Cargojet Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Cargojet Conference Call. I would now like to turn the meeting over to Mr. Martin Hermann, General Counsel and Corporate Secretary. Please go ahead, Mr.

Operator

Hermann.

Speaker 1

Good morning, everyone, and thank you for joining us today on this call. With us on the call today are A. J. Vermoni, our Executive Chairman Aline Dillon, Co Chief Executive Officer Jamie Porteous, Co Chief Executive Officer Scott Calver, our Chief Financial Officer and Sanjeev Mainy, our Vice President of Finance. After opening remarks about the quarter, we will open the call for questions.

Speaker 1

I would like to point out that certain statements made on this call, such as those related 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 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 reconciliation of non GAAP measures to GAAP measures. I will now turn the call over to James.

Speaker 2

Thank you, Marty. Good morning, everyone, and thank you for joining us on the call today. Helene and I will share a few thoughts on the macro environment and the factors affecting our business and general business outlook before we pass the call over to our CFO, Scott to give you a bit more color on the financial drivers. We are extremely pleased with our Q2 results, particularly in the context of a weak or at least uncertain transportation environment. We have a very talented team at Cargojet and results like these require a coordinated effort to execute against our strategy.

Speaker 2

And Pauline and I both want to thank each one of our team members. We have often talked about our entrepreneurial culture and how it differentiates us from the competition. Despite the macro headwinds from the economic slowdown, geopolitical uncertainty and their impact on overall trade volumes, Cargojet's mix of business has allowed us to continue to grow revenues and not be solely dependent upon any one portion of our customer mix. We recently capitalized on the opportunity to service the fast growing China based e commerce brands with a 3 year scheduled charter service agreement with Great Visions HK Express to fly e commerce products between China and Canada. Global e commerce supply chains are constantly changing and Cargojet is at the forefront of identifying these emerging opportunities.

Speaker 2

As a result, each one of our lines of business posted strong growth rates during the quarter. Domestic network revenues grew by 10.8%, ACMI posted a 7.3% gain and all in charters posted a record 23.4% growth versus the Q2 of 2023. Overall, we posted an 11.5% increase in total revenues during the quarter as compared to the previous year. On the domestic side, the volumes from our major customers have stabilized and improved sequentially quarter over quarter. Our ACMI business continues to benefit from strong global demand and our ad hoc and scheduled charter businesses is experiencing record growth.

Speaker 2

While we are encouraged to see the second interest rate cut by the Bank of Canada, we still remain cautious and believe it will take some time for these cuts to show up in increased household disposable incomes. We are still cautiously optimistic in our continued growth expectations until financial conditions ease significantly for consumers and the political climate stabilizes globally. Our ability to harness growth opportunities is closely tied to our fleet management strategy. In prior quarters, we have talked about surplus fleet which was set aside for sale or lease. But significantly new growth opportunities have now absorbed much of our surplus fleet and we have accelerated the conversion of 2 767-three 100 aircraft to prepare for 2025 and beyond.

Speaker 2

We feel very confident about this decision particularly when considered in the context of reductions in other Canadian operators freighter fleets and available air cargo capacity particularly to serve long range charter opportunities. In mid January, we laid out our strategic priorities to focus on optimizing CapEx and generating free cash flow, including a framework on how we will allocate capital. Scott will provide more color on how we are progressing against these objectives, but we are very pleased with the speed with which we are adapting our business model to serve the new economic environment and fast changing supply chains. As we have said many times before, 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.

Speaker 2

Pauline and I now have 2 quarters under our belt as co CEOs and we couldn't be more pleased with the progress we are making given the macro headwinds facing our industry. We are extremely excited about the future and how we can continue to harness opportunities with the very fluid global supply chains and continue to profitably grow Cargojet's business and provide value for all stakeholders. Let me now pass the microphone over to my colleague, Pauline.

