Good morning, everyone. Welcome to Exchange Income Corporation conference call to discuss financial results for the three and nine months period ended September 30th, 2018. The corporation's results, including MD&A and financial statements, were issued on November 8 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&A for this quarter, the Risk Factors section of the Annual Information Form, and Exchange's other filings with Canadian securities regulators. Except as required by Canadian securities law, Exchange does not undertake to update any forward-looking statement. Such statements speak only as 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, and other interested parties. I would now like to turn the call over to CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator. Good morning, everyone. Joining me this morning are Carmele Peter, EIC's President, Tammy Schock, our CFO, and David White, our Executive Vice President of Aviation. Our third quarter was one of the strongest in our 15-year history. We continued to invest in and grow our subsidiaries while generating new record highs for revenue, EBITDA, adjusted net earnings, and free cash flow, less maintenance capital expenditures. The fact that we hit new highs in these metrics on an absolute basis is important, but not unexpected given the investments that have been made in the last two years. What is significant, however, is the absolute increases have translated into new highs on a per-share basis, demonstrating how accretive this growth has been. The per-share results for adjusted net earnings and free cash flow, less maintenance capital investment, both exceeded the previous quarterly record by 12%.
The third quarter was not an anomaly, nor was it a turnaround. In fact, it is in line with our performance for all of 2018, as the year-to-date metrics are also record highs. Adjusted net earnings per share and free cash flow, less maintenance capital expenditures per share, were also nine-month records. EIC has a long track record of increasing dividends we pay to our shareholders. Earlier this year, we increased our dividend rate to CAD 2.19 per annum. It is the strong performance I just highlighted that enables us to consistently grow our dividend. Even with the new higher dividend rate, our payout ratio has declined significantly, both for the third quarter and for the year-to-date. This improvement is evident whether the calculation is based on a free cash flow, less maintenance capital expenditure basis, or on an adjusted net earnings basis.
Based on the free cash flow, less maintenance investment basis, the payout ratio for the quarter improved to 42% from 45%, and on an adjusted net earnings basis, strengthened to 58% from 63%. On a trailing 12 basis, these payout ratios improved to 62% and 75% from 73% and 86%, respectively. As pleased as we are with our third quarter and year-to-date results, what is more impressive is that our recent performance is merely in line with the strong growth that we've been achieving for over 14 years. As such, our financial metrics are directly comparable over that period, and I will focus my next comments on that period specifically. In the nine months of 2018, revenue, EBITDA, and adjusted net earnings per share grew by 19%, 12%, and 16%, respectively.
For comparison, for the same nine-month period over the past eight years since 2010, we have grown EBITDA by 22% and 26%, respectively. That is very consistent and a remarkable track record that few companies on the TSX can compare to. We issued shares to fund some of this growth, which allowed us to maintain our strong balance sheet with consistent leverage. That being said, the accretive nature of this growth is evident in the fact that adjusted net earnings per share had a CAGR of 11% over that eight-year period. At the same time, we've consistently grown our dividend while achieving a significant reduction in our payout ratios.
The diversity of our businesses, including industries, capabilities, and geographies, creates resilience and durability and has enabled us to amass an impressive track record of growth, even in times of economic uncertainty and volatility, regardless of swings in resource prices or the value of the Canadian dollar. Once again, our third quarter financial results reflect the ongoing successful execution of this diversification strategy. Our revenue growth in the quarter was attributable to both acquisitions and organic growth in both the Aerospace & Aviation segment and the Manufacturing segment. While the Manufacturing segment as a whole achieved an EBITDA increase of CAD 8.5 million for the quarter, Quest accounted for CAD 6.1 million of that increase and continued to exceed our internal expectations.
Quest has contributed EBITDA of approximately CAD 21 million for the year-to-date, which exceeds the threshold to fully trigger the payout of the CAD 15 million earn-out that was included in the purchase agreement. The strong EBITDA growth from Manufacturing segment more than offset a 2% or CAD 1.3 million decline in the Aerospace segment. While Regional One's EBITDA was up for the quarter, Legacy Airlines and Provincial were impacted by higher operating costs from continued fuel price increases and lagged the nature of fuel surcharges implemented throughout the quarter. Although certain contracts have embedded fuel escalation clauses, most lag in time and general fuel surcharges were implemented only after it became evident that the hike in fuel prices were not going to be temporary. The worldwide pilot shortage has received considerable media attention lately, and EIC is not immune to this challenge.
What is less well known is the shortage of other aviation trades, particularly maintenance engineers, which are also a challenge. The industry-wide shortage of personnel has resulted in higher costs for our airlines in Q3, as overtime, contractor, and training costs were all up in 2018. The pilot shortage highlights the strategic importance of our acquisition of Moncton Flight College. Our airlines are actively working with Moncton Flight College to develop and implement initiatives to mitigate the impacts of the industry-wide pilot shortage. The breadth of our aviation operations has enabled us to vertically integrate our training through an investment which is immediately accretive to our shareholders. Implementing a plan to train our pilots will take time to design and implement.
I would now like to turn the call over to Tammy, who will review our financial results in greater detail, and I will update you on our outlook later in the call.
Thanks, Mike, and good morning, everyone. As usual, I will focus my comments on the results for the three-month period, the quarter.
