Q4 2022 Cargojet Inc Earnings Call
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Speaker 3: Ladies and gentlemen, welcome to the Cargo Jet Conference call.
Speaker 3: I would now like to turn the meaning over to Ms. Pauline Dylan. Please go ahead Ms. Dylan.
Speaker 4: Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. With me on the call today are Ajay Vermani, our President and Chief Executive Officer, Jamie Porteous, our Chief Strategy Officer, Scott Calver, our Chief Financial Officer, and Stanji Mani, our Vice President of Finance.
Speaker 4: After opening remarks about the quarter, we will open the call for questions.
Speaker 4: I would like to point out that certain statements made on this call, such as those relating to our forecasted revenues, costs and strategic plans are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earnings for share and return on invested capital.
Speaker 4: Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliation of non-GAAP measures to GAAP income. I'll now turn over the call to AJ.
Speaker 5: Thank you, Pauline. Good morning, everyone, and thank you for joining us over the fourth quarter earnings call.
Speaker 5: I want to begin by sharing a few thoughts on the economic climate.
Speaker 5: Although the central bank started to raise interest rates last March, the impact on consumer behavior is just beginning to be found.
Speaker 5: the central bank started to raise interest rates last March. The impact on consumer behavior is just beginning to be found. We saw this in our December peak period.
Speaker 5: which was slower than last year. We expect the consumer to remain cautious and retail sales to remain subdued in the near future.
Speaker 5: However, I want to put cargo jets last three years in context. Our adjusted EBITDA for the year ending 2019 was $156 million and we ended 22 with EBITDA of $330 million.
Speaker 5: This is an increase of 111% over three years.
Speaker 5: There is a perception that all of the growth was COVID driven.
Speaker 5: Let me remind you that these
Speaker 5: three years, we have brought in a major strategic partner, DHL, and diversified our business into ACMI as a strong pillar. This new revenue improves the mix between our flagship domestic business versus the lines of...
Speaker 5: brought in a major strategic partner DHL and diversified our business into ACMI as a strong pillar. This new revenue improves the mix between our flagship domestic business versus the lines of business.
Speaker 5: charter, although cyclical continues to be an important part of the process.
Speaker 5: important and opportunist business that helps us utilize our assets when they're not supporting our domestic overnight network.
Speaker 5: We have also been prudent in managing cash flow and capital expenditures.
Speaker 5: Given the nature of our business, we have always structured our capital expenditures and their plans with flexibility and optionality.
Speaker 5: with the changing economic conditions at the present time. We are exercising that very flexibility.
Speaker 5: by deferring capital expenditures previously announced by approximately $400 million.
Speaker 5: This will involve, the major portion of this will involve
Speaker 5: not two, but four triple sevens. So we will have a reduction of four triple sevens from the eight. Scott will have further comments on.
Speaker 5: this particular matter.
Speaker 5: I also want to highlight that while we have done that, we have maintained our flexibility with MROs.
Speaker 5: for conversion slots which are premium and we will hold on to that and defer them by 12 to 18 months or two years if we need to, to see the economic climate, what kind of conversions it would want.
Speaker 5: Scott will provide more color on this, as I mentioned. As an entrepreneurial company, we have always been focused on cost management. As the pandemic hit, we were focused on meeting the demand and deployed resources and added cost to successfully manage the opportunity.
Speaker 5: At that time, our simple principle was we need to handle the volume which was overflowing and it had to be done at any cost.
Speaker 5: Now we find ourselves dealing with a different set of economic environments and have shifted back to our...
Speaker 5: basic routine of focusing on every dollar we spend.
Speaker 5: Every dollar we are spending is under review.
Speaker 5: As such, we have several initiatives underway that will reduce costs and allow us to remain focused on our goal of maintaining historical margins. We are also focused on the right sizing of our network, our fleet, and our human resources to match the demand out there.
Speaker 5: At a macro level, e-commerce has not become...
Speaker 5: It has now become part of normal consumer behavior. A lot of more essential goods are being ordered online versus selective online buying occurred prior to COVID. The job market continues to be resilient and inflation is starting to show some signs of it.
Speaker 5: It also worth noting that our business is underrated by some of the world's largest logistics brands such as PureLayer, Cannapose, UPS, Amazon, DHL, TFI, International, Ant-Lover, Health Group.
