Q3 2020 Cargojet Inc Earnings Call
Good day and welcome to the Cargojet Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Colleen. Please go ahead.
Morning, everyone and thank you for joining us today on this call.
With me at the office or Jamie for Eastern Chief Commercial Officer, and Sean Kim Our Chief Financial Officer, He Jay Romani at our President and Chief Executive Officer is joining us remotely.
Your opening remarks about the quarter, we will open the call for questions I would like to point out that certain statements made on this call such as sales relating to our forecasted revenues cost strategic plans and forward looking within the meaning of US a couple of securities laws.
This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDA, our fees refer to our most recent press release and MTN, a four important assumptions and cautionary statements relating to forward looking information recommendations of non-GAAP measures to GAAP income.
Now I'll turn over the call to AJ.
Oh, Thank you poly and thank you everyone for joining us this morning.
2020 has been a year so the history books in many ways.
When I first talk about the pandemic that over Q1 earnings calls there was a very high degree of things I'd.
<unk>.
What would cases were rapidly rising and the world's most significantly on badge.
Eight months later as the winter approaches the case count is on the rise again.
We have learned a great deal.
Better feared on PPI medical professionals and scientists have developed better treatments for do series outcomes and as human beings, you have developed personal safety protocols and survival skills.
Change many afford the study habits, including over shopping.
There has been many acts of kindness and we have come together as a community to help each other.
I continue to be amazed by the human spirit.
And I want to thank everyone, who is making a difference and business serving on the front lines do over.
People are going.
Now turning to our third quarter results.
We continue to benefit from the strong tailwinds.
Commerce fueled by the work from home culture.
While the initial surge in log sales was driven by temporary change in consumer behavior.
Now seeing structural changes in the retail industry that is shifting investment and resources.
Bricks and mortar stores to digital E commerce at a much larger scale.
Ecommerce as a percentage of overall retail sales has gone up from around 7% well over 11% in Canada.
Friend in U.S.
Nuclear markets.
Even steeper.
Touching nearly 30%.
For long.
That.
The prolonged pandemic has forced.
Actually all retailers deployed as sources towards digital Commerce, and we expect Canada to follow you listen you could suggest.
Implications for the shipping and logistic industry means two to three times in season volumes over the next three to five years as we get strong and we see a strong come back all bdcs business and B to C remaining strong.
This trend was clearly visible in a revenue growth of 38% in third quarter and strong growth in number domestic overnight network news grandson.
Hi segment.
While quarter on quarter group sales were charter business was somewhat slower compared to last quarter. This was expected due to fewer shipments from.
China and other parts of the world and the governments have been.
Shipping it off.
In two weeks on hand.
For the time being.
Having enough inventories on hand for the time being we posted a strong growth over prior year and it was harder business.
All of our key metrics on revenue gross margin and EBITDA continued to show strong growth and demonstrate.
The operating leverage of her business model.
Adjusted EPS for the quarter was.
1.72.
Compared to 0.09 from the prior year.
Back to back strong quarters, Cargojet generated 59.3 million in adjusted free cash flow.
During Q3.
And one point 144.8 million.
To date, allowing us to further reduce <unk> overall.
Leverage to approximately 2.1 times.
12 months Squealing EBITDA.
We're also continuing to invest in growth opportunities, while we were going to be something of a balance sheet with an overall reduction of 92 million and net debt on a year to year basis.
Moving onto operations the number one priority for us.
I mean, the health and safety of our employees.
We had been operating at over nine years.
Deep long games, the past previous months.
This means our teams are working extremely.
Hard.
Keep the supply chains, moving safely and securely, especially as the weather gets colder.
What would the holiday season on the Horizon, we are deploying additional resources to make sure that we delivered the ski season safely and on time for all of our customers.
Continued to provide the best MPT medical advice, along with enhanced sanitizing.
Sanitation majors Liberty.
I'll bring <unk> fleet and asset utilization continued to demonstrate additional hopper.
Operating leverage as demonstrated in improved margins.
We took delivery of the Boeing 773 hundred last month and are in the process of deploying an additional aircraft in the fourth quarter to support.
One thing that is clearly differentiated is our people yes.
Yes, so incredibly proud of for one.
One of the core team members.
On a daily basis we.
We see stories of how it worked out for every night from Ram Me Ben.
Pilots.
Who are going well beyond the call of duty and operating safely to serve our customers during these challenging times.
We are closely monitoring the changing shopping habits shipping and shopping habits.
Brent and the domestic and international markets and spending the necessary time to understand and adopted these dynamics.
As you have noticed.
Oh, the wide body passenger business, it's still a.
Oh ways and years away from becoming normal. This also opens up opportunities in the international shipping arena as well.
Why did we freeze some uncertain climate in the near future. We believe the key to successfully resilience and adaptability yeah.
You have no diversified into not only.
Charters.
Not a big part of our business, but also you see a mine that has helped us reducing our dependence on domestic overnight business.
Let me say this but we are all positioned to handle the changing that station and logistics landscape you have a great team strong set of assets a highly flexible fleet and we are well capitalized to continue to capture growth opportunities understanding in warmer.
Your position ourselves with over $600 million of liquidity and she's economy went soft on us.
Once again, thank you for joining us this morning.
And we will open the call for questions now.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.
And our first question comes from Mona Nazir with Lauren Branch. Please go ahead.
Good morning, congratulations on the quarter and thank you for taking my questions. Good.
Good morning.