On a consolidated basis, we generated revenue of CAD 308.2 million, which is up CAD 54.8 million or 22% compared to the third quarter of last year. Revenue in the Aerospace & Aviation segment increased by CAD 22.6 million, with the Aerospace & Aviation segment revenue from Legacy Airlines and Provincial was up CAD 13.2 million or 9%. The addition of Moncton Flight College was the largest contributor to Provincial's revenue increase during the quarter. Legacy Airlines benefited from the Kitikmeot contract, which commenced in the fourth quarter of 2017, as well as higher passenger volumes in Ontario during the year. Revenue at Regional One was up CAD 9.3 million or 17% for the quarter. Sales and service revenue within Regional One was up 28%, with higher amounts across all revenue streams.
While the largest gains were made in the aircraft and engine asset sales, parts sales were also up 16%. Parts sales comprise the largest proportion of revenues in the sales and service category, representing approximately three-quarters of the sales and service revenue in the quarter. Other service fee revenue showed a strong increase but continues to be a smaller component of revenue. While lease revenue was on par with the prior year, the quality of that revenue improved. In Q3 of last year, lease revenue included a significant redelivery settlement, and there was no corresponding transaction this year. Excluding the redelivery settlement, lease revenue increased by about 11%. Regional One's fleet of CRJ900 aircraft generated stronger lease revenue as there was greater utilization of those assets by customers during the busy summer months.
The weaker Canadian dollar during the quarter resulted in a CAD 2.1 million increase in Canadian dollar revenues overall for Regional One. Excuse me. The Manufacturing segment's revenue was up CAD 32.2 million or 65% for the quarter. This growth was attributable to the added contribution from Quest, which was acquired midway through the fourth quarter last year, as well as increases from WesTower, Ben Machine, and Stainless. WesTower continues to benefit from operational changes made in the last 18 months and the expansion of its service offerings. Ben Machine again benefited from high levels of defense spending worldwide and is seeing returns on prior growth CapEx made to expand its production capacity. Stainless is also starting to experience returns on the growth CapEx made in previous periods to increase its plant capacity.
Consolidated EBITDA was CAD 79.2 million, which is up CAD 7.2 million or 10% from Q3 of 2017. The growth was driven by our Manufacturing segment, which had EBITDA of CAD 14.1 million for the quarter, including the addition of CAD 6.1 million from Quest, as Mike mentioned earlier. It wasn't just Quest driving the growth. The balance of the segment achieved a collective 43% increase in EBITDA compared to Q3 of 2017. We reported net earnings of CAD 24.2 million or CAD 0.77 a share, compared to CAD 23.9 million or CAD 0.78 a share in Q3 2017. Our higher EBITDA for the quarter was mostly offset by increases to depreciation, amortization of intangible assets, interest costs, and acquisition costs. The slight decrease in earnings per share reflects an increase of 2% in the average shares outstanding during the quarter.
Higher long-term debt outstanding on our credit facility and increases in benchmark borrowing rates resulted in higher interest costs. They were up for CAD 4.5 million over the prior period. There was also a CAD 1 million of non-cash interest accretion recorded in relation to the earnout liabilities of both Quest and Moncton Flight College. Depreciation increased by CAD 1.6 million, and that is the result of purchases of capital assets during 2017 and throughout 2018, and the depreciation of capital assets that we acquired with the purchases of Quest and Moncton Flight College. Income tax expense was down CAD 2.7 million, and the effective tax rate has decreased to 19.8% from 26.7%. The proportion of pre-tax earnings has shifted to lower tax rate jurisdictions in comparison to Q3 of 2017. Additionally, the tax rate applicable to our earnings in the U.S. has decreased in comparison to the prior year.
On an adjusted basis, net earnings increased 15% to CAD 29.6 million for the quarter, resulting in an adjusted net earnings per share of CAD 0.94, which is up from CAD 0.84 in the Q3 of 2017. That's an increase of 12% over our previous high in Q3 of 2017. Our payout ratio, when calculated as a percentage of adjusted net earnings, strengthened to 58% from 63% for the quarter and improved to 75% from 86% on a trailing 12-month basis. The improvement reflects the increase in adjusted earnings, which was in excess of our increase in dividends. Free cash flow for the quarter was up 15% to CAD 64.2 million. On a per share basis, free cash flow was CAD 2.04, which is up from CAD 1.81 per share last year. Our free cash flow less maintenance CapEx payout ratio improved to 42% from 45% last year.
Our trailing 12-month payout ratio also improved to 62% from 73%. Looking at our balance sheet, we ended the quarter with a cash position of CAD 25.2 million and working capital of CAD 309.7 million, which represents a current ratio of 2.32:1, and that compares to cash of CAD 72.3 million and working capital of CAD 240 million and a current ratio of 1.9:1 at the end of 2017. Our cash balance at December 31st, 2017, included CAD 56.8 million to fund the redemption of our convertible debentures, which were redeemed in January 2018. The entire earnout for Quest and a portion of the earnout for Moncton Flight College will be paid within a year and have now been included in the current section of our balance sheet.
