Good morning, ladies and gentlemen. Welcome to the CargoJet Conference Call. I would now like to turn the meeting over to Pauline Doulon. Please go ahead, Mr. Doulon.
Thank you, operator. Good morning, everyone, and thank you for joining us today on this call for the first quarter of twenty twenty. With me on the call today are A. J. Vermani, our President and Chief Executive Officer Jamie Porteous, our Chief Commercial Officer and John Kim, our Chief Financial Officer.
After opening remarks about the quarter, we will ask the operator to open the lines for questions. I would like to point out that certain statements on the call, such as those relating to our forecasted revenues, costs and strategic plans are forward looking within the means 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 assumptions and cautionary statements relating to forward looking information and for reconciliations of non GAAP measures to GAAP income. I'm going to turn the call over to A.
J. Now.
Thank you, Pauline, and thank you, everybody, for joining us this morning. Before I speak to Cargill's first quarter performance, I want to take a moment to thank to talk about this once in a lifetime moment we are all living in. COVID-nineteen has disrupted lives, businesses of billions of people around the globe. Sadly, over four thousand three hundred Canadians have lost their lives. Our hearts go out to the families and their loved ones.
As a business that has been declared an essential service, we have had the opportunity to be in the center of this fast changing environment. While I always I have always been proud of my team, but watching them swing into action and put in place new processes to protect our employees, customers and cargo in record time and still operate at full capacity has been nothing short of remarkable. Harvandeep provided a detailed update on our COVID response in our March 19 press release. We are managing unprecedented volumes, often at short notice and not changes, but our team continues to shine every day just like thousands of other frontline heroes who are serving our country at difficult times. We have had a long history of working shoulder to shoulder with the courier, freight forwarders and postal industries.
While everyone is being asked to stay home, frontline delivery workers, postal courier employees and e commerce delivery personnel are busy delivering essential packages to households allowing them to safely stay home, allowing us to stay safe. Being able to support the vital industry during this pandemic has been a real privilege. I salute each one of the front line heroes. And now let me turn to the targeted first quarter results. We had a very strong start to the year with revenue growth of 11.4%, gross margin growth of 52 and adjusted EBITDA growth of 24.5% of our business is demonstrating strong operating leverage.
While I'm particularly proud of the fact that our growth was not concentrated in this line of business, while domestic overnight held its own, ACMI and all in charter and all our other businesses posted strong year over year growth. With over $29,000,000 in adjusted free cash flow, we posted our best of the quarter in the free cash flow generation. We are well capitalized and have sufficient liquidity to meet our day to day future growth needs as we navigate these uncertain times.
Moving on to operations. We are experiencing some unexpected surge in business
to commerce sorry, business to consumers e commerce volumes, but these are being offset by significant declines in business to business volumes. This is due to the national shutdown of virtually all types of businesses. We expect business to business volumes to come back slowly as the provinces allow businesses to reopen again. As a matter of fact, we have started to see some turnarounds in the last one week already. While it is fair to say that nothing prepares you to face as a challenge like COVID-nineteen, it is worth noting that our ability to rapidly adapt to the new reality is a result of many years of hard work.
We've been putting in place the building blocks of our growth strategy and have allowed us to manage extremely variability in volumes as well as the flight network. The foundation of our business is built in five core strategies that I have mentioned on my previous calls. Number one, build the best overnight cost effective AI network. Number two, maximize fleet and asset utilization. Be relentless about our on time performance.
Build a unique cargo that culture leading to the best and grow in aviation and last fall financial discipline to build long term shareholder value. As we move forward, we will continue to be guided by these priorities. While the long term implications of the full impact of COVID-nineteen remains unknown, Carbide is working hard to adopt to this fast changing environment and the new norm. We have a great team, strong set of assets, highly flexible fleet and we are well capitalized, continue to capture growth opportunities in this changing environment. I want to conclude by once again thanking from the bottom of my heart each and every one of our frontline workers.
And I feel privileged to be part of an essential service that are keeping our country's supply chain moving. Once again, thank you for joining us this morning. We'll open the lines
The first question is from David Ocampo with Cormark Securities. Your line is open. Please go ahead.
Good morning, everyone. Good morning.
Hey, Jay, last quarter, you kind of indicated that you expected the volume for volume to pick up in the back half of the year and to sort of end up up mid single digit. I understand that the pandemic changes everything, but
kind
of based on what you see today and
in your seat, is mid single digits still achievable?
