Good morning, ladies and gentlemen. Welcome to the Cargojet third quarter results conference call. I would now like to turn the meeting over to Pauline Dhillon. Please go ahead, Ms. Dhillon.
Thank you. Good morning, everyone, and thank you for joining us on the call today. With me on the call today are Ajay Virmani, our President and Chief Executive Officer, Jamie Porteous, our Chief Commercial Officer, and John Kim, our Chief Financial Officer. After opening remarks about third quarter results, we will open the lines for any questions. I would like to point out that certain statements made on the 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 EBITDAR. Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations of non-GAAP measures to GAAP income. I will now turn the call over to Ajay Virmani, our CEO.
Good morning. Thank you, Pauline, and thank you everyone for joining the Cargojet conference call this morning. On August 23rd, we announced a strategic partnership with Amazon. On September 30th, we started a second ACMI route for DHL between Mexico and Cincinnati, Ohio, adding to the solid foundation of our ACMI line of business and continued growth. On October 31st, we announced our intent to redeem our 2021 convertible debentures, two years early. These moves are in line with our long-term strategy of building strong foundation for growth, as well as our desire to reduce overall leverage and strengthen our balance sheet. Let me now talk about third quarter results.
We posted another strong quarter with 4.7% revenue growth, excluding fuel surcharges, margin expansion, and a strong adjusted EBITDA growth of 24.1% over last year. As I mentioned on our last quarterly call, that we are now positioning each of our business segments for growth with higher margins. We are putting in place the strategic components so that over the long term, our domestic network, ACMI, as well as charters, can be all positioned as growth businesses. During quarter 3, we made significant progress towards this goal. Our domestic overnight revenues grew by 5.5%, largely reflecting summer months of online shopping. Our ACMI business grew 33.3%, reflecting additional routes we added for supporting some of our major customers to service U.S., Mexico, and a couple of other markets.
As for the softness in charter revenues, as we noted at our last analyst call, we made a proactive decision to suspend certain unprofitable routes for South America due to lower global air cargo demand and redeployed aircraft to more profitable opportunities. We expect margin improvements going forward as a result of this decision. We will continue to monitor opportunities, and we will only enter new charter routes if we can meet our margin expectations and targets. Our core emphasis remains on enabling faster deliveries for e-commerce for all of our customers. We were pleased with the growth we saw during the Prime Day sale and traffic during back to school. Also demonstrated new customer behavior. We are now gearing up for our peak season volumes. It is worth reminding everybody that Canadian e-commerce market as a percentage of total retail sale is still behind U.S. and Europe.
Canadian e-commerce remains around 6%-7% range, while the U.S. is almost double that percentage, and Europe being triple of that. We believe we are still in the early stages of harnessing this secular trend and have a lot of catching up to do. Major online retailers are regularly adding new SKUs to the Canadian offering, improving selection for Canadian consumers. We are continuing to see a shift in the shopping patterns. With Amazon's announcement of one-day Prime and other retailers now trying to compete with faster delivery standards, online shopping has now moved to a seven-day-a-week shopping pattern. Major brands are now accelerating their focus on building direct-to-consumer business models, creating more opportunity for air cargo volumes.
This is leading to stronger volumes on the weekends on our network, and we expect to see more of this trend during the peak holiday season. We are also pleased with our fleet utilization metrics and are committed to managing our CapEx prudently. As we see additional growth opportunities, we'll invest in our network appropriately. I'm extremely proud of my team of 1,100 employees because each one of them understands the importance of on-time delivery for our customers, along with safety and security. Our maintenance team works extremely hard to make sure that our fleet remains in top form. Once again, I'm pleased to report that quarter three on-time performance was 99.3%.
This is a key metric for our customers because they have built their first and last mile networks that rely on our ability to meet our commitments. As I shared in my previous remarks, we remain focused on profitable growth while continuing to strengthen our balance sheet. Our medium-term goal is to bring our overall leverage down to somewhere below three times adjusted EBITDAR. I must caution that we are still in a hyper-growth environment in the e-commerce space, and if we are presented with strong growth opportunities with attractive margins and economics that can drive long-term shareholder value, we will not be shy to invest. Let me conclude by commenting on the upcoming peak season. Based on our assessment of shopping behaviors, an increasing number of categories for which consumers are now shopping online.
