Good morning, ladies and gentlemen. Welcome to the Cargojet special conference call. I would now like to turn the meeting over to Pauline Dhillon. Please go ahead, Ms. Dhillon.
Good morning, everyone, and thank you for joining us today on this special conference call. With me on the call, we have Ajay Virmani, our President and Chief Executive Officer, Jamie Porteous, our Chief Commercial Officer, and John Kim, our Chief Financial Officer. After the CEO's opening remarks, 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 EBITDAR. Please refer to our first quarter press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliations on non-GAAP measures to GAAP income. I will now turn the call over to Ajay Virmani, CEO of Cargojet.
Good morning. Thank you, Pauline, and thank you everyone for joining us today on this special conference call. We're very excited to be sharing an important milestone in Cargojet's journey. Earlier this morning, we announced a strategic agreement with Amazon. We started our commercial relationship with Amazon back in 2015, and today we signed a long-term strategic partnership that strongly aligns the commercial interest of both companies. Under the new strategic agreement, Cargojet will issue warrants to Amazon to purchase variable voting shares. These warrants will rest based on the achievement of commercial milestones of up to CAD 600 million in revenues over 7.5 years. The agreement creates strong incentives for Amazon to continue to grow with Cargojet, utilizing our overnight air network as well as our charter services.
Cargojet expects this agreement to generate additional revenue growth and be meaningfully accretive to Cargojet's earnings and cash flow over time. Cargojet plans over time to add more non-stop flights, allowing later departures and earlier arrivals to 15 major cities that it already serves, and to add new routes selectively as well. These service and frequency enhancements will benefit all Cargojet customers and will expand Cargojet's reach to approximately 95% of the Canadian population. It is worth emphasizing that a stronger Cargojet network is beneficial to all our existing customers. Whenever we have added a major customer in the past, the expanded and enhanced network was made available to all our customers. This created new opportunity for everyone, and we will continue with that philosophy.
I have previously mentioned that growth in e-commerce and recent industry announcements, including a seven-day-a-week service, will drive better fleet utilization and further strengthen Cargojet's premium domestic network. Based on the macro trends we see in the market, we believe Canada remains significantly behind the U.S. and U.K. in terms of growth, potential, and online shopping. Canadian online retail sales as a percentage of overall retail sales is still around 6%, well below 12% in the U.S. and 20% in the U.K. Furthermore, both U.S. and U.K. e-commerce are still growing at double digits. According to a recent e-commerce benchmark study, hyper-elite shoppers who make more than 41 purchases a year has more than doubled between 2016 and 2018. This trend is just one example of the potential e-commerce growth we expect to see in the future.
This agreement allows us to capture growth as online retailers in Canada motivate to bring new ideas that will require more capacity for first, middle, and last-mile cargo deliveries. This means growth for Cargojet and growth for Cargojet customers. In my remarks during our second quarter earnings call, I shared key priorities with you. You may recall the number one and two priorities were to build the best overnight cost-effective air network and to maximize the asset and fleet utilization. Today's announcement is another step in how we are executing these key priorities. We are the middle-mile backbone that enables our customers to fulfill on their e-commerce promises. We are very proud of the entire team of Cargojet professionals who continue to provide excellent service and value-added services to our customers every day.
Our enviable on-time performance results of 99% for the past six months of this year and our focus on building long-term customer relationship has made Cargojet the leading cargo airline in Canada today. We are thrilled to be welcoming Amazon to an impressive list of Cargojet's long-term strategic customers and ready to support the e-commerce growth in Canada. Thank you for your time.
Operator, we'll now open the lines for questions, please.
Thank you. 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 for the participants register. Thank you for your patience. The first question is from David Ocampo of Cormark Securities. Please go ahead.
Good morning. Thanks for taking my questions. My first one relates to pricing on the incremental volumes. Did you have to give up on price? As I know, your pricing is sort of based on the amount of volume each customer has.
