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Edited Transcript of CJT.TO earnings conference call or presentation 4-Nov-19 1:30pm GMT

Q3 2019 Cargojet Inc Earnings Call

MISSISSAUGA Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Cargojet Inc earnings conference call or presentation Monday, November 4, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay K. Virmani

Cargojet Inc. - Founder, CEO, President & Director

* Jamie Bennett Porteous

Cargojet Inc. - Executive VP & Chief Commercial Officer

* John Kim

Cargojet Inc. - VP of Governance, Corporate Secretary & CFO

* Pauline Dhillon

Cargojet Inc. - Executive VP of Marketing, Public & Government Relations

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Conference Call Participants

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* Ben Cherniavsky

Raymond James Ltd., Research Division - MD & Head of Industrial Research

* Cameron Doerksen

National Bank Financial, Inc., Research Division - Analyst

* David Ocampo

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Douglas Taylor

Canaccord Genuity Corp., Research Division - Director

* Gianluca Tucci

Echelon Wealth Partners Inc., Research Division - Research Analyst

* Kevin Chiang

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst

* Konark Gupta

Scotiabank Global Banking and Markets, Research Division - Analyst

* Nauman Waqar Satti

Laurentian Bank Securities, Inc., Research Division - Associate of Research

* Walter Noel Spracklin

RBC Capital Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Cargojet Third Quarter Results Conference Call.

I would now like to turn the meeting over to Pauline Dhillon. Please go ahead, Ms. Dhillon.

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Pauline Dhillon, Cargojet Inc. - Executive VP of Marketing, Public & Government Relations [2]

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Thank you. Good morning, everyone, and thank you for joining us on the call today. With me on the call today are Ajay Virmani, our President and Chief Executive Officer; Jamie Porteous, our Chief Commercial Officer; and John Kim, our Chief Financial Officer. After opening remarks about third quarter results, we will open the line for any questions.

I would like to point out that certain statements made on the call such as those relating to our forecasted revenues, costs and strategic plans are forward-looking within the meaning of applicable securities laws. This call also includes references to non-GAAP measures like adjusted EBITDA and adjusted EBITDAR. Please refer to our 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 income.

I will now turn the call over to Ajay Virmani, our CEO.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [3]

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Good morning. Thank you, Pauline, and thank you, everyone, for joining the Cargojet conference call this morning. As you know, we have had a very busy quarter. On August 23, we announced the strategic partnership with Amazon. On September 30, we started a second ACMI route for DHL between Mexico and Cincinnati, Ohio, adding to the solid foundation of our ACMI line of business and continued growth. And on October 31, we announced our intent to redeem our 2021 convertible debentures 2 years early. These moves are in line with our long-term strategy of building strong foundation for growth as well as our desire to reduce overall leverage and strengthen our balance sheet.

Let me now talk about third quarter results. We posted another strong quarter with 4.7% revenue growth, excluding fuel surcharges, margin expansion and strong adjusted EBITDA growth of 24.1% over last year. As I mentioned on our last quarterly call that we are now positioning each of our business segments for growth with higher margins. We are putting in place the strategic components, so that over the long term our domestic network, ACMI as well as charters can be all positioned as growth businesses.

During quarter 3, we made significant progress towards this goal. Our domestic overnight revenues grew by 5.5%, largely reflecting summer months of online shopping. Our ACMI business grew 33.3%, reflecting additional routes we added for supporting some of our major customers to service U.S., Mexico and a couple of other markets. And as per the softness in charter revenues as we noted at our last analyst call, we made a proactive decision to suspend certain unprofitable routes for South America due to lower global air cargo demand and redeployed aircraft to more profitable opportunities. We expect margin improvements going forward as a result of this decision.

We will continue to monitor opportunities, and we will only enter new charter routes if we can meet our margin expectations and targets. Our core emphasis remains on enabling faster deliveries for e-commerce for all of our customers. We were pleased with the growth we saw during the Prime Day sale and traffic during back-to-school. Also demonstrated new customer behavior. We are now gearing up for our peak seasons' volumes.

