Mar 9, 2016
Executives
Joe Hete - President and CEO Quint Turner - CFO Joe Payne - SVP, Corporate General Counsel and Secretary
Analysts
Chip Rowe - BB&T Capital Markets Helane Becker - Cowen and Company Jack Atkins - Stephens Steve O'Hara - Sidoti and Company Adam Ritzer - Pressprich
Operator
Welcome to the Fourth Quarter 2015 Air Transport Services Group Inc. Earnings Conference Call.
My name is Christine, and I will be your operator for today's call. 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, President and CEO. You may begin.
Joe Hete
Thank you, Christine. Good morning, and welcome to our fourth quarter 2015 earnings conference call.
With me today are Quint Turner, our Chief Financial Officer; and Joe Payne, our Corporate General Counsel. Our fourth quarter 2015 earnings release was issued yesterday after the market closed, and we issued a separate release early today, announcing new agreements we reached overnight with Amazon.com, for an air cargo network that will serve Amazon customers in the United States.
Our fourth quarter and year included a number of major accomplishments, which I will cover in a moment. Most important were our outstanding financial results, which included $30 million in revenue growth, and a record $198 million in adjusted EBITDA for the year.
Now in 2016, we set the stage for even greater results under our new agreements with Amazon. They cover the lease and operation of Boeing 767 Freighter Aircraft and include provisions that grant Amazon the right to require a substantial minority interest in ATSG.
Both our earnings release and the announcement of Amazon agreements are available via our web site, atsginc.com. This landmark agreement with Amazon includes leases for 20 767 freighters to be delivered by mid 2017, and related operating services we will provide under our five year crew, maintenance and insurance for CMI agreement.
In addition, we have granted Amazon the right to receive warrants, to purchase up to 19.9% of our common shares over the next five years at $9.73 per share. Based on our initial analysis of the results we can generate under our Amazon agreements and other developments in our business, we now estimate that our adjusted EBITDA from continuing operations will be $208 million in 2016.
That estimate includes $9.5 million in additional non-cash pension expense compared with 2015, and a $1.5 million reduction in non-cash revenue related to the pay-off of our promissory note with DHL a year ago. I will provide some additional color on these agreements and our related fleet growth plans for 2016 in a moment.
Quint is here to summarize our year end results and update you on our financial position at the end of 2015. Quint?
Quint Turner
Thanks Joe and good morning everyone. Let me begin by saying that during the course of this call, we will make projections or other forward-looking statements that involve risks and uncertainties.
Our actual results and other future events may differ materially from those we describe here. These forward-looking statements are based on information, plans and estimates as of the date of this call, and Air Transport Services Group undertakes no obligation to update any forward-looking statements to reflect changes in underlying assumptions, factors, new information or other changes.
These factors include, but are not limited to, the successful implementation and operation of the commercial arrangements to be performed for Amazon, which will be described more specifically in the Form 8-K we will file at the end of the week. The cost and timing, to which we are able to purchase and modify passenger aircraft to a cargo configuration.
Our airlines ability to maintain on-time service and control costs, shareholder approval of the proposed equity arrangements with Amazon, to be described in the Form 8-K and also the proxy statement we will file later this month, and other factors that are contained from time-to-time in ATSG's filing with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K and quarterly reports on Form 10-Q.
We will also refer to non-GAAP financial measures from continuing operations, including adjusted EBITDA and adjusted pre-tax earnings, which management believes are useful to investors in assessing ATSG's financial position and results. These non-GAAP measures are not meant to be a substitute for our GAAP financials, and we advise you to refer to the reconciliations to GAAP measures, which are included in our earnings release and on our web site.
The news that Joe just shared about our new Amazon agreements is certainly exciting and puts us in great position to perform well over the next several years, presenting the opportunity for significant revenue growth and diversification. But I don't want to overlook our financial results for 2015, which were among the best we have ever recorded.
We experienced both solid growth and improving margins, stemming mainly from more efficient deployment of our freighter aircraft throughout the year. Let me take you quickly through some 2015 financial highlights, before returning you back to Joe, starting with our consolidated top line and earnings results.
Consolidated revenues for 2015 rose $30 million or 5% to $619.3 million. For revenues again set the pace, increasing 15% to $181.6 million.
Excluding airline related reimbursement revenue from both periods, 2015 annual revenues rose 6% and fourth quarter revenue rose 11%. Our pre-tax earnings from continuing operations were $20.5 million for the quarter and $62.6 million for the year.
Adjusted for our 2014 pension settlement charge, pre-tax earnings increased 13% for the quarter and 7% for the year. Net earnings from continuing operations were $13.3 million or $0.21 per share for the fourth quarter and $62.6 million or $0.60 per share for the year.