This agreement is strictly strategic and long-term of a relationship and not a commercial agreement. The commercial agreement is already in place, and this is not an area that we dealt with while negotiating this. We already have a customer agreement which deals with the commercial aspects of space and pricing that remains in place, that has been in place for a while, and there is no changes to that.
That makes sense. In terms of the uses of equity, I think you mentioned in the past that you wanted to be debt-free in six years. You'll essentially have a lot of dry powder if Amazon exercises on the warrants. Do you have any plans for the use of capital, or is that just going to be directed at future-
Well, our first priority is to pay down the debt as quickly as we can. Obviously, if there's growth opportunities and we need to spend money to make money and expand the business, obviously we're not going to pass on those opportunities to add assets selectively. As you know, we only add assets and spend money if there is business to back it up.
Last one from me here. If they kind of execute on all the milestones, would you have to add any additional aircraft to the fleet?
At this stage, the plan is for the next couple of years, I think we can handle the growth definitely with our existing assets and our existing network with additional flights at various times of the day. I think the rotation of the aircraft that we have in plan certainly will allow us to do that. I don't see that in the near future, again, if the volume grows, as you know, the e-commerce is growing tremendously in this country, and if we see the need to expand, we definitely will. At present time, I think we can handle it for the next couple of years.
Okay. Thank you.
Thank you. The following question is from Doug Taylor of Canaccord Genuity. Please go ahead.
Yeah. Thank you. Good morning.
Morning, Doug.
For context, could you provide an update on what the Amazon direct proportion of your current revenue is, or the revenue run rate that exists today with that customer is?
Yeah. Hi, Doug. It's Jamie. As you know, we don't provide individual customers' revenue, but I think that over the last discussions that we've had in the last couple of quarters, you can sort of guess what the percentage of our overall business or revenues on the overnight network are represented by e-commerce.
We have confidentiality agreements in place with customers, and we respect that.
The reason I'm asking is, obviously e-commerce is already a big part of the growth drivers in the anticipated revenue growth. I'm just trying to understand what we should be thinking about in terms of what's incremental to the existing growth expectations provided. Is there any way you can help us think about that?
Doug, it's John Kim. I don't think this necessarily changes how we view growth and how we plan for our fleet, as AJ mentioned. it certainly gives us more confidence that we will continue to be a partner of Amazon and deliver their services in Canada. in terms of does this change our outlook for what we expect the growth of e-commerce to be in the next few years, I don't think that really changes that picture.
You see it more as potentially de-risking that growth profile, given the commitment made here by Amazon?
Yeah. You can certainly say that's a side effect of that.
Okay. One more question from me. Does this contemplate just the Amazon direct revenues, or does this take into account some of the derivative volumes that come through Canada Post and UPS but originate on Amazon?
Well, these revenues are directly related as a middle mile carrier, and we do get Amazon from our existing customers as well, and I think growth of e-commerce business that we project and what the industry projects certainly will benefit all our customers. They obviously use various carriers for various needs and various service levels, and we only provide the middle mile, whereas our other customers do pickup and delivery, and I think if we're growing, they will continue to grow with us as well.
I appreciate the color. I'll pass the line. Thanks.
Okay. Thank you.
Thank you. The following question is from Cameron Doerksen of National Bank Financial. Please go ahead.
Thanks, and good morning. Just a few questions from me. I guess firstly, just want to make sure I'm sort of understanding this correctly, the sort of the CAD 400 million in, I guess, cumulative direct revenue with Amazon over 6.5 years. Should I think about that as eventually, you would expect to get about CAD 60 million a year. Actually, I guess over time it would be more than that, but CAD 60 million a year. Is that the right way to think about what the potential revenue contribution is from Amazon direct over the, I guess, the 6.5 years?