Good morning, so in your outlook or in your commentary at least he stated that youre focused on ensuring strong long term coal in the east came right in charter business and then you can just touch on your diversification into those two areas I'm. Just wondering if you could speak a little bit more about that and how it shifted some more ad hoc sales.
In terms of demand and what kind of visibility do you have into the next quarter or even 2021.
Well I think as the domestic get stronger.
<unk> other businesses are also getting stronger so it feels like a deploying more playing on domestic overnight that gives us additional flexibility of fleet during the weekends during the day so what.
What that shows is that you know with domestic Ah, obviously beaches or because being over core and still is one of the core business is.
As sad demand grows we can certainly look at utilizing the same assets over the weekend and doing the these charters and some easier might work so.
And the second part of is that you see in my business Rehabs, We had no operating.
Three flights to Mexico, a day out of.
You asked cooperating and be like Bermuda.
And New York, we are operating a weekly flight into Havana.
Operating the film slates in to clone.
And we are continuing to grow that you see in my segment business, because we feel that you know there is a lot of opportunities that exists not only in Canada, but also across the border.
We have some licenses that allow us to slide in a third country from U.S. not within the U.S., but.
Out of the U.S. and that's part of the business is quickly growing because the integrators are not now going to depend on for at least the next three to five years on commercial lift by passenger carriers coming back because the confidence in flying.
Triple Sevens and 787 for passengers.
Is there you know at the moment and even if the.
The next three to five years about recovery that.
That leaves a big gap and who you.
And Oh cargo ductless being traditionally ship on passenger aircraft.
That lift needs to be replaced and that's where we see we have grown and that you see my business and we'll continue to make strides in that.
Perfect. That's great color. Thank you and just lastly for me I need seen tremendous growth over the last.
Nine months I'm, just wondering if maybe you could provide some insight into how you've been coping to meet increased demand in and really we're any potential bottlenecks bottlenecks exist or you need to make further investments if at all thank you.
Well the investments I mean, why how being able to cope with a few big clients you crying over basket keeping people safe.
You know we have a the challenges are.
The P.B. is a much better now like availability and we have been stockpiling, because we can never depend on the marketplace and the governments to supply us with that so that has been over biggest challenge to keeping over team and its sources are ongoing we have hired additional so I would say in the past.
Six months or so over 300.
<unk> Oh.
Oh, we're available from other airlines because of layoffs and the evaluation sector. So we were fortunate to find.
Great people to work on short notice and the.
The learning curve was also not as long. So those resources were hired recently, we have then added a couple of things.
Yes, the one which we had communicated on spec would've municipal airplanes, that's been put in use already and there's another one on the way so.
Besides that we have also looked at over ground support equipment and we have made a significant investment to make sure that while these like Atlanta, obviously to do that.
That did not waiting to be Offloaded to you know stuff like Motors. For example, it was a very simple thing, but you need to operators.
Operate those motors. So so there's not been an area, including expanding over facilities like in Edmonton, We are building a 10000 square foot.
Portables.
Temporary shed to accommodate the growth. So those are some of the examples that we are going to.
And you're making sure that all over all hands are on Bakken and any resource that is needed to make sure to handle the group is being handled whatever biggest challenge still remains as you asked me is just keeping over people safe and making sure that you know.
Yeah.
Become victims off Oh.
So.
Thank you that's it for me.
Thank you. Our next question comes from David Ocampo with Cormark Securities. Please go ahead Sir.
Good morning, Ajay I just building on mortgage last question, there, but I want to focus more on the domestic side of the business. Historically you guys have pointed out that you're sort of base fleet from say 2019 was able to grow volumes on that 4% to 5% range and obviously you guys about a little bit more aircraft.
Here. So I was just wondering how should we think about future volume growth on the domestic side of the business and what changes have you made to sort of your.
Your fleet schedule that can make you extract a little bit more on on the volume side.
Oh, Oh, Oh I'll just take this question and then I'll get Jamie to address it in a second well the the business on domestic side remains solid and strong.
The first at the end of the first quarter in the beginning of the second quarter. We saw some slowness in the domestic side of the business, which was the b to b business because all the businesses most of that business started closing down and that trend shifted to business to commerce customers, who are more smaller packages Andres inventions.
It doesn't make a difference to us whether it's 10 small packages or one big packages.
What we saw that trend and now Weve also seen lately that the business has business is open for business to business segment also picked up and hence we saw some tremendous schools on the domestic side of the business.
Ah So that's a big part of our business, we continue to focus on on that and as much as a it needs and I think that there's no sector, a little continue to grow as more.
People buy online and more people Oh speed at home working so that the suppliers are shipped to them at home. So.
So Jim you want to add something to that.
Sure AJ good morning, David.
Yeah, just to add to his comments on the other benefit that we have and as we noted in previous quarters. This increase utilization of our existing aircraft assets, particularly on the domestic networks you know what the growth, particularly the growth of E commerce, it's allowing us to add additional flights as we've added a Saturday flights earlier in September October timeframe to meet with.
To meet the demand that ecommerce volumes move we're running two flights a week now for the last several months to to fight to Sunday.
For the last several months utilizing existing aircrafts that were operating during the overnight.
Primarily on the business nights during the week E. Commerce again as we saw in October with Amazons Prime week that was delayed from July until October we were able to handle those significant increases in volumes by utilizing aircraft during the day without having to bring in additional capacity. So combination of those as you noted we have two other aircraft that are coming.
It just came into the fleet at the end of September one that's literally coming online early next week that will give us additional overnight capacity, but then will contain additional.