Adjusted EBITDA increased 12% to $56.8 million for the fourth quarter and increased 10% to $198.2 million for 2015, both are record amounts for quarter and the year. Operating cash flow was also a record in 2015, it grew 17% from 2014 to $173.7 million.
CAM, our leasing business, was again the principal driver of our strong earnings progress in 2015 and is poised for more good results in 2016. CAM deployed six more 767 freighters in 2015 to external lease customers, including three in the fourth quarter, for a t total of 30 at year end.
Joe will have more about CAM's 2016 fleet investment plan, which includes the purchase, modification and deployment of four more 767 300s this year, three of which we will lease to Amazon during the fourth quarter. Those are in addition to the two we already had mod at the end of 2015, for deployment in the first half this year.
CAM's pre-tax earnings increased 4% for the fourth quarter year-over-year and 8% for the full year 2015. CAM's operating costs consists primarily of preparing aircraft for deployment and depreciation on its aircraft assets.
Our depreciation and amortization line primarily related to the growth of CAM's fleet increased 16% or $17 million to $25.4 million in 2015. Our ACMI services segment sharply improved its performance in the fourth quarter, with pre-tax profits more than doubling versus fourth quarter 2014.
That excludes the pension settlement charge we took in the fourth quarter last year. Our loss for the year in this segment was half than what it was in 2014, excluding the settlement.
Our airlines, ABX Air and Air Transport International delivered exceptional service to both new and continuing customers during the peak holiday season. That service would support from our logistics and maintenance businesses, included the rapid ramp-up of the Amazon trial air network in the fall, that currently includes five of our 767s.
Utilization of our dedicated ACMI fleet remains high in 2016. ABX launched CMI service for one additional CAM leased 767 300 for DHL in February.
We expect our airlines to add to their operating fleet, as the year progresses. As we mentioned in our earnings release, we expect our non-cash pension expense to increase significantly in 2016.
That factor, along with last year's changes in our DHL agreements and the non-cash revenue effect of the maturing of our DHL note will offset much of the financial progress we would otherwise achieve from operating more aircraft with our airlines. Taken together the two non-cash items, will create an $11 million headwind for the year-over-year comparison of pre-tax earnings and EBITDA.
On the other activities line, strong revenue growth, including a 30% increase in revenues from external customers, reflected more volume in the postal centers we manage and for handling services for other customers. Maintenance services for external customers also grew, including heavy maintenance services for Delta Airlines, under a new agreement that commenced in October.
Pre-tax results declined, as higher maintenance related earnings were offset primarily by a smaller actuarial credit in 2015 from prior year changes in employee benefit plans. Our CapEx cash spend for 2015 was $159 million, slightly below our guidance of $165 million last November.
We acquired four 767-300 aircraft in 2015 and deployed two of them before the end of the year. The third was deployed last month and the fourth will go to a current customer in April.
All four will be leased under multiyear arrangements, including three with eight year terms. We expect to invest about $290 million in our business this year, of which $215 million is for growth, and the remainder for maintenance CapEx; that's $10 million more than we had in our earnings release last night.
The difference is for equipment we will acquire to support the Amazon Air network, which we weren't prepared to include until the deal was signed. Our growth investments, will include the expenditures to complete modifications of the two 767 300s in process at the end of 2015, as well as the expenditures to place four additional 767 300s in service by the end of 2016.
These investments are well within the scope of our current cash flow outlook and credit availability. Our debt-to-EBITDA ratio at the end of 2015, was a conservative 1.6 times, as a result of strong operating cash flow, coupled with debt repayment during the year.
The interest rate on our variable rate debt is 2.2% as we enter 2016. We expect our leverage ratio to rise during 2016, as we continue to invest in the growth of our business, and in share repurchase.
Joe is eager to tell more about our 2015 achievements and our brighter cash flow outlook for 2016 under our new Amazon agreements. Joe?
Joe Hete
Thanks Quint. Before I talk about the tremendous news we issued this morning, I want to echo Quint's comment that we had a great year in 2015, with very good financial results and a number of significant achievements that give us great confidence about 2016, even before the contributions we anticipate under our new relationship with Amazon.
Most 2015 achievements, include an amended set of agreements with DHL that extended our relationship as their key provider of North American air support through March of 2019. Those agreements effectively doubled the number of contracted months for our dry lease 767s in DHL's network and extended CMI services for the 767s we prorate for them.
We also began to dry lease the DHL aircraft that they operate outside the U.S., with two 767 200s deployed with their affiliate airline in the Middle East. Greater deployments in 2015, included three more placed offshore, one with Raya Airways, and two more dry lease deployments with West Atlantic, our European affiliate.
West Atlantic now operates three of our 767s. We accelerated our fleet development program by acquiring four more 767 300s in 2015.
All four contracted with dry lease customers -- we established a strategic pathway into the China market last September, via minority interest in a joint venture, that will operate a new cargo airline from a base in Tianjin. The venture will launch inter-China cargo services, using the Boeing 737 freighter in the second half of this year.
