Cargojet Inc. (TSX: TSX:CJT), a key player in the Canadian air cargo industry, has reported a significant increase in its second-quarter revenues, driven by robust growth in its domestic network and charter services.
The company's earnings call revealed a 10.8% rise in domestic network revenues, a 7.3% increase in ACMI (Aircraft, Crew, Maintenance, and Insurance) services, and a record 23.4% surge in All-in Charter services compared to the same period last year.
The co-CEOs expressed optimism for the future, emphasizing their focus on customer satisfaction and operational efficiency. The CFO discussed capital allocation priorities, including a raised quarterly dividend rate, investments in growth, and share repurchases. The company also outlined its fleet management strategy, including the conversion of two Boeing (NYSE:BA) 767-300 aircraft to support future growth.
Key Takeaways
- Cargojet's second-quarter revenues showed strong growth, with significant increases across domestic, ACMI, and charter services.
- The company has entered into a scheduled charter service agreement with Great Visions HK Express, connecting China's e-commerce market with Canada.
- Fleet management strategy includes converting two 767-300 aircraft and adding two new 767s in early 2025 to capture growth opportunities.
- Cargojet's CFO highlighted an increase in the quarterly dividend rate, investments in growth opportunities, and share buybacks as capital allocation priorities.
- Direct costs per block hour increased by 2.2%, with ground costs up by $3.5 million or 21%, while SG&A costs remained flat when adjusted for non-cash, mark-to-market changes.
Company Outlook
- The company anticipates continued recovery and growth in the latter half of 2024, driven by strong demand in all revenue streams.
- There is a strong demand for charters, especially from DHL, with increased demand from China and Europe.
- Cargojet expects to accommodate 15% to 20% growth without adding more aircraft.
Bearish Highlights
- Startup costs associated with the China e-commerce contract are expected to lessen over time, but exact revenue contributions are still uncertain.
- Two aircraft were damaged by a hailstorm in Calgary, affecting fleet availability.
Bullish Highlights
- Record growth in All-in Charter services, with a 23.4% increase compared to the previous year.
- Strong demand for e-commerce charters and potential for upsizing contracts in the second half of the year.
- Diversified business model showing resilience in the current supply chain environment.
Misses
- No chartered aircraft during Prime Week and no significant days in October 2023, contrasting with the current year's strong demand for charters.
Q&A Highlights
- Jamie Porteous discussed Cargojet's agility in initiating new programs and addressing customer needs, despite startup costs and unforeseen events like the Calgary hailstorm.
- Scott Calver detailed the fleet schedule changes, focusing on the 767-300 aircraft to meet market demand and the strategic conversion of aircraft.
Cargojet's second-quarter earnings call highlighted the company's strong performance and strategic initiatives to leverage the growing e-commerce market, particularly between China and Canada. The company's proactive approach to fleet management and capital allocation demonstrates its commitment to growth and efficiency. Despite facing challenges such as increased direct costs and unforeseen fleet damages, Cargojet remains optimistic about its future prospects and ability to adapt to market demands.
Full transcript - None (CGJTF) Q2 2024:
Operator: Good morning, ladies and gentlemen. Welcome to the Cargojet Conference Call. I would now like to turn the meeting over to Mr. Martin Herman, General Counsel and Corporate Secretary. Please go ahead, Mr. Herman.
Martin Herman: Good morning, everyone. And thank you for joining us today on this call. With us on the call today are Ajay Virmani, our Executive Chairman; Pauline Dhillon, Co-Chief Executive Officer; Jamie Porteous, Co-Chief Executive Officer; Scott Calver, our Chief Financial Officer, and Sanjeev Maini, our Vice President of Finance. After opening remarks about the quarter, we will open the call for questions. I would like to point out that certain statements made on this call, such as those related 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, adjusted earnings per share, and return on invested capital. 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. I will now turn the call over to Jamie.