Speaker 3

Thank you, Jamie. One of the most common questions we get when Jamie and I meet with analysts, our investors and even our customers, how is the co CEO model working? Our results today provide the best answer to this question. Q2 was a strong quarter, particularly given the broader macro environment for retail sales. We are very pleased with the progress we are making in maintaining our margins as we pursue revenue growth.

Speaker 3

I would say the co CEO model is working quite well at every level within our organization. Let me join Jamie in thanking our team. Operating a successful airline requires a finely tuned operational machine that could execute the on time departures and arrivals to and for our customers. Once again, we achieved 99.4% on time performance. This achievement is a testament to each member of the Cargojet family who are the true driving force in achieving OTP and ensuring our customers receive our 1st class service.

Speaker 3

A big thank you to everyone on the Cargojet team. Jamie provided some color on our revenues. I will take a few minutes to share updates on our operational efficiency initiatives. Q2 block hours grew 4.8% as we initiated the new scheduled charter service to China as well as increased ad hoc charters. We have selectively added resources to support this new growth vector.

Speaker 3

We talked about savings we are generating from our in house simulators during our last quarter remarks. As we see increased transatlantic flights, more pilots need to be ETOPS certified and these investments we made for our future are paying off today. We continue to see benefits from the cost savings we implemented in 2023. As we scale our business to the new normal, enhancing our information technology capabilities, we will be making investments in this area to prepare Cargojet for the next phase of our growth. We are carefully enhancing talent and key functions with an eye towards longer term needs of the company.

Speaker 3

1 of the key skills required to be successful at Cargo Jet is resilience. This is a hard trait to find, but it is crucial for us to preserve our entrepreneurial culture. We recently supported Amazon's Prime Week in July, and August September are typically back to school shopping months. We are closely watching consumer spending and will be soon shifting our focus to plan for the peak season. We are particularly pleased with the increase in our charter business, which is resulting in higher asset utilization as we continue to leverage daytime for charters and nighttime for the domestic network.

Speaker 3

I'll now turn over this call to Scott for an update on the financial drivers.

Speaker 4

Thank you, Pauline, and good morning, everyone. There are 3 areas I would like to address. First, being an update on our capital allocation priorities, followed by a high level view of our adjusted earnings. Lastly, I will provide some commentary relating to various costs disclosed in our Q2 financial statements. Cargojet's long term capital allocation strategy is to maintain dividend growth, identify and invest in growth opportunities, to maintain a conservative balance sheet as measured by debt compared to EBITDA and to opportunistically buy

Speaker 2

back shares.

Speaker 4

For dividend growth, the company is pleased to announce that the board has approved an 11.25% increase in our quarterly dividend rate. For growth opportunities, investing in revenue growth opportunities is a long term planning process. The recent e commerce growth for air cargo coming out of China has proven to be a great opportunity for Cargojet. The 3 year agreement that was communicated in a press release on June 10, 2024, is an example of Cargojet's ability to continuously identify emerging opportunities. As the result of this new contract, along with the growth of the ad hoc charters and scheduled charters, Cargojet has secured 2 Boeing 767 feedstock to replace the inventory of feedstock that was inducted into conversion in the 2nd quarter.

Speaker 4

As it relates to the share buyback program, year to date, Cargojet has purchased and canceled over 700,000 shares at a cost of $84,000,000 We will continue to assess the program throughout the remainder of the year. The last capital allocation strategy is to maintain a conservative balance sheet. Free cash flow was suppressed in the 2nd quarter, mostly due to the investment in the 2,767 feedstock. The longer term view for potential revenue growth, along with an opportunity to acquire the 2 feedstock at an attractive price has been an opportunity for Cargojet. Total capital expenditures will be in line with the ranges that have been previously disclosed.

