Cargojet Inc. (CJT) Earnings Call Transcript & Summary

Good day, and welcome to the Cargojet Canada Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Tomljenovic. Please go ahead.

Good morning, everyone, and thank you for joining us today on this call. With me on the call today are Ajay Virmani, Executive Chairman; Pauline Dhillon, Chief Executive Officer; Aaron McKay, Chief Financial Officer; Sanjeev Maini, VP, Finance; and Rémi Tremblay, General Counsel and Corporate Secretary. After opening remarks about the quarter, we will open the call for questions. I'd 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, 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 our forward-looking information and for reconciliation of non-GAAP measures to GAAP income. I'll now turn the call over to Pauline.

Thank you, David. Good morning, everyone, and thank you for joining us today. We delivered another strong quarter, demonstrating once again the resilience of Cargojet's business model and the strength of our long-term customer relationships despite continued market uncertainty. These results would not have been possible without the dedication of our team members. I would like to take a moment and sincerely thank every member of the Cargojet team for their continued commitment and outstanding efforts as well as thank our customers for continuing to trust Cargojet with their time-sensitive shipments each day. Our premium service built on reliability and consistency continues to differentiate Cargojet. Once again, we delivered an industry-leading on-time performance of 99.2%, reflecting the operational excellence our customers have come to expect. Throughout the quarter, we remained focused on what we can control: delivering exceptional service, operating safely and efficiently and deploying our fleet where it creates the greatest long-term value. Our one fleet approach continues to be a significant competitive advantage. It gives us the flexibility to dynamically deploy aircraft across our network, improve utilization and pursue the highest return opportunities as market conditions evolve. Higher fuel prices and ongoing geopolitical uncertainty remained headwinds during the quarter. Despite those challenges, our resilient business model, disciplined execution and focus on our customers enabled us to deliver another strong quarter. Aaron will provide additional detail on our financial performance in a few moments. Before turning to our business segments, I'd like to briefly comment on our recently completed pilot agreement. We are pleased to have reached a well-balanced 5-year collective agreement that recognizes and competitively compensates our pilots while preserving the flexibility and productivity that support Cargojet's long-term competitiveness. The agreement also continues our long-standing no-strike, no-lockout provision, providing stability and operational certainty for our customers, our pilots and our valued team members. I would like to sincerely thank our pilots, ALPA and everyone involved for their professionalism throughout this process. As customer agreements come due, we will look to pass these costs through. Many of these conversations have begun, but we anticipate a lag in timing. We look forward to building on this partnership over the next years. Turning to our business segments. Our domestic overnight continue to perform well and remains the foundation of Cargojet's business. Supported by a strong customer demand and exceptional service, it continues to play an essential role in Canada's supply chain. Charter flying delivered another strong quarter, including continued support flying for UPS. This business segment continues to enhance fleet utilization, strengthen customer relationships and create long-term value. This year, we were proud to celebrate 25 years of partnership with UPS. We are pleased to continue to fly their charters for the remainder of the end of this year to the end of Q4. We look forward to supporting their continued growth for years to come. One of Cargojet's greatest strengths is our diversified portfolio of long-term customer relationships across our domestic overnight network, charter business, hybrid ACMI, interline and international operations. That diversification provides resilience, creates flexibility and positions us well to navigate changing market conditions while continuing to create long-term value for our shareholders. Our European hub in Liege continues to exceed our expectations. Strong demand, including our recently launched Liege-Tel Aviv service, demonstrates the opportunity to grow our international network by leveraging existing assets while improving fleet utilization. We believe this model can be replicated in other regions as we continue expanding our global footprint. Our interline business also delivered another excellent quarter while growing volumes from our airline partners, further strengthening our domestic network and improving fleet utilization. Our ACMI business remained stable during the quarter and continues to provide an important source of diversified revenue. As opportunities emerge, we will continue allocating aircraft where they generate the strongest long-term returns. Overall, we are very pleased with our performance for the quarter. Looking ahead, we expect the global economic and geopolitical environment to remain uncertain. However, Cargojet has successfully navigated changing market conditions for more than 2 decades by staying focused on what matters: our customers, our people and disciplined execution. We remain confident in our strategy and in the strength of our business. We have exceptional people, long-standing customer relationships and a resilient operating model that has consistently performed through changing market conditions. Together, these strengths position Cargojet to continue creating long-term value for our customers, our team members and our shareholders. With that, I'll turn the call over to Aaron.

