Cargojet Stock

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.

Congratulations for the solid results. Maybe, Pauline, could you discuss about the upcoming customer agreement up for renewal this year and what you would expect in terms of pricing?

Yes. Thank you, Benoit. There are no customer agreements coming into the contract customers this year. The next ones will be 2029 and 2030. But we are speaking to customers about this new increase, and we are passing it through where we can with where the pilots are concerned. So we are looking at certain customers that do have shorter-term contracts, and we are introducing these new costs to them.

Okay. That's great. And last quarter, you provided a good update on the international opportunities in countries that you've been looking at. Could you maybe provide an update on the discussion you're having, whether you added some geographies and whether there are some that are close to the finish line?

Yes, absolutely. We've added Tel Aviv this last quarter. Q1 was focused on Liege. We built that lane. We built a lot of trade between Canada and Liege. And now we've extended Liege to Tel Aviv. We are in a lot of conversations, so still pursuing Africa, the Far East, we are doing charters now back from Western Canada into China. We look for opportunities there. Again, with the fleet sitting on the weekend, we're utilizing the assets well. And we continue to look at opportunities throughout Europe and Far East Asia as well as Africa and the Middle East.

Your next question comes from Kevin Chiang from CIBC.

Maybe just not to belabor the point on the new labor agreement and how it flows through our models, I guess I just think of it simplistically, adjusting for some of the stock-based comp noise in Q2 and looking at Q1 as well, you're kind of run-rating about $27 million a quarter of crew costs. Aaron, I think you said about 60% to 65% of that is wages. So am I just applying like a 26% lift to that starting in Q3 here and then just adding kind of the 35% of that $27 million? Is that kind of a simple way to think of it? And if -- I ran the math, so that gets me around $31 million, $32 million a quarter. Is that kind of the right ballpark to think about where crew costs go from here on?

I think at a gross level, that's the correct math. There's going to be the offsets that we'll get out of the productivity in there. I think if you look at the math of 16 days, 15 days of work is probably a good way to look at the math there, plus there's a couple of training days.

Okay. And I guess if I think of that productivity, I guess, simplistically, as you and Ajay said, if you're going from 15 to 16 days, that's like, I guess, a 6% offset. Is it -- I guess that's the offset you're talking about against that 26% wage increase.

Yes. Kevin, that's exactly right. You've got 1 day [ goes ] 6.5%, I guess, of productivity plus some training days as we go. In the first year, we get 1 training day; within the second year, 2; and the third year, 3; and fourth year, 4. So over the course, we'd be looking at probably average 2 additional training days a year that we get on top of that. But also not just the productivity, but it also gives us opportunities to be more price competitive with American carriers that we constantly compete with charters.

Now we have a lot more crew days. If you look at the total crew days, we gained about 6,000 crew days here, so -- over the year. And that productivity gives us a lot more pricing flexibility, long-term sustainability and also reduces the need for overtime that we had. So it's a very well-balanced agreement where the industry productivity and wages are now closer to the market than they were.

That's helpful. Pauline, you mentioned some of the longer-term contracts will take a little bit of time here to reprice on this new labor agreement. I guess for ACMI and charter, I often think of those as you're kind of pricing that in real time. Is there a way to think about maybe the potential revenue step-up here if we just assume, let's say, the amount of flying is the same, but just related to this labor contract, is it something that could be relatively material on a quarter-over-quarter basis just as you look to reprice those rates to reflect the new labor agreement?

Yes. Kevin, that's absolutely correct. We're going to reprice that. We're also looking at the mid-market customers where we're aligning that pricing because that's subject to annual pricing versus contract pricing. So all of those are being adjusted accordingly.

And Kevin, you're right on the charters and ACMI and some of the other stuff, which is real-time pricing. That pricing will be taken into account when the quotes and all that stuff is provided.

Okay. That's helpful. And maybe last one for me, and maybe I'll borrow from James' question earlier, maybe ask it a little bit differently. It looks like, when I look at the last, let's say, 2 to 3 quarters, your EBITDA per block hour has seen a step-up here, maybe closer to what you were seeing during the pandemic actually when clearly the market was in a different place. It feels like some of this might be related to the One Fleet strategy. Just wondering, like how should we think about EBITDA per block hour? Is there a lot of upside here still even with the lift you've seen over the past 2, 3 quarters, just given some of these initiatives you've been pursuing?

Yes. One thing I'll -- before Aaron and Pauline answer, one of the strategies that Pauline has implemented is quality of revenue and revenue enhancement. It means quite a bit of yield management. Quality of revenue means stuff that's not profitable or shouldn't be on our flights because it's not time sensitive and we were pricing it with passenger carriers, those are the days of the past. So I think you'll see that the revenue enhancements and revenue improvements, yield improvement initiatives that have been started a number of months ago are paying dividends now. So I'll let Aaron and Pauline comment on the rest of it.

Yes. Thanks, Ajay. Kevin, I'll put it really simply. We recognize that we're the best steakhouse in the city, we're not going to charge keg pricing anymore. We're realigning our revenue. We're looking at better revenue quality. We're looking at routes. We're looking at lanes. We're looking at everything, and we're reassessing our pricing. We're looking at mid-market. The e-commerce is certainly surging. We're looking at mid-customers. We're expanding and we're looking at our DIM factors. We're looking at utilization of the aircraft. That's why you see a big bump in interline. We're going out and having conversations with those customers. So we're filling a lot of gaps that were in place in the domestic overnight previously to us looking at the revenue quality.

And I'll add, at the same time, we've been talking for the last 3, 4 quarters about how we're trying to pressurize the cost structure constantly. I think Cargojet has always been a nimble, lean carrier, but one of the things we're making sure we're watching as we look at revenue initiatives, to Pauline's point, is making sure that we're keeping the lid on costs at the same time.

Your next question comes from Razi Hasan from Paradigm Capital.

Maybe just for -- to start off with, just with regards to volume growth in the domestic business for the quarter, could you let us know what that was outside of the CPI-related growth?

Yes, we don't report specific volumes on the domestic network. I mean I think if you look at the financials, we think of the domestic network as the unit sort of being the operating day. And so if you look at the revenue per operating day, that's probably the right metric to think of as a unit growth.

And we're seeing that increasing growth in the e-commerce is coming from our mid-market customers.

Okay. That's fair. And I may have missed this one, but just on CapEx for the remainder of the year, can you provide any color on how to think about that for Q3 and Q4?

Yes. No change to what we've talked about previously other than like we said, we've put one 767-200 into conversion. That's likely to have somewhere in the range of $10 million to $15 million this year and maybe another $5 million next year. And to Ajay's point, I mean, that's CapEx that will either be tied to meaningful revenue growth and EBITDA growth opportunities if they arise or divestment opportunities, which is what we've got in the fleet plan right now.

Okay. Great. And maybe just one last one, just on the fuel surcharge revenue for the remainder of the year. Should we look at it more as closer to Q1 levels, obviously, from the Q2 hike? Or maybe how to think about that for Q3 and Q4?

Look, I mean, the fuel has been so volatile and there's been a lot of reaction to each side of the current conflict in Iran saying certain things. I think our expectation right now is it remains elevated at the moment. It seems like it's likely to remain elevated. But if I could predict the energy markets that well, I think I'd be a happy man.

And your last question for today comes from Chris Murray from ATB Cormark.

I guess maybe I'm just going to try to tie some of this together a little bit because I think the question around the revenue efficiency, if I look at it and I look at ex the fuel charge, your revenue was up about 7%, but block hours were maybe down 7%. And we think about that in context of the lower capital spending, maybe more discipline around [indiscernible]. How are you guys thinking about how that all combines going forward, thinking that you've got the MD-11s, that capacity will have to replace, and being able to maintain that quality of revenue in a capital disciplined fashion? How do we think about longer term into '27 and '28, how you're expecting to see return on invested capital trend and your thoughts around the business longer term?

So Chris, I mean, I'll start maybe at the end of that question. Return on invested capital is something that I am laser focused on. It's one of the reasons we've been talking about cleaning things up on the balance sheet and to your point, improving the quality of revenue, the quality of EBITDA.

If you look at the trending in our ROIC, particularly in the denominator, over the last 2 quarters, I think we've had ending invested capital start to come down from some of the peaks 6 to 8 quarters ago or 4 to 6 quarters ago. And so just because of the way the math works there, and you do the average invested capital, there's a bit of a drag as you look at some of those peaks. It will take us another 3, 4 quarters to get past that. But we're -- I think at that point, you'll start to see average invested capital in a more reasonable place at the same time as we're working on the NOPAT side.

I think in general, what you're pointing at is exactly what we're trying to accomplish as a management team, which is be more efficient, work on higher quality revenue, higher quality margin with the assets we have.

Yes. No, I think you summed it up well, Aaron. It's exactly what we've been saying on the call. It's growth, international growth outside of the borders of Canada. It's utilizing the assets while keeping a laser focus on our costs.

And there are no further questions at this time. I will turn the call back over to Pauline for closing remarks.

Thank you, everyone, for participating on our call today, and we look forward to speaking to you in the next quarter. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

Good day, and welcome to the Cargojet First Quarter Financial Results 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, Vice President, Finance; and Remi Tremblay, General Counsel and Corporate Secretary. After opening remarks about the quarter, we will open the call for questions.

I would like to point out that certain statements made on this call, such as those 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 forward-looking information and for reconciliation of non-GAAP measures to GAAP income. I will now turn the call over to Pauline.

Thank you, David. Good morning, everyone, and thank you for joining us today. Before we begin, I want to take a moment and recognize our Cargojet team. In a highly volatile and uncertain environment, their resilience, their discipline, and their execution continue to set us apart. Their commitment to delivering reliable, world-class service is the foundation of our organization. 

We concluded the first quarter with an on-time performance of 99.2%, a key metric for our customers. The first quarter was shaped by significant global disruption. The conflict in Iran reduced global air cargo capacity and impacted key hubs across the Middle East. At the same time, disruptions to oil supply routes drove a sharp increase in fuel prices, with volatility remaining elevated and visibility limited. 

Fuel prices have increased materially during the quarter. Importantly, we have a well-established fuel surcharge mechanism in place. While there is a small time lag, this structure allows us to recover these increases and remain generally cost-neutral. This is a critical advantage in managing through periods of volatility. 

In this turbulent environment, we remain vigilant and focused. Our ability to dynamically align our fleet, our operations, and our cost structure with market conditions has allowed us to protect margins while maintaining industry-leading on-time performance. That disciplined approach continues to differentiate Cargojet and positions us to perform consistently through uncertainty.

Turning to our business segments. Our core domestic overnight network delivered a strong and stable performance with revenues in line with the first quarter of last year, despite an unusually strong comparison driven by tariff-related demand pull forward in early 2025. Matching at elevated levels reinforces the strength and the resilience of our domestic franchise.

Our hybrid ACMI business performed in line with expectations and reflects a more normalized run rate. We continue to manage this segment on a quarter-by-quarter basis, ensuring we remain agile and responsive to evolving market conditions rather than committing to fixed long-term assumptions.

Our charter business continues to be an important strategic growth lever. We are deliberately focused on selective high-value opportunities in underserved and niche markets where our flexibility and operating model provide a clear competitive advantage. A strong example of this is our recent charters to Venezuela for a South American-focused partner, the first by a Canadian carrier in approximately seven years. This demonstrates our ability to access markets and to create value through execution and network reach.

The grounding of the MD-11 aircraft has also created incremental demand for [Lyft], and we have been selectively capturing that opportunity. We are approaching this by ensuring we remain disciplined and do not overcommit capacity against what is, by nature, a very fluid situation.

That said, based on current visibility, regulatory authorities have not identified a clear timeline for the MD-11 fleet to return to service, which continues to support near-term demand for our network as well as charter opportunities. We will continue to leverage dislocation where it makes strategic and economic sense while maintaining full flexibility in how we deploy our assets. We anticipate our MD-11 flying to continue at least into the third quarter of this year.

Our Liege operation continues to perform above expectations. strengthening our European connectivity, enhancing the value of our domestic network through integrated global flows. Overall, we are very pleased with our performance in the first quarter. In a challenging and uncertain operating environment, our team executed exceptionally well, maintaining our existing business while continuing to identify and capitalize on new opportunities, which has always been our strength. 

