Earnings Call: Q4 2019

Feb 21, 2020

Earnings release

Good morning, everyone. Welcome to Exchange Income Corporation's Conference Call to discuss the financial results for the 3 12 month period ended December 31, 2019. The corporation's results, including the MD and A financial statements, were issued on February 20, 2020, and are currently available via the company's website or Silar. Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Security Laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or some questions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements, please consult the MD and A for this quarter, the risk factors section of the annual information form, and exchanges other filings with Canadian Securities Regulators. Except as required by Canadian Securities Laws, Exchange does not undertake update any forward looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded and broadcast live via the internet of the benefit of the individual shareholders, analysts, and other interested parties. I would now like to turn the call over to the CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle. Thank you, operator, and good morning, everyone. Joining me this morning are Carmel Peter, EIC's President, Daryl Bergman, our CFO, and David White, our EVP of Aviation. 2019 was a great year for EIC, as we generated strong financial results and invested in our future. 2019 was performance allowed us to increase our dividend for the 14th time in our history, while reducing our payout ratio. I believe the debt detailed the analysis of the results to Daryl, but I would like to get a few financial highlights for the full year and for the fourth quarter. Revenue grew 11 percent to $1,340,000,000 EBITDA grew 18% to $329,000,000. Net earnings grew 18%, while earnings per share grew 15% to $2.58. Adjusted net earnings grew 11%, while adjusted EPS grew 7% to $3.15. Free cash flow less maintenance capital expenditure payout ratio fell to 57%, while the adjusted net earnings payout ratio declined to 71%. Our 4th quarter was equally strong. Revenue grew 15 percent to 363,000,000 EBITDA grew 28 percent to $89,000,000. Net earnings grew 37%, while EPS grew 25% to $0.74. Adjusted net earnings grew 21%, while adjusted, EPS grew 11% to $0.88. Free cash flow less maintenance capital expenditure payout ratio was essentially flat at 52%. While the adjusted debt earnings payout ratio improved to 65%. I should point out that both EBITDA and earnings were by the implementation of IFRS 16. IFRS 16 increased EBITDA while reducing earnings and adjusted earnings. It has absolutely no impact on cash flow. The impact of IFRS 16 has been detailed in previous financial periods and I will not repeat it here. I was into my mind blisters of its implementation. EIC has a number of significant achievements in 2019. That contributed to these results and will drive growth in the future as well. Adam and his team followed up the acquisition of Quest in late 2017, and Moncton Flight College in 2018, with the acquisitions of AWI and LV Control in the fourth quarter of 2019. AWI is the 1st vertical integration acquisition for Quest. AWI is a glazer who installs Quest's product the Northeastern United States. This will provide Quest customers with a single point of contact for the purchase and installation of products. This matches how Quest operates in Canada. Not only will the acquisition of AWI simplify things for our customers, It will generate returns for Quest on installations as revenues continue to grow in this geography. LV Control is a dominant Western Canadian Electrical Systems integrator in the Agricultural Material Handling segment with a strong margin profile. Its services include maintaining grain, uploading elevators, systems to grade grain by quality and putting appropriate silos and automatically updating credit to farmers accounts while updating inventory positions and financial statements for the grain company. They have a great relationship with many of Canada's granting companies and a track record of profitability. Both acquisitions will strengthen our manufacturing segment and fuel growth in 2020 and beyond. Our existing operations had a year of contract renewals and new contract wins. Not only will this fuel growth in 2020 and beyond, it provides great stability for our earnings. While we do have largely in the mining sector, which are negotiated on an annual basis. We do have a material aviation contract in North American Aerospace And Aviation segment. That expires in either 2020 or 2021. A sample of the new, renewed, new or expanded contract include the ramp up of Canada's fixed wing search and rescue program, where Powell will provide in service support. The Nunavut Medical Passinger Transport contract, the significantly expanded Canadian Department of Fisheries contract awarded in 2019, for late 2020 implementation, the government of Manitoba Charter Services contract, and the maritime surveillance contract based in Curacao. You'll also recall that all of KeyWAC's new Metavac contacts were reviewed in recent periods. Regional 1 entered into a joint venture with SkyWest, North America's largest regional carrier to lease engines for regional jets. The joint venture subsequently announced that the initial assets of the Partnership had been leased on a long term basis to a regional operator, to a US operator, or Regional 1 will be leasing the airframes as well. This initial placement will drive returns in the second half of twenty twenty as the aircraft go into service and beyond. The relationship with SkyWest is expected to provide other opportunities in the future. We also took steps to strengthen We completed 2 market fundraisings, a convertible debenture offering in March, replacing a debenture, which was called by EIC and largely converted into equity and an offering of common shares in October. Both were very well accepted by the markets and were oversold, resulting in the underwriters fully exercising their full over allotment options. Finally, we increased the size of our syndicated bank facility while reducing interest costs and improving the flexibility of the covenant package. I will leave it to Daryl to detail these initiatives, but I'm pleased to report that in aggregate, these initiatives, together with our strong operating performance have served to reduce leverage while increasing liquidity and access to capital and increasing our earnings on a per share basis. A wazer between one of my EIC team members and a friend of his came to its 10 year end in November of this year. My team member believe that EIC would consistently generate an average all in return to our shareholders of at least 10% His friend believed that this was not achievable. Given that the TSX as a whole, generates only approximately 7% in average returns. When the final calculation was completed, EIC had not only generated the return of far higher than the 10% threshold, and in fact, had a dividend reinvested average annual return of 21%, three times the average of the TSX generated over the same period. He won his back, and it was not even close. I decided to have the calculations redone as at December 31st in order to make them more readily comparable to the TSX as a whole or other component companies. We calculated the dividend reinvested return to our shareholders for 1 year, 5 years, 10 years 15 years, as well as since our inception. In all of these periods, the return exceeded 21% annually. This is a level of shareholder return that very few can match. And a level of consistency that even fewer have achieved. The absolute level of returns and their consistency speak to the success of the EIC model. And I would like to take a moment to discuss 5 reasons why we were able to achieve this. Firstly, we have maintained a system long term strategy since our IPO in 2004. EIC is driven by building a portfolio of strong companies which will enable the company to provide a reliable growing dividend to our shareholders. While we invest significant effort examining and refining our