Northwest Natural Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2023

There are 14 speakers on the call.

Operator

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.

Operator

Dillon.

Speaker 1

Thank you, Marie. Good morning, everyone, and thank you for joining us today for our Q1 2023 results. With me on the call today are A. J. It's A.

Speaker 1

J. Vermani, our President and Chief Executive Officer Jamie Porteous, our Chief Strategy Officer Scott Calvert, our Chief Financial Thank you, professor and Sanjeev Mani, our Senior Vice President, Finance. After opening remarks about the quarter, we I would like to point out that certain statements made on this call, such as those relating To our forecasted revenues, costs and strategic plans are forward looking within the meaning of the applicable securities laws. This also includes reference 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 and A for important assumptions and cautionary statements relating to forward looking information and for reconciliations of non GAAP measures to GAAP income.

Speaker 1

I will now turn the call over to A. J. For his remarks.

Speaker 2

J. Juvekar:] Thank you, Pauline. Good morning, everyone, and thank you for joining us on our Q1 earnings Given the tough industry and macroeconomic backdrop, we are pleased with our stable Q1 performance. Another factor that has had a disproportionate impact on our volumes is the shift in consumer spending away from goods, The spending on travel and leisure activities during the post pandemic period. Consumers was not able to travel or go to restaurants, theaters Our movies during the past 2 years of COVID, we are seeing a higher proportion of disposable income being on travel and leisure activities versus pre pandemic levels.

Speaker 2

We expect this mix to normalize in the later part Our strategic decision to place a high conviction bet on building ACMI Business has allowed us to soften the volatility of earnings despite a challenging economic environment and a lopsided consumer spending mix. ACMI business now accounts for 1 third of our overall revenues. Let us now touch on the more Immediate task of managing in a challenging economic environment. Softer industry results As well as the challenging macroeconomic data remains a major headwind for our business. Despite the recent downward trend in the Inflation rate over the last few months, we do not expect interest rates to decline in the near term.

Speaker 2

Therefore, we are focusing hard on our cost management across the entire business and more specifically, number 1, Working closely with our largest customers to right size our network to reduce block hours while maintaining delivery standards. Lock hours is a key driver of our direct costs and if we can find opportunities without sacrificing services, we can Number 2, identifying opportunities for 4 to 5 Surplus B757 aircrafts for ACMI contracts are dry these options. We believe these actions will significantly offset aircraft costs and depreciation expense. Number 3, With our 2nd flight simulator coming online in Q3 of this year, we plan to operationalize 100% of pilot training in Hamilton, our house. This will result in significant cost savings in travel, hotel and crew expenses.

Speaker 2

Number 4, With a greater ability to plan our maintenance schedule, we are targeting a significant improvement in our maintenance productivity. Given the hectic peak flying over the past few years, such planning was suboptimized. Number 5, We have eliminated all temporary labor in our operational areas and are targeting 0 over time goal. Number 6, we are reviewing every line item and focused on reducing overall expenditure in all areas And a frozen nonessential hire. Our cost reduction initiatives are in the early stages of implementation.

Speaker 2

We expect to see additional benefits from these in the coming quarters. On the capital expenditure side, At the last quarter call, we shared our desire to exercise options to delay aircraft conversions. We are exercising The optionality to better align the timing of capital expenditures closer to the planned conversion dates of aircraft We are going to be targeting significantly lower CapEx In 2023 than previously announced, Scott will give you more details on our CapEx spend. Despite a challenging economic environment, we remain focused on identifying new revenue opportunities and We are aggressively pursuing new ACMI and ad hoc charter opportunities. We believe we can help Our customers further streamline their networks.

Speaker 2

We'll continue to strike the right balance Between cost management and staying prepared for opportunities when the tide turns, it is a delicate balancing act. Training pilots and maintenance personnel takes time. Likewise, securing aircraft And bringing them on our certificates and making them operational takes time. For a slightly for a highly capital intensive business, Long term planning is just as important as the short term cost reduction. With a strong balance sheet and a solid liquidity position, Blue Chip portfolio of customers and partnerships and superior on time Track record, we are well positioned to weather this storm.

Speaker 2

While we cannot predict economic cycles, our business model remains resilient And long term macro trends that drive our business remain intact. We expect to resume growth trajectory as soon as the economy turns Good morning. With a strong committed team, we remain focused on executing on our long term strategy and creating shareholder value. I will now pass on the call to our CFO, Scott Calvert, for an update on the business.

