Good day, and welcome to the Cabo Jet Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Pauline Dillon, Executive Vice President. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us on the call today. With me on the call are A.
J. Rahmani, our President and Chief Executive Officer Jamie Fortieth, our Chief Commercial Officer and John Kim, our Chief Financial Officer. 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 and adjusted EBITDA. Please refer to our most recent press release and MD and A for important solutions and cautionary statements relating to forward looking information
and for reconciliations of non GAAP measures to GAAP income.
I'll now turn the call over to Ajay for his opening remarks.
Thank you, Pauline, and thanks, everybody, for joining us for our Q2 conference call this morning. We are certainly in the middle of a pandemic of the century. Direct ordinary times to be operating any business. While Canada is making progress on flattening the curve, there is no time to make complacent. Until the safe vaccine is available widely, we are likely to keep operating in the new norm.
While Cognizant's business has been able to operate normally, we are painfully aware that there are thousands of businesses that are struggling and that there are millions of Canadians that have not been able to return to work. It's a high moral responsibility on us to give back. Therefore, today, we are announcing $2,500,000 pandemic relief initiative through CARBOGET Foundation, which we just formed, that will focus on three things. Number one, direct support to health care community in fighting COVID-nineteen from helping hospitals and long term facilities better prepared to cope with a potential second wave to enabling vaccination as soon as a safe vaccine is available. The initiative will identify and fund the most compelling needs for the health care community.
Number two, support measures to combat racial inequality by helping underprivileged communities better prepare to pursue technology and professional careers. Number three, support the most vulnerable members of our society that are critically hard hit by ongoing pandemic. This pandemic has exposed several weak thoughts in our society from the limitations of the health care system to the fragility of life of the weakest member of our communities. That is why we feel this initiative is an important step in doing our part as Canada navigates this difficult moment. Before I turn to our second quarter results, I also want to take the opportunity to thank our 1,200 frontline team members across the country, and that includes each and every member of this CargoJet team.
They're giving us hope. They're allowing us to maintain a sense of normalcy, and they are keeping the supply chain moving and the country going. Thank you, team, Carvajet. Now turning to our quarter two results, we posted the best quarter in Carvajet's history. The momentum that we started in quarter one has picked up speed in quarter two.
We are experiencing a strong tailwind driven by several factors, which I will touch upon shortly. Virtually all our key metrics, including revenue, gross margin, adjusted EBITDA, posted strong record growth level, and this is allowing us to strengthen our balance sheet and create further capacity to capture our capital growth. If we were to look at adjusted EPS that excludes stock warrant expenses for the quarter was $2.71 compared to adjusted EPS of $0.32 in quarter two twenty nineteen. We generated $55,700,000 in adjusted free cash flow in quarter two and $85,500,000 for the first six months of the year. As mentioned in our previous call, we are focused on using our cash flow for two: number one, capital expenditures to drive growth and number two, retain our debt.
The strong cash flow was deployed towards these two objectives, bringing our overall leverage to 2.7x trailing adjusted EBITAR compared to 4.5x as of June thirty of last year. Furthermore, it is worth noting that we are well capitalized and have more sufficient more than sufficient liquidity to meet our day to day and future growth needs as we navigate through these uncertain times. Cargojet has recently completed a public offering of $150,000,000 in hybrid debentures and increased its credit facility from $400,000,000 to $600,000,000 with an extension of term to July 2025. This has allowed us to further strengthen our balance sheet. Moving on to operations.
There are several moving parts that are affecting our business. Let me highlight a few things that help drive us going forward. Number one, let me begin with our charter business. We had a very strong charter revenue before Q2. With passenger airlines cutting down over 90% of the flight schedules, there was a worldwide shortage of cargo flying capacity.
The freight that used to fly in the bellies of passenger airplanes had no other alternatives, which led to a strong demand of our charter services and refueled charter flights to bring personal protective equipment from Southeast Asia and Europe for various federal and provincial agencies and some private companies in Canada. Arborjet has several lucrative opportunities internationally, and we could have made even higher revenues and higher profits. As a proud Canadian airline, we chose to support Canada's healthcare needs in this extraordinary power of need. Although our charters from Asia have slowed down in quarter three, we fully expect add on charter demand to continue to be strong to improve. Number two, our ACI business ACMI business continued strong performance as we signed two new routes for DHL to add daily air cargo capacity between North America and Europe, and that will continue at least till the end of the year.
We expect our ACMI business to continue to benefit from reduced cargo capacity worldwide as passenger airlines struggle to remain return to building capacity to pre COVID-nineteen levels for several years to come. Number three, as widely recorded in the media, the online shopping or e commerce as a percentage
of total retails doubled in
April compared to Q1 of this year. This trend continued in May, and we have no reason to believe that it is slowing down. Our customers are handling more B2C packages than Xmas or Black Friday. It is worth pointing out that the growth in e commerce was not restricted to traditional larger retailers only. We saw thousands of small and medium sized merchants shift their sales to online channels.