Looking ahead, while the global trade and geopolitical environment remain unstable, our strategy remains clear.

We will continue to operate with discipline, remain focused in how we deploy our assets and selectively pursue opportunities where we have a structural advantage. Cargojet is built for this kind of environment, and we intend to continue executing from a position of strength. With that, I'll turn the call over to Aaron to review our financial performance.

Thank you, Pauline, and thanks, everyone, for joining us today. Like Pauline, I'm very pleased with our performance in the first quarter of 2026. Despite challenging operating conditions, the diversity of our revenue streams, our deep customer relationships and our team's ability to identify and take advantage of opportunities in the market, has allowed us to deliver year-over-year revenue growth. At the same time, our relentless focus on cost and operational discipline continues to produce robust adjusted EBITDA margins. The Cargojet team's consistency in delivering through all types of market and operational conditions is what drives the success of our business, and I echo Pauline in my thanks to all Cargojet employees.

During the first quarter of 2026, we generated $254.7 million of revenue, up $4.8 million or 2% from the $249.9 million generated in the first quarter of 2025 despite very challenging operating conditions and a tough comparable period in Q1 last year. Our revenue growth, along with our continued focus on cost control and optimization of fleet utilization led to another strong quarter of adjusted EBITDA coming in at $81.9 million, up from $80.8 million for the same period in 2025 at a roughly equivalent margin.

We also delivered free cash flow of $87.4 million in Q1 or $25.3 million, excluding the previously disclosed receipt of proceeds from aircraft sales during Q4 of 2025, a significant improvement from the $45.9 million outflows in Q1 of 2025. I'm very pleased with the resilience of our domestic network revenues, which continue to benefit from growing e-commerce demand across Canada. In the first quarter of 2026, our domestic network generated $104.8 million of revenue, in line with the first quarter of 2025 despite the growth and changing market conditions in 2025 that Pauline has already spoken about.

During the first quarter of 2026, our hybrid ACMI business generated revenues of $54.2 million, down slightly from the $59.4 million during the same quarter of 2025, but in line with the run rate we generated in the back half of 2025, excluding Q4 peak flying. I'd like to remind everyone that during the first quarter of 2025, our hybrid ACMI network had not fully transitioned from longer stage length east-west flying to the current North-South intra-Americas flying, which is the primary driver of the change in year-over-year revenues.

In Q1, we saw the full benefit of the new charter opportunities we discussed on our fourth quarter call. Total charter revenue of $58.1 million was up 26% or $12.1 million from the $46 million generated in the first quarter of 2025 as the basket of new charter opportunities, including the support flying for a long-term partner, our new long-term charter partner serving Central and South America and our new service to Liege more than outweighed the revenue generated by our Transpacific flying in the same period of 2025.

The connectivity of our domestic and hybrid ACMI businesses to geographies where we are serving those new charter partners also allows us to manage our fleet efficiently, supporting the robust adjusted EBITDA margin generated this quarter.

The final item I'd like to discuss is our continuing focus on our efficient and disciplined approach to capital. During our year-end conference call, I had shared that subsequent to the year-end, we would receive the proceeds from the disposition and sale of two nonstandard Pratt & Whitney-powered aircraft from our fleet. I'm happy to report that transaction is now complete. Those proceeds, combined with our core free cash flow allowed us to reduce our net debt to $915.2 million at the end of the first quarter, a reduction of $72.7 million from the end of 2025, bringing our net debt to adjusted EBITDA ratio to 2.8x, well on the path to our long-term target of less than 2.5x.

As we previously noted, our capital allocation priorities continue to be sustained dividend growth, the pursuit of accretive growth opportunities with disciplined capital deployment, opportunistic use of our NCIB and maintaining our net leverage below 2.5x over the long term. In Q4 2025 and Q1 2026, we've demonstrated our commitment to those goals by announcing an annual dividend increase along with our Q4 results, using existing capacity to pursue new accretive charter opportunities efficiently linked to our domestic and hybrid ACMI networks, renewing our normal course issuer bid and executing the repurchase and cancellation of more than 188,000 shares while reducing our net debt towards our long-term target.

We expect to continue to focus on those priorities through the remainder of 2026. With that, I'll hand the call back to Pauline.

Thank you, Aaron. Over the past several quarters, we have seen persistently elevated levels of volatility and uncertainty driven by fluid global conditions. As we move through the second quarter, we remain measured in our outlook. That said, as demonstrated in the first quarter, challenging environments also create opportunity. At its core, Cargojet is built for these opportunities. We will continue to actively manage the business with discipline while remaining focused on identifying and capturing opportunities in a dynamic and ever-changing market.

Before we open the call for questions, I would like to take a moment and thank our team. The results we are delivering today operationally and financially are a direct reflection of their commitment, their resilience and their professionalism.

I'm extremely proud of how our team continues to show up, adapt and execute at a very high level. With that, we'll open the lines for questions.

[Operator Instructions] Your first question comes from Chris Murray from ATB.

Just I mean, starting a little bit with the announcement from Amazon yesterday about extending their logistics network to other customers. I know in Canada, you have a pretty sizable and dominant position and Amazon is a pretty big partner. But I guess two parts to this. One, does that impact you at all with that announcement? And then second, on a more broader basis, can you talk a little bit about what you're seeing in terms of growth in that domestic market from perhaps other folks who don't have as evolved an e-commerce platform? I know there's been some discussions in the past with perhaps other retailers or other vendors about bringing them into the network perhaps more directly. And any idea about how we should be thinking about growth in domestic over the next year would be great.

Ladies and gentlemen, we experiencing some technical difficulties. Please remain on the line. Thank you. Chris Murray, if you would mind repeating the question, please. The speaker is now back with us.

Okay. Great. The question I had was about Amazon's announcement yesterday, extending their logistics network to other customers. In Canada, you have a pretty sizable and dominant position and Amazon is a pretty big partner. But two parts to this question. First, does that impact you with this announcement? And then second, on a broader basis, can you talk a little bit about what you're seeing about growth in the domestic market from perhaps other companies who may be looking to build a more developed e-commerce platform, looking for distribution? I know there's been some discussions in the past with other retailers or other vendors about bringing them into the network perhaps more directly. So any color on what that looks like over the next year and how you think the domestic business evolves or even longer term would be helpful.

Chris, it's Ajay. I'll take that question. First of all, Amazon announced this entering into the logistics arena. I think that their goal primarily from what we can see and what we've been told is to put some freight on their network, so it lowers their network cost. Whether they become a real operator and real integrator, that remains to be seen because as you can see, UPS and FedEx have billions of dollars of investment in infrastructure. Tracing, tracking, service, pickup, delivery. I don't know if Amazon has reached that level. But obviously, with their size and resource, they can if they want to. But from what we see in the marketplace, they are not ready yet. The second part of it is whether if they do become, let's say, in Canada, a parallel to UPS and FedEx, keep in mind, they are on our network. So if they were going to take any business from anywhere, it comes back to our network. So we don't impact and we have a long-term contract with Amazon with certain provisions, which I'm not able to disclose that, that activity can be limited in Canada.

And secondly, anything that moves off Cargojet network from container A, it might go to container B. So we don't see that as a net negative to us in any which way. And third thing, domestic outlook looks strong. We are growing on the domestic side in spite of all the geopolitical and other disturbances we have in the marketplace. As you noticed, we recently announced that we're going to invest and spend more money and time onto the domestic network, strengthening it more instead of cross-border. And I think that we find the domestic business here to be the one that is consistent growth and also easier for us to manage, it's in our backyard. So I hope that clarifies any Amazon issues that you might have.

No, that's helpful. The other question, maybe this one is for Aaron, but just kind of broadly, I know you had the sale of the two aircraft last year, but you also talked a little bit about wanting to look at your mix of leased aircraft versus owned aircraft to the idea of maybe, call it, rightsizing the balance sheet, maybe doing some more sale and leaseback transactions. And you mentioned your goal of trying to get down below 2.5x leverage, which I think maybe perhaps opens up other -- other opportunities. Can you talk a little bit about your thoughts around additional transactions, what's available to you in the marketplace right now? And how we should be thinking about cash flow over the balance of the year, either with those transactions? And any updates on CapEx would be helpful.

Ladies and gentlemen, please remain on the line. Once again we had lost the speaker, we'll take a few moments. Thank you. Okay. And we have the speaker back. Chris, if you don't mind repeating your last question, please. Thank you.

Yes, sure. So again, probably more for Aaron. But just looking at the transactions that you did last year on the sale of the aircraft, you had talked previously about maybe looking at the mix of owned versus leased aircraft on the balance sheet with the opportunity to maybe free up or manage some capital. I'm just wondering, any thoughts around additional transactions this year and how that would impact free cash flow? And any thoughts around CapEx for the year that goes into that calculation would be helpful as well.

Yes. Thanks, Chris. So I think what we've been saying and we'll continue to say is from the perspective of looking at sale leasebacks, we are looking at the transactions opportunistically. I wouldn't say we have a set program of going out and pursuing sale leasebacks, where we can get attractive deals that will lower our overall cost of capital and are accretive to the business, we will certainly take a hard look at them.

I think there's certainly potential for you to see at least maybe one more of those deals this year. I think from a free cash flow point of view, you'd certainly see us show that as a net cash inflow in free cash flow. From a net debt perspective, I mean, the lease liability goes on the balance sheet. So it really depends on the transaction terms on what your inflow is versus that lease liability. But generally, it's not going to have a major impact on net debt directly.

Your next question comes from Kevin Chiang from CIBC.

Maybe just wondering what impact, if any, did the fuel lag have in Q1 on your earnings? I believe your domestic revenue segment typically sees about a two-month lag in terms of recovery.

Yes. We think of it, Kevin, more of a one-month lag. I think it's a little tighter than that. Fuel prices really started to come up right towards the end of Q1. So the impact wasn't as great in Q1 as you might end up seeing in Q2. For us, fuel is obviously largely the pass-through after that been a lag. So you probably didn't see an overall material impact in Q1. We obviously put a fuel surcharge in place fairly quickly. So I think we'll expect more of that in Q2.

Okay. That's helpful. And this is going to be my second question. I noticed your receivables ticked up here in Q1. And I guess if I look at your receivables turnover, maybe a little bit lower than we've typically seen. Just anything we should be thinking about on the receivables front for the remainder of the year, maybe as a working capital tailwind as you unwind this receivables number?

Yes. I think you'll see it -- you'll see it stay up a little bit through the year. Some of the new business we're doing has a little bit of longer receivable time line. But some of that also we had recoveries of insurance proceeds. But I think if you look at the subsequent events, you'll see we received some of that after Q1. It's just a timing difference.

Your next question comes from Konark Gupta from Scotiabank.

So maybe first on the hybrid -- sorry, hybrid ACMI. So I think the point you guys tried to make initially in the remarks is last year, you probably hadn't seen the full transition from longer stage land to the shorter stage land. So, would you say Q1 of this year is actually reflective of all the changes that have taken place in that business? I mean this is the sort of bottoming or troughing in that market because it seems like the revenue is at the low point compared to what you had in 2022, maybe. So yes, any thoughts on ACMI? Where does it trend from here? Is it the bottom or you might still see some downward shifts in the next few quarters?

So Konark, I'll take that. It's Ajay. ACMI is pretty solid. The number of planes committed are the number of planes. So we don't see anything going down. Hours shift sometimes because, for example, they might not want to fly to Bogota because there's more demand to Venezuela. So there might be a couple of hours difference here and there.

So that's the flexibility we offer our customers. We don't see that we're going to lose any aircraft unless the total trade is dead and the geopolitical and tariffs and war situations are so bad that everything is shut down. So we don't anticipate that. But again, everybody is -- your guess is as good as mine on that issue. As far as the hybrid ACMI is concerned, what Pauline did was implemented a model where we were not able to use a lot of ACMI planes for our own charters.

So right now, our agreement now allows us the flexibility with DHL to use any ACMI planes that we have as long as they are available, and we can do it within the rest period of the planes. The maintenance is not affected. So many factors go into it. The bottom line is that 12 or 13 aircraft that we fly for DHL today, they are available at least three days a week to us to look for charter opportunities.

So that change and model will increase our crew utilization. It will increase our aircraft utilization, and we have started to market some of that product. We have seen some small successes. But again, this is just a work in progress that we started. We'll see some more results as the year goes by.

