Cargojet (TSX:CJT) Q3 2026 Earnings Call

0:00 Good day and welcome to the Cargojet conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President of Investor Relations, David Tomljenovic. Please go ahead.

0:15 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, Vice President of Finance, and Remy Tromwe, General Counsel and Corporate Secretary. After opening remarks about the quarter, we'll 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 easy cost, adjusted earnings per share, and return on invested capital.

1:03 Please refer to our most recent press release and MD&A for important assumptions and cautionary statements relating to forward-looking information and for reconciliation of non-GAAP measures to GAAP income. I'll now turn the call over to Pauline.

1:19 Thank you, David, and good morning, everyone. Just before I start, I just want to mention I'm getting over laryngitis, so please bear with me on today's call. Thank you for joining us to discuss CargoJet's third quarter results. We are extremely pleased with our performance this quarter, delivering record third quarter revenue of $286.5 million and record third quarter adjusted EBITDA of $90.2 million. Net earnings increased 117%. Thank you for joining us. Sharpen our commercial focus and strengthen our approach to revenue quality, cost management, network efficiency, and asset utilization.

2:36 These initiatives have further enhanced our operating capabilities, strengthened our organizational effectiveness, and positioned Cargojet to deliver sustainable growth, improve financial performance, and stronger results and returns from our existing assets. Most importantly, we have accomplished this while maintaining the exceptional service standards our customers expect. Our on-time performance reached 99.3% during the quarter, demonstrating that operational efficiency and service go hand in hand. We are also honored to receive The 2026 Shipper's Choice Award in the Air Freight category in September, reflecting the trust and confidence our customers continue to place in cargojet.

3:37 I want to take a moment and sincerely thank our entire cargojet team for their commitment and contribution to these results. Their dedication, professionalism, and continued focus on operational excellence have been instrumental in our progress. I also want to thank our customers for their continued confidence, their trust, and their support. Turning to our broader strategic priorities, our focus remains firmly on one fleet, one network supported by improved asset utilization, operating efficiency, cost discipline, and Prudent Capital Allocation.

4:23 At the center of this strategy is our continued focus on integrating and optimizing our operations across the organization. Rather than viewing our domestic overnight hybrid ACMI and charter operations as independent businesses, we are increasingly managing our aircraft, our network capacity Thank you for joining us today. Thank you for joining us today.

5:47 October domestic volumes have remained strong and current customer forecasts provide encouraging visibility as we enter the most important season, peak. Based on the information available to us today, we expect the peak season demand to be broadly comparable to 2025 peak. Our operational priority is to ensure that we are fully prepared to execute reliably and efficiently through this critical period. Moving to our hybrid ACMI business, performance has remained increasingly consistent over the past quarters. We remain focused on efficient aircraft deployment, reliable execution and effective management of our customer commitments.

6:39 Looking ahead, we expect this business to continue delivering performance broadly consistent with the past two quarters. supported by our focus on operating efficiently and asset productivity. Turning to our charter business and international opportunities, we continue to make encouraging progress. Our charter business continues to evolve from primarily ad hoc flying toward a more balanced mix of scheduled and customer specific charters. This evolution provides greater revenue visibility, creates opportunities to build consistent cargo volumes, and allows us to deploy available aircraft capacity more productively.

7:30 During the third quarter, our charter business benefited from our Liege service, including an additional midweek frequency and its subsequent extension to Tel Aviv, as well as flying to Central and South America and weekend charter operations to China. Building on this progress, we recently announced a new scheduled charter service between Hamilton and Miami operating three times weekly beginning December 2nd. We set out at the beginning of 2026 to enhance our global footprint. We are pleased Canada is now a global cargo hub connecting Europe, Asia, North and South America.

8:19 By connecting our domestic network with key international markets, we can create new cargo flows, increase network density and generate incremental revenue from our existing infrastructure and aircraft. We are particularly encouraged that we have already secured volume commitments from existing customers ahead of the Miami launch. Our international expansion strategy remains commercially driven. We will continue pursuing opportunities that strengthen network connectivity, improve asset utilization, and deliver attractive financial returns. Another important area of focus has been our ability to respond to evolving customer requirements while keeping our aircraft productivity deployed.

