Cargojet Inc.

This conference is being recorded. Cette conférence est enregistrée. All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the cargo jet conference call. I would now like to turn the meeting over to Ms. Pauline Dillon.

Please go ahead, Ms. Dillon. Thank you, Operator. 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 Calver, our Chief Financial Officer, Sanjeev Mani, our Vice President of 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 and within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earnings per share, and return on invested capital. 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 income. I'll now turn over the call to A.J.,

Thank you, Pauline. Good morning, everyone, and thank you for joining us for our fourth quarter earnings call. I want to begin by sharing a few thoughts on the economic climate. Although the central bank started to raise interest rates last March, the impact on consumer behavior is just beginning to be felt. We saw this in our December peak period, which was slower than last year. We expect the consumer to remain cautious and retail sales to remain subdued in the near future. However, I want to put cargo jets last three years in context. Our adjusted EBITDA for the year ending 2019 was $156 million, and we ended 22 with EBITDA of $330 million. This is an increase of 111% over three years. There is a perception that all of the growth was COVID driven. Let me remind you that these three years, we have brought in a major strategic partner, DHL, and diversified our business into ACMI as a strong pillar. This new revenue improves the mix between our flagship domestic business versus the lines of business, charter. Although cyclical, continues to be an important and opportunist business that helps us utilize our assets when they're not supporting our domestic overnight network. We have also been prudent in managing cash flow and capital expenditures. Given the nature of our business, we have always structured our capital expenditures and their plans with flexibility and optionality. With the changing economic conditions at the present time, we are exercising that very flexibility by deferring capital expenditures previously announced by approximately $400 million. This will involve, the major portion of this will involve not two, but four triple sevens. So we will have a reduction of four triple sevens from the eight. Scott will have further comments on this particular matter. I also want to highlight that while we have done that, we have maintained our flexibility with MROs for conversion slots, which are premium, and we will hold on to that and defer them by 12 to 18 months or two years if we need to, to see the economic climate, what kind of conversions it would want. Scott will provide more color on this, as I mentioned. As an entrepreneurial company, we have always been focused on cost management. As the pandemic hit, we were focused on meeting the demand and deployed resources and added costs to successfully manage the opportunity. At that time, our simple principle was we need to handle the volume, which was overflowing, and it had to be done at any cost. Now we find ourselves dealing with a different set of economic environments and have shifted back to our basic routine of focusing on every dollar we spend. Every dollar we're spending is under review. As such, we have several initiatives underway that will reduce costs and allow us to remain focused on our goal of maintaining historical markets. We're also focused on right-sizing of our network, our fleet, and other human resources to match the demand out there. At a macro level, e-commerce has now become part of normal consumer behavior. A lot of more essential goods are being ordered online versus selective online buying occurred prior to COVID. The job market continues to be resilient, and inflation is starting to show some signs of weakness. It's also worth noting that our business is underwritten by some of the world's largest logistics brands, such as Purolator, Canipos, UPS, Amazon, DHL, TFI International, and Lauer Health Group. There's an old saying, you're as good as the company you keep. These are resilient businesses and will continue to be the backbone of our global trade and commerce. In the Fourth quarter, we announced the renewal of UPS contract in mid-January. We announced the Canada Post and payroll later contract extension in January as well. These contracts are long-term. They were expiring in March 2025, but having heard of our investment partners, we purposely extended These contracts, 2029 and 2031, locking up these customers and ensuring that there is no competitive impact on our business. This also solidifies CargoJet's leadership position in the Canadian overnight air cargo market. We have now extended all of our strategic customers. We have managed two down cycles before when CargoJet was a much smaller organization with limited options to manage costs. Today, CargoJet is much larger, much more optionality in managing the economic cycle. You may recall we started to prepare for the cycle back in January 2021 when we solidified our liquidity and our balance sheet by raising $365 million in equity. We remain confident in our long-term growth strategy and expect to resume our capital expenditures and growth initiatives as we come out of the economic cycles. Just as our team demonstrated resilience in managing rapid growth driven by pandemic, we are equally capable of managing the down cycle with similar rigor and discipline. One of the biggest lessons we have always learned in our business is It's never as rosy as it seems, and it's never as gloomy as it appears. Therefore, we will stay focused on our long-term mission of creating shareholder value and managing our short-term volatility. I will now pass on the call to our CFO, Scott Caliver, for an update on business. Thank you.

