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.

Trader, we'll start taking questions now.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to smell. Our first question is coming from Kunark Gupta with Scotiabank. Please go ahead.

Thanks, and good morning, everyone. Congratulations on a great quarter. Yeah, good morning, Kunark. Morning, AJ. So my first question, AJ, is on the charter business, the all-in charter. It looks like over 90% of the total revenue growth in the quarter came from the all-in charter business, which obviously looks like it was driven by the relief charters from the government. What do you expect from this segment in the second half as some of the kind of relief work kind of slows down, I guess, but you also noted some e-commerce activity. So can you give us any sense on where this all-in-charter business stands today and going forward? So the charter business has certainly slowed down from quarter two. Predominantly, the business was in China at that time and for a number of government agencies and some private companies that dealt with PPE. Some of the market has shifted to Turkey, Istanbul for gowns and some of the other PPE. There's still certainly a strong demand, but not as strong as what it was imported to. Also, all indication to us are that, you know, there's obviously looking to get out of this pandemic through vaccine and other different treatment options. quick tests and rapid tests. So we see some of the demand from PPE as they stockpile going into some of the other medical areas. And we are all already seeing those trends. So certainly, you know, I don't think that the quarter two charter is going to be repeated. And if it is repeated, that means we are all in trouble as far as the COVID is concerned. And nobody wants to see that. But I certainly see a demand for charters in two – in three areas, actually, internationally. One is, obviously, there's – with $150 duty-free import, we see a lot of activity that people buying from foreign websites that was not available a while back. Number two, a lot of new companies that are in the – e-commerce business now that weren't there before, both domestically, internationally, and trans-border-wise. And number three, the charters for other medical supplies. And since the value cargo space on passenger airlines is very limited or it's very unknown when they will be fully back, we certainly feel that it will be more than what the normal has been in the past. Right. That makes sense. Thanks for that. And then on the ACMI, so obviously you had your six routes for DHL, and then you had two incremental that you got for Europe starting April, I guess. I think you are expecting that to continue through the year at this point. Any sense on what would take DHL to make these contracts permanent? Obviously, passenger airline capacity is down. So is there any sense that you get from DHL that these contracts can be extended for longer? Yes, certainly we have talked to them and we continue discussing with them. But, you know, since we are in such a non-chartered territory, nobody can predict what's happening. What we see today is certainly that, you know, since we started these flights, the demand hasn't slowed down. So we've been assured that, look, there is no reason why this will not continue until December 31st. And there is a strong possibility that this might, you know, continue for a long period of time, depending on how quickly the commercial airlines ramp up in 2021. So, we expect that because DHL is a very service-oriented business, even if some capacity opened up, let's say about 70% of the capacity opened up on passenger airlines, our own internal projections are that You know, the capacity is not going to be cheap, and, you know, companies like DHL who pride themselves on service and they're on time product as they're moving, they're not going to rely on high-cost, unpredictable passenger capacity. So we, you know, our estimation certainly believes that these routes could continue, but we don't take anything for granted. And we are continuously looking for opportunities to expand presently into South America and other areas that we are considering. Correct. Okay, thanks. And last one for me. So obviously the e-commerce trends are pretty noteworthy in these times. And I think you guys saw in the kind of last few months, the B2C increase was more than the B2B decrease, I guess. But as the B2B comes back, do you see a similar pattern where the B2B is not replacing B2C one-to-one as in like B2B is growing or rebounding, but the B2C is not shrinking? Yeah, see, in April and May, B2B was hardly there at all. It was mostly B2C. So I think that the B2B will come back eventually. But I don't think the habits that now people have formed to get their daily supplies on e-commerce are going to change. So, you know, let's say, for example, if the retails were 7% of the total retails were e-commerce and it went to 15% during pandemic, we can see that maybe it'll come back to maybe 12 or 11 or, you know, they're not going to certainly go back to 7%. So there will be some cannibalization from B2C to B2B because people are itching to go out shopping. But I think certain trends will remain strong. Combining both of them, B2B and B2C, we'll certainly see a great net increase from where things were prior to COVID. Perfect. Thanks for that. I'll get back to you. Thank you.

Thank you. We will take the next question from David Ocampo with Foremark Securities.

