Cargojet Inc.

All participants, please stand by. The conference is now ready to begin. Good morning, ladies and gentlemen, and welcome to the Cargo Jet Conference Call. I would now like to turn the meeting over to Martin Herman.

Please go ahead. Good morning, everyone, and thank you for joining us on this call. With us on the call today are A.J. Vermani, our Executive Chairman, Pauline Dillon and Jamie Porteus, our Co-Chief Executive Officers, Aaron McKay, 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 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 income. I will now turn the call over to Jamie.

Thank you, Marty. Good morning, everyone, and thank you for joining us on the call today. As we've done in prior quarters, Pauline and I will share our prepared remarks, and then we will open up the call for questions. What started in the United States as a liberation day on April 2nd has clearly set the stage for a new trade world order. While countries in economic blocks such as Japan and the European Union are buying peace and entering into trade deals with the United States, the longer-term impact of this seismic change will only emerge in the coming years. There's definitely a greater level of uncertainty that is translating to slower decision-making. We believe the key to surviving this unprecedented period is resilience. and resilience is one of the foundational values that CargoJet was built upon. Trade is as old as civilization itself. The Spice Route is about 5,000 years old, and the Silk Road is over 2,000 years old. Accordingly, we do not expect world trade to come to an end anytime soon. There will be new export countries, new trade routes, and new opportunities. Our mission is to stay one step ahead, and we have demonstrated just that by identifying growing ACMI opportunities with DHL, by entering into long-term contracts for China scheduled charters, and we will continue to find new and emerging trade routes around the globe. Closer to home, our domestic network is unparalleled. Despite global uncertainties, our domestic business posted 14% year-over-year growth in Q2. As I've noted before, During tough economic times, consumers often substitute a product with a lower cost item, but we expect the volumes to remain resilient. Our Q2 results clearly demonstrate that such behavior is playing out and that e-commerce is still strong and has a long runway of growth ahead of it in Canada. That said, we did see some weakness in our European ACMI routes after the Liberation Day, but we remain optimistic that after the EU-USA trade deal, and our new DHL agreement, air cargo flows will reemerge in the coming quarters. Our charter business posted a 22% growth, demonstrating the stickiness of this trade lane that is relatively new for Canada. We did, however, identify an attractive opportunity to streamline our fleet by acquiring a total of four aircraft, three converted Boeing aircraft, and the outright purchase of a used factory-built freighter. The growing size of Cargojet's overall fleet now warrants an enhanced maintenance spare fleet to backstop heavy maintenance schedules and to sustain operational reliability for both Cargojet-owned as well as CMI aircraft. Management will be selling two older 767-300 aircraft in Q3 2025, and one leased 767-200 will now be returned to the lessor in Q1 2026. This will lead to a net addition of one 767-300 aircraft. These investments, partially funded in prior periods, reflect timing differences between cash inflows and outflows, thereby resulting in a net year-to-date free cash flow outflow of $118.4 million. We expect to fully offset this cash flow shortfall by Q3 2025 through operational cash generation and the sale of the two aircraft, returning to our previously stated adjusted EBITDA leverage ratio range of 1.5 to 2.5 times. During the six-month period ended June 30th, the company purchased for cancellation an aggregate of 704,533 voting shares under the NCIB for a total cost of 73 million, including 1.4 million share buyback tax. Our dividend policy remains consistent with previous years. We remain confident that our resilient approach to turning threats into opportunities will continue to serve us well into the future. Our fleet of 43 freighter aircraft and our unique mix of domestic network, ACMI, and all in-charter revenue segments creates a very strong competitive advantage, provides further growth opportunities, and continues to generate value for all stakeholders. Thank you, and let me now pass the microphone over to my colleague, Pauline.