Okay. That's very good color, Ajay. And on MD-11, I wanted to understand the opportunity set here. So it seems like the grounding is still on. I think one carrier, [ DOLE ] recently announced that they might look to unground some planes because it's costing them a lot of money and all that. What are you hearing from your customers on MD-11 side of things? I mean Q3… Yes, go ahead, sir.

Yes, I'll take that one. Regulatory authorities have not permitted the MD-11 flying again. We will take our guidance from FAA and Boeing. While we are hearing some noise that the -- an integrator is going to bring them back online and use them in their network. We have not been officially been given that green light nor has the industry. In my opening remarks, I did state the customer that we are operating our assets for, we will continue to do so until the end of Q3. That's the commitment that we have. That customer has officially come out and said that they will not bring the MT11 back into their fleet.

And last one for me on the Iran war and the Middle East conflicts, I guess, as a whole, I mean, it sounds like the global air cargo capacity that's impacted by Iran situation is about 5% or something. That's meaningful. What are you seeing from your customer base in terms of opportunities maybe? I mean, I understand, obviously, the risks are evident from fuel and whatnot, but what could be the potential opportunity here for you guys? And would that be more on the ACMI side or charters?

Well, the opportunities that we are seeing, Konark, are getting inquiries and that we are mulling over are opportunities from Europe to Asia, Europe to India.

Europe to Africa.

Europe to Africa, and there is some active quotations and active discussions going on. But again, our model is that we don't want to get into a commercial risk on handling these shipments, we like to work on ACMI or a charter model, which our base risk is protected and there is some upside, we can handle that or small downside, but we'd like to cover most of our risk. So you can call it ACMI, you can call it charter. At the end of the day, we have to be risk-free on fuel. We have to be risk-free on filling the plane.

And just to Ajay's point, we want to make sure that we're safe. It's opportunities like these that we continue to monitor as they come available. We continue to have dialogues. The world has gotten smaller since the war, and Cargojet is very well positioned with our weekly flights into Liege to carry those flights forward, as Ajay said, to India, to Africa or to anywhere that we see an ACMI opportunity or a charter opportunity.

Your next question comes from Cameron Doerksen from National Bank.

Just wanted to quickly follow up on the fuel lag question. You mentioned kind of minimal impact in Q1. Just wondering what we might expect in Q2, I guess, from a bottom line perspective, let's assume that the fuel price kind of stays steady through Q2. Obviously, you'd have higher fuel surcharge revenue coming in. And I presume with the one-month lag would be pretty much that would fully offset the cost impact. But I just want to make sure there was no surprises, I guess, on the bottom line in Q2 from any transient fuel issues.

No, I think you're thinking about it correctly, Cameron. I think you'll have that one-month lag, but otherwise, it's generally a pass-through for us.

That's good. I guess my main question, I just want to, I guess, better understand how the new charter work that you're doing to the South and Central America is evolving. I guess has the volume of work changed at all since you first talked about it, I guess, earlier in Q1? And is there any seasonality to that business that we should expect over the coming quarters?

Yes. We've added Venezuela to that, as I spoke about in my opening remarks. Venezuela is a new additional route. We are operating two flights a week into Venezuela for that customer. Everything is moving as it should be. We're very pleased with that routing. We're having a lot of other customers also reach out. It's a new market. It's a market by Canada. Our Canadian operators haven't flown into since 2019. So it's lending to be a strategic opportunity for Cargojet.

And just, I guess, broadly on that customer and in that those markets, I mean, is there any seasonality, I guess, we should expect through the year? Or is it pretty steady quarter-to-quarter?

It's pretty steady quarter-to-quarter.

Your next question comes from Daryl Young from Stifel.

Just, I wanted to touch on the domestic network. It sounds like the outlook is still quite strong. But with some of the consumer sensitivities that are starting to be talked about, how are you thinking about your exposure there? I think in the past, you've talked about structural e-commerce trends maybe being more important than short-term consumer sensitivity. Has that thinking changed at all? Or how should we think about that?

No, I think April is trending to be a strong month. I think that you're going to continue to see e-commerce growth in this country. Canada lagged the rest of the world when it came to e-commerce. And while you do see increasing fuel prices and maybe consumers moving away from restaurants or travel, the shift has come to buying patterns where consumers are now buying online. Shopping has changed. We don't anticipate nor have we seen any slowdown in the domestic overnight consumer demand.

And just to add to it, when shifts like these happen, we have seen that before, people are not going to stop buying. Instead of $100 pair of shoe, you might buy a $50 pair of shoe instead of stock -- stocking 10 of toothbrushes, you might just keep two. So the shipments continue on. Maybe the value of the shipments is less, maybe slightly the weight might vary. There will be more frequent smaller shipments than bigger shipments. So all these trends we have experienced from COVID on or even before that, when the economies go down or when there is some doubt, but don't see the change in for us, it might be a value of the shipment that's not going to impact us. So that's the trend we have always seen in these situations.

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

I just want to have a question on capacity and where you sit perhaps if we do get a little bit of an uptick in volume, there's talk of the freight recession coming to an end among your trucking peers, even some of your railroad peers. So if that does -- if we do see some of that lift as the year plays out, where do you have capacity? Maybe touch on domestic, mainly in your domestic, and how does that look outside your domestic in the charter and ACMI as well?

Yes. Thanks, Walter. One thing that we've gotten better with is the utilization of our aircraft. We now consider ourselves as having a one-aircraft market, which allows us to deploy our assets from whether they're in Miami or whether they're in Liege to better capture markets. We are interchanging aircraft here on the domestic network. We are looking at incremental revenue opportunities through our existing fleet. We feel we have enough capacity. We're confident that we do. And we have the ability to flex that utilization as needed on demand lanes. So we're confident we have the right fleet with the right ability to handle any growth that we see in the next year.

Fantastic. Just getting a run rate because you're all-in Charter, obviously, you're having some great success there. It's up 26%. But I know there's seasonality, intra-quarter seasonality in that number as well. Is that something we see tick down quarter sequential as it has in the past? Or is this a new kind of run rate that we build on from here through the course of the year? Just want to model correctly the kind of all-in charter revenue given some of the opportunities that you've executed on in that segment.

No, Walter, we don't see any changes there.

I think to Walter [indiscernible] earlier points, some of the new charter partners maybe have a little less seasonality to them. This basket of new opportunities is, I would say, more of a steady through the year versus seasonal.

Your next question comes from Steve Hansen from Raymond James.

I'm going to dovetail on the previous comment and just look a little bit further out. It sounds like to me you almost have more opportunities than you can perhaps satisfy, and capacity is, of course, limited to some degree. So I mean as we think about the balance of this year for charter specifically, can we expect that to grow through the year and put up numbers that are again maybe not as high as the first quarter growth rate, but you've got [indiscernible] easier through the years? I'm trying to [indiscernible] how the growth profile is going to look for charter through the year.

Yes, it's a great question. We continue to look at new markets. We're looking to expand. We were going to go into Tel Aviv in April of this year. Unfortunately, with the situation globally, we had to pull that back.

We feel that we have the right fleet. It's the utilization of the aircraft. To Ajay's point earlier, we were dedicating assets to DHL. We are now using those assets, when it is not operating the DHL network, to deploy and capture any charter opportunities that are available to us. So, do we see charter opportunities? Absolutely. Are we aligned to service those with our current fleet? Absolutely. We just have to utilize the aircraft better, and strategize our routes and our lanes, and look for opportunities.

Okay, great. And just one last one. I know you've already discussed the ACMI entering a new sort of level here. But is there any indication at all yet, just given the global situation, that you have opportunities to start re-increasing stage length yet? Or is it still too early for that?

I think it's still too early for that. With that particular customer, we're still flying the same number of aircraft. It's just that we're not flying transpacific and transatlantic as we've previously done so, primarily because of tariffs and the uncertainty in the geopolitical climate.

[Operator Instructions] Your next question comes from Tim James from TD Cowen.

My first question -- I just want to tie back into the last discussion there related to DHL and the ACMI flying. You've outlined some adjustments to the approach with DHL, where it frees up or gives you aircraft availability to deploy in other places. Can you reconcile that to the August announcement of last year about the – where you renewed the DHL agreement, if it has sort of implied an upsize in terms of revenue? Are these changes that you are talking about sort of revisions or adjustments to that agreement as it was announced last year, or was this all embedded in that original renewal that was disclosed last year.

That agreement was on its own. That's got nothing to do with the changes. Times have changed. Asset utilization is where it is. If you don't utilize the assets that are sitting there, it's a shame on everybody. So we've been trying for a while to convince DHL that if we fly these assets more, they'll generate more revenue, and we can share some of that additional revenue with them rather than the plane sitting. The concern is you could fly the plane when they are not flying for DHL, but the service to them is very, very critical.

So what we are working on is placing a spare in Cincinnati and Miami hubs, if we can find the right equipment to do that, but also step up the maintenance so that Fridays, Saturdays, Sundays, and even Mondays, these planes are available to us for charters.

This is not part of the original agreement. This is a tweak that was initiated by the team here a couple of months ago. We have just finalized that. But in principle, we could use it whenever there is a charter opportunity. This is an add-on. It is strictly -- again when the planes are sitting on the ground, they're not making any money, but if they're flying, they will. And DHL, if any partner, they recognize the most because they're in the same business.

And there will be -- we haven't finalized the exact numbers yet, but they will get some portion of our revenue if we generate revenue. So it will be a win-win situation for both parties.

Okay. That's really helpful. My second question, I think Pauline, you were commenting earlier about the global uncertainty, geopolitical uncertainty, et cetera, that is impacting the industry. Could you just talk through how it's impacting your business? Or maybe the question should be, is it? Because I look at the results and I almost struggle a little bit to sort of draw a direct line and say it's having a negative impact here. I'm just wondering if you could tell us if that's like an observation about the world around you, but you're very well insulated? Or are there little places where you're feeling it?

Yes. Tim, I think if we're facing it anywhere, it's not on the domestic overnight. And to my comments earlier, the domestic continues to grow. We've had a strong April. Consumer demand to what Ajay was stating, hasn't really changed, whether they buy $100 or $50 item, they're still shipping it. Canada was way behind on e-commerce, and we're catching up to the rest of the world. Retailers are closing. And if they are open, they aren't carrying the inventories that warehouses are carrying. So we're seeing the domestic overnight still performing well.

Where we've seen a lag is the ACMI business, where we were doing additional flying on top of the minimums for our ACMI customer, we've seen that decline, having us shift over to looking at different opportunities to use those assets when the customer schedules allow us to. So we're seeing a little dip there. We've also brought the charter business sort of back into the North American and South American flying. You saw that in the increase in the charter business. It is something we continue to focus on. I think our shift is really focused on the utilization of the assets no matter where the assets sit and continue to explore opportunities outside of the Canadian domestic marketplace.

Your next question comes from Benoit [Poirer] from Desjardins Capital Markets.

First question, we are seeing a capacity reduction from overall airline because of higher fuel expense. So, a lot of airlines came down. I just suspect that capacity from passenger belly might come down. And just wondering whether it brings new opportunities or new discussion for you, maybe not to the magnitude that we saw during COVID, but maybe whether it provides a little tailwind for you?

At this point, we're just in all those conversations. We're looking at routes. That's why Tel Aviv was interesting for us. We were activated and moving to that market at the beginning of April. But due to the war, due to the Middle East crisis, we pulled back. Venezuela was a new opportunity for us. We moved into that market. It's proving to be a successful route for us. Liege was another opportunity that we did sort of a research and development in November to see what opportunities existed. And if those would sustain, and we're very pleased with the decisions and the chances that we've taken to the markets that we are moving into. We'll continue to explore underserved markets and look at niche opportunities that best fit for Cargojet, just not in the short term, but for longer strategic growth.

And as I added, if you recall a few minutes ago, I said we're looking at opportunities in India and Africa and some of those countries are at the reason because some of those flights have been reduced to those countries because of the Middle East conflict. So those are the ones in consideration to replace passenger [lift].

Okay. That's interesting. And maybe, Pauline, to come back to the domestic business that you see growth in April. I was just wondering how would you qualify Q2 2025? I know that Q1 was very strong a year ago. You got some pull forward in demand. I was just wondering whether Q2 2025 was also a strong quarter. Was there some pull forward in demand or we could see a higher growth in Q2 this year?