Our working capital has increased through the first nine months of 2018. Those increases are largely attributable to investments that we've made at Regional One and to increased receivables from higher business volumes in our airlines and in the Manufacturing segment, particularly at Quest. We expect our working capital position to decline during the fourth quarter, as it typically does. The government receivables associated with our increased business volumes in our airline business have been substantially collected subsequent to quarter end. We also expect Regional One's working capital to decline. Investment in working capital at Regional One relates to the purchases of both ERJ-145s and ERJ-170s, which are included in inventory, and both are expected to generate sales volumes and positive impacts to earnings in the fourth quarter.
Sales associated with those investments, as well as the collection of a secured receivable from an aircraft sale in the first quarter, will result in a reduction to working capital as well. The monetization of working capital during the fourth quarter will reduce both our debt and our leverage ratios. Our leverage ratios remain well within our target range, and we have approximately CAD 320 million of available capacity within our credit facility. In short, we're very well positioned to take advantage of future growth opportunities as they arise. That concludes my review of our financial results, and I'll pass the call back to Mike for some closing remarks.
Thank you, Tammy. At the beginning of the year, we stated that we expected both EBITDA and adjusted net earnings to grow between 10%-20% this year. We also indicated there would be a significant decline in growth capital expenditures and that maintenance capital expenditures would increase slightly. Our nine-month numbers demonstrate we are well on our way to meeting this guidance. We expect continued growth in the fourth quarter. We are still finalizing the impact of the new IFRS standards as they relate to revenue recognition and leases. While we own our aircraft fleet, it will result in some changes to the accounting for real estate leases. While not material from an earnings perspective, they will increase EBITDA and interest expenses. We will provide forward-looking guidance for 2019 when we report Q4.
At this point, we expect growth absent these changes in the high single- digits to low double -digits. We will refine this for you early in 2019. Looking ahead, we are excited about the strong performance from Quest and even more so for its future prospects. We remain on schedule to open the new Quest facility in Texas early in the new year. We will begin trial production runs in the first quarter and expect the plant to contribute to results in a meaningful way in the second half of the year. We are excited about getting the plant into production as our order book continues to grow, and we look forward to taking advantage of sales opportunities that we could not move on previously because of our lack of production capacity.
Our flight training business at Moncton Flight College is expected to help us on multiple fronts. Currently, most of the revenue is from international students as we get contracts from international airlines who bring in up to 50 students at a time. On that side of the business, we have seen very strong demand for the foreseeable future. There are synergies in terms of our own airlines. We're going to work to build our own pilot streams, providing the airlines with a significant competitive advantage in an extremely tight pilot market. On October 29th, we announced the Force Multiplier as following a complex process from the highly modified state and technical capabilities of the aircraft, has received the final approval from Transport Canada. It went into service and will contribute to results in the fourth quarter.
This specialized aircraft sets new benchmarks for flexibility and quick response for intelligence, surveillance, and reconnaissance clients globally. We're excited about the demand we have seen thus far, and we look forward to updating you on the progress as the plane serves customers around the globe. We're proud of our track record of profitable growth and ever-increasing dividend to our shareholders. We have accomplished this by remaining true to our philosophy of buying strong, niche companies, believing in management, and helping them grow. We are constantly working on fine-tuning our model and improving our results, but we believe in our strategy and have remained true to it for 15 years. As an investor, you will know that we are committed to a strong balance sheet, accretive investment in both acquisitions and organic growth.
We have demonstrated that this model generates increasing per-share profitability, which has in turn facilitated our 5% growth in dividend rate since our inception. This is a track record which few, if any, can match. We're excited about the fourth quarter. Investments in previous periods will drive fourth quarter results. As Tammy mentioned in her section, a temporary bump in investment in Regional One inventory will drive fourth quarter as these aircraft are sold. The investments in maintenance capital expenditures made earlier this year at the airlines will ensure we have the necessary capacity to look after our customers during the very busy Christmas season. We will continue to digest the accretive acquisitions of Quest and Moncton Flight College. In short, we look forward to speaking with you again in February with the full year results.
Before I move on to questions, I want to take a moment to thank all of our stakeholders for their support over the last years. There has been significant volatility in our stock and some inaccurate allegations made by people trying to undermine our stock. Thank you for staying with us, and I'm glad that we have been able to consistently generate the results that show the efficacy of our business model and our ability to meet your expectations in the past, the present, and the future. We'd now like to open the call to questions. Operator?
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile a Q&A roster. Our first question comes from the line of Mona Nazir from Laurentian Bank. Your line is open.
Good morning, congrats on a fantastic quarter.
Thanks, Mona.
My first question just has to do with the Aerospace & Aviation segment, which comprised 89% of the segment mix. EBITDA was essentially flat year-over-year. I'm just wondering if you could talk about this performance, particularly in light of the rising fuel cost environment wherein a number of Canadian peers reported either a significant decline in profitability, missed estimates or reduced outlook. Thank you.
I appreciate that, Mona. It was a tough environment, particularly early in the quarter as fuel prices were moving quickly up the pilot shortage creates challenges. We've been able to maintain a full roster of pilots, but the cost of training them to make sure they meet your standards is high. We've been able to offset that by being able to pass on these price increases to our customers and by the tight management of our people. We've foreseen the challenge with pilots, have been working on strategies well in advance of the problem showing itself the way it has. That's enabled us to, while it was at a slight decline in our performance quarter-over-quarter, it wasn't particularly material. We see that continuing to improve in the fourth quarter as fuel prices have moderated.