business model each year, we are committed to being an income story. That has enabled us to increase our dividend fourteen times and maintain a dividend CAGR of 5% since inception. We are a dividend story when income is invoked. In the markets, but we are an income story with growth is what the market desires as well. But our plan to provide a growing dividend provides growth with income as is evidenced by our consistent 21% aggregate return. Our shareholders do exactly who we are and what we are trying to achieve. Secondly, we maintain a long term focus. One of the great challenges of being a publicly traded company is the market's focus on quarter to quarter results. We pride ourselves on looking towards the horizon and focus on generating long term sustainable success rather than simply maximizing our profit in which required us to invest significant amounts of capital years before revenues and profits could be proven out. The design construction and certification took over 2 years to complete, but we are now realizing the benefit of the project. A second example is the slow measured ramp up of the Quest Dallas facility. A choice was made to ramp its production slowly in order to make sure that the quality of the product matched that from our first plant. This choice met losses would be incurred during the wrap up but the long term reputation of the company is preserved and in fact enhanced. 3rd, we believe in a balanced approach to growth. Utilizing both acquisition and organic investment. Many people saw EIC or many people view EIC in simply an acquisition company, but that is not correct. Since our inception, we've invested approximately $750,000,000 in our platform acquisitions, while at the same time investing over a $1,000,000,000 in tuck in acquisition and growth capital into those platforms. We maintain the same expected return threshold for both acquisition and growth capital opportunities. Which enables us to grow our subsidiaries and maximize the returns we generate. EXT needs to make sure that we have the capital available to fund the opportunities uncovered by our subsidiaries and any new acquisition opportunities we uncover. The high standard of returns on all investments ensures that growth is accretive on a per share basis and not just growth. For the sake of 4th, and perhaps most importantly, culture. We buy strong companies with proven market niches and established management team, Our culture allows these companies to be led by these management teams who understand the business better than a new owner could possibly understand. We don't buy growth in companies. EXC provides oversight and the capital necessary to implement their business plan. But we do not take over day to day management. As a result, our management teams remain motivated and entrepreneurial. We've been able to keep the management teams in place in our subsidiaries for years, maintaining that knowledge and expertise enables EIC to pursue its diversification strategy that would be absolutely impossible without these talented people. The final driver of our success is social responsibility. There has recently been a significant increase in focus on environmental and social responsibility by the capital markets. EIC has always believed that these matters were fundamental to long term sustainability of the company which is why since our inception economic development in the 1st nations communities we serve to providing employment opportunities through programs like life and flight, to provide life changing experiences to First Nations Children through our bomber and jet programs. Or improving our environment by building greener plants like Quest Zero Waste Facility in Dallas. Investing in our environment, investing in the communities we serve, investing in the people who are our customers, our current and future employees, may not have immediate results, but consistent with our corporate strategy of a focus on long term growth, We we have a commitment to social and environmental responsibility, not just today, but yesterday, today, and tomorrow. We know it works not only from our financial results, from the quality of people we attract, the companies we are able to buy, and the support of our customers. I would now like to turn the call over to Daryl to discuss our 2019 results. Daryl? Thank you, Mike and good morning, everyone. Before I present the results, I would like to take a minute to speak to some financial highlights from 2019. 2019 has been a year where we saw many all time quarterly highs, including in the third quarter, where adjusted net earnings reached a quarterly high of $1.03, which was the first time in the company's history that adjusted net earnings exceeded $1 per share in a quarter. To wrap up the year, EIC reached a new milestone with regards to annual adjusted net earnings per share. Where it broke through the $3 threshold, reaching $3.15 per share. 2019 also a year where we demonstrated our ability to maintain a strong balance sheet with modest leverage and good liquidity to allow us to be ready when opportunities arise. The outcome of transactions in 2019 lends well to our ability to access capital going forward, and at levels which is the best the company has experienced. In Q4, we entered into a new credit facility that improved our access to available capital by 500,000,000 inclusive of the accordion feature, while at the same time providing lower interest on borrowed and onboard amounts, increasing allowable leverage from three and a quarter times to 4 times, minimizing security requirements, providing much more flexible covenants, and brought new members into our syndicate of lenders that can support growth. Syndication of the facility was materially oversubscribed. The improvement to our credit facility as we have stated before, does not in any way change our approach to our balance sheet strategy, which is a supporting principle of our business model. We take and will continue to take a disciplined approach to our aggregate leverage, which includes both secured debt and convertible debentures, and is adjusted for full year impact of acquisitions, keeping it between 2.53.5 times, which we have kept consistent since inception. One of the key tenets of utilizing convertible debentures is managing maturities and retiring these debentures at the first appropriate time. That said, we decided to exercise the right to call the 7 year 6% convertible debentures, which were due on March 31, 2021, and we're in the money. The result of this decision was $24,700,000 principal amount of debentures that were converted into 780,112 shares, at a price of $31.70 per share. With a very small amount of remaining outstanding debentures redeemed. When the ventures were initially issued in February 2014, shares were trading around $21.70. As an overall result, the effect on dilution of equity was approximately 358,000 shares less than if we had decided to elect to issue equity in 2014. We replaced the aforementioned convertible debenture issuance with a new one. The new debentures featured a lower interest rate of 5.75 percent and a higher strike price of $49. The offering was oversubscribed and the underwriters exercised their over allotment, which brought the gross proceeds to $86,225,000, dollars. The proceeds of the offering were used to pay down long term debt. Looking at the combined impact of the 2 convertible debenture transactions, it resulted in a conversion to common share equity with lower dilution and paid down secured debt, which improved both our liquidity and leverage. In the fourth quarter and concert with 2 accretive acquisitions, we chose to complete an offering of common shares. The capital raise further reduced leverage, and received strong support from the market. The offering was materially oversubscribed and the underwriters exercised their full allotment option. The gross proceeds of the offering Before I move on, I should point out that even with the new share is shares issued as part of the common share offering and the debentures converted