We expect this trend to continue. Number four, the flip side is that B2B segment was almost shut down for the most part of Q2. Therefore, movement of packages containing auto parts, machinery, dentist supplies and other business packages were down significantly. As Canada's economy slowly opens, we saw B2B volumes start to return in June and expect the trend to strengthen in Q3 and Q4 as the economy opens further. One of the most critical areas of focus of us remains the health and safety of our cargo debt employees.
I'm extremely proud of each and every member of our team. We stepped up to beat the challenge of keeping our business going despite the unprecedented challenges thrown at us by COVID-nineteen. We built extensive new health and safety protocols for employees and ensured sufficient supplies of PPE for everyone in our warehouse, including their families. We introduced HeroPay for our frontline employees and onetime Hero bonus at the end of the quarter, too, for all employees for all of our employees. These were intended to soften the stress levels of everyone that everyone's stress level as they took care of their families' and children's needs.
Together, these measures allowed us to maintain 100% of our daily operation, and the COVID incidents across the workplace were only a handful. Our on time performance during the pandemic and the last quarter volumes with increased business activity still remained at an all time high of 98.8%. These measures cost us approximately $10,000,000 to $11,000,000 in increased wages and extra expenses for the PPE that we supplied back to our team members. We didn't implement any COVID related surcharges with any of our customers, and we were not seeking any government assistance. But as we look to the future, we believe that B2C, e commerce, ACMI and reopening of the economy along with B2B volumes present stronger opportunities.
We expect charter opportunities to remain attractive until passenger air traffic returns to pre COVID levels. While the longer term implications and the full impact of COVID-nineteen remains unknown, Harwood Lift is working hard to adapt to the fast changing environment. Let me emphasize that we are well positioned to handle the changing transportation and logistics needs of our customers. We have a great team, a strong set of assets, highly flexible fleet, and we are very well capitalized and continue to capture growth opportunities in this challenging environment. Once again, thank you for your support and thank you for joining us this morning.
We will now open the call to the questions.
Trader, we'll start taking questions now.
Thank Our first question is coming from Karnak Gupta with Scotiabank. Please go ahead.
Thanks and good morning everyone. Congratulations on a good quarter.
Good morning, Panhard.
Good morning, Naira, Ajay. So my first question is on the charter business, the all in charter. Looks like over 90% of the total revenue growth in the quarter came from the all in charter business, which obviously looks like was driven by the rebid charges
for the government. What do you expect from
this segment in the second half as some of the kind of rebid sort of slows down, I guess, but you also noted some e commerce activity. So can you give us any sense on where this call and chat business stands today and going forward?
So the Tata business had certainly slowed down from quarter two. Predominantly, the business was in China at that time and for a number of government agencies and some private companies that dealt with PPE. Some of the market has shifted to Turkey, Istanbul for Gowns and some of the other PPE. There's still certainly a strong demand but not as strong as what it was in quarter two. Also, all indications to us are that there is obviously, everybody is looking to get out of this pandemic through vaccine and other different treatment options and test and rapid test.
So we see some of the demand from PPE as they stockpile going into some of the other medical areas, and we are already seeing those trends. So certainly, I don't think that the quarter two charter is going to be repeated. And if it is repeated, that means we are all in trouble as far as the COVID is concerned, and nobody wants to see that. I certainly see a demand for charters in two areas actually internationally. One is, obviously, there's $150 duty free import.
We see a lot of activity that people buying from foreign websites that was not available a while back. Number two, a lot of new companies that are in the e commerce business now that weren't there before, both domestically, internationally and trans worldwide. And then doing the charters for other medical supplies and since the bally cargos based on passenger airlines is very limited or it's very unknown when they will be fully back, we certainly feel that it will be more than what the normal has been in the past. Okay. That makes sense.
Thanks for that. And then on the ACMI, so I know you had your six routes for DHL and then you had two incremental that you got for Europe with starting April, I guess.
And I guess you are expecting that
to continue to be at this point. Any sense on what would take DHL to make these contracts permanent? Obviously, passenger AML might not be down. So there are any stands that you get from DHL that these contracts can be expanded for longer?
Yes. Certainly, we have talked to them and we continue discussing with them. But since we are in such an unchartered territory, nobody can predict what's happening. What we see today is certainly that since we started these flights, the demand hasn't slowed down. So we've been assured that, look, there is no reason why this will not continue until December 31.