Jamie Porteous: Thank you, Marty. Good morning, everyone, and thank you for joining us on the call today. Pauline and I will share a few thoughts on the macro environment and the factors affecting our business and general business outlook before we pass the call over to our CFO Scott to give you a bit more color on the financial drivers. We are extremely pleased with our second quarter results, particularly in the context of a weak or at least uncertain transportation environment. We have a very talented team at Cargojet, and results like these require a coordinated effort to execute against our strategy, and Pauline and I both want to thank each one of our team members. We have often talked about our entrepreneurial culture and how it differentiates us from the competition. Despite the macro headwinds from the economic slowdown, geopolitical uncertainty, and their impact on overall trade volumes, Cargojet's mix of business has allowed us to continue to grow revenues and not be solely dependent upon any one portion of our customer mix. We recently capitalized on the opportunity to service the fast-growing China-based e-commerce brands with a three-year scheduled charter service agreement with Great Visions HK Express to fly e-commerce products between China and Canada. Global e-commerce supply chains are constantly changing, and Cargojet is at the forefront of identifying these emerging opportunities. As a result, each one of our lines of business posted strong growth rates during the quarter. Domestic network revenues grew by 10.8%, ACMI posted a 7.3% gain, and All-in Charter posted a record 23.4% growth versus the second quarter of 2023. Overall, we posted an 11.5% increase in total revenues during the quarter as compared to the previous year. On the Domestic side, the volumes from our major customers have stabilized and improved sequentially quarter-over-quarter. Our ACMI business continues to benefit from strong global demand, and our ad hoc and scheduled charter businesses is experiencing record growth. While we are encouraged to see the second interest rate cut by the Bank of Canada, we still remain cautious and believe it will take some time for these cuts to show up in increased household disposable incomes. We are still cautiously optimistic in our continued growth expectations until financial conditions ease significantly for consumers and the political climate stabilizes globally. Our ability to harness growth opportunities is closely tied to our fleet management strategy. In prior quarters, we have talked about surplus fleet which was set aside for sale or lease. But significantly new growth opportunities have now absorbed much of our surplus fleet and we have accelerated the conversion of two 767-300 aircraft to prepare for 2025 and beyond. We feel very confident about this decision particularly when considered in the context of reductions in other Canadian operators' freighter fleets and available air cargo capacity, particularly to serve long-range charter opportunities. In mid-January, we laid out our strategic priorities to focus on optimizing CapEx and generating free cash flow, including a framework on how we will allocate capital. Scott will provide more color on how we are progressing against these objectives, but we are very pleased with the speed with which we are adapting our business model to serve the new economic environment and fast-changing supply chains. As we have said many times before, Cargojet is a customer-centric company, singularly focused on putting our customers first and enabling them to keep their promises to both shippers and consumers around the world. This is what makes us successful and builds long-term relationships. Pauline and I now have two quarters under our belt as Co-CEOs, and we couldn't be more pleased with the progress we are making given the macro headwinds facing our industry. We are extremely excited about the future and how we can continue to harness opportunities with the very fluid global supply chains and continue to profitably grow Cargojet's business and provide value for all stakeholders. Let me now pass the microphone over to my colleague, Pauline.
Pauline Dhillon: Thank you, Jamie. One of the most common questions we get when Jamie and I meet with analysts, our investors, and even our customers, how is the Co-CEO model working? Our results today provide the best answer to this question. Q2 was a strong quarter, particularly given the broader macroenvironment for retail sales. We are very pleased with the progress we are making in maintaining our margins as we pursue revenue growth. I would say the Co-CEO model is working quite well at every level within our organization. Let me join Jamie in thanking our team, operating a successful airline requires a finely tuned operational machine that could execute the on-time departures and arrivals to and for our customers. Once again, we achieved 99.4% on-time performance. This achievement is a testament to each member of the Cargojet family who are the true driving force in achieving OTP and ensuring our customers receive a first-class service. A big thank you to everyone on the Cargojet team. Jamie provided some color on our revenues. I will take a few minutes to share updates on our operational efficiency initiatives. Q2 block hours grew 4.8% as we initiated the new scheduled charter service to China, as well as increased ad hoc charters. We have selectively added resources to support this new growth sector. We talked about savings we are generating from our in-house simulators during our last quarter remarks. As we see increased transatlantic flights, more pilots need to be ETOP certified, and these investments we made for our future are paying off today. We continue to see benefits from the cost savings we implemented in 2023. As we scale our business to the new normal, enhancing our information technology capabilities, we will be making investments in this area to prepare a Cargojet for the next phase of our growth. We are carefully enhancing talent and key functions with an eye towards longer-term needs of the company. One of the key skills required to be successful at a Cargojet is resilience. This is a hard trait to find, but it is crucial for us to preserve our entrepreneurial culture. We recently supported Amazon (NASDAQ:AMZN)'s Prime Week in July and August and September are typically back to school shopping months. We are closely watching consumer spending and will be soon shifting our focus to plan for the peak season. We are particularly pleased with the increase in our charter business which is resulting in higher asset utilization as we continue to leverage daytime for charters and nighttime for the domestic network. I'll now turn over this call to Scott for an update on the financial drivers.
