May 6, 2015
Executives
Joe Hete - CEO Quint Turner - CFO Rich Corrado - CCO
Analysts
Jack Atkins - Stephens Seth Crystall - R.W. Pressprich Matthew Jacobson - Waveny Capital Charles Frischer - LF Partners
Operator
Welcome to the First Quarter 2015 Air Transport Services Group Inc Earnings Conference Call. My name is Sylvia, and I will be your operator for today’s call.
At this time, all participants are in a listen-only mode. Later,we will conduct a question-and-answer session.
Please note that this conference is being recorded. I will now turn the call over to Joe Hete.
Joe Hete, you may begin.
Joe Hete
Thank you, Sylvia. Good morning and welcome to our first quarter 2015 earnings conference call.
With me today are Quint Turner, our Chief Financial Officer; and Rich Corrado, our Chief Commercial Officer. Yesterday, we issued our first quarter earnings release which you can find on our Web site atsginc.com.
As we said in our release, 2015 is starting off with more of the same positive momentum we demonstrated in the fourth quarter. Our pretax earnings are up 40% and our adjusted-EBITDA increased 20% in the first quarter compared with the year ago.
There are still few headwinds, but 2015 is likely to be a better year than we forecast back in March. The quarter results were full with other good news.
We told you in March about starting off the year by signing the new DHL agreements in January. It took effect in April including long-term leases for two Boeing 767-300s as DHL upsized its fleet by replacing two 200s that operated under short-term arrangements.
In February, we exercised an auction to purchase our 46, 767 freighter a 300 series we had been leasing and operating for several months. We also executed another dry lease by placing our Boeing 767-300 with Cargojet.
And in March, we completed lease arrangements with West Atlantic where we’re 25% investor for 767 and we delivered the second of two lease 767s to important new overseas customers. One of them was converted to a dry lease in April and the other is expected to do so later in the year.
Altogether, we now have 28 767s deployed under dry lease arrangements which is eight more than we had at the end of the first quarter last year. The upshot of those deals and some pending arrangements with other customers means that we are rapidly approaching full deployment.
More growth opportunities are in our pipeline. Now I’d be updating you on how we intend to address that situation, while also allocating capital towards share repurchases after Quint takes you through the key numbers for the quarter.
Quint?
Quint Turner
Thanks Joe and good morning everyone. Let me begin by advising you that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties.
Our actual results and other future events may differ materially from those we 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 aren't limited to changes in market demand for our assets and services, the number and timing of deployments of our aircraft, our operating airline's ability to maintain on-time service and control costs and other factors, as contained from time to time in our filings with the SEC, including the 2014 Form 10-K we filed at March and the Form 10-Q we will file later this week. We will also refer to non-GAAP financial measures from continuing operations, including adjusted EBITDA and adjusted pretax earnings, which management believes are useful to investors in assessing ATSG's financial position and results.
These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our Web site. 2015 is already off to a very good start as Joe said and we’re increasingly optimistic about the remainder of the year.
Our consolidated first quarter revenues grew by 3.4 million to 147 million and net income from continuing operations for the quarter increased by 36% to 8.9 million or $0.14 per share. That’s our strongest first quarter earnings performance since 2009.
The key to our improving outlook and the driver of our first quarter gains is a steady improvement in our freighter leasing business and the flexibility of our business model which allows us to shift our aircraft between our leasing and airline businesses. We can offer the arrangements that our customers prefer, while also maximizing fleet utilization as those customer preferences change.
For the quarter, our adjusted pretax earnings increased $4.5 million to 14.5 million and adjusted-EBITDA grew 7.7 million to 46.5 million, reflecting improved allocation of aircraft between ACMI and dry lease customer opportunities. That ability to quickly allocate our aircraft toward wet or dry opportunities to maximize return has been the key to our steadily improving performance over the last year.
The adjusted pretax profit of 14.5 million equal the contribution of CAM has the gains from aims or maintenance MRO and our other businesses effectively offset a smaller loss in our ACMI services segment. Our airline operations continue to improve as indicated by the $4.5 million reduction and its pretax deficit versus first quarter 2014.