Speaker 5: There's an old saying, you're as good as the company you keep. These are resilient businesses and will continue to be the backbone of our global trade and commerce.
Speaker 5: In the fourth quarter, we announced the renewal of UPS contract in mid-January. We announced the Canada Post and PiroLator contract extension in January as well.
Speaker 5: These contracts are long-term. They were not.
Speaker 5: They were expiring in March 2025, but having heard of our investment partners, we purposely
Speaker 5: extended these contracts to 2029 and 2031, locking up these customers and ensuring that there's no competitive impact on our business.
Speaker 5: This also solidifies Cargill's leadership position in the Canadian overnight air cargo market. We have now extended all of our
Speaker 5: solidifies cargo gets leadership position in the Canadian overnight air cargo market. We have now extended all of our strategic customers.
Speaker 5: We have managed two down cycles before when Carbudet was a much smaller organization. There are limited options to manage costs. Today Carbudet is much larger.
Speaker 5: much more optionality in managing the economic cycle.
Speaker 5: You may recall we started to prepare for this cycle back in January 2021 when we solidified over liquidity and over balance sheet by raising $365 million in equity.
Speaker 5: We remain confident in our long-term growth strategy and expect to resume our capital expenditures and growth initiatives as we come out of the economic cycle.
Speaker 5: Just as our team demonstrated resilience in managing rapid growth driven by pandemic, we are equally capable of managing the down cycle with similar regular and discipline.
Speaker 5: One of the biggest lessons we have always learned in our business is, it's never as rosy as it seems and it's never as gloomy as it appears.
Speaker 5: Therefore, we will stay focused on our long-term mission of creating shareholder value and managing our short-term volatility.
Speaker 5: I will now pass on the call to our CFO , Scott Caliver, for an update on business. Thank you.
Speaker 5: I will now pass on the call to our CFO , Scott Caliver, for an update on business. Thank you. Thank you, AJ, and good morning, everyone.
Speaker 6: I will focus my remarks today on three topics. First, our results.
Speaker 6: Cargojet posted yet another strong quarter with a 13.2% increase in our revenue. Our diversification strategy is paying dividends as demonstrated by the strong growth in our ACMI business, while our domestic business started to see some weakness late in the fourth quarter.
Speaker 6: The software margins in Q4 compared to last year reflect our deliberate decision to not disrupt peak operations that are crucial for our customers. There are a number of pandemic-era extra costs that need to come out of the business, and we have embarked on a careful plan to streamline all cost-line items across the business. Towards the end of November and throughout December ,
Speaker 6: Cargojet and our customers experienced volumes that were lower than anticipated. The recently released economic data clearly shows a decline in consumer spending as the month of December progressed.
Speaker 6: After consultation with our strategic customers, the consensus was to consider December slow-down as the beginning of a trend.
Speaker 6: A trend that ultimately could be a recession with reduced customer spending.
Speaker 6: In December , management pivoted to a discipline focused on cost management per block hour and to further strengthen our balance sheet.
Speaker 6: Which brings me to my second topic, our balance sheet. We are paying equally strong attention to keeping a strong balance sheet as we have made several decisions to temporarily bring down our overall cap expand by $320 million to $400 million as Ajay mentioned compared to what we shared with you at our investor day last September .
Speaker 6: As part of our previously stated diversification and growth strategy, Cargojet undertook to add Boeing 777 long-range fuel-efficient aircraft to our fleet to expand international reach, strategically enhance our domestic network, and to broaden capability for long-range charters. This aircraft allows Cargojet to selectively add international routes that are more than a hundred feet long.
Speaker 6: The four aircraft embarked for DHL will continue conversion, but recent forecasts for the slowing
Speaker 6: global economy.
Speaker 6: We'll curtail our capital expenditure and defer taking delivery of the final four 777 freighters as previously announced.
Speaker 6: while maintaining full access to our conversion delivery slots. Arrangements with our MRO partners give us flexibility to maintain access to these valuable wide-body aircraft conversion slots, while at the same time better timing our capital commitments considering the global recessionary risk.
Speaker 6: The feedstock market for 777s is expected to remain strong, allowing Cargojet to initially divest feedstock of two 777s, freeing up cash to be used to pay down debt, while retaining optionality on conversion slots for the 2024-2026.
