Cargojet Inc.

All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the CargoJet conference call. I would now like to turn the meeting over to Martin Herman. Please go ahead, Mr. Herman.

Thank you. Good morning, everyone. My name is Martin Herman. I am CargoJet's General Counsel and Corporate Secretary, and thank you for joining us today on this call. With me on the call this morning are A.J. Vermani, our Executive Chairman, Pauline Dillon, Co-Chief Executive Officer, Jamie Porteus, Co-Chief Executive Officer, Scott Calver, our Chief Financial Officer, and Sanjeev Meni, 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 information within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA, adjusted earning 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 reconciliation of non-GAAP measures to GAAP measures. I will now turn the call over to AJ.

Thank you, Martin, and good morning, everyone. As you know, I stepped into the role of Executive Chairman effective January 1st, 2024. I'm extremely pleased to end the year with strong Q4 and full year results. This is extremely gratifying given the economic backdrops we faced in 2023 and the industry faced a downward trend. In my 22 years as a CEO, I have lived through three major economic cycles and each time the company has come out stronger. But running a business is a team sport. There is a tremendous team at CargoJet behind our long and successful track record of serving customers. Every single employee at CargoJet is passionate about customer success. While I continue to work on strategic initiatives as executive chairman, and I'm truly lucky to have two incredibly talented leaders, Pauline and Jamie, stepping up to take on the role of co-CEOs. Both these leaders have worked hand in hand and with me and have been battle tested over the past 22 years. Together we have seen plenty of highs and lows and have always found solutions to challenges no matter how difficult the task. Their high energy combined with deep industry experience makes them ideal co-CEO partners and take CargoJet to the next level. Therefore, it is only appropriate that Pauline and Jamie provide you with more color about the business, various initiatives, and our preparedness for the future. I will pass on the call to Pauline now.

Thanks, AJ. Good morning, ladies and gentlemen. Thank you very much for joining us on our fourth quarter results call. I am very pleased to be here today with Jamie Porteus as the new co-CEO of Cargojet. As many of you know, I have been with the company from day one, and I have been very fortunate to be able to play a key role in our remarkable growth journey over the past years. Just last week, we celebrated our 22nd year anniversary as an organization. I recall the days AJ, Jamie, and I sat in our offices wondering what we would name this organization. We had 20 staff and no jets. Jamie and I have never forgotten our humble beginnings. We often reflect on those moments and memories. I am honored to share this role with my longtime colleague, and together, we are excited in continuing to carry on the strong culture, the strong values, and vision set by our founder and executive chairman, AJ Vermani. We continue to be committed to delivering value to our customers, our teams, our shareholders, and society as we fulfill our mission. I will take a few minutes now to set the context and environment we have lived through over the past few years. To say that 2023 was a challenging year for cargo jet would probably be an understatement. After the strong COVID-driven tailwinds in 2020 and 2021, the competitive landscape in Canada was starting to change. Every passenger airline in Canada announced their entry into the dedicated air cargo business, including the introduction of their dedicated freighter fleets. Despite this highly competitive environment, we worked extremely hard and were successful in renewing every long-term contract with all of our strategic customers, reinforcing the very deep and wide competitive advantage that we have built around our business, especially in ensuring our ability to provide over 99.5% on-time performance to our customers consistently. Global air demand and growth was very strong well into 2022. And with this new changing reality, we embarked on an ambitious fleet expansion plan to maintain our leadership position and shared our longer-term growth plans at our Investor Day conference in September 2022. However, as we entered 2023, it became increasingly clear that the impact of rising interest rates Uncontrolled inflation, a slowing economy, and pullback by consumers was starting to negatively impact the entire air cargo industry globally. Of course, cargo jet was not immune to these macroeconomic challenges. Even though we are fortunate to have long-term minimum committed volumes from our key customers, we spent 2023 focusing and repositioning the entire cost structure of our business to match the new reality of slowing revenues and to protect margins. In addition, we prioritized exiting our fleet expansion commitments to preserve cash. This was not an easy task, but we are pleased with the outcome and the final step that we announced on January 15th to exit the last remaining 777 freighters. There is still a lot more work needed in this area, and we will continue to further optimize our fleet in 2024 while retaining the flexibility for future conversion slots and growth. We believe we have substantially unwound much of the cost hangover and successfully rationalized the bulk of our CapEx. Both of these actions have positioned us well to ride the uncertain economic climate. I feel just as excited about CargoJet's future today as I felt on day one of this journey. I'm going to pass the call over to my colleague, Jamie Porteus.