It is worth reminding everybody that Canadian e-commerce market as a percentage of total retail sale is still behind U.S. and Europe. Canadian e-commerce remains around 6% to 7% range, while the U.S. is almost double that percentage and Europe being triple of that. We believe we are still in the early stages of harnessing this secular trend and have a lot of catching up to do. Major online retailers are regularly adding new SKUs to the Canadian offering, improving selection for Canadian consumers.

We are continuing to see a shift in the shopping patterns. With Amazon's announcement of 1-day Prime and other retailers now trying to compete with faster delivery standards, online shopping has now moved to a 7-day a week shopping pattern. Major brands are now accelerating their focus on building direct-to-consumer business models, creating more opportunity for air cargo volumes. This is leading to a stronger volumes on the weekends on our network, and we expect to see more of this trend during the peak holiday season.

We are also pleased with our fleet utilization metrics and are committed to managing our CapEx prudently. As we see additional growth opportunities, we will invest in our network appropriately. I'm extremely proud of my team of 1,100 employees because each one of them understands the importance of on-time delivery for our customers along with safety and security. Our maintenance team works extremely hard to make sure that our fleet remains in top form.

Once again, I'm pleased to report that quarter 3 on-time performance was 99.3%. This is a key metric for our customers because they have built their first and last mile networks that rely on our ability to meet our commitments.

As I shared in my previous remarks, we remain focused on profitable growth while continuing to strengthen our balance sheet. Our medium-term goal is to bring our overall leverage down to somewhere below 3x adjusted EBITDAR, but I must caution that we are still in a hyper growth environment in the e-commerce space. And if we are presented with strong growth opportunities with attractive margins and economics that can drive long-term shareholder value, we will not be shy to invest.

Let me conclude by commenting on the upcoming peak season. Based on our assessment of shopping behaviors and increasing number of categories for which consumers are now shopping online based on the estimates and forecast received from our customers, we believe that this holiday shipping season -- shipping and shopping season is going to be yet another record-setting season. We are fully geared up to support the expected growth and look forward to ending the year on a positive and very strong note.

Once again, thank you for joining me this morning. We will now open the call up to questions. With me are Jamie Porteous, our Chief Commercial Officer; and John Kim, our Chief Financial Officer along with Pauline Dhillon.

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Pauline Dhillon, Cargojet Inc. - Executive VP of Marketing, Public & Government Relations [4]

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Laurie, if you can open up the lines for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from David Ocampo from Cormark Securities.

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David Ocampo, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [2]

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My first question is on volumes. This was kind of the focus last quarter, and it still looks relatively weak versus last year. Can you talk about some of the dynamics that play here, specifically B2B interline volumes then B2C?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [3]

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Well, the -- go ahead, Jamie.

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [4]

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Yes. David, I can comment on that. As you're aware and you've seen globally, overall, the cargo demand is down significantly. I think in Q3 2019, IATA was forecasting about 5% -- 6% global air cargo demand deterioration in volumes. I think you -- most people have seen Air Canada's -- Air Canada Cargo's press release last week where they reported 18% reduction in cargo revenues in Q3, primarily from international demand. We're seeing the impact of that. Our interline business is down about 40% year-over-year. Obviously, as Ajay mentioned in his notes, one of the actions that we took as we saw that demand deteriorating internationally was suspending the routes to Lima and Bogota and one of our weekly frequencies to Cologne so that we could do 2 things: One, improve margins; and redeploy those assets to more profitable routes, which we'll continue to do.

On the domestic side, the traditional B2B business is relatively flat overall, but that's certainly being offset by the significant growth in e-commerce from multiple retailers on our domestic network.

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David Ocampo, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [5]

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Perfect. And on the pilot shortage, ACA has early stated that they need to hire a significant amount of pilots for the MAX next year. And this coupled with new [RF] service rules, do you see any difficulties with recruiting beyond what you provisioned for?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [6]

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Actually, not. We had renegotiated our pilot agreement in light of the shortage we were expecting and the market conditions of the new pilot fatigue rules. We extended our agreement with the pilots for another 3 years up to 2027. We also put in place retention and attraction incentives for the pilots to stay on. Right now, our pilot count is quite up to what we expected it to be and what we need it to be. I think Cargojet has become a very attractive place. We are leading in terms of compensation and working conditions right now. And I think the steps we took, certainly, we are in a place to attract more pilots that want to come back to Canada who are ex-pats. they're flying for various foreign carriers and getting direct entry captain or direct entry first officer jobs on wide-body aircraft is something that neither Air Canada or WestJet can offer to new entrants in the marketplace. So we are quite well positioned for that.