We'll have a full quarter impact of the surcharges we've got in place, we've got a full roster of pilots in each of our companies.
We also, in the prior quarter, 2017, also had lease redeliveries. Comparatively, we had a fairly strong quarter in 2017.
That's very helpful. Secondly, you noted that the Force Multiplier program has gone into service following the final approvals from Transport Canada. I'm just wondering if you could describe the nature of the client work and the structure of the agreements that have been signed. I believe when you first purchased PAL, the EBITDA margin profile of the overall business was around 25%. Would that be an appropriate run rate to use for this program? Thanks.
I'm not sure that I want to get quite as granular on the rate when we're just putting it out for the first few times. We would anticipate that the Force Multiplier program will generate margins at the high end of our range simply because of the investment that's been made and the technical capability of the aircraft. In terms of our customers, they truly are around the globe, and it's everything from maritime surveillance to surveillance in areas of unrest. We have customers in various different governments. In terms of the revenue model, it tends to be sold on a per hour basis, and you're not phoning us up and saying, "Hey, I'd like a three-hour deal," because you'd have to reposition the aircraft somewhere else in the world.
The plane will go different places for weeks or months, but the revenue model is based on a per hour basis, fully staffed, where we have a crew ready to go, and we could literally be anywhere in the world in seven days.
Our next question comes from the line of Nav Malik from Industrial Alliance. Your line is open.
Yeah, thanks. Good morning. My first question, I just wanted to ask on Quest, it's obviously been very strong. Is there some seasonality in that business? I'm just trying to think what we should be expecting in Q4.
There's not so much seasonality. Q4 would typically tend to be a little bit softer simply because of the lost manufacturing days at Christmas time. It's not so much. Because we're in multiple cities, if you're only in cold weather markets, you might see a slight decline in the winter months. Because we're building in California and other places in the southern states, there really isn't a seasonality per se.
Okay. I just also want to ask, I know you did touch on it a bit, in terms of the working capital, I'm wondering if you can maybe quantify what we could expect to see there in terms of the reduction moving forward. I don't know, in terms of maybe what the impact could be on your leverage ratio? What that could decline? What that could look like maybe at the end of the year?
Well, it's hard to give you a precise answer because we're buying and selling things all the time, the things that are anomalies that are on the balance sheet that we know are going to change is we have a couple aircraft we bought for resale at Regional One, which we anticipate monetizing in the fourth quarter. We have a CAD 10 million receivable that was related to a transaction in the first quarter. We've got north of CAD 6 million of deposits at Quest for its expansion, which will become fixed assets. Additionally, we do a lot of work for the federal government with our First Nations customers, there was a material slowdown in payment at the government during the third quarter, which has subsequently been corrected.
You'll see a receivable decline there as well, together with the typical quarter-over-quarter decline, simply because Q4 is not as big as Q3 seasonally in that business. I think you'll see a significant portion, if not all of the increase in Q3 reverse in Q4.
Our next question comes from the line of Steve Hansen from Raymond James. Your line is open.
Yeah. Hey, guys. Mike, is there an ability to get the fuel surcharge to be a little bit more dynamic over time? I understand the sensitive nature to it, but I'm just trying to understand the dynamics going forward. These oil prices are, of course, dropping now quite quickly. I'm just trying to understand again, that mechanism is a little bit stale, I guess, is all I'm suggesting. I'm just wondering if you can get it more sensitive.
It's two things. You got to break our fuel surcharges into two types. There's ones that are contractual and there's ones that are discretionary when we implement them. When you look at the discretionary ones, I don't think you're going to see much of a change in how fast we implement them, simply because in most of the communities we service in the North, we have a dominant market position. You have to understand that the customers in those markets have their fuel delivered once a year over winter roads or by barge, and so their fuel price doesn't move up. When we go and fill our car, we go, shoot, the price of gas is up to CAD 1.35 a liter. Now it's CAD 1.45 a liter. We see it and have exposure to it, o ur customers don't.
One of the things we're very committed to is not doing things that would create the appearance of taking advantage of our market position. Our Presidents, Gary Bell at Calm Air, and Nick Vaudin, our folks at PAL, literally take the time to go visit our customers and talk in each First Nations community and tell them what is going to happen before we do it. That results in a few week delay sometimes in getting in place. Conversely, when you see what's going on now where the fuel prices are declining, we will take them off in the same way. On a net-net basis over time, we fully recoup the cost of that fuel. Just period to period, that may not be the case. The other ones I mentioned were contractual agreements.
Typically, the price for this quarter will be based on an average of the price in the previous month or quarter. Sometimes when you have rapid escalation towards the end of a period, it doesn't fully reflect it in the average price. You have to go through a second quarter to fully recoup that. Again, it works the same way when fuel prices fall. As much as it's a little bit frustrating that it's not perfectly matched, I'm very excited that we recoup the fuel prices and we're able to pass it on without a material effect on the overall volumes of our Aviation business.
Our next question comes from the line of Chris Murray from AltaCorp Capital. Your line is open.