Yes. I think if you look back at last year, Benoit, both Q1 and Q2 had pretty significant year-over-year revenue growth versus 2024. I think you saw that demand pull forward as the U.S. administration started talking about tariffs. That kind of happened in late Q1, early Q2. So I think that pull-forward impact is in both quarters.

Okay. And maybe any potential opportunities around the restructuring with Canada [Post] or basically neutral as it could move from container A to container B?

Yes, exactly, Container A to container B story.

Okay. That's great. And last one for me. Could you maybe provide an update on the upcoming pilot agreements that is -- will be up for renewal?

Yes. So we are in active negotiations with the pilots. We are progressing. We have made a lot of progress. There's a number of areas still need to be done. We've got a couple of months to get those done. We have regular meetings with the leadership at Pilots Union.

We have an extremely cordial and good relations. We expect that by the end of June or beginning of July to have something in place. That's our wish. The Pilots Union also want to see something done quickly. So I think it's moving quite smoothly at this stage, I would say, but you never know with these things. But at this stage, I don't expect any kind of turbulence because I think at the end of the day, everybody understands the market conditions. We understand what we have to do. They understand what they have to do. At this stage, there's no concerns. There's no red flags that we can see. We are very happy with the progress we are making.

And our last question for today comes from Razi Hasan from Paradigm Capital.

Maybe for Aaron, just on gross margin, lower year-over-year and sequentially. Could you maybe just walk us through how gross margins should be looked at for the remainder of the year?

Yes. So there's a couple of things that you're seeing in the gross margin, the fixed cost generally, and I'll expand the comment outside of that as well. So there's a couple of items in gross margin that are noncash that are more fixed in nature. They [only] vary directly with revenue. And I'm thinking of heavy maintenance amortization and depreciation in particular. So those are more based on the timing of CapEx and with sort of the elevated CapEx last year, you're seeing those higher. But again, they're noncash and a little more fixed in nature.

The other thing you're seeing going on in Q1 is in things like crew cost. If you look back at Q1 2025, any line in our financial statements that was linked to our stock price. So stock-based comp for pilots in the crew costs, stock-based comp in SG&A as well as the below-the-line stock warrant item, you'll see all of those have a large credit or a large recovery last year as our stock price changed by about 30% through Q1 2025. So, some of that is really just the year-over-year comparable where you're seeing a large credit in some of those costs last year that didn't exist this year.

Okay. That's helpful. And maybe just lastly, just in terms of the number of aircraft you're seeing or expecting by the end of the year, can you just comment, you have 40 now? Where will you be at the end of the year?

Yes. So we had 42 in the MD&A. I mean we're at 40 at Q1. That's a bit of a, I'll say, a tight number. So we actually took delivery -- we had previously said we'll take delivery of two aircraft this year. We took delivery of one just before the end of Q1, but it wasn't into service. We have to run a number of entry into service processes from a maintenance point of view and painting the aircraft, et cetera. So the aircraft was actually in paint at the end of Q1, so it's in service now. So that is one, and then there's one more aircraft to come later in the year.

We are up to 42 by the end of the year.

And I will turn the call back over to Pauline Dhillon for closing remarks.

Yes. Thank you. Thanks again, everyone, for joining us today. We have the one-on-one calls, and we'll be attending those, and we just want to extend our gratitude again for you taking the time to participate on our earnings call. Have a good day. Stay safe, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

Good day, and welcome to the Cargojet Year-End Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Tomljenovic, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on this call today. 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, Finance; and Remi Tremblay, General Counsel and Corporate Secretary.

After opening remarks about the quarter, we will open the call for questions. I would like to point out that certain statements made on this call, such as those 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 such as 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 will now turn the call over to Ajay.

Good morning, everyone, and thank you for joining us this morning. Before we begin the detailed review of the quarter, I'd like to offer a few broader remarks. Cargojet operates at the intersection of global trade, capital discipline and time-critical logistics; in stable environments that create opportunities; in volatile environment that demands clarity, discipline and execution.

What defines this company is not the cycle. It is how we manage through it. As previously announced, we transitioned to a single CEO structure as part of our long planned succession framework. I'm pleased that this is our first quarterly call with Pauline Dhillon as Chief Executive Officer. This next phase of Cargojet's evolution is centered on sharpened accountability and disciplined execution. The Board has been very clear in its mandate to Pauline and her management team.

Our priorities are extremely straightforward: deliver profitable growth with strong returns on invested capital; maintain operational excellence and industry-leading reliability delivered safely; exercise rigorous cost control and discipline while maximizing utilization of our fleet and infrastructure; and last of all, continue investing in our people and leadership depth to ensure sustainable and long-term performance.

Strong financial outcomes are only possible with a strong culture and an engaged workforce. That remains a core competitive advantage for Cargojet. These principles guide our capital allocation, our operating discipline and our long-term value creation. Pauline and her team are fully focused on delivering against these objectives.

Before I turn the call over, I'd like to express my sincere appreciation. On behalf of the Board of Directors, I want to thank more than 2,000 Cargojet employees for their professionalism, resilience and commitment to excellence. I want to thank them for coming through one of the roughest winters that I have seen in the last 30 years and maintaining our on-time performance.

To our customers, thank you for your continued trust. We'll continue to earn your business every day. And to our shareholders, thank you for your confidence and long-term support. We remain totally committed to disciplined execution, financial strength and sustainable value creation.

With that, I want to thank everyone and turn the call over to Pauline.

Good morning. Thank you, Ajay, for your kind words and continuous support. Before we discuss the details of our fourth quarter and full year results, I would like to echo Ajay's comments to start by thanking the entire team at Cargojet for their incredible effort and dedication over the past year. The strength and resilience of our business comes from our team who show up every day and every night to deliver world-class service for our customers.

As Ajay mentioned, that was never more true than during peak 2025. Despite the extreme conditions across the nation, our teams delivered exceptional on-time performance at 99%. On behalf of myself and the entire executive, we want to thank every single member of the Cargojet team.

During our Q3 call, we noted persistently high levels of uncertainty throughout global shipping lanes due to volatile tariffs and geopolitical conditions. We anticipate that global uncertainty will persist, and we will continue to limit our visibility for the foreseeable future. As a result, we intend to continue with our disciplined approach to aligning our fleet, our operations and cost to current market conditions to ensure we protect our margins and profitability while delivering industry-leading on-time performance to our diverse customer base across 3 business lines.

Cargojet experienced some event-driven activity in the fourth quarter that impacted our results. The grounding of MD-11 cargo freighters left their operators with reduced capacity and an uncertain outlook for the MD-11's return to service. Some of our long-term partners have been impacted by the grounding and asked Cargojet to support their needs in the fourth quarter. We continue to support those partners into the first quarter and will continue to do so for as long as they require.

We are thinking of our fourth quarter of 2025 as the tale of 2 cities that exist within our business. While the domestic network remained robust, long-haul transatlantic and transpacific lanes continue to be impacted by geopolitical uncertainty. According to recently released data from China customs, 2025 experienced the first decline in e-commerce volumes since 2022. China to U.S. e-commerce volumes fell by 50% in the third month in a row, including December and were down 28% for all of 2025.

While global uncertainty persists, we believe that Q4 2025 should represent the trough for our ACMI customers. While it is early, we are cautiously optimistic that ACMI conditions will show signs of improvement towards the end of 2026 if global political, tariff and economic conditions improve.

While global conditions remain challenging, our core domestic overnight business experienced a strong seasonal peak period. During our Q3 call, we were cautious about the resilience of the Canadian economy and consumer demand. Despite challenges from inflation and job uncertainty, Canadian consumers were active during the holiday season. As well, our domestic business continued to benefit from the ongoing adoption of e-commerce across the Canadian retail sector.

Increasingly, retailers are choosing e-commerce channels to optimize inventories and to best satisfy customer needs. The speed of delivery is critical to ensuring ongoing customer satisfaction in an increasingly e-commerce-driven retail environment. We expect this transition in buying behavior to provide an ongoing tailwind for our business.

Our focused efforts on developing new charter opportunities have resulted in the commencement of new charter services that align with our current North to South Americas flying. As well, we will deploy our assets to increasingly align with opportunities best suited to the composition of our fleet on lanes that are less impacted by political and trade-related tensions while we wait for broader shipping conditions to improve.

During Q4 2025, we commenced service between North, Central and South America for a new scheduled charter partner. This charter operates 5 days per week with destinations in the Caribbean as well as Central and South America. This charter business is well suited to our fleet and aligns well with the activities across other lines of our business. In Q4, we also announced a new weekend service to Liege, utilizing capacity within our fleet. This service reestablished a scheduled connection between Europe and Canada with the goal of building up this lane over time.

During Q4, the service captured strong seasonal demand in Europe for premium Canadian seafood and other Canadian goods, while our general sales agent in Europe delivered consistent volumes on the westbound sector. In many cases, the westbound volumes feeds into our domestic overnight market. Our Liege service has continued into the first quarter, and we will keep it going as long as it represents the best use of fleet capacity.

We continue to explore opportunities in a similar manner as we have with Liege. Our goal is to develop new profitable reoccurring revenue opportunities that utilize existing fleet capacity while also enhancing the value of our core domestic overnight network to other parts of the world. We are seeing changing global trade patterns impacting our China charter business with transpacific exports from China beginning to fall for the first time since 2022, according to our previously noted report.

In the fourth quarter of 2025, ongoing political and tariff challenges kept our frequencies relatively flat sequentially compared to the back half of 2024. When we announced our agreement with our Chinese partner, we noted that total revenue for the agreement was expected to be approximately $160 million. With the early success and extra flying we completed in late 2024 and early 2025, we have approached that total deal value in early 2026.

Given current conditions, we have mutually agreed with our partner to suspend ongoing service early in 2026. Our relationship remains strong, and we look forward to future business together when geopolitical and trade uncertainty allow. We expect that the new arrangements I noted earlier with both existing and new partners will more than replace expected minimum revenue in 2026 from our previous Chinese flying, while keeping our aircraft closer to home and operating missions best suited to their most efficient use.

As we look forward to 2026, our core focus on customer obsession will be demonstrated through our continued best-in-class on-time performance. We are always -- we are aware that we are operating in an unstable global trade environment and believe our disciplined approach to service delivery, cost management and capital deployment will set us up for success regardless of challenging operating conditions. We've proven our ability to be nimble to find and execute on new opportunities and to take advantage of changing markets to deliver value to our customers and our shareholders.

Despite the ongoing uncertainty that exists within global trade lanes, we will continue to look for and sign new opportunities for growth while remain focused on disciplined and profitable execution across all of our business lines. I'm going to pass the call over now to Aaron for his comments on our financial performance.

Thank you, Pauline. As Pauline noted, despite a challenging operating environment, Cargojet's disciplined approach to customer service, cost management and capital deployment as well as our ability to be nimble and take advantage of new opportunities allowed us to deliver strong Q4 results that we are proud of. That happens because of the experience and dedication of the Cargojet team, and I'd like to echo Pauline's thanks to the entire team for all the hard work through the fourth quarter.

As Pauline discussed, global trade uncertainty remains high, which means our forward visibility remains lower than we would like. Despite these challenging conditions, our disciplined execution and expense controls resulted in another quarter of strong adjusted EBITDA and adjusted EBITDA margins, which came in at $95 million and 33.4%, respectively, despite a small year-over-year decline in total revenues of 2.9%.

Revenues from the domestic overnight business were $120.2 million, an increase of $17.4 million or almost 17% from the same period last year, which led to a full year increase of almost 14%. This growth resulted from continued e-commerce penetration across Canada as consumer demand remained robust through Q4 and the holiday season. Looking forward, given broad geopolitical and trade uncertainty, we remain cautiously optimistic about continuing Canadian consumer demand and the continuation of e-commerce penetration we've seen, which may be offset by broader economic challenges.

Disruptions in transatlantic and transpacific trade routes continued in Q4 2025, which drove a continuing year-over-year decline in our ACMI revenue, in line with the declines we saw in the third quarter. Despite the lower activity, our ACMI partnerships remained strong and generated $64.6 million of revenue, a decline of $18.9 million from Q4 2024. As in the third quarter of 2025, in Q4, our ACMI flying consisted of shorter stage length north-south routes compared to those flown in the same period of 2024 when activity levels were higher than baseline economics of our long-term ACMI agreements.