Thank you, AJ, and good morning, everyone. I will focus my remarks today on three topics. First are results. Cargojet posted yet another strong quarter with a 13.2% increase in our revenue. Our diversification strategy is paying dividends as demonstrated by the strong growth in our ACMI business, while our domestic business started to see some weakness late in the fourth quarter. The softer margins in Q4 compared to last year reflect our deliberate decision to not disrupt peak operations that are crucial for our customers. There are a number of pandemic era extra costs that need to come out of the business, and we have embarked on a careful plan to streamline all cost line items across the business. Towards the end of November and throughout December, Cargojet and our customers experienced volumes that were lower than anticipated. The recently released economic data clearly shows a decline in consumer spending as the month of December progressed. After consultation with our strategic customers, the consensus was to consider December slowdown as the beginning of a trend. a trend that ultimately could be a recession with reduced customer spending. In December, management pivoted to a discipline focused on cost management per block hour and to further strengthen our balance sheet. Which brings me to my second topic, our balance sheet. We're paying equally strong attention to keeping a strong balance sheet as we have made several decisions to temporarily bring down our overall capex spend by $320 million to $400 million, as AJ mentioned. compared to what we shared with you at our Investor Day last September. As part of our previously stated diversification and growth strategy, Cargojet undertook to add Boeing 777 long-range fuel-efficient aircraft to our fleet to expand international reach, strategically enhance our domestic network, and to broaden capability for long-range charters. This aircraft allows Cargojet to selectively add international routes that synergistically connect with our flagship domestic network. A total fleet of eight 777s were planned, with the first four 777s to be deployed with DHL as part of cargo jet strategic agreement, and with the remaining four to expand our international reach. The four aircraft embarked for DHL will continue conversion, but recent forecasts for the slowing global economy will curtail our capital expenditure and defer taking delivery of the final four 777 freighters as previously announced. while maintaining full access to our conversion delivery slots. Arrangements with our MRO partners give us flexibility to maintain access to these valuable wide-body aircraft conversion slots, while at the same time better timing our capital commitments considering the global recessionary risk. The feedstock market for 777s is expected to remain strong, allowing Cargojet to initially divest feedstock of two 777s, freeing up cash to be used to pay down debt. while retaining optionality on conversion slots for the 2024 through 2026 should the economic climate turn positive earlier than expected. So to summarize, the first four 777s for DHL are still planned. The four that are designated for general growth, we did not buy feedstock for the fifth unit, so that's deferred. The six and seven units are related to the LOI as previously noted. and the eighth unit will be deferred, as previously discussed on the last results call, and this feedstock may be sold as well. The impact of the $320 million to $400 million deferral to our 2023 growth cap expend will be a net reduction of approximately $100 million to $125 million, and it could be slightly higher if we sell that last feedstock. The remainder of this deferral will impact mostly 2024, if required. The third topic, the resilience of our business model. As AJ mentioned, in mid-January, we announced the Canada Post and Pure Leader contract extension. This contract was to expire March 2025. The agreement was extended to September 30, 2029, with an option to extend to September 30, 2031. This early extension solidified CargoJet's leadership position in the Canadian overnight market. We have now extended the contracts for all of our strategic customers. These contracts were extended well before their contractual termination date, and they extend out to 2027 and beyond. These are solid examples of our value proposition. During peak COVID, the demand of air cargo led to Canadian passenger airlines entering the air cargo market with the launch of their own dedicated freighters. As demonstrated with our 100% customer retention rate, Our business model has once again passed the competitive stress test of our customers evaluating their options and renewing long-term contracts with Cargojet. All domestic and ACMI contracts contain minimum volume guarantees. These provide further support to Cargojet during softer economic cycles. In conclusion, we have rapidly responded to manage the business during this down cycle. We have taken rapid steps to preserve margins, profitability, and to maintain a strong balance sheet. We have a strong team that can execute our cost control initiatives, and we look forward to updating you on our progress in coming quarters. This concludes our opening remarks, and we will now open up the call to questions.

Thank you. We will now take the questions from the telephone lines. If you have a question and you are using a speakerphone, please lift the handset before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause with the participant register for questions. Thank you for your patience. The first question is from Karnak Gupta from Scotiabank. Please go ahead. Your line is now open.

Thank you. Good morning, everyone. Good morning. Good morning, Asia. So my first question is on the ACMI. You know, given the DHL ramp up that's been going on, What was primarily the driver for the revenue decline in Q4 versus Q3 sequentially? And would you expect this Q4 ACMI revenue run rate to continue in 2023, or should it increase the new aircraft offset by maybe block hours going down?