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David Ocampo, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [7]

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Okay. And kind of last one for me and a quick one. I'm not sure if you mentioned this in your prepared remarks, but did you add that regular service Sunday flight or is that still to happen?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [8]

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Yes. We have a Sunday flight now as per our schedule. And in the peak, we are also adding a Saturday flight as well.

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [9]

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Yes. It's been actually a permanent flight since May of last year, and we recently added a second flight in -- as Ajay said, we'll be adding a Saturday frequency during peak.

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Operator [10]

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The next question is from Walter Spracklin from RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - Analyst [11]

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So Ajay, you mentioned another record fourth quarter coming up for peak. You had a pretty tough comp last year with double-digit. Is double-digit something we should bring -- pull in for volume? Or given a difficult comp, is it more kind of mid- to high single digit range just in terms of directional?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [12]

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We certainly expect a better peak than last year simply because, if you remember, a lot of shippers who weren't shipping and a lot of consumers who weren't buying because of the Canada Post strike going on and there was a big impact about that. And I feel that this year, the market is quite normal. E-commerce is in full swing. And I expect this peak to be certainly better than the last peak. And that's what we hear from our customers in their forecasts as well.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - Analyst [13]

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Okay. And i don't know if Jamie or John is the best one for this, but your margin has always been better in the fourth quarter because of that -- the economies of scale effect on the fourth quarter. And you had a very strong third quarter EBITDA margin. Any reason -- or is there anything in the third quarter margin that won't replicate and shouldn't we see again a better seasonally fourth quarter margin again compared to Q3?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [14]

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I'll take that, Walter. I can assure you that our focus for the last -- this year has been on margins a lot, and I do not see anything in the fourth quarter that we would have different trend for margins that we did in quarter 3. But keep in mind, we also suspended certain low margin routes like South America and a few other flights that we used to do here and there and some charters that were not giving us the required margins, and we were able to find those routes that were replaced with high margin daily flights like, for example, Cincinnati, Ohio, that kind of stuff. So margin improvement is on the top of our list, and I see no reason in quarter 4 that they will -- there would be any change in that at all. I think that it will get better.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - Analyst [15]

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That's fantastic. Okay. It's very encouraging. And then John, CapEx, any adjustment that you'd make given your view on fleet requirement? I believe if memory serves, you had $200 million for the year in total CapEx guidance that came down a little bit because you shook what aircraft free. Any update on the 2019 CapEx? And any indication can you provide based on your fleet plans for next year combined with maintenance CapEx what we should be putting into our model for the -- for CapEx for 2020?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [16]

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Sure. Walter, we don't have any change relating to our fleet plan from the last quarter. So what's in the MD&A is still -- we don't expect to add anymore aircraft other than the one 767-200 in the first quarter of next year.

In terms of 2019 CapEx, we probably will be slightly higher than $200 million. We've be looking in the market for engines and feedstock. And I think we found another aircraft with a couple of engines and a spare engine. So it might be closer to $210 million by the time we finish up the end of the year.

For next year, in terms of maintenance CapEx, our long-term average is somewhere between CAD 60 million, CAD 65 million per year. We should be close to that. We did buy a bunch of engines this year, which will help us reduce our engine CapEx for next year. But we haven't baked in our CapEx plans as of yet, but the long term -- it should be close to our long-term maintenance CapEx.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [17]

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Yes. And we -- Walter, our aim is to not sort of increase our CapEx from where we were last year. Although we are expecting a slight increase, but we will have to manage and we have strict guidelines to ensure that our CapEx doesn't exceed where we were last year.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - Analyst [18]

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So this year was a fairly heavy growth CapEx year with, if we call, $75 million in maintenance, about $125 million in growth, are you saying that we'll probably get about $65 million in maintenance this year, but would we have another $100 million?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [19]

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No. I think with the 1 delivery, which we've already capitalized, a lot of the costs for that conversion on our last 767-200, growth CapEx will not be anywhere near what it is.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [20]

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And we already have bought some engines that we will be using for future years because we got a better deal, so that will bring down that cost as well going forward.

