Exchange Income Corporation (TSX:EIF)

Earnings Call: Q2 2018

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Aug 9, 2018

Morning, ladies and gentlemen. Welcome to Exchange Income Corporation's conference call to discuss financial results for the 3 months period ended June 30, 2018. The corporation's results, including MD and A and financial statements, are available via the company's website or SEDAR. Before the call is turned over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward looking statements within the meaning of the Safe Harbor provisions of Canadian provincial securities laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements, please consult the MD and A for this quarter. The risk factors section of the annual information form and exchanges other filings with Canadian securities regulators. Except as required by Canadian securities law, Exchange does not undertake to update any forward looking statements. Such statements speak only as of the date made Listeners are also reminded that today's call is being recorded and brought broadcast live via the Internet for the benefit of individual shareholders, analysts, and other interested parties. Would now like to turn the meeting over to the CEO of Exchange Income Corporation. Mike Pyle, please go ahead, Mr. Pyle. Thank you, operator. Good morning, everyone. Also with me today are Carmel Peter, EIC's President, Tammy Shaw, our CFO, who will review our financial results in greater detail in a few moments and Dave White, our VP of Aviation. We are happy to be with you morning to discuss the second quarter results for 2018 and to update you on a number of initiatives, which we're excited about and will facilitate our strong performance in the future. The second quarter of 2017 was an exceptionally strong period for EIC and 2018 improved on that performance. Revenue grew by 15 percent to $313,000,000 EBITDA increased by 7% to 75,000,000 Adjusted net earnings increased by 4 percent to $0.80 per share. The payout ratio when calculated as a percentage of free cash flow less maintenance capital expenditures improved significantly to 58% from 75% in 2017. The trailing 12 month payout ratio calculated on the same basis also improved significantly from 64% 264% from 80% in 2017. The payout ratio as a percentage of adjusted net earnings was unchanged for the quarter at 68% and declined to 77% from 87% on a trailing 12 month basis. It is important to realize that these improvements in payout ratio were achieved after increasing the dividends by 4% to an annual rate of $2.19 per and free cash flow less maintenance CapEx expenditures per share all established new 2nd quarter highs for EIC. I will leave the more detailed analysis of the financial results to Tammy, but I would like to spend a moment talking about the environment in which these record results were achieved. Our Aviation And Aerospace segment generates a significant majority of the revenue and profit for the company. This sector faced material headwinds in the second quarter as fuel prices rose significantly, while labor markets for pilots remained very tight. We managed modest growth in our legacy and provincial operations, driven by the acquisition of Moncton Flight College. But this would not have been sufficient to generate the results we've announced today. The solid growth in our Manufacturing segment drove the 2nd quarter for EIC. Revenues grew 73 percent to $80,000,000 and increased to 26% of EIC's total from 17% last year. The impact on EBITDA was even greater as manufacturing increased to 19% of the corporate total for only 7% last year. This improvement was driven by I have said it for the last 15 years and I will repeat it again here. Diversification works. We have generated record results with better balance between our segments, while reducing the reliance on any single subsidiary. The biggest factor driving our results is the addition of Quest, which has continued to perform at a level which has exceeded our expectations. While we announced the acquisition of Quest late last year, we stated that the acquisition had based on a historical EBITDA of approximately 15,000,000. We also stated that the purchase price will increase to 100,000,000 of certain performance targets were hit. We fully expect the company to grow and significantly to grow and grow significantly. And that we would pay out the earnout following the 2018 fiscal year. It would be disingenuous, however, to say that we expect it to form at the level it has thus far. In the 1st 6 months of the year, it has generated a proxy $15,000,000 in EBITDA and about approximately equal to the last fiscal period before we purchased it. Well, I would caution against simply extrapolating this figure for 12 months as a number of factors have lined up to enable our existing facility to operate very near its absolute capacity. It is clear Quest will generate earnings well in excess as what is necessary for the vendors to receive the full $100,000,000 purchase price. With the increase in our order booked over $300,000,000 that we announced last quarter, we have committed to opening a new manufacturing facility in Texas. We have signed a lease on a building with over 300,000 square feet in space. Equipment will begin to arrive later in this quarter And by the end of the year, we will believe we will be in a position to begin initial product runs in the first quarter of 2019. It will clearly take a few quarters to ramp up the plant, but when completed, it will provide us the capability to more than double our existing production. We knew Quest was an exciting acquisition when it was announced, but the organic growth it has generated under the leadership of Martin and Jody Cash has exceeded all expectations. The balance of the manufacturing portfolio also performed well. EBITDA increased by 49% as a result of strong demand and more efficient operations. It was a challenging quarter for our aviation segment as labor shortages combined with rapidly increasing fuel prices put upward pressure on cost. We have strategies in place to deal with both of these situations and began their implementation in the second quarter. Many of our contracts allow for a direct flow through of fuel price changes. And while this makes sure we are not exposed in the medium term, there are often lag times before the increases take effect. As such, at times of rapid increases, we experienced a drag on our margins until the higher price kicks in. Other revenue streams require us to take direct steps to increase prices. It is very important to realize that most of the communities we service receive their fuel over winter roads once per year. And therefore, do not experience the fluctuations in fuel prices that more Southern Centers do with regular deliveries. It is therefore imperative that we give notice of fuel price surcharges and take the time to speak with community leaders, explaining why they are necessary. This also creates a lag before price changes are realized. We took steps late in the second quarter and into 3rd to pass on our higher costs to our customers, but we incurred a reduction in margins in the second quarter. Our ticketed fuel prices now largely reflect the current fuel pricing and the drag on margins will be reduced in the third quarter. Although should prices continue to escalate, further action may be required. Provincial faced headwinds in the quarter in addition to the industry wide, price increases and labor shortage. I strike at one of our major customers shut down their operations at the facility we service and as such reduced their demand. The strike has now been settled and demand has returned to pre strike levels. We announced to close the acquisition of Moncton Flight College in the first quarter. MFC is one of the world's leading flight schools offering intense pilot training in a university like setting, allowing pilots to achieve full certification in approximately 1 year. MFC met all of our acquisitions, criteria as a standalone investment, but it was the internal synergies with our existing airlines that made it such a strategic opportunity. The worldwide pilot shortage is worsening. And by acquiring an internal training capability, we are now able to implement the strategy to train pilots and then retain them longer by providing increasingly senior positions This will take some time to implement as the business is running near capacity and growth in demand is already anticipated from third party customers. Is a rare opportunity that is both accretive and highly strategic. MFC performed as expected in the 2nd quarter. Which was our first approximately $22,000,000 U. S. And EBITDA, which is approximately $1,500,000,000 less than the exceptional performance of 2017. Very strong sales of parts, engines, and full aircraft was offset by delays in the lease up of some of the CRJ900 fleet and the lack of lease return settlements that occurred in the preceding year. The demand for the CRJ900s has grown and we now have agreements in place that will see all of the, planes on lease by the end of the year. Some of the initial leases expire in 29 18, but we anticipate re leasing them before or shortly after their current leases expire. We continue to diversify our aircraft offerings in Regional 1. During the second quarter, we have acquired a fleet of 28 ERJ-one hundred and forty five aircraft. Some of the aircraft released to third parties, and or sold outright. Some of these transactions have already been completed, but most will be torn down and sold as parts. This transaction is evident in our quarter end balance sheet where inventory increased as a result of the purchase of these aircraft. Subsequent to quarter end, we completed the purchase of 2 ERJ170. The expansion into this ERJ platform increases the opportunities for Regional 1 to continue to grow in the future. There have been some who have hypothesized that EIC in general and Regional 1 in particular could not maintain the cash flow they generate without large investments in growth capital expenditures. The 1st 6 months show the fallacy of that argument. The 1st 6 months, EIC capital expenditures, including both Nate and growth totaled $62,000,000, down approximately 58% from the $140,000,000 $49,000,000, I'm sorry, invested last year. This decline is entirely explained by growth investments, which were nominal versus $92,000,000 last year. Maintenance capital expenditures actually increased slightly to $60,000,000 from $57,000,000 in the preceding year. It's important to note, this in no way represents a