Speaker 4

However, there will be a slight increase in growth CapEx that is expected to be mostly offset with reductions in maintenance CapEx. Cargojet is expected to close the year with $40,000,000 to $50,000,000 in growth CapEx, $130,000,000 to $140,000,000 in maintenance CapEx and disposal proceeds of approximately $105,000,000 finishing the year with a total capital expenditure, net of proceeds on disposal to be in the range of 65 $1,000,000

Speaker 5

to $85,000,000

Speaker 4

In summary, as it relates to the update on the long term capital allocation strategy, management is pleased with the recent contractual revenue growth opportunity and the prospect for the future. Switching to Cargojet's adjusted earnings. The non GAAP measure as defined in the MD and A adjusts for the fair market value changes for stock warrants and the non cash gain or loss on the swap derivative. There are a couple other non cash mark to market adjustments as it relates to long term incentive for pilots, management and directors. The 25% share price appreciation in the 2nd quarter resulted in a non cash revaluation expense to accrued costs and to SG and A.

Speaker 4

When you further adjust for these mark to market non cash adjustments and the non cash deferred tax change that relates to all mark to market valuation changes, the adjusted earnings per share for the Q2 is $1.03 compared to $0.68 per share for the same period in the prior year with the same adjustments. All things being equal, an increase of just over 50% compared to prior year. I will finish my prepared comments with a more granular view of our 2nd quarter results. Let me start with direct costs. As we have said in the past, it is recommended when assessing Cargojet's ability to manage costs, you exclude fuel expense as the fuel surcharge program ensures that fuel changes are neutral to profitability.

Speaker 4

It is best to exclude depreciation as well given the long term strategic implications. For the Q2, it is recommended that the mark to market non cash adjustment for pilot LTIP should also be excluded. When this refined focus on direct costs, the direct costs per block hour were approximately $5,325 compared to $5,210 in the Q2 of 20 23, a 2.2% increase. This is largely in line with inflationary trends. On the positive side, our investment in the flight simulator is paying off with savings in both travel and third party simulator rental costs.

Speaker 4

The cargo jet training classrooms and simulators are booked to capacity as we train new pilots to work towards the optimal level of pilots to support the increased revenue volumes. There is an increase in ground costs of $3,500,000 or 21 percent compared to the prior year. A better comparison is a sequential view compared to the Q1 of 2024 and you will see that the ground costs are essentially flat. A reminder that late in the Q2 of 2023, Cargojet was successful in more than doubling a third party logistics service that is provided to a strategic customer to scan and sort air cargo parcels. The growth in this revenue is the primary reason for the increase in ground costs compared to prior year.

Speaker 4

SG and A is mostly flat to prior year when you adjust for the non cash mark to market changes for management and directors long term incentive. Before I leave Cargojet's cost

Speaker 5

structure,

Speaker 4

a few words about the relationship between fuel expense and fuel surcharges and other revenue. A reminder that in the Q1 of 2024, Cargojet experienced maintenance revenue that was significantly higher than a normal quarter. Aside from the maintenance revenue, what is new to the current run rate is the 24% increase in all charter business. All in charter business is priced on an all in basis and therefore there is no requirement for a fuel surcharge. Excluding the business mix change along with the one time maintenance revenue in the Q1, the relationship between fuel expense and fuel surcharges and other revenue is consistent to the Q1, which is also consistent to this year's trend for jet fuel prices.

Speaker 4

In summary, we are diligently executing on our capital allocation strategy, carefully managing costs and continuing to identify growth opportunities in a fast changing supply chain that are shifting from one geography to another. Our diversified business model has proven resilient in the hypergrowth COVID environment as well as during an economic downturn in a tough aero cargo market. I will now pass the call back to Jamie and Pauline and A. J. For any Q and A.

Speaker 3

Operator, we can open the line for questions.

Operator

Thank you. We will now take questions from the telephone lines. Our first question is from Betty Yang from Canaccord Genuity. Please go ahead.

Speaker 6

Hey, good morning, guys. This is Betty on for Matt Lee. Good morning, Betty. Good morning. So first I have a question on the 2 new 767 aircraft that you left into this quarter that will come into service in early 2025.

Speaker 6

So are there any contract opportunities already attached to the new aircraft investment? And will this aircraft go into domestic network or will they mostly fly charter?