earlier in the year, that all of our per share measurements Finally, it is worth highlighting another principle that guides our strategy. In Q3, we increased the dividend for the 14th time in company history. Solidifying one of the best track records of dividend growth on the TSX. Even with this increase in the dividend, we continue to improve on our payout ratios. Overall, we are very pleased with the outcome of 2019. As I've noted on previous calls, Our 2019 financial results include the impacts of IFRS 16, comparability to results from prior periods with respect to EBITDA, net earnings, and adjusted net earnings are impacted. Now turning to our financial results, I will initially focus my discussion on our annual results and then I will continue with a shorter discussion on our 2019 Q4 results. Consolidated fiscal 2019 was another great year for EIC. We generated revenue of $1,300,000,000, which is up $138,000,000 or 11 percent over last year. Aerospace segment revenues increased $91,000,000 and Manufacturing segment revenues increased $47,000,000. Aerospace And Aviation segment revenue was up 10 percent to $975,000,000. The revenue from the legacy airlines and provincial increased by $60,000,000. Aerospace revenue increased with the deployment of the Force Multiplier aircraft and greater in service support revenue as overseas maritime surveillance flying hours increased. This segment also benefited from new revenues coming from long term contract to provide general transportation support to the due to judicial system in Manitoba. The Regional 1 revenue increased in 2019 compared to the prior year by $31,000,000. Sales and service revenue increased by 12% which can be attributed to investments made in working capital in prior years. Lease despite a customer bankruptcy at the end of third quarter of 2019. The increase is a result of higher utilization of aircraft, and an increase in the number of assets in the portfolio on lease. Notably, the assets related to the joint venture with SkyWest are currently being phased in did not contribute in a material way in 2019. The deployment of these assets will be phased in throughout 2020. Turning now to our Manufacturing segment, revenue grew by $47,000,000 over the prior period, benefiting from the commencement of production of the Quest Dallas plant and continued increases in custom manufacturing and high levels of defense spending. The revenue for this segment was 367,000,000 Moving to EBITDA. Consolidated EBITDA was $329,000,000, up 18% or 51000000 for the year compared to the prior period. This includes the $6,000,000 one time bad debt write off at Regional 1 because of an airline customer bankruptcy. Which decreased EBITDA during this period and the adoption of IFRS 16, which increased EBITDA compared to the prior year. Despite the write off, EBITDA performance on year was strong and EIC was still able to meet guidance provided. This is a further test dollars. In addition, we're looking at the ultimate DIC's diversified investment strategy, working as intended. EBITDA in the Aerospace And Aviation segment in 2019 was 299,000,000 increase of $51,000,000 compared to the prior year. EBITDA generated by the legacy airlines and provincial increased by $48,000,000. The increase in EBITDA for the legacy airlines and provincial was driven largely by the same underlying conditions as noted with the increased revenue previously discussed. Again, our EBITDA grew despite industry related challenges. Industry wide labor shortages resulted in continued, higher overtime, contractor, and training costs. The implementation of the EIC license life program will help mitigate the impact moving forward, but it's acknowledged that it will require time to take full effect. EAC also now has now also begun to implement similar strategies to address maintenance labor challenges. EBITDA for Regional 1 increased by $4,000,000 over the prior year. Excluding the impact of the one time $6,000,000 bad debt write off, EBITDA increased by $10,000,000 over the prior year. In Manufacturing segment, EBITDA was $56,000,000, an increase of $4,000,000 compared to the prior year. EBITDA at Quest was lower than the prior year as a result of costs incurred with the Quest's new Dallas facility, where management continues to proceed in a responsible manner, balancing production with important quality requirements and risk management. The balance of the Manufacturing segment collectively experienced growth in EBITDA, driven by increased revenues and operational efficiencies. Growth capital expenditures made in the current and previous periods enabled the segment to respond to increased demand from customers, resulting in increased EBITDA. Turning to earnings. Net earnings was $84,000,000, an increase of 13,000,000 The adoption of IFRS 16 in 2019 negatively impacted net earnings compared to the 2018 year. Net earnings per share increased by 15% in comparison to the prior period to $2.58. It should be noted that during the year the weighted average number of shares increased by 3%, partially offsetting the increase on a per share basis in net earnings, adjusted net earnings and free cash flow. We had adjusted net earnings of $102,000,000 for the 2019 year, representing an increase $10,000,000 or 11 percent compared to the prior year. Once again, EIC reached a new milestone with regards to adjusted net earnings per share. Seeing it increased to above $3. For 2019, adjusted net earnings per share increased to $3.15 compared to $2.94 last year. In 2019, free cash flow improved by 10% over last year, $246,000,000 or $7.58 per share. The main reason for this increase is the increased EBITDA and the decrease in current tax expense, partly offset by increased interest costs and principal payments on right of use lease liabilities. Free cash flow was impacted by the one time bad debt write off as previously noted. Free cash flow less maintenance capital expenditures per share increased 7% to $3.89 per share from $3.64 per share in the prior year. Growth in adjusted net earnings drove the improvement in adjusted net earnings payout ratio over the year to 71% from 74%. The stronger free cash flow less maintenance capital expenditures compared to the prior year led to an improvement in the free cash flow less maintenance capital expenditure payout ratio to 57% from 60%. In 2019, the Corporation announced its intention to reduce the adjusted net earnings and free cash flow less maintenance capital expenditures payout ratios to 60% 50% respectively over the 3 period. The improvement in both payout ratios this year shows positive progress towards the corporation meeting these goals and it shows that reaching these targets does not preclude the dividend increases when results warrant. Turning to working capital. During 2019, the corporation invested $45,000,000 in working capital across several entities, to support our organic growth resulting from various contracts, contract awards, the ramp up of Quest Dallas plant and increased operations. During the fourth quarter, the corporation was also affected by a slow payment of receivables from a significant government customer as a result of a cybersecurity breach. Expectations are for this receivable to be collected in the first quarter of 2020. Our leverage ratios remain within our target range and within our covenant with lenders. In addition, now is the new credit agreement under about We have access to approximately $580,000,000 of available capital and another $300,000,000. In addition to that, in an accordion feature, should we choose to exercise it? Now turning to Q4 2019 results. Consolidated Q4 was another good quarter for EIC. We generated revenue of 363,000,000, which is up 48,000,000 or 15% over the comparative period. Of the increase, $19,000,000 was generated in our Aerospace And Aviation segment, $29,000,000 was in our Manufacturing segment. The primary explanations for financial results and changes in the quarter were largely consistent with drivers for the year to date. Where there are notable differences, I