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [21]

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I think once we get through our planning cycle and -- again, we're always in the market for used engines primarily. We should be able to give you a better picture of 2020 in the next conference call.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - Analyst [22]

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Okay. Fantastic. Last question here is on ACMI and charter, adding another route there, September 30. Is the -- what could we look for in terms of quarterly run rate now when we're adding all the routes? And I do know, Jamie, if you've got any color on any additional routes that you're working on that might pop up in 2020?

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [23]

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I think the route -- I think you can factor in the new route that we added on September 30. I think we indicated in the MD&A is generating about $11 million in additional annualized revenues. You can add that to our run rate that we've experienced for the first 3 quarters and plan that out for 2020. Certainly, we're always in discussions with our customers, both DHL and others, about other opportunities, but nothing on the short term right now.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [24]

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We're always looking for opportunities. Our customers know it. And we'll continue to do that.

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Operator [25]

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The next question is from Konark Gupta from Scotiabank.

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Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [26]

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So just on the domestic first. I just wanted to touch on the previous comment you made. So the growth and, obviously, revenue per operating day has slowed down from -- to 3% from 8% to 9%. And I think you alluded to the international weakness, which I think plays into that as well because of some interlines, right? But I'm just looking for the specifics, if you can provide, on your contract versus the spot business, because you obviously keep 75%, 80% for your contracts and then the remaining goes to the spot business. Have you seen any change in that dynamic like spot falling off a little bit here because that's kind of the more -- the business that's more dependent probably on the global trade?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [27]

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No. I don't think we have seen anything significant drop on the spot. But also keep in mind, Konark, that the business in July, August are traditionally very slow because of the summer months. And the only real event we had was a back-to-school and a Prime Day sale, which kind of helped the whole process. But generally, I would not gauge July and August months for any kind of real growth because 70% of productions and facilities and warehouses are all shut down for summer vacations. So it is very traditionally slow months.

And the interline business, yes, it's not a high margin business, but it's certainly paced with the gas and some. And that business -- we expect it to bounce back. It's not -- that business is continuing on to some of the other countries and -- like South America and all that, but not to Canada, obviously. And I think (inaudible) has some resolution happens on the China trade deal with U.S. I think that business will bounce back as well.

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Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [28]

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Okay. That's great color. And then on the peak season. So it seems like you're expecting a decent increase here. So just trying to understand like what are you hearing from your customers in terms of the growth for this peak season? I know UPS just came out saying that on the flip side, they said they expected 26% increase in shipping returns on January 2. That's pretty high. And obviously, they are expecting a lot of return. So on the return side, they're expecting a lot of volume. But on the shipping side to customers, B2C, e-commerce, what are you hearing from your customers in terms of what kind of growth can you see this year in peak?

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [29]

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I can answer that for you, Konark. As Ajay mentioned before, I mean, there's a couple of things that are impacting our peak season this year. I can tell you that from all the e-commerce retailers that we receive forecasts, we're expecting extremely -- double-digit, strong double-digit growth year-over-year versus peak season Q4 of last year. And as Ajay mentioned a couple of other significant factors this year, there's no Canada Post labor disruption that's affecting volumes or affecting shipping patterns. We also have a short -- a condensed peak season this year as compared to normal. Traditionally, in the last few years, especially from an e-commerce perspective, peak season really starts on Cyber Monday and with U.S. Thanksgiving being a week later than normal this week on the 28th of November, the peak season really gets into gear starting December 22. So we're really looking at 5 weeks versus volumes condensed into 4 weeks, but we're expecting a very strong double-digit growth on the e-commerce side.

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Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [30]

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That's great. And on the convertible debentures, John, if I may. Can you tell us what is the amount outstanding today? And then have you already seen some conversion already by the holders?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [31]

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Yes. I think on the balance sheet because of the way you do the accounting, it looks like about $113.5 million. But I think in terms of gross debentures out there, it's more like $119 million. There was -- and the original amount was higher. We did have some redemptions -- typically, retail redemptions during the last couple of years to trickle in.

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Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [32]

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Okay. But you haven't seen any material redemptions yet by the holders or conversion?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [33]

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No. No. You got a few. And ideally, everyone needs to enter those debentures. Otherwise, they get taken out at 95% of market.

