Cargojet Inc.

Good day, and welcome to the CargoJet conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Pauline Dillon, Executive Vice President. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us on the call today. With me on the call are A.J. Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Commercial Officer, and John Kim, our Chief Financial Officer. After 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 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 and adjusted EBITDA. Please refer to our most recent press release in MD&A for important assumptions and cautionary statements relating to forward-looking information. and for reconciliations of non-GAAP measures to GAAP income. I'll now turn the call over to AJ for his opening remarks.

Thank you, Pauline, and thanks, everybody, for joining us for our Q2 conference call this morning. We are certainly in the middle of a pandemic of the century. These are extraordinary times to be operating any business. While Canada is making progress on flattening the curve there is no time to be complacent. Until a safe vaccine is available widely, we are likely to be operating in the new norm. While CargoJet's business has been able to operate normally, we are painfully aware that there are thousands of businesses that are struggling, and that there are millions of Canadians that have not been able to return to work. This puts a high moral responsibility on us to give back. Therefore, today, we are announcing $2.5 million pandemic relief initiative through CargoJet Foundation, which we just formed that will focus on three things. Number one, direct support to healthcare community in fighting COVID-19. From helping hospitals and long-term facilities better prepare to cope with a potential second wave to enabling vaccination as soon as a safe vaccine is available. The initiative will identify and fund the most of compelling needs for the healthcare community. Number two, support measures to combat racial inequality by helping underprivileged communities better prepare to pursue technology and professional careers. Number three, support the most vulnerable members of our society that are particularly hard hit by ongoing pandemic. This pandemic has exposed several weak spots in our society, from the limitations of the healthcare system to the fragility of life of the weakest member of our communities. That is why we feel the initiative is an important step in doing our part as Canada navigate this difficult moment. Before I turn to our Second quarter results, I also want to take the opportunity to thank our 1,200 frontline team members across the country, and that includes each and every member of this cargo jet team. They're giving us hope. They're allowing us to maintain a sense of normalcy, and they are keeping the supply chain moving and the country going. Thank you, Team Cargo Jet. Now, turning to our quarter two results, We posted the best quarter in confidence history. The momentum that we started in quarter one has picked up speed in quarter two. We are experiencing a strong tailwind driven by several factors, which I will touch upon shortly. Virtually all our key metrics, including revenue, gross margin, adjusted EBITDA, posted strong record growth levels, and this is allowing us to strengthen our balance sheet and create further capacity to capture hypergrowth. If you were to look at adjusted EPS that excludes stock warrant expenses for the quarter, it was $2.71 compared to adjusted EPS of 0.32 in quarter two 2019. We generated 55.7 million in adjusted free cash flow in quarter two and 85.5 million for the first six months of the year. As mentioned in our previous call, we are focused on using our cash flow for two things. Number one, capital expenditures to drive growth, and number two, repaying our debt. The strong cash flow was deployed towards these two objectives, bringing our overall leverage to 2.7 times trailing adjusted EBITDA compared to 4.5 times as of June 30th of last year. Furthermore, it is worth noting that we are well capitalized and have more than sufficient liquidity to meet our day-to-day and future growth needs as we navigate through these uncertain times. CargoJet has recently completed a public offering of $150 million in hybrid debentures and increased its credit facility from $400 million to $600 million with an extension of term to July 2025. This has allowed us to further strengthen our balance sheet. Moving on to operations, there are several moving parts that are affecting our business. Let me highlight a few things that helped drive a strong quarter. Number one, let me begin with our charter business. We had a very strong charter revenue in quarter two. With passenger airlines cutting down for 90% of their flight schedules, there was a worldwide shortage of cargo flying capacity. The freight that used to fly in the bellies of passenger airplanes had no other alternatives. This led to a strong demand of our charter services and we flew charter flights to bring personal protective equipment from Southeast Asia and Europe for various federal and provincial agencies and some private companies in Canada. CargoJet had several lucrative opportunities internationally, and we could have made even higher revenues and higher profits, but as a proud Canadian airline, we chose to support Canada's healthcare needs in this extraordinary hour of the need. Although our charters from Asia have slowed down in quarter three, we fully expect ad hoc charter demand to continue to be strong . Number two, our ACMI business continued its strong performance as we signed two new routes for DHL to add daily air cargo capacity between North America and Europe and that will continue at least until the end of the year. We expect our ACMI business to continue to benefit from reduced cargo capacity worldwide as passenger airlines struggle to return the belly capacity to pre-COVID-19 levels for several years to come. Number three, as widely reported in the media, the online shopping or e-commerce as a percentage of total retail doubled in April compared to Q1 2020. This trend continued in May, and we have no reason to believe that it is slowing down. Our customers are handling more B2C packages than Xmas or Black Friday. It is worth pointing out that the growth in e-commerce was not restricted to traditional larger retailers only. We saw thousands of small and medium-sized merchants shift their sales to online channels. We expect this trend to continue. Number four. But the flip side is that B2B segment was almost shut down for most part of Q2. Therefore, movement of packages containing auto parts, machinery, dentist supplies, and other business packages were down significantly. As Canada's economy slowly opened, we saw B2B volumes start to return in June and expect the trend to strengthen in Q3 and Q4 as the economy opens further. One of the most critical areas of focus of us remain the health and safety of our CargoJet employees. I'm extremely proud of each and every member of our team who stepped up to meet the challenge of keeping our business going despite the unprecedented challenges thrown at us by COVID-19. We built extensive new health and safety protocols for our employees and ensured sufficient supplies of PPE for everyone in our warehouse, including their families. We introduced hero pay for our frontline employees and one-time hero bonus at the end of the quarter too for all employees, for all of our employees. These were intended to soften the stress levels of everyone that everyone's stress level as they took care of their family's needs. Together, these measures allowed us to maintain 100% of our daily operation, and the COVID incidents across the workplace were only a handful. Our on-time performance during the pandemic and the last quarter volumes with increased business activity still remained at an all-time high of 98.8%. These measures cost us approximately 10 to $11 million in increased wages and extra expenses for the PPE that we supplied to our team members. We didn't implement any COVID-related surcharges to any of our customers. and we were not seeking any government assistance. But as we look to the future, we believe that B2C e-commerce, ACMI, and reopening of the economy along with B2B volumes present stronger opportunities. We expect shorter opportunities to remain attractive until passenger air traffic returns to pre-COVID levels. While the longer-term implications and the full impact of COVID-19 remains unknown, CargoJet is working hard to adapt to the fast-changing environment. Let me emphasize that we are well-positioned to handle the changing transportation and logistics needs of our customers. We have a great team, a strong set of assets, highly flexible fleet, and we are very well capitalized to continue to capture growth opportunities in this challenging environment. Once again, thank you for your support and thank you for joining us this morning. We will now open the call to the questions.