Speaker 4

Hi, Betty. Thanks for the question. At this time, there is no signed contract to support that investment. And you remember back on previous calls, Jamie has always noted that we have existing capacity to grow and he threw out numbers like $60,000,000 And that's essentially what we accomplished in the Q2 with that press release on the e commerce schedule charters. So what we had planned to maybe take place over the next 12 to 18 months happened very rapidly.

Speaker 4

So we had to pivot and replace that inventory of feedstock that was originally planned to have 1 converted late this year and 1 next year. We sent them both into conversion. So we had to pull that plan a little bit more forward. And we need feedstock on inventory. That's one of Cargojet's main priorities here that when there is an opportunity that we can pivot quickly and capture that inventory.

Speaker 4

And really, we just have to have that pipeline of inventory of feedstock for future growth. Maybe Jamie, if you just want to comment on some of the opportunities that do exist to support that investment.

Speaker 2

Yes. Good morning, Betty. Just to add to Scott's comments, I mean, we've in addition to his comments, we obviously, we added the China flying this year, which is required more aircraft. As I said in my comments, we've quickly pivoted from this time last year where we said we had 4 surplus 757s in the fleet. And then as we saw growth opportunities through the and we had 4 up for sale at one time in fact.

Speaker 2

And then as we saw growth opportunities emerge throughout the balance of 2023 and into 2024, we've reduced it to 2 and then subsequently down to we don't have any surplus aircraft for using all of them. We have at least 7, as you're aware, we have at least 767-200 that expires in February. So one of the 767-300s that we are converting will replace that and the other one will be a net increase, which with the size of the fleet that we have up at 41, 42, 43 aircraft by the end of 2025 With our heavy maintenance requirements on a fleet of that size, 2025 will be the 1st year that we actually have for most of the year three lines or 3 aircraft in heavy maintenance at any given time to support the fleet and the network.

Speaker 6

Thanks for answering. Just a follow-up question on the creation contract. Could you elaborate more on how this opportunity arose and how it is progressing so far? And do you see opportunities to upsize this contract as e commerce demand continues to improve in the second half of the year?

Speaker 2

Yes, sure. I can give you some color on that. I mean, it happens fairly quickly. I mean, demand, as you probably read in the media for e commerce products coming out of China has somewhat exploded this year. Earlier this year, we had done a few charters out of China back into North America and then we had in the spring, early spring, we had a significant multiple number of requests for either ad hoc or scheduled charters coming out of China into North America, into Vancouver particularly.

Speaker 2

It took us a little bit, not a lot, took us a little bit of time to sort of drill down and determine who's the actual customer that controls the volume and has the traffic. The customer that we contracted with was already an established player in that market and has been operating 2 has been operating and still continues to operate 2 flights a week with a 777 with a Chinese carrier Shanghai into Toronto. So they had established business and wanted to continue to grow. They had demands for capacity to continue their growth into Canada, particularly into Western Canada. Cargojet provided added value, leveraging our domestic network and the fact that we can connect from Vancouver to 15 other cities in Canada was very appealing to the customer.

Speaker 2

So the contract and the agreement came together fairly quickly, literally within a couple of months, a lot quicker than a normal contract of that magnitude and size. We started operating. We're operating currently 3 flights a week with the odd this week we're actually operating 4. But 3 flights a week. We didn't start that until late in Q2.

Speaker 2

I believe our first flight was about May 20 or May 22. So we really didn't see we certainly didn't see the full impact of that agreement in the Q2. We'll definitely see the impact of that in the 3rd Q4. And to answer your final point, yes, we are seeing significant and actively having discussions with both the existing new customer on that route and other potential customers. There's a significant demand for capacity, particularly between China and North America and particularly to Canada itself.

Speaker 6

Thanks. I'll pass the line.

Operator

Thank you. The following question is from Chris Murray from ATB Capital Markets. Please go ahead.

Speaker 7

Thanks folks. Good morning.