Good morning, guys. Good morning. Yeah, so there's been quite a bit of growth in ACMI and their charter volumes. And sort of how are you thinking about your fleet? You have one more plane coming in, I think, in October.

Is that enough to support the growth that you're seeing today, or can you possibly get opportunity to stay for the balance of the year and add another aircraft?

Yes, we have actually, as of October, we are going to add another aircraft. So, there will be two planes coming in, and those would be the planes that would be doing the international runs and the charters because, you know, the planes have been overworking. we can't sustain the same planes doing what we have done in the past three, four months. So, you know, safety, security, and making sure that continuity of service is important to us. And although we stretched the fleet pretty good in the past three months, we can't continue to do that forever. So we had one plane joining us in October, and now we have signed up for another plane to help our growth. Yeah, that's good. And, AJ, you talked about looking to expand into South America. This hasn't been talked about in a while, but are you still actively looking for a partner in the U.S.? Yes, we continue to explore some opportunities. We've had a number of discussions with various partners. But to be honest with you, we had to put things on hold for our discussions for a simple reason, that you can imagine that we've probably done more I would say, what, 50% to 70% more flying in Q2. We have really been stretched here to make sure that our daily operations go well. And, you know, we have put the U.S. expansion on a back burner. Actually, we had a lot of opportunities offered to us for the past three months or four months handling COVID supplies into the U.S. from other countries at much lucrative opportunities. opportunities that we didn't take. Our concentration has been to help out Canada, and this is where we were needed as Canada's cargo airline. So, our focus, whether it's commercial or doing a deal in U.S., has been not there at the present time, especially because of the situation in this country. But we certainly have, you know, we haven't canceled our plans. We've just trying to postpone to a time when we can really concentrate and do a deal that works for us. Now that makes sense. And sort of one last housekeeping item for me.

I don't know if John's on the call, but on the past you indicated that you want to be debt-free in the next five years or so. Is that idea still in place or has the timeline moved up because of the benefit that you're seeing from COVID?

Well, you know, certainly, you know, what we have done by restructuring with a hybrid venture and the cash flows from this year, we certainly, you know, brought our leverage down from 4.5 to 2.7, which is kind of, you know, a major achievement for us. You know, my goal would be to, you know, by the end of the year or bring it down to even, closer to two. That would be my ideal dream. But our priority remains that we become debt-free within five years and hopefully sooner. Great. That's it for me. Thanks, guys.

Thank you. Our next question comes from Alana Yontif with EMO Capital Markets. Please go ahead.

Hi. Can you hear me? Is that right? Hi. Great, thanks. I do have a couple questions, and the first is on the ACMI charter side. We can appreciate the slowing charter service, but is there a magnitude contribution from the second quarter that you don't expect to repeat going forward?

Well, yeah, we can't put numbers on it, but certainly, you know, we had a lot of PPE that was not available in this country, which has now been stockpiled. We will still have occasional charters. Would it be 25% activity than quarter two? Probably somewhere between 10 and 20% or 10 or 30%, somewhere in that neighborhood. We are seeing it's not that the charter business is dead in quarter three, but certainly there. But the intensity is, you know, if I was to take a guessing number, it's probably 70% less than quarter two.

Okay, great. Thank you. And I guess now a second question on heavy maintenance. So I understand you were able to delay some of the heavy maintenance previously, but how long can you defer this, and how much flexibility do you have to conduct heavy maintenance at a later date without disrupting your service?

So let's – we had eight aircraft that were deferred for heavy maintenance because we did some – Further checking on the aircraft, we enhanced our maintenance program. As you understand, that part of it is always believed in safety first and, you know, everything else after. So, you know, we got extensions on the sea check for 12 months on eight aircraft. There will be a domino effect on another aircraft for one year or so. All in all, you can say that, you know, 12 months on our fleet for all aircraft is but we have spent a considerable amount of money in doing interim checks and doing in-between checks to make sure that we are flying safely. So we don't think that we're going to be bombarded with 25 sea checks next year because our understanding is that the discussions that have happened with the regulatory authorities is to make sure that we don't, in order to keep providing service, and keep the supply chain moving in this country that we are not grounded with 25 aircraft at the same time. So these are strictly deferments that have been given to us based on our performance, based on our audits, based on certain additional maintenance work that we've been able to undertake, and our track record. And we continue to demonstrate that safety is paramount for us, and we obviously got some deferment on these checks, to make sure that the supplies are kept coming in. And all I can tell you is that we have a plan that is in front of the regulatory authorities, which in principle, they all believe we are just waiting for some approvals to come through.

