Earnings Call: Q3 2019

Nov 8, 2019

Earnings release

Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the 3 month period ended September 30, 2019. The corporation's results, including the MD and A and financial statements, were issued on November 7, 2019 and are currently available via the company's website or SEDAR. 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 securities laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions 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 Factor 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 to 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 for the benefit of individual shareholders, analysts or 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. Good morning, everyone. Joining me this morning are Carmel Peter, Yashi's President, Daryl Bergman, our CFO, and David White, our EVP of Aviation. Back in September, we hosted back to back Investor Days, at our Quest window plants in Mississauga, Ontario and Dallas, Texas. The purpose was to showcase the multiple operations and provide a better understanding of Quest product offerings and to show the progress of the ramp up of Texas facility. I would personally like to take a moment to thank everyone that attended and everyone that helped make this fantastic success. Now, I'd like to take a few minutes to discuss some of the highlights of what was another very strong quarter for EFC. We remain focused on the successful execution of our strategy, creating long term value through accretive acquisition and organic growth. By investing in including revenue, EBITDA, and earnings. We generated adjusted EPS of $1.03, which is a new milestone for us. And it was the first time in the company's history that our adjusted, net earnings exceeded a dollar per share for a quarter. $1.03 per share was an increase of 10% over the same period last year. EPS grew even more rapidly climbing 17% to $0.90 for the quarter. I will leave it to Daryl to discuss our financial performance for the quarter in detail. But I would like to stress that 9 months into 2019, these excellent results are the culmination of the strong contributions from many players in our diversified group of subsidiary companies. The importance of this diversification was highlighted in the quarter as we generated these record setting financial results despite temporary headwind. Regional 1 lost a significant customer to bankruptcy which resulted in a bad debt expense of approximately $6,000,000. Regional 1 works with smaller carriers around the world, and as a result, accepts a higher level of risk. It is this risk tolerance, however, that helps us drive above average industry returns. While there is an elevated level of risk, we are adept at managing it. And this is the first material write off we've incurred since acquiring the company over 6 years ago. Timing of aircraft and engine overhauls, as we discussed during the first and second quarter conference calls of 29 We benefited from a lower level of maintenance investment in the 1st 6 months of this year because of the timing of certain engine overhauls. This reversed itself in Q3 where maintenance capital investment exceeded last year's level by approximately $7,500,000. This was completely in line with expectation and the investment maintenance capital for the 1st 9 months of this year is up only slightly at 6% which is well below the growth in revenue of 10% and EBITDA of 15%. We guided that maintenance CapEx would increase at rates similar to the growth of the overall company. We are somewhat better than this guidance for 9 months and the increase in Q3 is entirely the result of normal quarter to quarter variation. The increase in quarterly maintenance investment combined with the write off at Regional 1 resulted in a slight increase in the free cash flow less maintenance capital expenditure payout for the quarter. The quarterly payout ratio increased to 49% from 42%. Excluding the impact of the write off at R1 The payout ratio has been relatively unchanged from 2018, even with the increase in dividends, in August 2019. And the increase in maintenance capital expenditures I just described. The trailing 12 month payout ratio, however, improved to 57 percent from 62% a year ago. The adjusted net earnings payout ratio improved on both a quarterly and trailing 12 month basis. To 55% from 58% and 72% from 75% respectively. We are beginning to reap the benefits of some of the investments made in prior periods. The strong performance in the aviation sector where EBITDA grew by 16% is a good example. The Force Multiplier went into services generated its first meaningful revenue and has now completed assignments for both the Canadian and American governments. It is now on an extended mission into the first quarter of 2020. We also began the new General Aviation Services contact for the provincial government in Manitoba. And the ramp up of the fixed wing search and rescue contract continued in the third quarter. While the amount of work being completed under this contract continued to grow. It will not make a mature runway until 2023 when all of the aircraft are in service and the overhaul cycle has begun. Other projects, however, are not yet at the revenue stage. 2 examples would include the joint venture with SkyWest, deploying through CS34 initiate engines on leased other airlines and the new contract new contract Provincial has entered into with the Canadian Department of Fisheries. The SkyWest joint venture has signed leases with the lessee airlines and deliveries have begun, but significant work must be completed by the lessee to upgrade the aircraft before the revenue stream begins. Which will be phased in and should be in full run rate by the end of the second quarter of 2020. As it pertains to the fisheries contract, we continue to operate under the old agreement until September of 2020 when the larger aircraft required for the new contract will go into service as the revenue will increase. Perhaps the most significant investment that is not yet contributing to our bottom line is the new Quest facility in Dallas, Texas. We are very proud of this state of the art facility and joined the opportunity to show it off at our Investor Day. We made a decision to make sure that the product of the new plant matched the quality of that generated in our Toronto plant. And therefore, by began by testing 100 percent of the finished goods that were produced. We have been very happy with the results of this testing and have recently cut it 25%. It will take a few more quarters to reduce the testing to the level we have in Toronto, but we want to make sure There are no declines in service from our customer's point of view. This should not come as a surprise to most of you, as we have always prided ourselves on taking the long view of investments and are not focused on short term results. We expect that the plan will move to profitability in either Q4 of this year or Q1 of next year. And will wrap its profitability from there. We were hard at work during the third quarter of 4 separate transactions, that will assist with and ensure our continued growth in 2020 and beyond. All of these