Based on the estimates and forecasts received from our customers, we believe that this holiday shipping and shopping season is going to be yet another record-setting season. We are fully geared up to support the expected growth and look forward to ending the year on a positive and very strong note. Once again, thank you for joining me this morning. We will now open the call up to questions. With me are Jamie Porteous, our Chief Commercial Officer, and John Kim, our Chief Financial Officer, along with Pauline Dhillon.
Laurie, if you can open up the call line for any questions.
Thank you, Ms. Dhillon. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from David Ocampo from Cormark Securities. Please go ahead.
Good morning, everyone.
Good morning.
My first question is on volumes. This was kind of the focus last quarter, and it still looks relatively weak versus last year. Can you talk about some of the dynamics at play here, specifically B2B, interline volumes, and B2C?
Well, go ahead, Jamie.
Yeah. Good morning, David. I can comment on that. As you're aware, and as you've seen globally, overall air cargo demand is down significantly. I think in Q3 2019, IATA was forecasting about a 5%, 6% global air cargo demand deterioration in volumes. I think most people have seen Air Canada Cargo's press release last week, where they reported 18% reduction in cargo revenues in Q3, primarily from international demand. We're seeing the impact of that. Our interline business is down about 40% year-over-year. Obviously, as AJ mentioned in his notes, one of the actions that we took as we saw that demand deteriorating internationally was suspending the routes to Lima and Bogota and one of our weekly frequencies to Cologne so that we could do two things. One, improve margins and redeploy those assets on more profitable routes, which we'll continue to do.
On the domestic side, the traditional B2B business is relatively flat overall, but that's certainly being offset by the significant growth in e-commerce from multiple retailers on our domestic network.
Perfect. On the pilot shortage, AC has verbally stated that they need to hire a significant amount of pilots for MAX next year. This coupled with new hour of service rules, do you see any difficulties with recruiting beyond what you provisioned for?
Actually not. We had renegotiated our pilot agreement in light of the shortage we were expecting and the market conditions of the new pilot fatigue rules. We extended our agreement with the pilots for another three years up to 2027. We also put in place retention and attraction incentives for the pilots to stay on. Right now, our pilot count is quite up to what we expected it to be and what we need it to be. I think Cargojet has become a very attractive place. We are leading in terms of compensation and working conditions right now. I think the steps we took, certainly we are in a place to attract more pilots that want to come back to Canada, who are expats.
They're flying for various foreign carriers and getting direct entry captain or direct entry first officer jobs on wide-body aircraft is something that neither Air Canada or WestJet can offer to new entrants in the marketplace. We are quite well-positioned for that.
Okay. Kind of last one for me and a quick one. I'm not sure if you mentioned this in your prepared remarks, did you add that regular service Sunday flight?
Yes.
Will that still happen?
Yeah.
Okay. Thank you.
We have a Sunday flight now as per our schedule. In the peak, we are also adding a Saturday flight as well.
Yeah. It's been actually a permanent flight since May of last year, and we recently added a second flight, and as AJ said, we'll be adding a Saturday frequency during peak.
Perfect. I'll hand the call over.
Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead.
Yeah. Thanks very much. Good morning, everyone. AJ, you mentioned another record fourth quarter coming up for peak. You had a pretty tough comp last year with the double digit. Is double digit something we should pull in for volume? Given the difficult comp, is it more kind of mid to high single digit range just in terms of directional?
We certainly expect a better peak than last year, simply because if you remember, a lot of shippers weren't shipping and a lot of consumers weren't buying because of the Canada Post strike going on, and there was a big impact about that. I feel that this year the market is quite normal. E-commerce is in full swing, and I expect this peak to be certainly better than the last peak, and that's what we hear from our customers and their forecasts as well.
Okay. I don't know if Jamie or John is the best one for this one, but your margin has always been better in the fourth quarter because of the economies of scale effect on the fourth quarter, and you had a very strong third quarter EBITDA margin. Any reason, or is there anything in the third quarter margin that won't replicate, and shouldn't we see, again, a better seasonally fourth quarter margin again compared to Q3?
I'll take that, Walter. I can assure you that our focus for this year has been on margins a lot. I do not see anything in fourth quarter that we would have a different trend for margins that we did in quarter three. Keep in mind, we also suspended certain low-margin routes like South America and a few other flights that we used to do here and there, and some charters that were not giving us the required margins. We were able to find those routes that we were to replace with high-margin daily flights, like for example, Cincinnati, Ohio, that kind of stuff. Margin improvement is on the top of our list, and I see no reason in quarter four that there will be any change in that at all. I think it'll get better.
