Earnings Call: Q2 2019

Aug 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 statements were issued on August 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 options 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 law, 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 broadcasted live via the Internet for the benefit of 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. Good morning, everyone. Joining me this morning are Carmel Peter, EIC's President Daryl Bergman, our CFO and David White, our VP of Aviation. Before we begin, I would like to highlight our upcoming Investor Day on September 18th, which is a Wednesday. The event will take place at Quest Window Systems newly operational U. S. Production plant in Garland, Texas. The Investor Day will include a tour of the new 330,000 square foot facility, which commenced production runs late in the second quarter. Members of both the EIC and Quest's senior leadership teams will be in attendance. Timely registration is required as space is limited. We have also arranged for a block of hotel rooms, which are available to attendees at their expense. If you are interested in a Our consistent delivered another strong quarter of operational and financial performance. EBITDA and adjusted earnings. Our trailing 12 month payout ratio calculated on a free cash flow basis less maintenance CapEx fell to 54%, which is a new all time best. With our continued growth in earnings and cash flow, Yesterday, we announced our 14th dividend increase in the past 16 years, further solidifying one of the best track records of dividend growth on the TSX. The $0.09 per share increase on an annualized basis beginning with our August dividend brings our dividend to 2.28 dollars per annum and extends our cumulative annual growth rate since inception of approximately 5%. I will leave it to Daryl to discuss our financial performance for the quarter in detail, but I would like to stress that after 6 months of fiscal 2019, vast majority of our businesses are delivering excellent results. Importantly, these results are largely due to the decisions and investments we have made in prior periods. It also points to the future where investments made recently will further grow our results when those assets come into production. That shouldn't come as a surprise to anyone who has been following us over the years. As our focus has always been on making investments that would pay dividends over the long term. Already in 2019, we have executed upon several initiatives that further enable us to continue our impressive track record to support the new materially expanded fisheries and oceans Canada contract awarded to Provincial back in March. Pall has been providing aerial surveillance for Canada's inland coastal and offshore waters on behalf of the government of Canada since 1990. These new investments will ultimately improve the product and the service we provide to the government and provide the foundation for further growth over the next decade This is just another example of our modus operandi, invest now for investments in the for benefits in the future. This contract goes into force in the second half of twenty twenty. The legacy airlines began recently began flying for the Manitoba provincial government under the new general transportation contract awarded in the second quarter. This contract will ramp to full capacity during the third quarter of this year. Production at Quest Canadian facility remains at full swing and we continue to grow our order book, which has grown by approximately 50% since Quest Window System was acquired in late 2017. And now stands at runs at its new facility in Garland, Texas. I will discuss the ramp up of the new facility later in the call. Earlier in the year, Regional 1 expanded its relationship with SkyWest by entering into and investing in a joint venture to acquire lease and sell CF34 engines. Last week, the joint venture announced an agreement to lease out its current portfolio of 14 CF34 engines. And I should point out that these engines are being paired up with Regional One's CRJ700 airframes and will be released for 10 years to a U. S. Operator. We expect these assets to enter lease in phases between now and next summer with the first one coming this fall. Again, those are just a few of the recent examples of investing now for benefits of the future. To be clear, none of those investments have generated cash flow in sets the table for future growth next year beyond. We are excited that Calm was a successful bidder in the Nunavut government RFP for passenger service in Kivolik and Sanik kilowak. We are finalizing a new contract which will see Calm's 30 year track record continue for many more years under the contract, which will go into effect later this year. I would now like to turn the call over to Daryl to discuss our second quarter financial results. I will update you on our outlook later in the call. Daryl? Thanks, Mike, and good morning, everyone. I'll begin with a quick reminder that our 2019 financial results include the impact of IFRS 16, which the corporation adopted using the modified retrospective approach. Since our financial results prior EBITDA, net earnings and adjusted net earnings for the quarter and year to date to prior periods are impacted. As Mike mentioned earlier, yesterday, we reported the highest 2nd quarter