Speaker 6: should the economic climate turn positive earlier than expected. So to summarize, the first four 777s for DHL are still planned.
Speaker 6: The four that are designated for general growth, we did not buy feedstock for the fifth unit, so that's deferred. The six and seven units are related to the LOI as previously noted, and the eighth unit will be deferred as previously discussed on the last results call, and this feedstock may be sold as well.
Speaker 6: The impact of the $320 million to $400 million deferral to our 2023 growth cap expense will be a net reduction of approximately $100 million to $125 million and it could be slightly higher if we sell that last feedstock. The remainder of this deferral will impact mostly 2024 if required.
Speaker 6: The third topic, the resilience of our business model.
Speaker 6: As AJ mentioned in mid-January, we announced the Canada Post and Pure Later contract extension. This contract was to expire March 2025. The agreement was extended to September 30, 2029 with an option to extend to September 30, 2031.
Speaker 6: This early extension solidified cargo jets leadership position in the Canadian overnight market. We have now extended the contracts for all of our strategic customers. These contracts were extended well before their contractual termination date, and they extend out to 2027 and beyond.
Speaker 6: These are solid examples of our value proposition. During peak COVID, the demand of air cargo led to Canadian passenger airlines entering the air cargo market with the launch of their own dedicated freighters.
Speaker 6: As demonstrated with our 100% customer retention rate, our business model has once again passed the competitive stress test of our customers evaluating their options and renewing long-term contracts with Cargojet.
Speaker 6: All domestic and ACMI contracts contain minimum volume guarantees. These provide further support to cargo jet during softer economic cycles.
Speaker 6: In conclusion, we have rapidly responded to manage the business during this down cycle. We have taken rapid steps to preserve margins, profitability, and to maintain a strong balance sheet. We have a strong team that can execute our cost control initiatives, and we look forward to updating you on our progress and coming quarters.
Speaker 6: This concludes our opening remarks and we will now open up the call to questions.
Speaker 3: Thank you. We will now take the questions from the telephone lines.
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Please press star one at this time if you have a question. There will be a brief pause on the participant register for questions. Thank you for your patience. The first question is from Karnark, Gupta from Scotia Bank. Please go ahead. Your line is now open.
Thank you, Avinash. Good morning, everyone. Good morning. Good morning, Aijit. So my first question is on the ACMI. Given the DHL ramp-up that's been going on, what was primarily the driver for the revenue decline in Q4 versus Q3 sequentially? And would you expect this Q4 ACMI revenue run rate to continue in 2023?
fell globally from the softness that we saw here domestically and globally rearranged some flying as an example. For most of the year, we were flying two aircraft on routes from Cincinnati to Vancouver to Shanghai and when there was softness in that market in the fourth quarter, those aircraft were redeployed to New Route to Central and South America.
in that reduction in block hours, still well above the minimum number of block hours per month, but lower than what it would have been comparatively to the previous quarter. In terms of 2023, we'll continue to see strong growth on the overall ACM I-BID in 23, a combination of the result of the annualized benefit of the three new routes that we started at different points.
on capex for 2023 was 320 to 370 million dollar with the fleet changes you announced this morning which included I think two triple seven sales as well as I think deferral of some slots or conversion. Where does the capex go from that guidance for 2023?
Yeah, it's Scott here. I'll take that one. It's going to reduce by in a range of 100 to 125 million. Now, as Ajay mentioned, we do have optionality to sell that feedstock for that 8, 777. So, it could even be expanded off that range. But currently, right now, we're planning in that range of 100 to 125 million.
Okay, and then last one for me, you know, with the kind of macro environment that you guys are seeing here and clearly you called out the peak season being softer than expected could could be a trend. But the ACMI growing in 23 domestic, you know, maybe softer than maybe initially thought.
Would you still expect 2023 to be a growth year from both revenue and EBITDA standpoint, given the commentary in the MDNA that the margins are likely to be stable?
So, Konark, yes, we expect the 2023 growth to be a growth year, but certainly not a double-digit growth year. We expect the 2023 growth to be a growth year, but certainly not a double-digit growth year.