Scott Calver: Thank you, Pauline, and good morning, everyone. There are three areas I would like to address. First being an update on our capital allocation priorities followed by a high level view of our adjusted earnings. Lastly, I will provide some commentary relating to various costs disclosed in our second quarter financial statements. Cargojet's long-term capital allocation strategy is to maintain dividend growth, identify and invest in growth opportunities, to maintain a conservative balance sheet as measured by debt compared to EBITDA, and to opportunistically buyback shares. For dividend growth, the company is pleased to announce that the board has approved an 11.25% increase in our quarterly dividend rate. For growth opportunities, investing in revenue growth opportunities is a long-term planning process. The recent e-commerce growth for air cargo coming out of China has proven to be a great opportunity for Cargojet. The three-year agreement that was communicated in a press release on June 10, 2024 is an example of Cargojet's ability to continuously identify emerging opportunities. As the result of this new contract, along with the growth of the ad hoc charters and scheduled charters, Cargojet has secured two Boeing 767 feedstock to replace the inventory of feedstock that was inducted into conversion in the second quarter. As it relates to the share buyback program, year-to-date, Cargojet has purchased and canceled over 700,000 shares at a cost of $84 million. We will continue to assess the program throughout the remainder of the year. The last capital allocation strategy is to maintain a conservative balance sheet. Free cash flow was suppressed in the second quarter, mostly due to the investment in the two 767 feedstock. The longer-term view for potential revenue growth, along with an opportunity to acquire the two feedstock at an attractive price has been an opportunity for Cargojet. Total capital expenditures will be in line with the ranges that have been previously disclosed. However, there will be a slight increase in growth CapEx that is expected to be mostly offset with reductions in maintenance CapEx. Cargojet is expected to close the year with $40 million to $50 million in growth CapEx, $130 million to $140 million in maintenance CapEx, and disposal proceeds of approximately $105 million. Finishing the year with a total capital expenditure, net of proceeds on disposal to be in the range of $65 million to $85 million. In summary, as it relates to the update on the long-term capital allocation strategy, management is pleased with the recent contractual revenue growth opportunity and the prospect for the future. Switching to Cargojet’s adjusted earnings. The non-GAAP measure as defined in the MD&A adjusts for the fair market value changes for stock warrants and the non-cash gain or loss on the swap derivative. There are a couple other non-cash mark-to-market adjustments as it relates to long-term incentive for pilots, management and directors. The 25% share price appreciation in the second quarter resulted in a non-cash expense to crew costs and to SG&A. When you further adjust for these mark-to-market non-cash adjustments and the non-cash deferred tax change that relates to all mark-to-market valuation changes, the adjusted earnings per share for the second quarter is $1.03 compared to $0.68 per share for the same period in the prior year with the same adjustments. All things being equal, an increase of just over 50% compared to prior year. I will finish my prepared comments with a more granular view of our second quarter results. Let me start with direct costs. As we have said in the past, it is recommended when assessing Cargojet’s ability to manage costs, you exclude field expense as the field surcharge program ensures that fuel changes are neutral to profitability. It is best to exclude depreciation as well given the long-term strategic implications. For the second quarter, it is recommended that the mark-to-market non-cash adjustment for pilot LTIP should also be excluded. When this refined focus on direct costs, the direct costs per block hour were approximately $5,325 compared to $5,210 in the second quarter of 2023, a 2.2% increase. This is largely in line with inflationary trends. On the positive side, our investment in the flight simulator is paying off with savings in both travel and third-party simulator rental costs. The Cargojet training classrooms and simulators are booked to capacity as we train new pilots to work towards the optimal level of pilots to support the increased revenue volumes. There is an increase in