Cargojet Inc.

Good day and welcome to the CargoJet conference call for quarter one earnings. Today's conference is being recorded. At this time, I would like to turn the conference over to Pauline Dillon, Chief Corporate Officer. Ma'am, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us on this call today. With me on the call are A.J. Vermani, our President and Chief Executive Officer, Jamie Porteus, our Commercial Officer, or Chief Commercial Officer, apologies, Sanjeev Mani, our VP of Finance, and John Kim, our previous Chief Financial Officer and currently a consultant to CargoJet. After opening remarks about the quarter, we will open the lines 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 EBITDAR. Please refer to our most current press release and 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 over the call to AJ Vermani.

Thank you, Pauline, and thank you, everyone, for joining us this morning. Although there is much progress being made on the vaccinating Canadians, Many countries, including Canada, India, Brazil, and Europe, are battling the third wave of coronavirus cases and are in a race to vaccinate their citizens. One thing we have learned for sure is that COVID-19 is a formidable enemy, and until we get the majority of the global population vaccinated, the economic progress will be somewhat uncertain. The last 13 months have been demanding, challenging, and yet we feel a sense of pride I want to take this opportunity to acknowledge each and every employee at Cargadget for their dedication in supporting our customers who themselves are going through a massive change. Like many other companies, Cargadget is also adapting to the new reality. While we don't know what the new normal may look like, but we know that we are not going back to the old. Many experts are calling for the future to be a hybrid, combination of the old and the new. To us, this makes sense. For example, if people have discovered that they can improve their quality of life by ordering daily use necessities online, they're likely to retain that habit. Yet, they might want to go out for shopping of items that give them joy and retail therapy. So there is room for both. Now let's turn over to Quarter one results for CargoJet. We delivered solid revenue growth of 30%, adjusted EBITDA growth of 44%, and we generated $35.2 million in adjusted free cash flow, a growth of over 18%. In terms of business environment, we are seeing some structural changes. The biggest change in retail has been the adoption of e-commerce by small businesses. While large retailers already had strong e-commerce platforms and capabilities, some businesses were not fully prepared for the digital economy and the digital change. Now, tens of thousands of small businesses have discovered the opportunity that the digital economy presents great opportunities. So, for the e-commerce revolution was driven by the consumer's who were pushing retailers to move online, but the pandemic has fundamentally changed this equation. We feel that the next phase of e-commerce revolution will be merchant-led. Thousands of new businesses have started during the past year and that never even considered a brick and mortar store. This changes the shopping cohesion fundamentally. In Canada, e-commerce as a percentage of sales has doubled from 7% to 14% and even more within less than a year. But still, it is far behind the US, Europe, and Asia. Canada has still a lot of catching up to do. With much of Canada's retail or services businesses still closed, the B2B segment continues to lag behind the B2C segment. The growth of this segment is tied to the reopening of Main Street economy. On the operational side, we are continuing to see strong volume growth, and as I mentioned before, in this hybrid world, we expect the baseline for almost every aspect of our business to move up. While we do not expect the 2020 results to become the new baseline, we do expect a significant shift upwards from the pre-pandemic volumes to from the new baseline. Recognizing this new reality, Cargadget has spent the last few quarters laying the foundation to capture the next phase of e-commerce growth. Number one, in line with our previously stated goal, we have significantly strengthened our balance sheet, paid down majority of our debt, thereby significantly reducing our leverage. Number two, as we move past the pandemic, we will be refocusing our efforts on cost efficiency and productivity. This area definitely took a backseat and a big hit as we focused on scaling up every part of our operation to meet the customer demands. Our biggest focus on for the next six to eight months would be strictly managing our cost and the areas that we can fine tune in to make sure that the money we spent out there is for the right reasons. And we certainly cannot hide behind the COVID cost increases forever. So this would be on the top of our agenda. We invested in the fleet expansion which stood at 20 aircraft at the end of Q1 versus 25 aircraft at the end of Q1 last year. We recently acquired a 757-200 to continue to meet the demand of our existing customers. We will take delivery of this aircraft in the month of May this year. We have also added approximately 60-plus pilots in the past three to four months to keep up the demand and also to comply with the new pilot fatigue regulations. Certainly the costs of our crews have gone up substantially. Some of it is recoverable and some of it is not, and we are doing a thorough analysis to ensure that the numbers that we have added can continue to serve the demand we have on hand and also we continue to work with our pilot leadership and Transport Canada to find synergies and solutions that balance between safety and commercial viability. We broaden our portfolio of services and announce an expanded relationship with Amazon. And we are investing, attracting, and retaining top talent by key functions across the organization. With shifting supply chains triggered by a significant reset of international passenger routes, we also see opportunities in the market share on select international lanes. Transportation, logistics, space remains highly volatile, and we are constantly adapting to maintain our leadership position. We are also making progress on developing our robust international growth strategy. We are enthusiastically awaiting delivery of additional aircraft, which are 5767s within the next 18 months. These will be deployed selectively on international high yield lanes that we see the demand on. But we are also in discussions with a couple of customers who certainly have demand for these aircraft, so we do not anticipate these aircraft to be sitting idle even for a day. The available belly capacity on international routes remain tight, and we are confident about the opportunities presented by this scenario. We have no idea when the normal cargo business on belly aircraft is going to be normal, but With the reduction of white-body fleets by many airlines, we certainly envisioned a shift of this product that was traveling on passenger aircraft before towards the cargo aircraft. We also continue to seek an investment and presence in our US market. The growth in the U.S. market is tremendous. There's many routes and many areas that we cannot cover with our current license arrangements, and we continue to seek a U.S. partner for our growth strategy across the border, as many of our customers in Canada are also customers in U.S. Thank you very much for being here today, and now we'll open the call for questions.

Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. Thank you. Our first question will come from Walter Spracklin with RBC.

Yeah, thanks very much. Good morning, everyone. Good morning. So I'd like to ask a bit about the cadence of your volumes by each of your major segments. AJ, obviously you're having outsized growth compared to prior periods, so prior periods are a little harder to use as a gauge. But let's start with domestic. Typically you do better in the second quarter, around the same, maybe a bit better in the second quarter than the first, and then kind of ramp up from there as we go through the year. Is that a fair trajectory here? Was there anything in the first quarter that was abnormally lower or higher that you would call out, or is the cadence on your domestic essentially going to be kind of around that similar path?

So, Walter, it's a very good question, and it's kind of tricky because, to be honest with you, We do get estimates from our customers. We used to get them well in advance, and now it's like a week or five days in advance of what they're anticipating. It depends a lot of if B2B business is open for a while, then the traffic mix changes, the forecast changes, and if it's strictly B2C type of stuff, it's a very different mix. To be honest with you, it's been the most unpredictable times we are in. I wish I could answer your question and say, what do I see in quarter two? And I would say that at least, I think, without sort of making any advanced guesses or any guidance, we anticipate from what we have seen in the market to at least be equal to or close to, you know, quarter one. So, Jamie, you want to comment on that?

Yeah, thanks, AJ. Thanks, Walter. Just to add to AJ's comments, and the only thing that would impact, I would say the trajectory is similar, as AJ suggested, for Q2 from Q1 on the domestic side, with one condition, the lockdowns in Ontario and Quebec, certainly, particularly in Ontario, and you may have read that some of the Amazon facilities were closed down because of COVID outbreaks. Those have definitely had an impact on, or will have an impact on Q2 volumes. And then the other uh, as you suggest, you know, we Q2 and then Q3 kind of is a little slower and we build up for Q4 in a traditional year. The other thing that's a little different, uh, that will have an impact. I don't think you'll see it in Q2, but certainly in Q3, when we start operating two dedicated aircraft on a CMI basis for Amazon, uh, we'll also have an impact on our domestic volumes.

Yeah, that, that, that was where I was going with the next, next line there, uh, Jamie. So, um, you know, you've got the base volume, but I know AJ last quarter said the pricing will be different in the first half versus the last half. So you do have the new business coming on, but presumably you have a price ramp as well. So cadence for revenue on the ACMI, you know, likely to, again, go higher on the basis of both those?

Not on, well, on the domestic business, you know, there'll be a, We expect that there could be some minor dilution on the domestic network as a result of us starting to fly two dedicated aircraft for Amazon within Canada on a CMI basis that could impact Q3 volumes, but we fully expect with growth and our year-to-date growth on the domestic business would reflect the fact that we'll easily fill that any space that's caused by dilution. The ACMI business remains very strong, as we noted in Q1, compared to last year, close to 100% increase. And as AJ was touching on in his opening remarks, we have significant opportunities to continue to grow our ACMI business. And really, we're just waiting for the additional delivery of aircraft to be able to take advantage of that opportunity.

So far, we don't anticipate to cut any domestic capacity because of those two planes from what forecast we've been given and told. But just as a backup, if we were to get one aircraft loose or a domestic network, we'll have it within seven hours flying for ACMI. So we do have a backup plan on that, but we are not anticipating any cut as of now. That's what we've been told.

