Good morning, ladies and gentlemen. Welcome to the Cargojet Special Conference Call. I would now like to turn the meeting over to Pauline Dillon. Please go ahead, Ms. Dillon.
Good morning, everyone, and thank you for joining us today on this special conference call. With me on the call, we have Ajay Vermani, 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 EBITDA.
Please refer to our first quarter press release and MD and 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 A. J. Vermani, CEO of Carvajet.
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 CarbuJets' 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, Carbajep will issue warrants to Amazon to purchase variable voting shares. These warrants will rest based on the achievement of commercial milestones of up to $600,000,000 in revenues over seven point five years. The agreement creates strong incentives for Amazon to continue to grow with Carbojet utilizing our overnight air network as well as our charter services. Carvajit expects this agreement to generate additional revenue growth and be meaningfully accretive to Carvajit's earnings and cash flow over time. Carvajit plans over time to add more nonstop flights along later departures and earlier arrivals to 15 major cities that it already serves and to add new routes selectively as well.
This service and frequency enhancement will benefit all CarboJET customers and will expand CarboJET's reach to approximately 95% of the Canadian population. It is worth emphasizing that a stronger targeted 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 of 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 week service will drive better fleet utilization and further strengthen Carvajet's premium domestic network.
Based on the macro trends we see in the market, we believe Canada remains significantly behind The USA and UK 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
UK. Furthermore, both USA and UK e commerce are still growing at double digit. According to a recent e commerce benchmark study, hyper lead 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 an online retailers in Canada, motivated to bring new ideas that will require more capacity for the for first, middle and last mile deliveries.
This means growth for Carbojet and growth for Carbojet 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 targeted 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 CarGajet the leading cargo airline in Canada today. We are thrilled to be welcoming Amazon to an impressive list of Cargadet'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. The first question is from David Ocampo of Cormark Securities. Please go ahead.
Good morning and 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. So 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's no changes to that.
Great. That makes sense. And in terms of the uses of equity, I think you mentioned in the past that you wanted to be debt free in six years. So you all essentially have a lot of dry powder Amazon exercises on the wines. 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. And 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. But as you know, we only add assets and spend money if there is business to back it up.
And last one for me here. If you if they kind of execute on all the kind of 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 potentially with not potentially, definitely with our existing assets and our existing network with additional flights at various times of the day. So 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. But 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.
But 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.
Thank you. Good morning. Good 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 customers?
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 quarter, 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.
Yes. The reason I'm asking is, I mean, obviously, e commerce is already a big part of the growth drivers in the anticipated revenue growth. So 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. But it certainly gives us more confidence that we will continue to be a partner of Amazon and delivering their services in Canada. But in terms of what does this 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.
So you see it more as potentially de risking that growth profile given the commitment made here by Amazon?
Yes. You can certainly say that's a side effect, though, Mike.
Okay. And one more question for 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, this is 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 of our customers. Growth is 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. Thank
you. The following question is from Cameron Dirksen 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 400,000,000 in, I guess, cumulative direct revenue with Amazon over six point five years. I mean, should I think about that as eventually you would expect to get about $60,000,000 a year? Actually, I guess, over time, it would be more than that, but $60,000,000 a year, is that the kind of the right way to think about what the potential revenue contribution is from Amazon direct over the, I guess, the six point five years?
So I mean, if you want to average it out, certainly that's the way the numbers work. But I think it takes a while to ramp these things up. They're not going to happen like $60,000,000 this year and it's not, as you know, is a science. But 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, and they certainly feel that they have the potential to do that kind of business that we stated.
So I can't say exactly what year how much revenue would happen, but over the course of the term, put in our press release, certainly, they feel that that kind of revenue expectations are there.
Okay. No, that's great. And
do they have I mean, as a
part of this, I guess, agreement now and there'll be obviously a potential shareholder here, are they going to have any say over decisions that you may make as far as your network goes?
So 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.
So no change in network for this particular deal. But 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 Carbajet is a neutral cargo network that provides services to all its customers in a same manner.
Okay. And 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. I mean, we've not so much in The Canada, but obviously in The U. S, Amazon is starting to compete more with some of traditional packaging 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 and about the and we certainly feel that this growth of Amazon that's being contemplated will benefit all our customers, not just us. And we'll continue with that path to ensure that that's the case.
Okay. No, that's great. And maybe just very lastly, it looks like there are some warrants that
are, I
guess, immediately invested at $400,000 Have I got that right?
No.
Yes. So 2.5% that lasts now.
Okay.
And seven point that leaves 7.2%, right? 7.4. They would last over six years, yes.
Okay, understood. Okay, that's great. Thanks very much.
Thank you. The following question is from Kevin Chang of CIBC. Please go ahead.
Hey, thanks for taking my question here. Maybe just on the maybe first for me, just on the $400,000,000 of cumulative revenue and then potentially $200,000,000 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 $400,000,000 or potentially $600,000,000 of cumulative revenue?