I'll get Jamie to answer that.

Yeah, good morning, Conor. Good morning, everybody. I mean, part of the reason we saw a reduction in ACMI flying in Q3 was just a redeployment of a reaction by DHL globally from the softness that we saw here domestically and globally rearranged some flying. As an example, for most of the year, we were flying two aircraft on routes from Cincinnati to Vancouver to Shanghai. And when there was softness in that market in the fourth quarter, those aircraft were redeployed to new routes to Central America in that reduction. in block hours, still well above the minimum number of block hours per month, but lower than what it would have been comparatively to the previous quarter. In terms of 2023, we'll continue to see strong growth on the overall ACMI bid in 2023, a combination of the result of the annualized benefit of the three new routes that we started at different points in 2022 for DHL that you'll see the full annualized effect in this coming year.

Okay, that's very close. Thanks, Jamie. And then with respect to the fleet, so I probably missed the CapEx number if you guys laid it out on the call here. So the prior guidance I remember on CapEx for 2023 was $320 to $370 million. With the fleet changes you announced this morning, which included, I think, two 777 sales, as well as, I think, referral of some slots or conversion, where does the CapEx go from that guidance? for 2023?

Yeah, it's Scott here. I'll take that one. It's going to reduce by in a range of $100 to $125 million. Now, as AJ mentioned, we do have optionality to sell that feedstock for that eighth 777. So it could even be expanded off that range. But currently, right now, we're planning in that range of $100 to $125 million reduction from what was previously disclosed.

Okay, that's great. Thanks, Scott. And is that just to confirm that 100 to 125 reduction inclusive of the two 777 sale proceeds?

That's right.

Absolutely. Okay. Thank you. Okay, and then last one for me, you know, with the kind of macro environment that you guys are seeing here, and clearly you called out the peak season being softer than expected, could be a trend. With the ACMI growing in 23, domestic, you know, maybe softer than maybe initially thought, would you still expect 2023 to be a growth year from both revenue and EBITDA standpoint, given the commentary in the MD&A that the margins are likely to be stable?

So, Konark, yes, we expect the 2023 growth to be a growth year, but certainly not a double-digit growth year. We expect that it will continue to grow. That's what our customers are telling us, but it won't be like a hockey stick that we have seen in the past three years, for sure. So, it'll be in the mid-single digits, probably. That's what we're looking at on it. And on the 777s, I also want to clarify that, just to make it clear, that we had originally bought four 777s for non-DHL purposes, and out of those, we canceled one agreement. So then we had three feedstock already. Two have been sold out of that. One is in the process of selling. So we would – that's where the major reduction of – you know, almost $400 million is going to come from 777s and its related costs. But when we say we are canceling it, we are canceling buying the feedstock or selling it, but we are maintaining the curve conversion slot, so we are still in the market should things improve.

Thanks, Sudeikala. I appreciate it.

Thank you. The next question is from Cameron Dirksen from National Bank Financial. Please go ahead. Your line is now open.

Yeah, good morning. Thanks very much. Maybe just to go back on the CapEx question, you gave some good details around 2023. Just wondering if you've got kind of a new expectation. Obviously, there's some moving parts here, but I just wonder if you have a new expectation for 2024 CapEx.

Okay, yeah, it's maybe if I just back up a little bit, because we'll just anchor with what we previously disclosed last year, where it was going to be approximately 1.1 billion. And when you see our Q4 results and what we spent in 2022, we spent 600, just over 600 million and about 480 of that was growth capital. So we already spent 480 of the 1.1 million in growth capital. So when you look at the deferral that we announced, and as AJ said, it could be as high as 400 million. Most of that will impact in 2024. Now, we don't know. We don't know if it's a six-month deferral, 12-month deferral, or an 18-month deferral. We're just really as nimble as possible here to have all optionality that if this recession doesn't happen or it starts to turn in Q3 of this year, we're going to pivot right back to growth like what we demonstrated in 2020, 2021, and 2022. So to answer your question, about $100 million to $125 million in 2023, with the remainder mostly being in 2024. And again, there is that optionality to expand from that $320 million to $400 million, and a lot of that could impact this current year as well, if we sell that last feedstock for that 777.