That's fantastic. Okay. That's very encouraging. John, CapEx, any adjustment that you'd make given your view on fleet requirement? I believe, if memory serves you, CAD 200 million for the year in total CapEx guidance, that came down a little bit because you shook one aircraft free. Any update on the 2019 CapEx and any indication can you provide based on your fleet plans for next year combined with maintenance CapEx, what we should be putting into our model for CapEx for 2020?
Sure. Walter, we don't have any change, really, in our fleet plan from the last quarter. What's in the MD&A, we don't expect to add any more aircraft other than the one 767-200 in the first quarter of next year. In terms of 2019 CapEx, we probably will be slightly higher than CAD 200 million. We've been looking in the market for engines and feedstock, and I think we found another aircraft with a couple engines and a spare engine. It might be closer to CAD 210 million by the time we finish up at the end of the year. For next year, in terms of maintenance CapEx, our long-term average is somewhere between CAD 60 million-CAD 65 million per year. We should be close to that. We did buy a bunch of engines this year, which will help us reduce our engine CapEx for next year.
We haven't baked in our CapEx plans as of yet. It should be close to our long-term maintenance CapEx.
Yeah. Walter, our aim is to not increase our CapEx from where we were last year, although we are expecting a slight increase, but we will have to manage it. We have strict guidelines to ensure that our CapEx doesn't exceed where we were last year.
This year was a fairly heavy growth CapEx year with, if we call it, CAD 75 million in maintenance, about CAD 125 in growth. Are you saying that we'll probably get about CAD 65 in maintenance this year, but would we have another CAD 100?
No. I think with the one delivery, which we've already capitalized a lot of the cost for that conversion on our last 767-200, growth CapEx will not be anywhere near what it is.
Right
this year.
Okay, perfect.
We already have bought some engines that we will be using for future years because we've got a better deal. That will bring down that cost as well going forward.
Okay.
I think once we get through our planning cycle, and again, we're always in the market for used engines, primarily. We should be able to give you a better picture of 2020 in the next conference call.
Okay, fantastic. Last question here is on ACMI and charter. Adding another route there September 30th. What could we look for in terms of quarterly run rate now when we add in all the routes? I don't know, Jamie, if you've got any color on any additional routes that you're working on that might pop up in 2020?
I think you could factor in the new route that we added on September 30th. I think we indicated in the MD&A generating about CAD 11 million in additional annualized revenues. You could add that to our run rate that we've experienced for the first three quarters and plan that out for 2020. We're always in discussions with our customers, both DHL and others, about other opportunities, with nothing in the short term right now.
Okay.
We're always looking for opportunities, our customers know it, and we'll continue to do that.
All right. Appreciate the insights. Thanks, everyone.
Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead.
Thank you, and good morning, everyone.
Good morning.
Morning.
Just on the domestic first, just wanted to touch on the previous comment you made. The growth and obviously revenue per operating day has slowed down to 3%, from 8%-9%. I think you alluded to the international weakness, which I think plays into that as well because of interlines, right? I'm just looking for the specifics, if you can provide, on your contract versus the spot business, because you obviously keep 75%-80% for your contracts and then the remaining goes to the spot business. Have you seen any change in that dynamic, like spot falling off a little bit here because that's the business that's more dependent probably on the global trade?
No, I don't think we have seen anything significant drop on the spot. Also keep in mind, Konark, that the business in July, August are traditionally very slow because of the summer months. The only real event we had was a back to school and a Prime Day sale, which kind of helped the whole process. Generally, I would not gauge July and August months for any kind of real growth because 70% of the productions and facilities and warehouses are all shut down for summer vacation. It is very traditionally a slow month. The Interline business, yes, it's not a high-margin business, but it certainly pays for the gas and some. That business, we expect it to bounce back. It's not that business is continuing on to some of the other countries, like South America and all that, but not to Canada, obviously.
I think as some resolution happens on the China trade deal with U.S., I think that business will bounce back as well.
Okay. No, that's great . On the peak season, it seems like you're expecting a decent increase here. Just trying to understand, what are you hearing from your customers in terms of the growth for this peak season? I know UPS just came out saying that, on the flip side, they said they expect a 26% increase in shipping returns on January 2nd. That's pretty high, obviously they expect a lot of returns. On the return side, they're expecting a lot of volumes, on the shipping side to customers, B2C, e-commerce, what are you hearing from your customers in terms of what kind of growth can you see this year in peak?