We expect that it will continue to grow. That's what our customers are telling us. But it won't be like a hockey stick that we have seen in the past three years for sure. So it'll be in the mid single digits probably. That's what we're looking at on. And on the triple sevens, I also want to clarify that
just to make it clear that we had originally bought four 777s.
for non-DHL purposes. Out of those, we cancelled one agreement.
So then we had three feedstock already. Two have been sold out of that. One is in the process of selling. So we would.
That's where the major reduction of almost $400 million is going to come from 777 and its related costs.
When we say we are canceling it, we are canceling buying the feedstock or selling it, but we are maintaining the curve conversion slot, so we are still in the market should things improve.
Thanks for the color. Thanks. The next question is from Cameron Dirksen from National Bank Financial. Please go ahead and your line is now open.
Yeah, good morning. Thanks very much. Maybe just to go back on the CapEx question, you gave some good details around 2023. Just wondering if you've got kind of a new expectation, obviously there's some moving parts here, but I just wanted to have a new expectation for 2024 CapEx.
Okay, yeah, maybe if I just back up a little bit, because we'll just anchor with what we previously disclosed last year, where it was going to be approximately $1.1 billion. And when you see our Q4 results and what we spent in 2022, we spent just over $600 million and about $480 of that was growth capital.
So we already spent 480 of the 1.1 million in growth capital. So when you look at the deferral that we announced, and as Ajay said, it could be as high as 400 million.
Most of that will impact in 2024. Now, we don't know. We don't know if it's a six-month deferral, a 12-month deferral or an 18-month deferral. We're just really as nimble as possible here to have all optionality that if this recession doesn't happen or it starts to turn in Q3 of this year,
We're going to pivot right back to growth like what we demonstrated in 2020, 2021 and 2022. So to answer your question about 100 to 125 million in 2023 with the remainder mostly being in 2024 and again there is that optionality to expand from that 320 to 400 and that could even a lot of that could impact this current year as well if we saw that last feedstock.
for that 777. Okay, no that's clear. And Scott, maybe another question for you. Just to, you know, obviously you guys had, I guess what you would call excess costs in 2022, a lot of which are not going to repeat in 2023. Can you just maybe talk through, I guess, you know, some of the details there as to what you expect to see from a total
you do everything pretty much at any cost.
Now, you know that that's overstating it, but we ran very high costs for overtime and for training and to some extent for temporary employees. And when you look at training, it's kind of a double whammy here because the training was very, very expensive. If we remember earlier in the pandemic, the training was very minimal because we're hiring.
pilots that were already certified to fly 757s or 767s because they were laid off from passenger airlines. So that was a very different dynamic than what we experienced last year. So we went from being able to train pilots measured in days to training pilots measured in months. And when you're taking several months to train a pilot to be certified to fly 767 or 757 in the mid...
training and temporary employees. Then there are other things as well. I must add that when we saw the slowness, it wasn't in October and November as much as in December . We already had built schedules, network and everything getting ready for December . We did not...
see the volumes that we normally see in December . So the first signs of slowness were literally in December , and we're at the cost structure, the network was all built up, so it's very difficult to change everything on a day-to-day basis because you expect that okay.
the volumes don't show up on December 5th, but they might show up on the 6th or 7th. So you can't take the cost down that quickly. But on top of the cost that Scott is talking about, we are also now right-sizing the network. Keep in mind, we do have a fairly
flexibility to switch between 767s if we need to consolidate more cargo and also split certain routes into 757 for more operational efficiency. So that exercise is ongoing right now and we expect that within the first quarter we'll make tremendous adjustments in our costs.
training over time, right sizing the fleet, and basically freezing everything else that does not produce at all.
Okay, no, that's great color. Thanks very much.
Thank you. The next question is from David Ocampo from Carmark Securities.
Thanks, good morning everyone. Scott, maybe a quick clarification just to kick things off. On the margin commentary that it should hold flat, are you expecting...
margins to hold flat with the Q4 or the overall margin level that you guys experienced in 2022? Yeah, getting back to the 2022, just our historical type of IPDOT margin in that 30 to 34, 35%.
You guys provided some pretty good commentary on the CapEx assumptions there. What's the financial impact to the EBITDA line? Because you guys previously provided 2026 targets on EBITDA.