9:16 As previously discussed, we have been providing additional aircraft capacity to UPS to support its network following the MD-11 disruption. We expect the requirement for this supplementary capacity to reduce significantly following the fourth quarter. However, our relationship with UPS remains strong, and we are well positioned to support any additional capacity requirements. as opportunities arise. Importantly, in anticipation of this transition, we have proactively secured additional flying opportunities, including new South American contractual routes, which have already commenced, as well as additional flying opportunities to China.

10:06 These developments demonstrate the flexibility of our operating model and our ability to anticipate changing customer requirements. Secure new business and redeploy aircraft efficiently to maintain productive asset utilization. Our focus remains on maximizing returns from our existing fleet while maintaining the flexibility to support our customers and pursue attractive new opportunities. As we look ahead to the remainder of the year, we remain encouraged by our and the opportunities before us. While the broader market continues to experience volatility and uncertainty, we enter the final quarter of 2026 with encouraging domestic volumes, a strong operational foundation and a more efficient and commercially focused organization.

11:05 Our priorities remain consistent, delivering exceptional service Improving revenue quality, maximizing asset productivity, maintaining cost and capital discipline, and selectively pursuing opportunities that strengthen our network and financial performance. The progress we've made over the past year is reflected in our third quarter results. More importantly, we believe these enhancements have further strengthened Cargojet's operating foundation and positioned us well for the future. As we look ahead, safety remains at the core of everything we do. Our unwavering commitment to the highest standards of safety, operational excellence and regulatory compliance continues to guide our decisions and remains fundamental to our long-term success.

12:03 We remain confident in our strategy, our team and our ability to continue creating long-term value for our customers and our shareholders. With that, I'll turn the call over to Aaron to discuss the financial results in greater detail.

12:20 Thank you, Pauline, and thank you everyone for joining us today. As Pauline noted, during the third quarter, we generated record revenue of $286.5 million and record adjusted EBITDA of $90.2 million. Net earnings increased 117% year-over-year to $19.1 million, and free cash flow was $62.1 million. We also continued driving our net leverage down, finishing the quarter at 2.5 times within our long-term target range, and improved return on invested capital to 5.8% from 5.0% in the second quarter. These results are the outcome of our increased focus on revenue quality, cost management, and capital efficiency.

13:10 As in the second quarter, higher fuel prices continue to be a factor in our reported results. As a reminder, Cargojet largely passes through fuel cost to customers through a fuel surcharge mechanism. That surcharge is reported in our results as revenue and will change broadly in proportion to change in fuel costs. As a result, Thank you. Thank you. Thank you. Excluding the impact of fuel price increases versus the third quarter of 2025, we generated revenue of $265.9 million, an increase of $46 million or 20.9% year-over-year.

14:15 Our domestic overnight network generated third quarter revenue of $105.9 million, excluding the $5.3 million impact of fuel price pass-throughs. This represents year-over-year growth of 6.3%, and a sequential increase of 1% compared with the second quarter of 2026. Our hybrid ACMI business generated third quarter revenue of $60.5 million, a 10.8% increase both from the second quarter of 2026 and year over year. As a reminder, in the third quarter of 2025, we had largely completed the transition from east-west transoceanic flying to north-south intra-Americas flying So this quarter is more of an apples to apples operational comparison than prior periods in 2026.

15:05 Our charter business continued its strong performance, generating $61.9 million of revenue in the third quarter, up 13.2% versus the second quarter, and 88.1% year over year. Contributions to the increases included the additional midweek frequency of our Liege service and subsequent extension of Tel Aviv, as well as ongoing flying to Central and South America, UPS support flying, and weekend charter flights to China. Our focus on revenue quality, fleet, and flight level asset utilization, together with ongoing cost management, contributed to free cash flow generation of $62.1 million in the quarter, compared with $152 million in the third quarter of 2025, with the difference primarily driven by increased proceeds from sale and leaseback transactions in the prior year.