Okay. All right. Well, thanks very much for your time. Appreciate it.

Thank you. Our next question comes from Konark Gupta with the Scotiabank.

Thanks, operator, and good morning, everyone. Good morning. Good morning. So you mentioned, and obviously I understand you don't guide, but you mentioned that the e-commerce has taken further acceleration with the merchant-based activities here. And then now you've got this new Amazon CMI contract, which sounds like you are suggesting it's incremental. It's not kind of cannibalizing any existing volumes here for you. So if I look at for the full year, you know, and considering again, you don't guide, but for the full year, if you think about where you're heading with respect to, you know, revenue and margins, if you can, you know, share with us any color or how do you see things progress overall? I'm like, can you, You had a pretty big Q2 last year. I'm like, can you still do something similar to last year from a revenue perspective? And then from a margin perspective, I think last time, the last few times you have been suggesting, you know, like you were kind of in the low 30% margin range, and then, you know, last year you were low 40%. And so where can you be from a margin perspective with all the kind of, you know, changes you are seeing this year as well?

So let me say this to you. The Q2 last year was, A total, total driven by everyday flight to China and PPE stuff. So the short answer is no, we cannot match Q2 unless the government runs out of PPE supplies tomorrow and we are asked to do 30 or 40 or 50 flights in this quarter. So we don't anticipate. I think that particular quarter for every cargo airline around the world was a very different story. We certainly don't anticipate that it will go because a lot of stockpiles have been accumulated, and I don't think that people are, you know, going to be using air for that product in the near future. So there's no shortage of masks and PPE at this time. However, you know, there's always new things happening, whether it is COVID, you know, that we could have five flights to India for relief. Now, mind you, they don't pay that well, but at least it's incremental to us, right? So the dynamics and, you know, the environment is totally changing on a weekly-to-weekly basis. It's hard to kind of give you whatever margins would be and what we are looking at if in the next four weeks the margins, I mean, the... business comes back more B2C type of business or B2B type of business, you know, we can anticipate some higher margins and some extra volumes. But also we do have, you know, with the number of pilots that we brought on, we do have charter capabilities a lot more than we had in the quarter one, and we are hoping that there will be some increase in that business as well. So overall, you know, if I had a crystal ball guessing it, you know, and I would imagine that quarter two would be pretty similar to quarter one, close to it within five or 10% of either way. But we are not anticipating that quarter two would be what it was in 2022, unless the world change on us, and none of us want that to happen. So... We'll be happy if we can continuously maintain what we're doing today.

That's great, Pilar. Thank you. And then coming to the fleet side, so you're getting, I think, the first of the five, seven, six, sevens in Q4 this year. And then I think supposedly you also added one or at least an LOI for a Boeing 757 this year. So curious as to your thoughts into, you know, how do you see utilizing those two aircraft, the Boeing 767 and Boeing 757 this year initially and then ultimately?

Yeah, so ultimately, I mean, we are looking at the 757 because there was a demand by one of our ACMI customers like as of yesterday. This was not even on our plan. We were asked if you can operate an additional flight on a certain route, and we decided Didn't have any aircraft to do it, but we found, luckily, an aircraft that was just being converted, and we were able to purchase that aircraft at a reasonable price. So that would be deployed in an ACMI environment. As soon as we get our hands on it, it will be probably end of May. And future aircraft, the 767 that comes in in the Q4 aircraft, Primarily, it will act as a peak aircraft because November and December capacity crunch is going to be a lot of demand at that time. Last year, we had to do a lot of double turns, and we had to really create magic to keep up with our peak. Our primary purpose would be to serve our existing domestic customers to make sure that they have the peak capacity. That's been our bread and butter, and we want to don't let our customers down. And right after peak Q1 in January, we plan to deploy that on select international routes like South America, Europe, and Latin America, Mexico. But keep in mind that, Konark, we also have availability of aircraft on the weekends. At any point from Friday to Monday, we have four additional aircraft. So our international strategy will not just depend on that one spare plane that we are getting. We will also start using our equipment on weekends, as we have done the past couple of years successfully, to have some dedicated international growth starting September, October. So the plan for the next five aircraft or next four aircraft that we are signed up over the next 12 to 18 months is that our first, to see if there is a demand in domestic that we need to increase, which we are not anticipating because we also have some spare capability. The second part of it is if there is enough yields and the market rates stay high as they are today, They will definitely go into retail. Some of it will definitely go into retail international, depending on the market. If I was making that decision today, definitely with no belly capacity and the rates almost doubled than what they were supposed to be, we would have no problem filling those on international dedicated routes. But we also... have a backup plan. If that is not the case, we are already in discussions with a couple of customers on ACMI basis who have already committed to taking majority of that 5, 7, 6, 7 the minute they come out. So that is a nice problem to have when there's more demand and less aircraft. In today's market, if I had five extra aircraft at CONARC, they would be sold today. So We do always plan, number one, where can we get the highest yield and continue to serve our existing customers, and number two is go after the new markets. And number three, you know, expand some of the ACMI stuff we have. So in all three areas, we feel pretty confident that – I know there were some questions about, have you got these contracts for 757s? Well, I can tell you today I don't have a contract, but it's up to me if I want to sign one because I want to wait it out and see what's the best option for me to sign where to deploy these aircraft. So that does not give me any sleepless nights whatsoever. As a matter of fact, we have a nice problem to have.

