, previously we had capitalized the engine overhauls for the GE powered 767-300s and depreciated it. So from an EBITDA standpoint that cost was added back and then after entering into the agreement with Delta that is expensed on the operating side, no longer ends up in depreciation. So from an EBITDA perspective, it's a headwind, although of course in terms of cash flow and earnings it's actually a positive and certainly provides something for CAM to offer a smaller lessee which is I think very valuable getting access to lower-cost engine maintenance on a per-cycle basis.

Thanks, Quint. And Joe, Quint and Rich, the last question here. As I think about big picture, you guys were able to acquire feedstock, three additional planes and obviously sounds like demand is clearly there, but you don't want to overpay. If I think big picture, if a customer comes to you with an aircraft and then offers like, 'Hey, would you -- let you guys operate a CMI arrangement' that would be a very good scenario for you, because it sounds like Joe, you guys are able to get pilots, get them on-board and train them. And so you know if a customer were to bring the asset, you would be willing to clearly operate under a CMI arrangement. Am I thinking about that right as a way to kind of think about growth down the road too?

I think Kevin, from the standpoint, like being one of our larger customers where DHL, Amazon or somebody like that, came to us, we what to do that, but I think if there was a -- if somebody came along with one airplane that they had, that they want us to operate, we'd have to take a hard look at that. I mean it's more about being able to get stickier with your customers in terms of meeting their needs, and if it -- if their needs are that they want to -- you to leasing the airplane and fly, that's an outstanding deal for us. If they have their own airplane, and want us fly, that's certainly something we would consider as well.

And our next question comes from Steve O'Hara from Sidoti & Company.

So just on the A321 and you said the costs were $2 million a quarter. Are they being capitalized or they are being expensed, but they're being kind of remove from adjusted?

Being expensed and then removed on the adjusted basis.

Okay, and why aren't they being capitalized?

Well, essentially under the rules -- under the accounting rules, you pretty much have to be at a point in time where approval of the certification is lead-pipe cinch before you're allowed to put those on the balance sheet. And of course, that's changed over the years. It used to be a little more, I guess liberal in your ability to capitalize.

Okay. So I mean at some point -- so you don't expect the development cost to be capitalized at any point, just because -- by the time you get there, they are already going to be done, is that....

Yes, I think near the end and we've said we expect the process to conclude, sort of in the 2019 timeframe. So near the end, I think we will be capitalizing some costs. But it's at that point, as you say, most of the development cost has been expended and flushed through the P&L.

And was that the loss on the JV. I thought that -- that you reported in the quarter. I thought that was on the Europe JV, but maybe I'm mistaken.

Yes, the minority stake we have in our European affiliate West Atlantic, it's on the equity method that we account for that. And there -- our shares of their operating results for a quarter are in the other expense operating line. Because it's an operating JV as opposed to this non-operating entity, which is below the line, and which we exclude from our non-GAAP results.

And then just on the returns from 767s versus A321, 737s. Can you give us an idea of maybe the expectation for the A321? I mean are they in line with what you generally get from the 767s? I guess, you get more, because you have ownership in the certificate, but I mean, what's the breakdown there?

Well, there is -- I think in terms of from the CAM standpoint and what we expect to achieve on an unlevered basis for just the asset. We -- over the long pull, we certainly expect returns to be as good, certainly as we get on the 767s. With the 321, there is going to be more opportunities I guess to realize margin, because we're invested in the certificate itself. Our MROs potentially could play a role and actually doing the conversions. And of course, CAM intends, as we've said, we think the asset's future is very bright and we expect to add it to CAM's portfolio. And also potentially one of our airlines could operate that, that aircraft type on behalf of our CMI customers. So there is a lot -- going to be a lot of opportunity, I think with that airplane. And of course, we talked about the amount of feedstock that's out there, there is over 1,400 of these operating, they are just now getting in the age range where we believe they will be attractive candidates for conversion. Often the feedstock is more expensive initially and comes down over time. So I think the returns could change a little over time. However, over the long pull, we would expect to achieve the same sort of unlevered ROIC that we get on our existing fleet.

And then just lastly, there were some comments from DHL that they were -- I guess hoping to grow closer with Amazon and boost that business. I mean, would that be a benefit for you guys or maybe do you see that as more of a long haul opportunity possibly. But do you think that would maybe improve utilization on 767s in the U.S. then maybe elsewhere as well?

I think that, they're already -- DHL is already doing the sorting and logistics work at the DHL Cincinnati hub. And so, and we fly for both customers separate networks today and they operate at different times of the day as well. So in terms of kind of the opportunity that would involve for us, would obviously be increased flying whether from one or both depending on the network that they were evolved to. Also keep in mind they are both global. And the way we look at this, we know that there is -- they'd worked together in Europe as an example. And we think that's great, because that will create an opportunity for more airplanes over there as well. So since they are both growing that means that they're both going to be needing more aircraft in the future. If they work together since we're such a -- they are such good customers of ours and we are a significant service provider to both of them, their growth means good opportunity for us.

