Earnings Call: Q3 2018

Nov 9, 2018

Earnings release

Good morning, everyone. Welcome to Exchange Income Corporation's Conference Call to discuss Financial Results for the 3 9 months period ended September 30, 2018. The corporation's results, including MD and A and financial statements, were issued on November 8th 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. Changes 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 Carmel Peter, EIC's President, Tammy Schoch, 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 had new highs in these metrics on an absolute basis is important. But not unexpected given the investments that have been made in the last 2 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 that Year to date metrics are also of expenditures per share were also 9 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 $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 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% 75% from 73% 86%, respectively. As pleased as we are with our 3rd quarter and year to date results, What is more impressive is that our recent performance is merely in line with the strong growth We converted from an income trust into a corporation in 2010. And as such, our financial metrics are directly comparable over that period, and I will focus my next comments on that period specifically. In the 9 months of 2018, revenue EBITDA and adjusted net earnings per share grew by 19%, 12% 16%, respectively. For comparison, for the same 9 month period over the past 8 years since 2010, we have grown EBITDA at EBITDA by at by 22% 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 8 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 industry's capabilities and geographies creates resilience and durability and has enabled us to mass 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 And Aviation segment and the Manufacturing segment. And while the Manufacturing segment as a whole achieved an EBITDA increase of $8,500,000 for the quarter, Quest accounted for $6,100,000 of that increase and continued to exceed our internal expectations. Quest has contributed EBITDA of approximately $21,000,000 for the year to fully trigger the payout of the $15,000,000 earn out that was included in the purchase agreement. The strong EBITDA growth manufacturing segment more than offset a 2 percent or $1,300,000 decline in the Aerospace segment. While Regional One's EBITDA was up for the quarter, legacy airlines and provincial were impacted by hiring higher operated 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 lagging time and general fuel surcharges were 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 left 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 over time 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 violent 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 As usual, I will focus my comments on the results for the 3 month period to quarter. On a consolidated basis, we generated revenue of $308,200,000, which is up $54,800,000 or 22 percent compared to the third quarter of last year. Revenue in the Aerospace And Aviation segment increased by $22,600,000 with the Aerospace And Aviation segment. Revenue from legacy airlines and provincial was up $13,200,000 or 9%. The addition of Munson Flight College was the largest contributor to Provincial's revenue increase during the quarter. Legacy Airlines benefited from the contract, which commenced in the fourth quarter of 2017, as well as higher passenger volumes in Ontario during the year. Revenue at Regional 1 was up $9,300,000 or 17 percent for the quarter. Sales and service revenue within Regional 1 was up 28% with higher amounts across 16%, part sales comprised the largest proportion of revenues in the sales and service category, for representing approximately 3 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 in this year. Excluding the redelivery settlement, lease revenue increased by about 11%. Regional One 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 $2,100,000 increase in Canadian dollar revenues overall for Regional 1. The Manufacturing segment's revenue was up $32,200,000 or 65 percent 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 West Tower Bend machine and stainless. West Tower continues to benefit from operational changes made in the last 18 months and the expansion of its service offerings, Bend machines again benefited from high levels of defense spending worldwide and see and it's seeing returns on prior growth CapEx made to expand its production capacity. Baneless is also starting to experience returns on the growth CapEx made in previous periods to increase its plant capacity. Consolidated EBITDA was $79,200,000, which is up $7,200,000 or 10 percent from Q3 of 2017. The growth was driven by our Manufacturing segment, which had EBITDA of $14,100,000 for the quarter, including the addition of $6,100,000 from Quest as as Mike mentioned earlier. But 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 $24,200,000 or $0.77 a share compared to $23,900,000 or 78 percent a share in Q3 2017. Our higher EBIT, 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 share 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 $4,500,000 over the prior period. There was also a $1,000,000 of non cash interest accretion recorded in relation to the earnout liabilities of both Quest and Moncton Flight College. Depreciation increased by $1,600,000 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 $2,700,000 and the effective tax rate has decreased to 19.8% from 26.7%. The proportion of pretax earnings has shifted to lower tax rate jurisdictions in comparison to Q3 of 2017. Additionally, the tax rate applicable to our earnings in the On an adjusted basis, net earnings