will provide some further commentary. Aerospace And Aviation segment revenue was up 8% to $253,000,000 for the quarter. The revenue from legacy airlines and Provincial increased by $21,000,000 over the comparative 3 month period. For Regional 1, revenue decreased slightly in the fourth quarter 2019 compared to the prior period by $3,000,000 due to higher than average sales of aircraft and engines in the comparative period. Notably, sales of parts are a consistent portion of sales and service revenues, and it and it increased by 17% from the comparative period, helping to offset the lower engine and aircraft sales. Lease revenues at Regional L1 were down marginally by 2%. The lease revenues in the fourth quarter of 2019 were impacted by the bankruptcy of a customer in the previous quarter. This resulted in some larger assets Revenue grew by $29,000,000 for the fourth quarter versus the comparative period. The total revenue for the segment was $111,000,000. Moving to EBITDA. Consolidated EBITDA was up $19,000,000 or 28 percent to $89,000,000 for the fourth quarter of 2019 versus the comparative period. EBITDA in the Aerospace And Aviation segment in the fourth quarter of 2019 was 81,000,000 an increase of $18,000,000 compared to the prior period. EBITDA generated by the legacy airlines and provincial increased by $16,000,000. EBITDA for Regional 1 was up slightly in the fourth quarter of 2019 versus the prior period by $1,000,000. The Manufacturing segment EBITDA was $14,000,000, an increase of $3,000,000 in the fourth quarter of 2019 versus the prior period. Turning to earnings, net earnings in the period was also strong coming in at $25,000,000, which is an increase of $7,000,000 compared to the prior period. Net earnings per share increased by 25% to $0.74. We had adjusted net earnings of $30,000,000 in the fourth quarter of 2019, representing an increase of 5000000 dollars or 21% compared to the prior period, Adjusted net earnings per share increased to $0.88 compared to $0.79 in Q4 of last year. It is also It should also be noted that in the period, the weighted average number of shares increased by 8%, partially offsetting the increases on a per share basis in net earnings, adjusted net earnings prior period to $696,000,000 or $2.02 per share. The main reason for this increase is the $19,000,000 percent increase in EBITDA in the quarter, partially offset by the principal payments on right of use lease liabilities. Free cash flow less maintenance capital expenditures improved by 9%. On a per share basis, it is up slightly to $1.09 to $1.09 per share from $1.08 per share in Q4 2018 as maintenance capital expenditures were higher in the 4th quarter as a result of certain timing of certain aircraft upgrades. Maintenance capital expenditures were up 22% in the 4th quarter, but were in line with expectations for the full year. The higher investment in the fourth quarter simply offsets lower levels earlier in the year. On a quarterly comparative, our adjusted net earnings payout ratio improved to 65% from 69% in the prior year prior period, sorry, The free cash flow less maintenance capital expenditures payout ratio was pretty much flat period over period at 52% compared to 51%. Subsequent to year end, we applied and received approval from the TSX with regards to the renewal of our normal course issuer bid for common shares. Before I pass the call back to Mike, I would like to make a couple of concluding comments. First, a general comment. As I come to the end of my 1st year with EIC, I would like to share how impressed I am with the depth of talent I have met throughout the organization. You just need to turn to what has been achieved over the course of just this year, not to mention prior years. It would be very difficult for any organization to achieve what has achieved without some pretty talented people from within. EIC's depth can be attributed to efforts around recognition of internal individual development opportunities and succession planning. Equally, as noted within our investment strategy, one of our key parameters in assessing potential acquisition is strength in management. This has definitely been a success in adding great value, both in talent and depth. My final comment would be with regards to guidance that Mike will further elaborate on in his subsequent comments. We provide guidance on an annual basis. That said, there are certain conditions throughout any given year that may vary results from quarter to quarter. Things like seasonality in our aviation segment where winter roads provide a temporary alternative means to to our airlines and affect passenger volumes and cargo. Timing of aircraft and engine overhauls, timing of investments in purchased inventory at R1 and slower lease revenues in certain periods as utilization of aircraft by customers is generally higher in busier summer months. That concludes my review of our financial results and comments. I will now turn the call back to Mike to wrap up. Mike? Thanks, Daryl. We are excited about 2020. Investments made in previous periods will begin to generate new while our acquisition pipeline is robust and we examine opportunities for organic growth. We closed 2 acquisitions in late 29 team. And as such, some of the opportunities we're examining are nearing the final stage of the process. The capital market in the U. S. Remains very liquid, And as a result, purchase multiples are higher than we think are sustainable in the long term and are higher than we are prepared to pay. Our pipeline is strong, however, and we remain a preferred buyer for companies with paternalistic ownership, who have reservations of the purchase and resale model of actions under consideration are in our Manufacturing segment. The investments we've made in previous years will bear fruit in 2020. The Quest Factory in Dallas will increase production and begin and begin to contribute to the bottom line. The ramp up of production will climb throughout the year. EWI has performed as expected since its acquisition in Q4 and will also grow Quest results in 2020. Investments of Provincial will also kick in in 2020. The aircraft for the first for the fixed wing search and rescue support contract will begin to be delivered in 2020 and continue for the next 2 years. The revenue from that contract will continue to grow as the aircraft go into service and need to be maintained. Although, revenue has already begun as we are required to have the infrastructure in place for the first deliveries. The new expanded fisheries contract goes into effect in the third quarter and will contribute late in the year. The Force Multiplier has completed several missions and discussions with several countries about longer term deployments are occurring. Investigations developing a second aircraft are also underway. LV Control is performed as affected since its acquisition and will also contribute to our growth in 2020. As a result of these factors and other factors, I am pleased to tell you that we expect EBITDA growth of 10% to 15% in 2020. This will mark the 8th consecutive year of double digit growth. Maintenance capital expenditure are expected to grow at roughly the same pace as the low end of our EBITDA guide. This is unchanged from previous information. I should point out, however, We have more heavy aircraft overhauls. That's a mouthful. In 2020, which will be completed in the first half of the year and as such, a much higher proportion of the annual investment will be incurred in the first half of the year. We try to complete this work in the slower winter period in order to maximize our capacity in the busy summer period. This contrasts with 2019 when a significant part of our capital program was engine overhauls, which can be completed at any time during the year, as they can be completed without taking the aircraft out of service for more than a day or 2. Given that maintenance capital expenditures are front end loaded, while growth will ramp through the year. We expect payout ratios will rise in the first two quarters before