And our next question comes from Chris Stathoulopoulos from Susquehanna.

I was wondering if you could help just walk us through how you're thinking about EBITDA -- adjusted EBITDA margins for 2018. And then looking at 2017, if I adjust for the leased amortization expense and then back out the $290 million of expense that's changing because of the accounting changes, I get to like a little under $800 million. And so you have on an adjusted EBITDA margin basis, around 34%. How should we think about margins, given all the changes in the aircraft additions for 2018?

As we mentioned Chris, the lion's share of these additions this year are going dry only, which as we've talked about in the past, because the leases drive predominantly the EBITDA, but not as much revenue. Certainly, from a margin standpoint those incremental assets they come into the fleet this year will come in at a very high EBITDA margin, since this is their dry only.

That coupled with these big changes in the revenue recognition, which you alluded to a second ago, essentially almost $300 million of our revenue in 2017 under the new rules will be netted out, sort of half of that is fuel and about half of that is related to the ground logistical functions we do at the Amazon gateways. And so from a margin standpoint, our EBITDA is going to look like -- a much, much greater margin than we realized in '17 as you said. That plus, the fact the incrementals are going in, low revenue, but high EBITDA, you are going to certainly see a positive trend in our EBITDA margin. I don't know if that is....

Yes, I know it does -- but in terms of the top line you adjusted, if we get to adjusting for 2017, I get to just like hair under $800 million. Is it fair to say, with all the changes in the aircraft that mid-to-high single-digit top line growth for 2018, is fair?

Yes, top-line growth is going to be lower, certainly than what we saw in '17 for the reasons we just talked about, our growth mostly tied into the dry lease only. So you're going to see much slower revenue growth once you factor out the accounting changes.

ACMI or CMI business puts a lot on the top line, but the margins associated with it are single-digit margins -- 80%, 90% margins on leases.

Okay, got it. And the three 767s, those were part of the previously announced planned purchases for [2017](corrected by company after the call)?

No, these were -- these are new incremental announcements. We had -- last quarter, we had anticipated having eight 767s in process at the end of 2017. As it happened, customers wanted to hang on to a couple of those a little longer. So those slipped into the first quarter of 2018, so we ended up with only six in process, but we'll buy two this first quarter, and then there's three additional that we just announced with last night with -- that will come on, and two of which will make it into service by the end of this year.

And could you just give a little bit of color perhaps on the average age of the aircraft, the routes or cycle times? I'm just trying to look here for a read through for maintenance expense on these planes?

Yes, I am not sure -- if there are dry leases, Chris, we don't have any maintenance expenses. That's the customer's nickel. But the aircraft are all, call it early '90s vintage. Hours and cycle times, I don't have that at my disposal. But generally, they're pretty low on the cycle side, higher on the hours, since they are long range airplanes.

Got it. And then last question on the Amazon network. You've been at full fleet of 20 since August. I think back in the second quarter, your CMI -- related CMI orders had come -- block hours had come down as they -- just curious, how is the business shaping up in terms of block hours or utilization? And then also as, it looks like they're adding new destination points. I'm curious, how should we think about costs or CMI margins as those new OD pairs come online?

Yes, Chris, I think, certainly, and I think we said this last quarter. Is that we had seen improved utilization on the Amazon route structure. And as you mentioned, we had the 20th airplane go on in August. So I think that for 2018 in terms of the Amazon network itself, we are expecting it in our guidance, we've baked kind of a stability in terms of continuation of the sort of route structure we have today. As we said, Amazon's routes tend to have higher utilization per tail than some others because they operate seven days. And many of the aircraft run sort of a racetrack circular route structure, rather than moving through the hub. And so they tend to be a little higher utilization from that standpoint. In terms of utilization's impact on revenue -- CMI revenues and so forth. Again, I think we're looking at sort of a stability situation as we move through '18. So I wouldn't expect a whole lot of difference between what you're just seeing, what you have seen in the last couple of quarters in terms of the go forward on that production.

Okay, but do you feel in terms of like on a margin basis, you're seeing somewhere like a run rate profitability now or -- is that -- I'm guessing as new airports or points come on line that's going to fluctuate?

Yes, we don't -- as you know, we don't talk about profitability by customer. We did talk about the ACMI Services segment. I think Joe indicated, we expected even after absorbing some additional labor costs with new agreements to remain a profitable segment for us in 2018. But we -- and other than that we don't want to drill down by customer.

And the next question comes from Jack Atkins from Stephens.

Just a couple of quick follow-ups, if I could. Quint on the revenue recognition, it's just changes to the P&L. In terms of the revenue coming out, we get, the cost -- the cost buckets obviously fuel -- is it right to expect your fuel expense that flows through the P&L to be down, pretty meaningfully on a year-over-year basis. And then what are some of the other cost buckets that -- I'm assuming maintenance and some other lines that will be lower on a year-over-year basis as well. And do you plan on recasting your financials to help us sort of think through the impacts there?

