Cargojet Inc.

Good day and welcome to the CargoJet second quarter 2022 results conference call. Today's conference is being recorded and at this time I would like to turn it over to Ms. Pauline Dillon, Chief Corporate Officer. Please go ahead.

Thank you, Arianna. Good morning, everyone, and thank you for joining us on the call today. With me on the call today are A.J. Vermani, our President and Chief Executive Officer, Jamie Porteus, our Chief Strategy Officer, Scott Colliver, our Chief Financial Officer, Sanjeev Mani, our Vice President, Finance. 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 the 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 A.J. Vermani. Thank you, Pauline.

I will cover the industry and general background revolving our business and the recent quarter results and turn over the meeting to Scott Calver for a detailed financial update. We are certainly and definitely living in very interesting and challenging times. Just as we are putting the pandemic behind us, there are several new challenges facing the economy and all of our lives. Inflation, rising interest rates, high fuel costs, Ukraine war still continuing, and the risk of recessions. All these things are lining up at the same time. One of the most affected sectors is the aviation sector, which is in an extreme turmoil all around the world. As for airlines that carry cargo in their bellies, there is simply too much turmoil. You have all seen the news of jammed air force, undelivered baggage, stranded passengers, canceled flights, And no doubt, the cargo portion of their businesses is the silent sufferer. But I must say, not a cargo jet. One major passenger airline has even announced their plans to abandon their strategy to pursue wide-body aircrafts on international routes and shift their focus and retrench from eastern Canada into western Canada. Many other large passenger airlines are also focused on fixing its passenger side of the business. Many of the resources that typically focus on cargo, including people, are being deployed on the passenger side to help stabilize their core business. And the cargo business is just an orphan at the present time with these kind of carriers. But let me say it very clearly. CargoJet does one thing and does it very well. We fly across Canada and internationally. We do not have any other distractions. Cargo is an all we do. And we do it well with over 20 years of experience. We have a cargo culture. We have a cargo pedigree where minutes count. The reason CargoJet was born was primarily to serve customers who could not depend on the unpredictability to value space availability. We have never wavered from that mission. We are executing for our customers and our on-time service track record for 2022 has been as strong as ever, in spite of all the industry issues. We are fully staffed. We have extremely highly qualified and very professional pilot group, very professional and qualified maintenance and ground handling teams. And we are squarely focused on one thing, serving our customers and on-time performance. If you are a major air cargo customer, Which airline would you rather be one? One that is single-mindedly focused on air cargo, which is 100% of their business, or you would be with an airline that is juggling between passengers and cargo and baggage, where cargo represents only 5% of their business. As an air cargo customer, the answer is simple. You will only get 5% of their attention from these carriers. This challenging environment has also allowed us to demonstrate to our long-term customers whose business depends on on-time delivery that CargoJet indeed is the right partner for them and their customers. Our customers' growth is our growth. We were tested at the start of the pandemic. We were tested when supply chains were disrupted due to floods forest fires affecting railways. We are being tested as passenger airlines juggle with the reopening. CargoJet continues to rise to the challenge, and we believe these are important examples which our long-term customers value immensely. While we feel confident about the long-term growth opportunities, but CargoJet is also not immune to the broader economic headwinds such as inflation, rising interest rates, general economic cycles, and somewhat of a slowdown on the e-commerce sector at the present time. While we still believe that e-commerce customers are taking a bit of a break flocking to the stores, We still feel that Canada has a lot to catch up with the world and we feel this segment continuously to grow from what we are seeing. This is exactly why we are watching all of our key metrics very closely and will remain prudent as we continue to strike the right balance between investing in future growth and maintaining a strong balance sheet. We have the best balance sheet of any airline in the world. We have almost $1 billion worth of equity or liquidity, I should say. And I must say that we are the most and best-equipped airline to weather any storm or headwinds that might be on the way. We are also continuing to attract the best talent in the industry. And I'm very pleased to welcome Scott Calvert as our new CFO. He's no longer a stranger to the transportation industry who will be addressing shortly. We also remain focused on building some strong management team in each of our growth segments with a focus on succession planning. Our diversification strategies is working well and totally on course. We are achieving what we set out to achieve in this area. At the end of the day, people drive results. And I'm a firm believer that if you take care of the people, they'll take care of your customers. I must say that I'm extremely proud of the group of people, whether it's maintenance, whether it's ground handler, whether it's finance, and our fine pilots, I can assure you that we do not compromise in getting the best talent that's available. Thank you very much. I will now pass on to our CFO, Scott Calver, for an update on the business.