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Operator [34]

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The next question is from Cameron Doerksen from National Bank Financial.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [35]

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Just a question on DHL. They just announced a fairly large expansion in Hamilton. I mean, I assume that's a positive for you. Can you maybe just describe what that potentially means for you with their expansion there?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [36]

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Well, what it means is that, obviously, we do a number of functions for DHL in Hamilton. We do the maintenance on that aircraft. We do the ground handling for that aircraft. And we also do -- obviously, fly that aircraft for them as well. And I think being in Hamilton, which is a great story for all of us that they do not intend to change their plans coming into Canada, reduce capacity. Hamilton is the hub for us. Hamilton is the hub for them. Now they were always -- not sure whether they're going to continue to fly into Hamilton or they would go into Toronto Airport or -- I mean, we would obviously gear up if they were going there. But I think what it does is it kind of solidifies our alliance with DHL in Hamilton, where we can do a lot of things together now that they have permanently selected that as a big hub.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [37]

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Okay. No. That's great. Just second question for me for John. Just on the stock warrant valuation gain in the quarter. I'm just wondering if you can maybe just walk through what drives that? And should we expect in the future gain or a loss each quarter? I mean, I know it's just an accounting thing, but I'm just wondering what's going to drive that quarter-to-quarter that gain?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [38]

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Yes. Cam, we have to be really careful in terms of the sensitivity to our customers. So the information that we disclosed and we're being pretty fulsome in terms of the disclosure that we make and the explanation of the accounting in our MD&A and in our financial statements, we really are not going to comment any further in terms of -- I mean, if there's some disclosure that you might find useful, we might think about it. But right now, it's really -- we're really unable to comment any further on the accounting of those warrants.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [39]

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Because of the sensitive nature of the business and we are a neutral network for all customers and we like to keep customer information, not sort of make it public, how much they're shipping, what the revenues are and all that. And that's a sensitive information for all of our customers, and we'd like to keep that portion of it confidential.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [40]

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Okay. But we should expect there to be a gain or -- I don't know if there's potential for a loss just from an accounting point of view each quarter? Is that correct?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [41]

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There's some revaluation each quarter. And again, that's all under IFRS. It's a requirement because of the nature of that derivative.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [42]

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Yes. So there will be quarterly adjustments as -- depending on the margin.

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [43]

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But they'll typically be nonoperating.

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Operator [44]

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Your next question is from Doug Taylor from Canaccord Genuity.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [45]

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Another question on the margin profile here. It was very strong in the quarter and you had some constructive things to say about the margins into Q4. One thing I observed was that you did seem to benefit from the -- your ability to pass-through fuel costs versus your realized fuel costs this quarter. Is there something as you shift some of your volumes or your capacity around that's changed structurally and how you're charging through for fuel costs that you expect to see a sustained benefit in terms of the revenue versus the cost line item there?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [46]

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I think, Doug, you're -- If you have seen any of that during the fuel, just keep in mind when we were flying the South American routes, the fuel was not a pass-through. We had the commercial risk on it. By moving away from that model temporarily because of the lower demand, the global trade and all that, we have gone to the ACMI, which we replaced that aircraft on that route with where we have no exposure for fuel. So I think that's where you might see some improvements, but our general fuel policy remains the same that customers have a built-in fuel price. And anything over and above that, we follow the index. All customers have their different formulas that they -- we have negotiated with them on fuel. And basically, the policy is that on our normal overnight network or domestic network, we do not have an exposure of fuel increases. So that's pass-through. But I think the margins on the fuel improvements are strictly as a result of canceling the flights to South America.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [47]

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So there is the potential for you to recognize more margin there through the cycle as opposed to just in periods where fuel prices have declined?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [48]

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Yes, even -- yes, there is because even on the charters now, we have tried to -- wherever -- when charters are needed by different customers, we evaluate whether -- who are we competing against, what are our options? And we certainly try to increase our margins on those ad hoc charters that we do.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [49]

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Okay. Second and final question for me. Again, building on the previous caller's line of questioning with respect to Amazon. I understand your sensitivity there, but -- I mean, is there anything qualitatively you can say about whether they've changed their behavior with respect to your network at all in following the new commercial agreement?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [50]

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So there was no new commercial agreement. This was a strategic agreement. So that's number one. There was never -- we never changed the commercial agreement. So we've had a commercial agreement for a couple of years with them. There is absolutely no change in behavior. They -- there is no discussion on any of the issues. Business is as normal as a customer. There is absolutely like -- nothing I can even tell you that I have even discussed anything with them on the revenue side or strategic or commercial mix up. They continue to do business as usual. They are very -- Canada is certainly a big growth environment for them. They certainly believe that Canada is way behind on e-commerce than the rest of the world and where Amazon operates in. And they have some very, very strategic and strong growth plans for Canada, and we are certainly part of that plan.