Even after the deployment of the two 767s in Europe and Asia that Joe mentioned two other 767 200s currently utilized for ad-hoc opportunities are available for longer duration customer contracts. CAM’s are into a flat versus the first quarter last year.
Depreciation from the [audio gap] plus cost and loss of revenue from air craft transitioning to new customers offset the increase in revenues from additional external leases. That won’t be the case going forward starting in the second quarter revenue growth for new external leases net of DHL lease reprising ramps up.
That will include contributions from the deployments Joe mentioned a minute ago. You may have noticed that we have received the aircraft and service table at the end of our earnings release to the show the allocation between internal and external customers on both the historical and perspective basis.
The new format separates our aircraft into three groups. Those are external dry lease customers operate themselves, those leave lease externally and operate on a CIM basis and those we lease to our airlines for ACMI customers.
We think investors will find this presentation helpful for tracking how our aircraft are allocated. In our ACMI services segment, the outlook is for continued operating improvement and higher fleet utilization but the factors we told you about March will still make year-over-year comparisons challenge.
A few non-cash items will also impact the segment. They include higher employee pension expense in 2014 and more revenue associated with the DHL note which became fully amortized in March.
On the maintenance side, we anticipate more heavy maintenance checks in subsequent quarters than we had in the first quarter. In the framework of the DHL agreement transfers more maintenance risk reward to us for the DHL dedicated aircraft we operate.
We also noted in our earnings release that we are mending our credit facility with our bank group. The maturity of their facility extends by year 2020 and we are adding $50 million in capacity in our revolver commitment to 325 million.
We retained a $50 million accordion feature and can now take an additional indebtedness of up to a 150 million, an increase of $50 million. All other facility features in key covenants remain the same.
The revolver balance at the end of the quarter was 180 million including drop to purchase a 767 in February. Our debt to EBITDA ratio ended the quarter at 1.8 times which qualifies us for a sub 2% interest rate on a variable rate debt.
As I mentioned a moment ago, our DHL promissory note was extinguished in March that releases us from its covenants including the obligation to pay DHL a portion of any capital we may return to shareholders. Before I turn it back to Joe, I know that many of you are focused on our free cash flow dynamics and the factors other than operating earnings that are driving those numbers this year.
We said in March that our pension funding commitments remain the same as last year about 6 million and we will make schedule debt principle payments of about 24 million this year. Our CapEx investments were projected to decline by $47 million this year with CapEx alone down approximately 32 million to about 80 million.
That still our current budget and we spend 43 million of the 80 million in the first quarter to acquire another 767 and fund our maintenance requirements. We may spend more if we elect to increase our fleet capacity as demand for the 767 and in particular 300 series remain strong.
In summary, I want to echo Joe’s confidence about an improving outlook for 2015 and about the cash flow we will generate to meet our commitments to grow the business and repurchase shares. Let me turn it back to him for him perspective on the quarter and our plans for the year.
Joe Hete
Thanks, Quint. The first quarter was notable, not just for the good results we posted but also for the new business we signed that I mentioned at the outset.
The ACMI and dry lease business we have launched includes arrangements with two international customers, Raya Airways in Asia and Star Air in Europe. Star Air is the principle source of air lift for the UPS express network within Europe and the largest ACMI operator of 767 freighters outside the U.S.
Raya is adding new longer routes within its southeast Asia cargo network from its base in Malaysia and upgrading its fleet of Boeing 727s to reach them. The 767 lease we completed West Atlantic gives them an important new capability to serve that very competitive European market.
That aircraft is supporting TNT 0 network in Europe on an ACMI basis and West hopes to land others 767 business there as well. The 767 replace with Star and Raya begin its wet-to-dry arrangements, our unique product offering that anticipates the conversion to dry leases after we initiate service on a wet lease basis to be hour airlines.