transactions have now closed. Firstly, we completed the acquisition of 2 more solid companies with robust growth potential. LD Control And Advanced Window Inc. Both companies align with our strategic focus of acquiring profitable, well run companies and niche markets. We completed an offering of common shares of EIC common shares that was very oversubscribed and allowed the underwriters to exercise a full overall allotment option, bringing the gross proceeds to $80,500,000. Earlier this week, we announced a new credit facility, that significantly increases our credit capacity, while reducing our borrowing costs and relaxing covenants making the facility much more flexible DIC. I will leave the details to Daryl, but suffice it to say when combined with the equity offering, our balance sheet is even stronger than it was and we have plenty of capital to attack any opportunity on a cost effective basis. LVV Control is a dominant Western Canadian Electrical Systems integrator in the agricultural material handling space, with a solid margin profile. Its services include maintaining grain, unloading elevators and systems to grade, grade by quality, and put it in silos, automatically applying credits to Farmers accounts and updating inventory positions and financial statements. They have a long record of profitability and strong relationships with many of Capa's largest grade companies. The acquisition of Advanced Windows is a vertical integration play for Quest as they are currently a very important partner for Quest in the Eastern Half of the United States. Quest is responsible for installing its own windows in its Canadian market, while customers utilize third parties to install the windows in the USA. The acquisition of AWI will request to vertically integrate and provide a single point of contact for customers in this market area. Not only will this simplify things for our customers, it will allow Quest to share in the growth, not only the production of Windows. But also the growth in the installation business. While significantly smaller than the Alvia acquisition, the ability integrate our Eastern USA operations, make it no less exciting. In both acquisitions, the proven existing management teams have committed to stay on and run the businesses for EIC. Both of these acquisitions closed in October, and we expect each of future later in the call. But for now, I'd like to turn the call over to Daryl who will discuss our third quarter financial results. I will update you on our outlook later in the call. Daryl? Thank you, Mike and good morning everyone. As I've noted on previous calls, our 2019 financial results include the impact of IFRS 16 Comparability to results from prior periods with respect to EBITDA, net earnings and adjusted net earnings are impacted. Consolidated in Q3 was a strong quarter for EIC. We generated revenue of $355,200,000 which is up 47000000 dollars or 15% over third quarter of last year. Of the increase, 39 $900,000 was generated in our Aerospace And Aviation segment and $7,100,000 comes from our Manufacturing segment. Aerospace And Aviation segment revenue was up 18 percent to $266,500,000 for the quarter with all components of the legacy airlines and Provincial and Regional 1 positively contributing. The revenue from the legacy airlines and provincial increased by $15,900,000. This increase can be attributed to the Forest Multiplier aircraft being deployed on several missions and higher volumes in Newfoundland and Labrador, and Quebec, which was due to activity in natural in the natural resource sector, increased passenger and medevac volumes in the kivolik region, and increased passenger revenue in the Manitoba market. For Regional 1, revenue increased in the 3rd quarter to 2019 compared to the prior period by $24,000,000. As we report, revenues at Regional 1 are comprised of 2 main streams, which include sales and service revenue and lease revenue. Within the quarter, Regional 1 had a higher than average volume of whole aircraft and engine sales which is reflected in the sales and service revenue. That said, sales and service revenue increased by $22,500,000 to $64,200,000 Also contributing to the increase in revenue at Regional 1 was an increase in part sales. As it pertains to the lease revenue at Regional 1, the higher utilization of aircraft within the portfolio and an increase in the number of assets in the portfolio on lease compared to the comparative period resulted in a $1,600,000 increase in the quarter versus the comparative period. Turning now to our Manufacturing segment. Revenue grew by $7,100,000 for the third quarter versus the comparative period. The total revenue for this segment was $88,700,000 The segment benefited from Quest being a big contributor to the revenue growth, as well as an increase in custom manufacturing, high levels of defense spending worldwide, increased spending from our telecommunications companies across Canada and operational efficiencies. Before moving on to EBITDA, I will stop here to mention that looking forward to the 4th quarter, results from both our recent acquisitions, LV Control, manufacturing and AWI will be incorporated in our Manufacturing segment reporting. Moving to EBITDA. Consolidated EBITDA was up $9,800,000 or 12 percent to $89,000,000 for the third quarter of 2019, versus last year. This includes a $6,000,000 one time bad debt write off at our Regional 1 because of an airline customer bankruptcy, which decreased EBITDA during this period. I will add a comment at the end of my report with regards to this write off. Despite the write off, EBITDA performance during the quarter was very strong, which is a testament to EIC's diversified investment strategy working as it is intended. EBITDA in the Aerospace And Aviation segment in the third quarter of 2019 was 82 $1,000,000, an increase of $11,100,000 compared to the prior period. EBITDA generated by the legacy airlines and provincial increased by $12,800,000. The increase in EBITDA for the legacy airlines was driven largely by the same underlying contributors as noted in the with the increase revenue previously discussed and cost savings associated with operational efficiencies such as capacity sharing across airlines, investment in additional aircraft to reduce third party charter costs, and fuel surcharge that were implemented later in Q3 in the prior period and remain in effect. Again, our EBITDA grew despite industry related labor 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 we acknowledge that this will take some time to take full effect. EIC is also developing similar strategies to address maintenance and labor changes. Sorry, challenges. EBITDA in Regional 1 was down slightly in third quarter of 2019 versus the prior period by 1,700,000 Excluding the impact of the one time $6,000,000 bad debt write off, EBITDA increased by $4,300,000 over the prior period. In the Manufacturing segment, EBITDA was $12,500,000, a decrease of $1,500,000 in the third quarter of 2019 versus the prior period. A main driver of this decrease were costs associated with the ramp up at Quest New Dallas Facility, where management continues to proceed balancing production