ground costs of $3.5 million or 21% compared to the prior year. A better comparison is a sequential view compared to the first quarter of 2024 and you will see that the ground costs are essentially flat. A reminder that late in the second quarter of 2023, Cargojet was successful in more than doubling a third-party logistics service that is provided to a strategic customer to scan and sort their cargo parcels. The growth in this revenue is the primary reason for the increase in ground costs compared to prior year. SG&A is mostly flat to prior year when you adjust for the non-cash, mark-to-market changes for management and directors’ long-term incentive. Before I leave Cargojet's cost structure, a few words about the relationship between fuel expense and fuel surcharges and other revenue. A reminder that in the first quarter of 2024, Cargojet experienced maintenance revenue that was significantly higher than a normal quarter. Aside from the maintenance revenue, what is new to the current run rate is a 24% increase in all charter business. All-in Charter business is priced on an all-in basis and therefore there is no requirement for a fuel surcharge. Excluding the business mix change along with the one-time maintenance revenue in the first quarter, the relationship between fuel expense and fuel surcharges and other revenue is consistent to the first quarter, which is also consistent to this year's trend for jet fuel prices. In summary, we are diligently executing on our capital allocation strategy, carefully managing costs and continuing to identify growth opportunities in a fast-changing supply chain that are shifting from one geography to another. Our diversified business model has proven resilient in the hyper-growth COVID environment as well as during an economic downturn in a tough air cargo market. I will now pass the call back to Jamie and Pauline and AJ for any Q&A.
Operator: [Operator Instructions] Our first question is from Betty Yang from Canaccord Genuity (TSX:CF).
Betty Yang: Hey, good morning, guys. This is Betty Yang from Matt Lee. First, I have a question on the two new 767 aircraft that you've add into this quarter that will come into service in early 2025. So, are there any contract opportunities already attached to the new aircraft investment and will this aircraft go into domestic network or will they mostly fly charter?
Scott Calver: Hi, Betty. Thanks for the question. At this time, there is no signed contract to support that investment. And you'll remember back on previous calls, Jamie's always noted that we have existing capacity to grow and he throw out numbers like $60 million. And that's essentially what we accomplished in the second quarter of that press release on the e-commerce scheduled charters. So, what we had planned to maybe take place over the next 12 to 18 months happened very rapidly. So, we had to pivot and replace that inventory of feedstock that was originally planned to have one converted late this year and one next year. We sent them both in to conversion. So we had to pull that plan a little bit more forward and we need feedstock on inventory. That's one of Cargojet's main priorities here that when there is an opportunity that we can pivot quickly and capture that inventory, and really, we just have to have that pipeline of the inventory of feedstock for future growth. And maybe, Jamie, if you just want to comment on some of the opportunities that do support that investment.
Jamie Porteous: Yes. Good morning, Betty. Just to add to Scott's comments, I mean in addition to his comments, obviously, we added the China flying this year, which required more aircraft. As I said in my comments, we've quickly pivoted from this time last year where we said we had four surplus 757s in the fleet, and then as we saw growth opportunities through the -- and we had four up for sale at one time, in fact, and then as we saw growth opportunities emerge throughout the balance of 2023 and into 2024, we reduced it to two, and then subsequently down to, we don't have any surplus aircraft. We're using all of them. We have leased seven, as you're aware. We have leased 767-200 that expires in February. So, one of the 767-300s that we're converting will replace that, and the other one will be a net increase, which with the size of the fleet that we have up at 41, 42, 43 aircraft by the end of 2025, with our heavy maintenance requirements on a fleet of that size, 2025 will be the first year that we actually have, for most of the year, three lines or three aircraft in heavy maintenance at any given time to support the fleet and the network.