I can answer that for you, Konark. As AJ mentioned before, there's a couple things that are impacting our peak season this year. I can tell you that from all the e-commerce retailers that we receive forecasts for, we're expecting extremely strong double-digit growth year-over-year, versus peak season Q4 of last year. As AJ mentioned, the other couple other significant factors this year, there's no Canada Post labor disruption that's affecting volumes or affecting shipping patterns. We also have a condensed peak season this year as compared to normal. Traditionally, the last few years, especially from an e-commerce perspective, peak season really starts on Cyber Monday. With U.S. Thanksgiving being a week later than normal this week, on the 28th of November, the peak season really gets into gear starting December 22nd. We're really looking at five weeks worth of volumes condensed into four weeks.
We're expecting a very strong double-digit growth on the e-commerce side.
Okay. No, that's great. Thanks. On the convertible debentures, John, if I may, can you tell us what is the amount outstanding today, and then have you already seen some conversion already by the holders?
Yeah, I think on the balance sheet, because of the way you do the accounting, it looks like about CAD 113.5 million. I think in terms of gross debentures out there, it's more like CAD 119 million. The original amount was higher. We did have some redemptions, typically retail redemptions during the last couple of years, trickle in.
Okay, you haven't seen any material redemptions yet by the holders or conversion?
No. You get a few, and ideally everyone needs to tender those debentures. Otherwise, they get taken out at 95% of market.
Right. Makes sense. Okay. Thank you so much.
Thank you. The next question is from Cameron Doerksen from National Bank Financial. Please go ahead.
Yeah, thanks. Good morning.
Good morning.
Just a question on DHL. They've just announced a fairly large expansion in Hamilton. I assume that's a positive for you. Can you maybe just describe what that potentially means for you with their expansion there?
Well, what it means is that obviously we do a number of functions for DHL in Hamilton. We do the maintenance on that aircraft, we do the ground handling for that aircraft, and we also obviously fly that aircraft for them as well. I think being in Hamilton, which is a great story for all of us, that they do not intend to change their plans coming into Canada, reduce capacity. Hamilton is the hub for us, Hamilton is the hub for them. They were always not sure whether they're going to continue to fly to Hamilton, or they would go into Toronto Airport. We would obviously gear up if they were going there.
I think what it does is it kind of solidifies our alliance with DHL in Hamilton, where we can do a lot of things together now that they have permanently selected that as a big hub.
Okay. No, that's great. Just a second question from me for John, just on the stock warrant valuation gain in the quarter. I'm just wondering if you can maybe just walk through what drives that, and should we expect in the future a gain or a loss each quarter? I know it's just an accounting thing, but I'm just wondering what's going to drive that quarter to quarter, that gain.
Cam, we have to be really careful in terms of the sensitivity to our customers. The information that we disclose, and we're being pretty fulsome in terms of the disclosure that we make and the explanation of the accounting in our MD&A and our financial statements. We really are not going to comment any further if there's some disclosure that you might find useful, we might think about it, but right now we're really unable to comment any further on the accounting of those warrants.
Because of the sensitive nature of the business, and we are a neutral network for all customers, and we like to keep customer information private, not make it public how much they're shipping, what the revenues are, and all that. That's sensitive information for all of our customers, and we'd like to keep that portion of it confidential.
Okay. We should expect there to be a gain, or I don't know if there's potential for a loss, just from an accounting point of view each quarter. Is that correct?
There's some revaluation each quarter. Again, that's all under IFRS. It's a requirement because it's the nature of that derivative.
Yeah. There will be quarterly adjustments-
Yeah
depending on the market.
They'll typically be non-operating.
Right. Of course. Okay. That's fair enough. That's all for me. Thanks very much.
Thank you.
Thank you. The next question is from Doug Taylor from Canaccord Genuity. Please go ahead.
Yeah. Thank you. Good morning.
Good morning.
Another question on the margin profile here. It was very strong in the quarter, and you had some constructive things to say about the margins into Q4. One thing I observed was that you did seem to benefit from your ability to pass through fuel costs versus your realized fuel cost this quarter. Is there something, as you shift some of your volumes or your capacity around, that's changed structurally in how you're charging through for fuel costs, that you expect to see a sustained benefit in terms of the revenue versus the cost line item there?