We expected to develop an appetite for our 767s in 2017 and beyond, as its volume expands. We also signed a new multiyear heavy maintenance agreement with Delta Airlines for its fleet of more than 18 717 passenger aircraft, with service that began in October.
That agreement validates both the 2014 expansion of our hangar capacity in Wilmington and our decades of experience servicing similar DC9 airframes. That's a wrap of our progress last year, which by itself, has positioned us for another good year.
Our key agreements with Amazon will lead to a minimum of 20 leased 767 freighters from our CAM leasing affiliate to Amazon. We also executed an air transportation services agreement, commonly known as a CMI agreement, covering crew, maintenance and insurance services provided by our airlines, to be effective April 1st.
And finally, we agreed to provide certain hub and gateway services to Amazon. The final component is an investment agreement that grants Amazon warrants that have exercised over the next five years, would enable them to own 19.9% of ATSG.
We are pleased to partner with Amazon, to support each of our business objectives, as we move forward. We are prepared to share the key factors you need to understand and assess how our new agreements will affect our own results and investments going forward, but we will defer to Amazon, all discussions about how our assets will be utilized in their business.
By the end of 2016, we will deploy 15 of our 767 freighters with Amazon, including 12 767 200s and three 767 300s. That includes the five 200s already deployed in the network, and seven other CAM owned 200s.
The net effect of these and other changes this year, will increase CAM's externally released aircraft portfolio by 14 this year to 44, including redeployments of four returning from other external dry lease placements. Those 44 leased aircraft will represent more than 80% of our projected fleet of 53 767s in service at the end of 2016.
In 2017, we will lease five more of 767 300 freighters to Amazon by midyear, for a total of eight 300s. CAM owns or has contracts to purchase all eight of the 300s.
The 767 200s will be leased for five years and the 300s will be leased for seven years. The CMI agreement includes a predefined monthly fee for aircraft, plus a variable component tied to aircraft block hours and cycles operated.
Pricing is subject to specified annual escalations over the five year period. The equity agreement described in our 8K, includes warrant grants to Amazon for the purchase of ATSG shares over the next five years at a price of $9.73 per share.
The closing price of our common shares on February 9, 2016. The warrants will be granted in three tranches; the first grant is for approximately 12.8 million shares of ATSG, of which 7.7 million shares are vested signed and the remainder will vest, as we deliver the last eight of the 20 aircraft.
The second grant, would include approximately 1.6 million shares that vest two years from now. After 4.5 years, a third tranche will be issued to true-up Amazon share of GAAP diluted shares at that time to 19.9%.
Amazon will retain the opportunity to exercise all of the vested warrants within five years of the signing of the agreements. ATSG has 75 million authorized shares today.
The Board will submit a proposal for shareholder approval at the next annual meeting of ATSG shareholders in May, to increase the number of authorized shares, by an amount sufficient to accommodate the warrants, and for other corporate purposes. Quint gave you a preview of our investment plan for 2016, which is based on solid demand for our aircraft and services from customers seeking competitive advantages, that regional air networks offer, utilizing the efficiencies and the flexibility of the mid-size aircraft that we operate.
We expect to invest approximately $219 million to maintain and expand our fleet this year. Part is related to required maintenance of our fleet, with the majorities for expansion, which would total $215 million for the year.
During 2016 and early 2017, we will acquire and complete conversion of at least five more 767 300s for Amazon, not including demand we seek to fill from -- for other customers. This stepped up investment is directly tied to our positive outlook for cash flow generation in 2016 and beyond.
As I said at the outset, our adjusted EBITDA from continuing operations for 2016, is expected to be approximately $208 million, including the non-cash pension expense and revenue effects highlighted earlier. Together, we expect those items to offset about $11 million, of what we would otherwise expect in adjusted EBITDA this year.
Our strong cash flow and balance sheet continue to give us the flexibility to create value for shareholders, through both continued investment in growth and through the share repurchase program we started last May. We spent $10.3 million to acquire 1.1 million shares last year, and spent another $1.8 million to acquire nearly 180,000 shares year-to-date in 2016.
While our capital commitments are increasing, they are justified by the returns we expect to generate from the additional assets and quality service we will deliver over the course of our relationships, with quality fast growing customers like DHL, Amazon and others. Today, we have multiple opportunities to grow our business, both at home and abroad, while maintaining the superior service that has been our hallmark.
We intend to update you regularly, as we pursue to capture the best of these very attractive alternatives. That concludes our prepared remarks Christine, we are ready for the first question.
Operator
[Operator Instructions]. And our first question is from Kevin Sterling of BB&T Capital Markets.
Please go ahead.
Chip Rowe
Hey, good morning guys. This is Chip on for Kevin, how are you?