Yes, Jack. Certainly, as we mentioned the fuel is -- would come down as you net that with the revenues. And I think in 2017, we had roughly $150 million in that line that would have been netted out under the new rules. On the ground services side, where those costs show up is primarily in the contracted ground and aviation services line in our P&L. Yes, and it was I think $135 million or $140 million, we published the number in our release that would -- so between the two, there's about $300 million there that would be netted on the revenue -- with the revenues.

Okay, maybe we can follow-up on that offline, just so I can be clear on exact buckets. The last question for me is on cash from operations. What were cash from operations in 2017, cash flow from operations. And then, is there a way to kind of think through, how you're thinking about that particular line in 2018, Quint?

Jack, I just grabbed a K here. But -- almost $235 million for 2017, up from $193 million in 2016. Net cash from operations. Of course, we've seen year-over-year growth has been very strong. Certainly the assets that are driving a lot of our cash flows, this year is as stacking up to be even a bigger year than 2017 was for asset additions. That's, of course, a big driver of our operating cash flow, along with the fact that we've got our complementary operations in ACMI Services and the logistical support, all those are producing profits. And so we expect another year of improved cash flows from ops.

So if I'm reading you correctly Quint, it sounds like you're -- if you are doing $310 million in EBITDA, you should be looking at maybe something in the high $200 millions for cash from ops, which would mean that you are effectively going to cover your CapEx for the most part with your cash from ops, is that right?

Yes, I mean, I think that's a fair assumption. As you know there is some other moving parts and pieces with working capital and so forth that can come into play as well, but I think that's directionally you've got that right, Jack. There's a -- on the pension side, we're looking at making an additional contribution into the plan, it's sort of a -- it's certainly not a required contribution, it's a discretionary contribution that we're making in order to take the arbitrage on PBGC premiums; we're getting a good payback in the reduction in our Pension Benefit Guarantee Corp premium that's levied on such plans

Okay.

So I think we're going to put in -- what an extra $20 million into that plan this year.

And the next question comes from Helene Becker from Cowen

Hey guys, Conor again. Just thanks for the follow-up. Kind of an offbeat question. I was curious if you could give us a little color on the structure of the recent dry lease agreements, and who's dictating prices, you guys or is it them or the customers. We are just trying to get a sense for when the aircraft do come off lease and just in case there is a customer out there -- a large customer out there that may need additional lift kind of long-term on an ACMI basis? Thanks again.

Our dry leases on our 767-300s generally around seven to eight years, and the pricing is -- hasn't really moved much either way, we tend to get obviously if it's a shorter seven year term, we get a higher rate than an eight year term or longer. So really the term -- it depends on the term that the customer wants us what the release rate will be. In general, customers come to us from time to time and they want a plane next month which usually is a very challenging thing to do. And other customers have time horizons where they can plan and those are the ones that are little more knowledgeable about multi-aircraft, getting multiple aircraft setup. So we've had a myriad of requests from both existing customers and from new customers over the past year that give us a lot of confidence that we'll get the aircraft that we currently have in queue confirmed and we're looking forward -- always looking for feedstock, looking forward to 2019's plan as well.

And next question comes from Christopher Hillary from Roubaix Capital

I just wanted to ask if you could share some of your thoughts on just the supply and demand dynamics, it seems like there is a lot of demand for your services and where do you see your company meeting the needs, where do you see other parts of the market meeting the needs and how that plays out over the medium term?

Well, there's probably another call it 250 feedstock available out there of different ages in the market from a 767 standpoint. And we are constantly talking with the airlines that have significant 767 fleets out there. Obviously, it's still a very efficient aircraft with the price of fuel coming down a few years ago, it remains a solid aircraft in the passenger fleet. And so the availability comes in waves where some airline will make a decision to either go to the 787 or they take an alternative fleet strategy when the 767s become available. And the key is to be there when those occurrences happen. We've always looked to get runs of airplanes from airlines. Our current fleet is predominantly made up of ex-Qantas and ex-American airlines. And so that's what we like to do as opposed to going out and opportunistically taking 1 or 2 from carriers here and there. So we've developed relationships with again with the airlines that have the larger fleets, which is why we tend to be the company to go to, when you want a 767 because we know -- we got a lot closer lead on availability and have the assets available.

Just maybe some thoughts on what you see the kind of growth rates are (inaudible)

Apologize with the transmission of your question was pretty garbled. So we could shoot an answer but I'm not sure -- we got the question.

Could you try to ask it again, Chris.

Sure. Can you hear me, okay?

No, no I apologize.

(Technical difficulty)

And this concludes the question and answer session. I'll now turn the call back over to Joe for final remarks.

Thank you, operator. As you hear other shares their enthusiasm for the impact of e-commerce trends on their results. We hope you remember that few if any have more of their assets directly committed long-term to the regional air express networks that make e-commerce fulfillment possible than we do. ATSG strategy to keep supplying the midsize freighters that those networks depend on looks better and better to us every year. Thank you for your time and have a quality day.

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