with important quality requirements and risk management. The balance of the Manufacturing segment collectively experienced growth in EBITDA. The segment benefited from an increase in custom manufacturing, high level of defense spending worldwide, increased spending from telecommunications companies across Canada, and operational efficiencies. Growth capital expenditures made in the current and previous periods enabled segments to respond to increased demand from customers Turning to earnings. Net earnings in the period was also strong, coming in at an all time quarterly high of $29,000,000, which is an increase of $4,800,000 to the prior period a year ago. Net earnings per share increased by 17% in comparison to the prior period to $0.90. This is an all time quarterly high. It should be noted that in We had adjusted net earnings of $33,100,000 for the third quarter of 2019, representing $3,500,000 or 12 percent compared to the prior period. As Mike mentioned, EIT reached a new milestone with regards to adjusted net earnings per share seeing an increase to above $1. In the quarter, adjusted net earnings per share increased to $1.03 compared to $0.94 in Q3 of last year. During the quarter of 2019, free cash flow improved by 5% over the prior period to 67,200,000 or $2.08 per share. The main reason for this increase is the $9,800,000 or 12% increase in EBITDA partially offset by the principal payments on right of use lease liabilities. Free cash flow was impacted by the one time bad debt write off previously noted, excluding the write off, free cash flow increased by 13% in the quarter over the period prior period. Free cash flow less maintenance capital expenditures fell 13 percent to $1.14 a share from $1.31 per share. In Q3 twenty eighteen. The decrease can be attributed to, again, the impact of the one time bad debt write off at Regional 1, and an increase in maintenance $500,000 in the quarter as expected as earlier anticipated expenditures were reallocated to the back half of twenty nineteen. On a quarterly comparative, our adjusted net earnings payout ratio improved to 55% from 58% in the prior period. The free cash flow less maintenance capital expenditure payout ratio increased to 49% from 42%. If we were to exclude the one time bad debt write off at Regional 1, comparative free cash flow less maintenance capital expenditure payout ratio, have been essentially flat to the prior period. Also affecting the current period would be the dividend increase and increased maintenance capital expenditures in the current period. As a refresher, we have noted in previous calls, The trailing 12 month payout ratio on an adjusted net earnings and free cash flow less maintenance capital expenditure basis is a better barometer of payout ratios given the seasonality of our aviation operations. On an adjusted net earnings basis, the trailing 12 month payout ratio improved to 72% from 75% to prior period, while on a free cash flow less maintenance capital expenditure basis, it improved to 57% from 5062. The improvement in free cash flow less maintenance capital expenditure payout ratio was driven by the increase in the cash flow generated by the company through the 12 month trailing period. Looking at working capital during the third quarter. The corporation experienced the cash inflow from working capital of $2,600,000, compared to a cash outflow of increase of working capital. In the prior year, Regional 1 invested significantly in its inventory of assets for resale, including 2 large aircraft, which resulted in a large investment in working capital. This difference highlights the nature and very timing of Regional One's sales and investment cycle. The inflow from the monetization of Regional One's assets in the third quarter of 2019 was partially offset by the investment in working capital required to support the corporation's remaining subsidiaries during the corporation's busiest quarter particularly at the airlines. Our leverage ratios remain within our target range and well within covenants with our lenders. In addition, now with the new credit agreement under our belt, we have approximately $600,000,000 of available capital and another $300,000,000 In addition to that, in an accordion feature should we choose to exercise it? Subsequent to the end of the quarter, we announced and completed 2 significant financing activities that further demonstrate EIC's ability to opportunist access capital and adds even greater strength to our ability to execute on our business model of accretive acquisitions, and investment in the organic growth of our subsidiaries. At the end of October, we closed an equity offering with a syndicate of banks which consisted of a bond deal that resulted in gross proceeds of $80,500,000. This offering was well received by the market, and was well oversubscribed indicating strong support and confidence in the company's ability to execute its strategy. The net proceeds of the offering were $76,500,000 and were used to repay debt drawn earlier in the month to complete the acquisition of LVT control in AWI. Also this week, we announced EIC has entered into a new credit facility. We were extremely pleased with our bank syndicate in turning this around quickly and for their ongoing support with this investment grade equivalent credit agreement which gives us more favorable facility from $1,000,000,000 to approximately $1,300,000,000. In addition, the accordion feature has increased from $100,000,000 to $300,000,000, which At EIC's option to execute, would provide the company access to a facility of 1,600,000,000. Further, the new credit agreement provides improved pricing on both amounts borrowed into the facility and standby charges paid for the unutilized portion of the facility. The company's maximum leverage ratio has been increased from 3.25x to 4x and the maturity of the facility is now November 5, 2023. Before I pass the call back to Mike, would like to make a couple of concluding comments. 1st, with respect to the bad debt write off at Regional 1 for the airline bankruptcy. The write off was the first experienced in EIC's 6 year history with Regional 1. While the write off is unfortunate, management continues on an ongoing basis to actively manage and monitor all credit exposures. Regional 1 competes in a market that is characterized by higher risks, That said, this higher risk also drives higher returns. It's important to note that due to management's ongoing monitoring, It allowed them to take quick quick action once the bankruptcy was imminent and all aircraft and other assets were recovered and returned immediately to be redeployed as soon as possible. In my final comment, I will will be with respect to the new credit facility. It is important to note that it has taken EIC 15 years to utilize approximately $700,000,000 of credit The fact that we have now had access up to an additional 900 should in no way be viewed as a change in our balance sheet strategy. Our aggregate leverage has to stay quite consistent over the past 15 years, and we do not intend to change that now. That concludes my review of our financial results and comments for the third quarter of 2019. I