Thank you, Jamie, and good morning, everyone. I would like to stay on the theme of resilience. On July 2nd, we announced that Amazon had renewed its air transportation services agreement for four years with us, with an option to renew for two additional years, potentially extending the relationship until March 31st, 2031. Last night, we announced that DHL has also extended its strategic partnership with cargo jets until March 31st, 2033, with additional options until March 31st. Let me first recognize the cargo jet team who makes it happen every single day and night. Consistently delivering on-time performance of over 99% month after month, year after year, requires a highly engaged and synchronized team that is pulling in the same direction. This is resilience. This is our cargo pedigree. This is our DNA. Our heartfelt thanks to each and every one of them. We would not have earned these long-term renewals without our team, their hard work, their passion, and their continued dedication to cargo jets. Amazon and DHL are two of the planet's largest logistics brands and have reaffirmed their vote of confidence in cargo check. These global leaders have vast resources to build engines that will drive their business. Our job is to support them in the most cost-effective way and to capture those growth opportunities. That is what excites us the most. Turning towards operational effectiveness, it is worth noting that despite a 10% increase drop in block hours loaned this quarter versus quarter two of the previous year, we have managed to post a strong adjusted EBITDA margin of 33.7%. Sequentially speaking, we improved our margins by 140 basis points versus first quarter of this year. We are starting to see sustainable cost efficiencies as a result of a new work smarter culture we are building in every part of our business. I touched on the need to build strong talent in all key functional areas in my prior remarks. Today, I am pleased to introduce Aaron McKay, who started on August 1st as our new Chief Financial Officer. Aaron comes with strong industry experience, and he looks forward to quarterly updates in the upcoming quarters. We are thrilled to have Gord Johnston, a veteran cargo jet executive, stepping into the expanded role of Chief Commercial Officer. This new role will streamline our sales processes and generate new revenues by improving capacity utilization in key lanes, including backhaul lanes, by leveraging spot and interline relationships. It is one of the key initiatives to improve margins. We also continue to make progress on our technology transformation project. This project will not only streamline our day to day operations, it will improve financial reporting while reducing working capital. On the operational front, our team delivered a successful prime week for Amazon and is gearing up for the back to school shopping season. We call it a warm up for the upcoming holiday season. We are also extremely proud of the health and safety team that are working on innovative ideas to train our employees using bite-sized video technology. Despite global uncertainty and a slowing economic outlook, we remain very optimistic about our ability to continue to deliver shareholder and employee value. We truly believe that every challenge is an opportunity. Maintaining strong engagement and supporting our team members to deliver the customer promise is a personal priority, and we are thrilled with the progress we are making. Thank you again for joining us this morning. Paul, if you'd like to open the line for questions.

Thank you. We will now take questions from the telephone lines. If you have a question, please press star 1 on the device's keypad. You may cancel your question at any time by pressing star 2. So please press star 1. At this time, if you have a question, there will be a brief pause while the participants register. We thank you for your patience. The first question is from Walters Fracklin from RBC Capital Markets. Please go ahead. Your line is open. Yeah, thank you very much.

Good morning everyone. You know you've brought in your block hours. You know they were looking at their they were stable in in Q1 but dropped 10% in Q2. Year over year are we going to run it kind of the lower level of block hours now in the back half? Or is it something that seasonally we might see the year over year go back? to prior year levels or stay at the down 10% year-over-year for the back half?

Good morning, Walter. It's Jamie. I can take that. Now, we would expect it to go back to more seasonally, a little bit higher than what we saw. The reduction that we saw in Q2 is a little less than what we saw in Q1. If I look at our ACMI overall block hours in the quarter, I think we were down 9% versus 16%, so slight improvement from Q1. And our indications are in the back. And equally with the domestic network, our hours were up a little bit, but that was a reflection of the 14% increase in revenue. And we would expect that in all three segments, the domestic, the ACMI, and our scheduled and ad hoc charter business will be stronger in the back half of the year.

Got it.

Okay. And then on the charter, kind of the same similar question. It was $46 million in Q1. It dropped to $40 in Q2. Is that a seasonal, or should we expect it to come back up in Q3 on seasonal, or is that sequential drop due to some other reason, again, as we look into the modeling for Q3, Q4?

Good morning, Walter. It's Pauline. No, we don't anticipate to see any further decline in that. We just saw a softening in the economy. As a matter of fact, we're starting to see things pick up again when it comes to the charter business.

And then on the CapEx side, can you give us your latest on maintenance CapEx that you're expecting in the year and then the growth CapEx net of your disposals?