16:00 Our focus on our capital management priorities resulted in further deleveraging in the third quarter. We had previously said that we had a path to achieving 2.5 times net leverage within our long-term range by the end of 2026, and I'm pleased to report that we have met that goal as at September 30th. Consistent with our capital allocation priorities and commitment to returning capital to shareholders, we repurchased 76,749 shares under our NCIB during the third quarter. We will continue to assess share repurchases in the context of free cash flow generation and other opportunities to create value for shareholders. Our overall drive towards more efficient operations and capital management also continues to deliver improvements in our return on invested capital.

16:50 At the end of the third quarter, our ROIC was 5.8%, up from 5.0% in the second quarter of 2026, primarily driven by higher net operating profit after tax. For several quarters, volatile global conditions have limited forward visibility. As we enter the fourth quarter and look toward 2027, challenging conditions across all modes of transportation remain. Over the past year, we have demonstrated CargoJet's ability to manage through those conditions while delivering improving financial results. With that, I'll hand the call back to Pauline.

17:29 Thank you, Aaron. Over the past year, we have made significant changes across our organization. We have challenged established practices, strengthened how we manage our business, and sharpened our focus on revenue quality. Thank you for joining us. I want to once again thank our team for their hard work, their commitment and willingness to embrace change. Change is not always easy and I am extremely proud of how our team has responded. Our achievements this quarter belong to them. I also want to thank our customers for their continued trust and confidence in Cargojet. We are excited about the direction Cargojet is heading.

18:53 We believe the changes we are making today are strengthening our footprint and creating a solid foundation for the next chapter of our growth and long-term shareholder value creation. With that, we will open the lines for questions. Ladies and gentlemen, should you have a question, please press star followed by one on your touchtone phone. You will hear a prompt that your hand has been raised. Just a moment for your first question. And your first question comes from Conor Gupta with Scotiabank. Please go ahead.

19:27 Hi, good morning. Am I audible? You are. Perfect. Good morning. I just want to ask on the ACMI revenue this quarter. Just curious how sustainable you see the turnaround, not just into the Q4 peak season, but also into 2027.

19:50 Good morning. We see it to be sustainable. You're seeing global trade increasing. We're seeing the customer come back, find new trade lanes. As we've always stated, CargoJet is their first selected partner to bring additional routes into Cargojet. So we're quite comfortable with the change and the growth that we're seeing with the ACMI business, not just from one customer, but from several customers moving forward.

20:24 Got you. Beautiful. And just one quick other one. Margins did fairly well this quarter considering the pilot contract and the fuel. So just wondering if you can elaborate on what contributed to the strength and if you have any sort of normalized margin.

20:41 The normalization that I'd call out is the fuel impact that I spoke to earlier. I think what you're really seeing is the outcome of all the efforts we've been putting into revenue quality and cost management over the past year. I think as we continue to focus on asset utilization and fleet and network efficiency, Those ultimately are drivers of margin.

21:12 Okay, beautiful. Thank you. Your next question comes from Chris Murray with ATB Capital Markets. Please go ahead. Thank you.

21:22 Yeah, thanks folks. Good morning. So just thinking about this new service to Miami, a couple questions. I mean, first of all, can you maybe elaborate a little bit on the type of customers that you've already engaged and the type of freight that you're going to be looking to connect into the network? And just more broadly, how does this fit into the utilization of some of the aircraft that you've already got?

21:52 Yeah, Chris, it's the same customers, the integrators, the freight forwarders. There's really no new customers outside of who we work with today. We work with freight forwarders. We work with integrators. We work with anyone that moves air cargo. So what this allows us really is to open the world through Hamilton to Miami, all the freight that we bring in from Europe. and all of the freight that we bring in through China. It allows us to open our domestic overnight, bringing in freight from Vancouver through Hamilton and then connecting into Miami, which allows us to open South America, which is exactly why we put this flight on.