will now turn the call back to Mike. To provide comments on our outlook for the balance of the year. Mike? Thanks, Daryl. At the risk of repeating ourselves, I think it is very important to reiterate that we have absolutely no intention For over 15 years, we have maintained a balance sheet that is remarkably consistent in terms of leverage, and that has served us well in strong and difficult markets alike and has allowed us to take advantage of opportunities whenever they are available. The acquisition of Calm Air at early 2009 during the financial crisis is a good example of this. There is no doubt that the new facility is a significant improvement from our previous facility and reflects the banking syndicates view of EIC's credit quality. It does provide access to more capital and lower pricing with far more flexible covenants which will help fuel our growth The third quarter was a microcosm of EIC strategy on many levels. I would like to take a brief moment to explain how this is the case. For those of you who followed the company for a while, this will not be new information. For those who are newer to the story, it will show how the consistent implementation of our business model has led to a 50 year, 5% CAGR on our dividend and a stock that has grown fivefold over that period. We produced record results in the 3rd quarter. Achieving an adjusted net earnings of $1.03 per share, a full 10% better than our previous high. This headline number, however, does not give a clear picture by itself. This performance was achieved in spite of an unusual write off at R1 Our losses at our NewQuest facility as we slowly and methodically rapid into production, which were offset by a gain on contingent consideration. The diversity of our subsidiary operations allowed us to set new earnings ties at the same time as tackling these issues. We have built a strong portfolio of operations that are not directly correlated and allow for resilience if challenges in a part of our company are incurred quite simply, diversity works. We also continue to invest in the future, both through growing our subsidiaries and through accretive acquisition. Who continued to generate strong return. We continued to invest in additional equipment and provincial for the new Department of Fisheries contract, which goes into effect later in 2020. And we executed on our plan during the quest plans online in such a manner that our customers will see the same high quality product they are used to from our Toronto facilities. In addition to investing in the future, went into service and began to contribute meaningfully to our results. With the purchase of LV Control and AWI. Both are accretive transactions and will grow and strengthen our manufacturing segment. LV will give us exposure to the agricultural economy, and AWI will vertically integrate into Quest, enhancing our return on Quest future growth. We strengthened our balance sheet with an equity offering and a new debt facility. As both were materially oversubscribed and bear witness to our ability to access the capital market whenever needed for the business. In short, I am very happy with the quarter. Yes. We generated record earnings, but quite frankly, that is just the tip of the iceberg. We are now 3 quarters of the way through the year, and I am pleased to confirm that we are comfortable with our previous guidance for the year. We are in the midst of our 2020 budget process and are not yet ready to provide formal guidance for this period. But I am able to tell you that we anticipate the growth in 2030 will match and likely exceed that in 2019. We will provide formal guidance I want to thank all of our customers, employees, shareholders, and all stakeholders for their ongoing support. We would now like to open the call questions. And your first question here comes from the line of raveel Afzal from Canaccord. Please go ahead. Your line is now open. Guys. Thank you for taking my call and congratulations on another strong quarter. Speaking about your 2019 EBITDA guidance, Now are you, you you just said that you are able to meet that guidance. Now are you factoring in this bad debt expense also the ramp up at Quest and you still think you can meet this 10% to 15% EBITDA guidance. Can you just provide us with some more color on that? Absolutely. There's no doubt that a $6,000,000 hit will move us foser to the lower end of our guidance, because that wasn't factored in when we we provide the guidance. But the continued growth in things like force multiplier, enhanced profitability in our airlines who are really hitting their stride improvements in Quest in the fourth quarter, while the U. S. Plant won't be contributing in any meaningful way. At that point, we'll be closer to it. And as such, we're comfortable in getting into that range of the 10% to 15% growth year over year. Remembering, of course, that that doesn't include $20,000,000 in, increased EBITDA from, the IFRS 16. So the growth is really 10% to 15% plus an additional $20,000,000. Got it. And how are you factoring in the M and A into that, guidance range? The M and A will help somewhat in the 4th quarter. But those are the those deals, those companies are project oriented and we're only getting a part of the quarter. So the amount they're going to contribute will be modest in that period. So it's not a big impact on the results. Makes sense. And then just moving on to force multiplier. Congratulations on the strong demand that you are witnessing for, for this, on demand surveillance plane. Now what type of what type of, metrics are you guys using before you determine whether this is a product type that you want expand more and get more force multiplies out there in the marketplace? Were you sitting in at our board meeting? I think I answered this exact question yesterday. It's really what we want to see is the consistency of demand. We have a lot of anecdotal demand, and it took us, a few months to figure out how to get the, governments to be able to use it when they want to. We now have the plane out until later in the first quarter and potentially longer than that. And to the extent that the demand remains resilient and particularly if we can get more than one customer want to get at the same time. And quite frankly, there are those discussions ongoing as we speak. That would see us add another another or more than 1 more to the fleet in this short term rental market. The interesting thing with it is, is the planes may not be identical. We may have the force multiplied that we built as a dash 8 platform. We may build another one of those. We may have built a smaller plane, or we may build a plane that's more like the ones we built for the government of UAE, which have even more equipment on them. It really depends on the specificity of, the demand we have. And just one other thing while we're on the force multiplier that I want to point out This is the way to understand EIC. We announced that, more than 2 years ago. It took us a while to build it. We had debt certified. And then we had once we had it certified, it took us away a long time to get, to figure out how the governments could utilize it because it's a