That's a great color, AJ. And just to clarify, is that 757 ACMI customer, can it be assumed as DHL or it could be something else?

Yeah, so, you know, it could be DHL. We also have another customer in the mix, which we obviously can't talk about it right now. We also keep in mind that, you know, 757 might not be the aircraft that goes to DHL. We might be able to Depending on or any other customer, we might have to switch it with a 200 or a 300 and rejig the network. And if this one fits in domestically better, we put it there. So that is on the planning table right now. And depending on, you know, what we can free up by adding that, can we have more efficiency on our domestic network with adding a 757 and freeing up a 767-200? which gives us more revenue outside. So those are some of the things the modeling is being done right now. So we haven't decided the type of aircraft that will go to ACMI, but certainly within the next 30 days we will have that decision.

That's great. Perfect. I appreciate the time.

Thank you.

Thank you. Our next question comes from David Ocampo with Ormart Securities.

Good morning, everyone. AJ, can you remind us if you have any other contracts that are up for renewal over the next few years? And then probably most importantly, based on your experience with the RFP process with Amazon, can we expect a lot of competition, particularly from the passenger airlines?

Well, we just concluded a deal with Amazon, which is a four-year deal with three two-year options. So the ink is not even dry on it, so don't expect that to be discussed or gone out for RFP or renegotiation anytime soon. We also have a strategic relationship and warrants with them. So, you know, looking at both the factors, we don't expect that, you know, unless we cannot service Amazon, which I find that it will be – you know, absolute disaster and it's not going to happen. I don't see any reason why that Amazon, the service they're getting, the value for the money they're getting, the past six years relationship, our proven track record, our own ground handling, our trace and track and IT is totally embedded in them. We are giving them the value for the money and I think after a year of looking at the Canadian marketplace, they selected Cargojet to fly those two aircraft for their additional growth. And to be honest with you, it was kind of great for us because it gives us $80 million opportunity to free up the cash and develop other businesses with it while maintaining Amazon. So I don't anticipate that that would be the case in the case of Amazon. We don't have any contract renewals to 2025 for now, at least four years from now.

And just building on the Amazon contract, I know it's not dilutive to your network, but have you gotten any pushback from Canada Post on that?

Well, when I say it's not dilutive, you know, Jamie had mentioned earlier, there could be initially, as we learn where the business is coming from, where it is going, it will take at least three to six months for forecasts and things to settle down. So we could face some minor dilution, but the thing is it will be made up for the additional volume growth that they have told us they're anticipating. So just to want to clarify that on it. Your second question is would that have an impact on Canada Post? We have been told that this is for the additional growth, and we've been told by Amazon that this is not cannibalization from you or others. But Do I have a solid guarantee that it's not going to have an impact on their volumes? I can't guarantee that, but from what we have been told, the principle of the deal is growth. The principle of deal is not taking from left pocket to right pocket.

That's great. And then finally for me here, acquisition opportunities were flagged, and I think it has been for the last few quarters. What are you seeing out there in the marketplace? Is there any specific area or geography that you're looking at? I know you mentioned a U.S. partner. Is that where your interest lies now?