Okay, great. And I guess last question about volume and your B2B business overall. I guess what's – What is the volume growth, if you can say, or an overnight network by month, and how is that trending in July?

The overnight network is certainly, I would say, at this stage, I can say back to normal levels, what they should be, maybe even slightly more uptick in it. We don't have the numbers handy, and we, as you know, we don't, give guidance on this stuff, but all I can tell you is that it's certainly not down and certainly the trend is up from where we've been in the past.

Okay, great. And last question, I promise. I guess the B2B business that you have, what is it at now versus pre-pandemic levels?

Again, once again, we haven't sort of looked that deeply into it, but When we look at our customers' numbers and we know some of the stuff, the density, the parcels, and it's a guessing game at this stage until we dive deep into it. But I would say that the business, if I was a guessing man right now, I would say at least 60% to 70% of B2B business is certainly back from where it was in the quarter one.

Great. That's all my questions. Thank you so much.

Thank you.

We will go next to Doug Taylor with Canicorn. Please go ahead.

Hi, Doug. Yes. Yeah, thank you. Good morning. I'll echo the congratulations on a pretty exceptional quarter, and it's nice to listen to a good aerospace story for a change, I think, for everyone on the call. My first question, I just want to ask you to repeat a number you provided. Did you say Q3 cargo plan? down 70% versus where it was in Q2. Was that approximately, was that the number? Did I hear that correctly?

No, no, no. What I said was the B2B business, what it was in quarter one, declined sharply in quarter two, but it was replaced by B2C business. But we see that in quarter three, that B2B is back to around 60%, 70% range from quarter one. while the B2C business still remains strong.

Sorry, I meant to say charter business versus Q2, Q3 versus Q2. Previous caller had asked a question, and I heard something about down 70% versus Q2 at this point. Did I mishear that?

No, that's correct. Good morning. The agent had mentioned In response to a question of what would you anticipate for ad hoc charters going forward into Q3, it's roughly about 70%. In Q2, we ran, you know, we flew 65% more block hours in total on all segments of our business as compared to Q2 last year. That included almost daily flights internationally, primarily from China coming back into Canada. I think we flew close to 100 flights. I think going forward in Q3, we would expect that frequency to be reduced to about 8 to 10 per month going forward.

Okay. Thank you for clarifying. And so just to understand the charter business and outlook a little bit more as it was such a big part of the Q2 strength. You know, how far out do you have visibility on charter flights? I mean, are these, you know, people booking a week or two weeks in advance, or do you have people booking charter flights for the fall and winter already? I just want to understand the level of visibility.

No, it's typically, you know, within a couple of weeks to a month at maximum. You know, really – and it's really driven by – you know, people's understanding or belief of, you know, what capacity is going to be available or not available in the marketplace. Particularly, you know, we're, as AJ noted, we're benefiting, you know, significantly because of a global, significant global reduction in cargo capacity, primarily as a result, typically on the Atlantic and on the transatlantic and trans-Pacific as a result of, you know, sort of the elimination of virtually most of the international wide-body passenger flying and all that belly cargo capacity that's gone. So customers typically, you know, are looking to see when if any of that belly capacity is going to return. I think the consensus in the industry is it's going to be, you know, several years before we ever get back to pre-COVID-19 international cargo passenger travel levels. So I think that bodes well for cargo jet and the demand for dedicated charter services going forward.

Completely agree. That belly capacity was never really operating anywhere near capacity, usually very low. load factors on that but so I mean could you as you look forward would you say that you know some of the I would say still very strong but softer than Q2 car charter demand is demand driven or has there also been some supply that's been added to the market by other competitors that you know risen to met some of the heightened demand as well and how much is that a factor?

