Q2 2024 Cargojet Inc Earnings Call
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Speaker Change: All participants, please stand by. Your conference is about to begin. Good morning, ladies and gentlemen. Welcome to the Cargo Jet conference call.
Speaker Change: I would now like to turn the meeting over to Mr. Martin Herman, General Counsel and Corporate Secretary. Please go ahead, Mr. Herman.
Speaker Change: Good morning, everyone, and thank you for joining us today on this call.
Speaker Change: With us on the call today are Ajay Virmani, our Executive Chairman, Pauline Dhillon,
Speaker Change: Chief Executive Officer, Jamie Porteous, Co-Chief Executive Officer, Scott Calver, our Chief Financial Officer, and Sanjeev Mani, our Vice President of Finance.
Speaker Change: After opening remarks about the quarter, we will open the call for questions.
Speaker Change: I would like to point out that certain statements made on this call, such as those related to our forecasted revenues, costs, and strategic plans, are forward-looking within the meaning of applicable securities laws.
Speaker Change: This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earning per share, and return on invested capital.
Speaker Change: 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 measures. I will now turn the call over to Jamie.
Jim: Thank you, Marty. Good morning, everyone, and thank you for joining us on the call today.
Jim: Pauline and I will share a few thoughts on the macro environment and the factors affecting our business and general business outlook before we pass the call over to our CFO Scott to give you a bit more color on the financial drivers.
Jim: We are extremely pleased with our second quarter results, particularly in the context of a weak or at least uncertain transportation environment.
Speaker Change: We have a very talented team at Cargojet and results like these require a coordinated effort to execute against our strategy. And Pauline and I both want to thank each one of our team members.
Pauline: We have often talked about our entrepreneurial culture and how it differentiates us from the competition.
Pauline: Despite the macro headwinds from the economic slowdown, geopolitical uncertainty, and their impact on overall trade volumes, Cargojet's mix of business has allowed us to continue to grow revenues and not be solely dependent upon any one portion of our customer mix.
Pauline: We recently capitalized on the opportunity to service the fast-growing China-based e-commerce brands with a three-year scheduled charter service agreement with Great Visions HK Express to fly e-commerce products between China and Canada.
Pauline: Global e-commerce supply chains are constantly changing and Cargojet is at the forefront of identifying these emerging opportunities.
Pauline: As a result, each one of our lines of business posted strong growth rates during the quarter.
Pauline: Domestic network revenues grew by 10.8%.
Pauline: ACMI posted a 7.3% gain and all in charters posted a record 23.4% growth versus the second quarter of 2023.
Pauline: Overall, we posted an 11.5% increase in total revenues during the quarter as compared to the previous year.
Pauline: On the domestic side, the volumes from our major customers have stabilized and improved sequentially quarter over quarter.
Pauline: All right, our ACMI business continues to benefit from strong global demand and our ad hoc and scheduled charter businesses is experiencing record growth.
Speaker Change: While we are encouraged to see the second interest rate cut by the Bank of Canada, we still remain cautious and believe it will take some time for these cuts to show up in increased household disposable incomes.
Speaker Change: We are still cautiously optimistic in our continued growth expectations until financial conditions ease significantly for consumers and the political climate stabilizes globally.
Speaker Change: Our ability to harness growth opportunities is closely tied to our fleet management strategy.
Speaker Change: In prior quarters we have talked about surplus fleet which was set aside for sale or lease.
Speaker Change: But significantly, new growth opportunities have now absorbed much of our surplus fleet and we have accelerated the conversion of 2767-300 aircraft to prepare for 2025 and beyond.
Speaker Change: We feel very confident about this decision, particularly when considered in the context of reductions in other Canadian operators freighter fleets and available air cargo capacity, particularly to serve long range charter opportunities.
Speaker Change: In mid-January, we laid out our strategic priorities to focus on optimizing CapEx and generating free cash flow, including a framework on how we will allocate capital.
Speaker Change: Scott will provide more color on how we are progressing against these objectives, but we are very pleased with the speed with which we are adapting our business model to serve the new economic environment and fast-changing supply chains.
Scott Calver: As we have said many times before, Cargojet is a customer-centric company, singularly focused on putting our customers first and enabling them to keep their promises to both shippers and consumers around the world. This is what makes us successful and builds long-term relationships.
Scott Calver: Pauline and I now have two quarters under our belt as co-CEOs and we couldn't be more pleased with the progress we are making given the macro headwinds facing our industry.