Thank you, Pauline, and thank you to everyone for joining us today. Our positive results this quarter reflect the organizational agility that is foundational to Cargojet's business and our ability to deliver disciplined growth across market cycles as we generated $275.8 million of revenue and $87.3 million of adjusted EBITDA, improvements in each metric, both sequentially and year-over-year. As Pauline mentioned, the rising price of fuel had an impact on our results this quarter, and I think it's worth taking a moment to walk through how. Like other industry players, Cargojet generally passes on fuel cost to customers through a surcharging mechanism. Because fuel surcharges increase revenue in direct proportion to changes in fuel costs, we do not expect them to have a material long-term impact on profitability. As a result, when fuel surcharges increase significantly, reported adjusted EBITDA margins can become temporarily diluted. In the second quarter of 2026, that dilution amounted to approximately 260 basis points of margin with no material impact on adjusted EBITDA itself. During the second quarter of 2026, excluding the impact of fuel price increases versus the second quarter of 2025, we generated revenue of $250.1 million, an increase of $11.9 million or 5% year-over-year. Our domestic overnight network generated second quarter revenue, net of the impact of fuel price pass-throughs year-over-year of $104.9 million, an improvement of 3% year-over-year and a slight improvement sequentially. During the second quarter of 2026, our hybrid ACMI business generated revenue of $54.7 million, representing a slight sequential improvement from the first quarter of 2026, but a 12% decline year-over-year as the transition from East-West transoceanic flying to North-South intra-Americas flying had not been fully completed in Q2 of 2025. Our charter business continued its strong performance during the second quarter, generating $54.7 million in net revenue, representing 37% year-over-year growth as we continue to see success with our Liege service, Central and South American charter partner and support flying for a previous MD-11 operator. While long-term visibility remains somewhat limited, priority air cargo continues to be one of the few reliable options for customers requiring certainty and speed in moving critical shipments. This makes it a valuable service for many customers despite the current market environment. Our revenue growth, combined with our continued focus on revenue quality, cost control and fleet and flight-level asset utilization resulted in another strong quarter of adjusted EBITDA. Adjusted EBITDA was $87.3 million compared to $80.2 million in the same period last year, while adjusted EBITDA margin of 31.7% when adjusted for the approximately 260 basis point compression as a result of fuel price increases represented a slight year-over-year improvement in the core business. Our focus on fleet and flight-level asset utilization and ongoing cost management initiatives contributed to strong free cash flow generation of $56.2 million during the quarter. This represents a significant improvement from the $72.5 million cash outflow experienced in the second quarter of 2025. Our capital priorities remain unchanged, and our strong free cash flow generated during the quarter further supported our deleveraging efforts, resulting in a reduction of our leverage ratio to 2.6x at quarter end, well on the path to our objective of below 2.5x. Consistent with our capital allocation priorities and our commitment to returning capital to shareholders, we also repurchased 121,390 shares during the second quarter of 2026. We will continue to evaluate opportunities to repurchase shares when we believe they represent an attractive use of capital. Before I conclude, I want to provide some additional context regarding our recently completed 5-year pilot agreements. As Pauline noted, we're pleased to have concluded a new agreement with our pilot group that moves us more towards market standards of both compensation and operational productivity. Effective July 1, 2026, our pilots will see a wage increase of 26%, followed by annual increases of 5% over each of the subsequent 4 years through June 30, 2031. Just as the agreement brings our pilot group more in line with market on wages, it also includes several productivity provisions, which bring us closer to market standards, including moving us from a baseline of 15 to 16 working days per month with an option for those who value the current work-life balance to stay at 15 days for most of the year with proportional compensation. These improvements bring our business more in line with the market. As Pauline noted, a key component of this agreement is the continued inclusion of the no-strike, no-lockout provision, which recognizes the different operational requirements between cargo and air passenger carriers as the provision provides our customers with confidence in the continued reliability and stability of our operations. For clarity, crew costs as reported in our financial statements include several costs which are not directly driven by wages, including per diems as well as hotel and transportation costs. Costs driven directly by wages have historically represented approximately 60% to 65% of the total crew costs reported in our financial statements. Overall, we believe this agreement provides the appropriate balance between recognizing the important contribution of our pilots, maintaining our competitive position and providing the long-term operational certainty required by our customers. Absorbing these costs without long-term impact to our margins is critical to our business. As you know, we've been focused on cost control initiatives for some time. And as Pauline mentioned, as customer agreements come due, we will look to pass through the additional cost increases. That will take some time to work through, but I'll note that some of these conversations have already begun. And with that, I'll hand the call back to Pauline.