The lower block hours, which result from the shorter stage lengths were the primary driver of the year-over-year decline. Current activity levels are aligned with those baseline economics, supporting revenue stability and certainty moving forward. We remain as the top service provider to key customers because of our relentless focus on maintaining our industry-leading on-time performance and customer service.

The charter business in Q4 2025 was also impacted by global political and tariff conditions, particularly on transpacific trade routes. Our total charter revenue was $58.2 million, down from $64.4 million in Q4 2024. The year-over-year decline was primarily driven by muted incremental peak season flying in Q4 2025 for our Asian charter partner because of ongoing uncertainty and unfavorable tariff and trade conditions. This was partially offset by increased seasonal peak flying for some of our long-term customers. We expect to continue to support our customers through what has begun as an event-driven charter opportunity. Currently, it's difficult to predict whether these represent longer-term economic opportunities.

We continue to believe that discipline in cost management and capital deployment is the correct approach to running the business through the current period of volatility. Our ongoing cost control initiatives allowed us to maintain EBITDA margins in the low to mid-30% range in the fourth quarter. The diversity of our revenue streams, our high level of customer service and existing flexibility in our fleet position us to capture new opportunities that develop in the market while longer-term global and political conditions normalize over time.

Turning to our fleet and CapEx. During the quarter, we completed the divestiture of our last Pratt & Whitney-powered aircraft. The 767 fleet is now standardized around the use of GE-based engines, which allows us to optimize our spare engine pool, spare parts inventory and ongoing maintenance activities. At the end of Q4 2025, our operational fleet was 41 aircraft.

CapEx for Q4 2025 was $45.6 million, which consisted of $37.5 million of maintenance CapEx and $8.1 million of growth CapEx. This compares to Q4 2024 CapEx of $136.9 million, which included $92.7 million of maintenance CapEx and $44.2 million of growth CapEx. We believe our current fleet of aircraft offers the operational capacity to accommodate our current customer commitments with enough available capacity to capture near-term growth opportunities.

In the first quarter, we expect some delivery payments for aircraft to be more than fully offset by the proceeds we received for the sale of 2 aircraft in the back half of 2025. Outside of that, we intend to tightly control growth CapEx through 2026 and any such spending will be tied to new long-term committed revenue agreements.

Prudent and disciplined capital allocation remains a key priority for Cargojet. Maintaining a net debt to adjusted EBITDA below 2.5 turns over the long term, supporting the investment-grade credit rating we achieved in the second quarter of the year is a key objective for us. The current operating environment as well as the timing of certain transactions means that the ratio remains slightly elevated at the end of 2025. Although pro forma for the receipt of proceeds received in early 2026 for the aircraft sold in 2025, our net leverage ratio was 2.8x. We remain dedicated to that goal and we'll balance that objective with returns to shareholders through continued dividend growth and the opportunistic use of our normal course issuer bid.

With that, I'll hand the call back to Pauline.

Thank you, Aaron. Our position as the #1 air cargo carrier in Canada is the result of decades of discipline and execution that provides us with the experience to consistently meet our customers' high expectations for on-time performance regardless of the operating environment. 2025 again demonstrated the resiliency and the flexibility of our business to deliver through all market conditions. That resiliency comes directly from our unique culture and the efforts of our almost 2,000 Cargojet team members.

I want to close today by again saying how proud we are of the entire Cargojet team for their continued dedication to the success of our business, resilience and discipline they demonstrate in their work every day. While the economic environment remains uncertain, we are confident that all those qualities will continue to drive the success of our business in the long run. We thank our customers for their continued belief in us. And to our shareholders, we remain committed to creating value. And with that, we will open the call for questions.

[Operator Instructions]

With that, your first question comes from Kevin Chiang with CIBC.

Maybe just a clarification question first on the update you provided on the Great Vision HK contract. It sounds like you're confident in being able to replace that revenue. Do you have that revenue in hand already? Or is it optimism around when you look into the pipeline that you'll be able to replace that as we get through this year?

Yes. Let me start by addressing the China question, Kevin. That contractual revenue was net in early 2026. This is a rapidly changing trade lane. As I stated in my prepared notes, I highlighted the decrease in the traffic primarily as a result of global uncertainty and tariffs.

We, as a company, continue to look for opportunities. We look at trade flows, trade lanes constantly changing. We have seen a decrease in the China to North America markets, but an increase from China to Europe. We are also seeing an increase from Canada to Latin America and Canada to South America. As I stated in my remarks, we mutually suspended the China route, and we continue -- we'll continue to revisit that with them as there's more stability in the global markets. In the interim, we have found opportunities in North America for better utilization of our aircraft, better rotation, better revenue, better margins and better shareholder value.

That's helpful. And then, Aaron, maybe this is for you. Strong sequential revenue improvement into the fourth quarter and peak season, tough weather conditions as well. But if I look at your OpEx less fuel and depreciation, I'll call it, your controllable costs, on a per block hour basis, they were flat to modestly down. Just wondering how we should think about your cost control initiatives as we go into 2026 here? Like are we starting to see maybe some of that cost momentum you highlighted last year? Or is there anything you'd call out in Q4 that might be anomalous that we shouldn't just straight line into 2026 here?

No, I think generally, what you're seeing is the outcomes of those cost control initiatives. And we're continuing to look at new opportunities. I mean one thing I'll call out, and this is not onetime, this is something that we'll keep going is if you look at crew costs within direct costs, you can see the impact of the work we did even late 2024 into 2025 of hiring and training the crew pool to the right levels for the business. So overtime costs are down quite a bit. That continues into 2026. Now obviously, we have the [indiscernible] in 2026 that will drive changes there. But it's a long-winded way of saying, I think what you're seeing is the outcomes of our cost control initiatives, and we expect those to be long-term savings.

Okay. That's helpful. And maybe just a quick accounting or modeling question. It looks like you had a reevaluation of your depreciation. Is the number we saw in Q4, is that kind of the right run rate to move forward with? And then just working capital was a pretty decent drag in Q4 and for the year. Does that reverse in '26? Or is there anything we should be thinking about from a working capital perspective?

Yes. On the first part of that, I think you're correct. I used the Q4 depreciation number. On the second part, I think there were a few items right at the end of the year that probably contributed to things like AR being a little elevated and created some of that working capital drag. So I think there'll probably be at least a modest reversal of that.

And your next question comes from the line of Konark Gupta with Scotiabank.

On good performance in Q4. Just maybe a clarification on the MD-11s. Did you quantify the revenue benefit you saw in Q4 or what you expect in Q1? And then did it only impact the domestic line of business? Or did it also show up in the charters?

It all showed up in the charters.

In the charters.

Okay. And then what sort of magnitude would you say that, that had? Because, I mean, just if we kind of straight line the revenue for that line of business, should that be sustaining into the second half as well? Probably not.

Konark, I'll take that. We have a quarterly commitment from -- of that opportunity. It's a quarter-to-quarter, but we expect it to be lasting at least till quarter 3 or quarter 4 of next year because quarter 4 becomes the peak where everything is required, but we expect -- we haven't seen anything from FAA or Boeing or anything when the MD-11s are going back or even if they are going back to service. So there is going to be a 54 aircraft capacity lag in the global cargo world. And I think that depending on the hours we fly, it's quite a fluid situation.

But let's put it this way that it makes up more than what we had in China and some of the other charters. It's the utilization of the assets within our own network that produces that revenue. And we're pretty hopeful that this is going to be a consistent revenue for this quarter and a couple of other quarters.

Okay. That's great color. And on the China contract, so thanks for the details there. But just wondering, with the early termination, and I believe the contract would have been due in May 2027, was there any penalty on either side or any kind of termination fee or compensation from the customer?

No, Konark, nothing such.

As a matter of fact, it was a mutual suspension of the contract, while the Chinese look at their -- not only their shipping, but their incentives from the governments for exports. So that's under review. And we had better opportunities keeping our, as Pauline said, aircraft closer to our home for maintenance, for pilots and all that stuff. So it was a very good opportunity for us to deploy the aircraft in this part of the world. And for them, it was also to review how they stand with the Chinese government and also with the U.S. government on tariffs. So it was kind of a mutual suspension for the time being. And it could start any time depending on when U.S. and China could end up in a deal. They will eventually. And I think it has a lot more potential in the future years. So it's all amicable and very -- as a matter of fact, the Chinese customer is also a big domestic customer of ours.

Right. Okay. And last one for me before I turn over. Capacity, I think you guys mentioned that you don't need to necessarily invest in growth CapEx, and it will be very contained going forward until you see any opportunities. But what kind of capacity or excess capacity you might have in the system today? I mean, I think with the China contract suspension and then some replacement contracts you talked about, would you still have excess capacity? Or would you need to get a couple of more aircraft if you get new contracts?

My answer to that is, Konark, this team has always found capacity because the team we have in our scheduling and operations working with maintenance when the aircraft are needed. The excess capacity for charters, we have never said no, we find a way to get it done, and we will. On a paper, you might see that, okay, we are 97% utilized on the aircraft. But we always find ways to locate the aircraft, downgauge the aircraft, upgauge the aircraft according to the demand and find that excess capacity for charters. The idea is that we never say no.

Yes, Konark, just to echo what Ajay is saying, we always are looking for opportunities. We have an exceptional skilled set of individuals who explore every single charter opportunity that comes in. Bringing the aircraft back all into North America certainly helps us with our fleet utilization. So we're constantly looking for growth, constantly looking for opportunities, and we believe that we have the right fleet to continue with our current customer needs and our projected customer needs.

And your next question comes from Walter Spracklin with RBC.

I know there's a lot of focus here on China and MD-11s, but your core business, the domestic overnight, that was up 17% in the quarter. This is during a freight recession. Just curious, can you -- I know e-commerce continues to do well. Was that the main driver? And is that going to -- is there anything onetime in that fourth quarter? Or do we see that kind of growth continuing into 2026 here?

Yes. Walter, great call out. Yes, you're absolutely right. We did see growth in the fourth quarter. I think e-commerce is the factor that we've seen this growth, especially over the entire year. We remain cautiously optimistic about 2026, and we continue to see e-commerce on the rise in Canada. As we've stated in previous calls, Canada has certainly been behind the rest of the globe in e-commerce activity.

The new generation that's out there probably doesn't know how to shop in retailers, they're online. So we continue to be hopeful to see that continued growth in Q1. Again, we were a bit surprised ourselves that the domestic growth was so significant over the year. We remain committed to hopefully seeing single-digit growth in Q1, but it's going to be, I guess, on purchasing powers and what the consumer market does.

Okay. That's great. And just in terms of modeling, Aaron, maintenance CapEx for 2026, I know growth you said would be offset by some sales. So is it going to be entirely maintenance CapEx? And do you have a range for us for '26 in maintenance CapEx?

Yes. Our expectation is that the 2026 CapEx will be largely maintenance CapEx. I think we've said in the past that we're seeing the maintenance CapEx come back down towards what we think of a long-term mean. So somewhere, I think, in the range of between $190 million and $210 million is a good number for 2026.

Okay. And then finally, capital -- yes, capital deployment, where do you focus free cash flow for '26? Is it bringing leverage? Is it keeping your leverage in that range you were focused on? I know you did a 10% dividend increase. Is there any room left for buyback? What are you thinking on capital deployment?

Yes. I think we've said over the long term, we want to keep that net leverage ratio below 2.5 turns. We obviously want to balance that with returns of capital to shareholders. So like you said, we saw the 10% dividend increase we just announced, and we'll obviously continue to think about opportunistic use of the NCIB. The leverage target, again, is where we'd like to get back to over the long term.

And your next question comes from the line of Benoit Poirier with Desjardins Capital Markets.

Congrats for the strong finish into the Q4. When we look in terms of adjusted EBITDA margin, you finished the year close to 33%, strong execution from a margin standpoint. You mentioned, obviously, a favorable environment with the MD-11 and also some rotation into more profitable lane. What about the -- whether the tighter capacity with the MD-11 helped in terms of pricing? And if you could maybe provide some thoughts about how we should be thinking in 2025, that would be great.