Hi, Walter. Sanjay here. We expect our CapEx to be – we will spend about $50 million to $60 million this quarter. And after basically settling up, cash what we receive from sale of assets, it will drop down to basically $80 to $90 million at the year end. We are selling two P767 aircraft and then we have a sale and leaseback arrangement for 2767. So it will virtually give us $170 million in cash inflow. Walter, just to make it clear, the 2767 We are selling our Pratt & Whitney aircraft. Majority of our fleet except these two aircraft are Pratt & Whitney, which we bought during COVID time because every aircraft was valuable. And strategically, two of a kind doesn't give us the synergies operationally. So we are selling those and replacing it with one GE engine, which most of our fleet. So it's a fleet rationalization that will help with cost and maintenance and synergies.

So that was a strategic move that we were doing. That's fantastic. And that harmonizes that and improves your efficiency there for sure. Last question is just on the DHL and the logic around issuing warrants with your customer. I mean, you are the only game in town. Why issue warrants and not more traditional warrants? kind of contract like you seem to have kind of now developed with Amazon. Your Amazon did include warrants before, didn't with the new renewal, but for DHL, they did before, and you're doing it again. I know you're canceling the other ones, but you're issuing new ones here. Talk to us about a little bit the logic around issuing warrants with this particular customer.

Yeah, so I'll take that. We are... We do have a fairly big market share in Canada, but keep in mind, all the DHL business we do can be done by other carriers. When I say other carriers, mostly American. So that part is not, you know, when you say we are the only game in town, pretty well. No, we're not the only game in town. There's many American carriers who can do that. We fly from here to Cincinnati. five, six flights a day. Then we do Cincinnati, Mexico, South America, some Caribbean. You know, Europe, we were doing until a while back until Europe dropped off a little bit. So any business we do with DHL does have, they do have options. And secondly, I think that the relationship with DHL is today, nobody is getting... eight or 10 years or 12 year deals with any carrier. And first of all, we canceled the old warrants, which was 1.6 million warrants at over $150 strike price. And we had to make it more interesting to continue with the unique partnership that DHL does not have with any other carrier other than us, which means when the business is down, you know, we're the last one told to, okay, you're going to take a break for this route. And when the business is up, we're the first one who gets called. So develop that uniqueness in relationship. We also have to show uniqueness in our flexibility of bringing a partnership approach that we both are aligned, we're on the same page, and we stand out compared to other carriers. I think by reducing the number of warrants, by, you know, making the price turn, we win by less dilution. They also win by less warrant. They get the motivation to give us more routes, and the partnership continues.

Great. Appreciate the time.

Thank you, Walter. Thank you. The next question is from Cameron Dirksen from National Bank Financial. Please go ahead. Your line is open. Thanks very much.

Good morning. If I could just follow up on, I guess, the question around the DHL deal. You know, you still had, I guess, a couple more years to run on the existing deal. So I'm just, my question is, you know, why now? You know, why the extension now? And is there anything, I guess, contractually that, I mean, other than the warrants that you just addressed, but is there anything else contractually different within the new contract?

Well, Cameron, contractually different is obviously the term of the agreement. Secondly, the contractually different is that the warrants that we have now reissued, which are a lot less, the site price is different. And most importantly, the revenue associated with warrants that they have to deliver is more geared towards growth than maintaining the business. So the interests align from that. But they're interested in growing with us based on our performance, our flexibility, our willingness to do more than anybody else. And we wanted to make sure that we refresh the agreement two years early. Now you're saying, why two years early? My question is, why not early? Why late? You know, when... Two years, yes, we could have lived the two years, but we could have lived with an outdated agreement that did not motivate the customer or us to do anything different. So two-year renewal, two-year earlier renewal, refreshes the whole agreement, commercial terms, adds the minimum block hours, add minimum number of planes, and certainly, you know, rejuvenates the whole partnership.

Okay, so some more potential upside, I guess, for growth with DHL. Yeah. Okay.

Yeah.