And there is a strong possibility that this might continue for a long period of time depending on how quickly the commercial airlines ramp up in 2021. So we expect that because DHL is a very service oriented business, even if some capacity opens up, let's say about 70% of the capacity opens up on passenger airlines, our own internal projections are, they will the capacity is not going to be cheap. And companies like DHL who write themselves for service and they have done a time sensitive product, they're moving, they're not going to rely on high cost, unpredictable passenger capacity. So we So our estimation certainly believe that these routes have continued, but we don't think anything is implemented. And we are continuously looking for opportunities to expand presently into South America and other areas that we are considering.
And last one from me. Obviously, the e commerce trends are pretty noteworthy in these times. And I think you guys in the kind of last few months, the B2C increase was more than the B2B decrease, I guess. But as the B2B
comes back, I mean, do
you see a similar pattern where the B2B is not replacing B2C one to one as in like B2B is growing or rebounding?
Yes. I see in April and May, there was B2B was hardly there at all. It was mostly B2C. So I think that the B2B will come back eventually, but I don't think the habits that now people have formed with the daily supplies on e commerce are going to change. So let's say, for example, if the retails were 7% of the total retails were e commerce and it went to 15% during pandemic, we can see that maybe it will come back to maybe 12% or 11% or they're not going to certainly go back to seven So there will be some cannibalization from B2C to B2B because people are itching to grow all shopping.
But I think certain trends will remain strong. Combining both of them, B2B and B2C, we'll certainly see a great net increase stronger as we can prior to COVID.
Thank you. We will take the next question from David Ocampo with Cormark Securities. Please go ahead.
Good morning, guys. Good morning. Yes. There's been quite a bit of growth in eight Day Mine and charter volumes. And sort of how are you
thinking about your fleet? You have number of things coming in,
I think in October. Is that enough to support the growth that you're seeing today? Or can you possibly be opportunistic stakeholder bound for the year?
Well, yes, we have actually, as of October, we are going to add another aircraft. So there will be two planes coming in, and those would be the planes that would be doing the international runs and the charters because planes have been overworking. We can't sustain the same planes doing what we have done in the past three, four months. So safety, security and making sure that continuity of service is important to us. And although we stretched the fleet pretty good in the past three months, we can't continue to do that forever.
So we had one plane joining us in October, and now we have signed up for another plane to help our growth. Okay. And A. J, you talked
about looking to expand into South America. This hasn't been talked about in
a while. Are you still actively looking for a
partner in The U. S?
Yes. We continue to explore some opportunities. We've had a number of discussions with various partners. But to be honest with you, we had to put things on hold for our discussions for simple reason that you can imagine that we've probably done up to a 50% to 70% more clients in Q2. We have really been stretched here to make sure that our drilling operations go well.
And we have put The U. S. Expansion on the back burner. Actually, we had a lot of opportunities offered to us in the past three months or four months handling COVID supplies into The U. S.
From other countries at much lucrative opportunities that we didn't take. Our concentration has been to help out Canada, and this is where we were needed as Canada's cargo airline. So our focus, whether it's commercial or doing a deal in U. S, has been not there at the present time, certainly because of the situation and this company. But we certainly have, we haven't canceled our plans.
We just kind of postponed to a time when we can really concentrate and do a deal that works for us. And sort of
one last housekeeping item for me. I don't know if John's on the call, but on the path you indicated that you want
to be set free in
the next five years or so. Is that idea still in place or is the timeline moved up because of the benefit that you're seeing from COVID?
Well, certainly, what we have done by restructuring with a hybrid debenture and the cash flows from this year, we certainly brought our leverage down from 4.5 to 2.7, which is kind of a major achievement for us. My goal would be to, to, by the end of the year or bring it down to even closer to two. That would be my ideal dream. But our priority remains that we become debt free within five years and hopefully sooner.
Our next question comes from Alana Yountif with CMO Capital Markets.
I just had a couple of questions. The first is on the AC and the charter side. You can appreciate the slowing charter service, But is there a magnitude transition from the second quarter that you don't expect to repeat going forward?
Well, yes, we can't put numbers on it. But certainly, we had a lot of PPE that was not available in this country, which has now been stockpiled. We will still have operational charters. Would it be 25% activity than quarter two? Probably somewhere between 1020% or 10% to 30%, somewhere in that neighborhood.
We are seeing it's not that the charter business is dead in quarter three, but certainly there. But the intensity is, if I was to take a guessing number, it's probably 70% less than quarter two.
Okay, great. And I guess now a second question on heavy maintenance. So I understand you're able to delay some of the heavy maintenance obviously. But how long can you perform this? And how much flexibility do you have to conduct heavy maintenance at a later date without disrupting your service?
So let's, we had eight aircraft that were deferred for heavy maintenance because we did some further tracking on the aircraft. We enhanced our maintenance program. As you understand, that's a target that's always believed in safety first and everything else after. So we've got extensions on the C Check for twelve months on speed aircraft. There'll be a domino effect on another aircraft for one year or so.