So we will push those out, right, Scott? Yeah, it's a deferral and we don't, again, we're just going to be able to pivot in either direction quickly. We don't know if it's a six month, 12 month or 18 month deferral, but we're going to, so really you're pushing those things out, I would say on average of about a year.
And if you look back to that long-term plan, 2026 was a pretty light year for CAPEX anyways. So it's almost just shifting 24 to 25, 25 to 26 just for round shifting. But we're still very, very committed to, we just can't emphasize enough what AJ was talking about there that we're retaining our conversion slots. That's what's most critical to this business is that we can get the feedstock quickly.
but we've still got our conversion slots so that we can go ahead as planned.
Right, so I guess your assumption is that you could still hit that $500 to $550 million if you did that, but it may not be 26, but 27 or 28.
Yeah, we didn't know there was going to be a global recession last summer and last September when we had that investor day, otherwise we probably would have been less bullish on the 2023. But our key thing was that we still believe in a good business case for us expanding, but only if the market.
sort of create that opportunity. And if it's not, you know, even when we built the business plan about a year ago, we knew that if there is an issue, we can get rid of some of these costs in airplanes.
very, very quickly, and which we did while maintaining that we are in the game, but we don't have the cost associated to being in the game.
Got it. And then maybe just as a final one, when you think about your infrastructure investments for the triple sevens, like new hangers and whatever other infrastructure related investments you have to make.
With the deferral of the 777s, can you still hit your return on invested capital targets with less scale?
So we will have some deferrals on hangers that we wanted to build for it, and tooling and training, so that's all been deferred. And also keep in mind that one of the things we're looking at is if we do build the hanger for 777, it will be able to take 2767.
7th and if let's say for example we don't need it for for 7th and we can put 7th and 7th in it for our heavy checks so those would not go waste so hangers is a good we are short of hangers now even for over 7th and 7th so
Most likely the hangers will go ahead, but it's not going to be just a 777 hanger. It's going to be a hanger for, keep in mind, we're operating almost 40 aircraft now. So we only have two hangers in Hamilton, so we could use two hangers somewhere else. Okay, that's it for me. Thanks a lot, guys. Thank you.
The next question is from Kevin Chang from CIBC. Please go ahead. Your line is now open. Morning Kevin. Good morning everybody. Thank you for taking my question. Maybe to start off with, a lot of good details on some of the...
moving parts on the employee expense line, and then talk about the OT, the training, and the use of temporary employees. But if I look at, maybe just crew costs as a percentage of revenue extra charge, you're tracking around 12, 12 plus percent in 2022.
is structurally higher here as a percentage of revenue, just given the growth profile that's been accompanied over the past couple of years here.
Thanks, Kevin. That's exactly what we did during planning season as we benchmarked back to 2019 because that's when our primary focus was cost controls and just before that massive growth where we doubled the size of the company in a short period of time. So yeah, that's exactly the plan here. Obviously, there's been some inflation since then, but with critical mass, with the size, with the new simulator and Hamilton to reduce training, we've been
All this stuff is going to get us back to our roots where we've always said it. I think on every call I've been on with Jamie, he talks about how we manage our cost per block hour, we manage everything to the minute. That's exactly what we're describing here, is really getting back to our roots and what we demonstrated in all those years leading up to 2019.
And Kevin, let me add something more to it that one thing that changed in 2020 was the duty regulations by Transport Canada. So that part of it, you know, we wouldn't be able to overcome because that's what the government is and the duty regulations are.
However, we have our own SIM now, which saves us travel days, training outside, hotels, airfares, all that. So we're trying to find how do we make up for those extra costs for the duty regs, and we are constantly focused on that. So our training costs will come down.
Our other costs will come down and we want to get closer to the 2019 levels, but one thing that we will not be able to do is there will be some costs that won't be able to be able to cut, which is the new due to the regulation. So we are trying to offset with other types of savings.
That's a great reminder and great additional color. Maybe just more of a housekeeping question, again, just on the employee expense line or the employee line. The headcount number was up. That's a great reminder and great additional color.
pretty significantly sequentially from Q4 versus Q3. And just when you report the head count number, would that include temporary employees, some of that variable labor you might be able to pull on or is that just full-time employees? And if it is the form, are you able to quantify how many?
temporary employees you would have used during peak season of Q4 or 2022? Yeah, that excludes our temporary employees, but what you saw there was some flexing up for peak with part-time employees. So there's a little bit of noise there in terms of they're not exactly a full-time equivalent.