Thanks, Pauline, and thank you, everyone, for joining us this morning. I'm also very excited to be sharing the co-CEO role with my longtime colleague, Pauline. Despite the recent economic and industry challenges, we were still able to post adjusted EBITDA of $301 million for the full year 2023. Although a slight decline versus 2022, it has almost doubled the pre-COVID run rate achieved in 2019. Our portfolio is far more diversified today than pre-COVID. Today, ACMI and the charter segments contribute as much revenue as our flagship domestic business. The resiliency of our business model was tested during the hyper growth days of COVID and again in the challenging market conditions of 2023. We managed to keep our debt levels under control with the year-end leverage of 2.6 times, just slightly outside our 2.5 times target. We also successfully implemented a share buyback program. We maintained our dividend growth and we currently maintain over $675 million of available liquidity and generated almost $38 million of free cash flow during the past quarter alone. A very strong balance sheet by all measures and these will be the pillars of our business going forward to generate free cash flow, improve leverage, reward shareholders while continuing to grow our business and our revenues. While it is almost impossible to forecast the economic turnaround, central bankers have indicated that there is progress in their fight against inflation and they do not expect any more rate increases. Low inflation is necessary for low interest rates, and both of these ingredients will help the economy slowly gain its footing. We have already seen sequential improvement in volumes and revenues in each of our revenue segments over the last half of 2023, which has continued into 2024. As Pauline pointed out earlier, we are well positioned to face any economic scenario. We have continually demonstrated that we can move very fast to adapt to the changing environments. Whether it's ramping up for growth as we did during COVID or unwinding almost a billion dollars in capex in less than 12 months, we are far more proactive and responsive than most. Our focus on cost management, both at the direct cost level as well as at SG&A, has yielded strong progress as we drive down total block hours and overall costs. Our spare 757 fleet does add some temporary pressure on the depreciation line, but we remain optimistic and, in fact, currently are finding creative solutions to this challenge. With all of these actions to further strengthen our business model, we are even more confident in our ability to come out stronger on the other end of this economic cycle. Behind this amazing company is an even more amazing team of over 1,800 employees who are committed to delivering industry leading over 99% on time performance every single day. The most recent peak season Peak season was one of our best in terms of on-time performance, although I'd like to thank Mother Nature as we face far less snow days during this Christmas and winter season than past. CargoJet is a customer-centric company, singularly focused on putting our customers first and enabling them to keep their promises to both shippers and consumers around the world. This is what makes us successful and builds long-term relationships. It is at the core of what we do. Pauline and I are very proud to be leading this amazing team into the next chapter of CargoJet's journey. That concludes my prepared comments, and I will now turn it over to Scott Calver for an update on the business. Thank you, Jamie, and good morning, everyone.

As disclosed on our January 15, 2024 press release, CargoJet is not expecting to incur any meaningful growth capital expenditures in 2024 and 2025. With the return to free cash flow, The focus in 2024 will be on capital allocation and capital discipline. Our four key principles will be to maintain our dividend growth, identify accretive growth opportunities that meet our margin requirements, maintain the current share buyback program, and target our net debt to adjusted EBITDA to be between 1.5 and 2.5 times. For the year ending December 31st, 2023, return on invested capital closed the year at 5.8% when excluding the one-time adjustment for warrant amortization. There are several actions in place that could improve both the returns and the level of invested capital. Let me start with invested capital, and I will again refer to the January 15, 2024 press release. For 2024, net capital expenditures are planned to be in the range of $60 million to $80 million. This range includes the final proceeds from the sale of the four remaining Boeing 777s. This range does not include any opportunities as it relates to the surplus of two Boeing 757s. Management previously indicated that there was a surplus of four Boeing 757s. Starting in the fourth quarter and continuing into the first quarter, two of these Boeing 757 aircraft have been put into service to support organic revenue growth. Management continues to explore options such as dry lease or the ultimate sale of the remaining two Boeing 757 aircraft. The available free cash flow will support the share buyback program and the repayment of debt, and this will provide a material reduction in Cargojet's invested capital. For the return on invested capital, or the net operating profit after tax, Cargojet will focus on asset utility to optimize the fleet size and the corresponding level of depreciation. The depreciation for the two surplus Boeing 757s has a material impact on our bottom line. This depreciation can be stopped once management designates the aircraft to be an asset held for disposal. It should also be noted that cargo jet has capacity to grow revenue in the domestic network. In most circumstances, as the revenue volumes return, this incremental revenue can fall at the bottom line. With a combination of added contribution from any increase in traditional domestic revenue, the potential lower depreciation relating to the surplus of Boeing 757s, lower interest expense, and the return of invested capital to lenders and shareholders, the return on invested capital will improve closer to levels experienced before this current freight recession. At this time, management views the impact on return on invested capital as a temporary issue. Switching to the income statement. You will note that there is a one-time non-cash adjustment for amortization for the contract asset as it relates to the warrants. CargoJet booked a one-time entry to increase the amount of total amortization since the warrants were put in place back in 2019. This entry was required to be more reflective to the current revenue volume that qualifies for the warrant program. The flip side of this one-time amortization is a reduction in expected warrants that may vest within the term of the warrants. We estimate that 1.2 million warrants may not vest, and thereby reducing the amount of dilution associated to this original warrant issuance. A quick comment about fuel expense and the two-month fuel surcharge leg. The adverse impact of the leg that was experienced in the third quarter last year was held mostly flat in the fourth quarter. The cost of jet fuel did not start to decrease until late December. We believe that cargo jet could have a tailwind in the first quarter if this downward trend continues to be experienced throughout the quarter. In the fourth quarter, direct expenses excluding depreciation and amortization improved by $7 million compared to the prior year. The most significant driver of cost to cargo jet is block hours. In the fourth quarter, cargo jet reduced block hours by 7.4% compared to the prior year. This reduction in block hours on flat revenue was critical to cargo jet maintaining EBITDA margins. Selling general and administrative expenses decreased by $7.3 million, which was primarily a reduction in salary, benefits, and incentive. Before I pass it back to our co-CEOs to answer any questions, I would like to provide you some additional information on capital expenditures. The reduction in maintenance capex in 2023 to $98.4 million was primarily the result of one of CargoJet's cost management initiatives and an initiative to reduce inventory. CargoJet was successful in reducing the inventory of spare engines that reduced the requirement of replacement maintenance capex. This initiative should not be viewed as deferring capex. It should be viewed as a one-time opportunity to reduce inventory levels. As indicated in the January 15th press release, CargoJet intends to settle back into our old run rate of $140 to $150 million in maintenance CapEx per year. For growth CapEx, typically the company is required to purchase used passenger aircraft, or what we refer to as feedstock, and then invest in the conversion costs as a second step. CargoJet owns the feedstock for two Boeing 767s, and therefore only the conversion costs are required should we proceed with the conversion, which will only be driven by revenue growth. CargoJet also has a lease to Boeing 767 that expires in February 2025. This lease could be terminated or it could be extended if additional 767 capacity is required. For the $110 million in proceeds that were identified in the January 15th press release, you will see a substantial deposit was received in the fourth quarter. Management anticipates that this transaction will be closed in the first quarter and the cash received will be directed to support the key principles that identified earlier. Maria, I'll now pass it back to you for Q&A.