revenue, EBITDA and adjusted net earnings in our history as a public company. On a consolidated basis, we generated revenue which is up 12.5000000 dollars or 4% over the second quarter of last year. Of the increase, 5,500,000 was generated in our Aerospace And Aviation segment and 7,000,000 was in our Manufacturing segment. Aerospace and aviation segment revenue was up 2 percent to $238,900,000 for the quarter. As 8% growth from the legacy airlines and provincial was partially offset by 10% lower revenue from Regional 1. The revenues from the legacy airlines and provincial increased by $13,400,000. The gains at the legacy airlines and provincial were attributed to higher volumes in Newfoundland, Labrador and Quebec, increased passenger and medevac volumes in the Kimberlet region and contributions from the rotary wing operation due to growth in new services, including emergency medical services. Regional 1, for Regional 1, the comparable period had higher than typical levels of aircraft and engine sales. That said, lease revenue for Q2 2019 was up 21% as a result of higher utilization of aircraft and an increase in the number of assets in the portfolio on lease compared to Q2 a year ago. The whole fleet of CRJ900 aircraft has been on lease since Q4 2018. In addition, the 10 CRJ200 aircraft we've leased to SkyWest is positively impacting lease percent for the segment. The total revenue for the segment was $87,000,000. The segment benefited from increase in custom manufacturing elevated levels of defense spending worldwide and higher spending from Canadian Telecom Companies. Consolidated EBITDA was up $12,200,000 or 16 percent to $87,200,000 for the quarter. Excluding the impact of the adoption of IRS 16, EBITDA was up 9%. The growth was mainly attributed strong EBITDA growth of 32 percent or 23 percent excluding IFRS 16 from the legacy airlines and Provincial, which In addition to their higher revenue, achieve costs, savings associated from operational efficiencies, and reduced third party charter costs as a result of capacity sharing across airline subsidiaries and investment in additional aircraft in prior periods. EBITDA from Regional London was down marginally by $700,000 or $1,000,000, excluding the impact of IFRS 16. An increase in high margin lease revenue was more than offset by lower profits on aircraft and engine sales. Manufacturing segment EBITDA was up $1,200,000 or 8 percent to $15,800,000. However, when excluding the impact In the second quarter, EBITDA, Quest was relatively flat over the prior period. That said, Quest Canada continued to operate at full capacity and delivered their best quarter ever with $8,000,000 in EBITDA. This was offset by anticipated losses at the new Dallas plant, We are prudently moving forward in getting the Dallas plant online as we take the appropriate amount of time to ensure production quality is up to Quest strict standards. The balance of the segment collectively continued to experience growth in EBITDA. The segment benefited from an increase in custom manufacturing High levels of defense spending worldwide, increased spending from telecommunications companies across Canada and operational efficiencies. We reported net earnings of $21,900,000 or $0.68 per share for the quarter, compared to $19,500,000 or $0.62 per share in Q2 2018. Excluding the impact of IFRS 16, net earnings increased by 13%. We had adjusted net earnings of $26,600,000 for the quarter representing an increase of 1.4000000 dollars or 5%. Excluding the impact of IFRS 16, adjusted net earnings were up 7%. Adjusted net earnings per share increased 4 percent to Excluding the impact of adoption of IFRS 16, adjusted net earnings increased 5 Free cash flow, which is unaffected by our IFRS 16, improved by 12% to $65,700,000 or $2.05 per share. Free cash flow less maintenance capital expenditures improved 16% to $1.08 per share from $0.94 per share in Q2 2018. It should be noted that the weighted average number of shares outstanding increased by 1% over the prior period, which partially offset to the increase in both adjusted net earnings and free cash flow. Our adjusted net earnings payout ratio and our free cash flow less maintenance capital expenditures payout ratio, growth improved despite the negative impact of 6% from 68%. Our free cash flow less maintenance capital expenditures payout ratio improved to 51% from 58%. As we have noted in previous calls, the trailing 12 month payout ratio is a better barometer of payout ratio given the seasonality of our aviation operations. On an adjusted net earnings basis, the trailing 12 month payout ratio improved to 74% from 77% at the June 30, 2018, while on a free cash flow less maintenance capital expenditure basis, it improved to 54% from 64%. The improvement in free cash flow less maintenance capital expenditures payout ratio was driven by 2 separate items. The first was an increase in the cash flow generated by the company. And the second was a decrease in maintenance capital expenditures compared to prior period. Taking a look at our balance sheet, We ended the quarter with cash equivalents of $33,000,000 and working capital of $320,000,000. This compares to a cash position of $43,000,000 and working capital of $301,000,000 at which include the inclusion of the current portion of right of use lease liabilities from the adoption of IFRS 16 The payment of