All in all, you can say that twelve months on your fleet for all aircraft. But we have spent considerable amount of money in doing interim checks and doing in between checks to make sure that we are flying safely. So we don't think that we're going to be bombarded with 25 key checks next year because our understanding is that the discussions that have happened with the regulatory authorities is to make sure that we don't, in order to keep providing service and keep the supply chain moving in this country, that we are not grounded with 25 aircrafts at the same time. So these are strictly deferments that have been given to us based on our performance, based on our audit, based on certain statistical maintenance work that we've been able to undertake and our track records. And we continue to demonstrate that safety is paramount for us, and we obviously got some deferment on these checks to make sure that the supplies are kept coming in.
And all I can tell you is that we have a plan that is in front of the regulatory authorities, which in principle, they all believe we are just waiting
for some approvals to come through.
Okay, great. And then the last question about volume and your B2B business overall. I guess, what is the volume growth, if you can say, in overnight network by month? And how is that trending in July?
The overnight network is certainly, I would say, at this stage, I can say, back to normal levels. They should be maybe even a slightly more uptick in it. We don't have the numbers handy and we, as you know, we don't give guidance on this stuff. All I can tell you is that it's certainly not down and certainly the trend is up from where we've been in the past.
Okay. And last question, I promise. I guess the P2P business that you have, what is it at now versus pre pandemic levels?
Again, once again, we haven't sort of looked that deeply into it. But when we look at customers' numbers and we know some of the stuff, the density, the parcels, and it's a guessing game at this stage until we guide deep into it. But I would say that the business, if I was guessing man right now, I would say at least 60% to 70% of G2B business is certainly back to from where it was in the 04/2001.
Great. That's all my questions. Thank you so much.
We will go next to Doug Taylor with Canaccord. Please go ahead.
Yes. Yes.
Thank you. Good morning. I'll echo the congratulations on a pretty exceptional quarter and it's nice to listen to a good aerospace story for everyone on the call. My first question, I just want to ask you to repeat a number you provided. Did you say Q3 cargo down 70% versus where it was in Q2?
Was that approximately with the numbers? Did I hear that correctly?
No, no, no. What I said was the B2B business, what it was in quarter one, declined sharply in quarter two, but it was replaced by B2C business. But we see that in quarter three that B2B is back to around 60%, seventy % range from quarter one, while the B2C business is still going to be strong.
Sorry, I meant to say charter business versus Q2, Q3 versus Q2. Previous caller had asked a question and I heard something about it down 70% versus Q2 at this point. Is that or did I mishear that?
No, that's correct. John, it's Jamie. Good morning. The Adi had mentioned in response to a question of what would you anticipate for as on charters going forward into Q3, it's down roughly about 70%. In Q2, we ran we flew 65% more block hours in total on all segments of our business as compared to Q2 last year.
And that included almost daily flights internationally from primarily from China coming back into Canada. I think we've moved close to 100 flights. But I think going forward in Q3, we would expect that frequency to be reduced to about eight to 10 per month
going forward.
Okay. Thank you for clarifying. And so just to understand the Charter business and outlook a little bit more as it was such a big part of the Q2 strength, How far out do you have visibility on charter flights? I mean, are these people booking a week or two weeks in advance or people booking charter flights for the fall and winter already? I just want
to understand the level of visibility.
It's typically within a couple of weeks to a month at maximum. And it's really driven by people's understanding or belief of what capacity is going to be available or not available in the marketplace, particularly as AJ noted, we're benefiting significantly because of a significant global reduction in cargo capacity, primarily as a result particularly on the Atlantic and on the Transatlantic and Transpacific as a result of sort of elimination of virtually most of the international wide body passenger flying and all that Valley cargo capacity that's gone. So customers typically are looking to see when, if any, of that Valley capacity is going to return. I think the consensus in the industry is it's going to be several years before we ever get back to pre COVID-nineteen international cargo capacity travel levels. So I think that bodes well for cargo jet and the demand for dedicated charter services going forward.
Completely agreed that Valley capacity was never really operating anywhere near capacity, usually very low load factors on that. So I mean, as you look forward, would you say
that some of the,
I would say, still very strong but softer than Q2 charter demand is demand driven or has there also been some supply that's been added to the market by other competitors that's risen to net some of the heightened demand as well? And how much is that a factor?
I think the competitive factor is not so much in the air because every airline, cargo airline operator is pretty busy with something or the other. More people have obviously because now they have time, they have switched a lot of supplies that have been stockpiled now and moved to surface or ocean freight, as we call it. So it's not that we have 20 other carriers coming in and quoting on other charters. We have a pretty good set of customers. We have a very loyal customer base that certainly the inquiries are there for charters.