change in EIC strategy. And in fact supports what the strategy has always been, which is where investment opportunities are developed that are accretive and meet the rest of our criteria, we will pursue them whether the opportunity is an acquisition or a capital asset purchase. And when we don't uncover these type of opportunities, we will wait for our standards to be met. Capital expenditures preserve the earning power of our subsidiaries. Growth investments are just that, investments to grow our company. Before I hand the call over to Tammy, I want to focus on the significant improvement in our payer ratios. This improvement is evident whether you calculate them based on free cash flow less maintenance capital expenditures or based on adjusted net earnings per share. It is also evident whether you calculate them for the most recent quarter, the 6 month year to date, or the 12 month period. This reduction in the payout ratio is even more, significant with the dividend increase of 0.09 dollars to 0.29 team earlier this year and maintains our over 14 year dividend CAGR of over 5%. A track record, which few if any other TSX listed companies can match. The quarterly and trailing 12 months ratios are discussed in detail in our MD and A released yesterday. So I'd like to take a moment to focus on the payout ratio improvement in the 1st 6 months of this year. Our payout ratio calculated as a percentage of adjusted net earnings fell from 103% last year to 89% in 2018. Our payout ratio and calculated on our free cash flow less maintenance capital expenditure basis fell even more dramatically. From 115% to 86%. I should point out 6 months are always higher than they are for the full year because they include the seasonally weak first quarter where winter roads compete with our airline business. The comparison of 28 to 2017 for the 6 months, however, shows the dramatic improvement even with the increase in dividends implemented this year. I will now hand the call over to Tammy who will give you a more detailed look at our financial statements. Thanks Mike and good morning everyone. As usual, I will focus my comments on the 3 months results ended June 30th. Consolidated revenue for Q2 was $113,400,000, which is up $40,300,000 or 15 percent from Q2 last year. Of the increase, $6,400,000 was generated in our Aerospace And Aviation segment and $33,900,000 in our Manufacturing segment. The Aerospace And Aviation segment generated $233,400,000 in revenue, an increase of 3%. Revenue in the legacy airlines and provincial increased by $10,000,000 or 7%. In our legacy airlines, the increase reflects the benefit of the addictive Medevac contract, which commenced in Q4 of 2017, higher fire suppression revenue, and higher passenger volumes in Ontario. Provincial's revenue was positively impacted by the acquisition of Moncton Flight College. Revenue generated by Regional 1 to declined by less than stronger Canadian dollar. I would note that the second quarter of 2017 was a record quarter for Regional 1. The decline in revenue is primarily related to the lease business in Regional 1. The lease revenue of Q2 in Q2 of 2017 included a significant redelivery settlement, which did not recur in Q2 2018. Sales and service revenue was essentially flat, although there was a shift in the mix between parts revenue and aircraft sales revenue. The Manufacturing segment had revenue of $80,000,000, up 73% or $33,900,000 Quest, which was acquired on November 14, 2017, but also contributing to this increase is the collective growth of all of our other manufacturing entities with the exception stainless, which had a slight decline in revenue. Both Bend Machine And West Tower had significant increases in revenue this quarter, High levels of defense spending worldwide is driving Ben's revenue increases and West Tower is now realizing the benefit of operational changes that they have made on to the lower levels of demand for their traditional services. Consolidated EBITDA was $75,100,000, up 7% or $5,000,000 from the second quarter last year. The growth was driven by our Manufacturing segment through both organic growth and through the acquisition of Quest. EBITDA was negatively impacted for the quarter by, prevailing foreign exchange rate. If If EBITDA if exchange rates had remained consistent with Q2's 2017, EBITDA would have been $2,000,000 higher. EBITDA in our Aerospace And Aviation segment was $67,300,000, a decrease of 4 percent or $3,000,000. The stronger Canadian dollar puts significant downward pressure on the translated results of our foreign entities and provincial provincial was essentially flat in comparison to the second quarter of last year. The benefit of increased revenue in these entities did not fall through to EBITDA, The results of our aviation entities were impacted by rapid increases in fuel costs. We are able to mitigate our exposure to rising fuel costs through fuel escalation clauses that are embedded in many of our contracts and through the implementation of fuel surcharges on noncurrent contractual revenue streams. However, there's a time lag in deploying these mitigation measures. Therefore, in circumstances where fuel prices rise rapidly as was the case during the second quarter, our results can be negatively impacted. Additionally, industry wide labor shortages caused increased overtime contractor and training costs in our airlines. Our airlines are actively working to develop and implement initiatives to mitigate the impact of these issues. However, these initiatives will take time before becoming fully effective. Moncton Flight College, which was acquired in March is in February, sorry, is a key part of our strategy in this area. Regional One's EBITDA in U. S. Dollars was down 7%. The decline reflects the lower levels of lease revenue that I discussed a few moments ago and a and a higher proportion of aircraft sales, which have lower margins associated with them in comparison to the margins that we achieve in relation to parts sales. Additionally, the stronger Canadian dollar caused a $1,100,000 reduction in EBITDA. The Manufacturing segment EBITDA grew by 204 percent or $9,800,000 to $14,500,000. The acquisition of Quest drove $7,400,000 of that increase, Plus performance continues to be ahead of the expectations that we set when we did the acquisitions. EBITDA from the remaining entities in the Manufacturing segment was 49 percent higher or $2,400,000 higher in comparison to the prior period. As I've noted, foreign currency rates did create head headwinds for us in the translation of our foreign subsidiaries into Canadian dollars. And, on a consolidated basis, if we used exchange rates consistent with those prevailing in 2017, we E EBITDA would have been higher by approximately 2 $2,000,000. So that was the consolidated impact of currency. Our Canadian subsidiaries also have exposure to the U. S. Dollar, however, because they're there are a variety of U. S. Dollar inflow and outflows such as the costs associated with aircraft parts and, the U. S. Dollar revenue contract that certain of our subsidiaries have. The net exposure in relation to our Canadian operations is not typically large. So the decline noted is flowing from translated results of foreign, subsidiaries primarily. We reported net earnings of $19,500,000 or $0.62 a share. These compared to net earnings of $25,800,000 or $0.83 a share in Q2 20 17. Earnings per share reflects an increase of 2% and the average shares outstanding during the quarter. The majority of the decrease in net earnings was driven by 2 items, First, that is a 3, a 3,900,000 after tax gain on the disposal of our partnership interest in Inew Macoon, which, which was included in Q2 20 seventeen's results. And the second item relates to our decision to redeem a series of convertible debentures early. Although the actual redemption occurred subsequent to the quarter end, upon making the decision to redeem noncash interest, which was being accreted over the term, to contractual maturity was accelerated, causing an increased interest expense of $2,200,000. Interest costs increased by $5,900,000 as a result of the non cash interest that I just noted and as a result of increased benchmark interest rates and an increase in the outstanding debt balance. Depreciation increased by $1,500,000 or 5 percent as a result of capital asset purchases in 2017, and the acquisitions of of, both Quest and Moncton Flight College, for which there is no comparative amount. Amortization of intangibles also increased by $1,600,000, which was due to the intangible assets that we, recorded with the acquisition of Quest. Income tax expense decreased by $3,900,000 and the effective rate of tax also decreased to 23.7 percent from 27 point 9. We have a higher proportion of earnings in lower tax, in lower rate tax jurisdictions, and that has positively impacted income tax expense. Adjusted basis, net earnings were $25,200,000 or $0.80 a share for Q2 2018, and that compares to $23,900,000 or 77 dollars a share for the comparative periods. Adjusted net earnings exclude the amortization of intangibles, net of taxes, which increased as a result of the acquisition of Quest, and also excluded is the noncash interest accretion that I just discussed. The gain on disposal of our partnership interest in Inu Mccune was in the based payout ratio and a free cash flow less maintenance CapEx based payout ratio to make decisions regarding dividends. Our payout ratio for Q2 twenty eighteen on an adjusted earnings basis was 68%, which is unchanged from the same quarter last year, despite an increase in dividends. Our trailing 12 month payout ratio in the quarter was 77%, down from 87%. This improvement reflects the increase in adjusted earnings, which was in excess of our increase in dividends. Free cash flow for the quarter was $58,800,000, up 14% Free cash flow on a per share basis was $1.86, which is up from $1.66 per share last year. Our free cash flow less maintenance CapEx payout ratio was 58%, a significant improvement from 75% in Q2 2017. Our trailing 12 month payout ratio also improved from 80% to 64%. Investments in the maintenance of capital assets, primarily air craft related assets decreased by about $800,000 in, in the second quarter of 2018 to $38,000,000 of this total is related to depreciation on Regional One's portfolio of aircraft and engines, which is in line with the second quarter of 2017. The legacy airlines and provincial had $19,300,000 in maintenance capital expenditures compared to $20,000,000 in the second quarter last year. Growth capital expenditures