22:45 The utilization of the aircraft is the aircraft that we have today. We have no intention to go out and purchase new aircraft. We're utilizing the same fleet during the day for these flights. So there's no CapEx coming to handle this new business.

23:02 Maybe one thing I'll add, Chris, is just one of the benefits on the cost side from a network efficiency point of view is If we had aircraft that were sort of operating more southerly and some that were operating more northerly, this gives us another route to move those aircraft, individual aircraft around within the network so that when we need to do maintenance, you can swap aircraft in and out here in Hamilton and shift other aircraft through the network more easily without like a ferry flight, for example.

23:31 Okay, that's helpful. Thank you. And then maybe staying with the whole aircraft and CapEx theme. You know, if we look at the fleet plan now, as we go into the next couple years, you really don't have a lot of aircraft, new aircraft planned. I think there's one aircraft you've got in conversion, but it sounds like you're going to sell that one. So a couple pieces of this. With your expectations for what it sounds like kind of reasonable levels of revenue growth in New Miami run, some other customers probably normal growth in domestic. and with new aircraft, a couple of things. One, should we be thinking that, you know, CapEx levels over the next couple of years will basically be at maintenance levels that we've seen in the last couple of years? And second, you know, how are you thinking about return on invested capital and leverage trends going forward?

24:24 And how do you deploy capital at that point?

24:28 Yeah, look, our focus right now from a metrics point of view is very clearly on ROIC and generating higher returns on the assets through higher asset utilization. I think we've been clear in the past that when we generate new opportunities that will require growth capex, we'll do that, but it'll require an ROIC hurdle that we're comfortable with. So you're correct that right now we don't have in the fleet plan like speculative aircraft. But as we generate new opportunities, if and when we have an opportunity that will generate the required ROIC for us, we'll look at growth capex at that point.

25:14 To your question about leverage, you're right. We're within our target leverage range. We're at the top end of it. I think there's potentially still some room for us to move within the range. But we also have always said that our capital allocation priorities include continued dividend growth, returns to shareholders through the NCIB. I think you'll have seen that we just renewed the NCIB for another year. And then, like I said, prudent growth in that generation. Okay, I'll leave it there. Thanks, folks. Thanks, Chris. Your next question comes from Walter Spracklin with RBC Capital Markets. Please go ahead.

25:59 Yeah, thanks very much. Good morning, everyone, and congrats on a great... Good morning, Walter. Yeah. So looking at... Let's start with all-in charter. I know you mentioned, Pauline, that the UPS revenue was going to come down, commensurate with their solution to the MD-11 disruption issue. and your commitment was that that revenue would be replaced and you doubled the revenue and almost doubled the revenue this quarter year over year and all in charter so it looks like that was successful. It is lumped on top of each other so you still are earning income here obviously from UPS. So as we look out to next year on a kind of annual run rate basis, given there's been so many moving parts now with with the UPS and the new business that you brought on partway through the year.

26:53 When we look at the full year number for 2027, how should we look at all-in charter compared

26:58 to 2026? Yeah, Walter, so the new business we just brought on, and we're going to continue to ramp that up, there's a lot more opportunity there. We knew that this business was coming to an end with UPS. They're in good shape. but we have gone out and found business that will replace that. So when the return of those assets come in, we'll utilize those assets to continue to build on that revenue stream.

27:30 That's great.

27:31 You mentioned that you're expecting... Go ahead. That's one quick add. We have added South America. We're going to add Miami and there is and a few more clients for the Far East and China that are already in the works. So the intent here is that we will replace the UPS flying. Those assets will be all gainfully employed, maybe not on day one, but we are hoping that within the first quarter we will have replacements for those.