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Douglas Taylor, Canaccord Genuity Corp., Research Division - Director [51]

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The other thing that is coming out in conversations I've had with you in the past is that Amazon often plans pretty far out in terms of their planning for logistics. Can you talk a little bit about what they're talking about for 2020? Or if those conversations started with respect to planning your fleet around what they'd like to do?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [52]

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Yes. So basically, Amazon is a number of ways that we get their business. We get it through a number of our customers. And if you look at the example in U.S., although they have 60 planes committed, they'll probably go with more planes. They are always looking for growth. So besides, they grow their own network, which they want to do with us, but they're also growing with many of the customers in U.S. with double-digit growth. So we get Amazon directly. We also get Amazon from 2 or 3 of our large customers, and everybody is seeing growth. And the plan that they tell us is that everybody is going to continue to grow with their growth. And basically that there is no change or shift that we will get it directly or the customers are going to -- everybody, they expect that because their business is such that requirements are such that certain customers want certain pickup on a certain day, and we are not in a pickup and delivery business. So we'll continue to grow the middle mile through our customers and through Amazon directly. So there's no change. Yes, they do some planning far out, but it's not something they do flight by flight or route by route. They just have a general forecast that they give us every 6 months that we look at and plan our capacity accordingly.

The good news is that all over the next year what we look at is we can accommodate all that growth in our existing fleet and existing infrastructure without adding any aircraft or any significant capital expenses.

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Operator [53]

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The next question is from Kevin Chiang from CIBC.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [54]

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Maybe if I could ask the margin question a little bit differently. So if I look at your year-to-date EBITDAR margin to kind of, I guess, neutralize impact of IFRS 16, you're up roughly 190 basis points year-to-date. And you've noted you're facing pilot costs. And I guess, you had some low margin charter business that you've exited. So when I think of 2020, and it sounds like you'll start recouping some of these pilot costs in the fourth quarter. You'll have cycled through a full year benefit of exiting some of these low margin routes. Is there a reason why your margin growth in 2020 can't be higher than what you're experiencing thus far in 2019? Or am I not -- Or am I missing something there?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [55]

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Well, we always strive to get higher margin business and we are -- it's somewhat a function of market as well. So yes, to answer your question on pilot fatigue surcharge, yes, we have implemented that with various customers. We'll see some of it come through in fourth quarter and some of it will come through in the first quarter. And some of it also will come through the second quarter of 2020. But that's strictly covering our costs to make sure that our margin doesn't dip further. It's not something that I think that would be a moneymaker or cost -- it's strictly a cost recovery for us.

The second part about the margins in 2020, as you know, we this year put a special or greater emphasis and focus on that. And I expect that we will certainly maintain or improve our margins strictly by managing, number one, our fixed cost that we have here. We are on a drive to make sure that we are not exceeding what we budgeted for. A lot of little improvements like, for example, if we have a lot of over time going, do we -- are we better off to hire more pilots and more maintenance people. So those kind of analysis we continue to do. And those impact our margins a fair bit.

So -- plus keeping the pricing to a level where we have a fair return on our investment, our cost of invested capital. Return on invested capital is our key measure, obviously, as we go forward. And I think that you will see in 2020, we will certainly maintain our better margins.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [56]

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That's helpful. And then maybe if I can just ask one on the charter business. You've talked about or you noted that you've suspended some routes there. Are there more adjustments that need to be made in that network? Or is -- the run rate revenue we saw in Q3, is that a good way to think about the quarterly run rate moving forward? And then maybe secondly, with the more heightened focus on margins and profitable routes, what does that mean for the long-term opportunity there? Are you less patient to incubate new routes on the charter front or not maybe?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [57]