Speaker 3

Thank you, A. J. Good morning, everyone. I'll first build on what A. J.

Speaker 3

Just previously mentioned as it relates to our balance sheet and update for our planned capital expenditures. In the last quarter, we had a subsequent event note outlining the opportunity to sell the feedstock for 2 Boeing 777s to support general growth. For this current reporting period, you will see assets held for sale on our balance sheet. This includes the 2 777s from the 4th quarter We've added a 3rd 777. If you go back to the Q3 last year, you'll remember that we exercised our option for 1,777.

Speaker 3

This 1 777 from the Q3 last year and the 3 that we have disclosed on our Q1 balance sheet completes the deferral of 4 777s for general growth. We have not changed our plans for the first 4 777s as these are essential to support customer requirements or what we refer to as strategic revenue growth. We have not canceled any of our conversion slots for both strategic and general revenue growth. At this time, we still believe that these are essential to support Cargojet's long term growth strategy, and we are confident that future feedstock Can be acquired closer to the scheduled conversion dates under similar terms and conditions. As A.

Speaker 3

J. Mentioned, we continue to work closely with our customers and we will manage our fleet size accordingly. In the short term, a reduction in non cash depreciation expense This does not align with our goal to maintain flexibility to provide exceptional customer service for various scenarios as required or potentially required by our customers. Having said that, we are pursuing an expansion of short term dry leasing opportunities To enhance earnings, an update on our profitability and our cost management initiatives. We are pleased with closing the quarter with $75,000,000 In EBITDA, despite an $8,000,000 reduction compared to the prior year, which was largely driven by crew, depreciation and one time extraordinary event last year with emergency COVID ad hoc charters from Asia.

Speaker 3

Our domestic overnight revenues at $84,000,000 were almost flat to prior year, but it is worth noting that the average quarterly revenue pre COVID $66,000,000 This is a baseline lift of 27%. Our ACMI revenue for the quarter was $65,700,000 versus a pre COVID average of $16,600,000 a lift of approximately 300% over a 3 year period. At $20,000,000 our all in charter business remained steady given the overall soft demand after the COVIC peak. It was a one time opportunity for charters last year with a reported revenue of $43,500,000 Since then, we have indicated that normalized charter revenue would be in The range of $15,000,000 to $20,000,000 per quarter. So we are pleased with charter revenue coming in at just over $20,000,000 for the Q1 in 2023.

Speaker 3

As for the impact of gross margin, the pricing last year for these emergency charters in an environment of constrained capacity was significantly more attractive compared to the typical conditions that currently exist. For crew costs, there is a 5 month lag to have a pilot fully trained and released into our schedule. We do not have enough capacity in Hamilton with our new 767 flight simulator. Therefore, the backlog of training is expensive as we outsource the training to a service provider in the United States. While the pilots are in training, the overtime is high for our existing pilots.

Speaker 3

The good news is that we've made significant progress in March and the progress since then is on track with our expectations. As for the progress on other cost management initiatives, as A. J. Just said, the most significant driver of costs in our business is managing our block hours. We recently further optimized our domestic network by eliminating a direct flight between Edmonton and Hamilton.

Speaker 3

The savings from this initiative starts in the beginning of 2nd quarter. The use of temporary employees has nearly been eliminated with the exception of temporary employees that are required to support Certain customer requirements that are paid for by the customer. Cargojet continues to manage vacant physicians where possible. There will always be exceptions When a vacant physician needs to be filled, but generally speaking, we are making progress to align our costs to the current environment. On a year over year basis, if you adjust back to prior year levels for crude costs, non cash depreciation and further adjust for the one time charters In the Q1 of 2022, the gross margin is consistent to prior year.

Speaker 3

Cargojet's adjusted free cash flow was flat compared to the Q1 last year, mostly due to a reduction in maintenance capital expenditures. We closed the quarter with our borrowings being down slightly compared to the start of the year. It is anticipated that the US75 $1,000,000 sale proceeds for the first two Boeing 777s will be received in the second quarter This will further delever the balance sheet. Cost management along with the opportunities to better time our capital expenditures Support one of our primary objectives or what we refer to internally as our guiding North Star, our debt to EBITDA ratio. In conclusion, since we started down this journey to manage the business during this down cycle, we are pleased with the progress made so far.

Speaker 3

The trend lines are encouraging and the team is committed to further improvements to achieve our short term goals while not losing sight that the fundamentals remain strong for our long term strategic plan. This concludes our opening remarks, and we will now open up the call to questions.

