Cargojet Inc.

Good day and welcome to the CargoJet conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Pauline Dillon, Chief Corporate Officer. 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 Aja Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Commercial Officer, and Sanjeev Mani, our Interim Financial Officer. After opening remarks about the quarter, we will open the call for questions. I would, however, 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 and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP incomes. I will now turn over the call to A.J.

Thank you, everybody, for joining us this morning. After a long 18-month dark shadow of COVID, there is some sunshine emerging as more and more Canadians get fully vaccinated. There is no question that the past 18 months have been challenging for businesses, governments, healthcare workers, employees and students, and companies like ours. But what I was most impressed which is the human spirit and its ability to adapt, adjust, and thrive. While the initial shock of shutdowns forced incredible hardships on businesses, we saw many businesses quickly adapt to the new digital reality. CargoJet is no different. After being declared as an essential service, CargoJet employees demonstrated heroic effort to keep their business going despite an unprecedented rise in volumes in a very short period. We also want to thank our customers who trusted us and trusted our team with their deliveries at this critical period. Like many other companies, CargoJet is also adapting to its new realities. While we don't yet know what the new norm may look like, we do know that we are not going to go back to the old. One word that we are hearing most often is hybrid. Return to office, schools, universities, and even shopping. People are adopting a hybrid approach to their lives. As economies reopen, people are eager to step outside and enjoy what they miss the most, the restaurants, the movies, the shopping, and the travel. At the same time, they have discovered that many of their routine tasks can be handled more efficiently through digital channels. Shopping for staples, daily household goods, and goods for kids and around house are much simpler to get delivered to your door. In terms of our business environment, thousands of new businesses have started purely on a digital basis because they do not want to take the risk of investing large capital in real estate or rent. These structural changes are driving a whole new digital economy. We are still not seeing the full recovery in B2B business segment. As you're aware, businesses were largely shut down for the most part of Q2. We expect the segment to pick up in Q3 and Q4, according to While there are many signs of hope in domestic air travel, most experts do not expect the international air travel to return to pre-COVID levels until 2023, 2024, or even maybe 2025. This will keep the belly cargo capacity constrained for the next few years. This means the international air cargo market will remain tight and will continue to present opportunities for cargo jets to grow. Some of these trends are bound to become permanent because of the level of services companies like CargoJet provide for this market. Now turning to our second quarter results, we are pleased to see strong momentum in virtually all of our lines of business. Revenue growth excluding chartered line of business was a solid 30%. As you know, prior years charter revenue reflect a significant one-time benefit from dedicated charter flights to bring PPE from China and other parts of the world to Canada. Going forward, we expect a more normalized revenue growth in our charter business. It is worth reminding everyone that CargoJet ended the full pre-COVID campaign year of 2019 with an EBITDA of only $156 million. The EBITDA for the first six months of 2021 stands at $131.6 million, compared to $124.8 million in 2020, an increase of 5.4%, in spite of the fact that we had a significant one-time benefit from the charter business in 2020. I share these numbers to explain the size of structural change we have gone through in the past 18 months. One noticeable cost increase is a cost increase of 49% in our crew costs. With the implementation of new Transport Canada pilot fatigue rules, which clearly disadvantage Canada-based cargo airlines against the U.S.-based cargo airlines, we are seeing a higher initial cost trend. CargoJet team is focused on finding cost-effective solutions to address this issue and deal with it with highest priority to find solutions to offset these costs and gain effectiveness. On the balance sheet front, we have been extremely prudent in utilizing strong free cash flows generated by the business over the past five quarters. We have brought down the leverage of our debt-to-EBITDA ratio to below one times EBITDA. You may recall the cargo debt leverage stood at nearly five times four years ago. Number two, we early retired aircraft leases and now own 83% of our fleet. 25 out of 30 aircraft are fully owned. We have paid down the revolver in full. We have $600 million in undrawn revolver, providing strong liquidity should we pursue growth ideas. Our net debt stands at $273 million, which is below our trailing 12-month EBITDA levels. We have also resumed our annual dividend growth as previously announced to return cash to the shareholders. Cargojet now enjoys one of the strongest balance sheet in the North American airline industry, and it was a deliberate decision. We wanted to be prepared for a potential inflationary environment. While there is a great debate about how long the inflation might last, wage inflation is permanent and it's here to stay. Economists agree that central banks will have to raise interest rates eventually. Cargadget is now well positioned to deliver shareholder value regardless of the direction the interest rates go. Let me touch on the operational side. We are continuing to see strong volume growth, as I mentioned earlier. In this new hybrid world, we expect the baseline for almost every aspect of our business to move up. We grew our fleet size by two additional planes, and it now stands at 30. This compares to 26 aircraft of Q2 last year. Our on-time performance remains at over 98.5% despite a significant change in the block hours loan profile of our company. This remains a critical deliverable given the importance placed on this by our customer. We are adding key talent and management in several parts of the company to reflect over size and complexity of this new baseline. Another significant focus for us is ESV. The board and the management team have been devoting a considerable effort to outline our policies, targets, and a framework where we can all play a role in helping the environment, and reducing our carbon footprint. While we continue to report on progress against the targets set by our board for each of the ESG component. An update on the international and ACMI growth strategy. We continue to make progress in both these areas. Having demonstrated the added value of dedicated air cargo service to our customers who initially signed up for shorter-term commitments, we are starting to see greater stickiness for certain international segments despite the reopening of certain passenger air routes. The international air cargo demand still remains very high and continues to present opportunities for our ACMI and charter businesses. Once again, some of these trends are becoming long-term and permanent as the customers get spoiled with the service they receive with dedicated cargo airlines. I once again thank you all for joining this morning, and we are now open for questions.