the full regional 1 and inventory. Our leverage ratios remain within our target range, and we have approximately $315,000,000 of available capital which continues to position us During the quarter, the Corporation exercised its rate to call it 7 year 6% convertible debentures, which were due on March 30, 2021. The redemption of the debentures was completed with cash on hand from the corporation issuance of its March 2019, 5.75 percent convertible debenture offering. Prior to the redemption date, $24,700,000 principal amount of debentures were converted into 7 $31.70 per share. On April 26, 2019, the remaining outstanding debentures in the principal amount of $3,100,000 were redeemed by the corporation. In addition, in the second quarter, the corporation entered into an interest rate swap with certain members of its lending syndicate whereby the corporation has fixed interest rates on $190,000,000 of its Canadian credit facility debt for a period of 4 years. That concludes my review of our financial results for the second quarter of 2019. I will now turn the call back to Mike to provide comments on our outlook for the balance of When we reported our 2018 year end results, we communicated that our expectations for 2019 auxiliary included EBITDA growing between 10% 15% and adjusted net earnings per share to grow between 8% 12%. In addition, we communicated our longer term guidance that we intend to 50%. This guidance does not include the impact of IFRS 16 changes that went into effect in 2019, which resulted in all material leases being shown on the balance sheet. Also, our 2019 guidance is based on our existing business today. Any new acquisitions, RFP awards, or major capital investments would expectably generate growth above and beyond our guidance for the year. For the 1st 6 months of 2019, our EBITDA is up 17% compared to a year ago or 9% excluding the impact of the adoption of IFRS 16. Our adjusted net earnings per share over this time were up 2% despite the, Excluding this adoption, the adjusted net earnings increased 5 percent to $1.27. The increase in adjusted net earnings was partially offset by the In short, we're in a good position to meet our guidance. Looking at our outlook for the balance of the year and beyond, Our Aerospace And Aviation segment continues to face industry wide labor shortages, which have resulted in continued higher over time contractor and training costs. The implementation of our life and flight pilot program will mitigate the impact moving forward, but will require time to take effect. We are also developing similar strategies to adjust to address maintenance labor challenges. On the subject of month and flight college, we continue to implement the life and flight program. Went up and running. It will enhance our profitability in MFC and provide a source of well trained pilots to our airlines. We're pleased to announce that the Force Multiplier flew its inaugural mission and began generating revenue in July. We continue to experience strong demand for the force multiplier and additional missions are already booked for the second half of this year. We're also pleased to announce that Calm Air International was chosen as a successful candidate in the government of Nunavent medical transfer RFP. Comber has been doing this work for the past 30 plus years, and we are happy to be able to continue. The contract is in the midst of being finalized and will take effect later this continue ramp through the balance of the year. Once a full production throughput, the additional plant will essentially have more than doubled Quest production capacity. Well, Daryl had mentioned that there was a delay in getting new facility up and running. It was important for us to ensure that Quest unparalleled production standards, were adhered to. This meant taking extra time to get things right and to hire and train the people. And I would point out that the plant is in full production or in production less than a year after the announcement of the expansion. The team at Quest has done an awesome job on standing up this plant and we will continue to grow it over the balance of the year and into 2020. And we were really looking forward to showing this plant off to you at our Investor Day later in September. Going forward, we will continue to make solid investments to enhance future growth. Our acquisition pipeline remains as strong as ever We don't have anything to report yet, but we continue to look at lots of great opportunities and remain very selective as we always have. The corporation has made significant strides in the first half of twenty nineteen towards a 3 year goal expenditure payout ratio. The increased cash flow generated was the fruit of prudent investments in prior periods. When we announced our 50% target, we were very clear that we intended to hit this target while still increasing our dividends to shareholders during the period. We have kept that promise and as a result of strong current results and investments made in 2019 that will generate cash flows in the future. We are pleased to reward shareholders with the 14th dividend increase in EIC's history. Finally, before moving on to questions, I want to thank all of our stakeholders for their ongoing support. Operator? Your questions will be Your first question comes from the line of raveel Afzal with Canaccord. Your line is open. Just