Operator

Thank you. We will now take the questions from the telephone lines. Thank you for your patience. The first question is from Chris Murray from TB Capital Markets, please go ahead. Your line is now open.

Speaker 4

Yes. Thanks folks. Good morning. So just maybe going back a little bit to, I guess the first question is on costs. Can you guys maybe elaborate a little bit about some of the levers that you're working on To look at getting these margins maybe right more right sized or the cost more right sized To the revenue profile you're thinking for the next little while?

Speaker 2

Well, the first thing, as I mentioned, we are looking at Right sizing the network with the right fleet and eliminating block hours. So the second part is we're looking at All our personnel costs over time. And third is greater focuses on Procurement, our supplier costs and any supplies we buy. So these are the 3 areas that we are focused on. And if you want further, we can certainly get on 1 with it.

Speaker 2

But these are the 3 major drivers Of cost and reduction of cost. So we are working on all three simultaneously.

Speaker 5

Okay.

Operator

And is it fair

Speaker 4

to think that I mean, I'm You started mentioning that you've been working on this now for maybe about a quarter. Is it fair to think that the that a lot of these initiatives will have The cost profile, right size, as we get into Q2 or Q3? Or is it something that you think could take a little bit longer to get these changes made?

Speaker 2

So we just because we didn't start working in the we started these initiatives more like in the middle of the 1st quarter when we saw the trends and macro trends. So I would we have to be as I said, We have to be very careful in balancing this because, obviously, if demands go up, You have to be ready. You can't just on Monday morning or Tuesday get ready and handle these. So we have to be very cautious in how we dismantle some of the stuff that has been built during the COVID times. And now I would imagine that probably another 2 quarters we'll see the full impact on some The changes we are making slowly because customers are important to us and we want to maintain the service.

Speaker 2

And but we also have full consultations with them when we sort of do certain changes to schedule that results in cost Reductions. So yes, I would say that probably for the next two quarters, this will continue on. Okay. My other question is on

Speaker 4

the ACMI business. There's always been some thought that this was going to be relatively resilient. And I go back to the Investor Day, and I think you folks mentioned that the way you're positioned with DHL that it would be, you'd probably be the most favored Client or operator, I guess, of that service for them. Can you just talk a little bit about what you're seeing in that ACMI market and if you think that there's any further opportunity for growth or are

Speaker 6

you just going to be able

Speaker 4

to maintain what you have at this point?

Speaker 2

If you look at HCMI business, it's not immune to the macro trends. I mean, whether it's a network, whether it's HCMI, when the Shipping is less, the demand is less, it affects all businesses. But we can tell you that we have not had a reduction in Number of planes, yes, some block hours have been reduced by DHL. All I can tell you is That we do have a preferential strategic partnership with them and we have had the soft landing of Any carriers they use, because number of carriers, almost every carrier has lost planes and routes. So we have having that relationship has certainly helped us to maintain the number of planes and we do get Opportunities from them on fill in basis when other carriers are going for maintenance and other things.

Speaker 2

We are the first one who gets a call on these. So in the summertime, we are pretty soon, I think we are starting 2 routes that are strictly Fill in for other carriers or maintenance issues. So we continue to be a preferred carrier. We continue to provide them with the service That exceeds anybody else and we continue to service them in a way that we remain number 1 with them. As the ACMI market is concerned, it is it goes in line with the macro trends.

Speaker 2

And I can tell you that whatever the trends are, it follows every line of business, whether it's charters or whether it's JCMI.

Speaker 5

Okay. That's helpful. Thank you.

Operator

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

Speaker 7

Yes, good morning. Thanks very much. Just a question on the, I guess, the domestic network. Obviously, there's not a huge amount of visibility going out to the next couple But I'm just wondering what your sort of core customers are telling you as far as volumes? Like what are they seeing in the markets?

Speaker 7

What's kind of their expectations for Capacity needs over the next couple of quarters.

Speaker 8

Yes. Good morning, Cameron. It's Jamie. It's I think, as A. J.

Speaker 8

Said in the opening remarks, We're definitely seeing the global and here domestically sort of the macroeconomic factors that are affecting all modes of transportation are certainly affecting Our domestic network, I think, as we indicated to you and others going into the quarter, coming out of strong year over year Domestic growth, we thought that the Q1 would see sort of low single digit growth. We obviously came in flat, and I think the indications are From our customers that will continue to see soft demand on the domestic for capacity on the domestic network for the balance of the year and that's why we've taken some of the initiatives A. J. Noted on the adjustments to our capacity and our schedule to meet that demand going forward.