In fact, Star already converted this wet lease to dry in April and we expect the same with Raya in the coming months. These deployments demonstrate the sustained appeal of our 767s to expanding regional network operators who appreciated fuel and operating costs advantages over older and smaller aircraft that many of them still operate.
The quarter also benefited from new operations for DHL including additional interim [indiscernible] assignments in the U.S. and in Europe.
Leases for the 2767 300s we operate for DHL in the U.S. also begin April 1st and extent through March 2019.
The new business I just mentioned is very encouraging, but it is already in the works and when we said our 2015 EBITDA outlook projection of 180 million. If the discussions of even more new businesses spring that give me greater optimism about 2015 than I had two months ago.
The ability of Rich Corrado’s team control prospects and the customers convinces me that we will likely exceed the 180 million EBITDA estimates we gave you earlier. Without signed agreement in hand however I am reluctant to take us to a new EBITDA number for the year.
As business develops, we will update you about the 2015 outlook on our next call in August. That the way of Rich’s team is going, we will soon run out of available aircraft to fulfill those commitments that will require additional aircraft investments to be sure we have aircraft available when our customers need them.
Our investments will still be based on our expectations or multi-year lease commitments that meet our greater return hurdles. We have sourced conversion fee stock and our principle conversion contractor has assured us that we could have another 767 ready to fly in four to five months after we acquire one.
Based on our continued strong cash flow generation and along with the capacity we now have in our credit facility, we have the needs to pursue growth and what remains a very positive climate for our industry. We also stand by our commitment to return capital under the share repurchase authorization that the Board approved last summer.
The Board has approved our plan and you can be assured that when we talk you again in August, you will see the results. We do not intend to dramatically lever up to take on it much bigger program in the Board authorized, we will maintain a balanced approach between investing in the growth that has rewarded our long-term shareholders and the accretive cash returns that share repurchases can generate.
The investments we have made to date have positioned our company to generate more than enough cash flow to do both. That concludes our prepared remarks.
Sylvia we’re ready to take the first question.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] And the first question comes from Jack Atkins from Stephens.
Jack Atkins
So I guess just a start-off with and it sounds like certainly an improved airfreight market is improving the outlook for your business for the remainder of the year and beyond perhaps the same. And could you maybe talk about, as you’re in discussions with customers and they want 767 assets to lease and clearly it’s a limited market out there.
What sort of leverage are you guys sort of getting in terms of being able to drive better lease rates both for just the asset under lease but also perhaps better ACMI lease rates as well. Is there a, sort of the pendulum swinging back in your favor if you will?
Joe Hete
I think Jack in terms of the ACMI is probably where the pendulum is swinging more back in our direction more so than the dry lease, a portion of the business that’s fairly steady from a lease rate standpoint. On the ACMI side, obviously the fuel price is being down is where they have been, [Audio gap] along, cost increases that we’ve incurred overtime certainly is a little easier to push back to a customer because the fuel component which there a 100% is less of burden than it has been in the past.
But when you look at the dry lease market there is not a lot of ups and downs in terms of lease rates relative to the asset. The 767 200 were kind of the only game in town from a 200 perspective I mean you don’t see anybody else that has them out there.
There is some competition I guess in the 300 segment, but there is not just a lot of assets available right now.
Jack Atkins
Okay. Joe that makes sense and so I guess if I'm thinking about it then outside of your agreement with DHL, could you may be help us think about, sort of the average length of the remaining ACMI leases just to get a sense for -- if there is an opportunity, may be step those rates up over the course of this year.
I guess what I'm trying to think about as it -- could you give that ACMI segment back to profitability in 2015?
Rich Corrado
Keep in mind that our deployments come from two basic areas growth, where airlines whether there is a integrator or regional airline seen growth in the market and also replacement. On the replacement side it may be for a 727, which we've seen lately, in those markets keep in mind because airlines generally almost planes they're paying a lot lower for them.