Speaker 5

Maybe turning back to your outlook, you made the comment that you're cautiously optimistic about the back half of

Speaker 7

the year seeing the recovery. So I was wondering if you could talk a little bit about outside of the charter business, what you're seeing in the domestic business and maybe in the ACMI business more in detail?

Speaker 2

Yes, maybe good morning, Chris. I think my comments were maybe a little conservative, but I think that's sort of the nature of how we've managed the business over the years. Certainly, in what we've seen in the first half of the year and sequentially, if you look at Q1, I think we are up 6.5% in revenue and yourself and others were very surprised with that and we increased that significantly to 11.5% in the 2nd quarter. And despite my cautiously optimistic comments, it is clear that the second half of twenty twenty four is going to be much stronger than the first half of twenty twenty four. In really all of our all three of our revenue streams, our domestic revenues in the second quarter were up just over 10% year over year.

Speaker 2

And as I noted in my prepared comments, we have sort of seen sequential quarter over quarter, year over year growth for all of our customers. And I would say in all three segments, largely driven by e commerce growth and the continued sort of low penetration rate of online sales in Canada as compared to as a percentage of overall retail sales as compared to other industrialized countries. And the feedback we're getting from our customers is and we see directly on the domestic just by the nature of the fact some new customers that I say new customers and not new contract customers, but new entrants, primarily in the final mile delivery space that are providing final mile delivery for other Canadian retailers other than Amazon obviously, that have obviously improved and grown their online platforms and that's resulting in new business. As I noted in the prepared remarks, our major contract customers are giving us feedback that they're seeing strong growth from the e com primarily from the e commerce business that they're carrying. Obviously, Amazon, we're seeing good example this year compared to last year, we had a very successful Prime Week as Pauline noted in her comments that we were we contributed to assisting Amazon and having, as they said, their best Prime Week ever in Canada.

Speaker 2

Comparatively going forward, they have their prime big days in October where they've already asked us for dedicated capacity for some charters for a 4, 5 day period in the middle of October, as well as doubling the charter capacity, at least the request for the capacity in peak season this year as compared to last year, where in 2023, we didn't charter they didn't charter any aircraft during prime week. There was no big days in October and we operated some 757s on charter on a charter basis in peak. This year, they've asked for a 767, which is 50% more capacity. Feedback from on the ACMI basis, primarily driven by DHL has indicated that they're seeing much stronger demand than last year, obviously, particularly out of China, but also from to and from Europe that will undoubtedly result in as we mentioned earlier this year, we ended last year operating 17 or 18 aircraft for them during peak season. We continued on a initially on a short term basis with 2 additional aircraft for a total of 17 that we've been operating all year that have been extended to the end of the year and it's entirely realistic to expect that we'll operate more than that in peak season because of that demand.

Speaker 2

And then on the charter side, we've reported the charter revenue, obviously a bump has been because of the impact of the scheduled charters that we have with our Chinese customer between China and Canada. But we also had a record quarter. The month of June was the first time in the history of our ad hoc charter business that we actually exceeded a charter a day. We had Pauline had given our charter sales team an objective to do 3030. I think we did 31 charters in 30 days, which is unprecedented.

Speaker 2

So demand seems to be strong across the board, which kind of that my long winded answer to your question kind of contradicts my cautiously optimistic comment earlier.

Speaker 3

Yes, Chris, just to Jamie's point, we did set an objective in June to do 30 on 30. The team did exceptionally well. We are seeing an increase in ad hoc charters. Certainly, what we didn't anticipate the year to begin with, but things have certainly changed in Q2. Canadian consumer is also very price conscious.

Speaker 3

We're shopping and they're shopping for more value. So this China business is basically fulfilling that gap where Canadian consumers have more opportunities and a better shopping environment than what was just available in e commerce within Canada.

Speaker 7

Okay. That's helpful. My other question is just maybe on the fleet mix. I guess, we've evolved the 757s moving in and out of the domestic market. Now it looks like you've moved them back in.