As we talked about vaccine, as we talked about supplies, there's always something or the other happening. We still have a number of charters booked for PPE for the quarter three. But as I said, they're nowhere near what quarter two was. And yes, great for our business, but not great for any of us if we were to go back to Q2 levels. So there is, actually, we do have quotations out.
We do have certain dates booked, some preliminaries, some fixed. There is increased level of activity from normal. But is it close to the quarter two level? Certainly not.
Last question for me. I'm curious just to get your perspective on, I mean, how close this Q2 performance was to
the functional capacity of Cargojet
the way it's set up right now in terms of the fleet. Was this about as good as
you could expect given the
current infrastructure? Well, let's put
it this way. We certainly put our people and fleet to test. And it certainly showed that if we ever get into this kind of a situation or increased volumes, it certainly shows that we have a lot of utilization that we can put into service if the demand for charters, demand for overnight demand for ACMI came in. And that's part of the reason we have added another aircraft because we're fully expecting that aircraft to be occupied the day it comes in. So what does that show?
That we do have capacity to do these charters on the weekend, certainly during the day, after running over my work and with the additional thing coming in, certainly expansion of ACMI opportunities. Yes. So we stretch our resources all the way to the limit. And certainly, is that sustainable for long term with existing fleet and people? Certainly not.
We added at least 100 jobs temporarily on contract in the past quarter. And we certainly feel that the resources we have currently can handle a lot more than what you saw in quarter one.
Thank you. Next, we'll turn the call over to Korn with Acumen Capital. Please go ahead.
Good morning and congratulations on the great quarter.
Thank you.
So just an operational question
for me. I'm just wondering how the domestic product was able to scale with additional flights in Q2 and what change you might have made going into Q3 based on demand levels?
Good morning, Nick. It's Jamie. I can take that. As Nick had noted, we flew as a result of being able to defer some of our heavy maintenance checks with approval of Transport Canada and then sort of some reengineering of our network that allowed us to free up not only free up some aircraft to take on the international charter business, but it also allowed us to leave the sufficient number of aircraft that we that we've required to meet the growing demand that we had primarily driven by e commerce in Q2. As I noted, we flew about 65% increase in block hours in Q2 versus last year.
The vast majority of those were long haul flights primarily to Asia and back. But we didn't have any issue in terms of capacity on the domestic network.
In fact, we had room for more growth if this
had occurred by double utilizing some of the aircraft during the day than we were what we typically would do during during peak season. We weren't we didn't do that, I don't think we
did it once in Q2. And then just looking toward the opportunities in
charter, I think Adrian said that there were PPE flights to The U. S. Are those opportunities still available? Or are they just side edged with the how the credits have been coming up?
No. The PPE some of the PPE supplies are shipped to Turkey actually, not U. S. Much. But U.
S, there is a lot of supplies coming in. As you know, we do six flights a day for U. S. On detail. And we see a lot of medical and PPE stuff that is coming in from U.
S. On those flights. Those are charter flights. Those are ACMI flights. But our direct, a lot of terminal flights have now shifted into the Turkey.
And what is the frequency of
those Turkey flights expected to be?
Sorry, I didn't hear your question. What is the frequency of the Yes.
It's two to three a month of the
eight to 10 that I had indicated that we would look at doing going forward.
Great. That's all from me. Thank you.
Our next question comes from Kevin Ching with CIBC. Please go ahead.
Hi. Thanks for taking my question here. With the top of PT and E, I think the Canadian federal government is looking for a private logistics
partner to just create a
permanent supply chain solution to move medical supplies like PTV and syringes. Is that something you're looking into? And is that
an end market you would
want to increase your exposure in longer term, just in terms of the nearshoring issues that have emerged through this crisis?
Yes. We're certainly on the list and the opportunities come up for any of the logistics that involve air freight and air cargo and urgency. We're certainly in the mix and as opportunities come in, we certainly have our heads in our fees into those opportunities.
Okay. And just last one for me. It's pretty clear that there's some structural growth here within Charter or ACMI that's given the outlook for that capacity. Just wondering what you think longer term that could mean for growth, potential growth in an international scheduled service, something more permanent or is that difficult to do because of what you said, you have two to four weeks visibility with a lot of your customers and maybe they're not willing to sign on longer term?
Well, the reason people are not willing to go three to five year deals because nobody knows what the demand is going to be. But let me give you one example. Sure, a lot of let's say, for example, companies like DHL who use their own aircraft and commercial lift for international cargo. Now there's not a whole lot of commercial lift and they're doing a lot of charters or ACMI with us and other carriers. The service levels offered by ACMI or charters are superior to belly cargo.