I think if we look at, like I said, business B2B businesses are were down, but we saw some upward trend in the last one week. B2C is up substantially, and I certainly feel that what you would just ask for like in the mid end of the day is certainly feasible. And sort of on the incremental Combining all the lines of business.
Right. And on the incremental charter business that you've been doing, how does the pricing on that, say, versus your base business and even compared to the passenger airlines that are completing those charter owned flights?
So the charter demand is extremely high. Our first priority is to provide these charters to the government of Canada and some of the provinces who are chartering on their own. Yes, they are they have a pretty good margin, but we're not into price gouging or soft gearing at this time as some of the other carriers are. We have a fair margin on it, but certainly not to the level where we're taking advantage of the situation that is out there right now.
And this may be a bit early, but we're seeing kind of passenger airlines retire some of their older aircraft, notably even 767s. Do you guys take that opportunistic view and look to acquire aircraft in this environment?
So yes, number of airlines are retiring 757s and 767s. We will look at those opportunities as they present themselves because there is going to be quite a few aircraft that will be available in the market and that have been retired by these airlines. We only take on aircraft when we have a use for it. We are always working to add aircraft. If there is demand for it, If we can find customers who are willing to take these aircraft, yes, we will go out and buy them.
At this stage, we don't have any plans. But there is also opportunities when these aircraft become available that if they're not to be used as aircraft, they can always be cut off for parts and the engines utilized on our aircraft. So those strategic opportunities, we have always taken advantage of and we're still looking for those in the market.
Okay. Thanks. I'll hop back in queue.
Thanks. Thank
you. The next question is from Doug Taylor with Canaccord Genuity. You are now open.
Yes. Thank you. Good morning. Further to that last question, can you update us on your capital expenditure planning for this year and whether there's been any changes here since your last update in light of the current environment?
We don't have any major changes in the plans that we presented. We have frozen all unnecessary when I say every capital expenditure is necessary, but I would say defer most of the capital expenditures if we can shift them to the following year or the following quarter. The strategy has been to preserve cash during these crises, and we are managing that very well. Outside of, as I said, any other opportunities that come along are extremely great, like in terms of acquiring parts or engines or aircraft that can be cut into parts and utilized in our fleet over the next one year or two years. We are open to those opportunities.
And so we are not we haven't changed any of our capital expenditures from where we were at the last time.
Okay. You mentioned in prior calls and your prior update related to COVID-nineteen that you'd received some relaxation on some maintenance requirements for this year. I guess, I'll ask you if you can talk about the regular scheduled maintenance, how far that can be deferred, whether or not we're going to hit a point where your fleet's just been running flat out for too long and you need to put some aircraft on the sidelines just to do regular scheduled maintenance and things like that or if you can defer all of this a whole year?
So we're working with Transport Canada just to make sure that number one, our safety and security of our equipment is paramount to us. And so what we're doing is we are by aircraft by aircraft, we are deferring some of the major items that are that we call our fee check items that are normally done every two years. So some of them could be deferred up to 20% to 30% of the total time that it takes. We are not deferring anything that's essential. We are doing it in house.
Transport Canada has also been very vigilant in making sure that any of the safety items that are being done, we do it whenever the aircraft is down. So it's kind of a mix of both. Some items have been deferred and some items are being done early and some items are being done now. So the key is to operate these planes safely and also the domino effect like you asked, what would happen if you had to take a whole bunch of them out at one point and not have anything to fly. That won't happen because our planning team is at it.
They're in Tesla Transport Canada almost on a daily basis. And any deferment of any major C checks is conjunction with doing some work early, some going along rather than doing it all at once. We're doing some work early, some a few weeks late and there will be some work that will be deferred. But at one point, this will have a domino effect into next year and those aircraft are also being planned at the same time. So the planning is key to this and we are hard at it.
Okay. Last question for me. You've mentioned the strength in the B2C ACMI charter business, B2B a little bit slower, although starting to potentially come back here.
Can you
give us, I mean for the benefit of the listeners, can you provide a relative proportion of your revenue that comes from the B2B versus B2C within the core overnight so that we can help understand those countervailing trends?
Well, we don't have kind of a segregation because we don't look into what the customers are shipping in their containers. We get a container to Vancouver, we ship a container to Vancouver. But after speaking to our customers, we've been told and advised and watching the trends that their B2B is down, but B2C is up. So the net result of us is not that we are down as a result of this. One thing I can tell you, Doug, is that B2C being up means people are now more used to e commerce solutions rather than going out to the stores.