Speaker 7

Can you talk a little bit about how we should be thinking about either the efficiency and the cost profile of those aircraft in the network? I know there were sort of some puts and takes about it. It gave you some more flexibility having a mix of 67s and 57s in

Speaker 8

the marketplace. But I'm just

Speaker 7

trying to understand when you've got this growth coming at you, are the 57s as efficient as, say, 67s? And like or should we really

Speaker 5

I guess really what I'm trying

Speaker 7

to get at is like on a block hour basis, are we or should we be like for like in terms of cost profile?

Speaker 8

Yes, maybe I'll take that, Chris. It's A. J. 757 and 767s are common cockpit aircraft. That's number 1.

Speaker 8

Same pilot, 1 pilot can get off and they fly 1 aircraft and get on to the second one. That's number 2. Number 3, majority of the parts are very common in that. Our simulator can accommodate the training for both the pilots. So both aircraft are very complementary to each other in terms of efficiencies, costs.

Speaker 8

When you have a £60,000, £70,000 load in any given night and you do not want to use a 767 because it will take up £220,000. So the very fact we can switch resources between one aircraft and the other, this is the most complementary common cockpit aircraft that you can find in the marketplace that you can switch on a very short notice, providing us the flexibility, efficiency, costs and customer demand balancing at the same time.

Speaker 3

Yes. And Chris, just to add to A. J. Comment, 75% of our charters are done with the 757s. Okay.

Speaker 3

That's interesting. Okay. Thanks, Bruce. I'll leave it there.

Speaker 2

Thanks, Chris.

Operator

Thank you. Our following question is from Walter Spracklin from RBC Capital Markets. Please go ahead.

Speaker 5

Yes. Good morning, everyone. Congrats on a good quarter here. Thanks Walter. Coming back to the back half of your outlook and your cautious optimism despite some of the indications, Jamie, that you're seeing it perhaps a little bit more optimistic.

Speaker 5

When you look at I guess it's safe to say when you look at your 3 segments, starting with domestic, you're seeing your advanced bookings, if you want to call it that, for the backup, particularly for the Q4, sounds like they are significantly above where your advanced bookings were this time last year. Is that a fair statement? Is it

Speaker 2

Yes, that would be fair, Walter. Yes, absolutely. I mean, last year, as you know, we were relatively flat through the 1st couple of quarters of the year. And that gave us indication that we weren't going to see a significant spike in the latter half of the year. We always as you know, typically our second half of the year is much stronger in all our revenue segments than the first half with peak season.

Speaker 5

So, if I look at your run rate for ACMI and Charter on the Q2, is that do we see a nice pickup from that given aircraft coming online, contract purchases and those advanced bookings, well, I guess, on ACMI and all in charter? Or should I look at the Q2 quarterly cadence for ACMI and all in charter to be kind of adjusting for seasonality and kind of the run rate we should look at through the rest of the year?

Speaker 8

Yes. One second, I'd like to comment just very quick. When you order aircraft, you obviously need to match spare parts, pilot training. So there's always that bag, Walter. It just doesn't show up like you order.

Speaker 8

There's a lag in between ordering, getting aircraft, getting it successfully certified. The time you order an aircraft, there's a year's worth of cost lag and so you can't immediately estimate or say that, okay, it's going to put this on day 1. But just to be a little cautious on that particular area.

Speaker 5

Got it. Okay. Thank you, A. J. And last question here is on your capacity.

Speaker 5

Jamie, you had mentioned you had kind of that 15% to 20% capacity and PolyMet indicated that kind of got used up with these purchase or these new customer contracts. When you bring on the new the 2 new ones now by the end of the year, are you back at that 15% kind of capacity run rate? Or perhaps give us a sense of what you have in terms of when we're looking at incremental margin on new revenue, what your capacity is now and what you hope it to be at by the end of the year?

Speaker 2

Yes. Just to clarify, Walter, the 2 aircraft won't come in this year. The 2 that are being converted, 1 won't be in until early 2024 sorry, 2025, correct. And the next one shortly after that. There are so there is no real capacity increases to our fleet.