And I think it's a matter of habit. They certainly get spoiled by being on an all cargo aircraft that operates at their convenience, goes from when they want it, goes into it's offloaded within thirty minutes and in the warehouse, we can accept cargo till fifteen minutes of the flight and load it. So, when people see the differences and we've noticed that in many cases, It's the same like when you're sitting home and ordering supplies online, your habits have changed. And we see similar trends in this where we have heard comments from many of our customers who are doing HMI and charters and that the Belly capacity was not available, they've all come back and said, wow, this is like, wait, we can get our drivers out on time, we can get our truck offloaded, we don't have to wait three hours for coming out of the belly if the passenger flight is late or if there's too many bags, the cargo has been bumped. So the level of service people are getting used to, we are hoping that at least some percentage of it will stick going forward.
That's helpful color. And then just one last one from me.
Just give us all the puts and takes. When I look at the swap hours in the quarter, a record number, I guess, in any quarter, when you look at it to Q4 and you get into your traditional peak season, do you think swap hours exceed what you saw in Q2 or do you not have enough to be at this point in time?
Yes, we don't have enough visibility because a lot of hours in Q2 were a lot of charters. We certainly will see an increased activity domestically for sure in quarter four from our indication from our customers that get ready for a bigger peak. But certainly, the block hours domestically will
certainly exceed what you saw in quarter two.
We will go next to Noam Sathir with Laurence Bank. Please go ahead.
Hi, good morning everyone.
Good morning.
So my first question is really on the pricing side. I was just trying to understand if you guys have any room within the charter, so there's further improved pricing. And just if you could remind us on the overnight segment, when will the commercial pricing increment come up for renewal?
So as for the pricing opportunities on charters, we want to be reasonable. We don't want to be seen like, obviously, we were much better than international flights that can't come off and some of the other stuff you saw coming into the company. So our pricing, our capabilities and our service with our superiors and any of the international partners at some of the government agencies initially. Yes, there's opportunities to take better prices. And obviously, U.
S. Dollar is a bigger dollar than our dollar. And we can take those opportunities, but not at the cost of sacrificing what Canadians need in the power. And being Canada's cargo airline, we pride ourselves with Canada First, to be honest with you. And our margins are healthy margins and we're not increasing them in the near future because that would not be right for us to be doing that at this time.
So we price it reasonably compared to others, but we also make it
up with a better service.
And if you could remind us of on the overnight segment when the agreements will come up for re pricing or renewal?
No, we have there's no agreements that are coming up for pricing at this time. But we do not have any sort of COVID surcharges and some of that stuff that other companies have done. We did not go into that. We have longer term agreements in place. We always continue to check with our customers if the demand shifts, what needs to be done, do we need to tweak the price if there is a growth opportunity with them.
We are always in constant discussions for win win solutions between our customers and ourselves in terms of opportunities and how we can improve both of our businesses, whether they're growth oriented and whether they are yield oriented and whatever we do, that's a constant discussion. But as contractually a concern, we don't have any other than normal CPI increases due. We don't have any sort of increases that are out of the ordinary plan, at least for the next few years out. Perfect. That's great color.
And just one last one. I understand there was a solid increase in demand. Have you guys turned away any of the clients in quarter two or were you able to satisfy anyone that came to you for services?
Yes. Internationally, yes. If I had 20 more planes, I think we could appeal that. ECMI wise, yes. We had many opportunities for ECMI as well, both shorter term and medium term opportunities, not from existing customers but new customers.
But our priority has always been our customers have been very loyal to us and our first opportunity, it was certainly opportunities for us that would have given us higher profits and given us more hours to fly and everything. When you look at it, we concentrated on our existing customers and met their demands and we turned away a lot of charter work internationally. We did not turn away any domestic business, obviously, because we were able to accommodate and get some extra flights going. But certainly on that side, yes, we did turn
away a fair bit of business.
That's all from my end, and congratulations on a great quarter.
Our next question comes from Walter Spracklin with RBC Capital Markets.
So you mentioned that you hope that we won't be in a situation where we'll have the same charter revenue in a quarter like this again and that being because of the demand for PPE would indicate something going wrong. But if we do hopefully get a vaccine, won't there be a overwhelming demand for airlift capacity both into Canada from where we put a manufacturer is and then distributed across Canada? In other words, couldn't we see a similar and significant trigger line item here for you in the event that we could get a vaccine?
Yes. We definitely see that vaccine and related supplies or treatment drugs that or test even, for example, if the government rolled out the ninety minute test as UK did and there's 90,000,000 test that have been rolled out that are going to be rolled out in UK, stuff like that would be spot opportunities and we're certainly hearing about it. We're looking at the trends. I think as people, by the end of the year or even before, certainly expect that inquiries that are coming in for charters seem to be all from where vaccine plants are, which is like India, which is like Eastern Europe and all that. So we certainly see that there will be and this is a time sensitive product.