I think, Doug, if you have seen any of that during the fuel, just keep in mind, when we were flying the South American routes, the fuel was not a pass-through. We had the commercial risk on it. By moving away from that model temporarily because of the lower demand, the global trade and all that, we have gone to the ACMI, which we replaced that aircraft and that route with, where we have no exposure for fuel. I think that's where you might see some improvements. Our general fuel policy remains the same, that customers have a built-in fuel price, and anything over and above that, we follow the index. All customers have their different formulas that we have negotiated with them on fuel. Basically, our policy is that on our normal overnight network or domestic network, we do not have an exposure of fuel increases.
That's pass-through. I think the margins of the fuel improvements are strictly as a result of canceling the flights to South America.
There is the potential for you to recognize more margin there through the cycle, as opposed to just in periods where fuel prices have gone up.
Yes, there is, because even on the charters now, when charters are needed by different customers, we evaluate who are we competing against, what are our options, and we certainly try to increase our margins on those ad hoc charters that we're doing.
Okay. Second, final question from me. Again, building on the previous caller's line of questioning with respect to Amazon, I understand your sensitivity there. Is there anything qualitatively you can say about whether they've changed their behavior with respect to your network at all in following the new commercial agreement?
There was no new commercial agreement. This was a strategic agreement. That's number one. We never changed the commercial agreement. We've had a commercial agreement for a couple of years with them. There is absolutely no change in behavior. There is no discussion on any of the issues. Business is as normal as a customer. There is absolutely nothing I can even tell you that I've even discussed anything with them on the revenue sides or strategic or commercial mix-up. They continue to do business as usual. Canada is certainly a big growth environment for them. They certainly believe that Canada is way behind on e-commerce than the rest of the world and where other Amazon operates in. They have some very strategic and strong growth plans for Canada, and we are certainly part of that plan.
The other thing that has come out in conversations I've had with you in the past is that Amazon often plans pretty far out in terms of their planning for logistics. Can you talk a little bit about what they're talking about for 2020, or if those conversations have started with respect to planning your fleet around what they'd like to do?
Basically, Amazon is a number of ways that we get their business. We get it through a number of our customers. If you look at the example in U.S., although they have 60 planes committed, they'll probably go with more planes. They are always looking for growth. Besides, they grow their own network, which they want to do with us, but they're also growing with many of the customers in U.S. with a double-digit growth. We get Amazon directly. We also get Amazon from two or three of our large customers, and everybody's seeing growth.
The plan that they tell us is that everybody's going to continue to grow with their growth, basically that there is no change or shift that we will get it directly or everybody, they expect that because their business is such that requirements are such that certain customers want certain pickups on a certain day. We're not in a pickup and delivery business, so we'll continue to grow the middle mile to our customers and to Amazon directly. There's no change. Yes, they do some planning far out, but it's not something they do flight by flight or route by route. They just have a general forecast that they give us every six months that we look at and plan our capacity accordingly.
The good news is that all over the next year, what we look at is we can accommodate all that growth in our existing fleet and existing infrastructure without adding any aircraft or any significant capital expenses.
That's great. Thank you very much.
Thank you. The next question is from Kevin Chiang from CIBC. Please go ahead.
Hi, good morning, and thanks for taking my question here. Maybe if I could ask the margin question a little bit differently. If I look at your year-to-date EBITDA margin to kind of, I guess, neutralize impact of IFRS 16, you're up roughly 190 basis points year-to-date, and you've noted you're facing pilot costs, and I guess you had some low-margin charter business that you've exited. When I think of 2020, and it sounds like you'll start recouping some of these pilot costs in the fourth quarter, you'll have cycled through a full-year benefit of exiting some of these low-margin routes. Is there a reason why your margin growth in 2020 can't be higher than what you're experiencing thus far in 2019? Or am I missing something there?
Well, we always strive to get higher margin business, and it's somewhat a function of market as well. Yes, to answer your question on pilot fatigue surcharge, yes, we have implemented that with various customers. We'll see some of it come through in fourth quarter, and some of it will come through in the first quarter. Some of it also will come through the second quarter of 2020. That's strictly covering our cost to make sure that our margin doesn't dip further. It's not something that I think that would be a money maker or it's strictly a cost recovery for us. The second part about the margins in 2020.