Thanks, AJ, and good morning, everyone. First off, let me start with saying how thrilled I am to be part of the amazing team here at CargoJet, and I am delighted to have the opportunity to share a few thoughts on the business. While many companies have been caught off guard with the reopening of the economy, it is worth noting that we spent the last 18 months preparing for a potential uncertain economic climate. Let me give you a few examples. As AJ just mentioned, we strengthened our balance sheet and we currently have all-time low leverage. We added flagship customers such as DHL to a long list of relationships that include Canada Post, Pure Later, UPS and Amazon. With strong growth in ACMI and charters, our business is now more diversified than prior to 2020 and this provides a balanced portfolio. We do not take risks with fuel. All of our customer contracts are fully indexed to the changes in the cost of fuel. Our fleet now stands at 34 aircraft. We have strong risk management strategies just in place for our $1 billion CapEx program. In June, we announced the expansion of our normal course issuer bid program to 1.5 million shares. We also announced the completion of our financing plans with a 400 million U.S. dollar delayed draw term loan with attractive rates, terms, and conditions. Lastly, we recently announced a dividend increase of 10% for our shareholders. The world is still adjusting to global supply chain disruptions and the future of passenger air travel and belly capacity on international lanes remains uncertain. These factors continue to create tailwinds for cargo jet. One example of supply chain challenges is showing up in excess inventory at major retailers. As these retailers clear their overstock, we expect many of these items to flow through the e-commerce channel. Furthermore, despite the short-term volatility in e-commerce volumes, we remain bullish in our view on the long-term growth cycle of online shopping. Many shopping malls are being redeveloped for residential and commercial use. These stores are gone forever. The last bull cycle for mail order business lasted from 1870 to 1940. This period was dominated by mail order catalogs by large department stores such as Eaton's, Simpson's, and Sears. The transportation winners of the last cycle were railways for the middle mile and trucking. We expect a new e-commerce cycle that began in 2000 to have a similar life cycle. This is a generational shift, but the big difference is that e-commerce is driven by small businesses as well as major brands such as Amazon, Walmart, and Best Buy. This is much larger than the last mail order cycle. The transportation winners of this cycle will be air cargo for the middle mile and trucking. This is why we are excited about the new economy and we feel confident in our long-term growth strategy. Now turning to our second quarter results. We posted another strong quarter with revenue growth of 43.3% compared to prior year, or 31.9% when excluding fuel. While we are pleased with double-digit growth in all of our lines of business, we are particularly pleased with the fact that our diversification strategy continues to allow us to leverage our various offerings that are meeting a diverse set of customer requirements. The adjusted EBITDA for the quarter came in strong at $81.1 million, compared to $67.4 million for the same period in 2021, an increase of 20.3%, despite Q2 having one less operating day compared to prior year. Adjusted free cash flow for the quarter stood at $44.8 million, up 24.4% compared to prior year. Our on-time performance remains in the high 90s as percentage of total flights. This is a critical deliverable given the importance placed on this target by our customers. This concludes our opening remarks, and we will now open the call to questions.

Thank you. If you would like to ask a question over the phone at this time, please press star 1 on your telephone keypad. That's star 1 to ask a question. And we will pause for just a moment to assemble the queue. And we will take our first question from Matthew Lee at Canaccord. Please go ahead.

Hi, thanks for taking my question. Maybe we can start with your broader expectations for volume across the domestic network for the next couple of quarters. You mentioned e-commerce customers are taking a bit of a break. Would you say you've seen any contraction on the e-commerce side or maybe just a deceleration in growth? And have you heard any commentary from your partners that suggest maybe they're tapering their needs?

Hi, it's AJ. Just a quick comment on that. I don't think e-commerce customers are taking a break. what the break is happening is a shift of what they're buying. Previously, there's a lot of luxury items were being bought. Previously, there were a lot of items that were of not necessity. The e-commerce is taking a break from buying expensive and luxury items and shifting to daily necessities. So, you know, you definitely need your daily necessities. You can postpone, you know, a pair of shoes or some of the things that you don't need right away. So what we are seeing is a lot of shift towards e-commerce towards daily necessities, not necessarily taking a break. Our customers, we're still in the middle of next month. We would be looking at probably peak forecast and some of the other stuff that we do plan around this time. So far, our business is steady. We have not seen Might have seen a little drop here and there on our day, but we saw a strong demand during the Amazon Prime Day. We continue to see our forecast coming from our customers that are not showing any major decline from their customers in e-commerce. But certainly, the mix of traffic has changed. For us, it doesn't matter whether you've got a nice pair of Nikes in it or you've got a bottle of oil in it. It's a shipment for us.

That's helpful. And then, you know, in the quarter, it looks like fuel costs actually surpass fuel revenues. You know, I know there's some delay in terms of the timing. Should we expect the profitability windfall to occur in the back half of the year if fuel costs stabilize or decline?

I think it always happens. It's been cyclical for the past 20 years where there is some kind of a lag that follows. And we expect that that will make up as the time goes in the normal course it has done in the past 20 years.

Okay, thanks. That's it for me.

Thank you. Next question is from Chris Murray at ATP Capital Markets.