Speaker 2

There are no capacity increases to our fleet in 2024, the second half of twenty twenty four. We still believe we are able to accommodate the growth that we have and we have demonstrated that I think in the Q2 with the 11.5% growth overall in our revenues without increasing the fleet. I have made previous comments before that particularly on the domestic network with the mix and as AJ mentioned with the flexibility and the uniqueness of both the 757 and the 767 aircraft being interchangeable on different routes depending on capacity demands that we could accommodate 15% to 20% growth without having to add another aircraft asset. I think we demonstrated that in the first half of the year, but particularly in the second quarter where our domestic revenues were up 10% or 11%. There's still some room to grow another probably 5%, 10% on that fleet without adding any aircraft.

Speaker 2

And particularly when you consider in the Q4, as you know, we deliberately don't have any heavy maintenance scheduled on the aircraft. We purposely schedule for that work to finish in late October, the beginning of November at the very most. So we have at least 2 additional aircraft from our heavy maintenance fleet that are available in November, December to take on the added spike peak requirements in both the domestic and the ACMI business. On the specific answer to your question on ACMI for the balance of the year, I think it's still safe to say we had 7, what do we have, 7.2% year over year growth in Q2, which is kind of in line with what we had previously indicated that we'd have mid to high single digit year over year growth. I think that would be the expectation probably a little bit higher than that for Q4 based on the demand that we see globally.

Speaker 2

Equally on the not necessarily sure we will replicate the ad hoc and schedule an ad hoc charter growth in the quarter, 24%, 25% in the quarter. In the subsequent quarters, we will definitely see a bump because we will have the consistent scheduled revenue from the China flights that we only had for a month and a bit in Q2. But we would there would be an expectation, particularly in Q4 with the increased demands on our domestic network and our ACMI business that we don't necessarily have the aircraft available 24 hours or 7 days a week to achieve the ad hoc charter revenue that we achieved in Q2.

Speaker 4

And Jamie, maybe I'll just add as well back to your comments that you made when we started the call. It's our intention at this time to not renew that lease in February of next year. Correct. So you'll see on the fleet table, we're only adding 1767 next year, not 2 by getting it from underneath that lease.

Speaker 5

Okay. That's fantastic. Appreciate the time as always and congrats on a great quarter.

Speaker 2

Thank you, Walter.

Operator

Thank you. Following question is from David Ocampo from Cormark Securities. Please go

Speaker 9

ahead. Thanks. Good morning, everyone.

Speaker 2

Good morning, David.

Speaker 4

Jamie, I just wanted to

Speaker 9

circle back on your e commerce business out of China. I think you flagged that your ability to connect to 15 other cities in Canada was one of the main driving factors why you're able to win that contract. But when I look at the $160,000,000 of contracted business, it does seem like that's only for the 3 flights that you guys alluded to and there's probably some incremental upside of moving the goods on your domestic network. Just wondering if that statement is accurate and if so, how much of a volume or revenue lift can we expect from moving those Chinese e commerce goods across your domestic network?

Speaker 2

Yes, you're right, David. The disclosure that we gave on that agreement was and the revenue associated with it, that $150,000,000 $150,000,000 $60,000,000 over the 3 year period was based on the 3 frequency per week minimum between China and Vancouver and didn't include any incremental revenue for traffic that they may retender to us in Vancouver beyond to any of the other 15 cities that we operate to. It also didn't include any incremental revenue for additional frequencies that we fly from China to Canada, either to Vancouver or Hamilton that I fully expect will be part of the growth of that business over the next couple of years. And as I noted before, we are already we are actually flying tomorrow, I think a flight for flight from China into Hamilton. Hard to quantify what that number is.