And we think the trend will continue. And that would certainly balance any decline in B2B. And I think, as I had mentioned in my previous calls, that we are about 7% to 8% of total retail sales prior to COVID on e commerce and the rest was all still traditional sales. I can tell you that after talking to many customers, everybody feels that this will certainly enhance and speed up Canada catching up to U. S.
Where 15% or 16% of the sales are on e commerce and in Europe and Asia, over 20%. So we see that this trend will continue on.
As
a matter of fact, more Canadians are going to buy be buying online. And I think many people that we have talked to have told us that they're now still used to buying at home, sitting at home for the past six weeks. At this point, they have had a taste of this and they really like it. So we think this would enhance and get us closer to what The U. S.
And worldwide percentages are for e commerce.
Thank you, Ajay. I'll pass the line.
Thanks.
Thank you. The next question is from Cameron Dorrington with National Bank. Your line is open.
I wonder if you could
just talk a little bit about the ACME business. What are your customers seeing there? I presume they're also pretty busy with e commerce related volumes. I'm just wondering if you see any additional opportunities either flying the existing aircraft on more routes or potentially new routes with your Acme clients?
Yes. Jeremy, you're on.
Sorry, I had to unmute.
Thanks, Cameron. Sorry, on
what customers specifically were
you asking? Can you please
just on the On
my phone. Yes, just on the Acme business, I'm just wondering what your customers are seeing as far as volumes. I presume they're also seeing pretty strong volumes. Yes. They are actually very strong.
And so equally sort of having the same impact on that part of the business as we see in the core overnight where obviously the B2C business is up significantly B2B down a little bit. One of the things that we've been able to do to take advantage of some of both the ACMI growth and strength and the charter business is through a little bit of a combination of a bit of re engineering of our domestic network flight schedule and combined with, as A. J. Noted, with Transport Canada allowing us to defer some of the heavy maintenance until 2021 has enabled us to free up four seven sixty seven-three hundred aircraft out of our fleet, two of which we've dedicated to doing relief charters to Shanghai from China back to Canada for the Canadian government and various provincial governments that are literally since late March early April been flying daily flights from Shanghai back into Canada. The other two aircraft that we freed up, we've been able to add to our HVMI flying with DHL to take advantage of a shortage of capacity between North America and Europe and have been flying some dedicated routes between Cincinnati and The UK initially and
we've just expanded that for another four
or five months to Brussels and London. And do you think I mean, obviously, with an ACMI rig, you have to long term, you have to add an additional aircraft. But I mean, do you think some of those business will become more permanent longer term? I mean, we think so. I think the spike in volume that we're seeing right now and certainly the lack of demand has increased yield significantly.
All indications are when you listen to and you guys probably know better than we do in terms of what the passenger industry is going to do, but all indications are that as passenger travel starts to come back and depending how many years it takes to do that, I think the last thing to come back is going to be global international passenger traffic. So we think there's going to be a significant reduction in Delhi cargo capacity as compared to what there was pre COVID-nineteen. And I think we're well positioned to take advantage of that opportunity. Okay. Excellent.
Thanks very much.
Thank you. The next question is from Chris Murray with Alticef Capital. Your line is open.
Yes. Thanks guys. Good morning. So just moving maybe on that point, Jamie, can you talk a little bit about
when you
talk a little bit about volumes, can you talk a little bit about yield flow and the pricing environment and how much do you think that's going to be longer term structural with that amount of capacity now permanently in all the markets?
Yes, I think it's going to be I think it will be significant for a long period of time. I think depending geographically in terms of international cargo, I think as passenger airline and belly capacity comes back, there's going to be certainly going to be an impact on yields lowering them a bit. But I think that as it noted, I think global I don't know what the percentages are, but if you look at total global air cargo demand, I think it's down by 56 or not demand, capacity is down 50% to 60% globally because of virtually no passenger aircraft, especially wide body long range aircraft operating around the world. I think that some of that assuming some of that's going to come back, obviously, economically, it's cheaper to put cargo in the belly of passenger aircraft than it is on dedicated freighters. But I think there's some strong confidence that yields are going to stay sufficiently high enough to justify cargo operators, Just not enough cargo operators to meet
the demand today, and I think we're going
to see that for the next couple of years.