As you know, we this year put a special or greater emphasis and focus on that, and I expect that we will certainly maintain or improve our margins strictly by managing, number one, our fixed costs that we have here. We are on a drive to make sure that we're not exceeding what we budgeted for. A lot of little improvements, like for example, if we have a lot of overtime going, are we better off to hire more pilots or more maintenance people? Those kind of analysis continue to do, and those impact our margins a fair bit. Keeping the pricing to a level where we have a fair return on our investment of our cost of invested capital. Return on invested capital is our key measure, obviously, as we go forward.
I think that you will see in 2020, we will certainly maintain or better our margins.
That's helpful. Maybe if I can just ask one on the charter business. You've talked about or you noted that you've suspended some routes there. Are there more adjustments that need to be made in that network, or is the run rate revenue we saw in Q3, is that a good way to think about the quarterly run rate moving forward? Maybe secondly, with the more heightened focus on margins and profitable routes, what does that mean for the long-term opportunity there? Are you less patient to incubate new routes on the charter front?
Yeah, so-
Not, maybe.
Kevin, if tomorrow if the trade deal is signed between the U.S. and some of the, let's say, primarily China and the margins and the business starts flowing as it was in the prior years, I think there is a strong improvement of the margins we can expect on those by two ways. One is that we will get some interline traffic that we can accommodate on the existing routes that will contribute to a fairly significant margin increase because we're not adding any cost at all.
I assume that this is a temporary trend. Two major giants like U.S. and China are not just going to stop doing trade. It's a matter of who blinks first and when the stuff happens. As you know, most of these things are now being settled on a Twitter these days rather than sitting across the table. We expect a tweet to come through any day and saying, "Yes, we are done." I think a lot of inventory is being built up in Far East, from what I hear from our contacts, and a lot of shipping will start as soon as that happens. Besides the interline, there could be also opportunities with our existing fleet to maybe do a Toronto-Mexico flight or a Toronto-Bogota flight or a Toronto-Lima flight or to Miami.
Those opportunities we will take, they might not be as high a margin as we do on ACMI and some of the other stuff, but we are also not just going to walk away, just thinking that we want to keep that margin at a certain level and forget the gross dollars and increase our EBITDA profitability. We're not going to look at facts in isolation about just the margin. When the trade patterns improve, as I said, we'll take the opportunity on the interline because that will come back. That has been there for at least 20 years that I know, and it certainly improved. This is the first time we have seen a dip, and so has Air Canada and so has every global carrier coming out from there. This is why we diversified.
We started looking at ACMI and some of the other seventh day flight and the sixth day flight for our customers here. We were able to replace all that and actually make it better. Same thing we will do when the trade comes back. We will look at those routes again. We have suspended them, we have not canceled them. We are quite open to looking at that opportunities definitely when they open up and we will look at expanding those routes with improvement of trade patterns.
That's helpful. Just is the current quarterly revenue stream you saw in the third quarter or volumes, you saw as that kind of a good run rate to think about?
Yeah
some of these tensions subside here?
Yeah. I think that's probably a good assumption, Kevin.
That's helpful. Thank you very much.
Thank you. The next question, and I do apologize if I don't pronounce this correctly, is Gianluca Tucci from Echelon Wealth Partners. Please, go ahead.
Hi, Gianluca.
Hi, guys. Good morning.
Hi.
Congrats on a pretty good Q3. A bunch of my questions have been answered here, but just on peak season. Do you expect to be flying seven days each week all season?
Yes.
If so, when is the expected first flight of that seventh day?
We've already started the second flight on Sundays, and I believe we start flying the Saturday, the first Saturday flight, sometime around the mid-November to the third week of November.
Okay, perfect.
Technically, we are doing seven days a week if you count the two Sunday flights.
Yeah.
That would be eighth flight we will add on mid-November.
Okay. On the core business today, it's still dedicated six days for each week that you're doing your core business flying?
One of the things as we said last quarter, I maybe remind everybody that the core business is, ACMI is quite core for us today and so is the domestic business. We used to call it core overnight business, a lot of our domestic business is not overnight anymore. We do day flights, we are going to continue to do day flights, we're going to continue to do weekend flights. I think we have taken the word core out because obviously that confused a lot of people and thought that ACMI and charters and some of the other business is secondary. As we have noticed, that business is also equally important to us. I would rather call it market segmentation more than splitting it up rather than core business for us.