Joe Hete
Hey Chip, good.
Chip Rowe
Congratulations. Looks like a great deal.
The additional aircraft for Amazon, where are those coming from?
Joe Hete
Well, if you look at our fleet today, we are operating five of them for them today.
Chip Rowe
Right. Where were your additional 15?
Joe Hete
Yes. The additional 15 would be, four returns that we have coming from current dry leases, and three that we had in other ACMI operations, and then we will buy eight 767 300s to fill out the additional 15.
Chip Rowe
Got you. And then, I thought I heard you say that 20 was a minimum, so this can be upsized apparently?
Joe Hete
Well obviously, if the network is successful, we would hope that there would be some additional expansion opportunities there. But we'd defer that question to Amazon.
Chip Rowe
Got you. And I know, Amazon -- sometimes they are a little bit tough on their pricing.
What kind of margin or EBITDA contribution can you expect from these aircraft, and how do -- as compared to your current leases?
Quint Turner
Well Chip, this is Quint; as you know, we have sort of an ROIC target for our investments, in our unlevered return threshold of 10% or more, on these aircraft. And certainly, that's a discipline that we strictly adhere to, and we think it results in an attractive price for our customers, certainly, and coupled with the flexibility that the lease provides.
But it also achieves our targeted ROIC. So that addresses your question enough there.
Chip Rowe
It doesn't, we can chat offline. So will this in any way impact your ability to provide capacity for the new China JV?
Quint Turner
No actually its part of our capital budget. We anticipate at least one 737 acquisition for the China JV, in 2016.
As been noted many times in the past, we were likely levered, and of course, we do that with the mindset, that when opportunities like this come along, that we have the capital base to be able to meet the customer's requirements, and here is a perfect example of maintaining that conservative balance sheet, until the right opportunity comes along.
Chip Rowe
Got you. And then, on the warrants, could you just recap that again?
You ran through that, and I think I may have missed some of that, if you can please recap that?
Quint Turner
And Chip, of course, realizing you want the detail now. But I will tell you, we will file an 8K on Friday, that will have sort of the detail that I think you are looking for.
But as Joe mentioned, there is kind of -- think of it as sort of a three tranche issuances of warrants. The first issuance is at the date of signing, the effective date, and there is roughly 12.8 million warrants that are issued, of which about 7.7 million of those vest immediately, and are exercisable.
All these warrants that we talk about are exercisable by Amazon for five years from the day to signing of these agreements. And so, the 12.8 million, of which 7.7 million vest, the remaining 5.1 million vest over the course of the placement of the leased 767 300s, which was the last eight of the 20 leases.
And those aircraft are kind of deployed, starting in the fourth quarter through the middle of next year. And then, two years, from the date of signing, there will be a second tranche of warrants, which is roughly 1.6 million warrants.
Those will be issued two years and vest immediately, and then of course, they have an exercisable period, they will have three years left on it, right to the fifth anniversary of the signing. And then the third tranche is -- will be dependent upon sort of the true-up to that 19.9%, and that will occur 4.5 years from the date of signing, and then of course, those warrants will be exercisable only for six months, to that fifth anniversary.
The amount of warrants in that third tranche, of course will be impacted by our share repurchases that have occurred over the 4.5 year period, as Joe mentioned. We continue to believe that, share repurchase is a good way to provide value to the shareholders, and we intend to continue the program that the Board initiated with the authorized program, and probably update that, as that program matures.
And it will be dependent upon that, as well as share issuances that will occur. For us, share issuances are typically limited to shares that are issued for incentive plans to management and so forth.
I think historically, we have probably issued, 400,000 or 500,000 shares a year, associated with those plans. And so, the net of that, along with the warrants, after giving effect to the warrants, will be trued up to a 19.9% a year, at year 4.5.
Chip Rowe
Okay. All right.
Very good.
Joe Hete
More than you may have wanted to know there.
Chip Rowe
Yeah, I won't ask you to repeat that. Okay, and then, the funding for the Amazon planes, are you guys funding these purchases?
Quint Turner
Well as Joe mentioned, we have got a balance sheet, and I know it was a source of a lot of discussion last year, that maybe, we weren't at an optimal capital structure with our leverage being so low. And of course, we knew we had a lot of things potentially in that were attractive growth opportunities.
And so, as Joe said, we are going to rely on that liquidity that's in our balance sheet, as well as the strong cash flows generated from the assets that are currently deployed and that will be deployed. And we believe, while leverage ratios will increase, it will be still very comfortable for us to be able to afford the investment in the additional 767 300s that Joe talked about a moment ago.
Chip Rowe
Okay. Well very good, [indiscernible] additional questions, I will follow-up offline.
Thanks guys.
Quint Turner
Thanks Chip.
Operator
Thank you. Our next question is from Helane Becker of Cowen and Company.