Yeah, thanks, folks. You know, Scott, maybe if you can touch a bit on the new U.S. dollar term structure and just how that dovetails into the capital plan. Certainly, we're a little concerned about what the longer-range forecast could look like and the movement's Can you just explain how you intend to use that facility?

Yeah, thanks, Chris. First off, let me start with saying that our goal here, we call it our guiding north star, is to maintain leverage below two times EBITDA. So that's the target going forward. We wanted to have enough committed capacity for any scenario. This is more than we currently need, but it gives us flexibility with any opportunistic growth capital. potentially we can look at calling the hybrid debentures at some point if that made sense economically. So it's committed. It improved the conditions on the revolver as well. We just wanted to have everything in place so that we have certainty going forward, and we thought it would be prudent to do that at this time.

Okay. But it doesn't really change your thoughts around the timing of aircraft we've talked about in previous quarters?

No. No, nothing's changed. We just have certainty on committed financing.

Okay. And then just, you know, with the number of disruptions and all the interruptions that have been in airports, things like that, you know, just looking at your website, you're talking about an OTP on-time performance around, you know, 98, 99. You know, are you guys still seeing, you know, good operational performance? Are there any issues around ground handling at airports that are impacting you folks? And if you don't mind, what was the actual on-time performance number for Q2?

Well, let me say this, that we are probably seeing one of the best on-time performance that we have ever delivered. Yes, there is a manpower shortage. There's no question we continue to recruit. We continue to recruit good people. But also, you know, by managing through, you know, better planning, you know, obviously some overtime. I would say that we're not meant to have no overtime. But I think we have a very motivated workforce today. that understand that minutes are important and customers count on us on a daily basis to make sure we deliver on time performance. So far, I can tell you, not only in the past, this quarter when all the turmoil started, the turmoil started two years ago when the COVID happened. And I can tell you that we do not have one container that out of the hundreds of thousands of containers we have handled in two years that missed a flight, or was running late because of any of the headwinds that we see. So our on-time performance is certainly over 98%, that I can tell you. I don't have it exactly broken down, but it is over 98 points right now, and we have never had performance that good. Touch wood, I don't want to jinx it, in the past two years. All right, that's helpful.

Thanks. I'll turn it over.

Thank you. Next question from Walter Sparkling at RBC Capital Markets.

Yeah, thanks very much. Good morning, everyone. So, AJ, just back on the disruption of the passenger airline and the belly space that is becoming increasingly unavailable. Do you feel like or have you taken advantage of this in terms of winning share? Can you lock in long-term contracts? with customers that perhaps wouldn't otherwise have been available? Or are you doing it more on a spot basis, one-off basis, or do you just not have the aircraft capacity right now?

Well, a number of things. We have limited aircraft capacity, and we can also turn morning flights, which is still better than two to three or four or five-day service that's out there in the market. So, yes, we have been entertaining. We have moved some extra flights. selectively. We recognize some customers that are just using us because there's turmoil right now and they will go back to. Those are our least sort of desired customers to help at the time. But people who have some customers that are existing customers that use both levels of service with white bodies and with cargo jets, we have certainly given preference to those. I think it's solidified more relationships. We have not taken advantage of gouging at this time and charging them an arm and a leg because they're stuck. I think with helping those customers that are probably users of both service, they see clearly the benefit of switching things over to us in the longer term. So yes, there has been short-term opportunities. We have created space. We have looked after existing customers, and we have also looked after customers that are partial cargo debt and partial white-body And I think that the message is very clear. You know, Walter, I must say that in 1985 to 2000, I was a user of cargo services as a freight forwarder, and I constantly was buying services from cargo airlines. In those 15 years, there was 14 cargo airlines that were in existence in Canada at one time They all went broke, merged with somebody, or closed down their doors. And they had one thing common. They were all related to some kind of a passenger operation. And our product is cargo. We do not sell business class. As I said in the last meeting, we do not sell duty-free. We're not into checked-in baggage. That's one place where we make money is cargo. And I think, you know, our cargo culture, our category, over 6,000 pieces of ground support, equipment, over 400 maintenance people, over 400 pilots, our own simulators starting for pilot training in the next month in Hamilton. You know, these are some of the tools that have made cargo jets a competitive force. And all I can tell you is that you know, we're extremely happy with the progress we have made in the marketplace with our people being the first and the foremost.

That's great, AJ. And you touched on another part of my question. I think I heard you right, but I just want to make sure, you know, your prior flight schedule was really revolved around your next day delivery customers and operating outside of just once a night for maybe, you know, back in the day it was four nights a week. didn't make sense. But now as e-commerce customers have been coming on, you've extended the number of nights per week that you fly. My question is, is there avenue with the new type of customer that's coming on now, perhaps traditional belly capacity or belly space customers who don't necessarily need to be there next night or next day? Can you start to offer maybe second, twice a day service. In other words, look for avenues to increase capacity utilization of your current aircraft without having to add more aircraft to be able to take advantage of some of these different types of customers.