Thanks. Good morning, folks. Just looking, you made the comment on your 2019 outlook that you were thinking that probably high single-digit growth, I just wanted to confirm, I mean, is that your thought around revenue, or is that around EBITDA? Just any sort of clarity you can give us would be appreciated. Just, Mike, you want to touch briefly on where you think the key drivers are going to be as we go into 2019?
I was talking with EBITDA in my number. It's very preliminary, Chris, high single- digits to low double -digits. I would think we're going to be in the second half of that. We're just working through exactly how IFRS 16 as it relates to the leases is going to flow through our statements, then we'll explain the impact of that as part of when we give you guidance. In terms of the main drivers, we're going to double production capacity at Quest. In the second half of the year, that's going to increase our ability to run more work through and really grow that business. You're going to see continued significant growth in Moncton Flight College as we implement some of our initiatives there and take advantage of the strong consumer demand for our product.
Force Multiplier is going to go into full use. We're very excited about that platform. Our team at PAL has worked a long time to get us to the start line now. The plane's ready to go, it'll be flying missions in this quarter. I think that's going to be a significant driver for growth. Together with profitability initiatives in the Aviation side and continued growth in the Manufacturing business as a whole, if you look at our MD&A, it's not just Quest that's driving it. Ben Machine, I think is up. Tammy, can you help me with this?
I sure can.
I think it's—
Ben Machine, they're up hugely. They've doubled their EBITDA. They're continuing to trend upwards.
We've seen 25% growth rates in some of those businesses. The demand on the Manufacturing side shows no sign of letting up. I think those would be the main drivers of that growth, Chris. Together with if we have an opportunistic ability to buy something along the way, that's our model, and that's what we'll do. The growth we've talked about is virtually all without any further investment. That's all stuff we've paid for already.
Our next question comes from the line of Cameron Doerksen from National Bank Financial. Your line is open.
Yeah, thanks. Good morning. Just a, I guess, follow-up question on the Quest business, obviously is doing extremely well. I know you don't want to talk about where the backlog stands right now. I'm just wondering if you can talk a bit about whether you're seeing any changes in demand for the product, particularly in the U.S. I mean, I guess there's been some concerns out there about housing slowdown, things like that. I'm just wondering if you're seeing that in any of the U.S. customers that Quest serves.
The short answer, Cameron, is no. The demand that we are seeing both in the markets we're in and perhaps moving with some of our customers as they go into other markets is dramatic. We walked away from tens of millions of dollars worth of work that we simply can't do it. We can't fit it into our production schedule. As the Texas plant ramps up, we're going to have extra capacity. One of the key things with that is that plant's over 50% bigger than our Canadian plant. As the opportunity grows, we can continually grow the production capacity in that plant as it's needed.
In terms of our order backlog, I'm not sure I want to get into publishing a number every quarter, but we told the market a little while ago that we had crossed the CAD 300 million threshold, and I can tell you it's grown again in this quarter. That's after producing CAD 25 million roughly of windows in the quarter. We've seen a material consistent growth in the order book. There is, from our view of the industry, absolutely no decline in demand. If anything, it's higher.
Our next question comes from the line of Derek Spronck from RBC. Your line is open.
Good morning. Thank you for taking my questions. Just on the Force Multiplier, can you talk about the total investment in that aircraft now that it's been approved? What sort of payback period are you expecting?
The second question of payback period is difficult till we've flown it and see if all the demand we anecdotally have turns into cash dollars in our bank account. I think you will see a return on capital that exceeds the average for PAL as a company and for EIC as a whole because of the technological nature of the aircraft. I'm reticent to give a precise price for the thing, but I can tell you that the aggregate cost is in the range of CAD 30 million.
Our next question comes from the line of Raveel Afzaal from Canaccord Genuity. Your line is open.
Good morning, guys.
Morning, Raveel.
Morning. Can you speak a little bit about what you think with respect to the earn-out with respect to Moncton Flight College? Do you expect to pay that? And how you think that's going to impact your valuation multiples with respect to this acquisition?
That's a good question. There's a material potential earn-out, help me here, Carmele, I think from CAD 35 million-CAD 55 million?
Correct. Yeah.
They can earn about CAD 20 million in addition to the purchase price. The original purchase price was based on the profitability in the period prior to our acquisition. To meet the CAD 20 million, the multiple on that is nowhere near as high as the original acquisition multiple. You will see for us to pay out CAD 20 million, you're going to need to see a material increase in the EBITDA generated by the business. We fully anticipate paying out most, if not all, of that earn-out. We have no reason to believe at this point that they're not going to hit their earn-out targets. It was based largely on orders in hand and pricing in hand. The team there have done a great job of executing so far. There's a full year to reach that, a little over a year to get some of that.
I can't speak with certainty at this point. Where we stand now, it's highly likely we will pay out the vast majority of that earn-out.
We've reflected that liability in the financial statements because we expect that.
Terrific. Can you speak a little bit about the torque in the Manufacturing business? We absolutely appreciate the torque that we have seen coming out of Quest. Now some of the other businesses in the division are also coming alive. When you look at the peak performance of these businesses historically, trough bottom performance historically, what's that delta? How much torque can we potentially see in this business?