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Kevin, tomorrow, if the trade deal is signed between the U.S. and some of the -- let's say, primarily China and the margins and the business starts flowing as it was in the prior years, I think there is a strong improvement of the margins we can expect on those by 2 ways. One is that we will get some interline traffic that we can accommodate on the existing routes, that will contribute to a fairly significant margin increase because we're not adding any cost at all. And I assume that this is a temporary trend. Two major giants like U.S. and China are not just going to stop doing trade. It's a matter of who blinks first and when the stuff happens. As you know, most of these things are now being settled on Twitter rather than sitting across the table. We expect the tweet to come through any day and saying, yes, we have done. I think a lot of inventory is being built up in Far East from what I hear from our contacts and a lot of shipping will start as soon as that happens.

So besides the interline, there could be also opportunities with our existing fleet to maybe do a Toronto-Mexico Flight or a Toronto-Bogota flight or a Toronto-Lima flight or through Miami. So those opportunities we will take. There might not be as high a margin as we do on ACMI and some of the other stuff, but we are also not just going to walk away just thinking that we want to keep margin at a certain level and forget the gross dollars and increase our EBITDA or profitability.

So we're not going to look at facts in isolation about just the margin. When the trade patterns improve, as I said, we will take the opportunity on the interline because that will come back. That has been there for at least 20 years that I know, and it certainly improve. This is the first time we have seen a dip. And so has Air Canada and so has every global carrier coming out from there.

So this is why we kind of diversified. We started looking at ACMI and some of the other seventh day flight and the sixth day flight for our customers here. So we were able to replace all that and actually make it better. And same thing we will do when the trade comes back. We will look at those routes again. We have suspended them. We have not canceled them. And we are quite open to looking at that opportunities definitely when they open up, and we will look at expanding those routes with improvement of trade patterns.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [58]

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That's helpful. And just, I guess, the current quarterly revenue stream you saw in the third quarter or volumes you saw, is that kind of a good run rate to think about until some of these tensions (inaudible) here?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [59]

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Yes. I think that's probably a good assessment, Kevin.

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Operator [60]

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The next question is from Gianluca Tucci from Echelon Wealth Partners.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [61]

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Congrats on a pretty good Q3. So a bunch of my questions have been answered here, but just on peak season. So do you expect to be flying 7 days each week all season?

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [62]

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Yes.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [63]

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And if so, like when is the expected first light of that seventh day?

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [64]

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We have already started the second flight on Sundays and I believe we start flying the Saturday -- the first Saturday flight sometime around mid-November, to the third week in November.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [65]

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Okay. Perfect.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [66]

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So technically, we are doing 7 days a week, if you count the 2 Sunday flights. But that would the eighth flight we will add on mid-November.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [67]

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Okay. And on the core business today, it's still dedicated 6 days for each week that you're doing your core business flying?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [68]

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One of the things we -- as we said last quarter, and I maybe remind everybody that everything -- the core business is -- ACMI is quite core for us today and so is the domestic business. So -- I mean, we used to call it core overnight business, but a lot of our domestic business is not overnight anymore. We do day flights and we are going to continue to do day flights and we're going to continue to do weekday flights. So I think more -- we have taken the word core out because obviously, that confused a lot of people and thought that ACMI and charter and some of the other business is secondary. And as we have noticed, that business is also equally important to us. So I would rather call it market segmentation more than splitting it up rather than core business for us.

So yes, domestic -- I would refer to that as a domestic business that -- right now, we are -- yes, we are 6 days plus an additional flight on Sunday. So it makes it 7 days, but also mid-November, we will have starting some daylight turns as well. So at the height of the peak, some of those flights that we are looking at 7 flights a week, obviously, there's more flights, but it would become probably a couple of additional flights during the peak as well, which is traditional for us.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [69]

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Awesome. Thanks for the color there Ajay. And Jamie, you commented on IATA data. Is it fair to say that the Cargojet is somewhat agnostic to that data because of how e-commerce driven and focused the company is?