Speaker 7

Okay. No, that's helpful. And maybe just a second quick question. You mentioned in the prepared remarks about some potential for dry lease Opportunities, just wondering if you can expand on what these opportunities might be?

Speaker 2

Well, we have initially, We brought in the 757s domestically to get us some more required lift And demand that was asked of us by our customers, also it provided Direct service to a lot of stations to further improve our services and take out the 767s that We're higher yielding in the marketplace from ACMI and Charter opportunities. Because of the certain macro trends, as we all know, We have now continued with the 767s in domestic operation because it reduces the number of block hours and also the cost advantage. So that will free up between 4 and 5757s At this point in time, where we are trying to market these as dry lease opportunities Or wet lease or HMI, whatever we can do, but we are actively going to be looking at these opportunities in the next coming weeks As dry dees or any other opportunities, we can find those. So there would be about 4 to 5757s.

Speaker 7

Okay. No, that's great color. Thanks very much.

Operator

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

Speaker 6

Thanks for taking my question here. Maybe if I just maybe just a macro question. You were pretty cautious on your Q4 earnings Call in early March. Just wondering, are things worse than you anticipated then or just Continuation of the cautious tone that you had in Q4 and you're just providing more granularity on some of the initiatives You're taking on the cost front here to right size the business or are you taking more steps than you had thought you'd be taking back in When you provided your, I guess, your initial outlook for 2023.

Speaker 8

Yes. Good morning, Kevin. It's Jamie. I think definitely Indications are the demand is softer than we would have anticipated even back in March when we were reviewing our Q4 results. As you recall, we saw Q4 the year as I indicated earlier to Cameron's question, I think we saw strong year over year growth when I look at the domestic network that Really fell off, it was a unique peak period for us where December, our traditional peak volumes sort of fell significantly Through sort of all facets of our business, all segments of our business, but particularly on the domestic demand, and that made us a little bit more cautious about what our expectations were Going forward, and I think initially back in the fall, we were talking about high single digit year over year growth for the domestic business.

Speaker 8

I think we tempered that in our 4th quarter Earnings call to low single digit and our actual results being flat. We think that's an indication that we're going to be a little bit more cautious About volumes on the domestic and for the balance of the year for the net and all indications from all of our customers is pretty consistent that Sort of overall consumer demand is lower than people expected and that's why we've taken some initiatives that we addressed earlier On driving block hour costs out of our network, rightsizing the aircraft types that are operating on the domestic network, All with the goal of trying to maintain the margins, that we've historically had on our business regardless of what the revenues are. And that spills over into the obviously into the ACMI business as A. J. Just commented on with lower demand, although we're still operating the same number of aircraft and we'll be adding additional On an ACMI basis, it should have we'll continue to have year over year growth just because of the annualized impact of some of the routes that we added in 2022, although they may not be Flying the same number of block hours that they did.

Speaker 8

And on the charter side, as Scott mentioned in his remarks, We're very satisfied with the ad hoc charter revenue segment in the Q1 at the high end of what we would expect and we would expect that to continue for the balance of the year By the nature of the fact that we have additional crew and certainly have additional aircraft available for ad hoc charters as compared to what we would normally have during a normal year.

Speaker 6

That's helpful. I know this is a difficult question to answer, but If you could reconcile the network, the way you see fit, I know you have to have these discussions with your customers. How many excess block hours do you think you flew in Q1 versus what you think you could have flown if you're kind of maximizing Minimizing the cost per block hour, is there a way to think of what you see as maybe The opportunity set here to kind of adjust the network relative to maybe what you flew in Q1, just given the environment we find ourselves in today?

Speaker 8

Yes, it's a hard question to answer, Kevin. It's an ongoing process as you can imagine, but we can't change the network on it. We can't just change it on a daily basis. We have Service commitments to meet for all of our customers across the country to the 15 cities that we fly to. Yes, we do things on a daily basis in terms of adjusting the capacity.

Speaker 8

We have the benefit of being able To interchange 756, it's one of the reasons why we prefer the 757 and the 767 aircraft with a common flight deck where we can interchange pilots. A I can literally get off of a 767 and get onto a 757. We don't have any restrictions in that matter and we'll adjust May not necessarily adjust walk hours, but it will reduce some operating costs if we're able to downsize a 767 on a certain route to 757 or consolidate 2 757s into a 767, but it's we do a very good job of matching demand and the actual pounds that we're carrying to the actual hours that we're flying on any given night, but it's an ongoing process that will evolve over the year.