Okay, no, that's clear. Scott, maybe another question for you. Obviously, you guys had, I guess, what you would call excess costs in 2022, a lot of which are not going to repeat in 2023. Can you just maybe talk through, I guess, some of the details there as to what you expect to see from a total cost sort of reduction based on some of the, I don't want to call them one-time costs, but some, I guess, excess costs that aren't going to recur that happened in 2022?

Yeah, absolutely. With 2022 being a record year for year-over-year growth, we just couldn't grow fast enough to service our customers the way they wanted to be serviced. So when you can't grow fast enough, you do everything pretty much at any cost. Now, that's overstating it, but we ran very high costs for overtime and for training and to some extent for temporary employees. And when you look at training, it's kind of a a double whammy here because the training was very, very expensive. If you remember earlier in the pandemic, the training was very minimal because we're hiring pilots that were already certified to fly 757s or 767s because they were laid off from passenger airlines. So that was a very different dynamic than what we experienced last year. So we went from being able to train pilots measured in days to training pilots measured in months. And when you're taking several months to train a pilot to be certified to fly a 767 or 757, in the meantime, you're running overtime to backfill for those positions. So we've ran very, very high cost to onboard all that revenue growth last year. So as we noted, we started to make plans in December. They settled into place in January and to a larger extent in February to deal with those three things, overtime, training, and temporary employees. Then there are other things as well.

And I must add that when we saw the slowness, it wasn't in October and November as much as in December. And we already had built schedules, network, and everything getting ready for December. And we did not see the volumes that we normally see in December. So the first signs of slowness were literally in December. And we're at the cost structure. The network was all built up. So it's very challenging. difficult to change everything on a day-to-day basis because you expect that, okay, the volumes don't show up on December 5th, but they might show up on the 6th or 7th. So you can't take the cost down that quickly. But on top of the cost that Scott is talking about, we are also now right-sizing the network. Keep in mind, we do have a fairly good flexibility to switch between 767s if we need to consolidate more cargo, and also split certain routes into 757 for more operational efficiency. So that exercise is ongoing right now, and we expect that, you know, within the first quarter, we'll make tremendous adjustments in our costs, training over time, right-sizing the fleet, and basically freezing everything else that does not produce a dollar.

Okay, no, that's great, Keller. Thanks very much.

Thank you. The next question is from David Ocampo from Carmark Securities. Please go ahead. Your line is now open.

Thanks. Good morning, everyone. Scott, maybe a quick clarification just to kick things off. On the margin commentary that it should hold flat, are you expecting margins to hold flat with the Q4 or the overall margin level that you guys experienced in 2022?

Yeah, getting back to the 2022, just our historical type of EBITDA margin in that 30% to 34%, 35%.

Got it. And you guys provided some pretty good commentary on the CapEx assumptions there. What's the financial impact to the EBITDA line? Because you guys did provide or previously provided 2026 targets on EBITDA.

So we will push those out later. right, Scott?

Yeah, it's a deferral. And we don't, again, we're just going to be able to pivot in either direction quickly. We don't know if it's a six month, 12 month or 18 month deferral, but we're going to, so really you're pushing those things out, I would say on the average of about a year. And if you look back to that long-term plan, 2026 was a pretty light year for CapEx anyways. So it's almost just shifting 24 to 25, 25 to 26, just for round shifting. But we're still very, very committed to We just can't emphasize enough what AJ was talking about there, that we're retaining our conversion slots. That's what's most critical to this business, is that we can get the feedstock quickly, but we've still got our conversion slots so that we can go ahead as planned.

Right, so I guess your assumption is that you could still hit that $500 to $550 million to beat the Dow, but it may not be $26, but $27 or $28.

Yeah, we didn't know there was going to be a global recession last summer and last September when we had that investor day. Otherwise... We probably would have been less bullish on the 2023.

But our key thing was that we still believe in a good business case for us expanding, but only if the market sort of creates that opportunity. And if it's not, even when we built the business plan about a year ago, we knew that If there is an issue, we can get rid of some of these costs and airplanes very, very quickly, and which we did while maintaining that we are in the game, but we don't have the costs associated to being in the game.

Got it. And then maybe just as a final one, when you think about your infrastructure investments for the 777s like New Hangers and whatever other infrastructure-related investments you have to make, But the deferral, the 777s, can you still hit your return on invested capital targets with less scale?