Okay, that's helpful. That's it for me. Thank you very much. Thank you. The next question is from Chris Marie from the ATB Capital Markets. Please go ahead. Your line is not open. Yes, thanks folks. Maybe turn it back to some of the newer contract wins with Canada Post.
Just, you know, if you go back a couple of calls, we had talked a little bit about, you know, maybe having to adjust pricing or anything like that. Can you walk us through, you know, how the structure of those contracts look and if there were any major changes from how they were designed the last time you signed them? You know, some of that information, Chris, you can appreciate our confidence.
changed a lot. Our financial profile has changed somewhat as well. I think we want our customers to grow. One thing I can tell you is that there are enough growth incentives for the customers to take advantage of the unused space and grow in those areas.
So that would be the basic difference that I'm able to tell you or share with you is that we have created some value-added features in our customer contract that some of the growth could be at a lesser of a price for them to go.
sell areas that they normally don't look at. So for example, there might not be stuff being sold from Winnipeg to Vancouver, for example. So they've never looked at it as, they would always be selling Hamilton Vancouver.
So we have said, look, we have some space from there, and why don't you go look in the market and see if we can get more business. So some of the, so you might say, okay, are you getting a discounted growth? Yes, you're getting a discounted growth, but that's coming in areas that are not being used. So...
Overall, it'll be net positive. So those are some of the things that we have offered our customers some incentive to go out and develop more business on areas that we could use as filler space as well. Okay, that's helpful. And then just thinking about the fleet, if I kind of compare the Q3 fleet plan to Q4.
if you need to, so if we do get some softness. And with the 6.7s in the domestic market then, would they just turn into maintenance spares or is the plan still to find something profitable or to do with those even in this climate? So Chris, one of the things we never had the luxury in the past.
a spare of each kind to maintain our service levels.
Also, it also gives us the maintenance pair for when the planes go into sea jacks, but also the flexibility of monitoring our network on a daily basis, almost that if you only have 80,000 pounds going to one station, we can put the 757 on and save a lot of operating costs.
rather than putting a 767 on. Similarly, if the volumes are more one day, we can switch it to a 767. So a combination of that strategy will help our overall cost structure to be better, but also keep in mind that, you know, with the growth we saw,
In the past couple of years, especially even in the domestic market, we were very focused on in terms of having the right number of aircraft flying for our network and leaving us at 757s and 767s for charter work. So there is a lot of opportunity for those.
So yes, we did buy some extra 757s, but most of them are doing the network or acting as pairs. So our domestic fleet is fully pretty well deployed except two 767s, which we feel, you know, one of them is being leased now by our partner in the US.
21 Air because they needed that aircraft. So we had the flexibility to place one over a 767-300 there. And I think we are also in discussions with many other clients to place the next one. So there is a couple of spare aircraft that we have more than what we need, but we are confident that those particular aircraft will be placed in the next coming months.
Okay, that's helpful. Thank you. Thank you. The next question is from Walter Spraglin from RBC. Please go ahead. Your line is now open.hh
Hi everyone and good morning. This is James McGarigal. I'm on for Walter this morning. Okay. Good morning James. Good morning. I just have a quick housekeeping question not to start on the fleet expansion. I know you spoke to the 777s earlier on the call, but I just want to clarify that right now the only planes that are not contracted with DHL is the DHL.
three 767s and that you have the option to cancel two of those. Do I have that correct? Yes. Perfect, perfect. And I know my other question was on DHL. I know they announced an increase to the South American investment and that cargo jet got a new route from that as well so congrats on that.
So it seems like DHL is investing heavily for future growth despite some immediate term volume headwinds. So is this kind of consistent with what you're seeing from your other large customers and how are they talking to you about their capacity needs longer term and are they still bullish on the ecommerce outlook into 24?
In 25, just to give some of the recent headwinds we're seeing.
So let's take the e-commerce element first. Yes, the e-commerce people are bullish, but as I had mentioned in the call earlier, they're not bullish with hockey stick growth. They're more looking at, you know, anywhere between 5 and 10% type of growth going forward. That's what our customers tell us.