28:07 That's fantastic. Thanks, Ajay. On the domestic, Pauline, you mentioned that Q4 should be comparable to Q4 last year. You did $120 million in Q4 last year, but you've done over $111 million in Q3 this year. I'm just curious if you meant by comparable, do you mean kind of similar step-up, or are you looking at a similar revenue run rate on the domestic side in Q4?

28:39 Walter, we're looking at a similar step up. Thank you for having said that. What we've heard from our customers, market research that we've done, it'll be a comparable peak to 2025.

28:50 Okay, perfect. On pricing, your one fleet strategy I think is a very effective one and it kind of, when you look at the capacity that you have, it makes the Thank you for joining us. to bring price up without waiting for the new contract to renew?

29:41 Yeah, you know, Walter, we can't do that. We have the contracts in place and we have to respect those contracts. But what we have done is contracts that we could have opened, we have opened. We've looked at, you know, something what we refer to as our B customers. We are realigning, I think I said this in my last call, we're realigning our revenue. We're looking at our pricing and and we're correcting it. We are the best steakhouse in the city and we're changing from keg pricing. It's something that we've really focused on especially in Q3 is revenue quality. We are assessing the product that we provide in the marketplace, the lanes that we go into and we're realigning the pricing to meet those needs and those lanes.

30:29 All right, going from keg pricing to Jacobs pricing, perhaps.

30:33 My personal favorite is butcher chef.

30:36 Okay, we'll go with that one. Thanks, everyone.

30:39 Thanks, Walter. Your next question comes from Steve Hansen with Raymond James. Please go ahead.

30:48 I just wanted to ask on ACMI for a moment. There are several references to it being more consistent now, particularly that we're lapping some of the more like-for-like comps, but I just wanted to ask specifically about the underlying sort of macro conditions there, and if you're seeing any improvement or shift in the market activity there that's giving you some greater confidence. Thanks.

31:09 Yeah, Raymond, sorry, I'll take that question. Yes, we are seeing definite improvement in the ACMI. Our customers that we use, DHL and a few others, have definitely indicated that the trade and traffic is up substantially from where we were, let's say, a year ago. They're seeing constant improvement, which is resulting in more flying for us. The geopolitical conditions in the world, we're all aware of. Read about it. But I think that all the Supply chain disruptions due to the war and other issues that are happening in the world. I think people are finding other ways of shipping and I think air has benefited a lot out of it and I think this is an improvement that our customers certainly feel that they can see the light at the end of the tunnel and that certainly resulted in stable ACMI. But I just do want to highlight that yes, it has come up, but ACMI does produce a fairly healthy sort of EBITDA and margin for us adding on to what all the infrastructure and costs we already have in place.

32:30 So whatever we add on top is certainly gravy.

32:37 That's really helpful. Thanks. And just one follow up on the buyback. It might be hard to answer, but how do you feel about the rateability of the buyback or the pace Relative to recent quarters, is it something you think you can continue sustainably? Do you want to take it up higher given the valuation? I'm just curious on how your thoughts are given the free cash flow you've been generating. Thanks.

32:55 Yeah, thanks, Steve. You know, obviously we've been pretty focused on getting the leverage in line. We've had that long-term target that we've been above for a little while. like I said we're really pleased to be within that target range we are at the top of it so you know we'll consider we'll continue to consider where in the range we want to be I think again as we look at capital allocation priorities outside of that obviously we've had an annual dividend increase or a close to annual dividend increase for years I think that's an expectation that we have of ourselves and and we'll continue to look at the rest of cash flow generation as Allocable between prudent growth opportunities and shareholder returns through the NCIB.

33:47 Your next question comes from Daryl Young with Stifle.

33:50 Please go ahead. Hey, good morning, everyone. Good morning. I just wanted to touch a little bit differently around capacity and what your expectations are. Over the last several quarters, you've had some very strong charter revenue. I think you said part of that has just been there's been way more opportunities as you fly more north-south and as ACMI has been more north-south oriented and now you're adding Miami north-south. So how do you plan to manage the fleet and margins as east-west flying recovers? And it sounds like you're adding more Asia capacity. So I'm just thinking in terms of the logistics of repositioning the fleet and what that means.