Well, it's Ajay. The pricing on the MD-11s, we obviously can't divulge into customer individual pricing. But let's say -- let's put it this way, that we do -- this is an opportunity which came out of a very unfortunate incident. We cannot see -- we do -- our style of business is that we do not -- this is from our existing customers. We do not look this -- take this opportunity as taking advantage of gouging the customers. All I can say to you is the pricing is extremely fair, competitive. And also, we were not the only game in town, like they had 10 carriers to select from, and we were one of the top 3 carriers they selected. So we have to be competitive, but they're also aware of that this is something they need on top of their. So it produces better-than-average margins, and we will continue to build that relationship with that customer.

That's very good color, Ajay. And could you maybe provide an update on the pilot agreement that is up for renewal this year?

Yes. We are in the middle of negotiations. We have a very cordial and excellent relationship with the pilot group and their leadership. We have been on the table for 3 to 4 months. We are making steady progress. The contract is due till June. Both parties have a willingness to get the deal done prior to that period. And so far, we have not seen any sort of road blockers on that. I think that everybody realizes -- both parties realizes the realities, which are the uncertain climate, some competitiveness of wages on the other side, we recognize that.

But also, we are also focused on -- besides financial gains, the company is also focused on productivity improvements, which the other side we're also aware of. So our target is to get a balanced deal done by the end of June. That's our target. And we have enough dates in the calendar, and we've had enough meetings and everything so far is very, very cordial and there's a willingness to do a win-win deal.

Yes. And just to echo Ajay's comments, Benoit, our pilots do understand our business, and they understand that providing our customers with the service levels that they've become accustomed to is paramount, not just for the organization, but for them as the pilot group. So we're very optimistic, as Ajay stated.

Okay. That's perfect. And maybe just a quick one for Aaron. You mentioned that maintenance CapEx should be at around a range of $190 million to $210 million. What about the proceeds from the disposal we should expect this year?

Yes. So that's a great point, Benoit. Just to clarify, that number that I gave is a gross number. That's before netting off any proceeds of disposal. So we have mentioned previously that there is a little bit of gross growth CapEx in Q1 as we make some delivery payments for aircraft. So that will be more than offset by the proceeds from the aircraft that we sold last year. And then we'll continue to explore opportunistically sale-leaseback transactions like we looked at in Q3 of last year. So I think there is good potential to have a significantly smaller net number on CapEx.

And your next question comes from Tim James with TD Cowen.

Congratulations on a good quarter to end the year. Yes. Just wondering, returning to the domestic revenue, just a great number to see there, e-commerce B2B. Is there anything in terms of particular lanes within Canada or regions? Or I know you don't get into customers, but customer types. So just -- I'm still amazed at how strong that was. But I'm just wondering if there's any sort of particular pockets in there that you would call out as driving that number.

No, Tim, it's just e-commerce. We're seeing an uptick in e-commerce. We saw probably more activity on the domestic overnight as we indicated in Q4, but it's primarily driven by e-commerce and consumer spend.

The only other thing I might add, Tim, is we've been seeing some of the same news reports I think everyone else has about the changing stocking patterns at retailers in 2025. So it's really -- it's difficult for us to see exactly what's happening with the freight on the planes. But I think we did see a little bit of a pattern where some of that stocking was pulled forward at the start of the year into Q1, Q2. And then there was a little bit of a hesitation of stocking in Q3, and then we saw that pick back up for the holiday season.

Okay. Okay. That's helpful. And then just turning to the lease service. It sounds like good volumes on the westbound. Anything you're seeing right now in that service that would suggest that it won't be sustainable or anything in particular that suggests it definitely is a feasible long-term service? I'm just trying to understand kind of the outlook and where the bias is at this point, if the current sort of revenue and economics of that, if they continue, you keep it in place? Or does something need to change to justify continuing with the service?

Yes. Good question. Good call out there, Tim. Yes, that was a research and development kind of a lane for us. It was something that we wanted to reenter Europe with -- on what trade lane we were going to go into, what airport. And Liege is very similar to Hamilton. It's the hub of cargo for Europe. It's proven to us that there is a lot of potential there. We ran it through Q4. Q1 still is looking very optimistic. It's a lane we're certainly going to watch. But at this time, we have no concerns or no hesitation to continue operating into Liege.

And your next question comes from the line of Chris Murray with ATB Securities.

So maybe turning back to the charter. This is maybe more of a conceptual question. If I look back over the last few years, Charter was always one of those kind of lumpier businesses, ad hoc contract here, contract there. But if I'm listening to you, it almost feels like you're trying to build a much more sustainable charter business, be it -- you talked about the North-South planes, the MD-11 contracts, which you could conceivably see those turning into an ACMI or something like that, [ Liege ]. You talked about other perhaps lanes that you could open. Is this a conscious effort on your part to try to build this business to be more consistent or more stable? And should we start thinking about this as less of an ad hoc charter and more of just a scheduled operation but more internationally focused?

Yes. Yes. Thanks, Chris. Good question. We're always looking for opportunities. I think we spoke about this at your conference. Cargojet is always looking for growth. We always look towards building our brand. One of the things that we had decided in 2026 was our domestic footprint is very strong here in Canada that our growth will come from global expansion. So we're constantly looking at new trade routes, new ACMI, new charter. And I think one of the reasons that we started Liege was for this reason, and it's proven to be a successful R&D project for us. And as we enter 2026, we're going to continue to look for opportunities always on the domestic and continual growth opportunities in North America, South America and Europe. That's going to be our primary focus as we enter the year.

Okay. Along those lines, any -- like I guess if you're going to stay in those geographies, so there's no thought of like either looking at a connection to Asia or other parts of the world there?

No, we will continue to look at all opportunities, but we want to make sure that with the fleet size that we have, with the utilization of the fleet that we have, that we integrate that fleet and those opportunities to marry one another.

Okay. That sounds good. And then, Aaron, maybe just to go back on the CapEx and the sale-leaseback question. So maybe I'm a bit confused. So the $190 million to $210 million numbers, that's gross CapEx and then we should expect that sale-leasebacks will reduce that number overall. Is that the right way to think about it?

Yes. That's gross maintenance CapEx to be 100% clear. There will be a little bit of gross growth CapEx as well in Q1, but that will be more than offset by the proceeds that are coming in, in Q1 for the aircraft that we sold in 2025. And then yes, any sale-leasebacks that we look at will further net down the total CapEx.

Okay. So maybe a different way to ask a question. Like if we were to think about all the moving parts here, independent of other like unplanned sale-leasebacks, what's the net number going to look like roughly?

Independent of other sale-leasebacks, I'm just doing the math in my head, somewhere in the [ $160 million to $170 million range ], I think.

Operator, I think that will be our last question for today.

I would like to hand it back to Pauline Dhillon for closing remarks.

Thank you, everyone, for joining us today. We appreciate you taking the time. We will move on to the one-on-ones that have been scheduled. Anyone else that wants to reach out, please reach out to David to set up any additional questions that you may have. Wishing everyone a wonderful day ahead. Thank you.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.

Good day, and welcome to the Cargojet Canada Limited Conference Call. Today's conference is being recorded.

And at this time, I would like to turn the conference call over to Mr. David Tomljenovic, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us on this call.

With me on the call today are A.J. Virmani, Executive Chairman; Pauline Dhillon, Co-Chief Executive Officer; Jamie Porteous, Co-Chief Executive Officer; Aaron McKay, Chief Financial Officer; Sanjeev Maini, VP, Finance; Remi Tremblay, General Counsel and Corporate Secretary. After opening remarks about the quarter, we will open the call for questions.

I would like to point out that certain statements made on this call, such as those 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 forward-looking information and reconciliations of non-GAAP measures to GAAP income.

I will now turn the call over to A.J.

Good morning, everyone, and thank you for joining us today.

In November 2023, we announced the first phase of our leadership transition. With my move into the Executive Chair role and the appointment of Jamie Porteous and Pauline Dhillon as Co-CEOs. Today, as we move into the next phase of that transition, I want to take a moment to recognize the outstanding contributions of Jamie Porteous and to officially welcome Pauline as Cargojet's next CEO.

Both Jamie and Pauline were founding partners of Cargojet 24 years ago. From day 1, they have developed and built this company from ground up. They were guided by a share commitment -- shared commitment of reliability, customer service and excellence in everything we do.

Jamie has played an instrumental role in transforming Cargojet from a small Canadian start-up into a global air cargo leader period. His strategic vision, discipline and customer-first mindset have been central to our success. On behalf of the Board, our employees and our shareholders, I want to sincerely thank Jamie for his incredible leadership and his 24 years of dedicated service.

While Jamie will be stepping back from daily operations to spend more time with his family in the new year, I'm pleased to share that he will be -- he will remain available to provide strategic advice, support and ongoing guidance for this transition and ongoing business. His insight will continue to be a great asset to the organization, and we are thankful to Jamie for continuing on his role as a strategic adviser.

As Executive Chair, I will also remain deeply engaged with the process, mentoring Pauline, working closely with the Board and the team to ensure a smooth and deliberate and thoughtful transition. The Board is proud to confirm Pauline Dhillon as our next CEO effective January 1, 2026. Pauline has been with Cargojet since day 1. And over the past few decades, she has worked in virtually every part of the business from network operations, customer relations, marketing, government affairs, Chief Corporate Officer and Co-CEO.

As Co-CEO, she played a key role in building Cargojet brand, strengthening our customer relationships, driving employee engagement. And over the past 2 years, she has continued to lead with purpose, driving growth, innovation and operational excellence. Pauline has grown up with Cargojet system. She embodies our culture, our people-first values and our customer service obsession.

The same ingredients that have made Cargojet successful over 20 years. She has my full confidence. She has the full support of Jamie Porteous. She has the full support of Board, and she has the full support of her team to lead this organization to the next chapter of our global growth. Thank you very much.

And I will turn the call over to Jamie Porteous.

Thanks, A.J., and good morning, everybody. Let me begin by sharing how sincerely grateful I am for the career that I've had at Cargojet and to the many colleagues who have helped shape our business into what it is today, including, of course, A.J. and Pauline, whom I have worked beside since day 1 with a simple but bold plan to create a world-class air cargo carrier.

We are truly a Canadian success story from both a transportation company and a public company standpoint and have built a legacy that will endure for many, many years for all stakeholders.

As A.J. said, I am extremely optimistic about the company's future, and I am fully confident in Pauline's capabilities to lead Cargojet into the next chapter and wish her and the entire Cargojet family the best of success and will continue to support and cheer you on from the sideline while I enjoy my next chapter. Thank you.

Now let me share some comments on the quarter. Entering the back half of 2025, the near-term impact of seismic shifts in global trade became more apparent as persistent tariffs and other trade barriers became the new normal. Demand remained uncertain as major policy shifts continued, including the removal of the U.S. de minimis exemption, disrupting transpacific e-commerce flows and tempering near-term growth expectations.

The longer-term impacts of this new trade world order are still developing with new behaviors rippling through global supply chains and consumer behaviors. In that light, and as we noted last quarter, resilience is the key to thriving in this unprecedented period. This quarter, I would add the word discipline as well.

Although in the longer term, we expect the world to adapt and global trade to reestablish new normal patterns, it remains likely that the near term will be characterized by continued uncertainty and some volatility. Through that environment, resilience and discipline will underpin Cargojet's ability to continue to deliver high-quality results.

Periods of change bring opportunities as well as challenges. Historically, Cargojet has demonstrated a very successful capability to take advantage of macro level economic changes in the past, most recently through the boom of e-commerce during COVID, and our job continues to be to find opportunities for disciplined, profitable growth in this ever-changing trade environment.

At the core of our business, our domestic network remains strong, growing by more than 6% year-over-year and over 12% year-to-date, primarily because of the continuing growth of e-commerce volumes within Canada as well as the increased business-to-business volumes and the impact of inflation-based price increases.

As disruption in transatlantic trade routes continued, we saw a corresponding decline in our ACMI revenue year-over-year as we described in the second quarter. Despite the disruption, our ACMI partnerships remain strong, with the decline reflecting a shift of our ACMI operations to be more north-south focused within the Americas resulting in lower block hours year-over-year. However, I must point out with the same number of contracted aircraft.

We remain optimistic that in the longer term, air cargo corridors will stabilize and Cargojet will be well positioned to take advantage of early returning opportunities with our ACMI partners.