That's number one. Number two is DHL investing in spite of all the rhetoric out there about recession and everything. Let me say this to you. So DHL or any international carrier, whether it's UPS, FedEx, their business is not going to be the same.
And again, I don't get into the business from what I can see and what I can tell and what I've been told is the biggest issue or driver for them has been the China business. So if everybody's down 37 to 44 percent on the China lane because of China's no COVID policy, the factories were closed.
the trade relationships have been bad. So that has been the major problem for all companies like DHL is the China business.
Europe remains strong, Mexico and South America remains strong. And if China does not improve, obviously it's a problem globally that everybody would face. I'm sure you have seen articles come out in various publications about empty ships and empty planes.
now. Glove businesses moving from China to Vietnam. You know robes are being made in Thailand now. So there is a lot of shift of industrial stuff that was made in China to reduce the dependence on China to other countries.
So, when these things start functioning well, it will take some time to adjust, but it will settle down that China will maintain some, but they would certainly lose some shipping to other countries. So, that is the major culprit in this whole exercise as far as the shipping is concerned. It is not.
global phenomena. Yes, people bought less in December on e-commerce because people were too busy spending their disposable income on travel because that's where you saw the big money was being sent or restaurants or resorts because people were locked up for three years.
commerce side of it, it will come back up as far as the ECMI side of the trade is concerned. Yes, until the China things improve, it will be a bit lower. But as I said, alternate markets are coming up and they will be shipping, if not from China, from somewhere else.
I appreciate the call or no I'll turn the line over thank you. Thanks James. Thank you. The next question is from Tim James from TD Securities. Please go ahead and your line is now open.
Morning, Tim. Good morning, everyone. Thank you very much for the time. My first question, I just want to look at the return on invested capital. I'm wondering if you can talk about how you see that trending in 2023 and then maybe in the two or three year period beyond that relative to what you reported.
as our ACMI business will grow, our return should grow along with it. But it all depends on economic environment when that growth will happen, but we will be able to maintain this return on invested capital what we have reported in the current quarter.
So, between 13-16%.
Okay, thank you. My second question, thinking about the market environment going forward over the next couple of years, should we kind of view the general global environment when thinking about how likely you would be to...
use those conversion slots that you've maintained or could there be sort of unique opportunities that maybe go against the general headwinds that we see in the global air cargo market that maybe provide you with what you need to say, hey, let's go ahead and take up and use those conversion slots.
Let me put it to you, those conversion slots can also be sold, transferred and deferred. So we're not married to saying that we are going to use them. We'll use them only as we've always done, in this case we had eight of them coming.
777s and four were sort of committed and four were for our growth. So, you know, being sort of on a cautious side and maintaining flexibility, we were able to, you know, sell the four and maintain the slots. So, if we find that the market is not maturing, we will be able to
there's enough people lined up to get conversion slots because we have the early 24-25 conversion slots. So there's quite a bit of demand for those conversion slots. So we would be happy to either sell them if the market didn't mature or we could convert the plane and sell the plane or dry lease the plane or fly commercially or do an ACMI. So there's a lot of options.
And I think what we have seen in this market is, if I had these triple sevens in the COVID environment, 2021, 22, we would be looking at, you know, 500 million bucks a week a day. So in our organization, we don't want to lose the flexibility of ramping up with a very little cost associated with it. And that's the model we have created. Okay, that's helpful.
And then my final question, you've provided some good pieces of information on the DHL business and the opportunities there. I'm wondering if you can sort of reflect on their behavior, like in terms of roots and capacity and the supplier group that they have. You know, anything you've learned, now that we've seen kind of a turn or a weakening in demand, has there kind of used
agreement, five-year operating agreement with DHL which is unique. Nobody else has that type of ACMI agreement in the world. We obviously are the, if not number one, number one and number two in terms of on-time performance and reliability which has enabled DHL to enhance its service level to its customers around the world and of course we have a financial agreement with the warrant.
deal that we have. So there's an incentive for them to reach certain revenue milestones. And we've seen exactly what we had been articulating for the last couple of years. There were some changes in the ACMI DHL flying in 2022 that I alluded to earlier, where we switched some routes, or they switched some routes that we're operating for most of the year out of North America into Shanghai, China, when that demand dried up. Those routes were switched and we...