Speaker 6

Okay. I'll leave it there. Thank you very much for taking my questions.

Speaker 2

Thanks, Kevin.

Operator

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

Speaker 5

Thanks. Good morning, everyone. Good morning. Jamie, Jamie, I guess when we think about the domestic network and the ACMI business, we've certainly seen a slowdown. But just curious how close are we to the minimum volume guarantees that might have with some of your customers.

Speaker 8

Yes, it's a good question, David. We're still well above those numbers. I think as we've indicated to you and to others before, About 70% to 80% of our capacity is on the domestic network is made up of Contract customers and their minimum volume guarantees the balances is ad hoc customers that we have that we trade with on a daily basis, but also for peak And excess demand from our customers, which is none of them are close to their minimums. I don't anticipate having that issue this year at all With any domestic contract customer and I think as we may have indicated before in the history of our business, we've only come across that on the domestic once and it was during the peak of COVID where we had one customer who Once and it was during the peak of COVID where we had one customer who historically was only in the B2B space Has since evolved into both B2B and B2C that was impacted and was below their minimums for a period of time, but that was back in 2020. I don't anticipate that Happening with any customers this year.

Speaker 5

Got it. That makes a lot of sense. And then maybe next one is for Scott. I mean, last quarter, you guys disclosed Now that you're deferring $320,000,000 of CapEx and that number could increase to $400,000,000 Just curious if there's any update on this number or if you Found more pockets of CapEx that

Speaker 9

you can defer or cancel.

Speaker 3

Yes, really at this time, all that we've made plans for and Committed to is that $110,000,000 that you see on the assets held for disposal. So it's still day by day, week by week As far as working with our customers and just seeing how the year shapes up, to go any further than what we have optionality to do.

Speaker 5

Is there any recourse on the build slots if you decide not to go through with it?

Speaker 3

It's a very small deposit and we've got a lot of time It's typically a year before the conversion before you're up against that next milestone. So but there are small deposits.

Speaker 2

And we can extend the conversion dates as well.

Speaker 5

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

Operator

Thank you. The next question is from Konark Gupta from Scotiabank, please go ahead. Your line is now open.

Speaker 10

Hi, good morning. This is Joey filling in for Konark. My first question is regarding CapEx. So how do you see total CapEx trending over the next 3 quarters and in 2024?

Speaker 3

Good morning. Yes, so really, if you go back to our guidance that we issued at our Investor Day last September And you look at the mid range for 2023, it was $350,000,000 So right now that $350,000,000 we've got the $110,000,000 for sale That's in our current assets, the assets held for sale. So that gets us down to $240,000,000 We could see it being as low as $200,000,000 There It's going to be somewhere just around $200,000,000 or north of $200,000,000 There's other delays that are out of our control like the 1st 777. We thought originally At Investor Day, that was going to come late this year. That's pushed out as much as 6 or 7 months, maybe longer, we don't know.

Speaker 3

So probably close to that $200,000,000 would be a fair number.

Speaker 10

Okay, great. Thank you. And I guess my second question is how soon can you guys add more aircraft to DHL this year? And What are your current expectations for ACMI revenue in 2024?

Speaker 8

Good morning, Joey. It's Jamie. We'll continue with the 15 aircraft that we're operating for DHL today. As you may be aware, we're going to have year over 3 of those aircraft we added to routes In 2022, and as I indicated earlier, the total block hours may be less than what we were flying on average 2022 because we had some long haul routes to Asia, particularly that when demand softened DHL redeployed those aircraft to other routes within their network. We plan to continue to operate those and we're working closely with DHL to see what growth is opportunities are for the balance of the year in terms of additional aircraft.

Speaker 8

It's one of the reasons why we've looked at freeing up some aircraft out of our domestic fleet, both on the 757 and the 767, but It remains to be seen what we're going to temper our growth expectations for the balance of the year.

Speaker 10

Okay, great. Thank you. That's all the questions for me.

Operator

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

Speaker 5

now open.

Speaker 9

Thanks very much. Good morning. Maybe, Jamie, just returning to your comments on the DHL aircraft then. Can you just walk us through for the remainder of this year and I guess 2024, what The incremental lanes route responsibility you'll have with DHL, I believe A. J.