Yes, domestic, I would refer to that as a domestic business, that right now we are six days, plus an additional flight on Sunday, so it makes it seven days, but also mid-November, we will have starting some daylight turns as well. At the height of the peak, some of those flights that we're looking at seven flights a week, obviously there's more flights, but it would become probably a couple additional flights during the peak as well, which is traditional for us.
Awesome. Thanks for the color there, AJ. Jamie, you commented on IATA data. Is it fair to say that the Cargojet is somewhat agnostic to that data because of how e-commerce driven and focused the company is?
Yeah. The only reference that I made, or the reason I made the reference for it, is because it does have an impact on our interline business and some of the international. The reasons that we suspended some of the international routes was, again, because lower global air cargo demand, and it certainly affected our interline volumes.
Okay. Excellent. Just one final question here for John. I saw in the MD&A that you amended your credit facility. Can you walk us through the highlights there? I saw that, I think on the 28th of October, it was amended.
Yeah. With the support of our banking syndicate led by RBC, we were able to achieve some better pricing, about 25 basis points on our revolver. We took the opportunity to extend that revolver, so we have a full five-year term now. A committed facility for yet another five years.
All right, guys. Thanks so much.
Thank you, Gianluca.
Thank you.
Thank you. The next question is from Ben Cherniavsky from Raymond James. Please go ahead.
Morning, guys. Most of my questions have been asked at this point. Just if I could follow up for a little more clarification. John, I appreciate the sensitivity of the warrant, but can you at least give us an indication of what the after-tax impact on EPS would have been from that gain?
I think we disclosed the gain in terms of that quarterly sort of revaluation that we have to do using some fairly sophisticated models. In terms of the gain for that non-operating gain, I think it was in the neighborhood of CAD 10 million.
Yeah. Is that after tax?
I'd have to get back to you on the tax effect because in terms of whether we tax affected that number, sorry, just I'm not sure. I can look that up and talk to you about that then.
Yeah, I'm just trying to get an adjusted EPS number that you guys don't disclose it, but it would be helpful to get that information in there, both on the quarter and the nine months. Then on the debentures, there's the potential dilution, if I've done it right, is about two million shares. Do you think that's what the full dilution, should we assume it's all.
It's at CAD 58, CAD 65 strike price, so that's about right.
Yeah. Okay. That's all I've got. Thank you.
Okay, thanks.
Thank you. Once again, please press star one on your telephone keypad if you have a question. The next question is from Nauman Satti from Laurentian Bank. Please go ahead.
Hi, good morning, everyone.
Good morning.
Just going back to the volumes part. I understand that with trade, there is an upside to it, but what would your outlook be like if, let's say, this trade thing continues? We've already seen that 2019 was weak on volume. For 2020, will we still see more contraction, or is it sort of flattens out?
I think we've probably seen the worst impact on the interline business that it has for us, and we discontinued the South American routes. I don't anticipate anything. What we are seeing on interline is bare minimum that is coming into Canada from other carriers. As you know, there is not a whole lot of trade dispute with Canada anywhere. What we're missing is the U.S. portion of that growth that we used to get on the interline. I don't anticipate that global trade would have any significant impact on what we do today. As you know, the driver of our business and the driver of growth is on the e-commerce side, on the domestic network. I don't anticipate that sort of area to be impacted by the global trade issues.
Thank you. That's great color. Just one more. For pilot fatigue regulation and the cost that you would pass on, if you could provide some color on the discussions that you have with customers. Have they sort of finished, like you finalized that process, or is that something that's still going on?
I think we are, besides a couple of customers that they are doing their due diligence with us in terms of whatever cost increases, what's the impact and how we spread it out. I think we are about 70%-80% have gone through with all the customers and put in place a different sort of, as our cost is phased, the approach of surcharges is phased as well. As I said, with the exception of one or two major customers that are in the due diligence, the rest have been all negotiated, and the matter has been closed.
Thank you. That's it from me. Congrats on great results.
Thank you.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Ms. Dhillon.
Thank you. I'm just going to ask AJ to give us any last remarks that he may have.
Yeah. Thank you very much. Again, a lot of questions and hopefully, as I said, our strategies to improve the margins and strengthen the balance sheet, manage our costs, and also manage our capital expenditures, bring the leverage down to three. That would be our goals, and I look forward to the next conference call with all of you with even better results. Thank you very much, everybody.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.