Yeah, good morning, Walter. It's Jamie. I can take that one. Yeah, I think you've seen that in the last few years. We've done that really as a result of the growth of e-commerce. But as you're indicating, with additional ad hoc customers on the domestic side, we've expanded our network to really seven days a week. We operate two flights on Sundays, so there's plenty of opportunity for additional capacity and additional utilization. I think I've noted before that we could theoretically duplicate our entire domestic schedule during the day. There's enough downtime, our average utilization on the domestic network aircraft is only about four and a half to five block hours a day. So theoretically, we could double that capacity if the demand was there.

That's great, Jamie. Appreciate that. Last question here. I cover a lot of other transportation companies that are just suffering from lack of labor. AJ, I think I heard you say the words fully staffed. And is that correct? Are you not impact? Is it fair to say that a lot of the supply chain issues that are impacting rail, impacting truck, impacting passenger belly space capacity. You're not seeing as much of those specifically as it relates to labor availability.

Well, a couple of months ago, yes, we were short 40, 50, 60 people, mostly in the ground handling, some maintenance people and some pilot people in every category. We have over 71 pilots in training today. which will be released every few months. We also have a number of maintenance people that are on board, and we also have narrowed the gap on ground handling staff. Now, I must say that if you looked at the numbers today, we'd probably be short maybe 20, 30, 40 people on the ground handling side. But the way we have rearranged the shifts, the way that we have managed the overtime situation, the way we have you know, organized, moving certain things in a certain way, call it, in other words, planning, has negated that impact. So, yes, we might have some shortage a little bit, but we are managing it well with the resources we have. And I think it's a lot better than we had what the situation was three months ago.

Fantastic. Thanks for all that, Connor. Appreciate it.

Thank you. Next question from Conor Gupta at Scotiabank.

Thanks, operator. Good morning, everyone. So my first question is on warehouse capacity A lot of transportation companies have been talking about how, you know, the warehouses in Canada, especially, they are so tight on capacity at this point, which is kind of impacting their ability to pull in freight volumes relative to demand. I mean, demand is pretty strong, but it's just the capacity. What are you seeing from your perspective and from your customers' perspective at Canada?

Yeah, good morning, Konark. It's Jamie. We're not as affected as from a warehousing standpoint, as you know, As you've seen in our facilities, most of them are literally an airport groundside to airside crosstalk operation. And many of the airports, especially the big airports in our hub in Hamilton, a number of our major customers operate their own facilities on airport. So we haven't seen any restriction in terms of capacity or capabilities at our facilities anywhere in the country.

Okay, that's great. Thanks, Jimmy. And then moving on to the margin profile, perhaps more for Scott here. Scott, welcome to the Earnings Calls. Just on the mix of the business, if I look at the ACMI, the proportion of ACMI has gone up this quarter versus last year's Q2, as well as this year's Q1. and yet the EBDA margin has compressed versus both peers. I know, obviously, fuel mathematically has an impact on the margin profile, right, and creates some noise there. Is there anything else you would call out?

No, nothing has changed compared to prior quarters. Really, the noise that we talked about earlier that AJ explained is the fuel in Q2. But other than that, it's really quite stable, and we've had growth in ACMI, which has always been the plan.

And that's why we had the extra planes that we ordered to expand the ACMI business. So it's in line with our business plan and business thinking and deploy the assets that we signed up.

Perfect. That's great. And also for me, just a fleet, I noticed you have signed an LOI in April, I think for leasing 1767-300. as well as you have probably extended the 767-200 lease, which I think was due later on, but it's extended to 2025 now. Any thoughts on what are sort of the intentions of the plans behind those two leases here? Like, do you see perhaps, you know, further delays in converted aircraft, or do you need more capacity? So, yeah, any thoughts there?

No, we, our planes are totally counted for against the contract. We obviously, as I've explained in the past, that we, with the size of the fleet we are getting to, we're going to be, we have 34 fleet and soon to be 40 and then soon to be 50. We do need spares to make sure that our planes perform, so on-time performance, which is critical to our business. So that means we will need, you know, some additional maintenance capabilities on our planes. And for them, For us to maintain that on-time performance, we need downtime on the planes. So we can keep getting greedy, but it'll have two impacts. One is the safety and security, and the second thing is the on-time performance. They go hand-in-hand with the maintenance. So a couple of planes that are coming free are strictly going to be ensuring that our fleet stays in good health. If we do need to do a fleet campaign, You know, if something's wrong with one plane, we want to make sure that all planes are checked for the same. So this is how the business works. And we're going to be expanding our operational and maintenance spare by one plane. And that's all part of our plan. So in order to question, there is not going to be any extra planes. As a matter of fact, every plane that comes offline is sold and is wanted. But at some stage, we also have to balance it out with our customers. you know, with our needs maintenance-wise and ensuring that the KPIs are delivered to the customer's performance. You know, so we have it all balanced. There is no spare planes that are going to be sitting around.