I think the competitive factor is not so much as the air, because every cargo airline operator is pretty busy with something or the other. More people have, obviously, because now they have time, they've switched a lot of supplies that have been stockpiled now and moved to surface or ocean free, as we call it. So it's not that We have 20 other carriers coming in and quoting on other charters. We have a pretty good set of customers. We have a very loyal customer base that, you know, certainly the inquiries are there for charters. As we talked about vaccine, as we talked about supplies, there is always something or the other happening. We still have a number of charters booked for PPE for the quarter three. But as I said, they're nowhere near what quarter two was. And, you know, and yes, great for our business, but not great for any of us if we were to go back to Q2 levels. So there is activity. We do have quotations out. We do have, you know, certain dates booked, some preliminary, some fixed. There is increased level of activity from normal. But is it close to the quarter two level? Certainly not.

Last question for me. I'm curious just to get your perspective on, I mean, how close this Q2 performance was to the functional capacity of cargo jet the way it's set up right now in terms of the fleet? Was this about as good as you could expect given, you know, the current infrastructure?

Well, let's put it this way. It was certainly put over people and fleet to test. And it certainly showed that if we ever get into this kind of a situation or increased volumes, it certainly shows that we have a lot of utilization that we can press into service if the demand for charters, demand for overnight demand for ACMI came in, and that's part of the reason we have added another aircraft, because we were fully expecting that aircraft to be occupied the day it comes in. So, what does that show? That we do have capacity to do these charters on the weekend, certainly during the day, after running the overnight network, and with the additional plane coming in, certainly expansion of ACMI opportunities, yes. So we stretched our resources all the way to the limit. And certainly, is that sustainable for long-term with existing fleet and people? Certainly not. We added at least 100 jobs temporarily on contract in the past quarter. And, you know, we certainly feel that the resources we have currently can handle a lot more than what you saw in quarter one. Thank you very much.

Thank you. Next, we'll go to Mr. Koren with Acumen Capital. Please go ahead.

Good morning, and congratulations on the great quarter. Thank you.

So, just an operational question for me. I'm just wondering how the domestic network was able to scale with additional flights in Q2 and what changes you might have made going into Q3 based on demand levels.

I can take that. As AJ noted, we flew as a result of being able to defer some of our heavy maintenance checks with approval of Transport Canada and then sort of some reengineering of our network that allowed us to free up, primarily free up some aircraft to take on the international charter business, but it also allowed us, you know, to leave the sufficient number of aircraft that we required to meet the growing demand that we had primarily driven by e-commerce in Q2. And as I noted, we flew about 65% increase in block hours in Q2 versus last year. The vast majority of those were long-haul flights primarily to Asia and back. But we didn't have any issue in terms of capacity on the domestic network. In fact, we've we had room for more growth if it had occurred by double utilizing some of the aircraft during the day that we typically would do during peak season. We didn't do that. I don't think we did it once in Q2.

And then just looking towards the opportunities in charter, I think Adrian said that there are PPE flights to the U.S.

Are those opportunities still available, or are they decided just with how the crisis has kind of gone?

No, some of the PPE supplies have shifted to Turkey, actually, not U.S. that much. But U.S., there is a lot of supplies coming in. As you know, we do six flights a day for U.S. from DHL, and we see a lot of medical and PPE stuff that is coming in from U.S. on those flights. But those are not charter flights. Those are ACMI flights. But our direct, a lot of China flights have now shifted into the Turkey region. And what is the frequency of those turkey flies expected to be?

Sorry, Nick, I didn't hear your question. The frequency? What is the frequency of the, yeah, of the turkey flies? It's two to three a month of the eight to ten that I had indicated that we look at, we would look at doing going forward. Great. That's all for me.

Thank you.

Our next question comes from Kevin Chang with CIDC. Please go ahead.

Hi. Thanks for taking my question here. Maybe just on the PP&E, I think the Canadian federal government is looking for a private logistics partner to, I guess, create a permanent supply chain solution to move medical supplies like PPE and syringes. Just wondering, is that something you're looking into? Is that an end market you would want to increase your exposure in longer term, just given some of the nearshoring? issues that have emerged through this crisis?