Speaker 9

Mentioned earlier about some Discussions around a couple of new ones coming this year. Can you just sort of indicate, but you've said that you'll continue with 15 aircraft, just Sort of the moving parts as we look forward, what you'll be starting up with them?

Speaker 8

Yes. As As I said, we'll continue with the 15 routes the 15 aircraft that we're operating presently. We have 2 other routes to Central and to the Caribbean and Central America that are anticipated Start at the end in the Q2, sometime the end of May and the end of June. Those are still yet to be determined whether there'll be long term routes. We have The aircraft available, we planned that would give us 17 aircraft and we'll continue to look at other certainly there's a lot of ad hoc opportunities as well with DHL where there's Specific demand on weekends or other times, other routes that they may want us to operate the aircraft, but that would Other than peak season, the additional 2 routes starting this summer would be the only 2 that I would anticipate we'll see growth on this year.

Speaker 2

But those are ad hoc Opportunities, those are we don't know whether they are permanent at this stage? Correct.

Speaker 9

Okay. So we shouldn't think of those as part of that 7 year agreement and what you talked about in that, this is incremental and again temporary to that whole agreement At the time.

Speaker 2

Yes. So I mean, they are well within the committed 7 year plan. So I I don't know whether you want to consider I mean it's a total revenue plan and I think over the revenue they're certainly on target on what they had committed even with that.

Speaker 9

Okay, that's helpful. Any commentary you can provide if we just really think kind of real time here just even since quarter end in terms of The volume trends that you're seeing in the domestic network in particular?

Speaker 8

Yes. I think as I mentioned earlier, I think we're seeing sort of continued softening and we're going into the summer months, which traditionally the second quarter It's sort of the softer quarter for us in terms of demand on the domestic network once we get into specifically second and third So the crossover between June, July August, the flat year over year domestic revenue That we experienced in the Q1, as I mentioned before, was a little bit below our initial expectations When we gave guidance or not guidance, but gave our opinion back on the Q4 earnings call that we thought we would see low single digit year over year growth. I think the fact that we're at flat in the Q1 is an indication that we're going to continue to see flat or even a A little bit of a reduction in demand, continued reduction in demand in the certainly in the second and the beginning of Q3. And that's why we're taking the initiative to You'll drive block hours out of the domestic network to meet the capacity and the cost to meet the demand so we can protect our margins.

Speaker 10

Okay. If I

Speaker 9

could just one last question. I mean, that still seems if you get slight Declines given the economy, given all the dollars going to travel, given I I mean, I know that the domestic competition is only early days, but it still sounds to me like a fairly good result in this Environment, so you're not I mean, I know it's not quite what you thought a quarter ago or several months ago, but do you not still sort of feel that That's actually a good result against this backdrop.

Speaker 8

Yes. No, we agree with you 100%. I think it's we have a combination of The domestic contracts with the minimums that we have, the demand that the amount of representing 90% of Presenting 90% of the domestic overnight business here in Canada to service levels, our on time one positive thing that we didn't talk about During this earnings call, as our on time performance and reliability during the quarter is probably the on the domestic is probably the highest that it's ever been. And that reliability and on time performance is key for To ensure that everybody talks about competition and yes, that's in the early days of WestJet and Air Canada, Not really in the domestic space, but we don't we're aware of that competition, but we're not really concerned about it. You're right.

Speaker 8

If we look at we are happy with the results. And if we look at We look at the details on our domestic revenue, if we back out some one time revenue that we had last year in the Q1 related to The domestic portion of revenue that we were able to generate to support some of the Asia flying that we were doing to fill the flights that we're going over to Asia to come back on charters, We're actually up a little bit year over year when you back that out. So no, I agree with you.

Speaker 9

Okay. Yes. Okay. Thank you very much.

Operator

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

Speaker 11

Good morning. Thank you for taking my question.

Speaker 2

Good morning.

Speaker 11

You mentioned that if we had excluded 3 specific costs this Quarter gross margins would have been flat year over year. Could you just review what those three costs were? And I guess in highlighting that, are Are you suggesting that margins could be flat year over year once certain costs have been taken out?

Speaker 3

Yes, absolutely. And good morning, Jonathan. Yes, so if you look at our detailed disclosure on our direct expenses, what really jumps off the page is the CREW and the depreciation. And we've already talked about the depreciation and A. J.

Speaker 3

Went into the detail with the 757s etcetera. And on the crew, it's very early stages. It really started settling in at the beginning of March. But long story short, if you went back and adjusted at historical levels for both Crew and depreciation, that explains a lot of it in terms of the gross margin issue within Q1. But then what has a real significant impact Is that $43,000,000 in charter revenue last year in Q1?