expensive on a per hour basis. But look, it is now contributing in a meaningful way. And so when we're making these investments, we're not making the what's going to happen in the next 15 minutes. And that's why when you look at Quest and people, they'll ask you, like, well, why is it taking 6 months to ramp it up? Because we're doing it the right way. We did build it for the next 10 minutes. We built it for the next 10 years. And in, my team there, we just finished a tour there yesterday, are just doing an exemplary job of building a state of the art facility. And we're excited, but that's going to give us a 2020, quite frankly, and beyond. Thank you for that. And then, you guys mentioned that you guys intend to keep your net debt to EBITDA at pretty consistent levels, but now with the substantial increase in your credit facility, Are you guys looking at much larger acquisitions than you have in the past? Does that change that, the the the scale of the acquisitions that you guys will look at now versus previously? The short answer to that, Ravi, is no, it doesn't change what we're looking at. We've looked at bigger transactions in the past. What we bought Pala as an example was a acquisition that was well over $200,000,000. We were very close on another acquisition in the manufacturing side that was of that size earlier this year that we decided not to do. So we continue to look at those. But the key thing with the facility is sometimes you gotta move fast, to be able to pose these things. And we're now in a position with the access to capital we have. In 15 years, we've invested 700,000,000. We now have access to 900,000,000. So we could do whatever we think is the right deal with the capital we have, but it's important to understand it's not gonna be done by levering up the balance sheet in the long term. If we have to move fast to close something, maybe we'll use it in that rebalance the credit facility or the balance sheet afterwards. But our commitment is to remain in that sort of 2.5 to three and a half times of aggregate debt to EBITDA, including our convertible debentures. Yeah, Ravi, if I might, it's Daryl. If I might add also on the new debt facility, Again, it's more a matter of also timing when you access the market. So when we looked at it, we looked at, how competitive we could get rates and lined at this point in time. And it was an opportunistic time for us to do that. So that's why we were able to, to do it this quarter. And your next question here comes from the line of Konark Gupta with Scotiabank. Please go ahead. Your line is now open. Hi. This is Amina speaking for, Konark Gupta. You mentioned that, the regional one, bad expense you received all the aircrafts back. Is it a one time expense or do you plan on writing down the customer? And, how many aircrafts are there. And when do you plan to anticipate deploying the aircraft to others? There's a few questions buried in there. First of all, the, the aircraft were fully recovered. So we don't need to write down anything else as it relates to the transaction. The aircraft, there's 5 of them that were on, service with that, with that airline. There are active discussions, with a number of airlines to place those and I anticipate those being in place. By the end of the year or certainly by the first quarter of next year. We're in active discussions on that. So no further write down from this and the plane should be redeployed shortly. Okay. I do have a question on the Canadian operations quest. There's incremental growth to support. When do you plan on achieving the steady state? Well, the steady state really isn't related to the Canadian. I don't think. I think you're asking me what the and correct me if I'm wrong, but I think you're asking me when Quest will reach steady state. And I, I really, I'm hoping nowhere soon. The business continues to grow. We built the, the plant with tons of extra capacity. In terms of profitability, we'll be there next year. But there won't be a, I'm certainly hoping there's not going to be a steady state Martin's, promised me that the demand continues to grow. And quite frankly, our leases are up in Toronto. We mentioned this on our, Investor Day that, leases are up in a couple of years, and it's highly likely that you'll see us, redo our Toronto Manufacturing facility into a single building with more square footage at that time. So I really don't see a steady state or a plateau anytime in the near future. Thank you. I don't have any more questions. Your next question comes from the line of Chris Murray with AltaCorp Capital. Please go ahead. Your line is now open. Thanks. Good morning folks. Hey Mike, just I maybe I'll ask you the question a little differently, because if we think about 2020 and as I said, your expectation is there that you'll see the growth. Is it fair to think that you've got everything in the portfolio today already kind of locked and loaded. So we're not talking about any sort of excess investments you're going to need to make or anything like that for growth or any sort of acquisition growth. So basically that's your baseline number. Is that a fair way to think about it? Absolutely. The only thing, Chris, that we would continue to invest in, there's still going to be $10,000,000 or $20,000,000 is for the continued of the the CFO contract that that start until September. So we're building that in. We already have the contract. The investment won't be finished till sort of midpoint to next year. But absent that everything else is locked, loaded and paid for. Okay. And then just kind of thinking about some of the stuff that's maybe not super transparent. The SkyWest agreement, if you can talk a little bit about that, but I'm also kind of curious about what CRJ production is shutting down. How you guys are seeing kind of the market value for some of the aircraft through Regional 1? And where do you kind of move from here? I mean, just on parts and stuff like that and just does that actually make it more attractive at this point or does it start raising some supply issues for you? Yeah, in the, in the medium term, and by that, I mean, multiple years, it really is no impact The challenge that we have in Regional One's business today is not a lack of demand. It's more a lack of supply. The planes have have continued to be used in strong demand around the world, even the 200s, which are the oldest of the CRJ fleeter and strong demand. The challenge is is that no one anticipated those planes still being in service. So there's a shortage of overhaul time, availability for the engines. And so that will be the rate the turpent step is access to, to engine for free time or access to overhaul capability. So in terms of the shutdown and the CRJ production, that could impact something or 15 years from now. But in the near term, the demand for those aircraft is so strong, that we don't anticipate that really doing much to our business. I would point out the, announcement of 1 of the major U. S. Airlines, as recently as yesterday. About the move to the CRJ550, which is sort of a hybrid, which is taking the 700 and reducing the number of seats in it, putting more, a more comfortable