during the quarter were nominal. We continue to expect growth capital expenditures to be much lower in 2018 overall. Than they were in 2017. At the current time, our planned expenditures for the remainder of 2018 include the new plant in Texas request and aircraft and ground facilities for Kuwait and to service its Medevac contract in the Baffin region of Nunavut. During the quarter, we completed our partnership transaction with Waseya Group. EIC has invested $25,000,000 in Waseya, of which $12,000,000 was an equity investment and $13,000,000 is a loan. Our share of Waseya's results are included in the results of our legacy airline. And are consistent with our expectations when we made the investment. The equity investment included other asset or is included in the other assets on our balance sheet. Turning to our balance sheet. We ended the quarter with a net cash position of $85,500,000 and working capital of 297,100,000 which represents a current ratio of 1.98 to 1. This compares with a net cash position of $72,300,000 and working capital of 2.40 $1,000,000 and our current ratio of 1.91:one at the end of 2017. The consolidated cash position at both June 30, and December 31, included cash held to fund the redemptions, the impending redemptions of convertible debentures. And I'll discuss that further in a moment. The increase in our working capital at June 30, 2018 in comparison to year end is primarily related to 3 items. An increase in Quest's working capital because of the growth in its business volume and its expansion into the U. S, an increase in inventory at Regional 1 as a result of the per of 28 ERJ aircraft, 17 of which were classified as inventory for resale. And lastly, an increase in the accounts receivable and Regional 1 due to the sale of an aircraft with an extended term. The receivable is secured by a letter of credit from the customer. Other changes in our working capital are typical for the second quarter as business volumes in many of our subsidiaries are higher in the summer months. As I noted a few moments ago, the debentures that were due in March 2020 were redeemed early on July 17, 2018, for approximately 65,000,000 The redemption was funded with the proceeds from the offering of a new series of unsecured debentures. In June, the syndicate of underwriters exercised their full over allotment option on our debenture offering, and we issued $80,500,000 of 7 years, 5.35% convertible debenture. As a result of this offering and the subsequent redemption of the March 2020 debentures, we are now positioned such that we have no debt maturing until 2021. We have also reduced liquidity risk as the maturity dates of our outstanding debentures are staggered off across a number of years. Additionally, we have mitigated the potential dilution from conversions through a material increase in the conversion price relative to the convertible debentures that were redeemed. In spite of a much longer 7 year term of these debentures, the interest rate remained unchanged at 5.3.5%. During the quarter, the credit facility was amended to increase its size by $250,000,000 extended term to May 2022 and add a new financial institution to the signature, to the synd syndicate, increasing the number of syndicate members to 11. At the same time, pricing was amended favorably and the covenants within the facility were amended to allow us greater flexibility to take advantage of growth opportunities quickly. The end result of these financing and financings and redemptions is that the company's balance sheet and capital resources are strong. Our leverage ratios are well within our target range and the available capacity within our credit facility now sits at approximately 350,000,000 So we are very well positioned to take advantage of growth opportunities when they are identified. And that concludes my comments on our financial results, and I'll turn the call back to Mike for some closing remarks. Thank you, Tammy. In our first quarter, we announced that KeyWatan had been successful in winning the RFP for the Baffin Medevac contract. This left Kimblec, which expires later this year as the only contract that was under a long term arrangement. I'm pleased contracts have been held under long components of Government Aire's operations. MetaVAC, including the Lifeline Program, which specializes in very emergent cases, firefighting, and general charters. We are very interested in the Matevac contract. Currently, the elacemurgent cases are handled by all four carriers on a rotational basis. Under the RFP, all of this work together with the Lifeline Program, which is currently handled by Government Dare will be awarded to a single carrier. Perimeter has served the province in this area for decades. And, the new combined format will vary yet very closely resembled the service the key wait and provides in all of Nunavut. We are excited about this opportunity and believe we have a proven track record. We will also be, pursuing, excuse me, we will pursue the RFP and expect significant competition. We are also examining the other two areas of this RFP. We've been working on our short term rental maritime surveillance aircraft to force multiplier for over a year and are very excited that it is on the verge of completion. We are in the final stages of certification process and expect it to go into service by the end of this quarter. Interest from governments around the world has been very high for its tech capabilities and quick deployment. In fact, We completed a project in the second quarter using 1 of our King Air surveillance aircraft where the original inquiry was for the dash, 8 force multiplier. We used the staffing and processes set up for the multiplier and an existing aircraft to meet a customer of glass The mission was very successful and bodes well for the launch of the multiplier later this quarter. Our investment in growth capital expenditures in the 1st 6 months has been very modest. We expect that it will be somewhat higher in the second half of the year as we complete the new factory for Quest, and the investment in key waiting for its enhanced benefit, its enhanced bath and medical contract. We will of course be true to our launch standing business model will move in quickly where opportunities are discovered. But at this time, our expectation is the Quest and Kuwait And Programs are our only planned investment outside of normal activity at Regional 1. We have strengthened our balance sheet over the first six of this year by replacing existing convertible debentures with a new series that have longer maturities lower interest rates and lower potential dilution as a result of higher strike prices for conversion. We extended and expanded our secured credit facility with lower interest rates and more flexible covenants. As a result, our balance sheet is in excellent shape. With $350,000,000 of liquidity and no debt maturing until 2021. Positioned to be able sector experienced challenging quarters and reduced their guidance for future quarters. Well, there is no doubt we have felt the effects of higher fuel costs in Q2 and to a lesser extent in Q3 as that the stronger Canadian dollar has reduced the value of our profits of our US operation. I am pleased to tell you that there is no such reduction in our guidance. At the beginning of the year, we stated that we expected both EBITDA and adjusted net earnings per share to grow between 10% 20% this year. We also guided that there would be a significant decline in growth capital expenditures and that maintenance capital investment would increase slightly. I am pleased to affirm all of this guidance. By the challenges with higher fuel costs and a very tight labor market for pilots, we fully expect to deliver We would now like to open session. Your questions will be pulled in the order they are received. Your first question comes from Mona Nazir with Laurentian Bank. Your line is open. Good morning and thank you for taking my questions. Good morning, Mona. So my first question and you kind of touched on this in your remarks, but there was another quarter of no growth capital in yet consolidated results remain strong and even over a longer term trailing 1 trailing 12 month basis, We saw growth CapEx down 80% and yet Regional 1 performed with $75,000,000 in revenue this quarter. There's been a strong correlation or belief that growth CapEx is driving your revenue and EBITDA, but looking at the last few quarters, there seems to be a disconnect So I just wanted to firstly confirm the statement that I think I just heard that there would be no significant growth CapEx for R1 this year. And if that's the case, what kind of revenue and EBITDA could we expect from our 1 with the minimal spend and just speak about the dynamic between growth CapEx and your revenue and EBITDA generating power. Thank you. Thanks, Mona. The, our one's a complicated beast because we're buying and selling assets at the same time we're investing in long term assets. And so when you look at our CapEx, it's the sum of the aggregate CapEx is the sum of our maintenance CapEx and our growth CapEx. We use depreciation as a proxy for our maintenance CapEx because what we're flying our lease fleet. We're using it up over time, but we need to replace that. So the first $8,000,000 or so dollars, we invest is just replacing what we use up. And if that's all we did for the foreseeable future, EBITDA would grow but grow modestly, without further investment. We're very opportunistic on when we invest in Regional 1. When the right deals are there, we will move. And, I wouldn't go so far as to say, there'll be no growth capital investments in Regional. 