Yes, we are, you know, we have, that's our sort of growth area because a number of our customers, as you know, they are American. They also have need for transporter international, which we have been doing with a Canadian license. But then internationally, there could be a flight that goes Cincinnati, Miami, and Panama that we can't do because we cannot do the Cincinnati, Miami sector because that has to be done by the U.S. carrier. And so, you know, there are many examples of those kind of routes that we cannot go after. And since we do have great customers who rely on us on 10, 11 planes for ACMI flying internationally out of the U.S., but we're kind of handicapped with not having an investment or license in a U.S. carrier. You know, we are looking at that opportunity very seriously because we feel there is a lot more opportunity to place aircraft and to have an ownership position which meets the DOT and FAA requirements of 25% investment. The company will seriously... pursue that over the next quarter to have an investment that gives us another outlet to sell our products and services and expand.

And what leverage are you comfortable going up to? I know you've gotten it down to a very, very reasonable level, but just trying to get a sense of an order of magnitude on how much capital you guys have to deploy.

If we were to look at a U.S. carrier, it's not going to be a huge capital investment, to be honest with you. It would be more of a startup. Yes, we've looked at many. There doesn't a week go by when a U.S. carrier doesn't want to sell. But our idea is to, we do have the strength and the backroom operations of cargo jet, which can be With some modification and FAA approval, we can use that on American carriers. So we don't anticipate to spend hundreds of millions buying a company unless something very good came up. I should never say never, but our initial thoughts are that we're going to invest in a small license more than a carrier and provide our backroom capability and utilize the overhead over there so that we get the synergies and we're not paying for something that is already built because we are fully capable of within three to six months or a year to get it up to the standards of cargo jet and enjoy our growth in the U.S. So I would say anywhere our investment in this project would be between, and that's strictly guesswork, no more than I mean, $5 and $20 million type of numbers. So we're not looking at any, any huge numbers in this regard.

Mr. Keller, thank you so much. I'll hand the call over.

Thank you. Our next question comes from Kevin Chang with CIBC.

Good morning. Thanks for taking my questions here. Good morning, Kevin. Maybe just going back to a comment you made earlier about as you kind of transition out of the pandemic, you know, focus will turn to maybe taking out some of the costs even occurred as you as you manage through, you know, the past 12 months or so. Do you have a sense of, you know, what structural costs you can take out of out of the business today or in another way? Is there is there a margin you think you can get to on your current revenue footprint just based on, you know, some of these cost efficiency initiatives?

Yeah. So, you know, just to give you an example, Kevin, I mean, this is all scattered over costs. Like for example, you know, when you are getting additional volumes, you're not able to hire many people because of the pandemic. People don't want to work because they're getting their government allowances. So we had to rely a lot on overtime in every, every direction. So, That cost is skyrocketing. So I think when things return towards normalcy, if the businesses increase, we can hire people at normal value rather than blowing over brains on overtime, for example. The cost of PPE that we are bearing, the cost of testing that's going on, that we have private testing, that's costing us a lot of money for the employees. We are also giving out... various incentives to people to continue to stay healthy. We also have, you know, certain routings cannot be done on certain planes because of certain COVID situations in certain countries. We cannot fly or get charter opportunities, for example, certain places in Asia because of breakouts in certain countries. So crews are being staying in Cincinnati, a lot of crews are staying in Cincinnati, the hotel cost. We don't have, for example, direct commercial flights to transport our crews to Cincinnati on a daily basis because there are three stops, and by the time they get there, they've lost their day. So, you know, as you know, CargoJet has two challengers, and that was the intent of these. We are using those challengers consistently six days a week to transport 12 pilots to Cincinnati every day and bring 12 pilots back. It is a costly affair, but it gives us the efficiency and ability to serve the customer at this time. So a lot of costs have creeped up on us because of the pandemic and how we had to work things around to continue to serve our customers who depend on us on a daily basis. So there's a lot of these costs that we need to relook at as things ease and the vaccination comes in and bring back the business to normal. Now, you know, when the business comes to normal, the costs, not every cost always disappears, but our aim is to identify those costs and work at all of them and get the best out of the what we used to be before, but also with that change, there might be some kind of balance between volumes. So if it is today, let's give an example, it's a 10 million pound a week on certain lane, it might only be 9.5 million. So there will be some volume adjustments and revenue adjustments. And if we did not make the adjustments for cost and the revenues adjustments are being made by the marketplace, we will not be very prudent then, obviously. So we want to make sure that we address the cost issue. Yes, there will be some gains, but there will also be some gains wiped out by the lower volumes. So I just want to make sure that it's not just the costs that are going to come out. We are also anticipating some of this stuff that's flying because of COVID, you know, might get reduced as well.