We kept the aircraft on other routes into Central and South America and in actuality, one of the routes we actually replaced an American carrier that was flying there. So that was what we anticipated and had articulated to the market that we would expect, and it's what we would continue to expect in 2023 and 24 as we go forward. Great. Thank you very much, Chairman.
Thank you. Once again, please press star one on your devices. Keep at it. If you have a question. The next question is from Steven Ensign from Raymond James. Please go ahead. He aligns on that open.
Good morning everyone, thank you for the time. I'm going to stay on the macro theme that Tim was touching on here a moment ago. I think as you suggested, the mainline carriers have been bringing on their own dedicated cargo aircraft of late, but you've been quite successful at extending all of your ACMI contracts with your key strategic partners here. So I'm just trying to wrestle between those two dynamics and hoping you could speak to some of the supply side dynamics. Thank you very much.
in terms of future capacity coming from those other carriers and whether that impacts your ability to deploy new aircraft or not at all. Thanks.
Yeah, I think just to clarify, you're specifically talking about other domestic cargo operators like Air Canada and WestJet. And if so, I mean on the WestJet hasn't even started operating for some 37s, there's still parts in Calgary. I think they've intended to or proposed an intended domestic schedule, which really doesn't match up.
and doesn't compete at all with our, from what we've seen, from our domestic overnight network, and really part of the reason that we extended and renewed the agreements with our major customers was to alleviate that competitive question that people had. In terms of our Canada, I mean, they're operating 7667s.
But as we've noted before, you know, the, the, and where we see those aircraft flying are primarily not primarily they're exclusively on international routes where our Canada cargo had strong belly cargo capacity and demands pre COVID where they continue to support those belly cargo historical belly cargo customers during COVID flying passenger aircraft without passenger and then those routes that had had.
cargo demand that they have. Again, those aren't markets that we compete in. We're very confident in obviously our domestic and our ACMI business and our capability of competing on a reliability level. We have a 20 year plus track record to stand on.
So it really is the demand environment that is critical in terms of the plein your aircraft going forward, not nothing to do with its supply side that you should.
Correct. Very helpful. Thank you. Thank you. The next question is from Fadi Shamoon from BMO Capital Markets. Please go ahead. Your line is now open. Hi, this is Michael Goldie on for Fadi. How is 2123 tracking so far both in the domestic...
It was somebody that you have a unique period for us. It was very strong in a co-bren November . And then we just saw after US Thanksgiving, some deterioration in demand that impacted us in December , which historically December is usually the heaviest month. I think that plateaued in December and what we've seen in January and February so far on the domestic side is a little bit flat, a little low digit as we commented earlier, low single digit year over year revenue growth. The AC My Business is still up because of the nature.
the charter market looking right now. I think you're able to get more than expected revenues there in the fourth quarter. Is that continuing into the new year or coming out of peak charter opportunities are a bit lighter now? No, demand for charter as remained very strong. We took advantage of the opportunity in Q4 because of the...
particularly in the month of December where again historically because of the peak season capacity demands for the domestic network and for the ACMI network we actually historically always embargo starters during the month of the latter part of November and December because we typically need those aircraft and crews to support the peak volume needs of our domestic and ACMI business. When we saw that softening
We freed up aircraft and crews and we took on additional charter business, ad hoc charter business in the month of November and December , significantly higher than the year than we would normally have in Q4. And we're seeing that trend continue into January and February . And we're going to take advantage of that opportunity by freeing up additional aircraft. As AJ said, we're bringing aircraft into the fleet to replace our peak, sorry, our
our operational sea check and hot spares, but we'll also designate aircraft and have more flexibility to designate aircraft that is dedicated to charters going this year. The demand is, at least for the first month and a half, has stayed very strong. Okay, perfect. Thank you very much, guys. I mean, keep in mind, in 2022, we had lots of, in January , February , we had a lot of PPE and China charters because people were running out of masks and others. Sorry.
So yeah, so you know, we don't have that kind of charters today where supplies for COVID are still being carried. So, you know, there would be some differential, but as the market generally goes for charters without the COVID impact, we're saying.
quite a few charges going on. Thank you. There are no further question registered at this time. I would like to turn back the meeting over to the moderators.
Thank you everyone. We appreciate you joining us for today's call. Have a good week.
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