1, when the right opportunities come, we'll jump on them. But there is absolutely no expectation in the near term of returning to the sort of $100,000,000 plus investments we've made in the couple of years before. Where we invested in a fleet of CRJ900s. Bottom line is, is that all we need to do is invest in our maintenance capital expenditures to meet obtain the cash flow that that company generates. And when the opportunities come and we do put something into growth, that will allow us to grow really any material trend down in R1 performance? Absolutely not. I mean, the only the only star I put on that is the Canadian dollar affects how we convert that. So when I talked about it, I speak of it in U. S. Dollars. If the Canadian dollar weakens improves the, the financial statement presentation of their profits since the Canadian dollar strengthens, it weakens it. But absent that, there's no reason to expect the decline in their performance. Okay, thank you. And just secondly for me, I mean, you're keeping your guidance unchanged at 10% to 20% EBITDA and EPS growth. Despite having over 70% aviation Aerospace exposure, the significant increase in jet fuel prices and also some of the aviation peers recently revising down the guidance. Now this may connect your ability to pass through fuel surcharge, but I'm just wondering if you could speak to the on quarterly EBITDA. But I'm just wondering if you could quantify the same for jet fuel? Thanks. We haven't published recently a, a precise calculation on jet fuel, on the cost because we're in the midst of putting price increases through in the quarter. It's in the low single digits of 1,000,000 of dollars. The net the net cost at who we service and the relative in the vast majority of where we service the relative pricing elasticity, we can push price increases through when our costs go up. But it's a matter of doing it in a politically appropriate manner. And when it's under contract, as an example, our government, our contract with the government in Nunavut for passenger service has a quarterly escalator. So or deescalator depending on fuel, but you have to go through the whole quarter of the, of the increase before the following quarter. You get to change your prices. And so, our we get hit in times of rapid expansion of fuel prices. It takes us a while to catch up. Conversely if prices fall, it takes us a little bit before we reduce the prices. So net net, it's pretty efficient. But you could see there would have been a couple of $3,000,000 of net fuel price impact in the quarter. And I think the other piece of this is, quite frankly, is that because of our diversity, not everything moves in the same way at the same time. And you see it this, in these results. The aviation had a tougher quarter, not unlike you see with the the WestJet Air Canada and the World, although we had nowhere near the impact they had on their performance. The strength of manufacturing right now easily carried the day and the continued, growth of Quest helped a ton. And I'd point out that Quest is still doing that with one factory. And it will be till next year. But it's tracking, to do, if you doubled the 15,000,000, it's 30,000,000, dollars, which is double what we bought it off of. That may be a little aggressive simply because we had the factory running at almost absolute capacity in the 1st 6 months of the year. Hopefully, we'll be able to do the exact same thing in the second half. But even if it's slightly less than that, the organic growth in that is just spectacular. And then we're super excited about adding a 300,000 square foot facility in Dallas next year. That was very helpful. Thank you all a step back. Thanks. Your next question comes from Steve Hansen with Raymond James. Your line is open. Just a quick one on Quest, Mike, can you just describe how the sales pipeline is evolving there as you continue to advance this new plant? I'm just trying to get a sense for how the book relates to the new capacity that you're we are starting to, we are booking stuff for the new factory, but on a very limited basis for the beginning part of next year. There's always challenges when you ramp up a new facility. And so as we book out later in 2019 into 2020, we're taking orders for that factory. The order backlog continues to grow. Notwithstanding, we're using up $25,000,000 of the rough a quarter in new revenue. The as we get moving into the new factory, it gets ramped up in the first half of next year. We will, you will see the sales grow significantly in the back half as we start booking sales into that plant. We're very reticent to book it too quickly, Steve, simply because if we're late, we shut down a developer's project, we can't be late. And so for us, the relationship with the developers and the architects is paramount. And so we're going to make sure that that factory is fully ready to go and we ease it into production because, yeah, notwithstanding. It's all the same technology we have in Toronto. You don't just turn a plant on and have it run it. We have to get the bugs out first. No, understood. That seems prudent. And then just quickly, if I jump over to the provincial side in the Force Multiplier in particular, so ready for certification entry into service, that's great. Can you are you going to start to give us some sort of sense as to how the bookings for that platform is going to look as we think about our model a little bit? And just as a broader question you described, the King Air Opportunity, I think, as well. And should we think about this being a growing portfolio over time? I think there has to be a but to that. The answer is yes. I think you should think of it as a growing portfolio over time. But we want to prove it out before we put the money out. And all I can tell you is the demand for that aircraft is exceptional. We're not taking a hard date booking until we have full certification. The last parts of that we could think could take a day and they could take 3 weeks. And so when it's done later this month, we have a strong degree of interest, both within North America and outside of North America. And so I think by the time we report Q3, we'll give you an idea of what actual flag we did this quarter and then an outlook into Q4. And ongoing of what it looks like. We were ecstatic that we were able to jump up and, look after a contract. It wasn't for the Canadian government. It was for another government. I can't disclose which one it was. But they were looking for the Force Multiplier. We took 1 of our Canadian surveillance aircraft that had an extra time and ran a multi week mission for them and, was a tremendous success. So where we've built that portfolio over time, It's a growth engine for Provincial. Having said that, you'll see the results before you see any more investment. Understood. Thanks. That's helpful. Your next question comes from Cameron Doerksen with National Bank Financial. Your line is open. Yes, thanks. Good morning. So just a couple of questions, I guess, on contracts as well. Think about this Manitoba Government Services opportunity, I'm just wondering, anybody sort of size that? I mean, you mentioned that perimeter is doing some of the existing work now that's shared with some other airlines. I guess, how big could it be if you were to win that business and what would potentially be the impact if somebody else wins it and you sort of lose portion that you currently have? Kevin, I'll be very careful on how I answer this just because I don't want to put ourselves in a competitive disadvantage by giving other people numbers that aren't readily available. But I think it's safe to say there's 4 other, there's 3 other main players in the MetaVAC business. In Manitoba. And the majority, something like three quarters of the work is already done by private people. So if you said we were an average player, we're probably slightly better than that. We've got about 20% of this market. And so you had it all, you'd have 4 or 5 times as much. And we, we do, slightly in excess of $10,000,000 of Medevac work in Manitoba now. Okay. No, that's very helpful. The interesting part about it is that Like I say, there's a lot of competition, so we don't want to get ahead of ourselves. And the government has to realize significant savings, or I'm not sure to even award the RFP. So it's going to depend on what the government thinks of all of our bids. But what makes us excited about this is we are one of the few carriers in Canada that has experienced in emergent cases. We've been worked at Nunavut where we've provided, all the Medevac services in various regions for over a quarter century. So we're used to dealing with the most extreme, most emergent unstable patients. Which is, a skill set, which is very limited in Canada. And we think, puts us in a great position to work province of Manitoba. Having said that, we've got good competitors. And so it's going to be a competitive situation, and we'll see if the government even awards the contract. When do you expect a decision by the government? I think that the schedule had to later towards the end of this year. Beginning of next year. It's a very complicated process. It wouldn't shock us if it got pushed out a little bit, but it's a we're busy working away on our bid as we speak. Okay. Just second question on the biggest department of fisheries and oceans. I think there's there's some commentary in the, in the MD and A here, but just wondering if you can comment on what the timing is for a decision there and and if assuming that you were able to win that work again, does the size of it change at all or is there, is it basically the same as what you're kind of doing now? That's a caution. You're winning the contest through the most complicated question. The bid for the maritime, 1 from Canada, will be awarded sometime. We think end of this year, beginning of next year. We have a contract through most of 2019. There will be 2 or 3 very good competitive bids. I'm not we've held it for a long time. So we are cautiously optimistic, but every time you bid, you're bidding, there's going to be other people trying to do it. We think in all likelihood over time, the scope of work will increase. We've given the RFP isn't as simple as an all in one. This is the way we do it. We've given the government options. And so we believe there's upside for growth not over time, but, we'll have better flavor for that probably early in the new year. Okay. Okay. That's great. Maybe just last quick one, hopefully, less complicated. Just on the latest, Medevac, I guess win here, nice to see that you've got all three of these, in Nunavut. Is that basically I guess the question is, is that an expansion at all of the business that you're doing there or is it essentially kind of, just kind of a renewal at the same kind of rate The Kimberic 1 is very similar. In Baffin, we added an extra base and it grew the size of the contract. Kimmeluk 1 is really just a it's basically the same it's basically the same contract with sort of inflation adjusted pricing. Got it. Okay. Perfect. That's all for me. Thanks very much. Your next. Guys, it sort of kicked me a bit here. Why use 10, it may be a little closer to the mid teens on our existing, share of the market. It may be something more like 15,000,000. And your next question comes from kornack Gupta with Macquarie. Your line is open. Thanks and good morning everyone. Good morning, Kodak. So, Mike, on Quest, I just wanted to understand, what would be