Ecommerce volume on weekends and during the day and you May have noted yesterday. Some of you probably saw Purolator's press release indicated that they were expecting a 20% increase in volumes in the holiday season. This year in the last couple of weeks have seen similar.
Commentary from our other customers, whether it's cheap you answered Fedex on predicting no record peaks. So no nothing mentioned Amazon with significant double digit growth. So we think we're well positioned in terms of capacity to handle it.
You just took my my next question Jamie but.
Perhaps if we see volumes continue at this at this rate and not this club I mean Q3 than the domestic side was up 18% year over year and you guys. The first some heavy maintenance if the demand is there can you guys meet that looking into next year.
Is that the right way to think about it.
Yeah, we don't we don't see an issue with the I mean, consistent although the volumes obviously are heavier than what we had predicted a year or so ago for the last I think we've been consistent in the last couple of years, saying that we didn't think we would need to add necessarily another aircraft to the domestic fleet to meet the typically the b to C E commerce growth that's.
That's changed a little bit, but with the aircraft that we brought on line, we're confident that we have enough capacity.
Work at least for 2021, and we continue to pursue and look for other aircraft because as we've noted before there are other opportunities not just in the domestic but on the semi side of the business that we think we may be able to take advantage of.
And last one for me is just more maintenance question, how should we be thinking about capex as we head into 2021.
[noise] Oh, it's John I can take that question AJ I'm not going to see what's the delivery of.
Oh, the last up to 6300. This year, you know that brings us to about 150 million of Capex for the full year we.
We are looking at potentially buying some additional feedstock in engines. So that may bring us up to about 190 for the full year, because we want to be well positioned to kids. So we want to put more aircraft into conversion.
So of that hundred 90.
Additionally, in Q3 or in Q4.
50 to 60 years that will be leased up so deal with the last aircraft that's being delivered as we speak.
That's one of the funniest, please so and that Weve extended you'll notice in our.
In our fleet plan and the M. DNA, we've extended the one operating lease that we have on the sales 767 200, that's a two year extension will probably throw off about 10.
$10 million to $12 million Canadian as leased up.
And then we don't have any other great actors.
Acquisitions, New Capex plan for next year other than maintenance.
Okay. That's it for me thanks, guys.
Thank you. Our next question comes from Konark Gupta with Scotia Bank. Please go ahead.
Thanks, and good morning, everyone. Congrats on a great quarter.
So just maybe first one on the margin I'm sorry, looking at the EBITDA margins. They took a big jump in Q2 and expand it further in Q3.
I'm guessing that you see in my and the mix that probably expanded the margin sequentially in Q3, but.
But do you see further margin expansion in Q4 sequentially EPS, that's duplication typically increases in Q4.
Oh, no I don't think we are going to see a big jump in quarter four oh on the margins on that side because.
Obviously, when we add routes in Riyadh and get.
More business or you know obviously its pricing is going to get adjusted as you know than quarter. Two there was not a lot of wide body lift available outside so bad and can result in a lot of you see my revenue and in quarter. Two we saw some of the lift come back so.
The price of the charters back or.
You know sky high in quarter, two and beginning of quarter three they kind of Ah Ah declined and became more realistic pad and then actually keep in mind. We also yeah, yes, we compete with.
You know the passenger side of the business that is non existent or very little right now, but also people live in stock piling on what's in freight and surface transportation. So that they don't have to spend a lot of expenses here. So why did we everybody. This clock with no PPS at all that's weird.
Margins were so high and we have seen steadily decline and more realistic levels of margins. So I don't think that you'll see a big expansion in quarter four oh for it for the margins.
Okay and if he can just go forward to 2021.
And one thing I'll Beach margins. So I think this year has been a pretty big jump in margin scaling up the work of the various puts and takes you would point out for us to consider when modeling out these margins into next year. So I mean margins are at a new normal level would you say that sustains a boat so from here or do you expect them to normalize.
Between 2019 and 2020 levels.
Yeah, I would say, that's a better way of saying that they will depending on how quick a vaccine comes in for example, if you're shipping vaccine, which we are ready to do obviously, there's going to be some higher margin business because it requires a lot of specialized handling business. So I wouldn't consider that sort of a normal day to day business.
But depending on how quickly the passenger side of the business that covers you know a lot of airlines and I had I was calling for three to five years recovery and if that flight to five year recovery is a gradual step by step recovery I would say that your estimate or your comment about somewhere between two.
Sales in 19, and 20 would be a good starting point look at do worse normalization, though.
Margins.
Okay. Thanks.
Perhaps on the domestic side or if you look at the pricing. So I'm looking at volume growth in domestic has been faster than that many in both that and the last two quarters a bit suggests obviously overall pricing has softened a bit. So I'm just trying to understand if you can provide any color as to why right.
Thing mix or pricing overall would be softer and be reading from cpis like insulation I'm in is its fog was since the contract mix isn't the b to b to B to C. Max orders that you are playing into that pricing weakness yeah. I didn't give you a few plays a big part into it.
And that kind of brings the whole.
Margins down on the domestic side definitely.
Okay. Thanks, and last one from me on the fleet side. So I I see you have extended the lease on sounds like seven and I think you have acquired a few aircraft recently as well no I understand your point on that you don't need much more capacity to be added than domestic for the next year or so.
But given the opportunities you pointed out in China, and then it seems like you need to add another a few dedicated aircraft spoke for each year in my what are your options at this point I'm like are you looking externally. So it's it enough capacity and you know you might get there itself.