Thank you. We will now take questions from the phone lines. If you have a question, please press a star 1 on your device's keypad. You may cancel your question at any time by pressing star two. Please press star one at this time if you have a question. There will be a brief pause while the participant register for questions. Thank you for your patience. The first question is from Cameron Dirksten from the National Bank Financial. Please go ahead, your line is now open.

Yeah, thanks very much. Good morning. Scott, I wanted to ask you a question about the, I guess, the warrant revaluation. If I understand correctly, I guess you've sort of done a reassessment here and you're not expecting, I guess, the same amount of revenue as previously thought was going to be the case when you first entered into these agreements. First, I just want to clarify that that's the correct assessment. And two, is it Is it both of the deals with Amazon and DHL, or is this one of them that you've had a reassessment on?

Good morning, Cameron. Yeah, it's the 2019 warrant, which relates to the Amazon contract. And the only point I don't want to clarify on your question, you said valuation. The valuation is a different exercise where the liability is revalued every quarter, and that adjustment for valuation goes up and down every quarter. What I'm talking about is really catch-up amortization. as it relates to the revenue. And the one nuance here that, I'm glad you raised the question because it is something that we need to get into a bit of detail here, is we have four different lines of business with Amazon. And not all those four lines qualify as what they call qualified spend for vesting for warrants. So that program was put together in such a way, and really what I'm referring to is one of the largest revenue streams is our ground operations that we do for Amazon. That has grown significantly. We've talked about it in the past. It only started a couple years ago, but it's been a driver of growth in domestic revenue. It's been the main reason why the headcount's increased to support that growth in business, a run rate of about $40 million a year now. So the good news story there is that revenue that was identified in 2019 to support that warrant program, the revenue's still coming in to a large extent. It's just not all four business lines qualify. So when you exclude the ground operations... It just means that you have less warrants to vest.

Okay, so your overall assessment of revenue hasn't necessarily changed. It's just that there's, I guess, lower revenue in a business line that did qualify, but higher revenue in a business line that didn't qualify.

Yeah, that's fair. It's not a material change. And it should also be noted, too, that this one line of business that we're talking about that doesn't qualify is also very asset-light. And that's one of the things I think we need to, because obviously we turn on invested capital, a primary focus for this year. As that revenue grows with no capital, it helps support that as well.

Okay, that's very helpful. Maybe just secondly for me, just around, I guess, the cost. I mean, you've done a good job of maintaining margins here. I assume you incurred some costs here related to the 777 preparation over the course of 2023. I'm just wondering what kind of headwind that might have been for your, I guess, overall costs in 2023 that, I guess, potentially goes away here in 2024. If you're talking about capital expenditures as a cost, or are you talking about... No, just more about the preparation, you know, to, I guess, prepare all the manuals and just, you know, costs you might have incurred related to, you know, starting to build inventories and things like that.

Yeah, it's not all that material. We absorb that with our current infrastructure of people and very experienced people in the company to get through all those regulatory procedures. But no, it's not material in terms of the costs that we've incurred.

Okay, that's helpful. I'll pass the line. Thanks very much. Okay, thank you.

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

You know, I don't know who wants to take this one, but just kind of looking forward, you did talk a little bit about the fact that you brought block hours down in the quarter, but that you were starting to you know, see some signs of growth or kind of more of a recovery into 2024. I was just wondering if you could maybe walk us through the different lines of business because it feels like the, you know, some of the mainline business looks like it's doing okay as is the ACMI and the charter. So just kind of get a feel for, you know, where we are in Q1 and what you guys are seeing for the next few quarters.