the factors that that keep you from annualizing that EBITDA, the $15,000,000 we saw in the 1st 6 months And any sense on timing of doubling the annualized EBITDA with the new taxes facility? I'm like, would that be a 2019 thing you think or it could be a late 2019 thing? I answer your second question first. It wouldn't be a 20 teensing because our, what we'll run through there in the first half of the year would be a fraction of its capacity. We have deliberately not booked in full because we wanna make sure we get the bugs out and don't delay any of our customers. So I think you're by the time you're looking at kind of we'll hit a run rate by the end of 2019 that you'll see in 2020. And, in terms of why we wouldn't extrapolate it, it's just because it was we ran the plant at 100 percent capacity. We didn't have any breaks between jobs. We were able to maximize what runs through there. When I say, extrapolating, it might be aggressive. I'm not suggesting there would be a material decline But 7.5 per quarter with one facility is effectively, our maximum capacity. And then depending on whether we're doing a US job or a Canadian job, the margins are slightly different. And so the product mix could change quarter to quarter depending on which building we're doing at a given time. So the all I'm saying is, is that, it's not a slam dunk, but because we did it for two quarters, we'll do it for 2 more quarters. But we're sold out through for the foreseeable future. So there's no reason to expect a material difference. Okay. No, that's helpful. And then on Moncton, so I'm going to get obviously embedded in Provincial. Any sense on what the contribution is looking like versus your expectations right now? And what is a growth strategy there? Like, and can you give us any sense on timing or magnitude there? Yeah, I'll give you qualitatively, yes, quantitatively, we haven't released that. And I'm not sure I'm comfortable doing that. It was right it was slightly ahead of our projections for the quarter where we gave you the, the historical rates. It's growing off of that. We would expect a more, significant growth in 2019 based on the contracts we have in hand. For international pilot. And that's what drives it's, it's, it's earnings right now. What we're trying to spend most of our time working on is bolting on to the, the core business, our internal training so that we can help ourselves with the strategic part of the business. We're confident based on the, on the contracts in hand that we'll see, we'll see good growth in that business in 2019. Yes, I can provide a little additional color on that. I mean, the limitations for growth is certainly not demand, nor getting the airplanes needed to provide the training. It's really the pilot So part of the the strategy, which will take some time, is to grow our pilot pool, pilot training pool. So that we have the instructors, instructors available to be able to grow up to the students that we can provide training to. Okay. That's great color. And lastly on the capital priorities, Mike, so I mean, you have this Quest now, force multiplier is almost done. And then obviously, there's few other contracts you might be spending on Where do you see the capital priorities after these investments? Well, I think for the balance of the year, you're going to see us finish the Quest plant you're going to see us do a little bit of stuff for Kuwait and in the grand scheme of the magnitude, that's a much smaller number. And if there's any opportunistic things in Regional 1, I think those are all we really see in the current year. Things can always change. So I think you're going to see modest investment. We're always looking for opportunities with Regional 1 or with some of these contracts. And If we're successful, for example, on the, the surveillance maritime surveillance contract with provincial next year, we will invest in that contract and build more infrastructure because the contract's bigger. But for the balance of this year, I think you'll see continued modest spending, on, growth CapEx outside of the two projects we've called you about. To the M and A is not really in the near term thing you're looking at? I mean, I guess that's Well, we're looking at M and A. I think, thanks Karlak, I didn't answer that part of the question. Adam's very busy. We've got some unique stuff, some exciting stuff in our pipeline. But with the number of deals we closed earlier this year, we're sort of at earlier stages. We're ramping back up. We use most of our horsepower for us to do, the Quest deal last year, then the Flight College and then we'll say we burnt on most of our horsepower closing those deals. So now we're ramping back in. So we're sort of in the beginning to middle parts of those transactions. There could be stuff happened by the end of the year on the M and A front, but I wouldn't expect anything closing in the third quarter. Okay. No, that's very helpful. Thank you. Thank you. Your next question comes from Chris Murray with AltaCorp Capital. Your line is open. Thanks, guys. Good morning. Turning back to capital spending and maybe we can walk through this a little bit because maybe I'm a little confused on Regional 1. So, you think about the quarter, you acquired 28, albeit smaller aircraft. I guess you sell them back out again. But I'm thinking call it $4,000,000 to $5,000,000 a copy maybe for those aircraft. Help walk us through how that business is changing. And And where exactly are you starting to source that kind of volume of aircraft at this point? Okay. Well, first of all, Well, I'm not going to give a precise number for the ARJ-one hundred and forty five's. They're nowhere near that per copy. They're less than a $1,000,000, an aircraft that we bought. Some of them had been parked for a while. We, divided them up. Tammy gave the breakdown. I think it's 17.11, I think 17 of them are in inventory and 11 of them are in capital assets. We actually leased and then sold some of them in the quarter. So they were in and out of the capital asset number. The rest are in inventory. They will take a while to work through as we park them out and sell them off. And I think that I don't have that precise number in front of me, but I think, yeah, we had about a $4,000,000 or $5,000,000 increase in our inventory at Regional 1 in the corner. Which was the net impact of those 17 aircraft. Okay. So I just want to finish off your question, Chris, because I don't think I answered the other half of it. The business really hasn't changed at all. It's just the opportunities for fleets. This was a unique one where we had worked with some groups on ERJs and develop some comfort and then develop a plan to deal with that fleet. If you tried to buy 1 or 2 or 4 or 5 of those aircraft, due to paid a lot more than what we paid for them. But because we took the whole fleet off the hands of, I believe that was from an investment bank that didn't really know what to do with them. They had been sitting for a while. And so we had a plan to turn some of them into flyers and some of them into parts. There aren't many opportunities to buy 28 aircraft at once. That was a unique opportunity and we jumped on it. More typical as 1 or 2 aircraft at a time. And again, typically the older the aircraft, the more fleet opportunities there are, So the CRJ200s, you're more likely to get 5 or 6 of those at a time than you would on say CRJ900s. So we continue to be opportunistic. We basically maintained our maintenance reinvestment over the year, but we haven't found enough to turn it into growth investment simply because not only are we depreciating the existing ones, we're selling some of them. So just to stay in the same place, we invest 1,000,000 of dollars each quarter. Okay. Fair enough. Yeah. No, just And I guess the ERJ170s you're bringing in, the 2 of those, those will just go to the lease pools. Is that fair to think? Well, potentially or we may remarket them. They're certainly not part outs. Those are either lease aircraft or resale aircraft. They're not, they're not part of aircraft. They're materially more expensive. Yes, fair enough. And then just trying to wrap my head around back half capital spending. Fair to think, and I'm even thinking into 2019, just the seasonal pattern, your maintenance CapEx should come down, I guess, Q3, Q4? And then should we expect, again, front half loaded into 2019 for maintenance and repairs like you've done? Or is there something changing in your availability provincial to do your time and maintenance right now? You're bang on in terms of the seasonality. And in Q3, when we report, I'm going to give you a guidance for next year. A big picture at this point. We don't expect any material increase in maintenance investment next year. We had a big year for engines this year. So potentially it could be a little less next year, but we're not in a position to give any sort of meaningful guidance on that yet. We'll do that at the end of the next quarter. But in terms of the trend, and the seasonality you're betting on, Chris. Great. Just, I guess, the other one of the other contracts or other investments that we haven't talked too much, was Waseya. Can you maybe kind of walk through the logic behind doing that? Was that just maybe to reduce some competition in that that Northern Ontario region or anything you want to add in terms of understanding what the opportunity is there? Sure. It's really, it's slightly different than what we've done in the past because it's the first time we didn't take 100% of acquisition. We took approximately half. And half of the $25,000,000 was a recapitalization. I think it's fair to say that, Waseya had some financial difficulty. And they needed to be recapitalized. We were competing with them in certain parts of the market. Other people were competing in other parts. And one of the great strengths of that company is the support it has from its component First Nations. And we made the decision that we're trying to spend into Northwestern Ontario. And in those communities, it's hard to go inward and competing with their own airlines. And so for us by partnering with them and helping that grow, it was win win. It enhanced our relationship with the First Nations in Northwestern Ontario. We helped them recapitalize to take advantage of growth opportunities. And then we're able to process of rationalizing service between the two carriers both to reduce costs and to improve the schedule for the customer. It makes no sense for perimeter and, say, I had to fly a flight right on top of each other when we both