That makes sense. Just on the, I guess, the Chinese e-commerce contract, I mean, it did look like maybe it slowed somewhat, I guess, sequentially in Q2, and I think maybe it sort of happened towards the end of the quarter. Can you just talk about how that volume is trending, like weekly flights as we sit here today and what your expectation is for the second half?

David can take that. Yeah, good morning, Cameron. Good morning. Yeah, you're right. We saw some softness on the weekly frequencies from what we saw in Q1. We're down to three frequencies per week throughout the summer, and we expect that to increase as we go into the third and fourth quarter.

Okay. Okay. And maybe just final clarification for me, for Sanjeev, just on the cash inflow from the two aircraft sales, I guess the sale needs back. I just want to confirm that you said $170 million in cash inflow. If that's correct, which quarter do you expect to receive that?

Yes, 170 is correct. We are already in process of completing sale, and we expect it to be over this quarter for $100 million, and $70 million is also in process. It may be a split between this quarter and next quarter, but we are pushing it hard for six. to complete the sale this quarter as well. So 70 billion might come this quarter or it will be 35-35.

Okay. Perfect. I appreciate the time. Thanks very much.

Thanks, Sam. Thank you. The next question is from Tim James from TD Carbon. Please go ahead. Your line is open.

Thanks very much. Good morning. Just wondering if you could speak to training costs and overtime costs. You know, I know just due to growth and other factors, those had kind of ramped up last year. I think training costs were called out this quarter as, I don't know whether unusually high is the right term, but called out as an impact. Could you just sort of address, have those normalized as we sit here in early August? And just any color on sort of your forward-looking expectations through the balance of the year?

Yeah, good morning, Tim. I'll take that. Yeah, they've normalized. We had hired a number of pilots last year. We've got them all through training. We're going to see normalization there. We don't expect those costs to increase for the remainder of this year.

Okay, great. Thank you, Pauline. My second question, returning to the DHL agreements, Is there any opportunity, do you think, to expand the number of aircraft or routes as part of this agreement? Or, you know, should this look over time like just more volume potentially or hopefully more flying on the routes that, you know, you're already familiar with and already have done for DHL since 2022?

Yeah, Tim, I'll take that. I don't think we'll see tomorrow that there's going to be new routes. but the intention is to have instruments and agreements in place, because obviously there is some forecasting that the customer has done, and they expect that once this pair of things and geopolitical stuff settles down, there is opportunities to go on certain lanes, certain segments, at certain times. So obviously, we want to be in a position to be the first ones to get in. The other thing that I pointed out to you, which I pointed out earlier, is that the warrants that have been given are more on the growth side. So obviously, DHL would not entertain a growth side warrant if they didn't intend to grow. So the intention of both parties is to grow together, and that's why that deal was done. So, you know, obviously it will depend on how the market behaves and how, where the demand leads open up, where the trade settles down, what countries it is going to be. But by putting this in place, we've become the first in line. So that was the intention on both parties, and the intention was genuine. Otherwise, no company, as I mentioned, the DHL or any organization in our business has agreements that can stretch to 2037 today.

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

Thank you. The next question is from Daryl Young from Steeple. Please go ahead. Your line is open.

Good morning, everyone. I just wanted to follow up quickly on Tim's question about new routes with DHL. There's some language in the press release that makes it sound like you might have a roofer on future opportunities. Is that accurate, or is that just more of a blanket statement that was included in there on future work?

Well, look, I mean, you can have any agreement, and there's as good as a goodwill behind them. There is no, you know, guarantees of anything in this world, but the very fact that a carrier and suppliers, I mean, a customer step up and do a potentially eight to 12-year deal with growth warrants certainly show the goodwill and the intention that we have had. Keep in mind, we've had this relationship with DHL since 2005. We're the carrier that stepped up for them and were flying 17, 18 planes during COVID. You know, so we have always been there for them. They have always treated as family, as partners. They have gone beyond in ensuring that the contracts and the terms they give us are fair. They're the ones who ensure that all the cost of living increases, anything that impacts our operation, whether it's operations, whether it's financial, You know, for example, DHL has aviation insurance major massive policies around the world. They let us participate in those so we can keep our costs lower. So it's more than a customer relationship. It's a partnership. And, yes, the new routes will come eventually. But, as I said, they're not coming tomorrow. But we are positioned to take advantage of the new routes and the new openings that they might have.