If you want to average it out, certainly that's the way the numbers work. I think it takes a while to ramp these things up. They're not going to happen like CAD 60 million this year, it's not, as you know, is a science. I think the customer's plan is definitely to ramp it up to those levels, which will average out to that. They still have to roll out their same-day Prime and other services in Canada, they certainly feel that they have the potential to do that kind of business, that we stated. I can't say exactly what year, how much revenue would happen over the course of the term, put in our press release, certainly, they feel that kind of revenue expectations are there.
Okay. No, that's great. Do they have, as a part of this, I guess, agreement now, and they'll be obviously potentially a shareholder here. Are they going to have any say over decisions that you may make as far as your network goes?
As you know, there is no board representation, or board seat on this deal. We listen to all of our customers to make network decisions. It's a common customer network. We do not change our schedules until we have a buy-in from all of our major customers. If our customers feel that collectively they can improve service, they would tell us, and we would go to all customers. No change in network for this particular deal. If Amazon requires special flights and charters and extra sections, we will gladly operate it. That's the spirit of the agreement, and everybody understands that Cargojet is a neutral cargo network that provides services to all its customers in the same manner.
Just in relation to that, I'm just wondering if you've had any discussions with your other major customers about how they feel about Amazon being a shareholder of Cargojet. Not so much into Canada, but obviously in the U.S., Amazon is starting to compete more with some of the traditional package and courier guys. I'm just wondering if you think there's going to be any, I guess, pushback from some of your other major customers that Amazon is a shareholder of their overnight provider.
Well, Amazon is a reality in the market. Yes, we have had some discussions with our customers about this situation. We certainly feel that this growth of Amazon that's being contemplated will benefit all of our customers, not just us. We'll continue with that path and to ensure that that's the case.
Okay. No, that's great. Maybe just very lastly, it looks like there are some warrants that are, I guess, immediately vested with 400,000. Have I got that right?
No.
Yes, 2.5.
Yeah. 2.5% that vest now.
Okay.
That leaves 7.2, right? 7.4. They would vest over six years. Yeah.
Okay, understood. Okay, that's great. Thank you very much.
Thank you. The following question is from Kevin Chiang of CIBC. Please go ahead.
Hey, thanks for taking my question here. First for me, just on the CAD 400 million of cumulative revenue and then potentially CAD 200 million after that. Is there any contemplation of the price versus volume mix? Let's say pricing is stronger or there's a greater inflationary environment where your pricing is reflective of that. Does that suggest that you could have lower volumes out of them, but still hit this CAD 400 million or potentially CAD 600 million of cumulative revenue?
Kevin Chiang, there's two parts to this. Obviously, this is a very strategic and different kind of a deal. The commercial teams continue to work together. Every quarter, we have a review. Pricing agreements are already in place. We don't anticipate that the CAD 200 million will only be a little bit less because we gave them a pricing discount. That's not sort of the idea behind this agreement.
Okay.
They will continue to receive pricing that our customers receive for that kind of business. There is no pricing discounts or commercial elements to this agreement.
Thank you for that. That's very helpful. I think in an earlier answer to a question, it sounds like this deal, it doesn't dramatically change how you think about the growth within e-commerce and versus this being an additive volume growth lever. Just wondering how this came together. I understand the strategic nature of it, and you've been clear that there's another commercial agreement in place with Amazon that specifically speaks to pricing and capacity and stuff like that. Like, how did this come together, and why is this the right time to engage with Amazon more strategically?
Hey, Kevin. It's Jamie. I think that one of the things from a strategic standpoint for Cargojet, if we looked at some of the risks to our business, one of the risks was Amazon is growing at such an accelerated pace that they're going to need more capacity. They've certainly been beneficial to our network, and as AJ was answering one of the previous questions on do they influence our network or our schedules, they certainly don't, but what they do provide is other opportunities to utilize our assets and to start flights as we had a year and a half ago on a weekend. They were instrumental in requiring the Sunday night operation, which we were utilizing existing aircraft assets for, and then it benefited.