declining in the second half of the year. Before moving on to questions, I'd like to make a quick comment about the coronavirus. EIC is fortunate that we have little exposure to this pandemic. Our exposure is currently limited to MFC where we trade pilots for Chinese airlines. These pilots arrive regularly and stay for 1 year. Should the flow of pilots be interrupted, it would have reduced revenue at MFC. But unless this unless the disruption will go on for a prolonged period where current classes of pilots have graduated and no new pilots have replaced them, the impact will not be material. To date, there has been no impact. Finally, before moving on to questions, I want to thank all customers, employees, shareholders and all stakeholders for their ongoing support. We'd now like to open the call to questions. Thank you. You will hear a tone acknowledging your request. Thank you. And your first question here comes from the line of Mona Nazir with Laurentian Bank. Please go ahead. Your line is now open. Good morning. Good morning and thank you for taking my questions. So my first question just passed to do with the manufacturing segment and the kind of the root of the lower margin, is it primarily all due to Quest And can you just speak about how the ramp up is progressing? Some of the growing pains or a wired decision to do a slower ramp. And then I just have a follow-up that now that we're into the end of February, how things are sitting now? Sure. Those those fit together pretty well. Quest builds windows for projects. We don't build inventory. And so to a certain extent, every project we do is a custom project. And so we wanna make sure when we started rolling this, the production into our Dallas facility that we have made sure that the product not sure it came out of Toronto. And because of a delay with our windows delays the whole project. And so we slowly wrapped where we did a higher level of testing in Dallas of each production unit, until we were confident that it matched the, products from Toronto. It actually goes a step further than that. You know, we had to build up the, we call it tribal knowledge of our workforce. Because they haven't built certain types of windows. And so each time they do it, it's a complete start from 0. We've seen them material increase in the throughput of production. It continues to grow and we anticipate by later in the year the throughput on a, per employee basis should not be close to matching that in Toronto. As a result, you'll see profitability begin to rise through this year and you'll see the full impact of it in the second half of the year. As for so far this year, Quest is performing as expected in the 1st 6 weeks of the year. Okay. Very helpful. And I know that there's an ongoing pilot shortage, which is further pressurized by new fatigue regulations. But aside from that, I'm just wondering if you could speak about what other areas you are seeing in labor shortages and how things are trending for 2020. Do you expect similar pressures? I'm gonna let Dave White, our EVP of the aviation take that one Good morning, Mona, and thanks for the question. And, you are on target as we monitor the pilot challenges over the last couple of years. We've seen increases in other areas, inclusive of the maintenance area with an aircraft maintenance engineers. So we're working on a prod We've actually had already got some people into the pipeline, for a similar approach to bring trained and, again, experienced engineers through an apprenticeship program that takes about 4 years for licensing to put people into our airlines. This program, which is a little different than the pilot allows us to, focus the experience in the airlines as apprentices at the same time that they're doing their training. So that's that's an initiative that we brought on this year. As well, we use the initiatives. We're lucky to have with 9 different independent companies to be able to attract the pipeline from various, sources. So we got a good reputation out to what our company has been able to hire maintenance people and the different companies reach out to their network. To also bring in more applicants. So we're we continue to monitor. There are some pressures in there, but we've, we've taken those proactive steps as well as not putting ourselves in a box in Sandusky only solution. We always have to find multiple solutions to the pipeline. Mona, just one thing I add is we built our like like program. We built it, with a platform that we could leverage so that we easily could address that, it's for fall that we knew existed on, for instance, the aircraft mechanics So having that platform readily available to address other needs is obviously very, useful for us, and that's we're gonna use going forward, not only for that, but other shortages that we see in the industry. K. That's very helpful. And just lastly for me, Mike, you on seasonality of CapEx a bit in your prepared remarks. I'm just wondering if you could speak about the upcoming year and what kind of ebbs and flows or variants are you expecting quarter to quarter. And just for my confirmation, is it that the annual CapEx shouldn't be, you know, too much different than 2019 if just the quarterly split? It, well, we, we anticipate that as the business grows, the CapEx grow with it. So I'd anticipate maintenance CapEx growth of high single digits to around 10%. But the more material change is the fact that in the first quarter and early second quarter, we have a number of heavy aircraft overhauls where we take aircraft out of service for weeks at a time while they're effectively torn down to their frames and rebuilt. We don't want to do that during the summer and and fall seasons where we're very busy. So that get moved forward in the year. And I think you'll see any material increase particularly in Q1, but also in Q2 versus last year. And then in the back half of the year, you'll see a decline. We had $40,000,000 in maintenance CapEx in in Q4 of this year. I don't have Q1 in front of me, but, it was materially less than that. And that's not typical for us. It's it's 2019 that was actually kind of atypical in terms of the breakdown of maintenance CapEx. 29, 2020 will return to a sort of more normal cycle where it's front end loaded and then reduces as the year goes on. Okay. That's helpful. Thank you. Your next question comes from the line of Raveel Afzal with Canaccord. Please go ahead. Your line is now open. Good morning, Ravi. Good morning, guys. Thank you for hosting the call. And I'll start off with Quest. Is it possible to quantify the margin impact and ramp up costs for Quest, on your manufacturing division's 2019 EBITDA? I I I'm I'm not sure I wanna get, that granular with a Ravi. What I can tell you is that, we incurred, actual losses in, in Quest, Dallas for the 1st 3 quarters of the year before effectively breaking even in the 4th quarter, but the impact is largely on Toronto. Where we effectively put so much stress on our production capacity there to keep up, we had made promises to customers that you have to deliver on time. So that meant we were running projects through on overtime and in less than the most efficient manner. And so that reduced margins particularly in Q4 in in Toronto. You'll see that slowly recovering Q1. And by Q2, I expect to see Toronto back to its more normal margin profile and then continued growth in Dallas through the end of the year. Yes, Robbie, the other thing to consider is we've also are investing today to make sure that we have the infrastructure for the kind of large order book, that exists. So as production grows, you'll see the absorption grow as well, which will help with margins. That's that's very helpful. Just one follow-up on that. And what portion of Dallas product are you guys testing now? What's to say in Q3 'nineteen and how that compares with the counter facility just so we see how that ramp up is coming along? It depends on the product itself. So it's not a precise number, but The Toronto number would be the low single digits. Less than 5% of