Sure. Good morning, Chris. It's Jamie. I can take that one. As I noted in my comments, we're continuing the trend that we saw in 2023. And I'll talk about each of the revenue segments. In terms of the domestic, as you know, we saw some double-digit reductions in volume in the first quarter of 2023, which improved sequentially in Q2. Q3 was actually flat year over year, which was very significant for us because it's typically the slower summer months that we're comparing. And then in Q4, we're up slightly. But the significance of that is you have to appreciate it. If you remember back in Q4 of 2022, we still had very strong double-digit revenue growth in October, November of that quarter. And really, the volumes fell off the cliff in December. So a comparison year over year of being relatively flat on the domestic businesses is a positive in our light. And we're seeing that trend continue into January. Equally on the ACMI segment, we flew additional, we were flying additional, we have 15 aircraft under contract with DHL. We were flying 17 or 18 aircraft during Q4, which helped the year-over-year comparison versus 2023. And those additional aircraft have continued into 2024. So we're seeing strong demand and our customers are seeing strong demand on the ACMI side in the first quarter, and we expect that to continue at least for the first half of the year. Equally, the charter business, again, in the fourth quarter of 2023, we're about $27 million in revenue, which is up about $5 to $10 million from our normal run rate, which was consistent with what we achieved during all of 2023. And we plan with the additional and available aircraft. And it's one of the, as I mentioned in my prepared comments on one of the creative solutions we're seeing to utilize some of the spare capacity that we have, particularly with the 757s. A couple of those are deployed either directly or indirectly to help us add additional flying on the ACMI business, either by freeing up 767s from the domestic network by putting in 757s, but it also is contributing and will continue to contribute to the achievement of the revenue levels that we've historically done for 2023 on the charter segment.

That's helpful. Thank you. Um, and then Scott, maybe my second question, just going back to the, uh, the, the, uh, amortization of the warrant. Um, so there was, um, you know, the 25.9 million, I think, um, adjustment for the catch-up, but there's also, I guess, uh, an, uh, an eight or $9 million, uh, kind of normal piece of the business. Um, but the presentation changed a little bit, which is, so we're trying to get a handle on, you know, kind of normalizing margins. Can you just walk us through, um, You know, what to expect as we go into 2024 in terms of where you're going to have that in terms of gross and net revenue versus margins and things like that, just if there's kind of a different way that you guys are going to report that we need to adjust for?

No, I think you've got it there. We did separate it specifically so you have full visibility to this warrant amortization, the $32.8 million in the quarter. It's $29.5 is one time. So really you're dealing with a delta, what's that, approximately $5 million? And that compares to the prior year. So that would be the normal run rate of amortization, excluding the one-time catch-up. So, you know, it's fair. As revenues grow, it'll grow. It's really a nature of the revenues that happen by quarter that drives the amount of amortization. And things will settle now that we're caught up with this one-time adjustment.

All right. And was that amortization previously running through you, just reporting kind of the net revenue number? Is that the right way to think about it? You're just breaking it up separately so we can see that?

Yeah, that's right. It was in domestic revenue in the past.

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

Thank you. The next question is from Kornart Gupta from Scotiabank. Please go ahead. Your line is now open.

Thanks, operator. Good morning, everyone. My first question is on the fleet side. Your fleet plan suggests the fleet is holding flat through 2026. I'm wondering how are you planning to tweak the domestic network in order to find incremental lift for DHL to satisfy the original contract, which was a $2.3 billion revenue?

Good morning, Konark. It's Jamie. I can take that. As you know, our current fleet sits at 41 aircraft, 17 757s and 24 767s. As Scott mentioned in his prepared remarks, we own the feedstock for two 767-200s, plus have a slot for an additional 767-300, which we plan on converting one per year over the next three years. In addition, as he also mentioned, we have a lease of a 767 aircraft that comes up for the end of its term in February of 2025. that we have the option to either return the aircraft to the lessor, or if there's a growth opportunity that we can utilize that aircraft either in our domestic or our ACMI business, we can extend the lease of that aircraft. So we have a lot. That's in addition to the current fleet where we have flexibility. As we indicated, we've reduced block hours overall in our domestic network by 7.5% or 7.7% in 2023. And even though we've seen revenue growth, we haven't had to put all of those aircraft back into the fleet equally yet. to operate 17, we're actually currently operating 18 aircraft for DHL, which is three more than our contractual commitment. We have those additional aircraft available in the fleet today.

Okay, that's great, Jamie, thanks. And if you can follow up on the 757, so previously you were contemplating four which were in surplus, and I think it seems like you put two in place. or deployment in the domestic network, the two that are surplus now, what's your visibility on that? What kind of discussions are you having? And if those don't go out, do you have room to kind of, you know, redeploy them within the network somewhere?

Yeah, we have, you're right, we've reduced the surplus to two because we're utilizing the other two Our intent would be the aircraft that come up for sea checks, we would freeze the sea check and park the aircraft until it's needed. They're actively for sale, not a very strong market in terms of used aircraft. There's a significant number of 757s available in the market today, but we would have those aircraft available to bring back into service on very short-term notice if they're required. Okay, that's great. Thanks for taking my questions. Thanks. Thanks, Conor.

Thank you. The next question is from Matthew Lee from Ken Accord. Please go ahead. Your line is now open.

Hey, morning, guys. Thanks for taking my question. Just in terms of the 777s, it sounds like you're going as far as a solid simulator to train. Did you happen to keep the conversion slots if down the road DHL decides they want to reconsider a 777 program with cargo jet, or is that no longer a medium-term part of the story?