Please go ahead.
Helane Becker
Thanks very much operator. Hi gentlemen.
Thank you for the time. Joe, did you have to get approval from DHL to do the 707 agreement, or is that not related?
Joe Hete
No, there is no requirement for us to get DHL's approval. However, obviously we advise them of what the opportunities are there.
Our positions is, is that potentially, there are some synergy opportunities between the two companies, with us being kind of the neutral in the middle. So we think it would be beneficial for DHL.
Obviously, they have been our primary customer for a long time. We expect to maintain the same relationship with them going forward, and this is just another opportunity for us to provide better service and more competitive costs for all of our customers.
Helane Becker
Great. And then Ken, Amazon buys shares in the open market, or are they limited to your warrants?
Joe Hete
I will defer that to Joe Payne.
Joe Payne
Hi Helane. Actually, they would be limited to the warrants.
They would not be able to buy in the open market.
Helane Becker
Okay. Thank you.
And then Quint, in the pension plan, I am not sure I fully understand the contribution? Because somehow I thought you were close to be eyeing fully funded.
So could you just explain that to me?
Quint Turner
Well sure Helane; the funding level is still quite good and comfortable. But what has happened, you have the sort of the non-cash GAAP expense, which because our plans are frozen, is affected by a couple of factors; one is, the discount interest rates applied to the obligation, which is reset each year end.
Now that actually -- the interest rate ticked up a little bit, as you know, compared to the end of 2014 to the end of 2015. So that was a good guide for us, and would have, in and of itself, lowered our non-cash expense that goes through the income statement.
However, the other factor that affects our expense, is the asset returns in the pension trust. We target about a 6.25% long term rate of return on our asset portfolio, and last year I think -- even though we have had a number of years, where we were double digits; last year, as you know, the market -- particularly at the end of the year turned down.
I think the portfolio had actually a loss of about 3%. So that has to be recognized and factored into our non-cash GAAP expense for pension.
The net result of those two things, results in a year-over-year increase, and the pension, the non-cash expense for pension that we would anticipate, 2016 versus 2015, of about $9.5 million, just for the pension.
Helane Becker
Okay, great. Thank you.
Quint Turner
I will say, as we report first quarter and start reporting for 2016. We are strongly considering, because these plans are frozen, they are really not driven by our operations.
Including that non-cash expense as an adjustment item out of our EBITDA, going forward, because it's really impacted more by interest rates and market returns, than it is, anything operationally. So you probably see that added to our non-GAAP adjustments.
Helane Becker
Okay. And then, separately, can you contribute shares to the plan, rather than cash?
Quint Turner
No.
Helane Becker
Okay, all right. And then my last question, is with respect to the CapEx budget, so you talk about the aircraft portion, and if I just do the basic math; I know you guys say you like to keep the all-in costs of conversion, acquisition and so on to -- $28 million to $30 million roughly per aircraft.
But if you do the division, it's kind of $40 million per aircraft, so have costs gone up, or does that include aircraft that you have not yet acquired, but have targeted?
Quint Turner
Well it certainly includes -- Helane, it includes aircraft that will have four aircraft that will be in modification at year end, that aren't reflected in our year end fleet numbers. And of course, those will be -- the aircraft that will be delivered to Amazon in 2017.
Helane Becker
Okay. And then, on the aircraft that come up for renewal this year, is this just limited to those few that you mentioned, that are going from one customer to Amazon?
Quint Turner
Yeah the ones that we have already referenced before, are all the ones that we -- this year.
Helane Becker
Okay. And do you have to do any modification work on those aircraft?
Quint Turner
No. You're doing any modification, but you got to transition the aircraft back from the lessees maintenance program to our maintenance program.
But that's not a major consideration.
Helane Becker
Okay, great. Okay.
That's all my questions. Thank you very much.
Joe Hete
Thank you, Helane.
Operator
Thank you. Our next question is from Jack Atkins of Stephens.
Please go ahead.
Jack Atkins
Hey, good morning guys, and congratulations on both a good quarter and the announcement.
Joe Hete
Thanks Jack.
Jack Atkins
So I guess, first of all, just to kind of piggyback on Helane's last question; with those customers, where you are transitioning capacity from them to Amazon; any sense for what they are going to be doing for airlift capacity? Are they going to be looking for other providers, or is it something you guys can help them with?
Joe Hete
One of the customers is Cargojet in Canada, and of course, they have been expanding their fleet by doing their own acquisitions of 767 300s and where as -- turning back the 767 200s. The other one is Amerijet and Amerijet will be the one that would take the 767 300 coming out of Mod in April; and the last one was the one that we had with Star Air in Europe, which they also took a 767 300 to replace it, that they had on lease from, I think it was Euro Atlantic, if I remember correctly.
Jack Atkins
Okay. That all makes sense.