Betty Yang: Thanks for answering, just a follow-up question on the [inaudible] contract. Could you elaborate more on how this opportunity arose and how it is progressing so far? Do you see opportunities to upsize this contract as e-commerce demands continue to improve in the second half of the year?
Jamie Porteous: Yes, sure, I can give you some color on that. I mean, it happened fairly quickly. I mean, demand, as you probably read in the media, for e-commerce products coming out of China has somewhat exploded this year. Earlier this year, we had done a few charters out of China back into North America, and then we had, in the spring, early spring, we had a significant multiple number of requests for either ad hoc or scheduled charters coming out of China into North America, into Vancouver particularly. It took us a little bit, not a lot, it took us a little bit of time to sort of drill down and determine who's the actual customer that controls the volume and has the traffic. The customer that we contracted with was already an established player in that market and has been operating and still continues to operate two flights a week with a 777, with a Chinese carrier out of Shanghai into Toronto. So they had established business and wanted to continue to grow. They had demands for capacity to continue their growth into Canada, particularly into Western Canada. Cargojet provided added value, leveraging our domestic network and the fact that we can connect from Vancouver to 15 other cities in Canada was very appealing to the customer. So the contract and the agreement came together fairly quickly, literally within a couple of months, a lot quicker than a normal contract of that magnitude and size. We started operating, we're operating currently three flights a week with the odd, this week we're actually operating four. But three flights a week, we didn't start that until late in the second quarter. I believe our first flight was about May 20th or May 22nd. So we really didn't see, we certainly didn't see the full impact of that agreement in the second quarter. We would definitely see the impact of that in the third and fourth quarter. And to answer your final point, yes, we are seeing significant and actively having discussions with both the existing new customer on that route and other potential customers. There's a significant demand for capacity, particularly between China and North America, and particularly to Canada itself.
Operator: The following question is from Chris Murray from APB Capital Markets.
Chris Murray: Thanks, folks. Good morning. Maybe turning back to your outlook, you made the comment that you're cautiously optimistic about the back half of the year seeing the recovery. So I was wondering if you could talk a little bit about outside of the charter business, what you're seeing in the domestic business and maybe in the ACMI business more in detail.
Jamie Porteous: Yes, maybe. Good morning, Chris. I think my comments were maybe a little conservative, but I think that's sort of the nature of how we've managed the business over the years. Certainly, in what we've seen in the first half of the year, and sequentially, if you look at Q1, I think we were up 6.5% in revenue, and yourself and others were very surprised with that, and we increased that significantly to 11.5% in the second quarter. And despite my cautiously optimistic comments, it is clear that the second half of 2024 is going to be much stronger than the first half of 2024. In really all three of our revenue streams, our domestic revenues in the second quarter were up just over 10% year-over-year, and as I noted in my prepared comments, we've sort of seen sequential quarter-over-quarter, year-over-year growth for all of our customers. And I would say in all three segments, largely driven by e-commerce growth and the continued sort of low penetration rate of online sales in Canada as a percentage of overall retail sales as compared to other industrialized countries. And the feedback we're getting from our customers is, and we see directly on the domestic, just by the nature of the fact, some new customers that, I say new customers, they're not new contract customers but new entrants, primarily in the final mile delivery space that are providing final mile delivery for other Canadian retailers, other than Amazon, obviously, that have obviously improved and grown their online platforms. And that's resulting in new business, as I noted in the prepared remarks. Our major contract customers are giving us feedback that they're seeing strong growth from the e-club primarily from the e-commerce business that they're carrying. Obviously, Amazon, we're seeing a good example this year compared to last year. We had a very successful Prime Week as Pauline noted in her comments that we contributed to assisting Amazon and having, as they said, their best Prime Week ever in Canada. Comparatively going forward, they have their Prime big days in October where they've already asked us for dedicated capacity for some charters for a four or five day period in the middle of October, as well as doubling the charter capacity, at least the request for the capacity in peak season this year as compared to last year where in 2023 we didn't charter, they didn't charter any aircraft during Prime Week. There were no big days in October and we operated some 757s on a charter basis in peak. This year they've asked for a 767, which is 50% more capacity. Feedback from on the ACMI basis, primarily driven by DHL has indicated that they're seeing much stronger demand than last year, obviously particularly out of China, but also to and from Europe that will undoubtedly result in, as we mentioned earlier this year, we ended last year operating 17 or 18 aircraft for them during peak season. We continued initially on a short-term basis with two additional aircraft for a total of 17 that we've been operating all year that have been extended to the end of the year and it's entirely realistic to expect that we'll operate more than that in peak season because of that demand. And then on the charter side, we've reported the charter revenue, obviously a bump has been because of the impact of the scheduled charters that we have with our Chinese customer between China and Canada, but we also had a record quarter the month of June was the first time in the history of our ad hoc charter business that we actually exceeded a charter a day. We had, Pauline had given our charter sales team an objective to do 30 and 30, I think we did 31 charters in 30 days, which is unprecedented. So demand seems to be strong across the board, which kind of my longwinded answer to your question kind of contradicts my cautiously optimistic comment earlier.