increased 15 percent to $29,600,000 for the quarter, resulting in an adjusted net earnings per share of $0.94, which is up 80 from $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. Again, the improvement reflects the increase in adjusted earnings, which was in excess of our recent dividends. Free cash flow for $2.04, which is up from $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 from 2.62 percent from 73. Looking at our balance sheet, We ended the quarter with a cash position of $25,200,000 and working capital of $309,700,000, which represents a current ratio of 2.32 to 1. And that compares to cash of $272,300,000 and working capital of $240,000,000 and a current ratio of 1.9:one at the end of twenty 17. Our cash balance at December 31, 2017, included $56,800,000 to fund the reduction of our, convertible debentures, which were redeemed, in, in January 2018. The entire earnout request and a portion of the earnout for Moncton Flight College will be paid within a year and has now been, included in the current section of our balance sheet. Our working capital has increased through the 1st 9 months of 2018, and those increases are largely attributable to investments that we've made at Regional 1 and, to increased receivables from higher business volumes in our airlines and in the Manufacturing segment, particularly at Quest. We expect our working capital positions 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 ones working capital to decline the investments in working capital at Regional 1 relates to the purchases of both, ERJ-one hundred and forty five and ERJ170s, which are included in inventory and both are expected to generate sales volumes and positive impact 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, 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 $320,000,000 of available capacity, within our credit facility. So 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 expect to both EBITDA and adjusted net earnings to grow between 10% 20% this year. We also indicated there will be a significant decline in growth capital expenditures and that maintenance capital expenditures would increase slightly. Our 9 month numbers demonstrate we are well on our way to meeting this guidance. We expect continued growth in the 4th quarter. We are still finalizing the impact of 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 write report Q4. At this point, we expect growth in absent these changes in the high single digits to low double digits and 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 Newquest facility in Texas in 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've seen very strong demand for the foreseeable future. And then there are synergies in terms of our own airlines where 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 has following a complex process from the highly modified state and technical capabilities of the airports as the aircraft I'm sorry, has received the final approval from Transport Canada. It went into service and will contribute to results in the 4th 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've seen thus far, and we look forward to updating you on the progress as the plane serves customers around the globe. We are 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 have remained true to it for 15 years. As an investor, you'll know that we are committed to strong balance sheet, accretive investment in both acquisitions and organic growth. We have demonstrated this model generates increasing per share profitability, which has turned into, in turn facilitated our 5% growth in dividend rate since our inception. This is a track record, which few, if any, can match. We are excited about the 4th quarter. Investments in previous periods will drive 4th quarter results. As Tammy mentioned in her section, a temporary bump in investment in Regional 1 inventory will drive 4th 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 ingest the accretive acquisitions of Quest at Moncton Flight College and in short, We look forward to speaking with you again in February with the full results, full year results. Before I move on 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've been able to systemically 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 And our first question comes from the line of Mona Nazir from Laurentian Bank. Your line is open. So my first question just has to do with the Aerospace And Aviation segment, which comprised 89% of the segment mix. EBITDA was essentially flat year over year. And 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 and 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. And 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 of the 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. And we see that continuing to improve in the fourth quarter as fuel prices have moderated while the full year full quarter impact of the surcharges we've got in place and we've got a full roster of pilots in each of our companies. We also, in the prior quarter, in 20 17, also had lease redeliveries. So comparatively, we had a fairly strong quarter in 2017. Okay, that's very helpful. And then, just secondly, you noted that the Force Multiplier program has gone into service following the final from Transportation 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, on the rate when we're just when they get out for the first few times. But there, 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 in the level of the technical capability of the aircraft In terms of our customers, they truly are around the globe as it's everything from maritime surveillance to surveillance and areas of unrest. There's, 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 3 hour deal because you got through