Thank you, Aaron. In previous quarters, we have highlighted the elevated levels of volatility and uncertainty across our markets. As we move through the third quarter, these challenges remain, but we are also seeking new opportunities to emerge. Our partners continue to grow, which gives us confidence that their growth will create additional opportunities for Cargojet. More importantly, we remain focused on pursuing selective and accretive international growth opportunities that leverage our existing fleet. We have said many times that Cargojet is built for change. What has become evident during this quarter is that we are also built for disciplined growth. Our business continues to evolve. Over the past several quarters, we have challenged ourselves to identify opportunities for improvement across our entire organization from finance to sales and technology to operations. While the foundation of Cargojet will always remain the same, a stronger and more agile Cargojet continues to emerge. I understand that change can be challenging. That is why I want to extend my sincerest and deepest appreciation to the entire Cargojet team. It is their hard work, their commitment and their belief in this organization that continues to drive our success. With that, operator, we'll take questions.

[Operator Instructions] Your first question comes from Konark Gupta from Scotiabank.

Congrats on a good quarter. I want to dig into the ACMI segment a little bit here. DHL recently reported their quarterly numbers and it seems like they're seeing a volume inflection in their Express segment. I guess those are your customers, obviously, one of the biggest customers you have. Just curious, when do you see the inflection in your ACMI business with them? I mean, is there any disconnect between what you do versus what they are seeing in their volumes? Or they haven't yet given you sort of incremental volumes for the next little while?

Yes, Konark, I'll take that question. No, they haven't given us any indication at this time. But we have a very strong relationship with DHL. We've always been their first-in and last-out operator. As their volumes continue to grow, we definitely look at that as opportunities for Cargojet's ACMI growth.

And the only other thing I'll add there -- it's Aaron here, Konark. The only thing maybe I'll add is by the end of Q2 last year, we had completed the transition to the North-South intra-Americas flying for them. So I would expect, from a comp perspective, as you look forward to future quarters, you'll be more in line. You won't see the same annual declines.

I see. So the comp effect will normalize going forward in the second half, right? But we should not expect maybe a big turnaround in volumes, if I understood correctly.

Well, we anticipate that they will grow because that's where they're trending at this point. Their projections for Q3, Q4 have all indications that ACMI and their volumes will grow. And as I stated earlier, we are their first preferred partner of choice. We're the first in and the last out. So as market trends change as global flows increase, we're positioned well to take on any additional ACMI flying that they may have.

Understood. That makes sense. And maybe on the fleet side, so it seems like you haven't changed anything for the fleet plan. But I noticed that this is a 767-200 that you guys are converting right now that's coming in 2027, you're looking to offload that. So what's the rationale for not including in your fleet? I mean, do you have enough capacity to absorb future demand? And do you have any excess fleet from the recent transaction with 21 Air that you might also be looking to divest?

Yes, Konark. So we're looking -- I mean, we've been looking for the last little while at an exercise of sort of cleaning up the balance sheet and looking at assets that we can either make use of or monetize. And this is one of those 2 airframes that we've mentioned in previous quarters we've had as feedstock. So this is part of those efforts of looking to clean up the balance sheet. Right now, we haven't added it to the fleet plan because we're considering some opportunities to invest in aircraft. But to your point, I think we've said over the last year, if and when we have material accretive growth opportunities that we can generate strong ROIC with a new asset, we'll look to do that.

Your next question comes from Walter Spracklin from RBC Capital Markets.

This is James McGarragle. I'm on for Walter this morning. I just wanted to ask for a progress update on the revenue per aircraft for the One Fleet strategy. So you mentioned last quarter, some of the DHL aircraft are now available for incremental charter opportunities. So can you just quantify how much incremental revenue was generated in Q2 from DHL aircraft? And how much more opportunity is there from here with this strategy as we look into the back half and into 2027?

Yes. I think it's going to be tough for us to specifically say how much incremental revenue is generated from those particular aircraft. I think we'll continue to look at opportunities where either aircraft are underutilized or they're sitting for a period of time. So a great example, as Pauline mentioned in her prepared remarks, the launch of our service from Liege to Tel Aviv. When we launched the Liege service earlier this year, we mentioned that it was using an aircraft that was otherwise idle over the weekend. That aircraft in Liege sits for a period of time. And so we've been looking for opportunities to use that and Tel Aviv emerged as a winner for us. So from an overall network point of view, it's looking at those sorts of opportunities of where we can pick up incremental work with aircraft that are otherwise sitting.

Yes, James, just to add to what Aaron said, our One Fleet strategy is working well for us. It's improved our yields without growing any CapEx. Just to add on what Aaron is saying, we are exploring opportunities to utilize our fleet, but ensuring that we have the most accretive routes that we deploy on. The hybrid ACMI fleet has also allowed us to operate for that customer on their schedules and block-hour agreements that we have in place. But we're able to utilize those assets when they are sitting idle. We're doing a number of charters from Miami into South America, into North America. And to further Aaron's point, when the assets are sitting in Canada and they're not being utilized, whether they're on the East Coast or the West Coast, we're deploying those assets. In November, when we launched the Liege route, we were very optimistic with it. And today, we're very pleased with it. And we were able to extend that. And today, when the asset just would remain here in North America, it's being utilized to fly to Liege, and we've been exploring opportunities, and we continue to explore opportunities, and we're very successful in deploying into Tel Aviv. On the other side of the nation on the West Coast, we are now looking at charter opportunities into China with those assets that sit in Vancouver. So we're constantly looking for new opportunities with the One Fleet strategy, and we're very pleased with the outcome of it. I hope that answers that question.