Yeah, we're certainly on the list, and the opportunities come up for any of the logistics that involve air freight and cargo and urgency. We're certainly in the mix, and as the opportunities come in, we certainly put our beds and our fees into those opportunities.

Okay. Thanks. And just last one for me, it's pretty clear that, you know, there's some structural growth here within charter or ACMI, just given about capacity. Just wondering what you think longer term that could mean for growth or potential growth in an international scheduled service, something more permanent, or is that difficult to do because of, like you said, you have two to four weeks of visibility with a lot of your customers, and maybe they're not willing to sign on longer term?

Well, you know, the reason people are not willing to go three- to five-year deals is because nobody knows what the demand is going to be. But let me give you one example. You know, sure, a lot of – let's take, for example, companies like DHL who use their own aircraft and commercial lift for international cargo. Now, you know, there's not a whole lot of commercial lift, and – They're doing a lot of charters or ACMI with us and other carriers. The service levels offered by ACMI or charters is far superior to, you know, belly cargo. And I think it's a matter of habit. You know, they certainly get spoiled by being on an all-cargo aircraft that operates at their convenience, goes from when they want it goes into, it's offloaded within 30 minutes and in the warehouse, we can accept cargo till 15 minutes of the flight and load it. So when people see the differences, and we've noticed that in many cases, you know, it seems like when you're sitting home and ordering supplies online, your habits have changed. And we see similar trends in this where You know, we have heard comments from many of our customers who are doing HMI and charters, and because the belly capacity was not available, they will all come back and say, wow, this is, like, great. We can get our drivers out on time. We can get our stuff offloaded. We don't have to wait three hours for it coming out of the belly if the passenger flight is late or if there's too many bags, the cargo has been bumped. So the level of service people are getting used to, we are hoping that at least some percentage of it will stick going forward.

That's helpful, Kala. And maybe just one last one for me. Just with all the puts and takes, you know, when I look at your block hours in the quarter, you know, a record number, I guess, of any quarter, when you look out into Q4 and you get into, you know, your traditional peak season, do you think block hours exceed what you saw in Q2 or do you not have enough visibility at this point in time?

Yeah, we don't have enough visibility because a lot of hours in Q2 were a lot of charters. We certainly will see an increased activity domestically for sure in quarter four from an indication from our customers that get ready for a bigger peak. But certainly the block hours domestically would certainly exceed what you saw in quarter two. Excellent. That's it for me. Congratulations on a great quarter there. Yes, thanks, Kevin.

We will go next to Naman Sati with Orient Bank. Please go ahead.

Hi. Good morning, everyone. Good morning. So my first question is really on the pricing side. I was just trying to understand if you guys have any room within the charter services to further improve pricing. And just if you could remind us on the overnight segment, when will the commercial pricing increments come up for renewals?

So, as for the pricing opportunities on, you know, charters, you know, we want to be reasonable. We don't want to seem like, obviously, we were much better than international sites that, you know, Antinox and some of the other stuff you saw coming into the country. So our pricing, our capabilities, and our service is far superior than any of the international charters that some of the government agencies did initially. Yes, there's opportunities to take better prices. And, you know, obviously, U.S. dollar is a bigger dollar than our dollar. And We can take those opportunities, but not at the cost of sacrificing what Canadians need in this hour. And being Canada's cargo airline, we pride ourselves as Canada first, to be honest with you. And, you know, our margins are healthy margin and, you know, we're not increasing them in the near future because that would, you know, that would not be right for us to be doing that at this time. We price it reasonably compared to others, but we also make it up with a better service.

Yeah, that's great. And if you could remind us of on the overnight when the agreements will come up for repricing or renewals?

No, we have, there's no agreements that are coming up for pricing at this time. But we did not have any sort of COVID surcharges and some of that stuff that other companies have done. We did not go into that. We have longer-term agreements in place. We always continue to, you know, check with our customers. If the demand shifts, what needs to be done? Do we need to tweak the price? If there is a growth opportunity with them, we are always in constant discussions for win-win solutions between our customers and ourselves in terms of opportunities and how we can improve both of our businesses, whether they're growth-oriented and whether they are yield-oriented and whatever we do. That's a constant discussion. But as contractually a concern, we don't have any other than normal CPI increases due. We don't have any sort of increases that are out of the ordinary planned. at least for the next few years out.