fly out of the community at 9 am on side by side. We're better off to provide service at 2 different times of the day to approve it for the customer and then we're working together on, streamlining the costs by us providing services for them and vice versa. We've started to supply them with some parts and fuel in certain situations. And they actually have helped us back us up, but we had some firework in Manitoba where we didn't have enough capacity. They came in and helped us. So, you can see it in our perimeter numbers. There's there's some growth because of the transaction there. And in terms of Waseya's numbers, it's not material at this point. But as we rationalize their business with them and help them return to growth, you'll see it in the future. Carmel, is kind of the champion of this project. I'll maybe see if I've missed anything. No, I think Mike covers the main parts. One thing I'll add is The partnership that we formed also gave them access to our aviation experience, and our buying power as a kind of aggregate group of airlines and sharing of resources, and best practices etcetera. So it's certainly a win win transaction. Okay, great. And then I guess my last question, just, and this is about the force multiplier. I'm just thinking about this contract with the government, should you win it, would that require you to start building multiple like that? Would that contract actually essentially commit the force multiplier to that program and then you're then left thinking about do you build another one, for other opportunities or or do you need additional aircraft just to support that opportunity as it stands? Because there's more than one option for the government under the bid we put forward. But it will, it will require further investment in new aircraft, some of the aircraft we use, for the existing contractor smaller than what they want and we may upgrade the technology. There will be an investment. The existing force multiplier playing will not play a role in that contract, other than maybe in ramp up helping us get the capacity faster depending on how much capacity the government chooses for us to have. But this plane is more for short term unique opportunities around the world or to help out governments who are looking at making a a purchase of a fleet and want to try this out first. And so it's the way I would describe it, it's our, if you want, go to an auto dealer, they have instrator you can drive. That's what this is, except we charge you for the demonstration. Okay. Just wondering along these lines, is there anything you can leverage around your relationship with Airbus, that they could maybe work into this space? Or are you fairly committed to wanting to stay on the Q300 platform? That's a good question. Those are discussions we're having internally. We haven't reached any kind of conclusion. We're very busy with Airbus right now on fixed wing SARs and they're beginning to deliver those aircraft next year. And so we're working with them handed handed glove. And I think if we do the job that we've historically done, the opportunity to do more work with Airbus will be there following that. But I think very much in the near term, that's where our focus on. Is standing up that program and doing what Airbus needs us to do and what the government of Canada needs us to do. All right, fair enough. Thanks folks. Your next question comes from Nav Malik with Industrial Alliance. Your line is open. Thank you. Good morning. Just actually want to ask on Regional 1. The mix of business, it shifted a bit more to the parts service portion this this time around. Is that what would you expect going forward? That that kind of ratio going forward? Or or maybe let us know what's behind that and how you see that unfolding? Well, there's 2 things. I mean, we mentioned in our on call that we had some 900s that weren't fully utilized. That should improve, which would drive lease revenue over time. And then the other thing in lease revenue, and It's almost at the stage where I don't like the word lease. It's more like rental income or where we're using up green time on aircraft because Arlene, we don't put out a plane for 6 years and then just take a lease payment and we're a bank. We're much more transactional, not in our lease portfolio. And so sometimes when leases are returned, planes at the end, they have lease return conditions where there could be an overhaul required by the by the lessee before they turn it back. But if we're going to report the aircraft out anyway, we may, monetize what the cost of that overall would have been and taken in a payment. And so that makes the lease stuff a little bit bumpy. And that's really the main biggest driver between this year's lease payments in last year's as we had lease returns last year on part out aircraft that we didn't have this year. So I don't think that I could tell you that there's a new normal or that there even is a normal you'll see oscillations between the 2. One of the things I've always said about Regional 1 is don't worry so much about the revenue and don't worry so much with the breakdown. It's the trend in EBITDA in aggregate that that's relevant to some quarters we sell more. And we may sell parts or we may sell old planes or we may lease out aircraft. I think, last year was a great year for lease returns. And so that inflated that number a little bit compared to what we would have in this year or a typical year. But I don't think there's a strategic difference in, what the breakdown is. The base part sale was consistent. Quarter over quarter. And then we have the decline in lease revenue that we've discussed. And then the sale of aircraft and engines, it will always move around depending on what the opportunities are. Okay. Okay. And then maybe just to, if I could clarify, know you've already talked about the fuel issue and the cost. But if I understand correctly, or if I may be just clarify, you're maintaining your guidance for the year despite increase in fuel. So does that mean you have that, I guess, margin pressure under control, like I guess in future quarters, like this quarter, you had maybe a couple of percentage point drop in your margins in the Aerospace segment, going forward. How would we expect to see that on a year over year basis margin wise? I'm comfortable answering that as it relates to the fuel. There's product mix has a big impact on margins. So if you have higher or lower, as an example, firefighting stuff in the summer. That's a very high margin business. And so that can skew percentages. And these rental Yes, the lease versus sale stuff at Regional 1. But in terms of the fuel, the extra fuel costs that have been in the $2,000,000 to $3,000,000 range in the quarter that we didn't recover back. But Q3 will have the majority of that fixed. We'll still have some fuel drag. Again, assuming fuel prices have plateaued. If they go up again, we're going to have to do the same process and we'll have to catch up process conversely, if they, if they decline a little bit, we'll do better than this. But I would expect that we by the time we get to Q4, we fully, we're very close to fully absorb the cost of the fuel prices. The impact will have in Q3 will be materially less than in Q2. Okay, okay. And then just moving to Quest, I know in the past you've quantified the backlog And I know it's strong, obviously, from your comments, but, but you didn't quantify at this time. Would you, is there a reason or would you quantify that or Yeah, we said after Q1, it was over $300,000,000. It's over $300,000,000 and it's grown, it's continued to grow. I don't want to get into tracking an exact number in this every quarter, but it has grown. It won't grow materially until we get the land up and running because we're not going to promise production. We don't have. Once we get the thing up and running, both the throughput will go through and the ability to take more orders in the sort of 29, the end of 2019, 2020, 2021 period, will come to fruition. But the demand in that business so it's no sides of abatement. We are still turning down orders, simply because we don't have the capacity to build them. Okay. And then just lastly for me, on the quest, the earnout, is that payable in cash or in, in stock? Okay. Okay. Thanks very much. Thank you. Your next question comes from Tim James with TD Securities. Your line is open. Good morning, Chip. Good morning. Thank you. My first question is on the Moncton Flight College and the opportunity there for that to relieve some of the pilot pressures throughout the organization. I'm just wondering if you could talk about the time frame, that you expect that to benefit? I know in the MD and A indicates it will take a bit of time. Does this something by the time we get start of next year that that could be providing some relief and that pressure should be dissipated or is this kind of a multi year process? Well, it depends on whether we're talking about whether the pilots are in training or out of training, because even in an intensive situation, it's a year long process, we will have more people in training by the end of this year. So by the time they get out, it's the second half of next year anyway. And will ramp that growth over time. I think the bigger part of it, Tim, is not just training the pilots, but a whole program to gain them. So we're going to bring people in and say, come, come to Moncton, get your training, We're going to guarantee you a job as a trainer. When you come out of there, you'll train other pilots for a period of time, then you'll move to one of our smaller airlines and then ultimately to one of our bigger airlines. We have unions, so we have to make sure everyone's on-site with how we flow the people between the various companies and the complications of those things. And that's the part that takes a little while. But in terms of, as simple as putting pilots in, that will happen this year. Carmel, again, she's the champion of this. So Yes. I mean, part of the other issue is not simply a shortage of pilots. It's actually a shortage of pilots that have efficient hours slash experience in order to move into the left right seats of various aircraft. So I mean, you guys see we have a destination that we can offer pilots to get them through smaller aircraft, become captains, move to larger aircraft. So we're in the processes, obviously, ensuring that folks know that the other part of the strategy is taking pilots who have 250 hours and getting them sufficient or increased hours by putting them back in Moncton Flight College to