That's helpful. And then second question, you provide some constructive commentary around the EU-US corridor. Is there specific work that is coming back, and presumably it's DHL-related volumes, or maybe there's some surge ad hoc charter that could be coming from there as well, just as tariffs and trade realign? Is that something you can speak to in terms of what you're seeing and the magnitude of potential upside there?

Yeah, so we see some next month or so. We do see some ad hoc charter opportunities as the DEMENIS, you know, is eliminated in the next month or so. So there might be some rush to get the product over to beat that. But that's the one time or sort of opportunity that might come to all the carriers. I think on the Europe corridor, Yes, there has been a Europe-America deal, but would that deal be just a deal or would that have an impact on shipping? We don't know at this stage, and as a matter of fact, nobody knows whether the 15% tariff on European goods is going to be translating into similar level of shipping or more level of shipping or less level of shipping. That will have to depend on the American consumers. But interestingly, there's a lot of products, for example, wine, that has not been part of that 15%. That's still under negotiation. So, yes, the 15% is a number, but then there's so many exceptions within the 15% that nobody has been able to absorb or able to put numbers or predictions around it. So we feel that at the end of the day, this will all shake down to common sense. stuff that's not working is going to be thrown out and stuff that's working will be kept. And I think we have to have an optimistic approach because the world has survived on the trade and all of a sudden, yes, there is some new order, there's some new spending on defense, there are some other pressures that we use for trade. And I think once this settles down, we're not going to have this continue for the next four years for sure. So I think At some stage, we'll find that stability.

That's great. That's good, Tyler. Thanks. I'll hop back in the queue.

Okay. Thank you. The next question is from Rafi Hassan from Paradigm Capital. Please go ahead. Your line is open. Thanks.

Good morning. Thanks for taking my question. I just wanted to ask, is there anything specific you can point to in regards to the 140 basis points sequential increase in universal margins? Does anything stick out to you, and in your opinion, is that sustainable, what you guys have currently?

Yeah, Pauline, you want to take that? Yeah, thanks, AJ. Good morning, Razzy. Yeah, so it's basically all the cost initiatives that we've put into place. It's something that we've been doing from the beginning of this year, and we will continue to monitor those and continue to see those improve.

Okay, thanks. And then maybe just lastly, just on the ACMI growth or increased year-over-year, just any thoughts for the remainder of the year, how you're seeing ACMI play out, obviously with the DHL contract, to your point, maybe move a longer-term growth profile there. But just for the back half of the year, any thoughts?

Yeah, we're hoping that it continues to grow. We've seen an increase from Q1 to Q2. We anticipate to see the seasonal increases that we do in Q3 and Q4. So we're optimistic.

Thank you.

Once again, please press star 1 on the device's keypad if you have a question. The next question is from Kevin Chang from CIDC. Please go ahead. Your line is open.

Hi, thanks. Thanks for taking my question. Let me just take two for me. It sounds like you're expecting a seasonal pickup here in the back half, as you usually do. But just wondering, more broadly speaking, do you expect a more normal seasonal peak or more typical peak season? It does seem like some transport companies – are assuming something a little bit more muted in the back half of the year, just given all the unusual trade flow we saw in the first half of 2025, just from a broader peak season comment. Do you think it will be more normal for CargoJet, or do you think it could be maybe a little bit more muted, just given some of the front running we've seen in the first half of this year?

Yeah, Kevin, I don't think we will see a very muted season. We will see some impact with the diminis disappearing. You know, some of the gifts people are buying that are under $800 in the U.S. Canada only had a very small demand in this. Anyway, so I think at the end of the day, I don't know what the definition of very muted and normal is. I think at the end of the day, the Canadian shipping, the domestic, we don't see that it will be a very muted season. Yes, there could be some softness in the ACMI type of North American or global charters simply because people don't understand what is the long-term impact of all these things. So peak season is peak season. People always buy stuff, so I'm not expecting that this is going to be a huge, huge bumper season. It's a season of adjustments, I call. You know, trial and error. Is this product, you know, expensive, more expensive? What are people gonna do? You know, companies, e-commerce companies are still, you know, shipping the same what they were doing. Tariffs and no tariffs. And we certainly feel that it's certainly gonna be closer to a normal season, not a muted season, but not a super bumper season. So we are expecting an above average sort of peak season, but not great, great, great peak season. But we've had surprises before.