Pauline: We are extremely excited about the future and how we can continue to harness opportunities in the very fluid global supply chains and continue to profitably grow Cargojet's business and provide value for all stakeholders.
Pauline: Let me now pass the microphone over to my colleague Pauline.
Pauline: Thank you, Jamie.
Pauline: One of the most common questions we get when Jamie and I meet with analysts, our investors, and even our customers, how is the co-CEO model working?
Pauline: Our results today provide the best answer to this question.
Pauline: Q2 was a strong quarter, particularly given the broader macro environment for retail sales. We are very pleased with the progress we are making in maintaining our margin as we pursue revenue growth.
Speaker Change: I would say the co-CEO model is working quite well at every level within our organization.
Speaker Change: Let me join Jamie in thanking our team.
Speaker Change: Operating a successful airline requires a finely tuned operational machining that could execute the on-time departures and arrivals to and for our customers. Once again, we achieved 99.4% on-time performance.
Speaker Change: This achievement is a testament to each member of the CargoJet family who are the true driving force in achieving OTP and ensuring our customers receive a first class service. A big thank you to everyone on the CargoJet team.
Speaker Change: Jamie provided some color on our revenues. I will take a few minutes to share updates on our operational efficiency initiatives.
Speaker Change: Q2 block hours grew 4.8% as we initiated the new scheduled charter service to China as well as increased ad hoc charters. We have selectively added resources to support this new growth vector.
Speaker Change: We talked about savings we are generating from our in-house simulators during our last quarter remarks.
Speaker Change: As we see increased transatlantic flights, more pilots need to be ETOPS certified and these investments we made for our future are paying off today.
Speaker Change: We continue to see benefits from the cost savings we implemented in 2023.
Speaker Change: As we scale our business to the new normal, enhancing our information technology capabilities.
Speaker Change: We will be making investments in this area to prepare Cargojet for the next phase of our growth.
Speaker Change: We are carefully enhancing talent and key functions with an eye towards longer term needs of the company.
Speaker Change: One of the key skills required to be successful at CargoCheck is resilience.
Speaker Change: This is a hard trait to find, but it is crucial for us to preserve our entrepreneurial culture.
Speaker Change: We recently supported Amazon's Prime Week in July, and August and September are typically back-to-school shopping months.
Speaker Change: We are closely watching consumer spending and will be soon shifting our focus to plan for the peak season.
Speaker Change: We are particularly pleased with the increase in our charter business, which is resulting in higher asset utilization as we continue to leverage daytime for charters and nighttime for the domestic network.
Speaker Change: I'll now turn over the call to Scott for an update on the financial drivers.
Scott Calver: Thank you, Pauline, and good morning, everyone. There are three areas I would like to address, first being an update on our capital allocation priorities.
Scott Calver: followed by a high-level view of our adjusted earnings.
Scott Calver: Lastly, I will provide some commentary relating to various costs disclosed in our second quarter financial statements.
Cargo Jeff: Cargojet's long-term capital allocation strategy is to maintain dividend growth.
Cargo Jeff: Identify and invest in growth opportunities.
Cargo Jeff: To maintain a conservative balance sheet is measured by debt compared to EBITDA and to opportunistically buy back shares.
Cargo Jeff: For dividend growth, the company is pleased to announce that the board has approved an 11.25% increase in our quarterly dividend rate.
Cargo Jeff: For growth opportunities, investing in revenue growth opportunities is a long-term planning process.
Cargo Jeff: The recent e-commerce growth for air cargo coming out of China has proven to be a great opportunity for Cargojet.
Cargo Jeff: The three-year agreement that was communicated in a press release on June 10, 2024 is an example of Cargojet's ability to continuously identify emerging opportunities.
Cargo Jeff: As the result of this new contract, along with the growth of the ad hoc charters and scheduled charters,
Cargo Jeff: Cargojet has secured two Boeing 767 feedstock to replace the inventory of feedstock that was inducted into conversion in the second quarter.
Speaker Change: As it relates to the share buyback program, year-to-date, Cargojet has purchased and cancelled over 700,000 shares at a cost of $84 million.
Speaker Change: We will continue to assess the program throughout the remainder of the year.
Speaker Change: The last capital allocation strategy is to maintain a conservative balance sheet.
Speaker Change: Free cash flow was suppressed in the second quarter mostly due to the investment in the 2767 feedstock.