And so how does that I guess going forward, how does that change your approach to kind of price volume trade offs? Is there a point where you just start pricing higher and keeping capacity down? Or do you start maybe increasing capacity and moderating price? Like how do we think about the trade off on a go forward basis?
I think you look at it two ways. I mean, I'm speaking specifically more about the international cargo opportunities. I think on our domestic network pricing is pretty stable. It's contractual, so we don't have a lot of impact on that. Internationally, I think where yields are at and pricing are at a level now where it makes total sense for dedicated cargo operators like ourselves to take that commercial risk to fly international routes.
And it depends on how much those yields come down. At a level pre COVID-nineteen, it didn't make economic or commercial sense for somebody like Cartwheel Jet to put a scheduled route on other than selective basis like we've done for the last eight or ten years to Cologne, because yields just didn't justify dedicated cargo operations. If you look at, as an example, our Cologne flight today, the yields out of Europe coming back into Canada are probably three to four times what they were pre COVID-nineteen. I don't expect that those would continue long term, but I don't think they'll go back to pre COVID-nineteen levels anytime soon.
Okay. Fair enough. And then just thinking about maybe potential for growth. You still have the one aircraft, I believe, that's still due September or something like that at a conversion. Just to give you discussions around that aircraft, is that still on schedule?
And then I guess the other question is, I would have to think the capacity is going to get tight to be able to do conversions. But do you guys have any opportunities if you wanted to do conversions? Is there capacity with the shops to actually be able to get that done?
Yes. There is obviously with the when you say the capacity is going to get tighter to convert, the Israeli aircraft industry that does conversions in Tel Aviv has also opened a facility in Mexico where they can do two aircraft at a time. I think, yes, there will be a higher demand for the aircraft, but I don't think that it will be an unmanageable conversion situation. We have an aircraft coming in September that will meet our needs and some growth opportunities at the same time. We also have access if we wanted to lease a bigger aircraft, those are available as well.
I think we'll have to and there are some converted 767s in the market as well. So there will be aircrafts pricing will decline. I don't know whether the conversion pricing will hold at this time or it will go down. But initially, short term, they'll probably hold and then eventually come down. So I think we're well prepared that within the existing fleet and the next aircraft coming in that we will have sufficient capacity to service the business on hand.
Okay.
Thanks. Those are all my questions.
Thank you. The next question is from Norman Patsy with Laurentian Bank. Your line is open.
Okay.
Hi, good morning.
Good morning.
So my first question is with regards to the demand that you guys can manage. I understand that you guys your flight time per aircraft is less than what the industry practice is. But I was just wondering if there is any bottleneck or anything that you guys are concerned about that can sort of hamper this management of this demand?
Well, we are always concerned about the overall economic condition of the world and especially the country. I think that if there is nobody buying any product anywhere, whether it's e commerce or stores, then obviously, we will get impacted at some point. But right now, the wave trend is, the wave it's looking like that there will be people are returning to back to normal. Obviously, if you look at the CBC headlines today, which talks about people are being pushed back into normal, which three weeks ago we were told is not normal. So there are there's obviously a mixed messaging.
This will all depend on how the market performs. We think that the e commerce demand certainly will be on the domestic side will definitely be strong. We also feel that international charters and international opportunities will be strong because the passenger airlines have always or in the past two weeks, whoever has declared results has openly said they don't expect that this will be normal for three years. So if it's not going to be normal, then we know that the white body aircraft that fly internationally and carry cargo are not going to be doing that, which means cargo aircraft will have higher demand. So in the short term and in the medium term, it certainly looks like that the demand for both the e commerce and the domestic side and also the international charters is not slowing down.
Fair enough. And if I recall, do you have the option to purchase the aircraft that you guys are leasing in October 2020? Is that something that you still plan on doing or you're going to continue the lease with them for another three years or so?
No, I think that's a capital lease on that aircraft. We already own that aircraft. The one that we are getting in September, October is already owned by us.
Fair enough. And just if you could provide an update on the pilot hiring. I understand you had to hire more pilots because of the Yes.
So because of the two reasons, we started hiring additional pilots because the pilot coming in December 2020, but also that helped us with additional businesses that additional flying we're doing. And we have been able to hire at least 20 additional pilots at this time and there's a number of them being interviewed and training we should be able to. So our plan is to within the next week to two weeks to have about 40 additional pilots that we will need for two reasons. One is the excess line. One is that we do want a buffer of at least 15 to 20 pilots on hand to mitigate if any of any of the pilots unfortunately cast with COVID being positive, we will need to maybe ground two or three or four and put them in quarantine.