Pauline Dhillon: Yes, Chris, just to Jamie's point, we did set an objective in June to do 30 on 30. The team did exceptionally well. We are seeing an increase in ad hoc charters. Certainly what we didn't anticipate the year to begin with, but things have certainly changed in Q2. Canadian consumer is also very price conscious. We're shopping, and they're shopping for more value, so this China business is basically fulfilling that gap for Canadian consumers to have more opportunities and a better shopping environment than what was just available in e-commerce within Canada.
Chris Murray: Okay, that's helpful. Thank you. My other question is just maybe on the fleet mix. I guess we've evolved the 757s moving in and out of the domestic market. Now it looks like you've moved them back in. Can you talk a little bit about how we should be thinking about either the efficiency and the cost profile of those aircraft in the network? I know there were sort of some puts and takes about it. It gave you some more flexibility having a mix of 67s and 57s in the marketplace. I'm just trying to understand when you've got this growth coming at you, are the 57s as efficient as, say, 67s, and I guess really what I'm trying to get at is, on a block hour basis, what should we be like for life in terms of cost profile?
Ajay Virmani: Yes, maybe I'll take that, Chris, it’s Ajay. 757s and 767s are common cockpit aircraft. That's number one. Same pilots, one pilot can get off and they fly one aircraft and get onto the second one. That's number two. Number three, the majority of the parts are very common in that. Our simulator can accommodate the training for both the pilots, so both aircrafts are very complementary to each other in terms of efficiencies, costs. When you have a 60,000 - 70,000 pounds load in any given night, and you do not want to use 767 because it'll take up to 120,000 pounds. So the very fact we can switch resources between one aircraft and the other, this is the most complementary common cockpit aircraft that you can find in the marketplace, that you can switch on a very short notice, providing us the flexibility, efficiency, cost, and customer demand balancing at the same time.
Pauline Dhillon: Yes, and Chris, just to add to Ajay’s comment, 75% of our charters are done with the 757s.
Operator: A following question is from Walter Spracklin from RBC (TSX:RY) Capital Markets.
Walter Spracklin: Good morning, everyone. Congrats on a good quarter here. Maybe coming back to the back half of your outlook and your cautious optimism despite some of the indications that you are seeing it perhaps a little bit more optimistic. When you look at, I guess it is safe to say when you look at your three segments of starting with domestic, your advanced bookings, if you want to call it that, for the backup, particularly for the fourth quarter, sounds like they are significantly above where your advanced bookings were this time last year. Is that a first statement?
Jamie Porteous: Yes, that would be fair, Walter. Yes, absolutely. Last year, as you know, we were relatively flat through the first couple of quarters of the year. That gave us the indication that we were not going to see a significant spike in the latter half of the year. We always, as you know, typically our second half of the year is much stronger in all our revenue segments in the first half of peak season.
Walter Spracklin: If I look at your run rate for ACMI and charter on the second quarter, is that -- do we see a nice pick-up from that given aircraft coming online? Contract purchases and those advanced bookings on ACMI and All-in Charter, or should I look at the Q2 quarterly cadence for ACMI and All-in Charter to be kind of adjusting for seasonality and kind of the run rate we should look at through the rest of the year?