It's not something that you can put on an ocean and wait for it. It's needed. It's needed like yesterday. So there's a lot of supplies around treatments, tests and cure and vaccines that are floating around in the market and people are preparing. So we do get calls on those, inquiring about our capabilities and some of those are from existing clients and government agencies.
So we do think that
Yes. And with the government now signing a supply agreement with Pfizer, have they approached you yet? Or I mean obviously if
they've got that contract in place, they've got to come up with some way
to get it to Canadians. Presumably, I know they have the Minister of Procurement's got a tender out there for the national distribution of that.
What about getting it
into Canada? Any word from the government as to securing something some of your capacity upfront?
With the government, we have had ongoing discussions of not just particular product, ongoing charter capabilities. We certainly participated in that tender from the air freight standpoint. But I think that we are a proven carrier to the government where we did so many of these China flights without a hitch. And we're certainly on their radar. We have discussions with them PPE and other supplies.
We don't like to ask what's in this flight, whether it's but we can certainly guess that this is not a PPE flight. This could be a vaccine flight or this could be some other product, medical products that are needed. Those discussions are always happening with the planning people and inquiring about nothing has been hoped so far. But, Brend, you're absolutely right, will shift from APE to more into test, treatment and vaccines. So let's just go into the future a little bit.
Let's assume for the sake of just
from the hypothetical that the first quarter twenty twenty one vaccine treatment is authorized and available for Canadians. Can we see another charter revenue line that you delivered here in the second quarter in that quarter?
Well, look, I mean, I think there will be certainly an increased activity. Would it be level would it be to the level of PPE? Probably not because if you look at PPE, there's 500,000,000 masks that have come in here, gowns,
gloves,
wipes, sanitizers. I mean, all that stuff was needed and has been stockpiled. Vaccines, even if you look at 300,000,000 vaccines, right? So they will not equate the volume that the PPE was there. But it would certainly be an increased activity from that standpoint.
That makes sense. Yes.
So can you you've very rightly
put dedication
to Canadians on PPE and presumably on vaccines as well. Is there typically, are you thinking about sending aircraft other in between those times of vaccine and now that PPE is going away? Could you have your aircraft go chase now the highest bid internationally even if it's not servicing Canada? Is that an option that you're looking at?
Yes. Is that I mean, now that we have some excess capacity, we are entertaining quotes from the international to international rather than just Canada Postgres. We certainly have dedicated fleets that we could make available at a short notice on it for the Canadian service. But yes, now this quarter, we have started to quote some activities definitely on business in December, business in November. We have certainly been very active in that market to see what's available and what we can carry.
Yes, that does open up, and we are actively pursuing
that. Our next question is coming from Amit Shah with Beacon Securities.
Thanks, operator. Good morning, guys, on a strong quarter. One question for me, maybe on the B2C, if you have visibility, some of the bigger clients are noting some changes in behavior driving grocery demand and the like. I'm not sure if you have visibility into what is going on on your claims from that angle? Are you benefiting from that?
And is there things that you guys can do to be able to carry that volume? Because that seems to be present an uptick demand and the change in behavior and other consumers in that side. Any color on that would be
helpful. Yes.
Good morning, Amit. It's Jamie. I can answer that. Yes, we've definitely seen that's been a part of the growth of e commerce on our experience during the quarter. It's sort of all driven by I think part of it is driven by people working from home and more people being at home and being reluctant to go out to stores.
It includes, interestingly enough, we do carry some of the grocery and some of the food online orders, particularly on certain lanes. If you do find out as an example, out of these parts, we have a large portion of our e commerce business is actually food. So it's definitely a part of the mix.
Daily items, we see a lot more people work from home, and we see a lot of those kind of items now becoming people just when they're out of time to order pants like nobody's going out and buying or if they need any stationery, if they need any daily supplies. So we see a lot of that activity happening, okay? And as the trend continues from work to home, many big banks and turn companies evolve, pull people to work out of the house. And I think we'll see, certainly see that we do see demand staying strong for sure.
That's great. And one more follow-up for me on the pricing. I know you guys have charted on a fair network, but some of the operators in The U. S. Have been passing in price increases and have not noticed any complaints from their retail clients, at least in terms of the price increases.
How is the environment and the discussion, especially as some
of the costs that you
guys have been experiencing related to COVID looks like they're going to stick? So how is the conversation on the pricing with your clients going in that company? How do they understand what's such dynamic?
Look, I mean, we are the only company in our industry that had a hero pay for every one of our employees for four months. We had when we entered that on July 7, we ended up with a sizable bonus to every employee in the company. We have a lot of expenses on PPE. Expenses have come down. SPP is more available now.
Initially, we were buying a mask at $4 Now it's come down to $1.5 or even less. So the crisis of keeping safe have certainly come down as well as PPE and supplies are concerned. I think that we believe in long term customer relations. All of our customers have been with us for fifteen, twenty years. And yes, some of our customers did have search targets.