So we will have some deferrals on hangars that we wanted to build for and tooling and training. So that's all been deferred. And also keep in mind that one of the things we're looking at is if we do build the hangar for 777, it'll be able to take two 767s also. So those hangers would be very useful to us no matter which part of the country we build in, whether Vancouver, whether we build in Hamilton or whether we build in Halifax. Those hangers can take 777s and if, let's say for example, we don't need it for 777s and we can put 767s in it for our heavy checks. those would not go waste. So hangers is a good, we are short of hangers now, even for our 767. So most likely the hangers will go ahead, but it's not going to be just a 777 hangar. It's going to be a hangar for, keep in mind, we're operating almost 40 aircraft now. So we only have two hangars in Hamilton. So we could use two hangars somewhere else.

Okay. That's it for me. Thanks a lot, guys.

Thank you. The next question is from Kevin Chang from CIBC. Please go ahead. Your line is now open.

Morning, Kevin. Good morning, everybody. Thank you for taking my question. Maybe to start off with, a lot of good details on some of the moving parts on the employee expense line. We talked about the OT, the training, and the use of temporary employees. But if I look at but maybe just crew cost as a percentage of revenue extra charge. You're tracking around 12, 12 plus percent in 2022. You're sub 10% in 2019. Do you see an opportunity to throttle that line item to maybe back where you saw in 2019 from an intensity perspective or is that cost just structurally higher here as a percentage of revenue, just given the growth profile of the company over the past couple of years here.

Yeah, thanks, Kevin. And that's exactly what we did during planning season, is we benchmarked back to 2019, because that's when our primary focus was cost controls, and just before that massive growth where we doubled the size of the company in a short period of time. So, yeah, that's exactly the plan here. Obviously, there's been some inflation since then, but... with critical mass, with the size, with the new simulator in Hamilton to reduce training. All this stuff's going to get us back to our roots where we've always said it. I think on every call I've been on with Jamie, he talks about how we manage our cost per block hour. We manage everything to the minute. That's exactly what we're describing here is really getting back to our roots and what we demonstrated in all those years leading up to 2019.

And Kevin, let me add something more to it that One thing that changed in 2020 was the duty regulations by Transport Canada. So that part of it, you know, we wouldn't be able to overcome because that's what the government is and the duty regulations are. However, we have our own SIM now, which saves us travel days, training outside, hotels, you know, airfares, all that. So, you know, we're trying to find How do we make up for those extra costs for the duty regs? And we are constantly focused on that. So our training costs will come down, our other costs will come down, and we want to get closer to the 2019 levels. But one thing that we will not be able to do is there will be some costs that we won't be able to cut, which is which is the new duty regulation. But we are trying to offset with other types of savings in it.

That's a great reminder and great additional color. Maybe just more of a housekeeping question, again, just on the employee expense line or the employee line. The headcount number was up pretty significantly sequentially from Q4 versus Q3. And just when you report that headcount number, would that include... Temporary employees, some of that variable labor you might be able to pull on, or is that just full-time employees? Are you able to quantify how many temporary employees you would have used during peak season of Q4 or 2022?

Yeah, that excludes our temporary employees, but what you saw there was some flexing up for peak with part-time employees. So there's a little bit of noise there in terms that they're not exactly a full-time equivalent.

Okay, that's helpful. That's it for me. Thank you very much.

Thank you. The next question is from Chris Murray from ATB Capital Markets. Please go ahead. Your line is now open.

Yeah, thanks, folks. Maybe turning back to some of the newer contract wins with Canada Post. Just, you know, if you go back a couple calls, we had talked a little bit about, you know, maybe having to adjust pricing or something like that. Can you walk us through how the structure of those contracts look and if there were any major changes from how they were designed the last time you signed them?

Some of that information, Chris, you can appreciate are confidential. We're bound by the confidentiality with the customer and we also don't want to get into too much contract stuff, especially with you know, a lot of competitors trying to get into the business, which is kind of tough because we have them locked up. But we don't like to release a lot of confidential information. But the contracts were done seven, eight years ago. The market has changed a lot. You know, our financial profile has changed somewhat as well. And I think we want our customers to grow. One thing I can tell you is that there are enough companies growth incentives for the customers to take advantage of the unused space and grow in those areas. So that would be the basic difference that I'm able to tell you or share with you is that we have created some value-added features into our customer contracts that some of the growth could be at a lesser of a price for them to go sell areas that they normally don't look at. So, for example, there might not be, you know, stuff being sold from Winnipeg to Vancouver, for example. So they've never looked at it as they would all be selling Hamilton, Vancouver. So we have said, look, we have some space from there, and why don't you go look in the market and see if we can get more business. So you might say, okay, are you getting a discounted growth?