Speaker Change: The longer term view for potential revenue growth along with an opportunity to acquire the 2 feet stock at an attractive price has been an opportunity for CargoJet.
Speaker Change: Total capital expenditures will be in line with the ranges that have been previously disclosed.
Speaker Change: However, there will be a slight increase in growth capex that is expected to be mostly offset with reductions in maintenance capex.
Speaker Change: Cargojet is expected to close the year with 40 to 50 million dollars in growth CapEx.
Speaker Change: $130 to $140 million in maintenance capex
Speaker Change: and disposal proceeds of approximately $105 million.
Speaker Change: Finishing the year with a total capital expenditure net of proceeds on disposal to be in the range of 65 to 85 million dollars.
Speaker Change: In summary, as it relates to the update on the long-term capital allocation strategy, management is pleased with the recent contractual revenue growth opportunity and the prospect for the future.
Speaker Change: Switching to Cargo Jet Adjusted Earnings.
Speaker Change: The non-GAAP measure, as defined in the MD&A, adjusts for the fair market value changes for stock warrants and the non-cash gain or loss on the swap derivative.
Speaker Change: There are a couple other non-cash market to market adjustments as it relates to long-term incentive for pilots, management, and directors.
Speaker Change: The 25% share price appreciation in the second quarter resulted in a non-cash revaluation expense to Krukos and to SG&A.
Speaker Change: When you further adjust for these mark-to-market non-cash adjustments and the non-cash deferred tax change that relates to all mark-to-market valuation changes,
Speaker Change: The adjusted earnings per share for the second quarter is $1.03 compared to $0.68 per share for the same period in the prior year with the same adjustments.
Speaker Change: All things being equal, an increase of just over 50% compared to prior year.
Speaker Change: I will finish my prepared comments with a more granular view of our second quarter results.
Speaker Change: Let me start with direct costs.
Speaker Change: As we have said in the past, it is recommended when assessing cargo disability to manage cost. You exclude fuel expense as a fuel surcharge program ensures that fuel changes are neutral to profitability.
Speaker Change: It is best to exclude depreciation as well given the long term strategic implications.
Speaker Change: For the second quarter, it is recommended that the mark-to-market non-cash adjustment for pilot LTIP should also be excluded.
Speaker Change: When this refined focus on direct costs, the direct costs per block hour were approximately $5,325 compared to $5,210 in the second quarter of 2023.
Speaker Change: a 2.2% increase. This is largely in line with inflationary trends.
Speaker Change: On the positive side, our investment in the flight simulator is paying off with savings in both travel and third-party simulator rental costs. The cargo jet training classrooms and simulators are booked to capacity as we train new pilots to work towards the optimal level of pilots to support the increased revenue volumes.
Speaker Change: There is an increase in ground costs of $3.5 million or 21% compared to the prior year.
Speaker Change: A better comparison is a sequential view compared to the first quarter of 2024, and you will see that the ground costs are essentially flat.
Speaker Change: A reminder that late in the second quarter of 2023, Cargojet was successful in more than doubling a third-party logistics service that is provided to a strategic customer to scan and sort air cargo parcels.
Speaker Change: The growth in this revenue is the primary reason for the increase in ground costs compared to prior year.
Speaker Change: SG&A is mostly flat to prior year when you adjust for the non-cash mark-to-market changes for management and director's long-term incentive.
Speaker Change: Before I leave Cargo Jet's cost structure, a few words about the relationship between fuel expense.
Speaker Change: and fuel surcharges and other revenue.
Speaker Change: A reminder that in the first quarter of 2024, Cargo Jet experienced maintenance revenue that was significantly higher than a normal quarter.
Speaker Change: Aside from the maintenance revenue, what is new to the current run rate is a 24% increase in all charter business. All in charter business is priced
Speaker Change: on an all-in basis, and therefore there is no requirement for a fuel surcharge.
Speaker Change: Excluding the business mix change along with the one-time maintenance revenue in the first quarter, the relationship between fuel expense and fuel surcharges and other revenue is consistent to the first quarter which is also consistent to this year's trend for jet fuel prices.
Speaker Change: In summary, we are diligently executing on our capital allocation strategy.
Speaker Change: Carefully managing costs and continuing to identify growth opportunities in a fast-changing supply chain that are shifting from one geography to another.
Speaker Change: Our diversified business model has proven resilient in the hyper-growth COVID environment as well as during an economic downturn in a tough air cargo market.