So we would not have the flexibility of the pilots that we have today. So it's sort of two way thing that we're doing. One is to mitigate to make sure that we have enough people on hand if that risk ever arises. And second part of it is to continue meeting the demand and doing charters that we're doing. So we're well positioned on that.
Yes. Thank you. That's it for me.
Thank you. The next question is from Walter Spracklin with RBC Condomakers. Please go ahead. Your line is open.
Hello, this is
Jason Gardel, actually. I'm on for Walter today. Thanks for taking my question.
Okay. I think we lost James. Hello?
Is the operator still there?
Thank you. The next question is from Amina Diwaje with Scotiabank. Your line is open. Please go ahead. Hi, this is Amina, Kornack Sculptors Associates.
I would like to know the progress in your ACMI contracts with DHL and other customers.
So our we already have customer contracts for DHL that we are flying into two flights a day into Mexico. We also have four or five flights that cover between Cincinnati and Canada every day. Present DHL flying that we are doing is on an ad hoc basis into Europe a couple of flights a day. And those are for a period of time, long term contracts at a certain time. But I'm sure that there will be some opportunities for us within the deal, the UHL system to expand.
So there's not much of an update on it other than at this time, we have stepped up for them and we have been able to reconfigurable network to provide capacity to them on two additional flights at the back we needed to Europe.
Thank you. I don't have any more for questions. Thank you. The next question is from Walter Stracklin with RBC Capital Markets. Your line is open.
Hey, everyone. Can you hear me now? Yes. Yes. Hey, this is James Figaro.
I'm on for Walter. I appreciate you taking my question. So when we're looking at your customer conversation due to COVID-nineteen, are your customers looking at change in any meaningful way the structure of your contract?
No, we have not had any sort of indication from any of the customers to change any of the contractual terms at this time.
Okay. And with regards to Air Canada's reconfiguration, how how do you guys see that this is affecting your business?
We are actually not seeing any impact to them because they have keep in mind, they have $800,000,000 of the cargo business that they need to so they're servicing only a portion of their business by doing what they're doing. As a matter of fact, with them getting into the business, that's taken some pressure off us to do some extra charges for our existing customers that we could not we had to say no to. So they're actually helping us and helping the marketplace and helping everybody in this country to meet the supply chain going. With them converting, keep in mind, into they're not full conversions. They're strictly taking the feed cells and put the net in so they can put some more boxes.
And these boxes are mostly, from what I understand, are for PPE and medical supplies and stuff like that. So not one company can handle the load this country needs. So they are technically trying to maintain their customers and help their customers and help us all at the same time. So we don't see any significant change in our business because of that.
Okay. That makes sense. And on the domestic business, is there going to be any impact on mix due to the new volume that you guys are bringing on in Q1 or any of
the PEACH?
No, no, not really. We don't think that will impact us in any way.
Okay. And then my last question here is how can you think about volumes capacity heading into Q2? I know obviously e commerce is strong. We're seeing a reduced capacity due to the lower passenger aircraft demand. So how is your team viewing the demand outlook in the near term?
And kind of related to that, how much capacity you guys have available to meet that demand?
Well, we could at any given night, I mean, to give you an example, if we are handling 500,000 pounds from here to Western Canada, we could, at any given night, increase that by 100,000 to 150,000 pounds at a slip up rate. So we do and we can do turnaround these aircraft in the mornings again to not maybe get there at four or five at the destination, but certainly do it by seven, eight in the morning. So if that was the case, we do have as I said, we have recruited a number of additional pilots. We do have the capacity to do early morning departures in addition to what we do. We can do an additional flight at night and we can also evolve day to turn the aircraft around if there was a demand that needed daytime service as well.
So we're well equipped to handle, I would say, on any given night or given during the day, at least 50% of our additional capacity if we needed to.
Awesome. That's it for me. Thank you.
We have no other questions released at this time. I'd like to turn the call over back to Mr. Damian. Your line is open.
Thank you, everyone, for joining us on
the call today. Wishing everyone a safe and happy and healthy day. Thank you.
Thank
you. The conference has now ended. Please disconnect your lines at this time and please thank you for your participation.