Yes.

We're getting a discounted growth, but that's coming in areas that are not being used. So overall, it'll be net positive. So those are some of the things that we have offered our customers some incentive to go out and develop more business on areas that we could use as filler space as well.

Okay, that's helpful. And then just thinking about the fleet, if I kind of compare the Q3 fleet plan to Q4 fleet, The number 757 seems to have stepped up a little bit more. I think you've got four additional aircraft coming early in 23. Can you talk a little bit about your ability to use the 757 in the domestic market and your ability to use that aircraft to flex down if you need to, so if we do get some softness? And would the 67s in the domestic market then, would they just turn into maintenance spares or Is the plan still to find something profitable or to do with those even in this climate?

So, Chris, one of the things we never had the luxury in the past three years to have maintenance fairs, operational fairs, hot fairs as our customers are asked because there were no aircraft available in up to 2022. So the 757 and the 767 gives us flexibility now to have a spare of each kind to maintain our service levels. Also, it also gives us the maintenance fare for, you know, when the planes go into sea checks, but also the flexibility of monitoring our network on a daily basis almost that if you only have 80,000 pounds going to one station, we can put the 757 on and save a lot of operating costs rather than putting a 767 on. Similarly, if the volumes are more one day, we can switch it to a 7-6-7. So a combination of that strategy will help our overall cost structure to be better, but also keep in mind that, you know, with the growth we saw in the past couple of years, especially even in the domestic market, we were very confident focused on in terms of having the right number of aircraft flying for our network and leaving us at 757s and 767s for charter work. So there is a lot of opportunity for those. So yes, we did buy some extra 757s, but most of them are doing the network or acting as pairs. So Our domestic fleet is fully pretty well deployed except two 767s, which we feel, you know, one of them is being leased now by our partner in the U.S., 21 Air, because they needed that aircraft. So we had the flexibility to place one over a 767-300 there. And I think we are also in discussions with many other clients to place the next one. So there is a couple of spare aircraft that we have more than what we need, but we are confident that those particular aircraft will be placed in the next coming months.

Okay, that's helpful. Thank you.

Thank you. The next question is from Walter Spracklin from RBC. Please go ahead. Your line is now open.

Hi, everyone, and good morning. This is James McGarrigle. I'm on for Walter this morning. Okay. Good morning, James. Good morning. I just have a quick housekeeping question to start on the fleet expansion. I know you spoke to the 777s earlier on the call, but I just want to clarify that right now the only planes that are not contracted with DHL are 3767s, and that you have the option to cancel two of those. Do I have that correct? Yes. Perfect, perfect. And I know my other question was on DHL. I know they announced an increase to the South American investment and that cargo jet got a new route from that as well. So congrats on that. So, you know, it seems like DHL is investing heavily for future growth, despite some, you know, immediate term volume headwinds. So is this kind of consistent with what you're seeing from your other large customers? And how are they talking to you about their capacity needs longer term? And are they still bullish on the e-commerce outlook into 24 and 25, just given some of the recent headwinds we're seeing?

So let's take the e-commerce element first. Yes, the e-commerce people are bullish, but as I had mentioned in the call earlier, they're not bullish with the hockey stick growth. They're more looking at anywhere between 5% and 10% type of growth going forward. That's what our customers tell us. That's number one. Number two is DHL investing in spite of all the rhetoric out there about recession and everything. Let me say this to you. So DHL or any international carrier, whether it's UPS, FedEx, their business, And again, I don't get into the business from what I can see and what I can tell and what I've been told is the biggest issue or driver for them has been the China business. So if everybody's down 37 to 44 percent on the China lane because of China's no COVID policy, the factories were closed, the trade relationships have been bad. So that has been the major problem for all companies like DHL is the China business. Europe has remained strong. Mexico, South America remain strong. And if China does not improve, obviously, it's a problem globally that everybody would face. I'm sure you have seen articles come out in various publications about empty ships and empty planes out of China. That is the major problem. One area is dragging pretty well the whole world on shipping. Now, the good part is that a lot of companies are now shifting focus from China and going to, for example, India. Their iPhones are being made in India now. Glove business is moving from China to Vietnam. Robes are being made in Thailand now. So there is a lot of shift of industrial stuff that was made in China to reduce the dependence on China to other countries. So when these things start functioning well, it will take some time to adjust, but it'll settle down. China will maintain some, but they would certainly lose some shipping to other countries. So That is the major culprit in this whole exercise as far as the shipping is concerned. It's not a global phenomenon. Yes, people bought less in December on e-commerce because people were too busy spending their disposable income on travel because that's where you saw the big money was being sent or restaurant or resorts because people were locked up for three years. And people were stocked up for three years and locked up for three years. So that's why we saw that decline in December. So our customers still feel that as for the e-commerce side of it, it'll come back up. As for the ACMI side of the trade is concerned, yes, until the China things improve, it will be a bit lower. But as I said, alternate markets are coming up and they will be shipping, if not from China, from somewhere else.