Speaker Change: I will now pass the call back to Jamie and Pauline and Ajay for any Q&A.
Speaker Change: Operator, we can open the line for questions. Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2.
Speaker Change: Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience.
Speaker Change: Our first question is from Betty Yang from Canaccord Genuity. Please go ahead.
Betty Yang: Hey, good morning guys. This is Betty on for Matt Lee. Morning, Betty. Morning. So first I have a question on the two new 767 aircraft that you invested into this quarter that will come into service in early 2025.
Matt Lee: So, are there any contract opportunities already attached to the new aircraft investment and will this aircraft go into domestic network or will they mostly fly charter?
Speaker Change: Hi, everybody. Thanks for the question.
Speaker Change: and...
Speaker Change: At this time, there is no signed contract to support that investment.
Speaker Change: And you'll remember back on previous calls, Jamie's always noted that we have existing capacity to grow any throw numbers like $60 million.
Speaker Change: And that's essentially what we accomplished in the second quarter with that press release on the e-commerce scheduled charters.
Speaker Change: So what we had planned to maybe take place over the next 12 to 18 months happened very rapidly. So we had to pivot and
Speaker Change: Replaced that inventory of feedstock that was originally planned to have one converted late this year and one next year. We sent them both in to conversion. Thank you very much.
Speaker Change: So we had to pull that plan a little bit more forward, and we need feedstock on inventory. That's one of Cargojet's main priorities here, that when there is an opportunity, that we can pivot quickly and capture that inventory.
Jamie Porteous: and really we just have to have that pipeline of inventory of food stock for future growth. It may be Jamie if you just want to comment on some of the opportunities that do exist and support that investment. Yeah, I'm just adding to Scott's comments.
Speaker Change: In addition to...
Jamie Porteous: his comments, we obviously we added the China flying this year, which is required more aircraft. As I said, in my comments, we've quickly pivoted from this time last year, where we said we had four surplus 757s in the fleet. And then as we saw growth opportunities through the end, we had four up for sale at one time, in fact.
Jamie Porteous: And then as we saw growth opportunities emerge throughout the balance of 2023 and into 2024, we've reduced it to two, and then subsequently down to we don't have any surplus aircraft, we're using all of them, we have at least seven, as you're aware, we have at least 767-200.
Jamie Porteous: That expires in February , so one of the 767-300s that we're converting will replace that, and the other one will be a net increase, which is with the size of the fleet that we have up at 41, 42, 43 aircraft by the end of 2025, with our heavy maintenance requirements on a fleet of that size, 2025 will be the first year that we actually have
Jamie Porteous: for most of the year, three lines or three aircraft in heavy maintenance at any given time to support the fleet and the network.
Speaker Change: Thanks for your answer. Just a follow-up question on the acquisition contract. Could you elaborate more on how this opportunity arose and how it is progressing so far? And do you see opportunities to upsize this contract as e-commerce demand continues to improve in the second half of the year?
Speaker Change: Yeah, sure. I can give you some color on that. I mean, it happened fairly quickly. I mean, demand
Speaker Change: As you probably read in the media for e-commerce products coming out of China has somewhat exploded this year.
Speaker Change: earlier this year. We had done a few charters out of China back into North America
Speaker Change: In the spring, early spring, we had a significant multiple number of requests for
Speaker Change: either ad hoc or scheduled charters coming out of China into North America, into Vancouver particularly.
Speaker Change: It took us a little bit, not a lot, took us a little bit of time to sort of drill down and determine who's the actual customer that controls the volume and has the traffic.
Speaker Change: The customer that we contracted with was already an established player in that market and had been operating too flat. Has been operating and still continues to operate too flat the week.
Speaker Change: with a triple seven, with a Chinese carrier out of...
Speaker Change: Out of Shanghai into Toronto, so they had established business and wanted to continue to grow and had demands for capacity to continue their growth into Canada, particularly into Western Canada.
Speaker Change: Cargojet provided added value, leveraging our domestic network and the fact that we can connect from Vancouver to 15 other cities in Canada was very appealing to the customer, so the contract and the agreement came
Speaker Change: came together fairly quickly, literally within a couple of months, a lot quicker than a normal contract of that magnitude and size.
Speaker Change: we started operating we're operating currently three flights a week with the odd this week we're actually operating four
Speaker Change: but three flights a week. We didn't start that until late in the second quarter. I believe our first flight was about May 20th or May 22nd.