reposition the aircraft some in the or somewhere else in the world. So the plane will go different places for weeks or months, but the revenue model is based on per hour basis, fully staffed where we have a crew ready to go and we could literally be anywhere in the world in 7 days. Our next question comes Yes, 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? Like what I'm just trying to think what she would be a expect in Q4? There's not so much seasonality. The Q4 typically tend to be a little bit softer simply because of the lost battering days at Christmas time. But it's not so much a because we're in multiple cities, if you're only in cold weather markets, you might see a slight decline in the winter months. But because we're building in California and other places in the southern states, there really isn't a, a seasonality per se. Okay. And then I just also want to ask, I know you did touch on it a bit, but in terms of the working capital, I'm wondering if 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 amount because we're buying and selling things all the time, but the things that are anomalies that are on the balance sheet that we know are going to change is we have a couple of aircraft we bought for resale at Regional 1 we anticipate monetizing in the fourth quarter. We have a $10,000,000 receivable that was related to a transaction in the first quarter. We've got north of $6,000,000 of deposits at Quest for its expansion, which will become fixed assets And then additionally, we do a lot of work for the federal government as of with our First Nations customers. And there was a material slowdown in payment at the government during the third quarter, which has subsequently been corrected So 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 line is open. 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. If oil prices are of course dropping out quite quickly, So I'm just trying to understand, again, that mechanism is a little bit stale, I guess, is what I'm suggesting. I was wondering if you could get a more sensitive it's 2 things. You got to break our fuel surcharges into 2 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. And you have to understand that the customers in those markets get 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 about 35 a liter. Now it's about 45 a liter. We see it and have exposure to it. Our customers don't. And 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. And so our presidents, Gary Bell, at, Vicamere and Nick Vaden, our folks at Powell, literally take the time to go visit our customers and talk to the, in each First Nations community and tell them what, is going to happen. Before we do it. And so that results in a few week, delay sometimes in getting in place. But conversely, when you see what's going on now, where the fuel prices are declining, we will take them off in the same way. So 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. And then the other ones I mentioned were, contractual agreements. And typically, the price for this quarter will be based on an average of the price in the previous quarter, month or quarter. And sometimes when you have rapid escalation towards the end of a period, it doesn't, isn't fully reflected in the average price. So you have to go through a second quarter to fully recoup that. But again, it works the same way when fuel prices fall. So, 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, 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. And I just wanted to confirm. I mean, is that your thought around revenue or is that around EBITDA or just any sort of clarity you can give it give us would be appreciated. And just Mike, you just 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. And 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 just, we're just working through exactly how IFRS 16 as it relates to the leases is going to go through our statements and then we'll explain the impact of that as part of the, what we give you guidance. But in terms of the main drivers, we're going to double production capacity at Quest. And so 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, London 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 and we're very excited about that platform. Team, pal has worked a long time to get us to the start line now. The plane's ready to go and it'll be flying missions in this quarter. I think that's going to be a significant driver for growth. And together with, profitability initiatives in the aviation side and continued growth in the manufacturing business as a whole. If you look at our or MD and A. It's not just Quest that's driving a bend machine. I think is up. Tammy, can you help me with this? I think it's Yeah. Bend machines, they're up, like, hugely within, they've doubled their either. They're continuing to trend upward. So very margin percentage. 25% growth rates in some of those businesses. And the, the demand on the manufacturing side shows no sign of wetting up. So I think those would be the main drivers of that growth, Chris. And together with, if we have an opportunity to buy something along the way, that's our model and that's what we'll do. But 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 Yes, thanks. Good morning. Just, I guess, a 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 DUKA in the U. S. I mean, 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, Ken, 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 1,000,000 of dollars worth of work that we simply can't do it. We can't fit it into our production schedule. And 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. So as the opportunity grows, we can continually roll 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, a number every quarter, but we told the market a little while ago that we crossed $300,000,000 threshold. And I can tell you, it's grown again in this quarter. And, That's after producing $25,000,000 roughly, of windows in the quarter. We've seen a material consistent growth of the order book. So there is, from our view of the industry, absolutely no decline in demand if anything gets higher. Our next question comes from 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 and what sort of payback period are you expecting? The second flush of payback period is difficult till we've flown it and CF. 