congratulations on the commercialization post multiplier. Can you give us some sense of what the economics look like for the second half of this year and how we should be thinking about potential EBITDA contribution from this from Force Multiplier for the following year? Sure. Force Multiplier has been a long term project of ours and it's exciting to finally get it to the point where it's generating revenue and it's really a great microcosm of our business strategy, we've invested tens of 1,000,000 of dollars in this platform because we saw an opportunity. And we had to design the aircraft, build the aircraft, get the aircraft certified. And then quite frankly, the process to, for governments to be able to take advantage of it through procurement was longer than we thought it was, would take But now we're through that process. We've flown inaugural flights, in Canada. We're in discussions with 3 or 4 other countries for projects in the balance of 20.19 and into 2020. And I think you'll see it contributing, Adam, if serial rate that exceeds our 15% threshold, for return on capital. It was really like the switch was turned on in July. When we took the first order. Okay. Very helpful. And you've made so many investments in different organic growth initiatives. Can you help quantify those? I'm trying to understand the relationship between net debt that you have right now and the EBITDA that's going to come from these investments future. So can you quantify these investments that you have made so far that have not yet contributed to your results? And should should start contributing in the second half of this year or twenty twenty? Thanks, Ravi. That, that question is really goes to the core of our of our growth strategy where we're investing money in current periods for returns in future periods. And when you look at the projects we have underway, that haven't contributed anything. And in fact, in some cases, we've incurred losses while we ramp them up. We've got force multiplier, which has no revenue in the current period. We have, the partnership we announced with SkyWest where we've got, engines in the partnership and, airframes from us directly haven't generated any revenue yet and we'll start in Q3 and grow through the next couple of quarters. We have Quest new production plant. We have the fisheries contract, which we continue to invest in, which will be going to service in the second half of next year. And we have the, Manitoba Government, Charter Services work, which we're doing. In aggregate, the capital that's already in those, is well in excess of $125,000,000 that contributed nothing. To our earnings, but will contribute cash flows for years. And in some cases, decades to come, as they come into production. And so when you look at our aggregate debt to EBITDA ratio of approximately $3,300,000, up 3.3 times, that includes both, secured debt and debentures. When you if you exclude investments that have been made for future earnings that we don't have the earnings yet. That falls below three times. Which is right at our core level that we'd like to be at. Super helpful. And just a final question for you. Can you tell us like about the Quest ramp up? First of all, the new plant like how much did it contribute in terms of negative EBITDA if you can go into that detail? And then how many employees do you have at the moment in your Dallas facility? The negative contribution would have been in the low single digits a 1,000,000 or 2 of a loss as we wrap up We currently have approximately 150 employees, in plan we continue to grow that. We made a decision that we're going to train up the core first group before we add too many more because it's too slow a process when you're training too many people at the same time. So the plant will move from negative contributions to positive contributions through the balance of the year. And I think by early in the next year, you'll see it getting to kind of more normal run rate maybe by theendofthefirstquarter. Simple fact is that we announced that plan to vote a year ago and it's in production. We're super proud of it. And, we're well on our way. Like I said, we have approximately 150 employees and that number will continue to grow as the initial employees are trained up to meet Quest standards. Your next question comes from the line of Steve Hansen with Raymond James. Your line is open. Yeah. Hey, Mike, can you maybe just elaborate a little bit on the new JV announcement and the deployment of the airframes and engines, just trying to get a sense for the timeline at which those assets will be deployed And should we think about it over a couple of quarters or they get almost immediately given there's a deal done? Just trying to get a sense for the roll out there. Sure, Steve. I'll take a question. It's Carmel. So the role is going to start this month, August. And then you'll see We've got 9 airframes going in and the 14 engines. We're going to see that roll out in about the next 8 or so months There's modifications that are required to the aircraft for the specific purpose that they're being used by the U. S. Operator So that's why they're going in phases because we send them over this modifications and then they get to put in service. So look at it over that period of time. Okay. That's helpful. And just on that sticking to the same venture, just I noted in the release