configuration, allowing it to be operated with the single flight attendants. And, that's just starting. And quite frankly, that's where our SkyWest joint venture not that airline per se, but that CRJ550 adjustment is where our aircraft to see our, I'm sorry, with SkyWest are going. So that was a long answer. I'll pause and see if I actually answered the question. Yes, the other thing I'd point out, Chris, is that, as we've announced, the sky went JV engines together with our airframes have a 10 year lease, which are being phased in during this quarter. So, you know, that reflects the demand that exists. Together with the parts, of course, would be required, over that timeframe. And your next question here comes from the line of David Ocampo with Cormark Securities. Wondering if you could provide an update on the outstanding RFPs and if there's anything in 2020 that you expect a bit on. There in terms of the ones we've talked about before, the government of Manitoba 1, the government has signaled that, now that the election is over, they're going to, reactivate the MetaVAC 1. And we would anticipate David had an award of that sometime next year. We might hear something late this year, early next year. It'd be a good We we're not certain yet whether they're going to have us revise our bids for things that have changed in sort of the, multiple quarters since the bids are submitted or if they're just gonna go off what's submitted. But, we anticipate that will come to a conclusion shortly. The other thing is, is our provincial subsidiary is regularly bidding on other RFPs. I think over the next quarter, you'll hear about, I'm not in a position to release it at this point. But some partnerships on a couple of significant Canadian and or other government, opportunities where we're going to partner with other industry players, not unlike the, fixedwing search and rescue contract where we partnered with Airbus, opportunities like that, and they're in Canada, they're in Australia, they're in New Zealand. They're in, the Netherlands. And so, I'm not in a position where I can announce anything specifically other than to say, we're excitedly exploring opportunities both on our own and with partners in those areas. Great. And, my last one here is just a quick one. You've talked briefly already about the bad bad debt expense, but Gerald, do you guys provision for any of us at all in the income statements? I think, I think if I despite speaking, sorry, I think, if I understood you correctly, do we provision? We do for smaller, things that We believe that the RGS situation, from the information we had given that the airline was going to be recapitalized And so, when it wasn't, it exceeded our provision. Okay. That's great. I'll hand the call over. Your next question comes from the line of Nav Malik with Industrial Alliance. Yes, thanks. Good morning. So I just following on that, on the bad debt expense. I just wanted wondering, what's the customer concentration at Regional 1, like what would be your largest customer, in terms of percentage? I'm not sure. In terms of the parts business, there's we have customers all over the world. It's very widely diverse. In terms of the lease environment, Argo would have been one of our biggest ones. 5 aircraft. We would have similar sizes than a few other airlines, a lead to the U. S. But, it too is fairly widely held. Okay. And then I just wanted to ask, so you note that you have had, higher than average volumes of aircraft engine sales in the current period. One, I guess, could you describe kind of what what that was. And then secondly, does that pull any sales from future quarters or what, maybe just kind of some more color on that would be. Appreciate it. Yeah, you got to, when you look at, we put the leases aside at Regional 1, we're selling, just to really break this into two pieces. You have parts sales where we're taking an aircraft from breaking it into smaller parts. And those are, are quite predictable growing on a regular basis, but aren't lumpy. The sale of, engines and aircraft are based on their opportunistic transactions. So if you sell some, did you pull it from another period? Well, once you sold it, you can't sell it again. So on some level, I guess that's correct. But it's more about when do we get a price that we think it's worth it in the market that we're going to take the the, the lead that sell the, sell the piece. And our inventory levels go up and down. We're buying all the time as well. And so we're replacing those assets with other assets. But we've said multiple times on these calls, don't try. To predict which quarter we're going to sell an airplane. As an example, we sold, correct me if I'm wrong, Carl, but at least, so the, CRJ, sorry, 24 hunches. We sold, I don't even have one of those in the quarter. That's a big number. We don't sell one of those every quarter. We sold the number of those ERJs. Remember, we bought, I believe, it was 26 or 28 of them all at once a couple of years ago. We've now sold off most of that fleet and we sold a a number of those in the quarter. It's it's just clearly opportunistic. It happens when it happens, And that's why the revenue, the the top line is hard to predict in R1. But remember, the margins on a full aircraft sale are nowhere near the percentages that you get on a part sale. And so while revenue may jump by $20,000,000, We don't get a commensurate increase in EBITDA of $20,000,000 of revenue. It's a much smaller percentage on the bigger transaction. One thing that remember the R1, I mean, what they're really good at is, is buying. And the ERK portfolio that we acquired a while ago is a good example that What we're seeing now was strong demand for the ERJ platform, and we were able to take advantage, out that this quarter until a number of built to aircraft. And that's what you'll see with R1, the good buys, and then they know their market, and they know when to sell to monetize. Okay. Okay. And then just lastly, I wanted to ask on Quest. I noticed that, or maybe I missed it, but I didn't see a backlog this, you know, this time around, I guess, and do you wanna comment on on that, or whether you'll be, you know, disclosing that going forward or whether, you know, you you know, maybe just comment on what what you see there? Not my intention to give like a a running total update, but I can tell you that it's consistent to growing slightly in the quarter. Yes. Okay. All right. Thanks very much. We're a bit cautious till we get that plant fully available. To make many promises. The opportunities at Quest greatly exceed our ability to fill them at this time. So it's really a matter of convincing ourselves how fast we can get that plant going as fast as as with a high quality production and until that we aren't going to take orders we can't fill. And your next question here comes from the line of Steve Hansen with Raymond James. Please go ahead. Your line is now open. Yes, good morning guys. Just very quickly, two high level questions for me. First, Mike, you guys have put a lot of capital into these internal growth projects in recent years. And now in recent weeks, we've got to an acquisition. Should we