That had the added benefit of being able to provide additional services to our other customers who also started, not initially, but eventually all started into a seven-day-a-week delivery business. I think that was the most significant thing. If you looked at the risks to our business, certainly from an economic standpoint, everybody has that risk. There's nothing we can do about that. From an operational standpoint, I think we've proven over the last several years that we execute on our operational plans very successfully. In terms of debt level, as AJ mentioned, one of the priorities is to, as free cash increases, is to pay down that debt. The other risk that we've had is from an e-commerce standpoint, Amazon is a growing customer, and was there a risk for them to go away?
This was a strategic arrangement to ensure that they were partnered with Cargojet going forward and not looking at potentially another operator to operate a network for them.
Yeah. Our basic reason, one other thing I'd like to add, Kevin, is that it's a growth area. It's a growth story. It's a growth opportunity. Obviously, the side effect of it is that also when you tie up with a growth story, you always end up with retention and for a longer-term relationship.
No, that's helpful. Actually, maybe just to follow up on that. The strategic agreement, let's say, rolls out for eight and a half years just based on, I guess.
Seven and a half.
Seven and a half years, sorry, based on how the deal works out. Does the commercial agreement you have with Amazon align with that, or has there been any adjustment in terms of the length of time of the commercial agreement to align with the timeline of the strategic agreement?
We obviously don't reveal customer agreements, again, for confidentiality reasons, but it's an ongoing agreement that certainly meets the test of all of our. It's in line with our commercial thinking and other customer agreements.
Perfect. That's it for me. I guess congrats on this new announcement here.
Thank you, Michael.
Kevin.
Kevin, sorry.
No problem.
Thank you. The following question is from Gianluca Tucci of Echelon Wealth Partners. Please go ahead.
Hi, guys. Good morning, and congrats on a great announcement.
Thanks, Gianl uca.
Just quickly here, do you have to change your ownership bylaws at all for foreign ownership?
The foreign ownership laws are 49% now, not 25% as it used to be. No, this does not affect any ownership laws because it's only warrants, and it's going to be well below the 49% mark.
Yeah.
Okay.
Luca, I think we've mentioned in previous calls that we are looking to align our bylaws, which are a maximum 25% foreign ownership with the new 49%, but that'd have to be done at the next AGM.
Okay. That's awesome. Thanks. Then just on, I guess, the CAD 600 million in volumes, can you clarify that that's above and beyond your existing business relationship with Amazon, or is that inclusive of your current business?
No, that includes the current business that we're doing with Amazon, Gian Luca.
Okay, great. Fantastic. I guess can you talk about the degree of growth of Amazon in your business overall over the past three years or four years as that endeavor has, I guess, grown or evolved?
Without disclosing exactly the annual revenues that Amazon represents today, Gianluca, I think we've shared with you before that Amazon became a direct customer of Cargojet's very late in 2015, really for that peak period. We've seen significant double-digit year-over-year growth since. 2016 would've been the first full year, we've seen, with the exception of a bit of a blip at the fourth quarter of 2018 as a result of a labor dispute with Canada Post that affected some volumes with Amazon. We've seen significant double-digit growth year-over-year and fully expect that to continue going forward.
Okay. Does this provide any opportunity for ad hoc cross-border ACMI routes with Amazon?
There's always that possibility when you have a relationship with a customer, and if there's needs to look into other flights in other areas, obviously we've become a preferred carrier and preferred partner, and if the opportunities come in, I'm sure we'll be in line.
Excellent. Thank you. Just my final question here. In terms of the expected ramp time of this new strategic agreement, is it safe to assume that by the first half of 2020, we'll start seeing the, I guess, fruits of this agreement?
There is no real situation that we're going to get 80,000 pounds starting Monday. That's not right. The ramp-up would be as quickly the customer ramps up their operation in terms of same-day Prime and other areas they're expanding in. This would be a gradual growth. It's not driven by a certain date. I think our present network, which as you know, we have a head haul and a backhaul situation.
Yeah.