So for them to step up into a 767 is a considerable additional expense, and will get a more efficient aircraft from both the reliability and the cost standpoint as long as they can fill it. So from that perspective you still have to be competitive and fit into a budget that they want to get into the aircraft for.
A wet-to-dry program which has been very successful over the past 6 months through a year, it's been significant in that these airlines are able to test drive the aircraft and make sure that they're able to drive that type of market and from a pricing standpoint on the wet portion of it we price it to be profitable. And then once the airline has experienced the aircraft the dry lease is at a competitive rate as well from a market perspective.
So our ability to leverage up the rates is not necessarily a functional overall demand in the market. Because the individual regional airlines have their own demand profile that we have to adapt to.
Joe Hete
Jack, as far as the overall ACMI segment in terms of getting that profitable, I mean as you saw the fourth quarter, it's all about utilization of the assets and as Quint noted in his comments, we do have two aircrafts for example that are underutilized in the ACMI segment. So the airline is carrying the burden of the cost of the lease of the aircraft plus the maintenance amortizations of heavy maintenance and et cetera.
So as soon as they get those deployed it has a marked impact in improving profitability of the ACMI segment.
Jack Atkins
Okay, so you would expect the ACMI segment to be profitable once those two aircrafts are deployed?
Rich Corrado
Our target is to get there.
Jack Atkins
Okay. And then just a couple of last items here.
Quint could you may be help us think about the sequential sort of movement on the EBITDA line. I know there is some puts and takes there with the DHL note amortizing down, but also you have some new aircraft deployments.
Just so we can think about how that should flow sequentially?
Quint Turner
Well, Jack I think it's fair to say this year, our expectations probably -- we had a very robust peak in the fourth quarter of ’14. And I think from -- because we are pretty well deployed at this point with not a lot of assets available.
Most -- a lot of our EBITDA of course is driven by the deployment of additional assets. And so I would -- I really think that variability wise there won't be, while we expect improving EBITDA sequentially that it won't be as volatile perhaps as what seen in some prior years.
Jack Atkins
Okay.
Quint Turner
Our assets are already out there for the most part.
Jack Atkins
So, we should be thinking about improved EBITDA sequentially even though you have a headwind from the new DHL arrangement?
Quint Turner
I think so, yes.
Operator
And the next question comes from Seth Crystall from R.W. Pressprich.
Seth Crystall
I had a couple of questions, it’s really more about the increase in the revolver. It doesn’t seem like you really needed all that extra availability at this point in time.
But at the same point you say you're not going to lever up the company to may be do a buyback. So I'm just -- it just seems strange to me that at this point in time the increase the facility by so much with not enacting a larger kind of buyback plan and just staying within the 50 million.
Can you help me out with that why you did it at this point in time?
Quint Turner
We of course the extra flexibility comes at a very inexpensive price adding dollars to the revolver really does not generate much in a way of additional interest cost or unused fee and it certainly preserves the most optionality we can get in terms of our capital allocation strategy going forward. So we’d like to take advantage of that when we can get it and as you know with a strategy that is likely to include both investments and growth as well as share repurchases, cheap capital, it’s always we have to lock that up when you have the opportunity.
Seth Crystall
I understand and I agree and I think those are probably two dual strategy to go after. Now what concerns me a little bit is that the end of the year core you said stay tuned for the first quarter call to hear about buybacks and you really just said now I mean Joe said now stay tuned in August for the next call to hear about it and that just seems to me just kicking the can down the road where as it seems to me that especially with now the authorization in place more availability on the revolver.
You could actually go and do something especially since in the past you’ve said that it’s difficult finding 767, so my view in terms of allocating or looking for more capital look at planes that are not 767s but expand the fleet to different type of models?
Joe Hete
Well, a couple of things. First off, I think that our message last quarter was that we are looking at second quarter as the likely time when we would be kicking off the buybacks.
I don’t think that’s really different and although that message point really hasn’t changed. In terms of the aircraft that we might look at, no it’s not impossible that we would look CAM based upon customer preferences may look at other options beside the 767 certainly the 73, the 757 are also aircraft that fit well with a lot of our existing customers and also a lot of the demand we’re seeing in the market.