read anything into that? I know you've commented in the past that acquisitions have been more expensive lately with cheap capital out there. Should we activity to become more significant going forward? Or should we still expect a combination of internal growth driven projects as well? That's a great question. The M and A U S still is, generally speaking, in prices, that are outside of our comfort zone. So the opportunities in the U. S. That are at a price we're prepared to do are still limited. Canada I don't think they're cheaper, but they were always a little bit more reasonably priced. And so you'll continue to see us, active in that market. And with the new credit facility, with the amount of money raised, I don't think we can expand by fees. If we didn't think we can deploy some of that over the short to medium term, But the key thing is it's always going to be a balance. We're going to take advantage of internal opportunities and external opportunities. And instead of taking advantage, it's not really directly your question, but I'm going to add something to that in terms of when we're investing in these things, it's the future we're looking to. When you look at what we've got, what we we talked about, we had 10% to 15% growth this year. I said that we expect to meet or seen that next year. It's kind of locked and loaded. We invest 1 year for the future years. So we have a full year next year, for small supplier. We've got the kickoff of the fisheries contract. We've got an expanded fixed wing search and rescue, contribution, we've got the rollout of revenue out of the, SkyWest Partnership. And Next year is not special. That's how we grow our business. We invest now for future returns, and it's not really driven quarter to quarter. But the beauty of it is when you do take a long term perspective, it actually shows up quarter to quarter. Sure. No, that's helpful. And just to follow-up on the LV control in particular. It clearly represents a step out from an industry standpoint into the ag space. Green handling and logistics in particular. I'm just curious if that is a one time transaction like you've done in past or is there complimentary deals like Advance with Quest that we could see going forward? I guess trying to understand the broad opportunity and how comfortable you are with Ag. Generally speaking. We've talked for a long time about getting it ag. I think people with global desolate use for a long time, heard me say ag a lot of times before anything actually happened. LV controls, we love because it is it has exposure to ag, but not with the season to season, cyclicality because they're dealing with big grain companies. Who will allocate their capital over numbers of years and set up projects. So we love it in that it's exposed to ag when it's not a cyclical as some other ag things are. And are there other opportunities? There are prices in ag still are higher than they are in other businesses. So I would be, I would be cautious in guidance that we're going to get those done, but we are actively looking at other opportunities in the space. Very helpful. That's it for me guys. Thanks. Your next question comes from the line of Norman Sadi with Laurentian Bank. Please go ahead. Your line is now open. Good morning, Dominic. Hey, good morning, everyone. So just my first question for Force Multiplier. So your legacy business, I thought it grew by 10% or 15,900,000. Is it fair to say that most of it is from Force Multiplier? No, I wouldn't say most of it. I would say it's perhaps the one of the largest contributors to that growth. But the operations at our legacy airlines were all strong in the quarter. And so one of the things we've gotten a lot better is sharing capacity between our airlines. And on any given day, you could have, COG doing a flight for perimeter or or pal, ending a plane across the Elbow with a busy period in another airline. So part of it comes from that. Part of it comes from the fact that in Q3 last year, we were dealing with a rapid spike in fuel prices at the time. And we it takes us a bit of time to catch up in getting the fuel surcharge in place. Fuel prices have now plateaued and the surcharges are in place. So that's also enhanced profitability, but there make no doubt, Yes, there's also increased revenue we're seeing in our in service support services, both locally here in Canada as well as in the UAE and our operations down there, which were a contributor for the quarter. Thank you. That's a great color. And just on your credit facility, in your prepared remarks, you mentioned that there is a cost reduction, if you could share how much is that? And the second one, I think you also mentioned that banks have started to view your credit profile better than what before. If you could share if there's any structural change in the collateral structure of that secure that line as well? I'll answer your first question with respect to the collateral part. Yes, there is a change. We have a lot, less restrictive security requirements under it. While it's not unsecured, I I would call it the next best thing. A simple GSA over the assets of the corporation. So it's a lot more relaxed security with respect to the cost reduction. Again, as we mentioned, there's a number of different elements that would go into that. Just general pricing has gone down about 25 days points, and we also have reductions in standby charges as well, also costs related to having in the previous credit agreement, having to incur cost is to, do liens on assets and all that every time we did something have gone away as well. So I would jump in just to add one thing to what Daryl said is that the key improvement on the collateral side is that historically, the guarantees provided by all our operators were were supported by, security instruments in those companies. And now the guarantees of our subsidiaries are, are unsecured which when you take a look at a company, take Regional 1 as an example that sells planes on a certainly a monthly basis, if not more, when we buy those, the bank wouldn't put security on the plane each time, you know, we sold it. We'd have to take it off. We pay our lawyers. We pay the bank's lawyers. This deal is good for us and bad for the legal community. Fair enough. And just one last one, in terms of your main factoring segment other than Quest, if you could provide an update on the other businesses and how well they are doing? The, in comparison to last year, at an aggregate, it was a good quarter. Our Bend Machine business our precision metal guys in Ontario continue to do very well and grow quarter over quarter. Alberta is challenged. I'm not sure that it's more challenged than it was before, but it's certainly consistently challenged. So it would be on the lower end of the performance scale. And then I guess the other one is, SFI. We've seen a bit of a decline in the award of work. There's lots to bid. This is almost identical to what happened in the year leading up to the last presidential election. And then immediately following the election, there was a boom in terms of the amount of work, allotted. And we would anticipate that as well. It will classify as clearly