Perfect. That's great, Kenneth. Thanks, AJ. I appreciate the time.

And the great fact, we have extended the lease on it. I would rather return that plane and buy it, but we need it so badly that we ended up having to extend the lease on it.

Makes sense.

Thank you. That's the only leased plane we have, and it's been around. That was our first 767 that we got in 2008. And I was hoping it would be gone, but every time we try to return that plane, we end up with a contract. So it's kind of a nice problem to us.

Great. Thank you.

Thank you. Next question from Kevin Chiang in CIBC.

Hi. Good morning. Thanks for taking my question. Hi. Hi, AJ and Tim. I appreciate the comments and your prepared remarks about the ebbs and flows, I guess, in the economy and with the consumer. And obviously, there's been some noise with some retailers and some of the difficulties they're facing as spending normalizes. But when I look at your results, you continue to show at least on a year over year basis, good growth here. So, so it does feel like, you know, I guess there's still a mismatch between demand for your capacity versus the amount of capacity you put up there. And I'm not sure how, how you want to frame it, but like you have a sense of how many block hours you think there's demand for your product versus the blockers you put up there. Or if you want to look at it by number of planes, like if you had extra X number of planes, you know, that would, that would fulfill the demand you see as you're kind of running below that is, is, Is there a way to frame kind of the demand-supply situation you're facing today, just given how you've performed in the first half of this year?

Yeah, good morning, Kevin. It's Jamie. I think I understand your question, but as I said earlier, to answer one of the other analyst questions, I don't think we're restricted in terms of capacity. If you look at all three segments of our business, the utilization of of aircraft is what we would have expected. Obviously, it was much greater than the year before. We saw significant growth in all three segments of our business, double-digit growth in all three segments of our business because of demand. We're not restricted or constrained by capacity other than delivery of new aircraft to add to our ACMI business, which, as we've noted before, due to supply chain issues and COVID-related delays, delays in the conversion of the 767 aircraft, particularly aircraft have impacted when we've started new ACMI routes. We just started a new route to Brazil earlier this month that was initially slated to start in April, but was delayed because of some regulatory issues and the late delivery of the aircraft. But we're not constrained in terms of capacity to meet the demand other than late delivery of aircraft.

That's helpful. I know you don't give... earnings guidance. But if I just look at the historical seasonality of your EBITDA, it's generally kind of like 43% to 45% of it you generated in the first half, and obviously the rest you generated in the second half. So if I look at the 164, is there any reason the 164 of adjusted EBITDA you generated in the first half of this year, is there any reason why the seasonality would be any different this year so that could represent about 45% of of your annual total? Are there things we should be cognizant of as we think of the back half of 2022?

No, we expect the trend to continue. And Kevin, to be honest with you, guidance or no guidance, you know, all the analysts that are on the call and cover us pretty well, you know, they have it right. They know what, whether guidance or no guidance, they are within 2% to 3% of what we do. So, you know, our books, although might not say point to a word, guidance, but it is pretty open to guess what we are doing and what flight. I mean, some of the analysts that even followed flight radar and seen how many hours we do and all that stuff. So it's a pretty open book. Short of using the word guidance, I think everybody is pretty well attuned to our business, which is good to see, especially guys like yourself, you know, who do a thorough work on some of this stuff. And as far as the trend is concerned, I do not see anything different in this back half compared to the other back halves of the previous years. So quarter three and quarter four are exceptionally strong for us, and all indications to us is that we have not heard anybody say they're not going to be utilizing their space or space You know, we're expecting forecasts from our customers in the next one month, and we'll be sitting down plotting them out. And this year, we'll have an extra plane or two to carry even more product if the demand is there.

Excellent. Sounds like you're setting up for a very strong second half here. Maybe just last one for me. Maybe just your thoughts on the NCIB. You know, you did increase it, you know, I suspect it reflects just the pressure your stock has been under, especially this year. I guess, how do you think about utilizing that NCIB? Is there a percent you want to purchase? Is it purely tactical? Do you buy below a certain price? Is there any quality you could provide there?

Well, we started the NCIB. Obviously, we feel our stock was undervalued. We had the cash to do it. We had the liquidity to do it. uh, you know, we, we have an approval of what, uh, Scott, one and a half, one, 1.5 million shares. Yep. Uh, but to be honest with you, uh, you know, right now I think we are in a blackout situation. Uh, and, uh, this is a program that we started to make sure that if the stock we feel is strongly undervalued and, and we can get a good value in investing in the stock, we will. Uh, but we are also, uh, very practical. And if we found that, uh, The market is not where it should be. We would not hesitate to amend or to make changes to our NCIB. We're not going to go blindly because we said that's what we're going to do. We're going to be very prudent in managing that almost on a daily basis.