Ajay Virmani: Yes, one second. I'd like to comment just very quick. When you order aircraft, you obviously need to match spare parts, pilot training, so there's always that lang, Walter. It just doesn't show up like you order. There's a lag in between ordering, getting the aircraft, getting it to be certified. The time you order an aircraft, there's a year's worth of cost lag. And so, you can't immediately estimate or say that, okay, it's going to be on day one. But just to be a little cautious on that particular area.
Walter Spracklin: Got it. Okay. Thank you, AJ. And last question here is on your capacity. Jamie, you had mentioned you had kind of that 15% to 20% capacity and pulling that, you indicated that kind of got used up with these purchase or these new customer contracts. When you bring on the two new ones now by the end of the year, are you back at that 15% kind of capacity run rate or perhaps give us a sense of what you have in terms of when we're looking at incremental margin on new revenue, what your capacity is now and what you hope it to be at by the end of the year.
Jamie Porteous: Yes. Just to clarify, Walter, the two aircraft won't come in this year. The two that have been converted, one won't be in until early 2024. Sorry, 2025, correct. And the next one shortly after that, there are, so there's no real capacity increases to our fleet in 2024, the second half of 2024. We still believe we're able to accommodate the growth that we have, and we've demonstrated that I think in the second quarter with the 11.5% growth overall in our revenues without increasing the fleet. I've made previous comments before that, particularly on the domestic network with the mix, and as AJ mentioned, with the flexibility and the uniqueness of both the 757 and the 767 aircraft being interchangeable on different routes, depending on capacity demand that we could accommodate 15% to 20% growth without having to add another aircraft asset. I think we demonstrated that in the first half of the year, but particularly in the second quarter where our domestic revenues were up 10% or 11%. There is still some room to grow another probably 5%, 10% on that fleet without adding any aircraft. And particularly when you consider in the fourth quarter, as you know, we deliberately don't have any heavy maintenance scheduled on the aircraft. We purposely scheduled for that work to finish in late October, the beginning of November at the very most. So we have at least two additional aircraft from our heavy maintenance fleet that are available in November, December to take on the added spike peak requirements in both the domestic and the ACMI business. On the specific answer to your question on ACMI for the balance of the year, I think it's still safe to say we had 7.2% year-over-year growth in Q2, which is kind of in line with what we had previously indicated that we'd have mid to high single digit year-over-year growth. I think that would be the expectation probably a little bit higher than that for Q4 based on the demand that we see globally. Equally on the not necessarily sure we'll replicate the ad hoc and schedule an ad hoc charter growth in the quarter 24%, 25% in the quarter in the subsequent quarters. We'll definitely see a bump because we'll have the consistent scheduled revenue from the China flights that we only had for a month and a bit in Q2. But there would be an expectation particularly in Q4 with the increased demands on our domestic network and our ACMI business that we don't necessarily have the aircraft available 24 hours or seven days a week to achieve the ad hoc charter revenue that we achieved in Q2.
Scott Calver: And, Jamie, maybe I'll just add as well back to your comments that you made when we started the call. It's our intention at this time to not renew that lease February of next year. So you'll see on the fleet table, we're only adding one 767 next year, not two by getting it from underneath that lease.
Operator: Following question is from David Ocampo from Cormark Securities.
David Ocampo: Thanks. Good morning, everyone. Jamie, I just wanted to circle back on your e-commerce business out of China. I think you flagged that your ability to connect to 15 other cities in Canada. One of the main driving factors is why you're able to win that contract. But when I look at the $160 million of contracted business, it does seem like that's only for the three flights that you guys alluded to and there's probably some incremental upside of moving the goods on your domestic network. Just wondering if that statement is accurate and how much of a volume or revenue lift can we expect from moving those Chinese e-commerce goods across your domestic network?