Perfect. That's great, Kader. And just one last one. I understand it was a solid increase in demand. Have you guys turned away any of the clients in quarter two or were you able to satisfy anyone that came to you for services?

Yes, internationally, yes. If I had 20 more planes, I think we could have filled that. ACMI-wise, yes, we had many opportunities for ACMI as well, both shorter-term and medium-term opportunities, not from existing customers but new customers, but our priority has always been, you know, our customers have been very loyal to us, and our first opportunity, it was certainly, you know, opportunities for us that would have given us higher profits and given us more you know, hours to fly and everything. You look at it, we concentrated on our existing customers and met their demands, and we turned away a lot of charter work internationally. We did not turn away any domestic business, obviously, because we were able to accommodate and get some extra flights going. But certainly on that side, yes, we did turn away a fair bit of business.

That's all from my end, and congratulations on a great quarter. Thanks. Yeah, thank you.

Our next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

Thanks very much, Robert. Yeah, congrats on a good quarter, AJ. So you mentioned that you hope that we won't be in a situation where we'll have the same charter revenue in a quarter like this again, and that being because of the demand for PPE would indicate something going wrong. But if we do, you know, hopefully get a vaccine, won't there be an overwhelming demand for airlift capacity both into Canada from wherever the point of manufacture is, and then distributed across Canada? In other words, couldn't we see a similar and significant charter line item here for you in the event that we do get a vaccine?

Yes, we definitely see that vaccine and related supplies or treatment drugs that, or tests even, for example, you know, if the government rolled out a 90-minute test as UK did, and there's 90 million tests that that are going to be rolled out in UK. You know, stuff like that would be smart opportunities, and we're certainly hearing about it. We are looking at the trend. I think as people, by the end of the year or even before, certainly expect that inquiries that are coming in for charters seem to be all from you know, where the vaccine plants are, places like India, places like Eastern Europe and all that. So, we certainly see that there will be, and this is a time-sensitive product. You know, it's not something that you can put on an ocean and wait for it. It's needed. It's needed like yesterday. So, there's a lot of supplies around treatment tests and cure and vaccines that are floating around in the market and people are preparing. So, we do get calls on those. inquiring about what capabilities and some of those are from the existing clients and government agencies. So, we do see that.

Yeah, and with the government now signing a supply agreement with Pfizer, have they approached you yet for, you know, see if they've got that contract in place? They've got to come up with some way to get it to Canadians. Presumably, you know, I know they have the Minister of Procurement's got a got a tender out there for the national distribution of that. But what about getting it into Canada? Any word from the government as to securing some of your capacity up front?

With the government, we have ongoing discussions of not just particular product, ongoing charter capabilities. You know, we certainly participated in that tender from the air freight standpoint. But I think that, you know, we are a proven carrier to the government where, you know, we did so many of these China flights without a hitch. And we're certainly on their radar. We have discussions with them on, you know, PPE and other supplies. You know, we don't like to ask what's in this flight, whether it's, but we can certainly guess that this is not a PPE flight. This could be a vaccine flight, or this could be some other product, medical products that are needed. but those discussions are always happening with the planning people, you know, inquiring about. Nothing has been booked so far, but the trend, you're absolutely right, will shift from, you know, PPE to more into tests, treatment, and vaccines.

So let's just, you know, go into the future a little bit. Let's assume, you know, for the sake of just from a hypothetical that the first quarter is 2021 vaccine treatment is authorized and available for Canadians. Could we see another charter revenue line that you delivered here in the second quarter in that quarter?

Well, look, I mean, I think there will be certainly an increased activity. Would it be level, would it be to the level of PPE? Probably not, because If you look at PPE, there's 500 million masks that have come in here, gowns, you know, gloves, wipes, sanitizers. I mean, all that stuff was needed and has been stockpiled. Vaccines, even if you look at three per, there's 100 million vaccines, right? So they will not equate to the volume that the PPE was there. but it would certainly be an increased activity from that standpoint. That makes sense.