And rightfully so, because they were delivering a lot of product from business to business shifting from business to consumers. Residential deliveries cost a lot more money and a lot more time than business delivery. You could do 20 business deliveries in the same building where people have to go house to house, costs a lot more for delivery. So today, we're quite justified in those charges. We do not do the last mile or the first mile.
We are the middle mile. Our costs were associated with HeroPay. Our costs were associated with keeping supplies. Our costs were associated with hiring 100 extra people and our cost was associated with overtime. And all these four elements of these extra costs, more than, we were more than compensated to charters and ACMI business.
So we certainly kept our domestic customers at the same price without any surcharges, providing them even better levels of service, keeping our employees safe. And we have long term relationships and we don't look at things short term. If we were really needing it and we were totally out of pocket and it was costing them millions of dollars with no other opportunities to get anywhere else, then we would have selectively approached our customers and said, look, there's a cost of doing business and we're looking for an increase. But fortunately, we did not release really need that we did not need that kind of surcharges from the customers because we were able to make it up with other businesses.
And we will take our final question from Kumar Peskar with Scotiabank.
Just a follow-up, actually. I think, like, obviously, a lot of the space on the pricing side. I just wanted to understand on the cost side. I mean, you obviously had some PPE costs and then some additional pieces that
you've hired those kind of
costs in Q2. Going forward, I mean, if I look at the margins, you had 46% plus kind of margin, EBITDA margin in Q2, which is rather than your typical low 30% usually. How do you see the margins evolve over the next next few quarters? And should we normalize that? Is it low to be?
Or can you still keep around 40 plus
The margins will be, again, as you know, the targeted policy has never been into the guidance of any of that stuff. Maybe we should look at it in the future. But I think our key is that, obviously, we want a certain margin on the businesses we support on, businesses we do. We know whatever domestic margins are. Example, we are paying a fair bit of overtime to our staff right now because that was the only option.
And overtime is sometimes time and a half, double time. Now that we have had time to sit back and relax a little bit, we're looking at more planning like should we continue to pay overtime or should we hire an extra 10 people but bring our cost down? And secondly, also, it's a strain on people as it continues to pay overtime, right? So margins do derive from not only revenue but from cost side. And the revenues are what they are and we will continue to be higher in the charter side and the HMI side.
But certainly, as the domestic business is concerned, we have we are contractually committed to customers for longer term on pricing. We have ability to pass on any increased costs that are government related or regulatory related. Those choices are always available. But one of the things that targeted pride itself of managing its costs in a certain way that we are not we don't have our hands out to the customers every second month that we have, which increased costs. We take some good with the bad.
And it's our job and our ability to manage our costs and overtime and keep our margins the way they are. We have to look in house at why if the margins go down, and the easiest solution is to go ask somebody for an increase, and you might be given once or twice and people will start looking for other companies. So before we go to the customers, our philosophy is to look inside that why our margins are still where they should be. Right. That's okay.
And finally on CapEx, I think there'll be
a new additional aircraft, but you added any expectations around CapEx for this year? And then as you go forward to 2021, obviously, I'm assuming there's no additional aircraft next year, just kind of the C checks you have, what kind of maintenance CapEx would you expect?
Well, next year, we don't at this stage, we don't plan to add any sort of aircraft. I think we are fully now this extra aircraft is obviously brought in because we feel we will need this in the peak time. As Walter had said earlier about vaccine in other areas. Certainly, the kind of work we do right now, we feel the aircraft we added will pay for itself. This year, probably, John, do you have color on this year's CapEx?
Yes.
I think in the previous conference call, we estimated about $100,000,000 healthy extra aircraft. And along with that, one or two spare engines that we're looking at now, about C150 for the full year. I think that's sort of on the high end.
Right. And that would be 60 to 70 inches of maintenance, John? Or that's Yes,
that's right. And our long term weakness CapEx average is anywhere from $60,000,000 to $65,000,000 And so that's sort of a good estimate of next year, I think.
Great. Thanks so much.
Thank you. That concludes today's question and answer session. At this time, I will turn the conference to you for any closing remarks.
Thank you, everybody, for joining private conference call. As I said, our focus remained to make sure that we kept our fleet in good shape and providing the on time service or even better what the customers are used to, utilization of fixed assets and taking advantage of our flexible fleet. And a great team here pitched in. And together, we were able to achieve a key show that how much capacity we can create within our own network. I'm pleased to report that with our great quarter in free cash flow from this quarter and the previous quarter, we have certainly made a big headway in terms of paying down our debt.
And again, our focus remains on improving our leverage, improving our balance sheet and paying down the debt as quickly as we can. So thank you very much and appreciate you guys joining us today.
Thank you. This concludes today's conference call. All participants may now disconnect.