Okay, that's great color. I'm wondering, as you sit here today, it's pretty clear you're facing more demand than you have capacity and people are scrambling given the dislocation of the air freight market today. Are you seeing any changes in competitive or customer behavior? For example, are customers prefer to have a shorter contract now because they don't want to lock in elevated rates today versus maybe what you saw pre-pandemic. Are you structurally seeing more passenger airlines or competitors look to ramp up capacity to take advantage of maybe a structural decline in belly capacity over the next few years here? Just wondering what you're seeing in the broader market from a competitive perspective as you talk to customers and as you kind of think about filling in the capacity you're investing in today.

Yeah, so it depends on the segments of the business. Domestic, no, I don't think we have seen much change in the customer contract type of discussions. Transporter and international flights are always, you know, different story. They are kind of not as ironclad as the domestic customers for longer and longer term. But, for example, you know, some of the contracts we have on ACMI, you know, if they're flying a route from Cincinnati to Mexico and it takes 200 hours a month, you know, they have the option to deploy those 200 hours somewhere else. So when you are on a preferred carrier list, you know, we are flexible. It doesn't matter where they make us fly. It's their plane. They pay for it. They can fly anywhere. So the contract durations are certainly not five to seven years, but they are certainly longer term than any. They're not like 30-day contracts either. So they're somewhere in the middle, and also they have the right and we have the flexibility that those routes can be shifted to other routes as the customer demands. So international and those kind of services are always, I would say, medium-term contracts, not short-term contracts, and that has been the trend even prior to the pandemic. And You know, that's the market. We have not – we have actually – we started with one plane with DHL 15 years ago, and now we are up to 10 or 11. So our track record, our growth, we have been the number one performing carrier. And, you know, we are hopeful that these are not short-term. That's what we've agreed on, and we continue to grow on that. But, yes, on the international and transporter markets and ACMI – The contracts tend to be not as long as the domestic contracts.

Okay, that's very helpful. That's it for me. Thanks to Congress and us all to start the year here.

Thank you. Our next question comes from Chris Murray with ATB Capital Markets.

Thank you. Good morning. My first question is really maybe thinking a little bit about some of the B2B traffic that you guys are seeing. I'm just wondering, I guess, a couple things. One, You know, when we saw the shutdown of the Suez, there was some discussion around, you know, folks kind of rushing around, but there's also a lot of discussion around supply chains. And I'm just wondering, as we go into the back half of the year and we get economies reopening, your thoughts around, you know, how much of that volume may move just over ACMI or how much, you know, you might be interested in picking up through charter to try to do maybe both if you can.

Yes, so we have seen some increase of charter activity because of that. I mean, obviously, the problem has been solved now, and things are moving freely. We have seen an uptick in the international charter activity, at least from a court standpoint. I mean, I wish we had more capacity to do those. You know, aircraft are fully deployed at this time, and... We certainly have taken advantage of some of those one-off opportunities as our crew and aircraft are pretty busy doing what they do. But any time we have been able to sneak in those charters, we have. But I really don't think that would be a permanent situation.

Okay, fair enough. And then just one quick housekeeping question. Just stock comp in the quarter moved up materially, and I know you're now calling it out as part of your adjusted EBITDA. Was this kind of a one-time thing, or is that something we should be expecting as a kind of normalized run rate for the rest of the year?

Well, you know, we looked at that definition of the EBITDA with the stock comp, and what it is is a basic distraction because they have no operational significance. And If we were to look at 2019, we would have been $4 million ahead. If we look at 2020, we would have been $10 million, $9 million down. And it has no operational significance. And then we consulted our auditors. We looked at what some of the other companies are doing. And from now on, we have adopted a policy that since it does not operate, affect or have any impact on the day-to-day operations and the numbers are mixed in with those. It's kind of a distraction when you have $3, $4, $5 million of gain or loss. It's really immaterial at the end of the day, but it takes away the focus from what is the operational income, what are the operational statistics, and we decided to adapt in line with most of the companies are doing not to include those on the EBITDA.

Okay, sorry, so just to clarify, this wasn't a new issue. This is more of a mark-to-market of the obligation.

Yes.

Okay, thanks. That's helpful. Thank you.

Thank you. Our next question comes from Matthew Lee with Canaccord.

Hi, morning, gents. Good morning. So my understanding is that the growing B2C market and international opportunity kind of gives you, you know, an opportunity to extend the number of hours that each plane can operate per day Do you have a target as to how many block hours you want your planes to operate?

Well, I mean, the target, what is our ideal wish? I mean, our ideal wish is that we could fly these planes for 18 hours a day, but that's certainly not, you know, possible because you need downtime for maintenance. Otherwise, you could fly these and then you would not have the performance and everything will – All hell will break loose. So, you know, if any of our planes can do anything between 200 and 250 hours a month, that's a pretty good average for us to attain.