I appreciate the call, Arun. I'll turn the line over. Thank you. Thanks, James.

Thank you. The next question is from Tim James from TD Securities. Please go ahead. Your line is now open.

Morning, Tim. Good morning, everyone. Thank you very much for the time. My first question, I just want to look at the return on invested capital. I'm wondering if you can talk about how you see that trending forward. in 2023 and then maybe in the two or three year period beyond that relative to what you reported for the full year 2022?

Sanjiv here. We still expect that in 2023 it will be in the teen, low teen to mid teen range. And we expect that as our ACMI business will grow, our return should grow along with it. but it all depends on economic environment when that growth will happen. But we will be able to maintain this return on invested capital, what we have reported in the current quarter. So between 13% to 16%.

Okay, thank you. My second question is, Thinking about the market environment going forward over the next couple of years, should we kind of view the general global environment when thinking about how likely you would be to use those conversion slots that you've maintained? Or could there be sort of unique opportunities that maybe go against the general headwinds that we see in the global market? air cargo market that maybe provide you with what you need to say, hey, let's go ahead and take up and use those conversion slots?

Let me put it to you. Those conversion slots can also be sold, transferred, and, you know, deferred. So we're not married to saying that we are going to use them. We'll use them only as we've always done is, you know, in this case, we had eight of them coming, triple sevens, and four were sort of committed and for our growth. So, you know, being sort of on a cautious side and maintaining flexibility, we were able to, you know, sell the four and maintain the slots. So if we find that the market is not maturing, there's enough people lined up to get conversion slots because we have the early 24, 25 conversion slots. So there's quite a bit of demand for those conversion slots. So we would be happy to either sell them if the market didn't mature, or we could convert the plane and sell the plane or dry lease the plane or fly commercially or do an ACMI. So there's a lot of options. And I think what we have seen in this market is if I had these 777s in the COVID environment 2021-22, we would be looking at you know, 500 million bucks of EBITDA today. So in our organization, we don't want to lose the flexibility of ramping up with a very little cost associated with it, and that's the model we have created.

Okay, that's helpful. And then my final question, you've provided some good pieces of information on the DHL business and the opportunities there. I'm wondering if you can sort of reflect on their behavior, like in terms of routes and capacity and the supplier group that they have? You know, anything you've learned now that we've seen kind of a turn or a weakening in demand, has their kind of use of your fleet of your capabilities kind of aligned with what you anticipated? And have you sort of learned anything or any general observations you could provide to us there? Jamie, you want to take that?

Yeah, thanks, Tim. Yeah, I think it's been exactly what we've been articulating for the last couple of years. Obviously, our relationship, we have an operating agreement, five-year operating agreement with DHL, which is unique. Nobody else has that type of ACMI agreement in the world. We obviously are the, if not number one, if not number one or number two in terms of on-time performance and reliability, which has enabled DHL to enhance its service level to its customers around the world. And of course, we have a financial agreement with the Warrant deal that we have. So there's an incentive for them to reach certain revenue milestones. And we've seen exactly what we had been articulating for the last couple of years. There were some changes in the ACMI DHL flying in 2022 that I alluded to earlier, where we switched some routes or they switched some routes that were operating for most of the year out of North America into Shanghai, China. When that demand dried up, those routes were switched and we We kept the aircraft on other routes into Central and South America, and in actuality, one of the routes we actually replaced an American carrier that was flying there. So that was what we anticipated and had articulated to the market that we would expect, and it's what we would continue to expect in 2023 and 2024 as we go forward. Great. Thank you very much, Jimmy.

Thank you. Once again, please press star 1 on your device's keypad if you have a question. The next question is from Steven Ensign from Raymond James. Please go ahead. Your line is now open.