I don't have it in those exact terms, but I can talk to you briefly about the individual businesses. WesTower declined dramatically last year. There was less towers being built and we went from essentially a CAD 9 million or CAD 10 million EBITDA business to one that didn't generate a material amount last year. We're well on our way back up that thing, not so much through tremendous consumer demand, but by broadening our product offerings. We see continued growth at WesTower. The demand in Alberta has strengthened, and we're probably halfway up the
Maybe two-thirds of the way.
Two-thirds of the way back to the norm for that business. FFI remains essentially sold out in our factory. We're actively looking for means of adding production to that business, whether it's building a factory or buying a factory. Butch and his team have done a great job of positioning us in the high end of the market, and we're excited about looking for capacity for them. Ben Machine, they're up something like 25% year-over-year in that business. It continues to grow. We've put in a couple million dollars of new equipment to add capacity. The defense market continues to grow. Am I missing anything here?
OMI.
OMI has essentially been running near capacity for two or three years. They're the ones probably least affected by the ramp-up because they were least affected by the downturn. They've had strong results for a long time.
Our next question comes from the line of David Tyerman from Cormark Securities. Your line is open.
Morning, David.
Good morning. I have a few questions. The first, the guidance, Mike, I just wanted to confirm the EBITDA guidance for 2019. Does that exclude the accounting changes?
Yes.
Okay. Thank you. Second question, on the fuel, did you say what the impact was on Q3?
Tammy is just going to look and see. I'm not sure if we've put it out quite that granularly.
Yeah, the Q3 i mpact on a net basis was just over CAD 1 million after we consider surcharges.
Okay. Thank you. Then on the pilot side, sort of the same question. Sounds like it's costing you. Do you have an idea of roughly what it would be costing?
The pilot turnover would cost us more than the fuel does. Training a pilot, Dave, help me with this, but we're in the range of CAD 50,000 a pilot to get on type training.
That's fairly consistent. Of course, it varies with size of airplanes and that, overall, that'd be a good average [to give there, Dave].
And so—
Go ahead, Dave.
No, that's fine. Once again, as the flow pilots through. We do see some increases from smaller airlines to larger airlines consistent with what you see in the industry, then the charges that are associated with that.
That's why we're so focused on the initiative to build our own pilot training capability with Moncton. It's such a unique opportunity because it's accretive and materially accretive as an acquisition on a standalone basis. We're now working on a program. It's not going to be as simple as just they'll train pilots for us. We want to retain pilots longer, and so we're working on a program which will enable us to have people come into the company, train at Moncton, get their pilot's license, move into a training role at Moncton, help us create more pilots, and then they'll be guaranteed roles in our existing airlines on larger aircraft types over time. We'll be able to preserve new pilots in our system longer. Fair description?
Absolutely fair description, Mike. It's not just about, as you call, growing a new pilot. It's about retaining the pilot, developing that pilot through time so you don't have that turnover in training costs where you're constantly moving the pilots. The retention is as much important as the recruitment, and we have a lot to offer at EIC because of the diversity in our number of airlines versus just one airline, which you'll see in other companies.
Our next question comes from the line of Tim James from TD Securities. Your line is open.
Thank you. Good morning.
Hey, Tim .
I just want to stay on that topic of the Moncton Flight College. I'm just wondering if you can provide an indication of the timing of when it will provide some relief to your pilot sourcing challenges. I realize that's probably a gradual process, but I'm just wondering at what point it will begin to have a meaningful impact. Secondly, we've talked a lot about the benefits and the need for pilots within Exchange. Can you just provide an example of exactly how that impacts financial results, whether it's an incremental revenue opportunity or how the cost savings are reflected in financial results?
Everybody, we're back. Sorry, we had a technical issue. Our phone went dead. Could someone say something, so I know we're back with you?
This is the operator. You're back live. We can hear you fine. Our next question will come from the line of Konark Gupta from Macquarie. Your line is open.
Just before we go to Konark, we haven't answered Tim's questions yet about the training. I'm going to hand it to Dave and let him explain how we'll see probably starting next year with some of the benefits of our program. I'll let maybe Dave handle that one.
Thanks, Mike. Absolutely. The question started with looking at the timeframe of when we can see the benefits of pilots coming from Moncton. Of course, we saw some of the benefits right away because just the familiarity with EIC and their involvement, we start seeing pilots right away. One of the tricks with pilot training is to make sure you have enough instructors to turn out a consistent and an increased flow of pilots. We didn't want to, as we call it in the industry, young. We wanted to make sure that flow of people increased the instructor strength. With that in mind, you got a pilot takes a year to train up as commercial pilots. They're already in the queue through traditional sources. Then they'll start doing instructor training.
That takes a couple of months. The trick, I shouldn't say the trick, what you want is the experience, the experienced pilots. We want to put these pilots at Moncton Flight College for up to a year of training. That'll build up their time. Then they'll come in online with our smaller operators and then the larger operators as experienced pilots. All that to say, the flow is already there in a minor way. What we want to do is be able to increase that over time to meet our recruitment retention needs. We're looking at probably eight, a year, 18 months, 24 months, then consistently and continuously after that.
You got to fill the channel. So it takes a while for the pilots to flow through. We have the beginnings of it. It's a stream which will turn into a river.