We also saw a year-over-year decline in our charter business as disruptions to transpacific trade, particularly e-commerce volumes meant that we operated 3 flights per week through the third quarter versus an average of closer to 5 flights a week in the third quarter of 2024 between China and Canada. We anticipate this frequency recovering late in Q4 as we enter the holiday peak season, and we continue to explore new opportunities for longer-term charter arrangements.

We remain confident that discipline and resilience, coupled with our diversified revenue streams and flexible fleet will allow us to continue to deliver strong margins in any macro environment and to remain well positioned to take advantage of and seek out new profitable growth opportunities through this near-term period of disruption and in the longer term when demand returns.

With that, I'll hand it over to my long-time partner, colleague and friend and our next CEO, Pauline Dhillon.

Thank you, Jamie. I am honored to assume the role of CEO after serving alongside Jamie as Co-CEO for the past 2 years. Jamie's leadership and strategic vision have been instrumental in bringing -- building Cargojet into a market leader with a strong financial and operational foundation.

I want to thank him sincerely for his decades of contribution and partnership and his continued support as my co-CEO and going forward, my strategic adviser. I'd like to sincerely thank Jamie for his friendship. I wish Jamie and his family all the very best as they embark on this new chapter of their lives.

Looking ahead, I am as excited about the future of Cargojet as I was on day 1. I want to thank the Executive Chairman, along with the Board of Directors for their continued confidence in me. We have a clear strategy, a strong mission and proven capability.

Our diversified business model, disciplined execution and a highly talented team position us well to capture new growth opportunities and to continue delivering long-term value to our customers and our shareholders.

As Jamie noted earlier, our position as the #1 air cargo carrier in Canada is the result of years of resilient operations, delivering time and time again for our customers through periods of both opportunity and adversity. That resiliency comes directly from our unique culture and the efforts of the Cargojet team. I want to thank each and every one of those team members for their ongoing efforts, their dedication and their commitment to safety, especially as we enter our peak holiday season.

As we discussed on our Q2 call, 2 of our largest customers renewed long-term agreements with us early in the third quarter, demonstrating the strength of those relationships and locking in long-term revenue sources and offering Cargojet preferred opportunities to fly additional routes as they develop.

Even as we renew and reinvigorate relationships with our partners, we continue to look for new opportunities, as Jamie mentioned. To that end, we recently announced Cargojet return to transatlantic markets with scheduled service to Liege, Belgium, linking our extensive domestic network with direct access into Europe's leading cargo gateway.

We also continue to explore new long-term charter opportunities globally as we see real market opportunity in that vertical. We also renewed our position as Canada's only ISO 9001 2015 certified air cargo carrier in the third quarter. And in October, renewed our IOSA registration, demonstrating our commitment to making safety the core of everything we do.

During the third quarter, we announced the redemption of our 5.25% senior unsecured debt debentures due in 2026, which we completed subsequent to quarter end using proceeds from our offering of 4.599% senior notes, extending our overall debt maturity profile and reducing our interest costs.

As in Q2, we saw block hours decline year-over-year as a result of the shift from the transatlantic ACMI flying to South American routes as well as lower frequency of China chartered flights.

However, our disciplined approach to cost management continues to produce tangible results as we were able to successfully scale many cost lines along with operational activity, resulting in an adjusted EBITDA margin of roughly 32%, consistent with our historical results of adjusted EBITDA margins in the low 30% range.

Discipline and flexibility in our fleet management are major drivers of Cargojet's success. During the quarter, we sold 1, 767-300 and leased 1, 757-200 to third parties, reducing our overall fleet size to 41.

In the fourth quarter of 2025, we expect to take delivery of 1, 767-300 aircraft from conversion and complete the sale of another aircraft, resulting in no net change in our fleet size. While we expect to take delivery of a fully converted 767-300 in Q1 of 2026, we currently expect to lease that aircraft to a third party on or shortly after delivery.

We will continue to look for opportunities to scale our fleet appropriately for the size and the needs of our business, something we have demonstrated a track record of successfully doing.

I'll now pass the call over to our new Chief Financial Officer, Aaron McKay. We are excited to have him join our team for his remarks on the company's financial performance in Q3.

Thanks, Pauline. I want to start off by saying how thrilled I am to be joining the leadership team of Canada's leading air cargo carrier. I'm passionate about aviation, and I've immediately felt the passion that all of our Cargojet team members have for this business as well. I'm looking forward to the challenges and opportunities we'll face together as a team in the coming months and years.

As Pauline and Jamie noted, discipline and resilience are words that we're very proud to have described the financial management of the business. The resilience of the business in a very challenging environment this quarter is apparent in the diversity of our revenue streams.

In the third quarter, domestic revenue came in at just under $100 million, up almost $6 million or 6% year-over-year, helping to partially offset declines in ACMI and charter revenue. As Jamie and Pauline mentioned, those declines were primarily driven by 2 very distinct changes linked to the macroeconomic environment.

Fuel surcharge and other revenue was down 8.7% year-over-year, which compares favorably to the 9.3% decline in direct fuel costs, demonstrating our ability to pass on fuel and other costs as part of our pricing model.

Against that backdrop, the business maintained a relatively strong adjusted EBITDA margin, as Pauline noted. One item to call out is the -- is that year-over-year in gross margin, because we include some less variable non-EBITDA impacting items like depreciation and heavy maintenance amortization that are driven by the timing of maintenance events and fleet size and direct expenses, our gross margin was squeezed with revenue declines.

Excluding those items, our gross margin is much more stable year-over-year with some increases in direct costs being partially offset by reductions in SG&A at the adjusted EBITDA level.

Prudent and disciplined capital allocation remains a key priority for Cargojet. Maintaining a net debt to adjusted EBITDA ratio of 1.5 to 2.5x over the long-term, supporting the investment-grade credit rating we achieved in the second quarter of this year is a key objective for us.

The current operating environment as well as the timing of certain fleet transactions has pushed our expected return to a net leverage ratio below 2.5x, which we now expect to achieve in early 2026. We remain dedicated to that goal, and we'll balance that objective with returns to shareholders through continued dividend growth and the opportunistic use of our normal course issuer bid.

Pauline walked through the fleet changes in the quarter, which resulted in growth capital expenditures of $22 million, a sequential decline from Q1 and Q2 as we believe the investments we've made to date as well as our near-term fleet plans are sufficient to meet near-term growth plans.

Maintenance capital expenditures in the quarter were $45.5 million, again, a sequential decline from the first 2 quarters of the year. Net of proceeds from disposal, the third quarter, we saw an overall reduction in year-to-date net CapEx of roughly $41 million to just over $170 million by the end of September.

We now expect Q4 gross CapEx to be in the range of -- gross CapEx to be in the range of $45 million to $55 million, with approximately half of that amount is growth CapEx, as a result of the expected delivery of 1, 767-300 aircraft from conversion. As we previously disclosed, we are actively looking at transactions that may reduce that incremental CapEx in Q4 to near 0.

I'll close by saying how pleased I am to become part of the Cargojet family, and I look forward to spending more time with Cargojet team members, our customers and the folks on this call.

With that, I'll pass it back to Pauline to close out before we take questions.

Thanks, Aaron. I want to close by once again saying how proud I am of the Cargojet team members for their dedication to the success of our business, resilience and discipline they demonstrate in their work every day. We have the cargo pedigree. While the economic environment remains uncertain, we are confident that those qualities will continue to drive success of our business in the long run.

Thank you for joining us. Kelsey, we'll take questions now.

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

This is Nate in for Konark. Congrats, Jamie, for a great career and Pauline for succeeding.

Just 2 quick questions. One is, how do you expect the recently renewed DHL contract revenue to ramp up through 2026 as you navigate the near-term route transition to short haul?

Thanks, Nate. Thanks for the comments. I mean, as I said in my remarks, we don't see -- we don't expect a rapid increase in revenues. It will really be dependent on what some of the global impact of the trade negotiations between the U.S. and other countries. And as those get resolved, I think we'll see a slow and steady ramp-up, but I don't anticipate it would be until later in 2026 and into 2027 at this point.

Yes. I just want to add in also that with DHL, we are one of the preferred carriers because of our strategic partnership with them. And when the Europe and other areas slowed down for them, we were given the opportunity to fly routes in South America where there are less block hours, but none of our aircraft were displaced. And I think DHL and Cargojet relationship being strong enough, we are the last carrier that gets any notice if there's any slowdown, but we are the first one to be brought in when things turn positive.

And I just want to add to A.J. and Jamie's comments. When DHL does ramp up again, we are ready for the ramp-up. We will be prepared to continue to service their routes, both in the short term and the long-term.

Okay. That's very helpful. The second one I would ask is, what has led to a decrease in China frequencies from last year against the backdrop of rising e-commerce demand in Canada?

Yes. It's just been the overall sort of uncertainty from a geopolitical standpoint, the uncertainty regarding tariffs, which affect more the U.S. than Canada, but we saw a decline from the frequencies that we were flying in the third and fourth quarter of last week, really started at the beginning of this year. It started strong. We were probably flying 4 or 5 frequencies in the first quarter, but then demand seemed to soften down to 3 frequencies per week, which was consistent through the third quarter. And we're -- as I said, we're expecting stronger -- have already seen some stronger demand in the fourth quarter.

And also the elimination of de minimis, which impacted shipments to the U.S., but a lot of U.S. shipments transit from Canada.

And your next question comes from Walter Spracklin from RBC Capital Markets.

Jamie, it's really been a great pleasure working with you all of these years. You're going to be -- you are going to be sorely missed, and I do wish you the best of luck. I envy a little bit on that regard.

Yes. Turning to the question, I guess, fleet plan, it looks like you're not -- you don't have much in the way of new additions coming in after Q4. So I'm not seeing anything in '26 or '27. Is that right? And if so, are we looking at any growth CapEx? Or should we model in some feedstock purchases? Curious to see -- curious to hear about what we should model in for growth CapEx in light of limited new deliveries.

Walter, it's Aaron here. We did mention we do expect to take delivery of 1 aircraft early in 2026, but it's our intent to lease that out either on or shortly after delivery. But beyond that, I think you're correct. We're expecting pretty minimal growth CapEx through 2026 at this point.

Walter, as you know, we have always kept our minds and doors open. If there is more business and if we have some guaranteed contracts, we do have access to 2 aircraft, which is 767-200s sitting in our possession right now that we acquired only for engine values, which we have already extracted. And those remain available to us to convert if the market picks up or if there's a demand or a guaranteed contract.

Okay. That's great. In terms of ACMI and charter revenue cadence, I don't know if looking at your historical is the right thing to do here given everything going on around us. But I know Q4 typically, certainly last year saw quite a pickup quarter-to-quarter from Q3 to Q4 in all-in charter, obviously, some of the new business there. And then in ACMI, we also saw a pickup.

When we model now for Q4 and then also 2026, how do we look at Q4 cadence relative to Q3? And for '26, should we -- given our -- given the world around us today, should we be building in any growth in your overall ACMI and charter businesses, respectively, for 2026? How do you look at the -- or how do you approach the outlook from that angle?

Well, just quickly, quarter 4 -- and I'll get Jamie and Pauline on this after I make my comment. Quarter 4 is certainly, as we know, traditionally better than quarter 3. And that is just the nature of the business that the peak period, overall demand is up, whether it's charters, domestic or ACMI, everything is relatively up. So quarter 4, yes, it will definitely be better than quarter 3. That's all I can tell you right now.

2026, we are in the process at this time with our customers discussing the needs for the first quarter because at this stage, nobody is committing anything to quarter 2, quarter 3 or quarter 4 next year. So at this stage, our discussions are primarily focused on quarter 1 of 2026.

And everybody, to be honest with you, as we know what the conditions are, wait and see sort of mode. So I wish we could give you a little more color on it, but this is exactly what we have right now is that in another week or 10 days, we will have most of our quarter 1 of 2026 finalized.

Just to add to A.J.'s comments, Walter, I think sequentially, you'll see an increase in both ACMI and the charter revenues in Q4 versus Q3 of this year, but it won't be of the magnitude of increase that we historically see sequentially from Q3 to Q4, similar to -- as an example for last year. And as A.J. said, I think going into 2026, at least in the first quarter, I think you'll see similar revenues that we saw in year-to-date in both the ACMI and the charter segments.

Yes. Walter, it's Pauline here. And just to add to A.J. and Jamie, while that's what we expect from the customers and as A.J. explained in Q4, we do plan to see an uptick. Going into 2026, we're also going to look at new trade routes. We're going to look at new opportunities. We're going to go out into the market and see how we can expand the brand outside of the current customer base that we have today, starting with the Liege program that we announced last week.