Speaker 3

That was pricing like once in a generation type of an event where you can get pricing to that. It was such extreme constrained capacity that pricing is just very different than what we experienced in Q1 this year. So those three things, when you get back to a normalized run rate, that reconciles that difference in gross margin year over year.

Speaker 11

And could you just remind us when the flight simulator came online and Sort of when you're expecting this training backlog to start to work down?

Speaker 2

Yes. So we have been for the past, I would say, about 6 months, We've been using our own simulator in Hamilton, the first one. The second one is coming in October, November this year. It certainly helps not only training, but in house, but also through travel days and And also just the overall training impact is much Positive than sending people outside because keep in mind, when you hire pilots, We have 50 pilots right now in training. They're not Part of any revenue generation, but that's the industry.

Speaker 2

So once we have our own Two simulators that we don't need to send outside and we can train them in house more efficiently and more cost effectively. That would start probably in we're slated to get it in end of quarter 3, so probably sometime in Q4 that We'll take over.

Speaker 11

Thanks. And just one other follow-up question. On the 757s that have been earmarked for leasing for expanded leasing business, Does that mean that there could be 4 to 5 domestic routes that might see reduced service as those are You allocated to support the leasing or is it the leasing purely an incremental opportunity kind of on weekends and where demand is low, etcetera?

Speaker 8

Yes, it doesn't reduce service anywhere, Jonathan. It's just we've we take as an example, if we put a 7 that AJ mentioned about the route, The direct aircraft or direct route that we are flying between Edmonton and Hamilton, we were able to consolidate that free up 2757s by putting a 7 on that route. So it doesn't have any impact on service. It's just matching the capacity to the demand.

Speaker 11

Okay. Thanks for your comments.

Operator

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

Speaker 12

Thanks very much, operator, and Good morning. A. J, I think you framed it right in your remarks that, yes, we flag A downturn in revenue, we should be mindful of that, but shouldn't lose sight of the longer term systemic trends that capitalize on e commerce And your strong competitive positioning. And I like what I'm hearing in terms of during that downturn, you're aligning your costs to reflect the downturn, But not losing sight of the revenue opportunity after that. I think so from a domestic perspective, I think that all makes sense.

Speaker 12

Where I think There's a little bit more misunderstanding as on the ACMI side, but I don't think the story is any different that Yes, during a downturn, DHL is going to look to align its block hours and that's what they're doing. So I'm wondering, I don't know, Jamie, you can answer this the right way or not, but if you look at this downturn and what DHL is doing perhaps on a temporary basis, What level of quarterly run rate are we expecting here in 2023? Is what you delivered In Q1, kind of a run rate or is that a seasonally low one? Just to understand where the Run rate is while we're in this downturn and then on the upside, if DHL were to return to It's pre let's call it pre downturn activity levels. What is the more normalized ACMI revenue run rate that you have with the aircraft that you are dedicating to them now and will be longer term?

Speaker 8

Yes. Good morning, Walter. I think the Q1 run rate for ACMI would sort of be reflective of what we At the low end of what we see for the balance of the year, there's a couple of routes that I indicated earlier that we're starting to the Caribbean and South America in the at some point in the Q2, as Ajay mentioned, may only be temporary. If they end up being longer term to the end of the year, then certainly that'll be incremental growth going out for the balance And with the exception of peak season, because I would expect that our demand in peak season from DHL and our other ACMI customers will be stronger In that quarter versus the previous year, but I think using Q1 is somewhat reflective of what we see as the sort of Bottom line for ACMI revenues going forward. And then to answer your question, one of the reasons why we have the fleet that we have and you're absolutely right, keeping the Even though we made some decisions on the longer term growth with the 777 aircraft, but keeping those slots and keeping the 1st aircraft that we have commitment DHL4 in 2024 and 2025 is to be able to pivot our business Very quickly to meet that demand.

Speaker 8

As we've indicated and as we've experienced over the last few years, one of the reasons we benefit From the relationship and the growth that we've had with DHL over the last few years was because of our ability to pivot very quickly in the early days Of COVID to provide dedicated cargo capacity for them and that's translated into the both the operating agreement and The long term operating agreement that we have with them today.