Speaker Change: So we really didn't see, we certainly didn't see the full impact of that agreement in the second quarter. We would definitely see the impact of that.
Speaker Change: in the 3rd and 4th quarter.
Speaker Change: And to answer your final point, yes, we are seeing, you know, significant and actively having discussions with both the existing new customer on that route and other potential customers. There's a significant demand for capacity, particularly between China and North America, and particularly to Canada itself.
Speaker Change: Thanks. I'll pass the line.
Speaker Change: Thank you. The following question is from Chris Murray from ATB Capital Markets. Please go ahead.
Chris Murray: Thanks, folks. Good morning. Um, maybe turning back here. Look, you made the comment that, you know, you're you're cautiously optimistic about, you know, the back half of the year, seeing the recovery. So I was wondering if you talk a little bit about, you know, outside of the charter business, what you're seeing in the domestic business and maybe in the ACMI business more in detail.
Speaker Change: Morning, Chris. I think my comments were maybe a little conservative, but I think that's sort of the nature of how we've managed the business over the years.
Speaker Change: certainly in what we've seen in the first half of the year and sequentially if you look at Q1 I think we were up 6.5% in revenue.
Speaker Change: and others were very surprised with that and we increased that significantly to 11.5% in the second quarter.
Speaker Change: And, you know, despite my cautiously optimistic comments, it is clear that the second half of 2024 is going to be much stronger than the first half.
Speaker Change: Up 2024 in in really all of our all three of our revenue streams our domestic
Speaker Change: Revenues in the second quarter were up just over 10% year-over-year and as I noted in my prepared comments, we've sort of seen sequential
Speaker Change: Unknown Speaker ...quarter over quarter, year over year growth for all of our customers.
Speaker Change: And I would say in all three segments, you know, largely driven by e-commerce growth and the continued, you know, sort of low penetration.
Speaker Change: Rate of online sales in Canada as compared to as a percentage of overall retail sales as compared to other industrialized countries and the feedback we're getting from our customers is and we see directly on the domestic. Thank you.
Speaker Change: Just by the nature of the fact some new customers that
Speaker Change: I say new customers, they're not new contract customers, but new entrants.
Speaker Change: primarily in the final mile delivery space that are
Speaker Change: Providing final mile delivery.
Speaker Change: for other Canadian retailers, other than Amazon, obviously.
Speaker Change: that have obviously improved and grown their online platforms, and that's resulting in new business. As I noted in the prepared remarks, our major contract customers are giving us feedback that they're seeing strong growth primarily from the e-commerce business that they're carrying. Obviously, Amazon, we're seeing a good example this year. Compared to last year, we had a very successful...
Speaker Change: Prime Week, as Pauline noted in her comments, that we contributed to assisting Amazon in having, as they said, their best Prime Week ever in Canada.
Speaker Change: Comparatively, going forward, they have their prime big days in October where they've already asked us for dedicated capacity for some charters for a four or five day period in the middle of October.
Speaker Change: as well as doubling the charter capacity, at least the request for the capacity.
Speaker Change: In peak season this year, as compared to last year work in 2023, we didn't charter. They didn't charter any aircraft during prime week. There was no big days in October . And we operated some 757s on charter on a charter basis in peak this year. That's where 767 which is. [inaudible]
Speaker Change: 50% more capacity.
Speaker Change: Our feedback from the ACMI basis, primarily driven by DHL, has indicated that theyíre seeing much stronger demand than last year, obviously particularly out of China, but also from to and from Europe .
Speaker Change: We have a number of aircraft that will undoubtedly result in, as we mentioned earlier this year, we ended last year operating 17 or 18 aircraft for them during peak season. We continued initially on a short-term basis with two additional aircraft.
Speaker Change: For a total of 17 that we've been operating all year that have been extended to the end of the year and it's
Speaker Change: It's entirely realistic to expect that we'll operate more than that in peak season because of that demand. And then on the charter side, we've reported the charter revenue, obviously a bump has been because of the impact of the scheduled charters that we have.
Speaker Change: with our Chinese customer between China and Canada.
Speaker Change: But we also had a record quarter. The month of June was the first time in the history of our ad hoc charter business that we actually exceeded
Speaker Change: A charter is day, we had...
Speaker Change: Pauline had given our Charter Sales Team an objective to do 30 in 30. I think we did 31 charters in 30 days, which is unprecedented. So demand seems to be strong across the board.