In terms of the extra revolver flexibility keep in mind that has an – that amendment hasn’t actually been executed as yet and we expect that to happen later this week.
Seth Crystall
Just last question I guess last quarter we talked about the post office contract we said that its operating under extensions now you thought it would might run through the end of the year. Is that still the case today or is anything changed there?
Joe Hete
The postal contracts were extended through the end of September and then we will go after rebid again at that point in time once postal service assuming they get to a point to where they can determine which direction they want to hit. So right now we’re good through September.
Operator
And the next question comes from Matthew Jacobson from Waveny Capital.
Matthew Jacobson
You guys mentioned sequential EBITDA improvement, you continued to highlight your strong free-cash-flow less volatility in your earnings, I mean is that right for an increase in the size of the share buyback program?
Quint Turner
Well I think again we haven’t committed and nor do we in advance disclose what exactly our level of purchasing will be, but we’ve certainly been out-front that we have the program in place and we expect to be executing on that strategy this quarter. So I don’t want to I guess go farther than that at this point Matt it really just depends upon how the opportunities unfold, but we certainly expect to be allocating capital towards share repurchase.
Operator
And then next question comes from Charles Frischer from LF Partners.
Charles Frischer
My question is more generic. Can you talk about the strength of the 767 market for freight versus potential their capacity in daily freight from the larger planes like the larger Boeing and the Airbus planes?
Joe Hete
I’ll let Rich handle that one. Rich?
Rich Corrado
Yes Charles the 767 is a regional freighter and so that it’s strike zone is really flying for integrators and the hub network or for example for Cargojet up in Canada that flies for UPS and flies for the mail. In those markets those networks run off a hub network where its required entry and exit of aircraft based on assort and although belly space is used a little bit for the major wings, you really need a freighter use to fly at night after pickups are made during the day, deliveries are made during the day and that doesn’t necessarily match up with belly freight.
If you talk about belly freight, if you look at the new aircraft that are coming into the market the Boeing 787 and the 777 with the large bellies, their average stage length is 5-6 hours and that's where that belly space is flying. The average stage like globally of a 767 freighter is a little over three hours and the average stage length for 767 200 is around 2 hours.
So, we’re not flying in those lanes where the competitive belly space and lower pricing you would find for that belly space is competitive. So the customers are different and the lane segments are different from the 767s that we buy.
Operator
And the next question comes from [indiscernible]
Unidentified Analyst
I appreciate the time, guys. Just a question with respect and I don’t know if this really affects you.
Do your customers notice the benefit during the quarter from the ports slowdown in the West Coast?
Joe Hete
No Elaine, we really didn’t see anything that we could directly point you to that says it was beneficial to us or our customers. There may have been some additional volume, domestically with DHL that may have increased the total payload on a given lane but nothing to drove extra flights.
Unidentified Analyst
Okay, and on your ACMI business, are you noticing your customers flying more than minimum guarantees?
Joe Hete
A lot of our ACMI business even though it's called ACMI when you're flying for network operators like TNT for example or even when throw up extra airplanes for DHL, it's on a specific route. So unlike the larger aircraft like the 747 or the 777s where you've got opportunities for additional flights around the globe we just don't have that kind of demand in our sector.
I mean there is a little bit obviously during peak seasons, but nothing and during the regular course of the year.
Unidentified Analyst
Okay and then you may have said this and I may have missed it I'm sorry about that, but on maintenance where the fleet is there, it was down on year-on-year basis which is good unless there was maintenance that was pushed off. So, is there anything we should be aware of in terms of timing events in that line item?
Quint Turner
I think Elaine kind of what we would expect to see certainly is -- this was as we commented a quarter that was a little better on the maintenance side. We would expect the run rate on a quarterly basis for our maintenance line item to be higher.
As we move through the year although not -- not real significantly higher not all that different from what the year-over-year numbers with last year's numbers developed as.