Jamie Porteous: Yes, you're right David. The disclosure that we gave on that agreement was, and the revenue associated with it, that $150 million, $150 million - $16 60 million over the three-year period was based on the three-frequency per week minimum between China and Vancouver. It didn't include any incremental revenue for traffic that they may retender to us in Vancouver beyond to any of the other 15 cities that we operate to. It also didn't include any incremental revenue for additional frequencies that we fly from China to Canada, either to Vancouver or Hamilton, that I fully expect will be part of the growth of that business over the next couple of years, and as I noted before, we're actually flying tomorrow, I think, a flight, a foreflight from China into Hamilton. Hard to quantify what that number is, it's definitely incremental revenue that should fall right to the bottom line, at least to step on the domestic network as it's on traditional backhaul routes where we have more capacity to, that's why it was sort of a win-win for us and very attractive always for us to be able to attract backhaul business out of Western Canada coming back into Eastern Canada, where we traditionally have more capacity than we would have on the headhaul routes in the other direction, and it was certainly -- it wasn't the deciding factor, but it was certainly, as I mentioned before, an added value that the customer greatly appreciated and thought was very beneficial to allow them to potentially limit their costs and their growth by not having to extend aircraft from Vancouver into Central Canada and just use our network on an incremental basis, but it's a little hard to quantify. As I said, we only started flying at the end of May, so we're still a little bit in the learning curve, a little premature to be able to estimate what those revenues could be.
Operator: A following question is from Nick Cochran from Ackerman Capital.
Unidentified Analyst: Good morning and congrats on the fine quarter. Just one question on the China contract. Were there any one-time costs associated with that in the quarter?
Jamie Porteous: Yes, there always is. I mean, for us to start that quickly is my comments at the beginning about how quickly the agreement came together. One of the things that I think Cargojet prides itself on is our flexibility and one of the reasons for our success is the speed in which we're able to, the flexibility and the speed in which we're able to react to customer requirements, whether those are existing customers that need us to do things on an ad hoc or on a peak season basis or new agreements like this one, it would be -- I would say it would be unprecedented for other carriers to be able to start a program from China to North America as quickly as we did with the three frequencies a week that we are flying so. And obviously associated with that would be some startup costs, particularly pilot costs. We may have pilot training, not training costs, but pilot overtime, where we're incurring to draft pilots to fly that route. There may be some additional training costs, as Pauline mentioned in her prepared statement about additional ETOPS pilots that we were required for that. Primarily on that side of things, but those would sort of soften out as we go forward in the next few quarters, the flat minutes.
Unidentified Analyst: That's helpful, and last week there was a pretty significant hailstorm in Calgary where any of your aircraft went back to?
Jamie Porteous: Yes, we had two aircraft that were impacted as a result of the hailstorm. One was the Amazon Prime aircraft that we operate on a CMI basis for them that was sitting in Calgary, 767, as well as one of our own 757s that received a significant amount of hail damage. We've moved those aircraft into Hamilton and are expecting to have those back in service, 757 fairly shortly, the 767, probably another week or so. But we've been providing backup service for Amazon with other aircraft in our fleet to make sure that they don't have any hiccups in service to their customers.
Operator: Our following question is from Jasroop Bains from TD (TSX:TD) Cowen.
Jasroop Bains: Good morning. Thanks, guys. I'm coming for Kim James today. Thanks for taking our questions. We just had a question regarding the change in the fleet schedule. When comparing the Q2 fleet schedule to the Q1, the number of 767-300 increased by two for 2025, which I presume is related to two conversion Jamie referenced in MD&A, however, the number 767-200 owned aircraft also come down by two. Maybe if you could provide a bit of color as to what's driving that decrease in 767-200 aircrafts?
Scott Calver: Yes, the current requirement right now is the 767-300s, and then that's the trans-specific routes that we've been talking about. So in a perfect world, we would have sent the two that were in feedstock into conversion first, and the two that we just purchased in the second quarter would have been in our inventory. But really, the market needs the 767-300s, so kind of reverse that order of the inventory, which just makes sense for us to respond quickly to the requirement.
Operator: We have no further questions registered at this time. Back to you.
Jamie Porteous: Thanks everybody for joining us this morning, and we appreciate your time.
A - Pauline Dhillon: Have a great week.
Jamie Porteous: Good day.
Operator: Thank you. If the conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.
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