Yes, good morning everyone. Thank you for the time. I'm going to stay on the macro theme that Tim was touching on here a moment ago. I think as you suggested, the mainline carriers have been bringing on their own dedicated cargo aircraft of late, but you've been quite successful at extending all of your ACMI contracts with your key strategic partners here. So I'm just trying to wrestle between those two dynamics and hoping you could speak to some of the supply-side dynamics in terms of future capacity coming from those other carriers and whether that impacts your ability to deploy new aircraft or not at all. Thanks.

Do you hear me? Yeah, I think... just to clarify, you're specifically talking about other domestic cargo operators like Air Canada and WestJet. And if so, I mean, on the WestJet hasn't even started operating for 737, they're still parked in Calgary. I think they've intended to, or proposed an intended domestic schedule, which really doesn't match up and doesn't compete at all with our, from what we've seen from our domestic overnight network. And really part of the reason that we extended and renewed the agreements with our major customers was to, to, uh, to alleviate that competitive question that people had. In terms of Air Canada, I mean, they're operating 767s, but as we've noted before, you know, and where we see those aircraft flying are primarily, not primarily, they're exclusively on international routes where our Canada cargo had strong belly cargo capacity and demands pre-COVID where they continue to support those belly cargo, those historical belly cargo customers during COVID flying passenger aircraft without passenger. And then those routes that had a good example would be from Bogota, Colombia to Toronto, connecting to their international network, where now as passenger travel has been reinstated, it's reinstated with more narrow body aircraft that don't have the cargo, belly cargo carrying capabilities that the aircraft that were operating on that route pre-COVID. So they use that to compensate and ensure that the cargo demand that they have. And again, those aren't markets that we compete in. We're very confident in, obviously, our domestic and our ACMI business and our capability of competing on a reliability level. We have a 20-year-plus track record to stand on.

So it really is the demand environment that is critical in terms of deploying new aircraft going forward, not anything to do with the supply side, as you said. Correct. Very helpful. Thank you.

Thank you. The next question is from Fadi Shamoon from BMO Capital Markets. Please go ahead. Your line is now open.

Hi, this is Michael Goldie on for Fadi. How is Q123 tracking so far, both in the domestic network and ACMI? Is softness extending from December, or is there some sort of improvement? Jamie?

Yeah, morning, Michael. No, excuse me. Yeah, I think certainly the peak period, as AJ was alluding to earlier, it was somewhat of a unique peak period for us. It was very strong in October, November, and then we just saw after U.S. Thanksgiving some deterioration in demand that impacted us in December, which historically December is usually the heaviest month. I think that plateaued in December, and what we've seen in January and February so far on the domestic side is a little bit flat, a little low-digit, As we commented earlier, low single-digit year-over-year revenue growth. The ACMI business is still up because of the very fact of the three additional routes that I noted before that we started for DHL in 2022 that will get the full annualized impact in 2023, although on a macro level, maybe on lower block hours, still well above the minimum just because of the nature of the routes that we're flying those aircraft versus what we may have been flying them in 2022. Okay. Okay.

And how is the charter market looking right now? I think you're able to get more than expected revenues there in the fourth quarter. Is that continuing into the new year or coming out of peak charter opportunities or are a bit lighter now?

No, demand for charters has remained very strong. We took advantage of the opportunity in Q4, particularly in the month of December, where again, historically, because of the peak season capacity demands for the domestic network and for the ACMI network, we actually historically always embargoed at-home charters during the month of the latter part of November and December because we typically need those aircraft and crews to support the peak volume needs of our domestic and ACMI business. When we saw that softening, we freed up aircraft and crews and we took on additional charter business, ad hoc charter business in the month of November and December, significantly higher than the year than we would normally have in Q4. And we're seeing that trend continue into January and February. And we're going to take advantage of that opportunity by freeing up additional aircraft. As AJ said, we're bringing aircraft into the fleet to replace our operational sea check and hot spares, but we'll also designate aircraft and have more flexibility to designate aircraft as dedicated to charter school in this year. The demand is, at least for the first month and a half, has stayed very strong. Okay, perfect. Thank you very much, guys.

I mean, keep in mind, in 2022, we had lots of, in January, February, we had a lot of PPE and China charters because people were running out of masks and others. Sorry? Yeah. So, you know, we don't have that kind of charters today where supplies for COVID are still being carried. So, you know, there would be some differential. But as the market generally goes for charters without the COVID impact, we're seeing quite a few charters going on.

Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to the moderators.

Thank you, everyone. Appreciate you joining us for today's call. Have a good week.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.