product is physically tested, whereas in Dallas for, through Q3, it was 100%. We're now down to about 25% and we intend to wrap that down here shortly again toward single digit. So we're making great progress on that. And I I really I'm nervous when I talk about this, that it comes across as apologetic because it really shouldn't be. It's not. What we wanna do is we have a standard in the marketplace that's given us our $304,000,000 order book. We ought to maintain that standard. Ramping the facility to the profit in the next 10 minutes isn't material to the value we create with that business. It's no different than with Force Multiplier where we took the time to have it certified so that all governments around the world can use it. And now we're seeing a great demand. And quite frankly, we're excited about that, man, as it made mean building another one. But it's the investment in making sure you do it right. And so it's the hard part of being public where people wanna know how you did last in the last 10 minutes and then extrapolate it. And, we're fortunate of, a group of analysts to look at our longer term prospects. But for us, we want to make sure people know that we're taking the time to do it right. Makes a lot of sense. Thank you for that. And I was just speaking about force multiplier. Congratulations. It's been getting a lot of media attention for its work in Mozambique. Can you directly speak to the split between Provincial's Airline And Aerospace division? I know you guys don't provide any directional help on that would be helpful and how you expect that to change based on these visible growth drivers for this, for this vertical? Sure. When we bought it several years ago, the segments were very close to equal. Between aviation and the, aerospace. But in the interim period, we had 2 major things that have grown the aviation. Base. So, our air air borealis partnership, with the Inuit in Labrador increased the size of that business. And then the acquisition of Moncton Flight College, which we lumped in with our aviation, as opposed to our aerospace, have it today that about 2 thirds of, would be in, the airlines and about 1 third would be in aerospace. But as we move forward, the growth goes the other way, with the contracts we've talked a lot. So you'll see the percentage of aerospace grow. And while aviation will continue to grow, we don't anticipate at least in 2020, it will keep pace with, with aerospace. Thank you for that. And just one more for me. I mean, your payout ratio remains below your long term target of 60 to 80%. Despite these re recent dividend increases, the does the board have a medium term target that we should be thinking about with respect to additional dividend increases as we look out to 2020 2021? Yes, we're definitely well within our comfort zone in terms of dividend payout ratio. We've set a 3 year target for to get, 50% on a free cash flow basis and 60% on an adjusted net earnings basis. And so we made significant progress towards that. And we will over the next couple of years get the rest of the way. But it's important that people understand this isn't an eitheror with dividend increases. You've seen this year, but not only did we issue stock. So some people go that's dilutive. Well, no, the use of proceeds was such So we created more earnings that it's actually accretive. So even with that and an increase in the number of the monthly, dividend, we've been able to pay down the payout ratio. And I think over the next 2 years, you'll see us do both, but working towards that goal of 50% 60% respectively. Perfect. Thank you for your time. Your next question comes from the line of Cameron Doerksen from National Bank. Please go ahead. Your line is now open. Good morning, Tim. Yes, thanks. Good morning. I just want to follow-up on the earlier CapEx question. I mean, we we you'll understand the maintenance CapEx going up in the timing of there, but you just read through the MD and A, it does sort of sound like growth CapEx expectations for 2020 should be that they would be lower year over year. And I guess firstly, if I got that correct. And secondly, if you are able to win a couple of these contracts that are out for bid, the one you've mentioned in Europe and also the medical and the Medevac. What does that mean for CapEx this year or is that more of a 2021 CapEx to that? First of all, if I if I've led people to believe that maintenance CapEx will go down, that's incorrect. No, sorry. The CapEx is expected to go up by 10%. But what should go down is maintenance CapEx in the second half of the year. Relative to this year because of the timing and the shift to the first half of the year. As it relates to those major contracts, most of them The possible exception would, that would be the Manitoba Medevac contract, which, is kind of the government's held in a band size bet that's going to go active again very shortly. And that could go into effect before the end of the year, which would result in some growth investment for that. But the other major, opportunities on the aerospace side are, are next would be next year and even later than that, investments. The only real major initiatives we have is the finishing off of additional aircraft for the fisheries contract. And, we're gonna buy a couple extra aircraft for, our aviation business. It's its growth rate consistently exceeds what we expected to and to maybe do a good job of looking after our customers, we need to add some more aircraft. So we will buy 2 or 3 more aircraft in the aviation segment. Okay. So just so I'm clear, I mean, your maintenance CapEx goes up, I heard that, but just sort of total CapEx, what should we expect for 2020 absent having to make additional investment if there's no, new new initiatives that I thought that we don't have today, growth CapEx will decline. Okay, okay. That's good. That's clear. And just maybe just secondly for me, just talking about the M and A pipeline, you mentioned on the manufacturing side is where you're seeing more opportunities right now. I'm just wondering if you can maybe talk about your, I guess, are there opportunities there that are fits with existing manufacturing operations that you have, or are you looking at new potential verticals here that you might look to invest in? It's a bit of both. We definitely have a couple of vertical integration opportunities with existing businesses. We find those exciting because once we understand the, the segment and the management teams in there identify something that they think makes their business stronger. Our our team puts that to the top of the list that we do have a couple of those opportunities. And we also are looking at a couple of I'm not sure I'd go quite as far as new vertical, but that are that I would have different customers of slightly different characteristics, but they would all be in that niche specialty manufacturing segment where we could explain to you guys when we buy it. What the secret sauce is and why we think this is a great opportunity. So nothing grossly different, but, there are a couple that are producing slightly different that we have today. Again, who knows whether we'll land any of those? And then on the aviation side, the stuff we're looking at is all directly related to what we do. It may be exactly the same and be a geographical expansion or it could be vertical integration to help us control costs. But there's nothing new in Air Canada doesn't have to worry about us buying an A320 to fly to Las Vegas. We'll stick to what we know. Okay. That's great color. Thanks very much. Your next question comes from the line of Chris Murray with AltaCorp Capital. Please go ahead. Your line is now open. Hi, Greg. Good morning, folks. Good morning. A quick question for you. Yesterday, the government of Manitoba started about perhaps moving some of the northern airports, to some of the local and future bans. And I was wondering, with all your offer includes primary and comm, does that create, challenges or opportunities for you? Because I know you have a lot of