a small part of our business. It would be slightly less busy than it was in the past. Although opportunities we're looking at remain strong. And your next question here comes from the line of Derek Spronck with RBC. Please go ahead. Your line is now open. Hi, good morning. Hey, good morning. Thanks for taking my questions. Mike, when you look at your portfolio of companies do you feel that you have the right balance Generally speaking, yes. I mean, the airline stuff we do, are flying in the aviation business really is just not tied to the economy in any way. There's a little bit in Newfoundland that would where we would be flying that's affected by the general health. But, the general health of the economy there hasn't has been challenging for a bit. Most of our flying is essential services. Refined to First Asian's communities, and the beauty of that business is it's the same whether, the Canadian dollar is 65 or 85 oils, 50 or 150. So we like the stability of that. Some of our manufacturing would be more exposed to the general, economy. But even with that, things like better, more tied to the military economy than they are, the general overall economy, And then we are excited. I don't wanna overplay it because L. V. Is not a huge acquisition, but it's one we're really proud of having and it gives us a little bit of exposure to that ag economy, which again, is completely different. Than the other thing. So, one of, when you look over 15 years, we've had, periods of time where aviation's carried the company. In tough manufacturing times. And conversely, we get a new competitor in aviation and manufacturing to carry the day. So Yeah, we are. I think that our portfolio gives us stability first and foremost. The only thing I'd point out is, there's a reasonable segment of our revenue, which is contracted. And we've recently renewed many of those contracts from, you know, Mike's spoken about a few DFO, a couple of years ago without the fixed wing search and rescue contract, which is, you know, a 20 plus year contract. We've renewed our government Nunavut medical transfer contract. We've secured a Medevac contract for all of Nunavut for several years. So all of those obviously are steady state contracts that are, of course, not cyclical. Okay. No, that's great color. You mentioned a little bit around the geopolitical environment and macro environment. Is that just more cautionary, type of language? Or are you seeing anything right now that that in any particular area that's giving you a little bit more caution than normal? I largely only as it relates to the state of this fabrication, we've seen less big business to business transactions. But on a materiality basis in EIC, I don't know if there was in front of me, but they would be something like 1% or 2%. It'd be 2.5% of our overall business. So it's it's not a material exposure. Okay. Okay. And when you're thinking about, you know, a potential acquisition here going forward, would it be are you thinking more more around, you know, a a a completely different business that would add additional diversification or would you be looking more towards enhancing some of the existing kind of end markets that your portfolio is currently involved in? Putting the but first before I answer the question, the but is we're opportunist so if something comes up, I I reserve the right to change my mind. But at this point, the things we're looking at are quite clearly, related to other businesses were in. And your next question here comes from the line Sean Levine with TD Securities. Please go ahead. Your line is now open. The report indicates that you guys expect Q4 lease revenue to be down in Q4 related to the customer bankruptcy. Just wondering you can quantify that? It depends on some discussions we're having now where the plates are going to fly here shortly. But it's, low single digits in terms of 1,000,000 of dollars. I'm really not prepared to give you a precise number of what I'm in negotiations. But it's not a big number. Okay. And it sounds based on your earlier comments that you wouldn't expect such an impact in Q1 'twenty from that? No, I would anticipate those points will be fine by then. Okay. And then just a question on Quest. I know it's still fairly early days in the ramp of the Dallas facility, but overall, has the speed and expenses that you that you associated or that you expected for the ramp up in line with your expectations? I would say that we had a couple of equipment issues with stuff as it was brought over and started and affected the wrap up of the plant to beginning, we had some soft damage to transport, which put us a couple of months behind our plan. And we sort of stayed a couple of months behind. But I would point out that when we built this, we haven't started a big plant like that before. And if we're going to make a mistake, we're going to make a mistake on the side of going to slow as opposed to going too fast. The worst thing I can do is have windows show up for the 40 5th floor in Oakland and have them leak and, destroy a relationship with a developer where we've done 10 projects for them before. We'll slowly ramp it we're making progress. We're up to 180 something or 190 employees in the facility and we're we're increasing that every week. And, you know, people could say, well, why don't you do it faster? Well, we gotta train the employees and having two people being trained by one person just impugns what the one person can get done. So we'll do it slowly and build it. Joe Cuykendahl, our GM there, is doing an awesome job. And, we're happy with where we are. We're excited about getting it going faster, making no doubt but, it's on track. Yeah. I think, Mike, just to comment on that too, the one softer side of that too is also the safety component. If you ramp up quickly, you want to make sure you're doing it safely as well. And, that's a good point, Daryl. And we have We have a big sign up in there of days since our last accident. And, for now, we've been able to say it's been a year and we haven't had any. And that's something we're very proud of. Yes, that's great. And then just a kind of housekeeping question, maintenance CapEx guidance, I think, formal guidance is still for growth in line with the overall business. You mentioned and reported year to date, up 6% I'm just wondering, should we continue to expect a pretty significant year over year increase in Q4? Or There'll be some increase. I don't know, but pretty significant it, it's hard for me to do this precisely because it depends on when certain engine things get redone when we get the back from the manufacturer. I would expect that Q4 will be slightly higher than last year, but I would anticipate a huge difference. And there are no further questions at this time. I will turn the call back over to Mr. Mike Pyle for closing remarks. Thank you, operator. I appreciate everyone participating today. It was a very exciting quarter and probably an even more exciting last 5 weeks since the quarter ended. I look forward to talking to you again soon in February when we report our full year results. Have a great day. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.