On time or are you looking internally maybe a couple of aircraft that are leased with third parties would you like to into the lifetime or how are you thinking about that well.
Well actually you know we do we are reviewing three aircraft for acquisition for a 2021 and if at all they should be converted by third quarter of 2021. So.
We do have tend to do well for us out there subject to due diligence on these three aircraft right now at the present time, but obviously, there's a lot of record checking that goes on when you buy an aircraft. So those aircraft are probably going to help us with the growth on news again, my charters and also somewhat of domestic.
As well on the domestic Ah growth are as Jim had pointed out pointed out that.
We have the ability we have the cruise and infrastructure to turn these aircraft around like for example, if a so called plant in Western Canada or coming back from Western Canada, We land at a three or four in the morning, we have the ability to garner at five o'clock in the morning and be in Vancouver for seven philosophy.
Same day, so not everything is required at four and five in the morning. So you can have a second tier sort of delivery at around 637 730 in the morning.
Keep up if the demand continues to grow on the domestic side as well.
Perfect. Thanks, that's it from me thank you.
Thank you. Our next question comes from Walter Spracklin with RBC capital markets. Please go ahead.
Thanks, very much good morning, everyone. Good morning Walter.
So when I look at the share my Ah at 37 million in the third quarter you booked a couple I think you said at least two new contracts late in the quarter what is roughly the exit rate on your three on your quarterly.
Roughly this quarterly cadence on the exit rate out of Q3 from the contracts that you've already have in place.
I can answer that Ah ha.
So we had a full quarter.
In Q3 as the other two additional routes that we added earlier this year Walter.
You know the ones to Europe, So I think by adding and so Q3 Q3 is a good run rate for <unk>.
Sort of the new AC My roots started earlier this year. We've added one more route at the end of September So incrementally in Q4, you should see the effect is that one roof for the entire quarter.
Yeah like the guidance that we gave on the other Mexican Ruth.
You know somewhere around 10 million annualized <unk>.
So that's what you should expect for Q4.
Additional.
10 million on top of the seven.
Oh, yes, I'm. So if you take our number three as a run rate another 10 million per year you know.
When you when we add another group.
Got it two to 3 billion on top of what we had in Q3 and Q Yeah. Just it just be aware that in 2021.
We are going to enjoy some premium pricing in quarter three in quarter four Walker for HCM I, just because of a peak and a lack of availability, but coming back to quarter one 2021.
You know the premium pricing that we have fracing that Mike is going to come down by about 15% or so on.
On average so.
Why do we enjoy that was because of the peak period.
Normalized.
In 2021.
2021, and then back up again, you said or did you go into peak of 22, <unk> one is that right.
Yeah, then it would pick up a little more.
Okay. So so really I mean, you're you're like you said AJ I mean, you know ATM by about a $150 million a year yeah.
Almost you know is tracking almost half of your your domestic met network now you add any all in chartering and.
And you do indeed have a a well diversified or kind of base.
Base there yeah that was that were targeting aim all the time to sort of.
Be in all the aviation sort of cargo aviation type of business is not just an overnight business.
And is there anything in my contracts now that you're looking at that are out for tender that could be additive to next year and and specifically you know it is a 150 million your absolute capacity with your current fleet or could you go much much higher than that in terms of RBC I might revenue.
Look over the current fleet that I think we can always increase the capacity by 5% to 10% by Rejigging schedules and sometimes doing additional flights on the weekend or doing extra current so oh, yeah, I would say between five and 10% or would the existing fleet or EPS was your question.
If you're looking at additional routes I mean, there's not a big goes by where we don't go out and Goldman on for business. So that's our job and we continue to do that but do we have anything yeah that we feel we can get it we are we have already.
As we said we are.
There's there's opportunities while and the international air cargo.
Capacities down because of the passenger side of the business. So more and more integrators are looking at are having their own capacity and we continue to.
The white them with quotations and sometimes it works out sometime it doesn't.
And and but also at some at times. It's also the AD hoc sales or that we expect are going to go up as well.
[laughter] how long are you locking. These passionate are these customers in four age or is it longer now that you have the offer you know people sound like they're more desperate for international Airfreight capacity are they willing and wanting to lock in for longer terms here in what would be the term.
So all that you see in my contracts are you know, they're not as hard as domestic Ah contracts and the industry needs to get my answer to get my works on a you know typically three to four year contract with certain out at six months or so.
Or you know average six months some of them are 90 days some of them are.
A year, but most of these are also that.
We have flexibility where they can switch from one drug to another so you Mike.
New Somalis into Europe, and pick up in South America, and the Caribbean. So I think that you know do ask for five year or seven year contracts, just like the domestic side of the business.
I see and why does not operate like that because people need flexibility and redeploying. The aircraft. So that is just the nature of the business.
Okay and in your current customer base I guess your big ones, you're right. The 2025 no no no it's you're going to be any movement or or have those customers wanted to extend beyond 2025. I know you have three year renewals with one of them you know that that are being exercised early is there any avenue for us.
Early exercise of a contract extension with any of your major customers on the domestic I mean because of the pandemic those discussions haven't even started yet so yeah summer in 2021.
You know when you have four years, four and a half years remaining normally typically he's kinda discussions start closer to two and a half to two year mark rather than they can afford a half year mark so.
But at some stage you know next year, we will certainly start talking to people.
Okay. That's all my questions congratulations on a great quarter. Thank.
Thank you Walter.
Thank you. Our next question comes from Kevin Chiang with C.I.B.C. Please go ahead.