facilities on those sites I'm not thinking also about operational things like fuel facilities and fuel storage. Any thoughts around that that could see some changes in your business over the next year or 2? I got at the 4th right on this that we weren't particularly involved in that initiative. So we're still learning exactly what it means. But quite frankly, if it gives the First Nations control over the airports in their area, that's probably a good thing. They've got boots on the ground and they see what's going on, in their individual communities. It's going to require the build off of a significant, management infrastructure for them to be able to manage those. And so I suspect this will take a little bit of time in terms of our business. If we can provide guidance and help, we'll be glad to do so. But I don't think it's gonna have much of a, an impact because those airports are, overseen by transport Canada. Dave, maybe if you've got a comment or 2 on that. No. Thanks, Wade. At the end of the day, it is early stages. We're just on the announcement of the transfer. But at the end of the day, the airports are a regulated entity and they're minimum standards that have to be maintained at the airports regardless of who's in control or owns those. So as far as our carriers going in there, we always look after our responsibilities, we have the same expectations for the Airports to be maintained to those responsibilities and which company or organization or corporation. Those are they still have to meet the standard set by transport, Canada, and ensure safe operations for the public. So I that was a whole bunch of we're not sure yet, but we don't think it has a big in a big impact yet on us. Okay. No. That's fine. It's just that the, you know, you're worried about, you know, your assets on the ground and stuff like that and and and and who's gonna have to pay to maintain those kind of things. I just got a question for you. I don't think that profile is going to change. We're paying for it now and we'll have to pay for it in the future. I think the bigger discussion will be who's gonna pay to maintain the airports, because they're typically right now owned by the province, maintained by the province. But the the MOU implies that it's gonna be tripartied between the first nations, the province, and the feds. And so we'll see. Mike just said, we do have assets there, but they are very limited in comparison to what we would have in the major centers like Winnipeg or Thompson or St. John's So while we have some assets. Materially, when you compare it to where we operate, it is it is like a great deal. That's a sir. We'll manage it, but we have to Big largely be freight hangers and fuel farms we would have up north. Yes, fair enough. And then my just thinking about payout ratio and dividend growth over the next couple of years, I mean, as you kind of alluded to, you're kind of at the bottom end of your range right now. Sure, you're going to, you've got some time on our maintenance So it'll take your payout ratios up a little bit, but then come back in. How do we think about, your dividend evolution over the next couple of years? Because as you've already alluded to, a lot of your growth is already prebaked. You've already got a lot of the, I guess, some pretty good confidence in the fact that that growth is going to be evident in 2020 and likely 2021, just given the nature of the contracts. Is it something that you want to get these programs into a more tour stage and get some more proving on them before you start wanting to move? Because if I look at it, you're going to end up in the 40s pretty, pretty soon. Just on a kind of a run rate basis without changing anything? I think A, I'm going to bring you board meeting to help me with these discussions with my board. But, the key thing is, is that we want to maintain and show that we're continuing to grow because sustainability is 1st, go to 2nd. But, there's one of our investors that, regularly says that I'd rather cut off my arm than cut the dividend. And, well, that's probably not true. It's it's reasonably close. So the the key thing for us is is that we wanna be able to move it reliably and regularly. And I don't think we need to not grow the dividend to reduce the payout ratio. If you look where we've come over the last 3 or 4 years, we've cut our payout ratios from the 70s to the 50s. And for us to drive it the rest of the way while maintaining modest, dividend growth, I think, is entirely achievable. We'll want to see us deliver on what we think we're going to do in Q1, and then we'll take a peek. Our board discusses payout ratio every quarter. I'm not suggesting that we're making a payout change in Jan, after Q1. I'm saying that we look at it every quarter. And if we deliver on our plan, we'll do everything to maintain that 5 percent dividend CAGR we've had for 15 years. We're proud of the fact that we're the only ones on the TSX that have that. Okay. So there's no, there's no thought as you grow to start changing the range and ratcheting it back down because I mean historically when you're trusting your 70s to 80 and it's now sort of 50 to 60. So as you get larger, it's not something to think about like 40 to 50 as a right pad. I think we've talked about getting to 50. I think that's the right stuff. And we will keep you, keep you informed if we change it beyond that. But for now, the goal of $50,000,000 on a cash flow basis and $60,000,000 on the earnings basis are where we're working towards. Okay, fair enough. Thanks, folks. Thanks, Chris. Your next question comes from the line of Konark Gupta with Scotiabank. Please go ahead. Your line is now open. Good morning. Good morning, Mike. How are you? We're good. That's exciting day. Pretty good, pretty good. Thanks for taking my question. So let me just dig in a little bit more on the quest. So you mentioned the taxes broke even in Q4. Just wanted to understand, to be sure, the breakeven level is going to sustain in, in the first half of this year, and then you see profits in the second half or is that, do you see a profit ramp up throughout the year every quarter? Are you negotiating on behalf of Joe down at my Dallas plant? No, I we expect them to make money in Q1. I but the amount we make will grow as the, number of windows processed per day goes up. That's really what drives it. I mean, and the other thing that I don't want to get lost in the wash is something Carmel mentioned a couple minutes ago is the kind of, shift of size that we have from what Quest was to what it is, to what it's going to be, quite frankly, we've invested in infrastructure and ad office and people and systems. And so we need to put out more windows to absorb those kind of head office costs for lack of a better term. So you'll see that get absorbed. Where the the bigger improvement will come is when we let Toronto run it more normal rates of capacity as opposed to taking every window out of there we possibly can. And you'll see that subside over the first half of the year. So I guess what I'm saying is you'll see improvement in each quarter. Not it won't take till the back half of the year, but you'll it'll be more evident as we get later in the year. Okay. No. That's helpful. And then what do you think about from, like, from just for the Texas plan? Tim, like, when you anticipate, in terms of timing, the steady state margin to be reached. Will that be something like next year or it could be year after? No, I think towards the end of this year or the beginning of next year we should be there. Now I caution the word about steady state because quite frankly, I'm more So the math, we built 330,000 square feet. So we've kind of talked to our quest guys about 2 things. When does Dallas become Toronto? To Toronto operating out of 200,000 square feet. But we're, I don't we didn't build 330 to build 200,000 square feet where the product So I expect further ramp ups. We may add pieces of equipment in the future, and that's probably 2021. By the time we get to that. And then quite frankly, the