become an instructor that builds their hours, we can preserve their seniority back at our airlines. So as they're building up hours, they're then able to immediately come in and slot into one of our aircraft, which is them fulfilling the need that we urgently have on an ongoing basis. So it's an overall strategy. It will take some time, but we're attacking it in a several pronged basis. Okay. That's helpful. My next question just, maybe for Tammy, just regarding the disposition of assets in the quarter, I'm just wondering if you provide some additional color on that. I think it was $24,000,000, am I correct in assuming that was the sale of aircraft or from the leasing portfolio? Yes. So there yes, so capital asset disposals from the lease portfolio? Is that what the question you're asking? Yes, I think it was the I'm a it knows that approximately $24,000,000 there in the cash flow statement. I just wanna make sure that I'm I'm understanding it correctly. Yeah. That's correct. That's where it's coming from. And so when we talk, it's important. Can we talk about that net CapEx number? That's so it's total purchases less our divestitures less our maintenance CapEx. What's left is growth. And we said in there that, Regional one was slightly negative growth CapEx in the quarter. And it was simply because the level of, purchases was not high enough to cover both the maintenance CapEx and all the assets that we sold out of a fixed asset. Which is all part of the business. We're regularly buy and sell aircraft. Okay. So if my math is right, I can think about the the gross growth CapEx, if you will, as I can deduct that from that kind of $24,000,000 in dispositions and the approximately 8 or $1,000,000 in maintenance CapEx. Is that right? So, well, if you, yes, if you take the dispositions and I don't know that every one of those is a regional one, I think the most, both of it certainly certainly is. If you take that, you add our maintenance CapEx for Regional 1, that will give you a gross number and then you add or subtract the growth CapEx to that to get the total purchase. Because like I say, we're constantly buying selling on a regular basis. So the CapEx numbers we present to you in growth are a net number. They're positives, less negatives. And I can't remember that could some of that disposition have been sold maybe sold in order to, I guess, transferred into inventory or was all of that 24,000,000 effectively sold to an outside party? Yes, that is cash. So that's that is to a third party. We do sometimes transfer assets when a lease is at a place at the end of its life, what you're talking about in the cash part of the business. Yes. Okay. So that amount is purely to outside as opposed to a transfer? That's right. We had the transfers this quarter between capital assets and inventory were trivial. Okay. That's perfect. Thank you very much. Next question comes from David Tyromut with Cormark Securities. Your line is open. Good morning, David. Good morning. First question is just on the working cap. I was wondering if you give us an idea of the outlook for the remainder of the earn into next year on that? Yes, that's a good question. Assuming there's no aircraft sales with terms like we did earlier this year, which is not the norm. It happens occasionally where we have someone as a letter of credit a reason they don't want to do. We had to ramp up at Quest for 2 reasons. One was we used to do $15,000,000 a month and now they're doing $25,000,000 a month. So just the sales growth there and some of the other places affect your, our working capital. That's fully into the statements now, so you shouldn't see that. And on top of that, Quest has a bunch of, working capital tied up in prepaid. So all the deposits we put up equipment for the new plant, we can't record those at a capital asset until they're delivered. So you'll see that reverse in Q3 where or some of them will balance in Q4 as the equipment is delivered. Aggregate working capital in the balance of the year, there should not be any significant increase in the working capital requirement. Okay, helpful. Thank you. And then the second question, just kind of looking out to 2019, On EBITDA growth. I see a few growth drivers here. The CRJ900 leases, the force multiplier, the month in play college. Are there other things besides that? And are these material as in greater than 5% in total? We haven't given any guidance, David, out into 2019 yet. The, the Moncton flight College growth is expected to be significant. I mean, bearing in mind that it started at 8. So if you doubled it, it would be 16. So and I'm not suggesting you double it. I was just trying to give a order of magnitude of it. The force multiplier will be material when it's out again. You're talking about a $40,000,000, $50,000,000 asset. We regularly talk about the returns we want. And so you can work that out. There's, the beginning of the fixed wing SARs next year, you'll will start to have some revenue in it 2019, but more materially in 2020. And Quest, you're going to see in the back half of the year, you're going to see the new plant kick in, which will also be material. Would that, though, would Quest be positive next year? Because you'll, I would imagine, have some start up costs first half. I think you'll see more start up costs in Q4 than you'll see in Q1. We should be, I wouldn't expect to make any money in the 1st part of the year. But I'll expect to be positive on that plan before the end of the year for sure. Okay. And then 900 leases, are they material or It's not a huge number, but again, you're talking a couple million here or there. It makes a difference. The interesting thing with Regional was is we know what we think we're going to do each quarter. But how would get their changes every time? We think we're going to sell a big aircraft. We don't. We sell more parts. Or release something or where our lease revenue is down and we flip more planes. It's it's a very transactional business. Which is why forecasting revenue even internally for us is hard. EBITDA, we're pretty good at getting to where we think we're going to be. Sure. So so when I add all those things up, like, then I'm thinking the thing descriptions you just gave, it doesn't sound like any of them are like really large numbers, meaning even, over $10,000,000 individually. So sounds like it would all add up to not a big number. Am I off track there or? I think, yeah, I think you may be in touch on the conservative side. We, like I said, we haven't given guidance yet. So I am hesitant to give big numbers, but if that take the Quest plant as an example. Take whatever you think we're gonna make out of the existing plant here and say, we're gonna make half of that next year in the other plants or whatever number you choose to put in there. You can question in and of itself could be double digits in terms of EBITDA. I mean, if we don't invest anything, it's not going to grow by 25 percent a year with no investment, like we don't do things. But our organic growth rates are still healthy. Yes. Okay. That's helpful. And just kind of continuing on, on Regional 1, Does that grow or can always grow? But I mean, based, you've made some pretty big fleet purchases in the last couple of years. You're parting out a lot of that stuff or it's in lease fleet. So I'm just wondering whether the part out fleet in the lease fleet can grow much from here? Or should we really be thinking of it as more of a static business or it may be even declining at times as if these bulges go through the Python? Well, I certainly, we don't view it as declining in any stretch. And in any given aircraft type, there may be the opportunity or may not be the deal opportunity to grow in a given period. What we're, excited about is our movement into the ERJ market, which gives just that much more opportunity, that much more field to run-in. And so, we certainly don't expect the investment level that we had in 2016 first half of twenty seventeen in that business. But we still expect to invest in the business and we still expect it to grow. Just not at those rates. Right. So thinking that way, like that is sort of the pig in the Python because you did have a huge bulge there. As that stuff is ported out, wouldn't that imply the business might shrink a little bit unless you can find that much business again? You're really close, David, except the one piece you're missing in that assumption is that when we calculate our maintenance investment, and our inventory, we're assuming we replace all that stuff. So growth CapEx, we don't get the growth CapEx till we've replaced all that stuff. And so as those 900s get used up or the more likely, those are going to be around a while because they're newer aircraft, But as the 200s get used up, we have to buy new 200s. We bought, I forget the number. We bought 5 or 6 of them already this quarter. Yeah. I saw that. Yeah. It might even be more than that. The word that there's a risk when you look at our financial state you see the net number and there's this idea that we haven't bought anything. And so we're using stuff up. That's a net number. We're reinvesting constantly We're taking that cost of sales money we got where we sold off and reinvesting it and buying new app equipment. Yes. Due to probably it's due to us used equipment. Okay. I get the idea here. And then just last quick question. Kind of fisheries contract. How do you have that now? How big is that? I don't know that we've ever published something that he he would be, give you and the basic idea, we're probably I don't have it in front of me, David, to be honest, but I think it's between $10,000,000 $20,000,000 in revenue. Okay. That's helpful. It just gives me an idea. Yes. It just gives you an order of scale. I don't have an exact number in front of me. Us from a competitive point of view, I'm not sure I want to publish that. Yes, no, that's fine. The rough magnitudes, very helpful. Okay, that's super. Thanks very much. Your next question comes from Scott Fromson with CIBC. Your line is open. Good morning. I thought most of my questions have been answered. Just one thing on the Middle East. It's been in the news lately with respect to Canada. How does this affect your business prospects in the region particular maintenance and surveillance. And I'm thinking of the prospects for the Force Multiplier. Can this reputation always matters. So I don't want to say that it's not, it's not something at all. We don't deal directly with the Saudi government on anything. So there's no direct impact to us. Most of