Good morning go in.
Good morning, everybody just taking myself on mute your thanks, Thanks for taking my questions and just echoing Walters a congratulations are getting good quarter [noise], maybe if I could just look at peak season, specifically you know if I look at historical it just kind of do a simple.
You know domestic network are pretty this overnight network revenue divided by.
Operating days, you typically see about a 20% sequential lift in that unit metric in Q4 versus Q3, just reflecting that peak season, just given how strong Q3 wasn't this year.
How should we be thinking about that kind of revenue per operating day within that domestic network is it should.
Should we should we think of that seasonal pattern holding so that typical 20% sequential lift or what.
What did you see some of that flow into Q3, just given how strong E commerce has been especially during the pandemic huh.
Hi, Jim Hi, [noise].
Yeah. Good morning, Kevin I think it would be realistic to think that you know our typical Q4 volumes. We already started to experience those late in Q2, but particularly in Q3 and the volumes that youve seen that we reported today are reflective of what we would normally I shouldn't factor a little higher than what we would normally reported in Q4 I don't think you'll see quite as you know the 20 per.
From a typical Q3 to Q4 and I think we've already seen some of that growth in Q3, although I still you know to my comments earlier when you when you read and see some of the comments that some of our customers, including as recently as yesterday with pure later.
Shifting actually a 20% increase in their total packages, but that includes their ground volume.
We're going to see a significant in a record peak season I'm not sure it would be quite a 20% bump from traditional Q3 to Q4.
Okay. That's helpful and then.
And you didn't know that you Didnt note in your in your revenue commentary that it looks like you did the volumes are exiting the quarter had had.
And essentially come back to kind of.
At least pretty pandemic levels are or what it looked like the prior year.
Just wondering how those b to b volumes shaped or been in October as as parts of the Canadian economy.
ER went back into locked down but at the same time, you guys are lapping easier comps so any commentary there would be helpful.
Yeah, I can take that AJ, it's the isn't reported there Kevin we did you know in the tail end of Q2, we started to see some of the B to B business come back again, and again I think we explained before that some of it we have some direct visibility to some some of its mix because we have customers like purolator, obviously that are very heavy in both beat.
B and B to C and they don't report you know and we don't physically no big difference between the two different products from we're handling it I'm sorry.
But I know in the dialogue with them and again with some of the the as we reported another strong indicator of some of our customers. If you look at some of the trends towards group of companies. Some of them are just strictly in the b to B business. So we saw significant significant declines there, but those are in Q3 for the most part I've come back to sort of pre COVID-19 pandemic lot.
<unk>, we expect those to continue going into into Q4 barring any other significant shutdowns of the economies, where we haven't seen anything yet that you can do.
Okay. That's that's that's good color and just last one for me on a sea of mine. Obviously are a great result in the in the third quarters here.
Just just confirming that this new route that you can just knew you left in Mexico router I suspect it's with.
DHL and then when you look at your overall, a seal my customer footprint.
[laughter] any concerns or just the customer concentration with DHL is because as you know part of the it seems like growth strategy to diversify the customer base.
Any comments there.
Yeah. So we are obviously because if you look at two P.S. in Fedex, they're licensed American carriers and there are you seeing my needs are more ad hoc and because they have their own fleet, whereas details I'm not a registered airline in U.S. and so there's more opportunities with that and the concentration.
Yes, you're absolutely right, we are looking to expand.
Our relationship with not only be a child, but other you know south American and Caribbean Ah carriers looking out to work on.
Commercial flights into places like Mexico, and there is less passenger flights going in.
You know, we just could not do any of that because of the lack of fleet and when you've got your occupied at your planes fully chartered and occupied a those commercial decision. So I took a backseat. So we are actively pursuing.
You know international flights they wouldn't be certainly Ah you see it might but they would be maybe more like block space agreement, just like them or domestic stuff.
Going into the international arena. So so so it'll be kind of you know.
You see it might yes, because of the licensing issues or the concentration is there with one customer, but we are looking at expanding those relationships with other international carriers, which are based in South America and the U.S. that.
That need additional lift because they cannot service.
Yeah, so that is ongoing at the moment.
Perfect. That's it for me thank you very much.
And our next question comes from Chris.
Capital markets. Please go ahead, yeah. Thanks, guys. Good morning, good morning.
Just turning back to the the charter business 80 last quarter, you gave us some really good color around how you thought it was going to evolve as we came through call. It the acute to pandemic and maybe you also made a comment about wanting to build maybe some longer term stability in that so I guess a couple parts to this question you know first of all.
How do you think Q4 charter is going to be and do you think that wall. Historically, it's been a very choppy type of business and even at one point, we were talking about maybe moving away from it a a little bit how do we think about that business as we go into 21 and your ability to make.
He put together longer term contracts or at least more stable contract.
Period to period.
Yeah, Jimmy you want to cover that.
Sure Good morning, Chris.
So you would we would expect that Q4, the all in charter would be.
Less than than we experienced in Q3, I think we predicted we'd run about 25% to 30% of what we experienced in Q2, which is which is about bang on what we what we actually achieved I think it's realistic to expect less than that in Q4 for a couple of reasons. One the demand has has lessened a little bit although.
Although the capacity has tightened up and rates.
Yields and rates are going up in Q4, just because of the seasonality in demand, but also because we need our aircrafts to meet the demands of both of our domestic business into peak season.
Volume growth demands if we're gonna have there as well as on do you see my business customers like DHL also experienced peak sales.