Good morning, Matt. There might be a little confusion there. We originally did have a 777 simulator on order as part of our growth plans, but that's also been canceled, resold, similar to the 777s. So really what we're left with is two simulators. They're both the 767 slash 757 simulators. Both of those are actively working, and Pauline, I don't know if you want to add any of that, but it is one of our more significant cost initiatives going into the current year.

Yeah, further to Scott's statement there. We have the two simulators, one for the 7-6 and the 7-5. You can use them for both. We are actively engaging with both of those aircraft. Our cost controls also allow us to keep our crews in Hamilton. We're no longer sending anyone to Miami, so we save on that expense and we save on crew time. But they're both actively working, and any excess hours, we're selling them in the market for when we're not using our own crews I hope that answers your question.

Right, but just in terms of doing a 777 program in the future, is that at all possible for CargoJet, or are you thinking that's no longer a possibility with DHL?

You know, this is AJ, by the way. On the 777s, I think that for the time being, we have put the program in a pause situation. We have done a lot of work, technically, manuals, you know, feasibilities, routes. So that work is all sitting there as probably more like an asset for us when we want to revive it. We still have four slots with IEI in Israel that we are under discussions to defer that for longer term, which could be two years, three years, or four years. I should say that, look, it's part of a cargo jet's dream to have 777, but at the right conditions and right market opportunities. We don't want to put it in today's market where the yields are down and the competition from the white bodies passenger aircraft is very, very substantial. So it would not be prudent to put them in, but since we have done a lot of work, we have developed a lot of infrastructure around it and also developed we are maintaining the slots to be three or four years down the road or earlier if needed, that keeps us at least motivated or looking at those when the timing is right. And if we felt the timing was not right, we will scrap that plan as well. Okay, that's very helpful, guys. Thanks.

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

Hi, thanks for taking my question here. Not to belabor the warrants, but if memory serves me correct, I think it had two tranches to it. It was a cumulative $400 million of revenue or business, in the first tranche, which might have been six or seven years, and then you have the option or there was an option to increase the number of warrants for an incremental $200 million of business. So in aggregate, that would be $600 million. So I just want to clarify, if I think of this adjustment, I suspect it has to do with that first $400 million. It sounds like you're in aggregate on track to hit that or you're hitting those targets, but just the composition of of that cumulative number has changed here.

Yeah, you're mostly right there. I'd say we're a lot closer to the full 600 when you include that one line of business that doesn't qualify as revenue for this program. But you could look at it. It's that growth piece that we're writing down. But in aggregate, when you look at the whole story, it's closer to the 600, I would say, than reducing and eliminating that growth piece.

Okay, that is helpful. And then just in terms of, I guess, you know, in terms of revenue trends as you look out into next year, if memory serves me correct, I think one of the areas you saw some pressure was in your, I guess, non-contracted business with the domestic segment. You know, those customers typically end up being a little bit more price sensitive. Just wondering how they're faring now. Are you seeing those volumes? pick up as well? And would you view that as a bit of a leading indicator in terms of where you see the cycle versus maybe looking at the volume trends from your longer term investors where you have a much larger percentage of their business and there's obviously a more symbiotic relationship between you and those longer term customers?

Yeah, good morning, Kevin. It's Jamie. I'd say yes, generally. I mean, the non-contract portion of our domestic business is certainly not a significant percentage of the overall business. So I think we look at a combination of indicators, that non-contract sort of ad hoc price business that we generate to fill empty space on the aircraft, on the scheduled routes that we fly on the domestic network. but certainly the trends we see from our contract customers, as you know, all of them have minimum volume guarantees. They're well above those minimum volume guarantees, but we, you know, probably a better indicator is the growth that we see quarter over quarter year over year from both, but particularly from the contract customers.

Okay. That's, uh, that's helpful. And, and maybe just, just last one for me, Scott, you know, you've been, um, you know, deploying capital towards your buyback. You have, uh, when you have cash coming in the door with some of these asset sales, you did your priorities. I think you have about a million shares left, give or take, in the buyback. I guess, how do you think about running through the remainder of that NCIB or the million shares you have outstanding? Is that something we should be modeling as essentially something you'll complete by November of this year? Or I guess, how do you think of that?

Yeah, it's something we're committed to. We, like you said, we've done over 600,000 shares just in the first three months alone. So for what we're going to do for the remainder of 2024, it is one of our targets. We're going to have to take a balanced approach here between share buyback and de-levering. and it really depends on share price, and it really depends on the reaction to our share price with the share buyback program. It's highly accretive. Obviously, it was very significantly highly accretive when it started mid-November, and it's accretive up to a decent share price, but again, it depends on how the market responds, and we'll just assess this month to month, and our board of directors obviously approves this at the end of the day, and we'll kind of continue doing what we're doing, and we'll probably have more information when we release Q1.

Excellent. That's very helpful. I'll leave it there. Thank you very much.

Thank you. The next question is from Jonathan Limers from Laurentian Bank. Please go ahead. Your line is now open.

Good morning. Thanks for taking my questions. During Pauline's opening remarks, she mentioned that at the beginning of last year, there were some concerns in the market about competition and the effect that could have on cargo jet going forward. I guess, what have you learned from the past year and following the renewal of the long-term take-or-pay agreements? Are you concerned at all about competition for next year in any of your business divisions?