Makes sense to me. That's it for me. Thank you for taking my questions.

As a reminder, to ask a question, please press star 1. And our next question is from Cameron Dorkson in National Bank Financial. Please go ahead.

Thanks very much. Good morning, everyone. Just wanted to come back to the announced new financing, the $400 million U.S. Are you able to say what the interest rate is on that? And could you just maybe talk more generally around your fixed versus variable exposure to interest rates?

Yeah, the... That new $400 million is on the same spreads as what we had on our revolver. So really, it's almost identical. We did take the opportunity to improve the existing revolver in that there was an additional security requirement, and we had that changed to the benefit of the company. So, yeah, I'm sorry, your second part of your question?

Just on fixed versus variable exposure, I think maybe you've hedged to some of that, but maybe you can just talk about that.

Yeah, now that we've transitioned from having cash in the bank to starting to draw on credit, that is what we're looking at because obviously with the hybrid debentures, we were all fixed and we're definitely not going to transition to being all variable as we start to draw on the other facilities. So as we progress and as leverage starts to support our growth strategy, that is definitely going to be something we consider in terms of having a policy for the board to consider on what's appropriate in our capital structure.

Okay, makes sense. And maybe a second question for me, just on the CapEx, can you just maybe update whether there's been any changes on your CapEx plan for this year and into next?

Hi, Sanjeev here. No, we are still on target, although certain deliveries are getting postponed due to supply chain issue, but there's no change in our investment plan as in the asset acquisition plan.

Yeah, we have not increased it. The plan is what it is, and except for some late deliveries, we are pretty well on target on the rest of it. And we have not added anything new.

Right, right. Okay, that's great. That's all I had. Thanks very much. Thank you.

Thank you. Next question from David Ocampo at Cormark Securities.

Morning. Thank you. Good morning, everyone. I just have the one question for me. When I think about the contracts that you guys have, they typically have CPI price adjustments. But I'm trying to get a sense if there's any caps to that and if the increases that you're seeing today are enough to offset the inflationary pressures that you're seeing on labor and what have you.

Most of our CPI provisions, as you know, we have had traditional contracts that were agreed upon on a CPI basis. But keep in mind that these contracts were, you know, nobody had ever seen inflation of 7 or 8 or 9 percent, and nobody ever had. You know, we have provisions in there where we can pass on a portion of the CPI, less energy, because obviously the fuel is a different component that we get a fuel surcharge on. So we pass on whatever CPI, less energy, and some of them, you're correct, have minimum leveled and some of them have maximum levels. It's a mixed bag. We also have a list of customers that we are not going to cover the full CPI. We would also look at probably when the contract renewal time comes to make up some of it depending on how long is this whole process going to last. So, yes, we did have some minimums. Over the years, we have got when the CPI was low, we were able to get minimums which were over the CPI level at that time. And sometimes you have to take good with the bad. And yes, we do have contracts that are not at 8%. As a matter of fact, we hardly have any contracts at 8%. So we feel that there will be some adjustment period in that and we will be able to go to some customers at the renewal time at some appropriate time to ensure that you know, we are made up for the difference. But at this time, if we went, every customer is going through the same situation, and I think we have a very long-term relationship with customers who have always been fair with us. We've been fair with them, and once they see that whatever costing structure is, I think we should be able to get a portion of whatever the shortfalls might be at the right time.

And I guess as a follow-up, if I take a look at your domestic revenues, it was up 15% year over year. So is it fair to say 10% is volumes, 5% is pricing?

I haven't looked at it that way, to be honest with you. I can't answer that question off the top of my head. So, Scott, can you?

No, I would say, David, that I would suggest most of it is volume growth. Only a very small percentage would be inflationary increases.

Okay, sounds good. That's all I have for you guys. Thank you so much.

Next question is from Tim James at TD Securities.

Thank you. Good morning, everyone. I just want to try and connect the dots a little further and make sure I'm understanding kind of the dynamic here in the domestic network revenue. So, You know, 15% growth year over year is very good. And then, you know, you talk about observing a slowing in consumer spending on goods in favor of services. I guess first, does that comment reflect sort of a post Q2 observation or were you seeing that in Q2 and despite that still generated 15% domestic revenue growth? Or maybe the more important part of this question, Ajay, you were talking earlier about sort of changes in mix. Does this observation about consumer spending really reflect the change in mix and therefore it actually doesn't really impact your revenue because you're kind of agnostic to mix shifts?