it's talked about still looking for additional deals. Are there additional business. Should we expect that to continue to grow from there into next year in terms of the asset pool size or how should we think about the cadence of the rollout after this initial deal here is deployed? Absolutely, Steve. We anticipate putting more assets into the partnership. Quite frankly, we didn't expect to have everything we've rolled in at the beginning to be fully spoken for at this point. So we're a little bit ahead of, our initial plan. So we're now looking for more assets to put in and then we deploy in the future. We don't have anything that's imminent, but we're between SkyWest and Regional 1, we're very actively looking for the right kind of assets that we could redeploy. Your next question comes from the line Cameron Doerksen with National Bank Financial. Just want to follow-up on, I guess, the investments that you made, you mentioned $125,000,000 in capital for growth that's coming. Just wondering if you can talk about, I guess, CapEx and maybe working capital investment that's required for the remainder of the year. I'm just wondering if we've kind of been past the peak here or are there still some additional aircraft you have to by to support these new contracts? It's a good question. Thanks, Cameron. In terms of working capital, there's seasonal changes, but there's no material change to working capital with one exception as Quest ramps up. Obviously, if you take facility from 0 revenue to ultimately when it matches the Canadian revenue of $100,000,000, there'll be an investment in working capital there. That notwithstanding, there should be no material changes in working capital. And I would point out a regional one they buy and sell things. So you could have quarter where it pops up and you could have a quarter where it jumps down depending on what assets we sell in that quarter. But in terms of a systematic ongoing investment. There is no expectation of a change in working capital other than Quest. In terms of assets for the contracts we have, The only contract that we're still working on being fully ready for is the fisheries contract. And so there'll still be investment in that through probably Q1 of next year till we're fully deployed. But the balance of everything else we talked about Quest has fully done, the aircraft for, Manitoba, the Manitoba Charter thing is fully done. And so the those are all up and ready to go now without further investment. I would hope to find something new and exciting to invest in, but at this point, that's our plan. So the investment through the balance of the year should be modest. CapEx, maintenance CapEx are likely to be slightly higher than last year. Simply because of the growth in the business and the timing of some engines that were originally thought to be done early in the year and will be done later on in the year. But even that's not a material difference. Okay. So just absent any new opportunities we should think about growth CapEx in Q3, Q4 being lower than what we saw in the first half of the year. Is that fair to say? Yes. Okay. And just maybe one quick update the status of the Manitoba Government Services contract. I mean, you've got a piece of that now, but just wondering what the about the MetaVAC portion of that, where that I guess, RFP process stands? Yes, that the government, didn't get all the way through. They had 3 tenders that they put out to privatize the Manitoba Government Services Aviation Business. The first was a forest firefighting contract, which we didn't bid on. We're not in that business. That was awarded first. Then we were awarded the the General Charter Services contract. And then they were still working on the, MetaVAC 1 when it's quite clear. Well, there hasn't been a formal call there's an election coming in September in Manitoba. So that one is not likely to be awarded until post the election. Assuming the same government stays in power, I think you'll see them continue with that project and it's always a bad idea for me to estimate how long a government will take to do something. But I believe it's a priority for the government. And I think you'll see something in the first quarter or 2 after, the election should a different party form government. I have no idea what they'll do with that RFP. Your next question comes from the line of Nav Malik with Industrial Alliance. Your line is open. Thank you. Good morning. I just wanted to ask first on the backlog at Quest. Could you just maybe comment on how does that backlog split out in terms of, or do you split out, I guess, in terms of the Canadian and the U. S. Facility? Or is it, are you basically operating the 2 facilities to manage business asset comes in or maybe give us a sense of that? Capacity when we're looking at taking orders. And so while we're ramping up, the majority of the orders are processed in Canada. Once we get that U. S. Facility to say it, to full production, We will then tend to move the projects to which one is better equipped for the project. Currently, a little over half of our revenue is driven in the U. S. But at the current time, as we're ramping up the plant, we don't produce U. S. Projects only in the U. S. And Canadian projects only in Canada. Over time, we'll move towards generating most of the projects in the country where they're of origin, where