All right, thanks. And then maybe on pricing, you know, it appears that cargo revenue per pound was moving kind of in the right direction in terms of growth despite this declining ACMI pricing. Can you maybe talk about how improving domestic pricing can offset some of the declines across other segments for 2021?

So you mean the domestic can offset the ECMI pricing?

Yes, correct.

Well, keep in mind the ECMI pricing is never going to be high because that's a full load we handle for the customer. You should also look at that the ECMI pricing is pretty risk-free where we don't take the commercial risk. We make a certain margin, we are happy with it, and we fly for a particular customer. Domestic market is a very different market where the pricing is, you know, per pound. You know, there are contractual commitments where people buy certain space because they want to make sure they have the space in the peak, they have the space in certain spikes, and going back to school sales, and, you know... peak time there's a lot of events that happen during the year where people buy a government year end so there's a lot of space that is protected and that's why you're able to get a lot of higher revenues out of domestic we also have a one-way market in the country as you probably know everything is exported from here to west coast and the east coast hardly anything comes back so that has to be priced into as well So the country being so large, country being one-way traffic, if you go to U.S., you will have L.A., Seattle, and Seattle, L.A. Like both sectors are full, or New York, Seattle, and Seattle, New York. Both sectors are full. We don't have industrial bases in our country that can fill out those. And hence, the domestic numbers are always higher than any other part in the world. So... you know, to say that we can get higher domestic revenues to offset the ACMI charter business or ACMI and charter business, it's not the right way to look at it because ACMI and charter business, we compete with international and U.S. carriers, whereas domestic, we are only competing right now with domestic white-body aircraft of West Ottawa Air Canada. So, It's a very different landscape, so I would not mix the two up in terms of trying to balance the yields out. Part of the reason CargoJet diversified its businesses was to take advantage of our infrastructure, our people, our facilities, and our aircraft, our know-how, our IT, to say, now we're going to go into ACMI. Now we're going to go into international. And as I had mentioned earlier, you know, in my last couple of calls, that adding ACMI and international was a no-brainer because for us it was just like when McDonald's was serving lunch and dinner and they added breakfast to it. So for us it was no real increase in cost in terms of infrastructure and people, but we were able to capture those revenues. So that was our philosophy and that You know, it wasn't certainly done to compensate for the yields with each other. It was strictly done to increase the overall yields and diversification so our business is not dependent on one line of segment.

All right. Thanks so much.

Okay. Thank you. Our next question comes from Cameron Dierksen with National Bank Financial.

Thanks. Good morning. Just maybe a few quick cash flow questions for me. One is just on the, I guess, the buyout of the finance leases. There's probably some detail that's in the MD&AN app. Can you just indicate how much of that is left for this year or the magnitude of that?

Yeah. Sanjeev, you have that number or John?

For this Yeah, John, go ahead. Go ahead, Sanjay. For this year, we will be buying one aircraft, and that will be around $15 million, and then the second one is in 2023, and the third one is in 2027. So for this year, it will be a $10 to $15 million one.

Okay, okay, so that's what's remaining, and... And can you just maybe update us on, I guess, the CapEx expectations for the full year 2021 and any, I guess, further commentary around the timing of the, I guess, CapEx requirements for the 777s that are coming down the road?

John, you want to? Yeah. This year, you know, we're estimating about 90 million of maintenance CapEx requirements and then probably about another 100 to 150 of growth CapEx. And really, it could be higher if we end up buying some feedstock for the 777s. So the total CapEx this year of 225 to 250, that's without buying feedstock for the 777s. With the 777s, we are potentially looking at not having to buy the feedstock until much later. So the majority of that spend, call it $150 million Canadian for the two 777s, will be in probably late 2022 and then throughout 2023.

And, John, that will also include the five new 767s that are being converted, right?

Yeah, the five 767s, they start conversion. The first one is inducted this May, and then it's basically nose to tail every five to six months. We'll get another one. So that spend roughly, you know, I think 30 million U.S. per aircraft will be sort of fairly even starting the mid part of this year and then extending out to the end of 2022, beginning of 2023.

Okay. So if I think about 2022 CapEx, excluding the 777s because the timing is uncertain there, but I would guess it would be lower than that 225 to 250 number in 2021. Is that fair to say?