Unidentified Analyst
Okay. Perfect.
And then I got all the other numbers. So, I appreciate your help.
Thank you very much.
Operator
And the next question comes from Jack Atkins from Stephens.
Jack Atkins
Great guys. I just kind wanted a walk through the cash flow side for a moment if we could.
Quint, I know you kind of writhe this numbers in your prepared remarks, but let's just say you generated $180 million dollars in the EBITDA. Could you walk us through sort of a cash items, do not cash taxes.
Once your cash interest expense, I think you said $80 million a year in CapEx, could you -- what's your cash pension? Just sort of we can -- so we can kind of nail down how much cash is available for either further investment of for a buyback.
Quint Turner
Jack, it's in terms of the -- and again keeping in mind some of these uses of cash are discretionary.
Jack Atkins
Of course.
Quint Turner
Certainly on the CapEx side, you’ve got to the mixture the growth and the maintenance. But we're guiding to 80 million of CapEx spent.
We've got cash interest, if you just annualize the quarter run rate you are about 12 million to 13 million of cash interest expense, on the pension side again, the net we had an increase and this was one of the P&L headwinds that we had. You had an increase in the pension expense, a little over 4 million and then we have 6 million of cash, which we will put into refined benefit plans.
And then you got schedule principal payments on our debt, our term loan, our asset back loans et cetera of about $24 million. I think those are the big item.
Jack Atkins
Okay, okay. So that’s going to leave you, I am glad that you said you are trending above that 180 million level, but call it at least roughly $60 million in availability to buy back stock or is that further period or investor further growth.
So what the plan B I mean…
Quint Turner
And the key thing to Jack is our balance sheet is as the case has been made by many, it’s a very likely levered. And so if the capital allocation opportunities for these themselves as I think we had an earlier question on for example expanding our revolver capacity and we have plenty of liquidity in the balance sheet.
Jack Atkins
Makes sense. And so I guess when you are thinking about allocating capital between growth paying down debt and then buying back stock.
I mean, is there a certain share price that you’re targeting more is it just for a function that you want to invest the certain portion of your cash flow into the buyback. I mean I am glad, I know you guys don’t want to give a lot of specific details around that at this point but help us understand from your perspective.
How you break that down going forward?
Joe Hete
Well, I think like other companies, I think when good growth opportunities present themselves and we’ve sort of define that as one we are comfortable that we’ve got a commitment from a customer that signs up for an asset. We have a little bias there, if that commitment is there certainly.
But we also see as a very accretive option for capital allocation buying back our shares. And of course the Board authorized $50 million, they didn’t put a time limit on it.
And we think in our remarks earlier we said the Board is approved plans, which we expect to be implementing this quarter to begin availing ourselves of the option to repurchase shares. And so you can, certainly the Board decides the authorization was $50 million.
Of course that get through revisited as needed, but if you’re looking to put some brackets around the size that certainly what’s been authorized.
Quint Turner
Jack we also have when you look at our credit facility, we have $50 million limit and of course and there is a 2.5 times after giving effect from a leverage standpoint that’s in the credit facility as well. But we’re not, obviously we don’t want to characterize ourselves as market timers but we do have in place a 10b-5 program.
So we’ll be in the market on a regular basis under that program. And then we do as flexibility with the 10b-18 program as the Board authorize.
Operator
And we have no further questions at this time.
A - Joe Hete
Thank you, Sylvia. I hope it’s clear to all of you as it is to us that are growing cash flow and our expanded debt capacity can fund both growth investments and freighter aircraft or customers want and we’ll pay for.
As well as the return of capital that shareholders want and your Board has approved. Many of you obviously support what we’re doing is indicated by the fact that our stock is up more than 50% in the last two years beating the Russell 2000 and many of you uses at benchmark.
Thanks to all of you for dialing into discuss ATSG’s Business Result and our capital allocation plans. And don’t forget this Sunday is Mother’s Day make it a great day for all the moms to know.
Thanks and have a quality day.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.