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 pallets and company and for EIC as a whole because of the technological nature of the aircraft. I'm reticent to forgive a precise price for the thing that I could tell you that the aggregate cost is in the range of $30,000,000. Our next question comes from the line of raveel Afl from Canaccord Genuity. Your line is open. Good morning, guys. Good morning, Ravi. Good morning. Can you speak a little bit about what you think with respect to the earnout with respect to Moncton Flight School? Do you expect to pay that how you think that's going to impact your valuation multiples with respect to this acquisition? That's a good question. The, there's a material or potential earnout, help me hear Carmel. I think from 35 to $55. So they can earn about $20,000,000 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 20, the multiple on that is nowhere near as high. As the original acquisition multiple. And so you will see for us to pay out 20, 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 earnout. We have no reason to believe at this point, that, they're not going to hit their earnout targets. It was based largely on orders in hand and pricing in hand. And the team there have done a great job of executing so far. So if there's a full year to reach that, a little over a year to get some of that. So I can't speak with certainty at this point from where we stand now. It's highly likely will pay out the vast majority of that earn out. Yes, we've reflected that liability in the financial statements because we expect that. Terrific. And 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. And now some of the other businesses in the division are also coming alive. So when you look at the peak performance of these businesses historically, trough, bottom performance historically, what's the delta? How much torque can we potentially see in this business? It's hard, I don't have it in those exact terms. So I can talk to you briefly about the individual businesses. West Tower declined dramatically last year. There was less towers being built and, and, we went from essentially a $9,000,000 or $10,000,000 EBITDA business to one that didn't generate a material amount last year. And we're well on our way back up that thing, not so much through tremendous consumer demand, but by broadening our product offerings. And so we see continued growth, at West Tower. The demand in Alberta has strengthened and we've seen where probably halfway up the 2 thirds of the way back to the norm for that business. SFI remains essentially sold out in our factory. We have capacity in our field work, and we're actively looking for means of having production 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, bed machine, they're up in, but something like 25 percent, year over year in that business and it continues to grow. We've put in a few couple of $1,000,000 of new equipment, to add capacity and, the defense market continues to grow. I'm missing anything here. And OMI has essentially been running new capacity for 2 or 3 years. And 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 Tireman from Cormark Securities. Your line is open. Good morning, David. Good morning. I have a few questions. The first, the guidance, Mike, I just want to confirm the EBITDA guidance for 2019. Does that exclude the accounting changes? Yes. 2nd question, on the fuel Did you say what the impact was on Q3? Ken, I just got to look and see if I'm not sure if we've put it out quite that granularly, but It was, yes, in the Q3 impact, on a net basis was just over $1,000,000 after we consider charges. Okay. And 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 that Dave needs to help you with this, but we're in the range of $50,000 of pilots to get on type train. That's fairly consistent. Of course, it varies with size of airplanes and that would overall, that would be a good average to get there. And so, Go ahead, Ed. No. That's fine. And once again, it's the flow of violence from the industry. So we do see some increases. Up from smaller airlines to larger airlines, consistent with what you see in the industry than the charges that are associated with the And 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. And 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 that month and get their, pilots license, move into a training role at Moncton help us create more pilots. And then there'll be guaranteed, roles in our existing airlines on larger aircraft types over time. So we'll be able to preserve new pilots in our system longer. Fair disruption. Absolutely fair description, Mike. It's not just about, as you recall, growing a new pilot 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 our 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 another company Our next question comes from the line of Tim James from TD Securities. Your line is open. Thank you. Good morning. 