And then just, also to clarify, is the conversion price still on that $25 million range or has that changed at all?
Joe Hete
No, it's in that $23 million to $25 million in the service cost.
Jack Atkins
Okay. And then as far as yearend leverage, you talked about the leverage ratio ticking up.
Where would you expect your leverage ratio to be at the end of 2016?
Quint Turner
That will be north -- certainly north of 2, maybe ticking up towards 2.5, Jack, I think is a good target.
Jack Atkins
Okay. And then in terms of the puts and takes for the guidance for 2016, could you just kind of walk through that one more time?
Both the non-cash items and just what's driving -- what's the puts and takes there, just to kind of summarize it?
Quint Turner
Jack, it's Quint. I guess, as you think about 2016, as we mentioned, we of course had two aircraft in modification at the end of 2015, that -- as was mentioned in their earlier remarks, one of those went into service for DHL in February, the other one will go into service actually for Amerijet, in April.
There is of course, additional aircraft, four other aircraft. One that will be placed in the third quarter, to a new customer, in dry lease, and then the last three, we will go to Amazon, those are all fourth quarter placements, kind of the October-November-December kind of placement.
So there is only, call it six months worth of contribution out of those last three aircraft. So when you think about CapEx versus EBITDA, you do have some backloading of the EBITDA contribution; because we are ramping up or building out their requirement.
And then of course, we still have liquidity for other customer needs, should they come along, whether that be DHL or anyone else. So there is always -- as we have done every year, we will update that as we move along.
So those will be positive contributors to EBITDA growth. We have mentioned the headwinds associated with primarily non-cash items, those two items, pension, which we said was $9.5 million year-over-year, when you think about sort of the 2015 EBITDA versus 2016; that's a bad guy of about $9.5 million.
And then, the fact that, in the first quarter of 2015 that we matured or fully paid off, if you will, even though it was a non-cash item as well, the DHL note, and that was a contributor to revenue, in that first quarter of 2015, of about $1.6 million. So together, call it $11 million from those two items, all non-cash, but yet, hits the EBITDA line.
Jack Atkins
Got you.
Quint Turner
Jack, when you look at the gearing up that we are going to have to do to support the aircraft to support Amazon; obviously, we are going to have to be hiring flight crews back, doing all the training. Obviously, there would be costs that we will incur, startup costs, call them, to bring those aircraft online on our certificates.
When you think about it, you got to look out into 2017, to where you see the full benefit of the aircraft going into service, and of course at this juncture, we really don't have much insight as to where the aircraft is going or how much they are going to operate, which we expect to start seeing, now that we have got these agreements inked.
Joe Hete
So consistent with the past, we will update that, as we become -- as we get more information about the utilization of the fleet and the date that you may want to target.
Jack Atkins
Okay. Makes sense, just a couple of more questions on the guidance; in terms of thinking about -- Joe, to your point of the full run-rate, the earnings power of the business, at least exiting 2016, is there a way to think about -- sort of how to -- and you have quantified this before, sort of what EBITDA run rate you expect to be on, exiting 2016.
Would you guys feel comfortable talking about that?
Joe Hete
No. It's a little premature for that Jack.
I think --
Jack Atkins
Maybe what's baked into your guidance and for the fourth quarter?
Quint Turner
Jack, again I think if we talk about where we are at for the fourth quarter, we are really answering your question. I think we'd like a little more time to digest that, and also get a little more input from our customers.
Joe Hete
But I think Jack, as you recall, I mean, most of the EBITDA is generated by the assets themselves. We have given you ranges in the past, in terms of where the lease rates.
And these are market lease rates, that are granted because of the volume, they are going to be on the low end of that. So you can make your assumptions in that regard, is that if you could come on one aircraft a month, and then use that as your jumping off point.
From an operations perspective, we have always talked about the fact that the ACMI side is a single digit margin. Again, we don't have any utilization data at this point in time, other than the current five that we operate.
So you can just take your best guess of that piece of it.
Jack Atkins
Okay. Then last few questions and then I will turn it over, will the warrants go into diluting share count immediately, I mean even if those are not best, and how should we think about diluted share count this year?
Quint Turner
Well, in terms of the GAAP diluted share count that you see in the filings, I mean, there is an application of the treasury stock method, that will occur to that. And so, we are still of course, working through the details of that, and we will be sitting down and going through that more with you.
But fair to say, that the treasury stock method, as well as share repurchase will impact that treasury stock GAAP diluted share count. And also -- but I can't say, Jack, that we certainly judge this deal to be very cash flow accretive to our shareholders.
There will be some non-cash effects of the warrants. For example, we will amortize the value of the warrants against our GAAP results, it will be a reduction of revenue, just the warrant itself has a value, that's amortized.