Because this particular customer has fulfillment centers all over the country, we have enough capacity to handle a fair bit of growth on our network today, and also deploy charters as they grow.
The only thing I could ask, Gianluca, I think we've shared that with you in the past too, is our experience with Amazon in terms of growth has been very positive. Coping with growth is really the challenge that we've had. I think we've shared with you in the past that we've had them provide us forecasts for peak periods or this past Prime week in July as an example, where they far exceeded their forecast. They give us significant growth forecasts, then the actuals come in much higher.
That's awesome, guys. Just my final question here to confirm it, this agreement today does not change your CapEx plans, at least for the near term, right?
Yes. Agree.
Okay, perfect. Excellent announcement, guys. Keep up the good work. Thank you.
Thank you.
Thanks, Gianluca.
Thank you. Once again, please press star one at this time if you have a question. The following question is from Ahmad Shaath of Beacon Securities. Please go ahead.
Hi, guys. Congrats on this significant announcement. I guess my first question just to clarify, it's safe to assume that the commercial agreements are consistent with your other agreements on the core overnight network in terms of the Amazon volumes, right?
Yes
The higher price adjustment?
Yes.
Okay, great. From a strategic perspective and I guess high level, would you guys agree that this agreement will answer the question that the Saturday-Sunday flight is definitely an incremental revenue and not really cannibalizing the Monday to Friday revenue, as some might have feared before?
When you talk about that it won't cannibalize Mondays' flights are so overfull that it's kind of sometimes a relief to get some of the volumes out over the weekend. There will be some cannibalization because me as a customer now can expect if I order something from Amazon on a Sunday or a Saturday, I'll get it on Sunday. Instead of ordering it on a Friday, I order it on a Saturday. Yes, there will be some cannibalization as the buying habits of various people change, but this will help us smooth our operations in terms of over 7 days over time. It's not going to happen tomorrow. We are operating a Sunday flight at this time and eventually go to 7 days a week.
Yes, there will be some stuff that people are, buying habits will change, but we expect that with the overall growth every day of the business we fly will grow.
Great. yeah, so what I meant, net it's incremental for sure for the Saturday.
Yeah, I think with the growth, you can certainly say that it's incremental and it's incremental to us directly, and it's incremental to us from our customers as well. Because every e-commerce retailer is growing, so it's not just this one.
Mm-hmm. Great. Just lastly, and maybe you touched upon this earlier, but what type of discussions have you guys had over the potential minimum, looks like maybe CAD 150 million minimum will be coming your way from Amazon if they end up exercising all the options. What other avenues do you guys discuss in terms of using that cash, if any, with Amazon?
Well, I think our priority remains to bring down the debt. If they deliver the revenues, exercise the warrants into equity. Yes, we definitely, as you know, the set price is almost CAD 92, CAD 91 and change. We will definitely have a good use of capital to reduce our debt and interest payments over time. That would be the first priority. If there's growth opportunities, we'll plug the capital there as well.
Great. Thanks for answering my questions and congrats again on this agreement.
Thank you.
Thank you. The following question is from Nauman Satti of Laurentian Bank. Please go ahead.
Hey, good morning, everyone.
Good morning.
Morning.
You may have already answered it, just to clarify, so there's no warrants that are going to be exercised immediately?
Well, there's 2.5% that vests immediately. I can't tell you what their plans are to convert them into equity at this stage. Certainly the vesting is there for 2.5%.
Okay, thank you. Just any idea of how you're going to use that cash or is it?
If they did exercise, again, at this stage, we don't expect additional CapEx, so it'll probably, not probably, most certainly will go towards the debt we have.
All right. That's it. Thank you.
Thank you.
Thank you. There are no further questions registered at this time. I'll turn the meeting back over to Mr. Virmani.
Yeah. Thank you everybody for joining in the call, and we look forward to working with all of you to continue updating you and continue to grow. Thank you very much.
Thank you, operator.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.