Speaker Change: which kind of that my long-winded answer to your question kind of contradicts my cautiously optimistic comment earlier, but
Speaker Change: Yeah, Chris, just to Jamie's point, you know, we did set an objective in June to do 30 on 30. The team did exceptionally well. We are seeing an increase in ad hoc charters. You know, certainly what we didn't anticipate the year to begin with, but things have certainly changed in Q2.
Speaker Change: Canadian consumer is also very price conscious and they're shopping for more value.
Speaker Change: So this China business is basically fulfilling that gap where Canadian consumers have more opportunities and a better shopping environment than what was just available in e-commerce within Canada.
Speaker Change: Okay, that's helpful. Thank you. My other question is just maybe on the on the fleet mix. You know, I guess we've evolved the, you know, the 757s moving in and out of the domestic market. Now, it looks like you've moved them back in.
Speaker Change: Can you talk a little bit about how we should be thinking about either the efficiency and the cost profile of those aircraft in the network? I know there was sort of some puts and takes about it. It gave you some more flexibility having a mix of six sevens and five sevens.
Speaker Change: In the marketplace, but I'm just trying to understand, you know, when you've got this growth coming at you.
Speaker Change: Are the 5-7s as efficient as, say, 6-7s, and, you know, like, or should we really, I guess really what I'm trying to get at is, like, on a block-hour basis, or should we be like-to-like in terms of cost profile?
Jamie Porteous: Yeah, maybe I'll take that question, Ajay. You know, 757s and 767s are common cockpit aircraft. That's number one. Same pilot, one pilot can get off and fly one aircraft.
Speaker Change: get on to the second one. That's number two. Number three, majority of the parts are very common in that.
Speaker Change: Our simulator can accommodate the training for both the pilots. So both aircraft are very complementary to each other in terms of efficiencies, cost.
Speaker Change: When you have 60, 70,000 pounds load in any given night and you do not want to use 767 because it will take up to 120,000 pounds.
Speaker Change: So the very fact we can switch resources between one aircraft and the other, this is the most complimentary common cockpit aircraft that you can find in the marketplace.
Speaker Change: That you can switch on a very short notice, providing us the flexibility, efficiency, cost, and customer demand balancing.
Speaker Change: at the same time.
Speaker Change: Yeah, Chris, just to add to Ajay's comment, 75% of our charters are done with the 757s.
Chris Murray: Okay, it's interesting. Okay, thanks folks. I'll leave it there.
Speaker Change: Thanks, Chris. Thank you. Our following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Walter Sprock: Yes, good morning everyone, congrats on a good quarter here, maybe coming back to the stack.
Speaker Change: Coming back to the back half of your outlook and your cautious optimism, despite some of the indications, Jamie, that you're seeing it perhaps a little bit more optimistic, when you look at
Speaker Change: I guess it's safe to say when you look at your three segments, starting with domestic, you're seeing...
Speaker Change: Your advance bookings, if you want to call it that, for the back-up, particularly for the fourth quarter, sounds like they are significantly above where your advance bookings were this time last year. Is that a fair statement?
Speaker Change: Yeah, that would be fair Walter.
Walter Sprock: Yeah, absolutely. I mean, last year, as you know, we were relatively flat through the first couple of quarters of the year and that gave us
Walter Sprock: We all know that the second half of the year is typically much stronger in all our revenue segments than the first half of peak season.
Speaker Change: So if I look at your run rate for ACMI and Charter on the second quarter, do we see a nice pickup from that given aircraft coming online?
Speaker Change: contract purchases and those advanced bookings, well, I guess, on ATMI and All in Charter, or should I look at the Q2 quarterly cadence?
Speaker Change: for ACMI and All-In Charter to be kind of adjusting for seasonality, kind of the run rate we should look at through the rest of the year. Yeah, one second, Brian.
Speaker Change: I'd like to comment just very quick. When you order aircraft, you obviously need to match spare parts, pilot training, so there's always that lag, Walter, it just doesn't show up like you ordered, there's a lag.
Speaker Change: In between ordering, getting the aircraft, getting it actually certified, the time you order an aircraft, there's a year's worth of cost, lag, and so you can't immediately estimate or say that, okay, it's going to put you on day one.
Speaker Change: So just to be a little cautious on that particular area.
Speaker Change: Got it. Got it. Okay. Thank you, Ajay. And last question here is on your capacity.