So Kevin, 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, but pricing agreements are already in place. We don't anticipate that the $200,000,000 will only be a little bit less because we gave them a pricing discount.
That's not sort of the idea behind this agreement. They will continue to receive pricing that our customers receive for that kind of business. So there is no pricing discounts or commercial elements to this agreement.
And thank you for that. That's very helpful. And And 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 versus this being an additive volume growth lever. So 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.
But like how does this come together and why is this the right time to kind of 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 A. J.
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, which was really 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. So I think that was the most significant thing. And 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 executed, we've proven over the last several years that we execute on our operational plans very successfully. In terms of debt level, as A. J. Mentioned, one of the priorities is to as cash flows, free cash increases is to pay down that debt.
And 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 Cargojug going forward and not looking potentially another operator to operate a network for them.
Yes. 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. And 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. And actually maybe just a follow-up on that. The strategic agreement, let's say, rolls out for another for eight point five years just based on, I guess, when these
seven point five.
Seven point five years, sorry, based on how these things works out. Does the commercial agreement you have with Amazon align with that or will you 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, sorry.
No problem.
Thank you. The following question is from Gianluca Stucci of Echelon Wealth Partners. Please go ahead.
Hi guys. Good morning and congrats on a great announcement.
Thanks, Luca.
So 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. And no, this does not affect any ownership laws because it's only warrants and it's going to be well below the 49% mark.
Okay. Yes.
Luca, I think we've mentioned in previous calls that we are looking to align our bylaws, which are a maximum of 25% foreign ownership with the new 49%, but that has to be done at the next AGM.
Okay. That's awesome. Thanks. And then just on, I guess, the $600,000,000 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, Gianluca.
Okay, great. Fantastic. And
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?
Yes. I mean, 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 cargogets very late in 2015, really for that peak period. And we've seen significant double digit year over year growth since 2016 would have been the first full year. And we've seen with the exception of a bit of a blip in the fourth quarter of twenty eighteen 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. And 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 and other areas, obviously, we become a preferred carrier and preferred partner. And if the opportunities come in, I'm sure we'll be in line.
Excellent. Thank you. And just my final question here. In terms of the expected ramp time of this new strategic agreement, is it safe to assume that like by the first half of twenty twenty, we'll start seeing the, I guess, fruits of this agreement?
There is no real sort of situation that we're going to get £80,000 starting Monday. That's not right. But 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. So this would be a gradual growth. It's not like driven by a certain date.
And I think our present network, which as you know, we have a headhaul and a backhaul situation when we so 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 Jen, Luca, is and 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 forecast for peak periods or this past prime week in July as an example, where they far exceeded their forecast. They give us significant growth forecast and then the actions come in much higher.
That's awesome guys. And just my final question here to confirm that the Selective Agreement today does not change your CapEx plans at least for the near term, right?
Yes.
Agreed. Okay, perfect.
Excellent announcement guys and keep up
the good work. Thank you.
Thank you.
Thank you. The following question is from Ahmad Saff of Beacon Securities. Please go ahead.
Hi, guys. Congrats on this significant announcement. I guess my first question just to clarify, so 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, in terms of CGI price adjustment? Yes.
Okay, great.
And from a strategic perspective and I guess high levels, do you guys would you guys agree that this agreement will answer the question that the the Saturday, Sunday flight is definitely an incremental revenue and not really cannibalizing the Monday to Friday revenue as some might have feared before?
Well, when you talk about that it won't cannibalize Monday's, Monday's flights are so over full 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 Saturday, I'll get it on Sunday. Yes, so instead of ordering it on a Friday, I ordered on a Saturday. So yes, so there will be some cannibalization as the buying habits of various people change. But this will help us move over operations in terms of over seven days over time.
It's not going to happen tomorrow. We are operating a Sunday flight at this time and eventually go to seven days
a week.
So yes, there will be some stuff that people are buying habits will change. And but we expect that with the overall growth every day will be every day of the business we fly will grow.
Great. So yes, so what I meant is net net it's incremental for sure on the for the Saturday.
Yes, 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
any like what any like what type of discussions have you guys had over the potential minimum looks like maybe $150,000,000 minimum will be coming your way from Amazon if they end up exercising all the options. So 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 exercise if they deliver the revenues and exercise the warrants into equity. Yes, we definitely as you know, the site price is almost $92.91 dollars and change. And we will definitely have a good use of capital to reduce our debt and interest payments over time. So that would be the first priority. And then if there's growth opportunities, we'll plug the capital there as well.
Great, great. Thanks for answering my questions and congrats again on the agreement.
Thank you.
Thank you. The following question is from Naman Sethi of Laurentian Bank. Please go ahead.
Hey, good morning, everyone.
Good morning.
You may have already answered it. Just to clarify, there are no warrants that are going to be exercised immediately?
Well, there's 2.5% addressed immediately. I can't tell you what their plans are to convert them into equity at this stage, but certainly the rest thing is there for 2.5%.
Okay. Thank you. And 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 will 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. Vermani.
Yes. So 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.