Seasonality and they're gonna have requirements for additional block hours flown during during the quarter, which is going to prevent us we've always even in normal years, we've always.
Hi, I'm restricted the amount of aircraft and crew availability, we have for AD hoc charters during the quarter, because we know that we're going to need those crews and we're going to need those aircrafts to meet the [noise].
I think if you see it might demand so I think you'll see a slight drop but not in Q4 in 2021, I think there's going to continue to be so significant oh demand.
Demand for international all in charters, not just because of pp obviously there's.
So the whole question about vaccines and and no second second reserves for certain [laughter] dynamic driving more P.P., but.
But certainly we continued lack of belly capacity from mobile passenger carriers is going to present it to you.
The present significant opportunities for charter for us in 2021, and I believe 2022 as well.
Okay. That's helpful. And then my other question is just really around you know capital our capital structure you.
Really a tremendous job of de leveraging through the year and you know what a lot of weight you've kind of hit.
What we thought was going to be a tough target to get to at about 2.1 times net debt to EBITDA.
How do we think about capital deployment from this point forward I mean, it does sound like you know I think John alluded to you know capital spending for a couple of aircraft and and just maybe some spare spare engines as we go through but you know how do we think about things like dividends or share buybacks or anything like that.
Well certainly Ah you know, we have not considered and looked at the share buyback at this stage certainly because obviously the price and also secondly, you know were priorities it means to keep the debt.
As little as possible lock in period and.
I would like to be that in the next five to seven years, we've relatively debt free so that when we are quoting on a you know some of the major contracts that come come come up that we remain competitive and a debt free company can certainly be outbid at now.
You know we any of the other competitive threat. So that's why it's very important to you know reduce that leverage you're talking about 2.1 and that said were key.
Area. So any time, we have met with institutional investors everybody has given us an indication that priority.
You know, it's not they would be more happy to see us retire debt and and get ready for the next round of bidding and Arctic piece that would come out in general rather than you know a few cents increase in dividend. We continue to run through your increase over dividends, which we have been doing.
But certainly we have not Uh huh.
Sit or a big dividend payout because as I said the demand for.
Aircraft and the demand for resources are up so we are going out and investing in that area and secondly, whatever is left over we want to concentrate on that so.
Dividends, although it's an important part of any kind of investment, but I think we'll see a lot of that [laughter] as the debt for tires, Okay and do you have any maturities coming due I know I appreciate you've got the revolver that you can just pay down debt do you have any other maturities or other you know either sales purchase.
Of leased aircraft or anything else that you could maybe be thinking about deploying capital in 21 Uh huh.
Hi, John.
Yeah, Chris I think Weve mentioned in previous calls we do have a number of finance leases that will be a coming to the end of their term. So over the next 18 to 24 months well be paying out all of our finance.
With the idea of just keeping those aircraft in the fleet.
Oh, yes, yes, I mean basically it was just a form it's a it's a lease with a buyout option, which we've feel were playing to exercise. So I think those buyouts or about $100 million Canadian roughly over the next 18 to 24 months [noise].
All right. Thank you folks good quarter.
Great. Thanks, Chris.
Thank you and our next question comes from Dan Cameron Doerksen with National Bank Financial. Please go ahead.
Yeah. Thanks, good morning I.
I guess really just a I guess, a clarification question or just to confirm.
I think you mentioned that you were looking to potentially add are you looking to add to three feedstock aircraft in Q4, I'm just want to make sure that that is correct and that you would expect those to be converted by Q3 2021, assuming everything goes as you expect is that is that correct.
Yeah Yeah.
Cameron just in terms of the feedstock purchases in Q4, I think that's correct.
In terms of converge.
Converting those aircraft next year, yeah. There there is not a lot of US there are not a lot of slots available for conversion I'm. We're trying to secure a couple of and so I would expect at least one of those three would be converted and brought it to the operations by you know this time next year.
Okay. Okay. So maybe one more addition, and just to get an idea just on the Capex impact as we look ahead to 2021 whats.
What's the I guess the cost of conversion. These days I know the feedstock or I guess <unk> expenses, probably come down, but the conversion cost what is that about.
So all in for you know 670, 200 or 300, you're talking to 15 to 18 million U.S.
But but a lot of also has to do with the condition of the engines and whether you have to do an engine.
And then any anymore.
The conversion themselves you know Ah with heavy maintenance and aviation upgrades or you're looking at 15 to 17, so U.S. depending on the condition of the aircraft.
Okay, that's helpful and.
And I assume that the the aircraft that you're looking to add would all be seven six sevens that correct yes.
Yes.
Right. So once I get there.
Okay and you know you've been asked this question in the past, but just wondering your updated thoughts on it just as far as additional fleet types, especially if you're thinking about going out and pursuing some additional international kind of charter work. It does it does it maybe start to make sense to get a longer range aircraft into the fleet.
Certainly you know I mean I to fiscal 17, if I had them today they would be a great addition, and we can pull them and every other direction.
The triple Sevens are extremely expensive because they're only factory, but look like now as they stand a there was no conversion a sub license or asking for EMS, yet converted those aircraft, although Boeing has announced that Israeli aircraft industries do.
Converting them in about three year timeframe. There are a number of other private companies that are trying to get that license as well to convert that so we even with the speed it up or we don't see the first aircraft coming out for at least three years and I think.
You know that would be a perfect timing for us.
Consider you know, replacing or at least let's say at least 27672 hundreds are phasing out seven five sevens and seven.