they're being sold. But that'll take us another year to get to that position. And then in terms of how we view our overall capacity, one of the biggest mistakes we could make is take too many orders. And so we're very cautious in what we're putting in there through there in the next number of months as we wrap it. And then We've got a little more runway when you get into 2020 once the plant's fully operational. Okay. That's great. And then, I also just want to ask on the revenue mix at Regional 1. Could you just maybe remind us? I mean, it's a it's lower sales and service revenue this quarter. But that's kind of the opposite of what it was last quarter. So is there a way that we should think about this segment, moving forward or it's just the nature of the business in terms of, with the period that you're in and what you see in terms of engine sales, parts sales versus lease revenue? Or is there a better way or any way, any way that we can kind of model it out? The way to look at Regional 1, you almost have to do it the opposite or the way you would look at a normal company. In most companies, you take the revenue and then drive down to EBITDA, in Regional 1, our EBITDA is reasonably predictable. And as we invest in assets, you see money going into growth, you should expect to see, subject to a lag the EBITDA grow. Our parts revenue is fairly consistent as is our lease revenue, although there is a seasonality to our lease revenue because some of our assets are deployed with carriers whose businesses, are seasonal. And as a result, when they're busier, they're paying more for the lease than they are when they're not busy. So there's a seasonality aspect to that. But the lease revenue is pretty predictable. The parts revenue is pretty predictable. The part that varies quarter to quarter and to be honest with you, there's very it's very difficult. We can't forecast it and is when we're going to sell a full aircraft or engine. And that could, to be clear, we've sold, as an example, a Dash 8 this quarter, Dash 8400, a Q400, which is $6,000,000 or $7,000,000 U. S. Asset. We may sell another of those this quarter. And so you could see very big sales as a result of that. But the EBITDA that's generated from those big sales in terms of percentages is always lower than it is on our parts sales where it's higher. So when you look at the aggregate margin on that, it's fairly predictable as well. So, I'm sorry that I can't give you a good way to get to the top line, but I think the bottom line, when you look at EBITDA and compare it to the previous quarter and to the quarter in the previous year is reasonably predictable. Your next question comes from the line of David Ocampo with Cormark. Good morning. In your prepared remarks, you talked a little bit about the ongoing pilot shortage and kind of alluded to the new hours of service regulations. Just wondering if there would be a hit to margins in 2019 or 2020 or have you had discussions with your customers kind of pass through those higher costs? I have to answer that in sort of two ways. Has there been an impact to our expenses? Absolutely there has. But that's already in there. In spite of that, we've been able to increase our margins in the business, part of it through efficiencies, part of it through additional assets we bought in the past and part of it through higher revenues. So I don't anticipate that you'll see a decline in margin on a go forward basis as a result of that because the cost is already in our financial statements. It does increase when we pay the pilots, but quite frankly, that's a smaller part of the cost than the training cost. When we lose pilots more quickly to large airlines, we have to retrain the pilots onto that aircraft type. And that could be a $25,000, $30,000 $40,000 cost to retrain a pilot. So it's the movement of pilots that creates the stress, not the change in plan, not to say the changes in wages is an important it is. But it's the changeover and turnover of pilots. That's a bigger driver of cost. And that is already fully reflected. Okay. And just on that, can you remind us on some of the incentives that you're offering in the life for a flight program to keep pilots longer? Yes, the life of flight program is it's aimed at people who want to become a pilot. And so historically, most people want to become a pilot. The training takes a long period of time because it requires buying flight time, which is expensive. So most people are doing it on a part time basis, while they work in other jobs to pay for their training. Life in flight is a program where you go from never having flown an aircraft to being fully licensed just over a 12 month period. What we're doing there is we're arranged financing. So the pilots, regardless of financial resources can join the program. The financing pays for all the training at the end of a year they're going to start working for us in training and gaining hours. So they're training other pilots. Which is a strange part of aviation. Most businesses trainers are people who have been in the business for a very long time. In aviation, most trainers are new pilots who don't have pilot in demand time. So they build that through training. So they'll work for us for a fair period of time, as a trainer, following which they have a guaranteed job with us, in the airline business with one of our airlines. And if