Speaker Change: Jamie, you had mentioned you had kind of that 15% to 20% capacity and Pauline indicated that kind of got...
Speaker Change: https://www.scottcalver.com
Speaker Change: When we're looking at incremental, incremental margin on new revenue, what your what your capacity is now and what you hope it to be at by the end of the year.
Walter Sprock: Yeah, just to clarify, Walter, the two aircraft won't come in this year, the two that are being converted, one won't be in until early 2024, sorry, 2025, correct?
Speaker Change: and the next one shortly after that, there are, so there's no real capacity increases to our fleet. There are no capacity increases to our fleet in 2024.
Speaker Change: We still believe we're able to accommodate the growth that we have, and we've demonstrated that I think in the second quarter with the 11.5% growth overall in our revenues without increasing the fleet. I've made previous comments before, particularly on the domestic network with the mix, and as Ajay mentioned, with the flexibility and the uniqueness of both the 757 and the 67 aircraft being interchangeable on different routes.
Speaker Change: Depending on capacity demands, we could accommodate 15-20% growth without having to add another aircraft asset. I think we demonstrated that.
Speaker Change: in the first half of the year, but particularly in the second quarter where our domestic revenues were up 10 or 11%.
Speaker Change: There's still some room to grow, you know, another probably 5-10% on that fleet without adding any aircraft. And particularly when you consider in the fourth quarter.
Speaker Change: As you know, we deliberately don't have any heavy maintenance.
Speaker Change: We are currently working on the final flight of the aircraft. We have at least two additional aircraft from our heavy maintenance fleet that are available in November and December to take on the added spike peak requirements in both the domestic and the ACMI business.
Speaker Change: On the specific answer to your question on ACMI for the balance of the year, I think it's still safe to say we have 7.2%.
Speaker Change: Here Thank you.
Speaker Change: Equally, I'm not necessarily sure we'll replicate the...
Speaker Change: Scott Calver, Ajay Virmani, Jamie Porteous, Unknown Executive
Speaker Change: Q2, but there would be an expectation, particularly in Q4, with the increased demands on our domestic network and our ACMI business, that we don't necessarily have the aircraft available 24 hours or 7 days a week.
Speaker Change: to achieve the ad hoc charter revenue.
Speaker Change: David.
Speaker Change: that we achieved in Q2.
Speaker Change: And Jamie, maybe I'll just add as well back to your comments that you made when we
Jamie Porteous: started the call. It's our intention at this time to not renew that lease February of next year. Correct. So you'll see on the fleet table, we're only adding 1767 next year, not to buy by getting it from underneath that lease.
Jamie Porteous: Okay, that's fantastic. I appreciate the time as always and congrats on a great quarter. Thank you, Walter.
Speaker Change: Thank you. Following question is from David Ocampo, from Konark Security. Please go ahead.
David O'Kampo: Thanks. Good morning, everyone.
Speaker Change: Thank you.
David O'Kampo: Jamie, I just wanted to circle back on your e-commerce visits out of China. I think you flagged up your ability to connect to 15 other cities in Canada.
David O'Kampo: One of the main driving factors why you're able to win that contract. But when I look at the $160 million of contracted business, it does seem like that's only for the three flights that you guys alluded to, and there's probably some incremental upside of moving the goods on your domestic network.
Speaker Change: Just wondering if that statement is accurate, and if so, how much of a volume or revenue lift can we expect from moving those Chinese e-commerce goods across your domestic network?
David O'Kampo: Yeah, you're right, David.
Speaker Change: The disclosure that we gave on that agreement was and the revenue associated with it that 150 million 150 60 million over the three-year period was based on the three frequency per week minimum between China and Vancouver didn't include
Speaker Change: Any incremental revenue for traffic that they may re-tender to us in Vancouver beyond to any of the other 15 cities that we operate to. It also didn't include any incremental revenue for additional frequencies that we fly from China to Canada, either to Vancouver or Hamilton.
Speaker Change: that I fully expect will be part of the growth of that business over the next couple of years. And as I noted before, we're actually flying tomorrow, I think, a flight, a fourth flight from China into Hamilton.
Speaker Change: Hard to quantify what that number is. It's definitely incremental revenue that should fall right to the bottom line, at least the stuff on the domestic network as it's on traditional backhaul routes where we have more capacity. It's why it was sort of a win-win for us and very attractive always.