Great. Okay. That makes a lot of sense. My last question here is on margins. And I'm not sure if this -- I know Pauline has been near and dear to your heart, but also Aaron, you explicitly called out your efforts to rationalize costs and spoke constructively about your margin profile going into 2026.

And -- but by the same token, we did see some pressure on margin when -- due to some of the costs that Aaron you flagged in your prepared remarks being sticky with lower revenue. How should we look at margins in 2026? Is this something that you see enough line of sight that given a fairly consistent revenue profile, if we were to assume that, is this something you can get better margins on? Or is there something else we should consider when we look out to 2026?

Yes, Walter, it's Aaron here. I think you're right. For 2026, we'll start to see more and more of the positive outcomes of the cost control initiatives we're taking. So I think you'll see the margins stay consistent, and you'll start to see that impact of those initiatives through the cost lines.

And your next question comes from Chris Murray from ATB Capital Markets.

So first off, Jamie, I just want to wish you a good retirement. I want to thank you for all your help over the years. It's really been appreciated. And Pauline, congratulations on your new role. And Aaron, welcome to Cargojet.

With that being said, maybe just trying to put together the ACMI and the charter, but also with the mainline business into Q4? And maybe just thinking about this a different way. Your block hours were down year-over-year about, I guess, about 15%. Just wondering how -- if we use block hours as a metric, how should we be thinking about block hour evolution over the next couple of quarters? Because it seems like the mix is going to change. And generally, we've seen that independent of where you're pointing the aircraft, it's really the block hours that drives the revenue. So just any thoughts maybe on a block hour basis on how to think about the next couple of quarters.

Yes. Thanks, Chris, for the comments. And in terms of block hours, you're right. I mean it's a big driver of revenue, especially on the ACMI and the Charter segment. Our domestic hours seem -- are pretty constant other than peak season. We obviously see a significant increase because of demand there.

The biggest driver of the reduction in overall block hours by 16% in the quarter was the reduction -- a combination of -- the biggest part of it was a reduction in ACMI block hours flown by DHL.

And as I noted in my prepared remarks, 2 things to point out. We haven't reduced the -- or DHL, our biggest ACMI customer hasn't reduced. We're operating the same number of aircraft that we've operated in previous quarters. We're just flying those on lower stage length routes.

And as I've said previously, typical ACMI contracts are structured on a rate per block hour with a minimum number of block hours per month depending on the aircraft type. You get the benefit of the incremental revenue when you fly incrementally more block hours on longer-stage transatlantic, European transpacific routes that we've seen in previous years in the last few quarters as DHL has shifted capacity globally to meet the lower demand, and we've seen more flying from -- within North America and between North America -- so on a north-south basis between North America and Mexico and South America, you see a corresponding reduction in those incremental block hours. We still fly above the minimums, but I expect that, that will continue into at least the first half of 2026.

On the charter hours, it's a combination. Our charter revenue is a combination of the scheduled charters we do with our Chinese customer between China and Vancouver, which you see some corresponding reduction in hours there based on the frequencies per week that we fly. The other portion of that revenue is our ad hoc charter, which has remained strong year-over-year.

Okay. That's helpful. And then, Aaron, maybe a question for you. There was a sale and leaseback in the quarter. And you're talking about maybe just for capacity management, looking at the sale or maybe a lease on the 767 coming in.

But I guess the bigger question here is thinking about the -- how you're going to kind of finance aircraft and the balance sheet right now. I'm just trying to understand if this is a kind of a more structural move to just find a balance between owned aircraft and leased aircraft, or how you're thinking about managing the cap stack around the aircraft over the next few years and if there's any sort of shift that we should be aware of?

Yes. No, thanks for the question, Chris. I don't think there's any sort of strategic shift. I think what you're seeing is we've grown the fleet a little bit in the recent past, and we're looking at the right ways to structure the financing of those aircraft.

We mentioned earlier, we've got 1 aircraft coming early 2026, and we have opportunities with feedstock that we have if we need them. But ex that, our expectation is that growth CapEx for next year is going to be pretty limited. So I don't think you'll see a strategic look at financing aircraft in different ways. This is just a bit of catch-up.

Okay. Could you -- I just -- I also go back to like your comment about Q4 CapEx might be neutral. So I was just wondering if there's additional aircraft you're looking to do sale leasebacks with or something else going on there?

That's exactly right.

And your next question comes from Kevin Chiang from CIBC.

And again, echoing congratulations, Jamie and Pauline. Maybe if I can ask the fleet question differently. So if I just take a simple ratio of like block hours to maximum payload. You're running just rough math, let's call it, almost 20% below some of the peak levels you saw during the pandemic when I understand things were probably stretched at that point in time.

But when you look at the volume environment ahead, you've kind of adjusted this fleet at the margin. But is there an opportunity to kind of reduce that what looks to be excess capacity in the number of aircraft you have just given the current volume environment? Or is that difficult to do just given some of the changes in length of haul or some of these longer-term strategic agreements you want to make sure that your service holds as volumes do recover with the likes of DHL and Amazon.

Just wondering how you think about kind of the fleet composition from kind of 42 aircraft. Could you push that a little bit lower if volumes don't recover here?

Yes. Kevin, yes, the short answer is yes, we could. We've done that in the past. I think we have a very good track record. If we have excess capacity, we can just park aircraft, we can store aircraft on a short-term or long-term basis. We could sell aircraft ultimately if we need to.

But I think some of the fleet rationalization that we did in the last -- really in the last 6 months and continuing to the end of this year is to put us in a position with the fleet that meets the requirements for all 3 segments of our business.

Our domestic is pretty constant. The ACMI, the number of aircraft, as I mentioned, hasn't changed with DHL, but also positions us very well for when the growth cycle returns that we have -- it's all about timing in this business that we have the aircraft, and we have the capacity when customer demand comes.

And the fact that we're very confident that we'll have very minimal growth CapEx requirements related to aircraft over the next couple of years because of the fleet size that we have today, meets all of our requirements, but also, I think, more importantly, positions us for when that growth cycle comes back that we can take advantage of those revenue opportunities without any delay.

And Kevin, I just want to highlight something that Jamie points out. While block hours are down, the number of aircraft that we have are still being utilized in the network, ACMI and charter flying. So the aircraft fleet is consistent with what the customers are looking for and what the demands of the market are just not the block hours associated to the aircraft that you've seen in the past.

That makes sense. And maybe just my second question. You announced the expansion into Europe, a scheduled service here. I mean it looks like -- and you kind of noted in your press release, this is a key cargo hub, and I suspect you see opportunities there.

I guess when you look at your broader expansion opportunities, just what are some of the key features you're looking for? Is it trying to match your trade routes with some of the stuff, I guess, that came out with the budget last night. Is it tapping into untapped opportunities you've always seen that maybe were just higher hanging fruit given some of the other opportunities in front of you?

Just how should we think about this broader kind of international scheduled expansion just given the announcement last week into Liege there?

Yes. Kevin, we're excited about it. We're looking at -- and we constantly look at different trade routes. We look at new opportunities. Liege, we're servicing once a week with the 767. The demand is there. We're seeing that from the marketplace. Obviously, we're going to continue with this flight. We're going to operate to Liege, and we're going to extend the brand into Europe and hopefully have connectivity through China and India and pick up cargo on the return.

November, December looks strong for this route. It's one of the things that we know best is how to manage our customers' needs and expectations. So we're pretty excited about that, and we're also looking for other trade opportunities and trade routes.

And your next question comes from Timothy James from TD Cowen.

Jamie, thanks very much. It's been a pleasure and not only working with you, but learning from you. And Pauline, congratulations on the CEO role.

Thank you very much.

My first question, can you talk about -- as we sit here sort of later in the year, can you talk about if you have any additional insights? And I know it's a little bit tricky to comment on this. But if you have any additional insights on sort of pull forward in demand that occurred in 2025, again, related to sort of impending tariffs and trade issues and what have you.

Have you seen any indications or your customers giving you any that maybe the earlier part of the year did benefit more and you're feeling that effect here in the third quarter? And I'm thinking of both in the domestic market and sort of your international volumes as well in ACMI and/or charter.

Tim, as you know, we are very, very close to our customers, and we -- there's not a day goes by where we don't talk about what's happening in the marketplace.

Because of the tariff situations, for example, many carriers, whether it's DHL, UPS, where everybody has reduced capacity from Asia connection into Europe and to North America. People who were building, buying 10 -- let's say, they were buying 10 of widget now is buying 2 or 3 because they don't know whether the demand will be there for them to sell or not. So the size of the shipments has considerably gone down because of the uncertain macro conditions.

Now you're asking how do the customers feel about what their volumes are going to be. To be honest with you, our customers, certainly, they are in a zone where they're waiting and seeing. And their customers are also telling them the same thing that we are not going to commit anything right now because we don't know whether this is a permanent shift. I hope it's not. That's not what we feel. I think things will normalize. Tariffs do come into play and then trade normalizes at some point. And that's what our industry feels as a whole.

And we are hoping that once people -- I don't think it's the tariffs that much. It's the uncertain nature of the tariffs that are going on and how it's implemented and when it's going to happen and the backlogs at the airports and the warehouses. So it's all totally connected with uncertain. That's the word that uncertainty is the word here. It's not the amount of tariffs and it's not what's happening. Everybody is aware of it.

So until that clarifies, I think we are all in a zone of wait and see. But the good part is that Cargojet's model is quite adjustable to these changes. We can shave block hours. We can shave some variable expenses that we don't have to do. We can cut our cost infrastructure quite deep if we needed to without disrupting the service. And also our relationship with customers help us deploy those aircraft to other routes if one route is not working.

So we are in the best position to ramp up when things clear up, but we are also in the best position to ramp down a bit. And as you can see on our SG&A, we saw some of that improvement. It's strictly because of our ability to bring the expenses down when needed.

And to A.J.'s point, we have the ability to do that, and we proved to do that during COVID. We ramped up as market demanded, and we were able to readjust after COVID.

Okay. That's helpful. My second question, Pauline, you mentioned about looking at opportunities for new trade routes in 2026, like the lease route that you've announced. Can you just kind of give us a bit of an overview of how you evaluate those new route opportunities in terms of -- is it primarily with your existing customer base? Just kind of how you go about deciding on the value, the decision, the economics behind new route opportunities.

Yes. Chris, we look at where trade happens, where -- what trade routes are required and in demand by the customer base. This customer base is a little bit more diverse than the domestic customer base. These are more freight forwarders and less couriers and integrators.

We went to Liege because it is a cargo hub of Europe. It has got the best connectivity in Europe. We've taken our extensive domestic network, consolidated and are opening this trade route and servicing Europe and Canada and expanding our brand globally.

So yes, we do look at the market. We look at where the market trends are going. We look at what the customers are expecting. We look at niche markets specifically that are cargo-driven that are not overserviced by passenger aircraft, allowing more cargo lift to go in and service the consumers and the markets that we strategically select.

And your next question comes from Razi Hasan from Paradigm Capital.

Congrats to both Jamie and Pauline. Just quickly on previous calls, you spoke about potential opportunities of flying directly into Canada given the tariff impact. I know it's still uncertainty out there, but is there any update on any potential opportunities that you guys are seeing?

Sorry, flying into Canada?

Yes. It's kind of bypassing the U.S. and flying into Canada. I think you mentioned that on previous calls, just given the tariff uncertainty. Is there any update there to that?

Yes. We have -- we've continued to have inquiries from customers, particularly out of China, looking at flying additional frequencies into Canada and even some into the U.S., but nothing that's -- that we're anticipating flying in the next -- at least in Q4 or Q1 of next year.

Okay. Great. And then one last question just in terms of flight out of China, should we expect the [indiscernible] 3 flights a week into maybe the back half of 2026, just given the setup heading into the back half of 2025?

Yes. We don't see any change there too.

And there are no further questions at this time. You may please proceed.

Thank you, everyone, for joining us on the call today. We appreciate you taking the time. We'll continue with the analyst calls throughout the day. We look forward to speaking with all of you soon.

Ladies and gentlemen, this concludes your conference call for today. We thank you very much for your participation. You may now disconnect. Have a great day.