That's helpful. Sounds like you're setting up for heightened volumes here relative to the first half. Maybe, you know, Pauline, you mentioned, you know, some of the executive management changes, and one caught my attention. You talked about the new CCO role and maybe opportunities for backhaul and improving efficiency. I'm sure it's early days here, but I guess if you're to look at that opportunity, just wondering, it sounds like there's some efficiency levers you foresee, maybe even revenue levers. Is that something we should see flow through? Like in revenue per operating day, are there opportunities there as you take a backhaul? It sounds like there's margin opportunities. Is there a way to quantify the potential upside as you leverage some of these, I guess, I'll call them inefficiencies that you noted earlier?

Yeah, you call them inefficiencies. I'll call them opportunities.

Opportunities, yeah.

Yeah. You know what? We are a domestic player, and obviously we're always looking for opportunities, whether they're growth opportunities or cost constraint opportunities. But at this point, I think it's too early to share or to quantify what you're asking for. We will embark on it in Q3 and hopefully have something to report at the end of the quarter.

Okay. I look forward to that. Thank you very much. Those are my questions.

Thanks, Devin. Thank you. The next question is from Please go ahead. Your line is open.

Yes. Good morning. Thank you. Jamie, the domestic growth that we're seeing, I mean, it feels like it's, you know, much stronger than the market growth and organic growth that we're seeing in the market. What's driving that? Is this kind of broad-based across your customer, or is it driven by kind of specific customer?

No, good morning. It's mostly driven – not mostly. I would say it's all driven by stronger e-commerce demand in Canada and e-commerce growth that we've seen across all of our customer base, including Amazon. As AJ was alluding to in answering the question on growth in the second half of the year, Amazon is an example. Prime Week was stronger than it was in previous years. We see that trend continuing, and that's really what's driving the growth on the domestic side. Okay. So it's kind of –

More broad-based across all the commerce channels. Okay. The, so we should expect on that front kind of typical seasonality from a domestic growth perspective as we go into Q3 and Q4, like with, you know, strength and to peak in Q4? Yeah, that's correct.

Okay. I want to go back to the DHL agreement.

Just make sure I'm walking away with the right feedback here.

So the margin profile of the current tools that you have with DHL doesn't change. Your minimum block hours profile doesn't change. This is really an extension of the contract with a framework that is potentially supported for growth, that there's some growth initiative potentially in the pipeline under the new framework and incentivized customer potentially on that growth. Is that the right approach to think about it? Andrew, you want to take that?

Yeah, Fadi. Absolutely. I mean, that's, as AJ said earlier, the new agreement in answer to the question of why it's renewing it early is to take advantage of the growth opportunities as the economies improve around the globe over the next several years. And really the agreement, you know, it's the best alignment for us with a major customer that we've had a long-term relationship with back to 2005, and it certainly incentivizes DHL to direct more business to cargo jet as a result of the warrant agreement than any other global cargo carrier that they use is As AJ noted, we'll be first in, last out for any new business. So there's significant expectation that we'll have opportunities for growth in the coming years.

Okay. So there's no change into the economics of the current business that you do with DHS all about the growth. Correct. And kind of a related question, I mean, this international expansion over the last few years have been great for growth, but from an ROIC perspective, it's kind of been – in that single-digit range. Does this change with the new contract? Is there kind of a financial framework that allows you to improve your asset utilization or maybe get economics that are different that would support expansion in the ROIC as we go to the next few years and hopefully you expand that relationship with VHF? Hi, Fadi Sanjeev here. This contract has just been agreed to, so we will see in future how it turns into and how effective it will be on our ROIC ratio. It is too early for us to comment on that one.

Appreciate it. Thank you. There are no further questions registered at this time. All right.

Thank you for joining us. Have a good day.

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