they stay with us Carmel or Dave, maybe you can help me with the period is. At the end of it, they'll have paid down their loan significantly and then we forgive the balance at the end. It's approximately 25,000. So about a quarter of it we forgive, And that's if they stay and work with us as a pilot for, For approximately in total from the time that they've got their licenses 4 years. That includes time that they're an instructor as well as the time that they spend with our airlines. And of course, the hope is, of course, having been through our system, and we provide mentorship as well, that they act we become long term employees of EIC and join our family permanently. The other piece we're doing with that is we're specifically targeting our customer groups that the Inuit and other First Nations to try and develop a pilot pool of people from the communities to service the communities to historically they're underrepresented in the pilot, world. And so we're hoping that with this program and the access to the capital, quite frankly, at the end of if a student comes out of high school in 'nineteen, by the time they are through the 4 year period with us and the 1 year of school. So 5 years, both the same time you'd have a university degree, they'd be pretty close to making $100,000 a year and their debt fully paid off. Which when you compare that to graduating with a science degree, and starting work, you'd be nowhere near the same financial position And so we think it's going to be attractive to young people coming out of high school. We don't see themselves as, going to school type. Your next question comes from the line of Tim James with TD Securities. Your line is open. Thanks and good morning. I'm just wondering if you could tell me what the approximate value of assets were that were transferred to inventory at our regional 1 in the quarter and year to date? Just give me a second. I've got to come up with that number. The net change to inventory R1, I think when I look at this, it's, I'm just looking, I think it's a U. S. Number was about $10,000,000, which was largely driven by a single aircraft that's being held for resale and we expect to sell in the in Q3. And then for the full year, Carmel, I think that number is 16,000,000. It was $16,000,000. So it was $6,000,000 in the first quarter and about $10,000,000 in the second quarter. The $10,000,000 being largely made up of the of a single asset for resale. Okay. Thank you. And then just looking at the joint venture here. So the 14 CF34 engines will be leased by the joint venture aero engines. Which you have a minority interest. But the airframes themselves are getting leased by Regional 1 and so EIC will record 100 percent of that revenue and expenses. Is that correct? That's exactly right, Hess. Okay. And then the 3 CRJ700 airframes that were purchased for inventory, which are not part of the lease transaction, were those included in inventory purchases in the second quarter of 2019? And then I guess, there may have been one in the first quarter. I I don't have that right in front of me, Tim, but they're included in the purchases in the first or the second quarter. But they're in inventory. They're not fixed assets because we're tearing them apart for sale. Your next question comes from the line of Nomman Sadi with Laurentian Bank. Your line is open. Hi, good morning, everyone. Good morning, Nova. Yes. So just going back to Regional 1, I understand the lease business is doing well. Do you have any idea or if you could guide us what the duration of your lease assets are? And is that something which is going to grow because of the JV that you have now? Yes. Well, the clearly, we, but last year, we at least 10 CRJ200s to SkyWest. On medium term leases. We have a balance of, CRJ700s and 900s which are on medium term leases. And those churn, like we put and staggered, they're not all in the same length. Typically, those leases would run between a year 4 years. And, we will renew some of them. Some of them will come out and be parted out. Some of the planes will be solved, but new planes will go into it. So As long as we invest in the maintenance capital expenditures that we have, that lease pool will stay equal. If we put money into growth capital in the lease program that lease pool would expand. As it relates to the stuff in the joint venture, both our airframes and then the engines where we have a minority interest in, those are 10 year leases. So those are much longer than we typically enter into. Fair enough. And just going back to the Mountain Flight College, if I understand or I remember correctly, you're expanding the campus. Is that still happening? And how's the progress on that front? So we've expanded within our two facilities that we have now and they will over the next quarter or 2 or 3 reach capacity. We're now looking, for the opportunity to open a third base. It would likely be in a different geographic area just to give us diversity on the weather, having 3 in exactly the same weather area increases volatility. And the beauty of that business is the capital intensity is much lower than normal for aviation. The cost of training aircraft is relatively low. The key piece for us is going to be Carmela and Dave White knocking the ball out of the park on our life and flight program to give me more trainers. The more trainers we have, the faster