Toronto plant is in two buildings in the butcher both leased which the leases expire in 3 years. The next phase of this is to put Toronto into one building and, and do that. So that's probably that's 3 years from now. So steady state will refer for a short period of time. But as long as the market demand is where we've seen so far, we anticipate further growth. Okay. And then you mentioned Toronto or at least expiring it 3 years, right? And so mean, is there any, kind of, evaluation to kind of move the plan before 3 years, or you wanna wait until the lease lease expires on that? If by the time something, the size of building we need Konark is probably gonna have to be built, never say never. So it's it's likely that it's at the expiry of those leases. And then how we would dovetail production, there's a whole bunch of work that isn't finished yet. About how we will do this, because what we don't want to do is take a plant out of production and put the stress on Dallas that we've put on Toronto while Dallas is wrapped up. So, we'll keep you guys informed in future, quarters as to how that plan's coming. And it's in its baby steps phases right now. The most important thing to us is is getting our Dallas plant cooking. Some of you have had the opportunity to see it. And it's a very impressive place. And, I'm pretty confident of what we can kick out of that place. Okay. No. That's great. Thanks. And then on the regional 1, so can you remind us where, where are you on SkyWest deal at this point. I'm like, how many aircraft and engines are, waiting to be placed and then any similar opportunities like SkyBell as the that's cooking right now. Sure. So, when we did the joint venture Sky West. There was 14 engines that were placed in the joint venture. All of those are under contract to be leased together with 10 of our air frames, that Regional 1 has on its own. We announced shortly after the formation of the joint venture that a, everything that we have were being leased to a US operator and that they were going to be on lease or going into lease in phases, starting in Q4 of 2019. And then continuing on for the first half of the year. So that for the second half of twenty twenty, they should all be on lease. That's still, as per plan. I believe we had 4 of our airframes going into lease in Q4 of 2019, the balance will be this year. With respect to additional operator opportunities with SkyWest, yes, we're looking to transfer additional assets into that joint venture for, leasing to the same program that the current assets are, going on leased for And in relation to similar opportunities like a SkyWest Joint Venture, yes, we have, arrangements whereby we, have jointly invested in assets where Regional 1 uses its management capability. To leverage their know how. And in fact, under that, those arrangements, we have over $100,000,000 of assets under management. Okay. That's great. Thanks so much for that. And then lastly, on the legacy airlines, so any any contract renegotiations, that could happen over time, that you are looking at? And any new bidding opportunities you mentioned, obviously, one of the Maddie Wacks, right, but any anything else beyond those? This is the most fun answer. No. There's nothing I have to renegotiate. We have small little things here and there with a different, a specific mine or things like that. But in terms of our big picture contracts, no, they're all in place for the foreseeable future. We're excited about the opportunity with the Manitoba provincial government, but So are some of our competitors. So, we'll work hard to win that when the opportunity is there, but outside of that, there really isn't a lot going on in the legacy other than looking after our customers and doing a good job. Okay. And and on the fuel surcharge, Mike, any any sense on the recent volatility in fuel price, obviously, it's been down. Any any adjustments that you need to make or you have made quality? We think our fuel prices are largely in line. When they bumped up a few weeks ago, several weeks ago, we were getting close to the point where we wanted centered, putting on a fuel surcharge. But again, we, because of the nature of who we're serving in our 1st nations, we wanna make sure that we need to put the fuel surcharge on before we do. And so patients paid off. The fuel surcharge is is about right for now. If fuel prices change, we'll adapt in the future. But for now, we're in the right spot. Perfect. That's all for me. Thank you so much. Thank you. Your next question comes from the line of Tim James with TD Securities. Please go ahead. Your line is now open. Just, back to questions, just to confirm the reference in the in the report to relatively flat EBITDA there, relative to the prior period, which I assume means Q4 of 'eighteen Is that reference include any contribution that would have come in the quarter from AWI? I realized that was probably relatively immaterial, but was it at least In aggregate, it would, in aggregate, including AWI, it was about flat. On its own, it was down And that's, again, because of the factors I've mentioned before, a rock breakeven in, in Dallas combined with lower margins in Toronto because of how fast we were running it and the extra infrastructure bill to facilitate Dallas. So that was offset somewhat by the, by the, profits in AWI. Okay. Okay. Thank you. And then turning to Regional 1, the reference to investing $6,600,000 in inventory, through the year. I just want to confirm that's a net number. Or another way of thinking about that is that inventory went up by $6,600,000, the balance, the year end balance relative to the end of 2018. Is that correct? That's exactly the way to look at it. Inventory at, at R1 is moves every day. We're constantly selling stuff. We're buying, pools of inventory, and we're parting out some of our own planes. So it goes in and out So when we talk about those things, our investment there is really 3 things. It's the net investment in inventory after the cost of sales go through and how we've replaced it. Its maintenance capital, which, maintains the aircraft in the lease fleet. And then if any mounted, that's in excess of maintenance to grow the lease fleet. So those are the three numbers. When you look at the inventory, it was relatively flat at 6,000,000 that the sale of one engine or one airframe could spin that. So we're able to bounce around like that forever. And then my final question more of a big picture question. As exchange continues to grow, are there any sort of the smaller businesses that you would contemplate selling as maybe their size doesn't justify the ownership. And I'm not asking for specific names of businesses. I'm just wondering if your ideal and optimal average investment size is changing at all? In terms of new investment, Timmy, couldn't be more right. I mean, we aren't buying things that make $3,000,000 or $4,000,000 anymore. Unless we're fooling them into a business that we already have. We still do tuck in things. But in terms of stand alone businesses, we do have some that we wouldn't buy today. We understand those businesses pretty well, and we've got great management teams in place. So there's no pressing requirement to make any changes. Okay. Quite frankly, I view it as all of our stuff. Well, they're not quite children. They might be step children. And we we have to have quite a good buy offer to sell them. And, the smaller ones are the same. They we know them. There's no great need to sell them. Quite frankly, part of our secret sauce is vendors knowing that we buy the whole. And so, I hold that reputation pretty close to me. We wouldn't sell a business if the offer's right, but the offer would have to be right. Okay. Thank you very much. And I'm showing no further questions at this time. I will turn the call back over to Mike Pyle for concluding remarks. Thank you everybody for joining us today. We're excited about what's coming up in 2020. I look forward to talking to you in May. Have a great day. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.