Yeah, I think so. It might be similar depending on the timing of our maintenance CapEx, because as you know, maintenance CapEx is driven largely by engine refurbishments. I think it'll probably be a pretty light year next year. But we can probably give you a bit better guidance for next year once we get into the latter half of this year. But, you know, typically we're looking at $80 million, $90 million per year in maintenance cap tax next year with the 767 spelling, at least another $100 million.

Okay. Got it. Okay. No, that's great, Keller. Thanks very much.

Thank you. Our next question comes from Michael Goldie with BMO Capital Markets.

Hi, guys. Just a quick one for me. Can we think of this all-in charter as a rough run rate for coming quarters, or is it still fluctuating quite a bit?

Yeah, I think it's still fluctuating. We have done some flights to China and a few other countries. It's on and off. It's kind of unpredictable. We do have good sort of bookings for the next quarter, month or two. And it's one of those things that, you know, if we had a normal year, we know what charters we get and where we get them. Here it's a demand base, especially for if it's medical supplies and COVID supplies, they take priority over our normal charters. You know, obviously we don't let our customers down. We find a way to get those done. But I anticipate that the charters would be no less than what we did in the first quarter. Okay, thank you.

Thank you. Our next question comes from Ramsey Neelam with State Street Global Advisors.

Hi, good morning. I've got a couple of follow-ups. Can you give us a sense of the current B2B volumes compared to pre-pandemic level and also if possible, Can you give the broader mix of B2B and B2C volumes in Q1?

Yeah, Jamie, we might not have the exact sort of statistics and numbers, but I think Jamie can give you the general color on it.

Yeah, thanks, Ramzi. It is correct. I mean, one thing you have to appreciate is we don't have direct visibility with every customer as to what percentage of your business is is strictly B2B and which is B2C, as most of them participate in both spaces. But obviously the B2C business is growing. If you look at Pure later, as one of our larger customers, I think a year and a half prior to the COVID-19 pandemic, they had publicly announced that they expected that over 50% of their business would be represented by B2C within the next five years. I think that's, they would say today, but that's definitely been pulled forward by several years and they would expect to be if not at that level now, certainly at that level within the, you know, the next year or so, uh, the, the downturn, you know, the impact on the B2B volumes that we saw, you know, that started really in, uh, in March and April of 2020, when the pandemic started shutting down, uh, parts of the economy across the country that, you know, had a profound effect on, on if a customer was, was strictly in the B2B business. Uh, if I looked at somebody, um, uh, like Brinks or, or, um, Initially, one of the transport companies, ICS Insurance Career Service, that were at one point strictly in the B2B business, their volumes were probably down by 50%, and then they sort of came back in the summer of 2020 when the economy started opening up again across Canada and again saw a strong peak period, I would say a normalized peak period in terms of B2B volumes, but then we've seen Not as dramatic a downturn as what we saw initially in the second quarter of 2020, but certainly seeing a negative impact on those B2B volumes because of the continued shutdowns, particularly across Canada. So as we see the vaccines roll out and economies come out of lockdown, we fully expect those volumes to come back, I would think, by Q4 at this point.

Thank you. That's great. Maybe one more question quickly. Do you see any structural shift of the contracts? I mean, the clients are moving from passenger aircraft to the cargo players, given the uncertainty in the passenger belly capacity, I mean, broadly speaking, in the industry?

Go ahead, Jamie.

Yeah, no, Ramzi, we definitely see a significant structural shift. There's been Prior to COVID-19, as we've said many times, over 50% of the world's air cargo traveled in the belly of passenger aircraft, primarily wide-body passenger aircraft operating intercontinentally and internationally. You've seen a significant decline, obviously, in the frequency of that. Subsequently, you've seen most major airlines around the world, especially the large global ones like Lufthansa, KLM, British Airways, and here at home with Air Canada, already announcing significant early retirements of big parts, significant parts of their fleet, primarily their wide-body aircraft that had huge cargo carrying capabilities in addition to the passengers they carried on the main deck. Those aircraft are not coming back into service anytime in the future if they're announced the early retirement of those aircraft. So that's created a significant void and a significant opportunity for for companies like Cargojet that are operating dedicated cargo aircraft to continue to grow both our ACMI business and to expand our international scheduled commercial business.

Thank you. Thank you very much.

Thank you. I'm currently showing no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

Yeah, thank you everybody for joining. Sincerely appreciate the support we've received from the financial community to, as we call it, fortify our balance sheet, and hopefully we continue to grow with this kind of support from our customers, our investors, and our employees. And I want to thank each one of you for participating, and great thanks to my team for making quarter one a great success. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.