Our next question comes from the line of Konark Gupta from WesTower or from Macquarie, sorry. Your line is open.
Did we hire you, Konark?
Yes, Mike. Is the job open or no, I would love to. I had a question, Mike, on the cash flows here because obviously that's a big focus point. Wanted to understand your CapEx, and I'm talking about like total CapEx growth and maintenance as well as working capital investment plans as we get into 2019, and how should we think about the Regional One business from cash flow perspective? Not from EBITDA, but just from the cash flow perspective. What's your thoughts on there?
Well, let's take the components you talked about. We haven't finished our budget for maintenance CapEx, but we're well on our way, and we anticipate something that looks very similar to this year. We may see some improvements. We'll give details of that going forward. It won't be materially different than what we've experienced this year. In terms of growth CapEx, you've seen a material decline in the level of investment in Regional One. No one should take that as a lack of interest in putting money there. If the opportunities and the right opportunities are there, we'll move. That's a matter of being opportunistic. At this time, in terms of big fleet purchases and the stuff that really drive that growth CapEx number, there's nothing anticipated.
Not to say it can't happen or won't happen, but at this point, we would anticipate growth CapEx in the line of what's gone on in this year. From an inventory point of view, it's really an anomaly when things move quarter to quarter. We bought two big expensive aircraft knowing where they were going when we bought them. Delays in the pre-delivery inspections and stuff meant that it stayed on our books over a quarter end. Everyone goes, "Oh, there's a big ramp-up in working capital." On one hand, the absolute numbers say that, but in the real world, that's just in and outs over time. The material level of working capital isn't going to change in that business. We also have a CAD 10 million receivable on an aircraft, that's going to come in.
Short-term anomalies bounce it around, fundamentally, there isn't any investment in working capital required to maintain the profitability levels of that business. Again, should an opportunity to buy something and part it out like we did with the ERJ in the second quarter come along where we invested CAD 15 million? Sure, we'll take it again. Again, those bounce around, but you shouldn't see a material uptick, and that's why we're trying to give guidance that in Q4 we expect that working capital to decline as well. We also have seasonal issues in our working capital. Q2 and Q3 are materially higher quarters. Q4 is kind of an average quarter, and Q1 is lighter. You're always going to see receivables build in Q3, especially when you're dealing with governments. Governments always pay, but they always pay late.
We saw that ramp up and we've already seen the other side of that curve early in Q4 as we started to collect that. When you're looking at this, I think depending on how much growth you put into your model, that may require some growth investment, a Regional One. If you're modeling modest growth, that comes from the assets we already own.
Our next question comes from the line of Mona Nazir from Laurentian Bank. Your line is open.
Hi, just had a quick follow-up in regard to the Moncton Flight College. I'm just wondering if you could provide revenue and EBITDA for the quarter and year-to-date, which I didn't see going through the quarterly package. Just when we're looking at the numbers that were paid, you paid CAD 35 million based on CAD 7.6 million in EBITDA. If the deal is to be increasingly accretive with the CAD 20 million additional payment, would it be safe to assume that you could see a 60% growth in that EBITDA run rate to around over CAD 12 million?
I'm not sure I want to give you that level of granularity, but all of your assumptions are correct. We paid CAD 35 million off of the CAD 7.6 million. Our current run rate is higher than that, and next year we expect a material increase to fund the earn-out. When you're talking about the original multiple of close to 5x, the multiple on the earn-out is a fraction of that.
Our next question comes from the line of Derek Spronck from RBC. Your line is open.
Okay, thanks. Just a quick follow-up question here. How should we be thinking about maintenance CapEx in the fourth quarter?
Maintenance CapEx in the fourth quarter is probably in line or slightly higher than last year. When we gave guidance at the start of the year, we're bang on that guidance for the full year. I'm always reticent to give quarter to quarter too detailed a thing on CapEx, simply because an overhaul of an engine can slip from one quarter to another, and it can make a CAD 1 million or CAD 2 million difference if we do it a quarter earlier or a quarter later. Big picture, it's in line with the preceding years, maybe slightly higher.
Our next question comes from the line of Mark Neville from Scotiabank. Your line is open.
Hey, good morning. Apologize if you've already addressed all this, I just want to make sure that I'm understanding the guidance for next year. High single-digit EBITDA growth, that's without incremental growth capital or incremental levels of working capital investment into the business?
Correct. That's funded by what we have. As an example, it's what's invested plus what we've told you we're investing. The completion of the plant in Texas, you'll see the cost of that show up in Q4. You've got the Force Multiplier, which we've already completed, it's those projects, but it's not new big growth CapEx, no. The other thing I'd like to point out, again, the guidance for next year of around 10% is preliminary. We'll tighten it down once we finish those things. There's also two other things that could drive that materially up from there. There's two outstanding RFPs, one with the Department of Fisheries, that Provincial is awaiting word on, then the Manitoba provincial government has put out an RFP for all of the medevac work.
Were we to land either of those would both have a significant impact. To be clear, neither of those are included in the numbers I quoted you.
Our next question comes from the line of Steve Hansen from Raymond James. Your line is open.
Yeah, Mike, can you just remind us where we are at with the SAR contract and your efforts there to staff up ahead of the future commitments?