Good morning, Jonathan. It's Jamie. I'll just add some comments and maybe Pauline can finish them off. But in terms of competition on the domestic network, we certainly don't feel any direct threat, as we've noted right since the beginning when Air Canada and WestJet both got into dedicated freighters. Air Canada has continued to, as they indicated when they first got into 767 freighters, to deploy those aircraft primarily on international routes to support strong cargo markets where they don't have the belly cargo capacity that they may have had pre-COVID, and that's what we've continued to see. Certainly no threat domestically in terms of Air Canada. In terms of WestJet, even less so. The 737s, they were unfortunately delayed in implementing those aircraft for several years because of Transport Canada regulatory requirements that needed to be met. Launched those in the spring of 2024. with what I would call a fairly aggressive domestic schedule, but it really petered out fairly quickly, and they're just doing some ad hoc flying right now and don't pose any material threat to us.

Yeah, I echo Jamie's comments. We always take competition very seriously, but we feel that we have a unique brand and a track record. We are an organization that is customer-obsessed, And the one thing that we can provide stronger than our competitors, that's our on-time performance. And we continually and consistently prove that to our customers and the market.

And it's AJ. I'd like to add one thing about that factor. If you look at the renewals of our long-term customer contract, there was four of them that we renewed in the past couple of years. Amazon was one of them. UPS, DHL, we picked up additional, CPGOC, which is Canada Post, and Peer Relator. All these contracts were negotiated right in the middle of COVID when both carriers had announced plans to expand into the cargo business. So the customers obviously listened to what the competition was out there, and I can assure you that after a lot of due diligence by customers, they decided to renew with cargo jet till 2029, majority of the contract. So we feel that the product we built, the cargo culture we have, the very fact we are not tied into a passenger business where the passenger business could have a million bags unsorted at any point in time, we saw in the past couple of years their on-time departures and on-time arrivals, as we all see the papers and their statistics, we are pretty confident about when people need to get there, they use cargo jet. When they don't have time to 24, 48 hours or get there when you can, unfortunately, all these competitive carriers are their first priority or their major product being passenger. You know, they certainly have the desire and will to be in the cargo business, but the circumstances of serving the passenger best, which is 90% of your business, does not allow for a healthy cargo environment, in our opinion. And we just tested this out with four or five renewals in the past two years.

Okay, thank you. And just on the ACMI business, you know, there's been a number of changes recently with the 777s being taken out. You know, this one-time charge to the warrants this quarter. I know that there's three additional aircraft flying, you know, for DHL. Could you just provide us with an update on the type of volume growth that you're expecting now into 2024 and 2025? You know, I mean, A year ago or two years ago, we would have been looking for kind of 20 to 40% growth year over year for ACMI. You know, I'm kind of looking for mid to high single digits now.

Yeah, I think, good morning, Jonathan and Jamie. I think, you know, probably a little stronger than that, a reflection of the, you know, if you looked at the current ACMI flying contractually that we're doing for DHL, we have 15 aircraft under contract. And as I mentioned earlier, We added a few during peak for their peak season demand, and that's continuing into 2024, where we presently have 18 aircraft. So that's a 20% increase in the fleet, which we've indicated or they've indicated to us will continue for at least the first half of this year. So that's certainly a strong indicator that demand is coming back internationally.

Okay, thank you. And would you be able to provide us with a little more color, Jamie, on what the customers might be telling you on the domestic side? I know you shared earlier during the Q&A your expectations for the continued trend into early Q1 of revenue close to prior year level.

Yeah, consistent with what we said in 2023 on the domestic side, we saw a We saw lower overall volume at the beginning of the year in the first quarter after volume really deteriorating at the end of 2022 in the month of December particularly. But that improved sequentially in the second quarter of 2023. And then as I noted in my comments earlier, it was flat in the third quarter in the summer months, which was what our customers collectively had indicated that they all thought that the second half of 2023 would be flat. all the indicators that they were seeing would be much stronger than the first half of 2023 that we experienced. And that's exactly what the reality turned out to be. We saw flat growth in the summer months, and then we saw, you know, sort of flatter or up a little bit in the fourth quarter. But as I mentioned in my earlier comments, I think it's significant to note that, you know, quarter over quarter, we're comparing, you know, 2022's fourth quarter was very strong for two thirds of the quarter and really fell flat in December. So we're very pleased with the, the, the, the returns that we had in the fourth quarter of 2023, and all consensus of our domestic customers is 2023 sort of saw the trough in the summer in terms of demand, and demand came back up at the end of the year and is continuing with interest rates coming down with inflation in January being only at 2.9%. It seems that consumer spending is a little stronger than it was at the early part of 2023, and we're forecasting mid to high single-digit revenue growth on the domestic sector for 2024. And I can tell you January started off much stronger than that. So we're sort of encouraged by the early returns in the first quarter.

Okay, excellent. And if I could just ask one more question, just on the EBITDA margin and the costs. There was some discussion earlier about the initiatives you're working on with the 757 and 767 flight simulators. Are there any other... things that you're focused on to find efficiencies for this year, or is it more just volumes and driving operating leverage? And maybe if you have an update as to sort of where you think margins could get to two years out.