Yes, yes, that does. I appreciate the color. And then just on the charter business, obviously, that was a standout in the quarter. But can you just help us break down and understand how much was driven by sustainable new routes, and any impact from the MD-11 grounding and potential onetime ad hoc activity? Just want to get a better understanding with the MD-11 winding down to Q3 or potentially into the back half of the year, how we should be thinking about the charter run rate ex the MD-11 uplift.

So the MD-11 is now extended until Q4. It's really hard for us to determine the charter revenue per aircraft, primarily because that's what we do. We look for opportunities to utilize the assets when the assets are not operating, whether they're for the ACMI customer or for the domestic network.

Your next question comes from Tim James from TD Cowen.

I guess my first question, returning to the new pilot agreement. You've outlined the annual wage increases there while highlighting kind of the productivity improvements. I just want to focus on that a little bit because that's obviously an important component to forecasting over the next couple of years as opposed to just thinking about the wage increases. Is there any sort of more color you can provide us or kind of help in terms of kind of shaping up expectations on what productivity improvements really mean and how we should think about those in terms of our modeling and forecasting going forward?

Yes. Tim, it's Aaron here. I think one of the things I mentioned in the prepared remarks was this moves us closer to sort of an industry standard of work days per month. So I think everyone we've talked to know that we've been a bit low on that metric versus the rest of the market. What that means is the pilot group will be flying a bit more per person. And so it will probably take a little bit of time to fully realize the benefits of that as we grow into it. Our pilot group today is, I think, of a good size for our business. As you know, we've spent some time over the last year optimizing for the reserve pool and overtime. I think as we continue to grow through the next couple of quarters, you'll see us utilize that additional time more and more effectively.

Tim, it's Ajay. I'll just weigh in on -- as Aaron indicated that our work days used to be 15 per month per pilot is now going up to 16. And also some of the training days, which would be, say, over the next year, at least 2 to 3 training days on top of that a year. So as we move forward with the wage increases, which were behind the industry, our productivity also lagged, which is now becoming closer to the industry as well. So while giving the pilots flexibility, if they want to work less, 15, then they get prorated and get paid less. So while the wages are now matching the industry, the productivity is also catching up with the industry, which we lagged. So I think combine that with our ability when the contracts with the customers come due to ask for those increases will put us in a better position overall.

Okay. And then my second question related is the -- as we look at crew costs today, I know last year, there were some heightened costs related to training and to overtime, if I'm not mistaken. Have those sort of impacts more or less normalized now as we think -- if we look at Q2 as sort of a base case? Or are they still sort of higher than they would be at a steady state under normal conditions?

So I think some of them have normalized in Q2. But with these productivity improvements, they would further be normalized or get reduced as we go on.

Your next question comes from Cameron Doerksen from National Bank.

I just wanted to ask about the domestic network. Just if you can comment maybe on what kind of trends you're seeing there. Obviously, some decent revenue growth. But just what do you see into Q3 and Q4 from your customers there? And have you got any, I guess, early indication on peak volumes from your customers yet? Or is it maybe too early to tell?

Yes. No, I'll take that question. July has been strong. We are continuing to see strong growth in our domestic. It's probably driven by e-commerce. I often refer back to a change that we've seen in patterns here to secondary markets. When the Hudson's Bay sort of closed their doors, we've seen more B2C, it seems like the secondary markets now are not going to retailers. Retailers aren't carrying inventories as they were. They're moving into more of the warehousing. So we're seeing an uptick on e-commerce, primarily into the secondary markets. We anticipate domestic to remain strong for Q3 and Q4.

Okay. That's helpful. And just going back to the -- I guess, the fleet and maybe, I guess, more specifically, the CapEx expectation for this year. Is there any, I guess, change to the gross CapEx number you expect for 2026? And I guess is there any change on the outlook into 2027, specifically around maintenance CapEx?

Yes. The only change I would say at this point, Cameron, is we noted in the MD&A earlier that we did decide to take one of the feedstock 767-200s and put through conversion. That will add $10 million to $15 million of CapEx this year and maybe $5 million next year.

I think, Cameron, the key is that all CapEx that Aaron just talked about will be either matched with increased demand or we have potential to lease these aircraft out if we don't need it. So it will not just be simply sitting idle.

Your next question comes from Benoit Poirier from Desjardins Capital Markets.