Speaker Change: For us to be able to attract backhaul business out of Western Canada coming back into Eastern Canada where we traditionally have more capacity than we would have on the headhaul routes in the other direction. It wasn't the deciding factor, but it was certainly, as I mentioned before, an added value that the customer greatly appreciated and thought was very beneficial to allow them to...
Speaker Change: You know, potentially limit their costs and their growth by not having to extend aircraft from Vancouver into central Canada and just use our network on an incremental basis. But it's a little hard to quantify, you know, as I said, we only started flying at the end of May. So we're still a little bit in the learning curve, a little premature to be able to...
Speaker Change: Estimate what those revenues could be.
Speaker Change: Richard, that's it to me, Walter, go back next corridor and once you have a full corridor on your belt.
Speaker Change: Thanks, David.
Speaker Change: Thank you.
Speaker Change: Once again, please press star 1 at this time for any questions or comments.
Speaker Change: Our following question is from Nick Cochran from Ackerman Capital, please go ahead.
Speaker Change: Good morning and congrats on the front quarter. Thanks, Nick. Thanks, Nick.
Nick Cochran: Just one question on the China contract. Were there any one-time costs associated with that in the quarter?
Speaker Change: Yeah, there always is. I mean, for us to start that quickly, as my comments at the beginning about how quickly the agreement came together.
Speaker Change: you know, one of the things that I think
Speaker Change: Cargojet prides itself on is our flexibility and one of the reasons for our success is our
Speaker Change: The flexibility and the speed in which we're able to react to customer requirements, whether those are existing customers that need us to do things on an ad hoc or on a peak season basis, or new agreements like this one.
Speaker Change: It would be, I would say, it would be unprecedented for other carriers to be able to start a program from China to North America as quickly as we did with the three frequencies a week that we're flying. So, and obviously associated with that would be some start-up costs, particularly pilot costs. We may have pilot training, not training costs.
Speaker Change: Pilot over time where we are incurring to draft pilots to fly that route. There may be some additional training costs as Pauline mention in her prepared statement about additional E TOPS pilots that we require for that. That primarily on that side of things with
Speaker Change: But those should sort of soften out as we go forward in the next few quarters.
Speaker Change: We're flattened.
Speaker Change: That's helpful and last week there's a pretty significant hailstorm in Calgary where any of your aircraft impacted.
Speaker Change: We had two aircraft that were impacted as a result of the hailstorm. One was the Amazon Prime aircraft that we operate on a CMI basis for them that was sitting in Calgary 767 as well as one of our own 757s that
Speaker Change: received a significant amount of hail damage. We've moved those aircraft into Hamilton and are expecting to have those back in service seven by seven fairly shortly. The 767, probably another week or so, but we've been providing backup service for Amazon with other aircraft in our fleet to make sure that they...
Speaker Change: Don't have any hiccups in service to their customers.
Speaker Change #100: Thanks a possible.
Speaker Change #100: Thank you.
Speaker Change #100: Thank you.
Speaker Change #101: Our following question is from Jasrup Bains from TD Cowen. Please go ahead.
Ken James: Good morning. Thanks, guys. I'm filming for Ken James today. Thanks for taking our questions. We just had a question regarding the change in the fleet schedule.
Speaker Change #103: When comparing the Q2 fleet schedule to the Q1, the number of 767-300 aircraft increased by two for 2025, which I presume is related to the two conversions you made reference to in the MBNA.
Speaker Change #104: However, the number of 767-200 owned aircraft also come down by two. Maybe if you could provide a bit of color as to what's driving that decrease in 767-200 aircraft.
Speaker Change #105: Yeah, the current requirement right now is the 767-300.
Speaker Change #106: And that's the trans-specific routes that we've been talking about. So, in a perfect world, we would have sent the two that were in feedstock into conversion first, and the two that we just purchased in the second quarter would have been in our inventory. But really, the market...
Speaker Change #106: needs the 767-300, so kind of reverse that order of the inventory, which just makes sense for us to respond quickly to the requirement.
Speaker Change #107: Okay, perfect. Thanks guys, that's it from us. Thanks, Andrew.
Speaker Change #108: Thank you. We have no further questions registered at this time.
Speaker Change #109: Thank you.
Speaker Change #110: Thanks everybody for joining us this morning and we appreciate your time. Have a great week. Great day.
Speaker Change #111: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.
Speaker Change #111: [inaudible]