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 a gradual process. But I'm just wondering at what point it will begin to have a meaningful impact. And then secondly, we've talked a lot about the benefit and the need for, pilots within exchange. Can you just provide an example of exactly how that impacts financial results, whether it's sort of 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. But I'll let maybe Dave handle that one. With, you know, looking at the time frame 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 are involved, but we start seeing pilot training away. One of the tricks with, pilot training is to make sure we have enough structures, to turn out a consistent and an increased flow of pilots. So we did want to, as we call it, the industry, the young, we wanted to make sure that flow of people increase the instructor strength. With that in mind, you got a pilot takes a year to trade up as commercial pilots. They're already in the queue, through traditional sources. And then, they'll start doing instructor training. That takes a couple of months, but the trick enough attention to the trick. What you want is the experience, the experienced pilot. So we want to put these pilots above the play college for up to a year, of training, that'll build up their time, and then it'll come in, online with our, smaller operators and then into larger operators as experienced pilots. All that to say the flow is already there in a minor way, but what we want to do is be able to increase that over time to meet our, recruitment retention needs. And we're looking at probably a year, 80 months, 24 months, and then consistently and continuously after that. You got to fill in the channel. And so it takes a while for the pilot flow through. We have the beginnings of it, but it's a stream which will turn into our river. And our next question comes from the line of Konark Gupta from West Tower or from Macquarie. Sorry, your line is open. Did we hire you, quote, ARC? Yes, Micah. Is the job open? No, I would love to. So, I had a question, Mike, on the cash flows here, because obviously, that's a big focus point I wanted to understand, your CapEx and I'm talking about like total CapEx growth and maintenance as well as working capital investment plan as we get into 2019? And how should we think about the Regional 1 business from cash flow perspective, not from EBITDA, but just from the cash flow active. So what's your thoughts on there? Okay. Well, let's let's take the 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. But, 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, in Regional 1. No one should take that as, a lack of interest in putting money there. If the opportunities or the right opportunities are there, we'll move. But that's a matter of being opportunistic. But 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 going on in this year. And then from an inventory point of view, it's really an anomaly when things move quarter to quarter, we bought 2 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 at quarter end. And 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 out over time. The material level of working capital isn't going to change in that business. We also have a $10,000,000 receivable on an aircraft. So that's going to come in short term anomalies bounce it around, but 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 CRJ, the ERJs, I'm sorry, in the second quarter come around where we invested $15,000,000. Sure. We'll take it again. But 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. Q1 is later. So 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. And so, 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. So, when you're looking at this, I think depending on how much growth you put into your model, that may require some growth investment at Regional 1. But if you're, modeling modest growth, that comes from the assets we already own. And our next question comes from the line of Mona Nazir from Laurentian Bank. 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. And just when we're looking at the numbers that were paid. So you paid $35,000,000 based on $7,600,000 in EBITDA. And if the deal is to be increasingly accretive with the 20,000,000 additional payment, then it's would it be safe to assume that you could see a 60% growth in that EBITDA run rate to around over 12,000,000? I'm not sure I want to give you that level of granularity, but all of your assumptions are correct. We bought we paid $35,000,000 off of the $7,600,000. Our current run rate is higher than that. And next year, we expect a material increase to fund the earnout. When you're talking about the original, multiple close to 5. The multiple on the earnout 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 4th quarter? Maintenance CapEx in the 4th 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've always readison to give quarter to quarter, too detailed, I think, on CapEx simply because and overall as an engine can slip from 1 quarter to another and it can make a $1,000,000 or $2,000,000 difference. If we do a quarter earlier or a quarter later, But big picture, 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. Apologize if you've, if you've already addressed all this, but, 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 cap investment to the business. Correct. That's funded by what we have. So as an example, well, it's what's invested plus what we've told you. We're investing. So the completion of the plan in Texas. That's going to be, you'll see the cost of that show up in Q4. You've got the force multiplier, which we've already completed. And, so it's those projects, but it's not new, big growth CapEx. No. The other thing I'd like to point out, and again, the guidance for next year of around 10% is preliminary. We'll tighten it down once we finish those things. But there's also 2 other things that could drive that materially up from there. There's 2 outstanding RFPs, one with the Department of Finance, the