Speaker 2

It's definitely incremental revenue that should fall right to the bottom line, at least the step on the domestic network as it's on traditional backhaul routes where we have more capacity. So why it was sort of a win win for us and very attractive always for us to be able to attract backhaul business out of Western Canada coming back into Eastern Canada, where we traditionally have more capacity than we would have on the headhaul routes in the other direction. And it was certainly it wasn't the deciding factor, but it was certainly, as I mentioned before, an added value that the customer greatly appreciated and thought was very beneficial to allow them to potentially limit their costs and their growth by not having to extend aircraft from Vancouver into Central Canada and just use our network on an incremental basis, but it's a little hard to quantify. As I said, we only started flying at the end of May. So we're still a little bit in the learning curve, a little premature to be able to estimate what those revenues could be.

Speaker 9

Okay. That's it for me. We'll circle back next quarter once you have a full quarter on the results.

Speaker 2

Thanks, David.

Operator

Thank you. Our following question is from Nick Colquelin from Acumen Capital. Please go ahead.

Speaker 5

Good morning and congrats on the strong quarter.

Speaker 2

Thanks Nick. Thanks Nick.

Speaker 4

Just one question on the BitScienk project, were there any one time costs associated with that in the quarter?

Speaker 2

Yes, there always is. I mean for us to start that quickly my comments at the beginning about how quickly the agreement came together. One of the things that I think Cargojet prides itself on is our flexibility and our be able and one of the reasons for our successes is the speed in which we're able to the flexibility and the speed in which we're able to react to customer requirements, whether those are existing customers that need us to do things on an ad hoc or on a peak season basis or new agreements like this one. It would be I would say it would be unprecedented for other carriers to be able to start a program from China to North America as quickly as we did with the 3 frequencies a week that we're flying. So and obviously associated with that would be some startup costs, particularly pilot costs.

Speaker 2

We may have pilot training, not training costs, but pilot overtime where we are incurring to draft pilots to fly that route. There may be some additional training costs, as Pauline mentioned in her prepared statement about additional ETOPS pilots that we will require for that. Primarily on that side of things with but those should sort of soften out as we go forward in the next few quarters, or flatten.

Speaker 10

That's helpful. And last week there

Speaker 9

was a pretty significant hailstorm in Calgary, where any of your aircraft impacted?

Speaker 2

Yes, we had 2 aircraft that were impacted as a result of the hailstorm. 1 was the Amazon prime aircraft that we operate on a CMI basis for them that was sitting in Calgary 767 as well as one of our own 757s that received a significant amount of hail damage. We've moved those aircraft into Hamilton and are expecting to have those back in 757 fairly shortly, the 767 probably another week or so, but we've been providing backup service for Amazon with other aircraft in our fleet to make sure that they don't have any hiccups in service to their customers.

Speaker 9

Thanks a lot. Thanks Nick.

Operator

Thank you. Our following question is from Jasrub Banes from TD Cowen. Please go ahead.

Speaker 10

Good morning. Thanks guys. I'm filling in for Tim James today. Thanks for taking our questions. We just had a question regarding the change in the fleet schedule.

Speaker 10

When comparing the Q2 fleet schedule to the Q1, the number of 767-300 aircraft increased by 2 for 2025, which I presume is related to the 2 conversions you made reference to in the MD and A. However, the number of 767-200 owned aircraft also come down by 2. Maybe if you could provide a bit of color as to what's driving that decrease in 767-200 aircraft?

Speaker 4

Yes. The current requirement right now is the 767-300s. And then that's the trans Pacific average that we've been talking about. So in a perfect world, we would have sent the 2 that were in feedstock into conversion first and the 2 that we just purchased in the Q2 would have been in our inventory. But really the market needs the 767-300.

Speaker 4

So kind of reverse that order of the inventory, which just makes sense for us to respond quickly to the requirement.

Operator

Thank you. We have no further questions registered at this time. Back to you.

Speaker 2

Thanks everybody for joining us this morning and we appreciate your time.

Speaker 3

Have a great week.

Speaker 2

Have a great day.

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
Cargojet Q2 2024
00:00 / 00:00