And we will be -- in the first quarter and speaking more definitively about that, but there will be some non-cash effects that flow through our P&L results. So they will -- and these calls, throughout 2016 will have some more adjustment items, to get down to the cash performance of the business that we have had in the past.
Jack Atkins
Absolutely, it makes sense. I just want to make sure that everyone's thinking about that correctly.
Okay, and then last question and I will turn it over, the D&A expense for 2016, is there something we can use for modeling purposes there?
Quint Turner
Again, you just use the fourth quarter, annualize that, and take the additional aircraft that we bring online, let's say we got one in April, or one that came in February, one in April, one in July, and then one each in October-November-December. Those will be the primary contributors to the D&A side.
Jack Atkins
Okay. Thank you.
Operator
Thank you. Our next question is from Steve O'Hara of Sidoti and Company.
Please go ahead.
Steve O'Hara
Hi, good morning. Congrats on the agreement.
Joe Hete
Thank you.
Steve O'Hara
So just -- I guess I am curious as to, maybe how the agreement came to fruition? I mean, is this something you were kind of paying Amazon on, or based on maybe some publically well known issues with one of their providers, or is this something that just kind of -- maybe came to you?
Joe Hete
It just kind of came to us Steve.
Steve O'Hara
Okay.
Joe Hete
Obviously Amazon, we had questions about their view of that, and that would have to be -- those questions would have to be posed to them.
Steve O'Hara
Right, right. Okay.
And then just so I am clear, I want to -- I mean, you know you have gone over this few times, but in terms of maybe incremental 767 200 or 300s, can you just tell me, incrementally, how many are you buying, maybe specifically for Amazon, and then maybe, if you are buying any, to kind of have some -- let's say staging, if you will, for customers that might come after? It sounded like you had -- you kind of -- your demand commentary seemed pretty positive too?
Joe Hete
In terms of the 200s, obviously, we own all those to-date, for a number of years. On the 300 side of the equation, as we mentioned, we already own and/or have contracts to purchase the feedstock necessary to fill out the Amazon requirement of eight 300s.
I mean, in addition to that, we do have under contract, a couple of more opportunities for purchasing a couple of 767 300s. However, they wouldn't be available to our customer until 2017.
Essentially, the modification line at II is filled up for 2016, and of course, we are occupying the better part of it for the early part of 2017 as well.
Steve O'Hara
Okay. And then -- so on the CapEx, did you say 211 for aircraft, is that what the number was?
Joe Hete
215, it includes some equipment to support the aircraft, so call for aircraft and modifications etcetera. 205, then another 10 for support equipment.
Quint Turner
And that includes, Steve, the fact that we will have aircraft in modification at the end of 2016, that are slated for 2017 revenue deployments.
Steve O'Hara
Right. Okay.
Is there a way to -- I know you noted that, you thought there might be expansion opportunities. I mean, is there a way to quantify, how much capacity they currently use --
Joe Hete
I don't know about that Steve. We don't have any insight to that.
Steve O'Hara
With the five that you have, what percentage of their U.S. lift you occupy?
Joe Hete
We have no idea.
Steve O'Hara
Okay. And then just, quickly on the share count, do we assume kind of that you add the 7.7 in, and then you use the cash to buy back the stock at the market price, to get more to the diluted share count, is that the right way to do it?
Quint Turner
That's the treasury stock calculation that you're describing, yes.
Steve O'Hara
Right. Okay.
All right. Thank you very much.
Quint Turner
Thanks Steve.
Operator
Thank you. And our next question is from Adam Ritzer of Pressprich.
Please go ahead.
Adam Ritzer
Good morning. Just had a handful of questions, maybe you could help me figure out.
I guess, on the growth CapEx, you're saying it's about $205 million, and you say you have four planes, which is roughly $100 million, does that also include four more planes you're anticipating to buy and remod later this year?
Joe Hete
Yes.
Adam Ritzer
Okay. So after that, you would, at this point in time, you'd have the whole Amazon deal fulfilled?
Joe Hete
No. With the four that we have in mod at the end of the year, remember, there will be five more that will be delivered in 2017.
So we'd have one more that would enter modification for that program in 2017.
Adam Ritzer
Okay. So [indiscernible] into 2017.
Okay. So I was just confused, that $200 million is really almost eight planes?
Quint Turner
When you think about, we had one aircraft that went to DHL in February, so we had the modification costs associated with that; or at least a portion of the modification costs. We had another aircraft that we bought and put into the mod line, in December that will come out in April.
So we had most of the modification costs for that aircraft in 2016. We have the aircraft that we bought, and we will put into service in July of this year.
We will have the full load on that. We have three, that we will give to Amazon in the fourth quarter, we will have the full load on those, and then we will have the four, that are in modification at year end.
Obviously, we'd have the purchase done at that point, portion of the modification costs done, and then we also have deposits that we will put down on aircraft that will be delivered in 2017, as well as the deposits on the modification slots to cover those aircrafts.