we can grow that business. The restriction really is human capital. Non financial capital. Your next question comes from the line of Chris Murray with AltaCorp Capital. Your line is open. We're always looking at it, Benoit. And this is where we think we'll get to in this initial phase of where we're going, from an organization. Chris, are you with us? I should clarify when I say leaning out of your organization, we're really leaning it out as a higher Operator, maybe we can, I think Chris is on another call? Yes, certainly. Sorry about that. Your next question comes from the line of Kyle Brock with RBC Capital Markets. Your line is open. Good morning. This is Kyle on behalf of Derek Good morning, Tom. Good morning. On the $375,000,000 in Quest backlog, what's the timeline on the conversion of that And is there any risk to meet in the existing obligations if the Dallas facility doesn't ramp as quickly as expected in the second half of the year? We don't publish the exact breakdown, but it's over the sort of the next 3 year period. We've built a we've built into our model, the ramp up of Quest and clearly, our Toronto plant is running at full capacity now and the Quest plant in Dallas is on on track. If there was a catastrophic failure there, it would put pressure on our Toronto plant to keep up, but we're comfortable with the way we daggered our work. And, the interesting thing about Quest that makes it more challenging is the developers tell us they're going to need windows in a given period, but they could easily have delays, whether it be with getting the appropriate zoning, whether it's, getting the site work done. And so it's not a precise science. So we're always juggling moving some orders forward, some orders back to meet the needs of our customers. And that will continue now and after the plant being up. But, we're in a good position. Okay, great. Thanks. Appreciate the color. And just as a follow on, are you seeing any wage inflation in the Dallas area given tight labor conditions? Not really. We expected it. The wage costs are in line with what We anticipated to pay. The cost of acquiring the employees, the upfront cost is a little bit higher. Because you have to chase harder to get the employees really low at 1 percentage unemployment area. But the margins that we'll generate from the plant are in line with our expectations. Your next question comes from the line of Tim James with TD Securities. Your line is open. Thanks. Just a very quick follow-up question. I just want to confirm when you think about your return on invested capital and your kind of 15% rule of thumb or target. Are you using EBIT? Is operating earnings the kind of the numerator in that calculation? We're, yes, other than aviation, it might be, maybe slightly different. We're taking our EBITDA and subtracting maintenance CapEx. So, in some cases, maintenance CapEx is higher than the dollar. In some cases, it's less So it's really it's really the way we calculate our, our payout ratio that we're using. So it's EBITDA, minus interest about probably before, just because we use an unlevered model. So it's a return on aggregate capital as a return as opposed to our return of equity. Okay, perfect. Thank you very much. Your next question comes from the line of Ace Murali with CIBC. Your line is open. Hi, it's Scott fromson. I got cut off, so dial back in. Just Good morning. On the topics of decreasing the dividend payout ratio over the next 3 years, can you talk about where you might cut back on CapEx assuming there continues to be a timing lag on capital deployment and cash flow returns. I don't I would suggest that the future reductions are sort of baked into the money we've already deployed Scott with, you take $125,000,000 to actually a little more than that and employ our typical returns on that. And given that some of those investments Quest in particular are going to generate higher than 15% returns, the ability to pay to reduce the payout ratio is based on investments we've already made. So that's part of the reason why you're going to cut back at least on the quantum of, of acquisitions? It implies no, not really. It means we'll do acquisitions where the, the returns are sufficient. But we've already got enough investments in the bank that are that will help us deliver on our on our 3 year commitment. And quite frankly, when you look at our payout ratio, it's gone from 71% in 2017 to 61% last year to 54% on a trailing 12. So we're, we're making great progress on that. And then as the assets come into production you see a decline in the debt to EBITDA because the EBITDA naturally goes up. Right now, we've got the debt, but not the asset. If you were to look at it like an acquisition, most people would pro form a the, the cash flow from the acquisition because it's a CapEx that's not done. And so that's why I tried to give some color on the amount of investment that's been made that doesn't have a return in our statements yet. And there are no further questions at this time. I turn the call back over to our presenters. Given that there's no further questions, I'd like to thank everyone for participating in today's call. I look forward to updating you our progress again next quarter and we're excited about meeting some of you at our Investor Day in Dallas. Have a great day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.