Seven five sevens once they are phased out they will be replaced by 767 200, and then 7673 hundreds with a typical seven so yes that is definitely a some of the considerations and meetings, we've had and we continue to keep an eye on a as a lot of triple Sevens at park suites.
It is not an issue today.
That.
The conversions are not there at the time by Boeing or any of the license cuts by the Boeing company. So.
We continue to monitor that situation and I think the conversion might even be speeded up since Ah.
As a lot of feed stock out there.
[noise] right. Okay. No. That's very helpful that was all for me thanks very much.
Thank you and our next question comes from a lot of young with BMO capital markets. Please go ahead.
Thank you can make lying I.
I just had a question about that.
So you are you at that type of market strength, allowing.
Oh, gosh, let hold and how do you ensure that white cap.
I don't have any longer term.
While ensuring these parents to market and minimize.
Well look I mean, you know, it's a free market that people are going to enter the market because I think it's way too creative you know obviously they will just keep in mind, what we built it took US 20 years to build this organization you know there is a lot goes on because I'm not.
So it is a developing you know or programs that you are continuously cleaning hiring people you know you have.
Ground support equipment that and operators you have.
The maintenance team because we have a strong maintenance team of 200 engineers.
Classically be sort of 15 cities every night, you know if somebody wants to fly into the domestic market and offer it looks it caught on Vancouver, or Hamilton, Vancouver service and back or pull in the Calgary in between that still need to service.
A major savings in Canada. So you know we welcome any competition really not again competition I think competition keeps everybody healthy, but I think the aggregate culture.
I'll touch that.
You know, we treat our customers who treat our employees to greet ore suppliers as well to ensure that we never feel that you know.
But yes, we do have a major market share.
Off or the overnight business, but we are not free of any competitive issues. At this time, we certainly have competition.
And although.
Although we can't stop.
But he from entering the market, but on the other hand, we do not give an opportunity in terms of service pricing or culture or hobby handled things.
For people, who are you know compete with us as well so.
It's really in our hands at the end of the day asking how we are handling them are sold in the marketplace.
I mean clearly that's what this is all off of very bad service that previous 15 airline said for why did from 1985.
Thousands. So you know there was 14 of them, but right the business undercapitalized.
No commitment to service and you know that's why the coverage that was born and Cogs <unk> told me realizes that's why those caring is never survive. So you know we have agreed.
Our access to capital, we get very little capitalize anybody who's starting.
New business like this has to look at a at least 600.
$800 million worth of investment in this business today so.
So.
Plus hiring a whole bunch of people. So it is although for a big company to put in a billion dollars, it's not difficult, but also making sure that you know the stuff gets handled on a priority bases and services provided.
It's certainly you're telling in this country, especially this country's one way as well because a lot of product moving from east to west and.
Saturday's Ah, but hardly anything comes back and balancing those act on a daily basis is also a telling for any anyone could.
[noise]. Thank you and just one last question actually on service now trending.
Yeah. So over a ontime performance has not gone below 98, and a half or sad. So these are the carrier controllable delays I mean, taking the weather and.
Are there other on not on non uncontrollable delays out.
We are already.
You know this year really willing certainly over 98, and a half or sand and.
We are one of the best maintenance and dispatch reliability not be bad we had not one of the best way to get the best when it comes to 767 and seven five sevens According to Boeing statistics.
[noise] [noise], okay. Thank you so much.
Yeah. Thanks.
Thank you and our next question comes from Doug Taylor with Canaccord Genuity. Please go ahead.
Thank you good morning, and thanks for squeezing me in.
I'm I'm curious given everything that you just said about the competitive dynamics you know your your track record the amount of capital required why do you think that you know, reducing your leverage to zero or near zero net debt.
Isn't necessary.
You know a milestone to hit to eliminate or reduce the threat of competition and who you think that competition would potentially be when you do get around to that point, where you're renewing these kind of foundational contracts.
Well look first of all Oh, we don't know competition can come from anywhere right. So we're not sure where the competition is going to come from we don't know if any at this stage wide. The debt reduction is necessary because you know our whole model was built on buying and owning the aircraft and pay them off and seven.
Eight years, and we certainly and this is one of our philosophy is that when the renewal time comes in five to seven years. You know, we do want to share some of that you know about free cash flow and I'm not saying that you know we've been out we want to give it away, but certainly.
The customers that have helped us be off the bat customers that have stuck with us customers that have given us loyalty and customers that have helped reduce our debt.
Deserve a you know when do they knew their contract and we have paid off the debt. So we have extra cash.
That goes to work certainly shareholders and dividends, but some of it could go back to the customers and that's the philosophy that I've always believed in sharing with other customers.
And that's what differentiates us from from a lot of other companies.
That might not find it necessary that they have to share with customers, but that's what is the difference between Haas and and a lot of other companies out there [noise].
Okay. That's helpful.
Just a couple of questions here on the charter business, you've given some color as to the the linear or do you see that business go into Q4 and into next year I. Just just to help me understand I mean, how much of that that extra business right now is still.
P. P E government type business as opposed to I guess I'd say other commercial charter business is not necessarily tied directly to.
Pandemic provisioning and there's more tied to regular commercial business, just trying to find a different way of getting overseas.
Yeah, I didn't mean, it would take them.
Yeah. Good morning, Doug, it's probably the best way to look at it is that you did see a p., we sort of restricted to weekends going forward into Q4, just because of availability of aircraft. So you're probably looking at their depending on demand maximum wants to two flights per week. So call. It you know eight to 10 flights.