34:33 Well, I can certainly take that very quickly. I think, as Pauline indicated, the Miami add-on is with the existing fleet and sort of tweaking the network and finding opportunities with the existing assets that we have. As far as the traffic flows are concerned, as you know, there is two flights a week we are now doing from Europe, which also not only Europe, it connects from all over the world into Europe with our interline partners comes into Hamilton. And then we are opening up more lanes into South America with that Miami connection. Also from the China, same issue. The flights that are coming in, we are offering more solutions to our customers because the demand for South America is extremely high.

35:25 Also backhaul from South America, flowers, vegetables, and many other products that are coming in, the produce. That's all coming into Miami and some of it's being plucked and not sort of getting the proper attention it should with having a proper service like that. I think those are the customers that would be using that service. So Miami is strictly an add-on of existing fleet for this kind of traffic flows that connect cargo jet being the middle of coming, let's say, from Bogota into Miami into Hamilton to Liash and other destinations in the world and similar way back. So this is an existing opportunity, a strategic one, and using the existing fleet and offering our customers somewhat of a global solution.

36:20 Yeah, Darrell, just adding to what Ajay is saying is we're using the existing fleet that we have. We're optimizing the fleet. So the China operations are weekend operations. when the assets sit in Vancouver. The Liège operations are again weekend and midday when the assets are available to us. We're considering day networks again when the assets are available to us. So we've really focused on utilizing the capacity that we have available when the aircraft are not scheduled for the ACMI or for the domestic overnight, which is allowing us to do more charters and allowing us to find new opportunities of growth as we indicated very early in the year in global expansion.

37:06 Okay, that's helpful. Thanks very much and congrats on the good results. Thank you. Thank you. Your final question comes from Tim James with TD Cowen. Please go ahead.

37:21 Thanks very much. Congratulations on the good results. Thank you. One quick question. Just wondering if you could provide, and forgive me, I missed a little bit of the call, so I'm hoping you didn't touch on this, but if you could provide a bit of an update on kind of pilot costs as it pertains to overtime and training. I know there was some sort of volatility in that for a variety of reasons over the last couple of years, but have they effectively normalized as we think about the third quarter and should remain relatively normalized going forward? Hi, Ted and Darren.

37:55 Yeah, so the pilot agreement we signed at the end of July this year, but it was effective as of July 1st. So the new pilot rates were fully in effect for Q3 2026. So you are seeing a step up in Q3 2026 versus Q3 2025. I think we pointed that out in the MD&A. We said the variance, it's up 4.4 million for total crew costs year over year, and that's primarily due to the new contract. One thing I'll say is because we signed the agreement late in July, we weren't fully able to implement all the productivity benefits in the agreement through Q3. So you're correct that all of Q3 is the correct new rate.

38:46 but you'll see us implement the productivity benefits over the coming quarter as well coming quarters.

38:55 So is your is your pilot pool and where you would like it to be at this point and therefore any kind of overtime is tracking what you would expect on a normal basis and training costs the cadence of that is fairly normal like there's no sort of

39:13 Just one quick comment on that, and your question, Tim, is yes, the pilot, we have enough pilots. Secondly, our training, we have two simulators in Hamilton, and it's a very efficient training system that we developed a number of years ago, so Thank you for joining us. More productivity gains. Right on the heels of signing this, we are moving into a peak period. And all the additional flying we are doing, actually we become more competitive in the marketplace because our pilots are enough to not only do the network, but carry on the additional flying and take on that burden as well. So all these facts, I think we will see more normalization of this coming in the first quarter. as we get over the peak and implementation of all the productivity gains and rescheduling of

40:48 the software that goes with programming these pilot changes. So I think we are definitely on a positive trend with this whole situation.

40:59 Okay, that's the only question I had. Thank you very much. Thank you so much, ladies and gentlemen. This concludes today's conference call. We thank you for your participation. You may now disconnect.