Hey, Jonathan, it's Scott. Yeah, really 2024 is sustaining what we did in 2023. We consider those to be highly sustainable. Then there is further opportunity But like I said in the past, we're working a bit harder to capture smaller numbers. We still have some RFQs and RFPs to do. One of the priorities in 2024, we're going to improve some of our systems. They need to be a bit updated here to support this new diversified business. And so that's going to be longer-term savings, but it will definitely give us an opportunity to to just support our customers and manage our costs and make quicker decisions, all that, just with a bit of a focus on our systems this year. But really, we do have operating leverage in this business, so there is an opportunity to improve where we're currently at. But right now, it's really going to depend on the revenue volumes coming back, and we'll just have to be patient here through this soft economy.

You know, one thing I can certainly add is that efficiencies, cost management and cost control and gaining some extra dollars by these exercises, this is a continuous journey. We haven't reached a destination, and there is no destination. This is going to go on, and we will find things as we go along.

Thanks for your comments.

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

Thank you. Good morning. Just a quick question. Returning to the 757s, Jamie, the two that were surplus but now have been Were you indicating that those are being used for both some ACMI flying and some charter flying? Sorry, I just kind of missed that commentary or couldn't quite pick up on where exactly their home is currently.

It's a combination, Tim, and good morning, by the way, of putting those aircraft either directly or indirectly. Directly would be directly into an ACMI route for DHL. Indirectly would be into our domestic network to free up a 767 to deploy as an additional aircraft for DHL.

Okay, perfect. Thank you. Then just looking at the Amazon agreement, the warrant agreement, and you've talked about how the revenue mix or you've got more – you've generated more revenue that doesn't necessarily qualify towards the warrants. The revenue that – that does qualify, but maybe has been a little bit lower and hence the need for this non-recurring item this quarter. Can you talk about maybe why that revenue hasn't reached the sort of original framework? Is that just a function of the economy we're in today? You know, what's the cause of that if you were able to point to something?

I can answer part of that, Tim. I think it's important to understand. I think if you were If you were sitting in Amazon's shoes today negotiating this warrant agreement, you'd probably include more revenue in the qualified spend, or they would want to, than when we first entered into the warrant agreement several years ago. We really have four sources of revenue, of which really only a portion of two of them qualify. The BSA, or Block Space Arrangement, which is the capacity that Amazon would purchase on our domestic network, only the net revenue portion of that revenue is considered qualified spend. The fuel surcharge, of course, that's not considered part of the qualified spend. Equally on the CMI, it's really just the management fees for the CMI, the fuel burn and the pass-through expenses like navigation and landing fees aren't part of that. Those have stayed. The CMI is relatively consistent. The MOP, which is the third-party logistics business that Scott was referring to, which is growing substantially, none of that revenue, is considered part of the qualified spend. And equally with charters, which happen fairly usually during peak season, but only the non-revenue portion of the charter revenue is considered qualified spend. So in their aggregate in total, Amazon's still continuing to grow at a significant pace. It's just the portion that's considered part of the qualified spend for the warrant calculation has changed.

Okay, that's really helpful. Thank you. And then just one more question, if I can squeeze it in. Any thoughts on sort of pilot availability and staffing? Obviously, having sort of pulled back on the growth plans, I think that that probably helps you out. But is the company in good shape in terms of labor availability? I guess I'm thinking flight crews in particular. Any sort of issues or challenges there as you look at 2024 and 2025?

I mean, there's always challenges. It's somewhat cyclical in terms of pilot demand. We went through Some periods earlier this year, late last year, where as other scheduled passenger airlines, particularly Air Canada, ramps up their hiring, our attrition rate is a little higher than we would like it to be. But we manage, we try to get ahead of that curve with our flight ops folks hiring and training pilots in advance in anticipation of that. One of the more recent developments with the bankruptcy protection of Lynx Airlines has freed up a couple hundred pilots in the industry that are Flight operations actually will be hosting a call today advertising availability at cargo jet for those pilots. So we're in good shape.

Yeah, and just to add to Jamie's comment, having the 767s available to us, the sims in Hamilton, will allow us to train the pilots and get them online quicker than what we've had in the past.

Super. Okay. Thank you very much.

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

Thanks very much, Alberta. Good morning, everyone. Good morning, Walter. So you've had a nice lift in the revenue per block hour in the fourth quarter. You had a nice one in the third quarter as well. Presumably that's your CPI. I know there's a lot of mix in that all the time. So maybe if you could break out for us. Is that CPI now kicking in? And the reason I'm asking is that as if and when cost inflation that's ubiquitous kind of starts to simmer down and you're still getting some of the lag effect of higher CPI, is that emerging opportunity as we go into 2024 as your pricing kind of holds in? but perhaps costs start to moderate a little bit.

Morning, Walter. It's Jamie. I think the biggest improvement in the revenue per block hour has been our management of the actual block hours themselves. The 7.7% reduction in block hours in the quarter year over year was significant. That caused the increase in revenue. Block hour contributes, obviously, to us being able to maintain the EBITDA margins that we're at. We'll continue to – we certainly won't add back block hours, particularly to our domestic network, certainly not as quickly as we drove block hours down. And a good indicator is what we've seen in January with the demand increase on the domestic network. We haven't increased block hours at all. So I would fully expect you'll continue to see revenue per block hour in the first quarter of 2024 – to be stronger than it certainly was in Q1 of 2023, consistent with what you just described in Q3 and Q4.