[noise] at the most for month going forward.
And I would say less than I did want to December because as I noted earlier, we significantly reduce our AD hoc chunk or.
Availability during the month of December and particularly this year with what we expect to be record domestic volumes were going to need the aircraft and crews pretty much somebody's beep.
[noise] and has your visibility on charter demand profile improved I mean, you typically it was only a couple of weeks. So you'd have request for charter I mean has people attempted to go out there and book.
Adhoc charters further out into the future, which gives you that competence and you know starting into next year and things like that.
No not on the AD hoc side, it's typically a fairly short window in terms of bookings.
Finally, we're seeing as I noted before you know coming into November and you know towards the middle of Q4, we're seeing a significant increase in pricing for AD hoc charters and you see that on a internationally pricing levels are going up because capacity is being reduced demand is still there might be a little less than it was certainly less than it was in Q2.
On the fee side, but.
But certainly with Jim no passion or virtually no global passenger international flights by providing a belly cargo capacity and going into the traditional peak season <unk> for international cargo not just for domestic cargo demand is being squeezed pretty soon therefore is going up.
And just to add to that would you ask there was a lot of request for future booking do we honestly. We have received a lot of request for January February March four charters and charter pricing and availability in Boston.
Possibility of contract or we believe that's basically to do people are protecting their position as you probably have read that.
And on the World 8000 cargo flights or would be needed.
ER for the transportation of vaccine and vaccine related Ah Ah equipment back would be needed Ah. So a lot of countries have asked and availability and come over here now for goosey for Yaron Custard and I'm doing a deal for a whole year.
But Doug or philosophy is that you know being a Canadian cargo airline over priorities could look after the Canadian tourist.
And and that's why we are holding out to make sure that you know Canadians needs are met before we oh for a lift of other countries [noise].
Well as a Canadian I got to say I appreciate that thanks for answering my questions.
Okay.
[noise]. Thank you and our next question comes from Amman shops with B Securities. Please go ahead.
Hi, Good morning, guys. Congrats on the significant quarter just quickly on the charter side to side and you just mentioned customers are starting to discuss longer term contracts.
What I.
Any terms that came out of that in terms of what it did discuss sales.
Oh in terms of commitments and that ability to back out like what do you. What are your senses that they're just like to lock themselves and then that they don't need the capacity. This sector itself to back out just a little bit more color on the terms that are being discussed.
I'd walk in further gastar basically pre buying certain number of flying hours or whether you know whether the flights will be to Europe, whether they will be the way here, whether they'll be to Mexico, and whether there will be to U.S. or UK, you know nobody knows where the vaccines are going to be coming out of at this stage. So everybody's kind of as you can see the government is Bob.
Vaccines from four or five different suppliers from various parts of the region. So everybody's kind of spreading or at least a taking a position, but you can't put all your eggs in one basket. So similarly people have inquired about the charters people have offered US Congress people have offered to buy ours.
And you know so they would they would commit to a certain number of hours in a year or six month.
Again, nothing has been formalized nothing has been sort of discuss because we have not sorta seriously and we have listen, but we have not gone into the nitty gritty or discussed with any of the let's say American carriers are Europeans, who are looking for cargo lift and the reason part together explain although.
You know the Canadian government has started some discussions with with.
Various parties about shipping a vaccine there's nothing finalized but as you don't want that since you know we are a Canadian company and we are we going to keep a lot of capacity available Canadians and the Canadian government and Canadian people. So we haven't gotten into it.
Nitty gritty of the contract but basically.
You know as happened in <unk>, we were offered a lot more money by other foreign governments today would flights into their countries for the charters and we didnt take that opportunity because this country really needed to be so you know we took we could have had better margins had we taken.
More American flights are more European flights at that time, but we decided no Canada. There were priority. This is a real base.
This is what you know kinda Canadians dependent on and we did not.
Go for the short.
Short term a huge increases.
But we were being offered so I think similar thing we can see similar trends developing in vaccine it sounds.
Oh, that's great and just one follow up on the charter for me in normal seasonal let's say Q1 Q2 like similar to Q3 going forward.
In light of the current network are designed to do you guys have what how should we think about the maximum theoretical revenue generation on the charter business is Q2 of this year achievable again, given what are your latest cardiolite no or what would be kind of a nice number to use for if you're able to.
Utilize audits for this.
This year, certainly a unique year because.
Every government and including over government was caught with no P.B. So the pricing was never an object I think there is a lot more planning going on for next year people know what the shortfalls are people know how much capacity you did a they're slightly more competition on that so I think that we will not see the craziness that went.
On a this year because nobody was expecting a pandemic.
I wouldn't say that everybody and every government is 100% prepared but at least it 60% to 70% prepared a you know with with what carriers to choose and you know what aircraft are deployed and.
More time to negotiate the deals are fuel prices lower so I think a lot more as a planned this year and I think the margins that we got on charters are in spite of that we took the lower margins are probably not something that are in my view a sustaining.
Well for a you know 2021, yeah, we will have pretty good margins, but as you know I remember talking to corner, you know somewhere settling between 2019 and 20 would be a good good way to sort of consider that a question.
That's great. That's it for me thanks for answering my questions.
Thank you.
Thank you we have no additional questions at this time.
[noise], Okay. Thank you Rick everybody everybody for joining and we look forward to having some caps of individuals or beyond the conference call and appreciate the support for everybody. Thank you.
[noise] soon this concludes today's call. Thank you all for your participation you may now disconnect.
[noise].