Yeah. So, and you, you know, you very likely quote dedication to Canadians on PPE and presumably on vaccines as well. Is there strategically, are you thinking about, you know, just sending aircraft other, you know, in between those times of a vaccine and now that PPE is going away, Could you have your aircraft go chase now the highest bid internationally, even if it's not servicing Canada? Is that an option that you're looking at?

Yes.

I mean, with the capacity, now that we have some excess capacity, we are entertaining quotes from the international to international rather than just Canada-focused. You know, we certainly have a dedicated fleet that we could make available at a short notice on the Canadian service. But, yes, now this quarter we have started to quote some activities definitely on business in December, business in November. You know, we have certainly been very active in that market to see what's available and what we can carry. Yes, that does open up, and we are actively pursuing it. That's fantastic. Appreciate the call, as always, AJ. Stay safe. Thanks.

Thank you. Our next question is coming from Amin Shah with Beacon Securities. Please go ahead.

Thanks, operator. Good morning. Congrats, guys, on a strong quarter. One question for me, maybe on the B2C, if you have visibility – Some of your bigger clients are noting uptick in changes to behavior, driving grocery demand and the like. I'm not sure if you have visibility into what is going on on your planes from that angle. Are you benefiting from that? And is there things that you guys can do to to be able to carry that volume because that seems to be an uptick demand and stickiness in the change in behavior on the consumers on that side. Any call on that would be helpful.

Yeah, good morning, Amanda and Jamie. I can answer that. Yeah, we've definitely seen, you know, that's been a part of the growth of e-commerce on our, that we experienced during the quarter. It's sort of all driven by, I think a big part of it is driven by people working from home and more people being at home and being reluctant to go out to stores. It includes, interestingly enough, we do carry some of the groceries and some of the food online orders, particularly on certain lanes. In Newfoundland, as an example, out of the East Coast, we have a large portion of our e-commerce business is actually food. It's definitely a part of the mix.

Daily items, we see a lot more people work from home and We see a lot of those kind of items now becoming, you know, people just when they're out of pants, they're out of pants, like nobody's going out and buying, or if they need any stationery, if they need any daily supplies. So we see a lot of that activity happening today. And as the trend continues from work to home, many big banks, insurance companies have all told people to work out of the house, and I think, you know, we'll certainly see the B2C demand staying strong for sure.

That's great. And one more follow-up for me on the pricing, and I know you guys have tried to run a fair network, but some of the operators in the U.S. have been passing in price increases and, you know, have not noticed any complaints from their retail clients, at least in terms of the price increases. How is the environment and the discussion, especially as some of the costs that you guys have been experiencing related to COVID looks like they're going to stick? So how is the conversation on the pricing with your clients going in that front, and how do they understand, you know, for such dynamics?

Well, look, I mean, you know, we are the only company in our industry that had a hero pay for every one of our employees for four months. When we ended that on July 7th, we ended up with a sizable bonus to every employee in the company. We have a lot of expenses on PPE. Expenses have come down as PPE is more available now. Initially, we were buying PPE a mask at $4. You know, now it's come down to $1.50 or even less. So the prices of, you know, keeping safe have certainly come down as far as the PPE and supplies are concerned. I think that, you know, we believe in long-term customer relations. All of our customers have been with us for 15, 20 years. And, yes, some of our customers did have surcharges. And rightfully so because they were delivering a lot of product from business to business shifted from business to consumers. Residential delivery costs a lot more money and a lot more time and effort than a business delivery. You can do 20 business deliveries in the same building where people have to go house to house, you know, costs a lot more for delivery. So they were quite justified in, you know, in those charges. We do not do the last mile or the first mile. We do the middle mile. Our costs were associated with the hero pay. Our costs were associated with TP supplies. Our costs were associated with hiring 100 extra people. And our costs were associated with overtime. And all these four elements of these extra costs, more than, you know, we were more than compensated through charters and ACMI business. So we certainly kept our domestic customers at the same price without any surcharges, providing them even better levels of service, keeping our employees safe. And, you know, we have long-term relationships and we don't look at these short-term. If we were really needing it and we were totally out of pocket and it was costing us millions of dollars with no other opportunities to make anywhere else, then we would have selectively approached our customers and said, look, this cost of doing business, and we're looking for an increase. But fortunately, we did not release really need that, you know, we did not need that kind of surcharges from the customers because we were able to make it up with other businesses.