Partnership fisheries, I'm sorry, that, provincial is a waiting word on. And then the Manitoba provincial government has put out an RFP for all of the MetaVAC work. And so, were we the land either of those? Those would have both have a significant impact and 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. Yeah, Mike, just can you just remind us where we're at with the SARS contract and your efforts there to staff up ahead of sort of the future commitments? Yes, the, the, we're still at the, at the baby stages of that contract. The first planes get delivered next year. And so we'll start ramping up our staffing on the West Coast for that during 2019. And then as the planes come over the next 3 years, you'll see us staffing up our other facilities. And, but you won't really see a mature level of revenue till 2021 in that. You'll see a constant ramp up through there. But, and then 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, we, we have the site and, we're just working on the final design. That's 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. Hey, Mike. Just wondering about any thoughts you may have around Bombard Gates sale of the Q400 including the Q1 into the Q3. Over to Viking. I guess, a couple of pieces of this. 1, is that something, is that program something that you had looked at? Terms of acquiring, I know you like the Q300 for some of the different applications. And can you any thoughts on if that creates a new sales opportunity for you or what that does with Regional 1 in terms of supporting the queue and the dash 8s? We clearly, our significant player with the dash 8 environment particularly from our operating airlines. And so 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 1 from the part 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 I don't think we anticipated a sale at this point. And so we're kind of just figuring out exactly what we're going to do with it. But, our discussions, particularly with our Regional 1 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. And so airplanes that fly for a long time need parks, and that's good for us. So We're working on our strategies in a newer environment. We're looking at strategies, to the extent that Bombardier would ever monetize a CRJ platform and 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'm just wondering with these redelivery settlements that occur in Regional 1, is it possible to give us an indication on what what exactly is that drives that settlement? And 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 don't have it. What it is, Tim, is when we've got planes that are on our longer term leases, they have redelivery condition. So the plane has to be returned with certain, maintenance completed on the plane And so that could be a fresh C check. It could be a hot engine, a hot section, overall, of the engines depends on the individual, planning the individual lease, what those conditions are. Depending on what we intend to do with the aircraft or we're going to part it out, we don't, intend to, release that particular aircraft. We may accept a monetary payment in lieu of the return conditions. And so it could be anything, but typically, they're material amounts of money. They're north of a $1,000,000 typically. Because they're typically on planes that are out longer, but we put a plane out with a 1 year lease, 2 year lease. They typically don't have the same kind of lease return conditions. It's something that if we bought a plane that's on lease or we put it out for a material lease period, where the lessee has to provide the plate back in a certain condition. And inherently, that's lumpy. We don't always get those at 100% of the lease turn, see returns as, as income because we're going to park the aircraft out. And so, where are we to put it to the aircraft? All we would be doing is reduce the value of the inventory. So, it's lumpy. And last year, we had a disproportionate number of them. That's why we were so excited about the performance of our lease portfolio in the quarter in that original one was in line with the preceding year, but we didn't 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 repeatedly. And our final question today comes from the line of David Tirement from Cormark Securities. Your line is open. Yes. Just one clarification. The fisheries contract, I think you're the incumbent on that. So if you lost it, would it have a material negative impact on guidance? 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 is asked for bigger aircraft and, and investment. So the new contract is a bigger, significantly bigger value than the existing contract. It would have an impact on us, but not a material impact, where we had not win it. We've had that contract for, 20 something years. And so, we're optimistic. We're realistic. It's an RFP with the government, so there's nothing guaranteed. But we've done a good job on that contract and we're cautiously optimistic we'll be successful at the RFP. Okay. And it sounds like if you if you do win it, that it will, that the scope increase is large enough that it would the EBITDA guidance possibly? Yes. But again, David, that's likely wouldn't impact next year. It would impact the following year because we have put the right assets in place. And 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 So, 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. But we 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 questions, I want to thank everyone for participating in today's call. I, again, want to reiterate our, appreciation of the support 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. And quite frankly, our outlook is as strong as it's ever been. So, I look forward to meeting This concludes today's conference call.