That's fantastic. And that leads to my next question. Can you talk a bit how you mechanically pull out block hours? I mean, it's just route optimization on the same revenue. And is there avenue to do that further? Do you feel like you've kind of managed that to its optimal level now and that now when... volume comes on, are you forced to bring block hours on or can capacity utilization move up a little bit as that operating leverage kicks in?

I think we're very confident that we can bring on an additional easily 10% to 15% more revenue on the domestic network without increasing block hours. And to answer the first part of your question, the major reductions that we did in our domestic network. We did, I think, in April and July of last year, which were significant. I think we've exhausted any of those significant reductions in domestic block hours, although we manage it literally on a daily basis. I can tell you as early as last week on a Thursday night, we're consolidating our routes out of Hamilton because a lower demand, particularly on a Thursday, will consolidate and save the block hours between Hamilton and It doesn't sound like a lot, but when you save five block hours in an operating day for the same amount of revenue, it's significant. So we will continue to do that throughout 2024.

So you just said, Jamie, 10% to 15% higher revenue on the same block hour. I mean, that would be very accretive to margins. Is that not right? I mean, your margins... We would agree. Okay. That's okay. Good answer. Moving on to... Moving on to ACMI and charter, you know, that can move around as you dedicate more aircraft on ACMI and as charter demand can fluctuate a little bit. But I think you have a little bit of visibility here, and I think you alluded to that, that the demand is continuing here into 2024. So is it fair to kind of model your Q4 run rate on revenue for each of ACMI and charter, at least for the first half of the year, and then see how the back half goes from there? Is that the Is that the right way to do that?

I think it's fair on the ACMI basis because we are operating a similar number of aircraft in Q1. And as I mentioned before, we expect that to continue until at least the end of Q2. So in that sense, yes, I think that's fair, Walter. In terms of charter, a little bit more cautious on that because obviously that's a reflection of our capability to increase the run rate from sort of 15 to 20 million per quarter to the mid to high 20s. was a result of the additional aircraft we had available because of the softness in the domestic and the softness in the ACMI flying. So it's a bit of a balance as we bring back aircraft. We haven't added any more block hours to the domestic and don't intend to this year, but with a couple of more aircraft flying for DHL, it lessens the total availability. So I still think we're going to be in that mid-20 run rate, but we're a little more cautious on that. But you're right, at least for the first half of the year, that's fair, and we'll take a look at it as the year goes along.

Okay. All right. That's all my questions. Thanks very much. Thanks, Walter.

Thank you. Once again, if you have a question, please press star 1 on your device's keypad. We have a question from Ahmad Shah from Beacon Securities. Please go ahead. Your line is now open.

Good morning, guys, and thanks for taking my question. I guess the first one is just maybe a little bit about the charter environment. I'm just wondering, is it returns or margins that are not attractive for you guys to deploy the other two B-757s? You don't want to drag margins for 2024, or how should we think about that?

We've never deployed dedicated aircraft assets to the charter business. It's always been utilization of aircraft assets that are related to the domestic or the ACMI segments of our business, typically during downtimes when those aircraft aren't required to fly the missions for the domestic or the ACMI, which has traditionally been daytime or on weekends when they're not flying for their contractual commitments in those revenue segments. With some surplus aircraft, that's given us a lot more flexibility. And it's not as simple as having an extra two 757s and saying those are available for charters. we actually, it's not always a 757 that you, it's predominantly 767s that are the preferred aircraft or the market that, uh, uh, that makes up most of our charter market is in 767s, but we'll, you know, take a spare 757 or two, deploy it into the domestic network to free up a 767, particularly if it's for a multiple day charter, but it's not as, uh, you know, we, we plan, as I said, we would expect that for 2024, we'll continue in that mid 20 run rate, um, But it wouldn't be something that we would look at to specifically answer your question that we would take the two spare aircraft that we're completing seat checks and are going to park them. It wouldn't make sense from a margin standpoint for us to dedicate those to – there wouldn't be enough work to dedicate those to ad hoc charters.

Fair enough. I appreciate that call, Jamie. And the second one, maybe that one for Scott. When we talk about consistent margins, I just want to clarify – Are we X'ing out the impact of the fuel, especially since it's becoming somewhat of a potential drag given the lag on the pass-through? Or how should we think about the margin number that you guys say it's going to be consistent for 2024?

Yeah, that's fair. It's consistent. It's really hard for you folks to really measure the impact of that lag because on that fuel surcharge revenue line, it says fuel surcharge and other pass-throughs. The other pass-throughs is a significant number. And then when you look at fuel expense, there's things going on in there as well that makes it really tricky for you folks to – but really, nothing's changed. It neutralizes over time. It's really just – you always hear about it with the rail and the trucking companies talking about it. And our problem is just twice as big because it's a two-month leg compared to a one-month leg. But it does even out over time. So it's sustainable over time.

Got it. That's helpful. Thanks, Todd. I'll jump back in with you.

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

Thank you, Marie. Thank you, everyone, for joining us on the call today. After a lot of heavy lifting in 2023, CargoJet is well positioned now. We have an exceptional team, a proven business model, and the best on-time performance in the industry. We do one thing, and we do it well. We fly cargo. Every package is treated like it flies in first class. We do not offer economy class. Thanks again, everyone, for joining us. Have a great day. Thank you.

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