That's great, Colin. Thanks for answering my questions. Congrats again on the quarter. Thank you.

Thank you. And we will take our final question from Kunar Gupta with Scotiabank. Please go ahead.

Thanks, Kunar. Hi. Thanks for taking my question again. Just a follow-up, actually. I think, like, obviously a lot of discussion on the pricing side, but I just wanted to understand on the cost side, I mean, you obviously had some PPE costs and then some, you know, additional people that you hired, those kind of costs in the Q2. Like, going forward, I'm like, if I look at the margins, you have 46% plus kind of margin, even DA margin in Q2, which is higher than your typical low 30s usually. Like, how do you see the margins evolve over the next few quarters? I'm like, should they normalize back to the low 30s or can you still stick around 40 plus? You know, the margins will be, again, You know, as you know, Cargadget's policy has never been into the guidance of any of that stuff. Maybe you should look at it in the future. But I think our key is that, you know, obviously we want a certain margin on the businesses we support on, businesses we do. We know what our domestic margins are. You know, example, you know, we are paying a fair bit of overtime to our staff right now because, you know, You know, that was the only option. And overtime is sometimes time and a half. It could be double time. Now that we have had time to sit back and relax a little bit, we're looking at more planning. Like should we continue to pay overtime or should we hire an extra 10 people but bring our costs down? And secondly, also to strain on people as we continue to pay overtime, right? So margins do derive from not only revenue but from cost side. And the revenues are what they are, and they will continue to be, you know, higher in the charter side and ACMI side. But certainly, as the domestic business is concerned, we are contractually committed to customers for longer term on the pricing. You know, we have ability to pass on any increased costs that are government-related or regulatory-related. Those choices are always available. But, you know, one of the things that Gargoyle prides itself on managing its costs in a certain way that we don't ever hand out to the customers every couple of months that we have this increased cost. You take some good with the bad. And, you know, it's our job and our duty to manage our costs and overtimes and keep our margins the way they are. You know, we have to look in-house. that why if the margins go down, the easiest solution is to go ask somebody for an increase, and you might be given once or twice, and people will start looking for other companies. So before we go to the customers, our philosophy is to look inside at why our margins are not there where they should be. Right. That makes sense. And finally, on CapEx, I think with the new additional aircraft that you added, any expectations around CapEx for this year? And then as you go forward to 2021, obviously, I'm assuming there's no additional aircraft next year. Just kind of the sea checks you have, what kind of maintenance CapEx would you expect? Well, next year, we don't, at this stage, we don't plan to add any sort of aircraft. I think we are fully now You know, this extra aircraft is obviously brought in because we feel we will need this in the peak time. You know, as Walter said earlier about, you know, vaccine and other areas. Certainly the kind of work we do right now, we feel the aircraft we added will pay for itself. This year, probably, John, do you have a color on this year's CAPAC?

Yeah, I think in the previous conference call, we estimated about $100 million. Now with the extra aircraft and along with that, you know, one or two spare engines that we're looking at now, about $150 Canadian for the full year. I think that's sort of on the high end.

Right, and that would be 60 to 70 inclusive of maintenance capex, John, or that? Yeah, that's right.

And our long-term maintenance capex average is anywhere from 60 to 65 million.

And so that's sort of a good estimate of next year, I think. Great. Thanks so much.

Thank you. That concludes today's question and answer session. At this time, I will turn the conference to you for any closing remarks.

Thank you, everybody, for... Joining CargoJet conference call. As I said, our focus remained to make sure that we kept our fleet in good shape and providing the on-time service or even better what the customers are used to, utilization of fixed assets and taking advantage of our flexible fleet and great team here pitched in and together we were able to achieve at least show that how much capacity we can create within our own network. I'm pleased to report that, you know, with our great quarter and free cash flow from this quarter and the previous quarter, we have certainly made a big headway in terms of paying down our debt. And, you know, again, our focus remains on improving our leverage, improving our balance sheet, and paying down the debt as quickly as we can. So thank you very much, and I appreciate you guys joining us today.

Thank you. This concludes today's conference call. All participants may now disconnect.