Yeah. So, you know, in our case, I mean, the consumer spending has not shifted from goods to services certainly that won't affect us. What we are saying is that consumer spending is shifting from the type of goods that were being bought before to the type of goods that are being bought now. So, you know, with inflation running the way it is, people are buying and shipping necessities rather than luxury goods, rather than goods that are not required. So there's more spending on the day-to-day stuff and necessities rather than So that's where the shift is. So whether they want toothbrush or toothpaste, we see a lot of those shipments, which we never saw in the e-commerce. People are not going out and buying that product off the stores. They just know the prices and they order it and they have it delivered to their home. So that convenience factor is the shift that we did not see in the past. So we feel that the e-commerce market Obviously, you know, we've read, we're not, you know, we've seen the news with other companies that have had a bit of a slowdown on their e-commerce sort of vendors or whether e-commerce shipping or stuff like that. For us, shipping is a shipping, whether you're shipping, as I said, coffee mugs or whether you're shipping, you know, shoes. So for us, the difference is the mix of product, mix of cargo. rather than mix of services and goods.

Okay, that's very helpful. Thank you. My second question, I'm just wondering if we could return to another topic from earlier here. And it's about kind of what you're hearing from your customers in terms of volume that they've given to cargo jets since the start of the pandemic. And I'm trying to get at their thinking to the degree you have a sense for it around their plans for sending volume back to ground, marine or passenger belly space as those sources or modes of transportation kind of come back or become less congestion. It seems like those modes, those other modes continue to demonstrate reasons not to use them in the future other than maybe price. Do you feel, if you look at all the volume that you have gained since the start of the pandemic, that most of it will stay with you as those other modes kind of normalize because your customers are thinking about the future and saying, hey, things are better now, but who knows in the future? Or do you think you retain some of that volume, but a lot of it goes back to its sort of traditional modes of transportation?

Good morning, Tim. No, I would say that none of it would go back. I would say none of the volume that we, you know, with very little exception, there was some, you know, minor, you know, when the floods happened in BC last year, as an example, and some ground volume or rail volume may have shifted to air and that's subsequently gone back. But the biggest driver of growth in really in all three segments of our business have been on the domestic side, has been really driven by the growth of e-commerce as a percentage of overall retail sales in Canada. And as we've noted several times, we see that continuing, although the mix may change a little bit, but the demand is certainly still there. We're not seeing a shift. There's nobody using our services that would look at going back to ground or rail. They're using air because it has to get there overnight. Equally, our ACMI business, the growth of that has been a combination of global e-commerce growth, but also particularly with DHL, a significant strategic shift in their business from a partial dependence on belly cargo capacity for their global network historically or pre-COVID to a ship to exclusively dedicated cargo aircraft. And that's subsequently why we've grown, particularly with them, and announced the significant agreements with them earlier this year. And then equally, our charter business is growing because of the lack of cargo capacity and the increasing demand globally. So I don't see any shift of anything any of our business back to other modes. I don't think that exists.

And just as a reminder, ACMI business that we diversified into, there was a reason for it because it is not volume sensitive. We fly a certain number of hours at a certain price and not at a risk. So, you know, we don't find that that kind of business has any relevance. You know, sure, if the overall business goes down, it could. But since we have some guaranteed contracts on that, that business is not volume sensitive whatsoever.

Okay. So if I could just summarize that to make sure I understand. So these other modes are kind of a mess still today, if I can call it that, in terms of the service that they can provide. Once they get sorted out, whether that's 12 months from now or five years from now, even though they're kind of not a mess at that point, you think, you believe that your volume that you have won and taken over the years will stay with dedicated cargo and with cargo jet. Is that the correct way to think about it?

Yeah, the thing is that, you know, the days of building inventories are gone, you know, where people would do B2B and sit on millions and millions of dollars of inventories. You know, people are pretty spontaneous. I think the shopping habits have changed. If you follow the trend in Europe, where over 20% of the retail sales are e-commerce. So that's a trend. I don't think people are going back to that, you know, no e-commerce at all. If you look at Asia, it was over 30%. Canada was about half of what U.S. is. So, you know, in five years, 10 years, you know, I can tell you from my experience, you know, starting from 9-11 to recession in 2008 to, You know, VC floods, forest fires, you name it, there's one every three years. We go through this cycle where people understand the importance of the air freight. So I think that the speed today, the traditional air freight business, which is spare parts, medical supplies, perishables, lobsters and fruits and, you know, essential spare parts, car parts, these are all traditionally air freight businesses. And we don't see that all of a sudden, because the supply chains could be normal, that everything comes back to normal. As a matter of fact, people are now learning to live with next-day delivery on most of the stuff, and cost is not an object. I'm sure any people we talk to in our company and say when they order stuff from, let's say, for example, Amazon or any of those media outlets, you know, they look for the fastest service. If you order something, you don't want to be sitting in transit for six days. You know, by signing up $150, $180 for a prime, you're getting your shipments the next day. Nobody ticks on the box that I can get it three days after. So I think these common habits are hard to break. And that's, you know, that's what our research tells us that, you know, shipments that have sort of traditionally shipped to the faster mode are going to stay majority of them in that direction. And there'll be new products and new market shares coming on as well. So there's never been in the past 20 years of aviation that I have seen that a trend continues on for five or 10 years. There's always a break of cycle of some sort, whether it's, as I said, some kind of world event that triggers that. So that's how we feel about it.