Adam Ritzer
Got it. But it's really the timing in terms of why the 200 looks so big, and its only four planes, it's really eight, with a little hangover timing on the mods delivery, that whole thing.
Okay, I get it. So let me ask you this, in terms of the warrant deal, with the free cash flow you should generate this year and next, clearly, you'd have enough money to pay for the fleet expansion.
Why do the warrant deal? Was this something that you proposed to them?
They wanted to do as part of the agreement? Could you help me understand why you need all this cash and diluting the additional dilution?
Quint Turner
Well I mean clearly, the other party wanted and used this, I believe, as an important relationship. And that interest I think is not atypical of how they have approached things with other partnerships that they also saw, as something that made sense for them on a more long term basis.
And so it was included in the deal. Clearly, all that had to be factored in our view, of whether this is a real positive deal for our shareholders.
And as we said earlier, we believe its accretive from a cash flow standpoint, to our existing shareholder base, and certainly, changes the dynamic of our revenue structure, in terms of diversification. Amazon of course is a fast growing company, as you know Adam.
So we believe, taken in totality, that the deal we struck is very beneficial.
Adam Ritzer
Okay. So it's really more about a long term relationship, because then you don't need this cash to do this deal, right?
Quint Turner
We don't get any cash, until the point in time that they would exercise the warrants at, they essentially have five years to exercise the warrant.
Adam Ritzer
So it's really like, look guys, we want to be in bed with you for a long term. We need 20 aircraft now, like you say, the size of Amazon, who even knows how big this thing is, and how much more equipment they could use down the road.
Okay. So my last question has to do with the leverage; Quint, you mentioned you might get up to 2, 2.5 times.
That would imply -- I am using like 220 of EBITDA, ex these non-cash charges; 2.5 times, that would put you over 500. How is that possible?
Quint Turner
Well again, we are just giving a range. We are not signing anything.
We will definitely be at this point. But as you know, there is lot of flexibility in our alternatives for providing value.
And so, I think, we are trying to take that into account --
Joe Hete
When you are doing CapEx, then you only have that, then you have got the investment we will make and are trying to JV, we will be buying back shares, which will be a use of cash as well. So I mean, ultimately, we are just kind of taking our best guess, in terms of where we are going to end up at the end of the year, in terms of the leverage ratio.
Adam Ritzer
Okay, right. So maybe a moment in time, if you had to buy a bunch of planes, very quickly, how to invest in China, etcetera.
It might start pushing up at the higher end, but over a period of 12 to 24 months, as the cash flows come in, it would obviously come down dramatically. Is that a good way to look at it?
Quint Turner
If we stop investing in additional growth assets --
Adam Ritzer
I know, that's never going to happen. But that's fine.
Okay. Thanks very much guys.
Great job on the Amazon deal, and we will talk soon. Thank you.
Joe Hete
Thanks Adam.
Operator
Thank you. And we have a follow-up from Helane Becker of Cowen and Company.
Please go ahead.
Helane Becker
Thanks operator. Sorry guys.
Just a quick -- does Amazon get a board member?
Joe Hete
Under the terms, once they have to exercise sort of a 10% position and Joe Payne, you chime here in if you need to, but they would have the ability to nominate a board member, to the ATSG board.
Helane Becker
Okay. One or two?
Joe Hete
Just one.
Helane Becker
Okay. Thank you.
That's all I wanted to know. Thanks guys.
Thanks for taking the follow-up.
Joe Hete
Thanks Helane.
Operator
Thank you.
Quint Turner
I would just add Helane that, until such time, as they do -- and we are going to file an 8-K, as we had indicated on Friday, in more detail. But just a fullsome answer to your question, until such time as they do exercise warrants, that gives them a 10% ownership, they would have a right to have a board observer.
But it will be a non-voting.
Helane Becker
Okay. Thank you.
Thanks for that clarification.
Quint Turner
Sure.
Operator
Thank you. And I will now turn the call back over to Joe Hete for closing remarks.
Joe Hete
Thanks Christine. I hope you are as excited as we are, about the outlook of your company's future under this new set of agreements with Amazon.
We will be sharing more details about the agreement and the rest of our business in our 8-K and 10-K filings later this week; and also in the proxy materials we will distribute at the end of this month. As you review them, please keep in mind, that the full execution of the Amazon agreements we signed this morning, will depend on your support of a proposal to increase the number of our authorized shares at the annual meeting in May.
In the meantime, we will be focused on executing the major investment program we outlined, pursuing new opportunities, and at the same time, continuing to deliver great service to all of our current customers. Thanks, and have a quality day.
Operator
Thank you. And thank you ladies and gentlemen.
This concludes today's conference. Thank you for participating.
You may now disconnect.