Speaker 12

And putting that into numbers, I mean, given the current Run rate that you mentioned of Q1 plus in Q2, Q3 and then as you reflected for Q4, could we that's in the 65, let's say, 65 to 70 range in the 1st part of this year. Is that 65% to 70% when we look at our numbers on a more normalized Full run rate quarterly in the 1st 3 quarters of the year could be more in the $80,000,000 range when if you were to be fully utilizing Those aircraft in the 1st 3 quarters of the more normalized years, is that off the mark that $80,000,000 run rate if we do see a rebound In overall demand.

Speaker 2

Well, when things rebound, anything is possible, right? But I mean, we haven't had we've had some ad hoc discussions with DHL and a couple of other ACMI opportunities. Everybody is looking at quarter 4 probably this year, a little bit of a turnaround and I think if We'd be the first one to get calls and this is why we are kind of afraid to we're a little bit hesitant to go out and sell these 7 57, that's why we have put it up for short term lease opportunities at this time. I think that The minute things open up, we can plug the 757s back in and free up the 767s for those opportunities. So the flexibility has to be maintained Walter because we cannot fire off, we cannot go find planes when opportunities arise.

Speaker 2

On the other hand, we can't wait forever for those opportunities as well. So that's why monitoring the trends and staying close to the customers and finding out What we should hold and so the cost reductions temporary help right now. But I think some of the assets, I mean, we could easily sell the 757 is tomorrow, close to $100,000,000 But we also have to look at the flexibility that it's giving us To interchange between 7.5 and 7.6 domestically according to as the demand Changes and also watching for if things don't improve by quarter 3 or quarter 4, then all bets are off Anything, but I think it will be it will not be wise for us to dispose off any of these assets, We are acting to the short term market volatility right now. Yes,

Speaker 12

that makes sense. Thank you, A. J. And then Just last for me, back to you, Scott, in terms of CapEx, I hear you on the $200,000,000 roughly just north of $200,000,000 for 2023. You did mention though that that would be reflecting also a shift of the 777 delivery into 2024.

Speaker 12

Just want to Make sure so that expectations are aligned appropriately. Now that will bump up your 2024 CapEx, Having that delivery early in the year, what are you framing for CapEx for 2024 Just to frame it or to position the expectations properly.

Speaker 3

Yes. Walter, I think you're bang on there in terms of what we those ranges that we provided for our disclosure, For our guidance for the old strategic plan, the guidance that we provided last fall, it's still consistent. We're not changing that. So So yes, there is going to be some movement out of 2023 into 2024, but that 777 and some related costs that relate to that, that would be the main thing right now.

Speaker 12

Okay. Okay. That's all my questions. Thanks very much guys.

Speaker 2

Thank you.

Operator

Thank you. The next question is from Steve Hansen from Raymond James. Please go ahead. Your line is now open.

Speaker 13

Yes, good morning everyone. Thank you for the time. I commend you for taking swift action here to right size the costs and I do recognize the balance You're trying to strike between cost and service, but in the event that demand was to deteriorate meaningfully further, say another 10% or more, How would your plan change today? Or would it just be a more rapid pace that you would expect? Or what would you do differently In event the demand does continue to break down here.

Speaker 13

Thanks.

Speaker 2

Well, look, I mean, we replaced 2757s with the 767, Which took out like on a particular plane at £25,000, £301,000 reduction, which is 25% Base reduction from what we had planned for quarter 1, if demand was to go down further, We take 767 out at £120,000 night and replace it with an £80,000 aircraft. So we do have the fleet flexibility. Today we are enjoying that If the aircraft are not flying, I mean, sitting here, we already have the capital expense. It's not going to cost us any more money, Except the depreciation portion of it, but our main cost driver, as I said, is block hours and The type of plane we fly on a certain route. So if the demand was to go down 10% or 15%, The easiest thing for us is to adjust the size of the aircraft and reduce sometime the frequency of it Or something, but that would be the major thing we would do immediately.

Speaker 2

And that is being monitored by the way, not on a weekly basis On a monthly basis, it's done on a nightly basis with our network planning folks that they know what's coming in by 6, 7 o'clock at night And we plan that right kind of aircraft in that market. So it's an ongoing process.

Speaker 13

Appreciate the color. Thanks.

Operator

Thank you. There are no further questions registered at this time.

Speaker 2

Thank you everybody for joining in the quarter 1 conference calls and we'll continue to work hard to Weathered the storms and this economic environment. So thank you very much everybody.

Operator

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

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Earnings Conference Call
Northwest Natural Q1 2023
00:00 / 00:00