Okay, that's great, Carlos. Thank you very much.

Thank you. Next question from Ahmad Shah. It's Beacon Securities.

Yeah, hi, guys. Maybe my first question on the ACMI and all-in-charter A strong performance, but I noticed you guys pointed towards a change in or reduction in scheduled charters and also ad hoc ACMI. Just wondering if that's a reflection of demand or just lack of capacity on your side and how we should think about that for the rest of the year.

If there is any, and I think our ACMI certainly grew from what I saw. But, you know, we could have handled a lot more if that's what you wanted to know, if we had the capacity. So, Sanjeev, how much did our ACMI grow? 62%. Yeah. So we did not, I thought we were seeing positive growth numbers on both of our businesses. And the charters are a reflection of if we have the aircraft available. You know, we can keep the aircraft on spec and say let's keep it if a charter happens or we have a guaranteed ACMI deal. So obviously we take the guaranteed ACMI deal in those cases.

I think you are referring to a comment where it says that ad hoc ACMI charters have reduced. But that is one-time ACMI contracts which we get. Because since our scheduled ACMI charters with DHL grew at a considerable pace, we used all our regular aircraft on that lane. So there's no such thing to be concerned of.

Yeah, it's traded off with the regular ACMI business rather than ad hoc.

Yeah, exactly. No, that's what I was referring to. Thanks for clarifying, Sanjeev. And then Maybe a couple of housekeeping items. I noticed you guys stopped reporting the average volume number. Any reason behind that? Is it a change of the mix of the business that makes that number less reliable, or what's the driver behind that?

You're referring to the average daily volume that we used to report One of the reasons why we stopped reporting it, we can give it to you individually, I guess, but it's really a metric that we don't look at. It's a little deceiving because we've historically done it. We didn't realize that a lot of analysts were taking that number and looking at the average daily volume compared to the average daily revenue. And really, that's not a fair metric because the way that our domestic business particularly is priced, it would make sense if 100% of our domestic business was priced on a per pound basis, but it's not. There's significant differences between different contracts. Some are by pound, some are by container, some are minimums per day. And with the volume fluctuations, we often got questions about, or not questions, we got comments that, oh, your yield has declined or your yield has increased when it's really not an accurate measurement.

That's great, Jamie. Thanks for the clarification. I'll jump back on the queue.

Thank you. Next question from Nick at Acunem Capital.

Good morning and thanks for taking my questions. Just the first question for me, it relates to the underlying demand of the domestic network. Is there any color you can share on Amazon Prime Day and how am I to compare it to prior years either in terms of total volume or maybe year-over-year growth in volumes?

Yeah, Nick, it's Jamie. Good morning. One of the fundamental differences between Prime Week, Prime Week was very successful for Amazon, both here in Canada and in the U.S., and one fundamental difference in Canada is the first year that they actually had Prime Week where they had their own dedicated aircraft. So the two CMI aircraft that we've been operating in Canada for them since last summer, and as you remember, they didn't have the Prime Week last year. Uh, so first amount of capacity demand would be to fill their own aircraft. And then the remainder of their demand would be filling our BSA flights. And there, the volume was up significantly. I think it was up, uh, the demand for our domestic network was up over 50% from what the average weeks would be before prime week.

Good color. And then maybe switching to, uh, ACMI, is there any color you can provide on, on how your relationship with DHL is involved and what new routes you might've had in, uh, in the second or third quarters?

Well, you know, we did sign an agreement a couple of months ago with DHL. As you know, it involves some warrants and involves some revenue commitment, route commitment. Everything is on progress. I think as soon as the aircraft comes offline, we have commitment that we announced at that time that four 777s are going to go to DHL and also... additional five, seven, six, seven. So that stuff is, that business case and plan is on plan. And I think if we were to able to offer more planes to them, they would definitely use them. You know, some routes, some days we fly to Europe and the other days they ask us to go to China or Brazil or, you know, our contract is more of a, you know, number of block hours that we fly per aircraft for them, a number of aircraft. But we keep the flexibility within the contract as the demand shifts, as the changes are needed, that they might have more cargo available in certain port where they're suffering. They will ask us to shift those into those routes. So the relationship is strong. And the relationship is a partnership. You know, we value it. They value us. And I think part of the reason is that in the whole DHL mix, we are the highest performing on-time performance carrier for DHL in all the carriers.

Great. That's all for me. Thanks again.

There are no other questions in the queue at this time.

Thank you very much for joining us on this second quarter, third quarter, second quarter, sorry, Paul. I really appreciate everybody's time and insightful questions, and we look forward to planning and communicating on our investor day, which should happen in the very near future. So until then, we look forward to seeing you guys.

This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.