Yeah. We are still at the baby stages of that contract. The first planes get delivered next year. We will start ramping up our staffing on the West Coast for that during 2019. As the planes come over the next three years, you will see us staffing up our other facilities. You will not really see a mature level of revenue till 2021 in that. You will see a constant ramp up through there. The only investment for that project will be likely something in 2020 in terms of a new hangar in Winnipeg for the overhauls. We have the site and we are just working on the final design, but that is really the only investment required for that because most of our work is people in that project.
Our next question comes from the line of Chris Murray from AltaCorp Capital. Your line is open.
Thanks. Hey, Mike, just wondering about any thoughts you may have around Bombardier's sale of the Q400, including the Q1 to the Q3 over to Viking. I guess a couple pieces of this. One, is that program something that you had looked at in terms of acquiring? I know you like the Q300 for some of the different applications. Any thoughts on if that creates a new sales opportunity for you or what that does with Regional One in terms of supporting the Q and the Dash 8s?
We clearly are a significant player with the Dash 8 environment, particularly from our operating airlines. The fact that there's someone going to take it up and continue the run with it is positive from our point of view. We're committed to continuing to support customers with Regional One from the parts point of view, and the ongoing production for the Q400 is good news for us. We never had serious discussions with Bombardier on that. I don't think we anticipated a sale at this point. We're kind of just figuring out exactly what we're going to do with it. Our discussions, particularly with our Regional One guys, are positive. We think this is going to create opportunities for us. We think those are great airplanes, and they're going to keep flying for a long time.
Airplanes that fly for a long time need parts, and that's good for us. We're working on our strategies in a newer environment. We're looking at strategies to the extent that Bombardier would ever monetize its CRJ platform, because we're very committed to that. At this point, it's moderately positive, but we'll have to see how it shakes out over time, exactly how that changes our strategy.
Our next question comes from the line of Tim James from TD Securities. Your line is open.
Thanks. Good morning. Actually, you addressed most of my questions here, but just one quick one. Mike, I am just wondering with these redelivery settlements that occur in Regional One, is it possible to give us an indication on what exactly is that drives that settlement? Is there some kind of a rule of thumb we can use for the value of those relative to the value of the associated aircraft?
If there is a rule of thumb, I do not have it. What it is, Tim, is when we have got planes that are on our longer-term leases, they have redelivery conditions. The plane has to be returned with certain maintenance completed on the plane. That could be a fresh C check. It could be a hot section overhaul of the engines. It depends on the individual plane, individual lease, what those conditions are. Depending on what we intend to do with the aircraft, if we are going to part it out, we do not intend to re-lease that particular aircraft. We may accept a monetary payment in lieu of the return conditions. It could be anything, but typically they are material amounts of money. They are north of CAD 1 million typically, because they are typically on planes that are out longer.
When we put a plane out with a one-year lease, two-year lease, they typically do not have the same kind of lease return conditions on something that if we bought a plane that is on lease or we put it out for a material lease period where the lessee has to provide the plane back in a certain condition. Inherently, that is lumpy. We do not always get those. 100% of the lease return fee returns as income because we are going to park the aircraft out. Were we to put it to the aircraft, all we would be doing is reducing the value of the inventory. It is lumpy. Last year, we had a disproportionate number of them.
That is why we were so excited about the performance of our lease portfolio in the quarter in that Regional One was in line with the preceding year, we did not have any of those one-time bonuses in our statement this year. It was just pure ongoing sort of higher quality lease revenue, certainly more repeating lease revenue.
Our final question today comes from the line of David Tyerman from Cormark Securities. Your line is open.
Yes, just one clarification. The fisheries contract, I think you're the incumbent on that.
Yes.
If you lost it, would it have a material negative impact on guidance? If you win it—
It would have an impact. It wouldn't be a 2019 issue if we were to lose it because the lead time on implementing it is long. The contract has asked for bigger aircraft and investment. The new contract is a significantly bigger value than the existing contract. It would have an impact on us, but not a material impact where we did not win it. We've had that contract for 20-something years, we're optimistic. We're realistic. It's an RFP with the government, there's nothing guaranteed. We've done a good job on that contract, and we're cautiously optimistic we'll be successful on the RFP.
Okay. It sounds like if you do win it, that the scope increase is large enough that it would be the guidance sum possibly.
Yes. Again, David, it wouldn't impact next year. It would impact the following year because we have to put the right assets in place. If we were to do it, we would clarify for you what that investment is like because we'd be buying assets to meet the contract. We would clarify should we be successful. I'm not going to do that now and give my competitors advantage of what I think it costs. Should we be successful, we will give you some guidance on what our investment will be and what we think the growth that drives is.
We have no further questions. I'll turn the call back to Mr. Pyle for closing remarks.
Thank you. If there's no further questions, I want to thank everyone for participating in today's call. I again want to reiterate our appreciation and support from our stakeholders. We've gone through some challenging times from a volatility point of view. Fortunately, it's happened at a time when our results have never been better. Quite frankly, our outlook is as strong as it's ever been. I look forward to meeting with you again when we announce our Q4 results. Thanks and have a great day.
This concludes today's conference call. You may now disconnect.