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Jamie Bennett Porteous, Cargojet Inc. - Executive VP & Chief Commercial Officer [70]

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Yes. The only reference that I made or the reason I made the reference for it is because it does have an impact on our international -- our interline business and some of the international. The reasons that we suspended some of the international routes was again because of lower global air cargo demand and it certainly affected our interline volumes.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [71]

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Okay. Excellent. And then just one final question here for John. I saw in the MD&A that you amended your credit facility. Can you walk us through the highlights there? I saw that -- I think on the 28th of October it was amended?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [72]

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With the support of our banking syndicate led by RBC, we were able to achieve some better pricing about 25 basis points on our revolver. And we took the opportunity to extend that revolver. So we have a full 5-year term now. So a committed facility for yet another 5 years.

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Operator [73]

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The next question is from Ben Cherniavsky from Raymond James.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [74]

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Most of my questions have been asked at this point, but just if I could follow up for a little more clarification. John, I appreciate the sensitivity of the warrant but can you at least give us an indication of what the after-tax impact on EPS would have been from that gain?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [75]

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I think we disclosed the gain in terms of that quarterly sort of revaluation that we have to do using some fairly sophisticated models. But in terms of the gain for the -- that non-operating gain, and I think it was in the neighborhood of $10 million.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [76]

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Yes. Is that after tax?

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [77]

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I have to get back to you on the tax effect because in terms of -- whether we tax effected that number, sorry, just I'm not sure. But I can look that up and talk to you about that.

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Ben Cherniavsky, Raymond James Ltd., Research Division - MD & Head of Industrial Research [78]

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Yes. I'm just trying to get like an adjusted EPS number that you guys don't disclose it, but it would be helpful to get that information in there both on the quarter and the 9 months.

And then on the debentures, there's the potential dilution. If I've done it right, it's about 2 million shares. Do you think that's what the full dilution? Like, should we assume it's...

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John Kim, Cargojet Inc. - VP of Governance, Corporate Secretary & CFO [79]

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Yes. It's at [58, 65] strike price. So that's about right.

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Operator [80]

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(Operator Instructions) The next question is from Nauman Satti from Laurentian Bank.

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Nauman Waqar Satti, Laurentian Bank Securities, Inc., Research Division - Associate of Research [81]

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Just going back to the volumes part. I understand that with trade, there is an upside to it. But what would your outlook be like if, let's say, this trade thing continues because we've already seen that 2019 was weak on volume. So for 2020, will we still see more contraction? Or is it sort of flattens out?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [82]

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I think we have probably seen the worst impact on the interline business that it has for us and we discontinued South American routes. I don't anticipate anything. What we are seeing on interline is bare minimum that is coming into Canada from other carriers. And as you know, there is not a whole lot of trade dispute with Canada anywhere.

So what we are missing is the U.S. portion of that growth that we used to get on the interline. I don't anticipate that, that global trade would have any significant impact on what we do today as the driver of our business and the driver of growth is on the e-commerce side on the domestic network. So I don't anticipate that sort of area to be impacted by the global trade issues.

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Nauman Waqar Satti, Laurentian Bank Securities, Inc., Research Division - Associate of Research [83]

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That's great color. And just one more. For pilot fatigue regulation and the cost that you would pass on, if you could provide some color on the discussions that you have with customers? Have they sort of finished? Like, you've finalized that process? Or is that something that's still going on?

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [84]

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I think besides a couple of customers that we are -- they are doing their due diligence with us in terms of whatever cost increases, what's the impact and how we spread it out. I think we have about 70% to 80% have gone through with all the customers and put in place a different sort of -- as our cost is phased, the approach of surcharges is phased as well.

But as I said, with the exception of 1 or 2 major customers that are in the due diligence, the rest have been all negotiated and the matter has been closed.

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Operator [85]

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There are no further questions registered at this time. I would now like to turn the meeting over to Ms. Dhillon.

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Pauline Dhillon, Cargojet Inc. - Executive VP of Marketing, Public & Government Relations [86]

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Thank you. I'm just going to ask Ajay to give us any last remarks that he may have.

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Ajay K. Virmani, Cargojet Inc. - Founder, CEO, President & Director [87]

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Yes. Thank you very much, again. A lot of questions. And hopefully, as I said, our strategy is to improve the margins and strengthen the balance sheet, manage our costs and also manage our capital expenditures, bring the leverage down to 3. That would be our goals. And I look forward to the next conference call with all of you with even better results. Thank you very much, everybody.

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Operator [88]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.