our work in the region is done through UAE. Who's a very serious partner of Saudi. But our relationship, we're built into with long term maintenance tracks and we do stuff with them and our relationship is great. We're always very sensitive to political stuff in the region. But at this point, we don't see any impact on our business. Thank you. Your next question comes from raveel Afzaal with Canaccord. Your line is open. Good morning, Robbie. Morning. First on dividends, it appears that you guys are approaching close to the lower end of your targeted payout ratio. So is there a possibility of further dividend increases or how are you thinking about potential additional dividend increases going forward? That's a good question, Ravi. Our view on dividends is 2 fold. We, we always, we invested a long time in that 5% CAGR we've had. We just increased our dividend. We wanna make sure that we fully fund the next one before we make a change. So we watch that regularly, but I think you're going to see us as we continue to grow our ability to pay the dividend, spend it two ways. Part of it on actually just permanently reducing our payout ratio and part of it in increasing the dividend. We've increased our dividend already this year. So I wouldn't anticipate anything barring exception performance, in the next quarter or 2. But we're always looking at it. And, I think our track record speaks for itself in terms of, our desire to share it with our shareholders. But I think over time, you're going to see us tightening up that payout ratio, a little bit at a time. Got it. Thank you. And then with respect to those CRJ900s that are going back on, you mentioned that some are coming off leases in Q1 twenty nineteen. So when you're signing the contracts right now for the CRJ900s, is it for all of these CRG 900s, even the ones that are coming off lease in early 2019? Or if you're 3 negotiations on the ones about the ones coming off of lease, whether they'd be to end to lease or a new lease. I'm talking about there's some now that were only underpowered by the hour leases, moving those to traditional straight monthly leases with, reserves. And so next year, we like it's a constant ongoing thing. The leases don't all line up at once. And so we're always renewing leases. My point when I talked about it was is that the demand for them has strengthened. We were getting close to by all the, by the end of the year, We expect to have leases in place for all of them and then we'll continue to work on the ones that come due next year. Perfect. And, if possible, can you quantify what sort of an increase we have seen in the inventory over the last 12 months associated with Regional 1, given the record performance continues to deliver? I can tell you that in the last quarter, it was about a $5,000,000 increase And that change in inventory over the last four quarters there, if I take Q3 and Q4 of last year, and, Q1 and Q2 of this year would have been something in the range of $6,000,000 or $7,000,000. I don't remember right now. Zach number in front of me. That's for U. S. Dollars for the last 12, last 12 months on a trailing 12 basis. Sounds great. Thank you so much for taking this. The biggest impact on that is when we do bigger fleet transactions. I don't think we've ever bought 17 aircraft or 28 aircraft the same time before and 17 of the one into inventory. So it'll take us a bit to chew through that. But we don't, I don't see a material change. Like, if we're looking at what is our like we do with our growth CapEx, what is our inventory levels to maintain our free cash flow. They'll plateau. They'll go up $3,000,000 this quarter, down $3,000,000 in the next quarter. When you're buying and selling, it's not like we're buying shoes and we can just go to our manufacturer and pick them up. We have to be opportunistic in buying. So when I say it stays flat, it bounces around, but there won't be a material trend, absent an opportunity to grow. And It's really important. We haven't really talked about it a lot yet on this call, but there there was a real, theory put out by some of the shorts that we couldn't maintain this EBITDA level without massive investment. And the last 12 months have proved that that's essentially nonsense. Our EBITDA stayed very close to where it was at record levels last year. And, our growth CapEx has actually been negative. And if you include the inventory stuff, we're basically flat. Exactly. Perfect. Sounds good. Thank you for taking my questions. Thanks, Robbie. Your next question comes from Mona Nazir with Laurentian Bank. Your line is open. Hi, just a quick follow-up. So just looking at the year to date quest EBITDA performance and it's in line with the annualized 2017 figures. And I'm just wondering, is there anything that you've done that previously they've been unable to achieve with utilization really low when you purchased it? Did you change the sales process since there was an impact on demand? And just was there ever a time when the company was able to achieve a 15,000,000 kind of EBITDA run rate during the 6 month period? Thank you. They've never they've never been remotely close to that. I would love to say it's because of our genius guidance. That would be a massive lie. The reason was quite simply is they were building the order book 4 we took over. And, we knew there was a ramp up. That's why there was an earnout. The ability to generate strong margins by having the plant run at absolute capacity has been better than we anticipated it would be. And, because of our ability to invest in a new plant, they've had the confidence to take orders farther out and fill the order book tighter. Than they otherwise would have had they not built that. But the drivers of the business that have led to this kind of, performance are the order book, the strength of the company and what they were doing before we bought it. We've given them the financial stability to look out and plan to grow further. But what we see here is work that was largely done before we bought it. Thank you. Your next question comes from Scott Thompson with CIBC. Your line is open. Hi, maybe this question for, Tommy, just to get a better sense of the, accounting. Just taking the 28 ERJ-one hundred and forty five aircraft, purchase. Can you run through the how it, works through the, the cash flow? Like, what gets put into inventory and what gets put into capital assets. Just trying to get a sense of the cash flow accounting, please. Okay. So when we buy the aircraft, we make a our best estimate of what we're ultimately going to do with each aircraft in the fleet, which, which does change. So that's why we can have transfers between capital assets and inventory. But right now, we we've got 17 of them that have gone into inventory. So the the purchase price associated with those 17 is going to our working capital line. And the ones that are classified as capital assets, are showing up as a, a cash flow from the purchase of capital assets down in the investing session. Okay. Thanks. That's very helpful. Thank you very much. Just standard accounting, there's nothing unusual about it. Okay. The only art form to it is, is when you buy 28, saying that we're going to sell, that we're going to part out 7 or 2015 or 2019. It depends on what the opportunities are. And so that's why you sometimes see some movement between the two. But absent that, it's pretty straightforward. We put the full value of whatever the planes we're parting out are into inventory and the full value of the other ones goes into capital assets. That makes sense. Must be tough to know when you, take possession. Yeah. I mean, some it's easy. Like, if you buy a CRJ900, We know that a $10,000,000 plane is not getting parted out in the short term. It's going to go into the lease pool, whereas you buy a $700,000 plane, there's a lot of things that could happen. You could put a $1,000,000 into it and lease it out. You could put a $1,000,000 into it and sell it or you could just part it out. So that is that's where the art form of the business is? I would assume also on a new platform. It it it takes a while to understand the the dynamics of the market and what, what you can sell and what you can lease and what you, what you can part out. You're bang on, Scott. I mean, the, the secret sauce of Regional 1 is knowledge. Their ability to understand what the part of value is and the demand and who needs engines and what can we do with these aircraft is what enables them to earn the margins that they earn. And so as we ramp into a new type, like the 2170s we bought, you have to get your your feet wet slowly. And build up that knowledge base. So you're bang on. That's it. Thank you. Next question comes from Derek Spronck with RBC Capital Markets. Your line is open. Thanks guys. I know there are a lot of questions have been asked. Just quickly, thinking of growth CapEx in the back half of the year, the 2 ERJ170 I would assume would be growth CapEx and then the 11 CRJ200s would be inventory? No, I wouldn't make that assumption. Certainly the 2170s are fixed assets, but understand they may not be growth depending on what other sales we have. They may just replace other assets, but we talk about those. It's really always important to say that Like, we we sell aircraft every quarter. We buy aircraft every quarter. You gotta get to the end and it's the net number that matters. And so that clearly, the 170s are capital assets and the CRJs would be a combination depending on what we choose do with them. Okay. And then the plant per quest, would that be recorded in the back half of this year or would it be flow through into 2019? I would say the vast majority of it will be in the back half of this year. Okay. And just moving on to the legacy airlines, you fly into some remote locations where effectively I would assuming it's more very little competition out there. Are there any regulatory caps in terms of what you can implement from a bear pricing perspective? In terms of a regulatory thing, no. In some areas, it's contracted. So we have a contract with government and Nunavut for what tickets cost for their travel. So that has a straight flow through mechanism, whereas in places like Manitoba, Northwestern, Ontario, those are typically what the market price is. And so those would be, lots of reasonable and appropriate. And like I say, we take great pride in the fact that we move slowly and we make sure we inform our customers what's going on. Bill Worley, the founder of Perimeter, when, when we bought up for 50 years, it was with us for 10 till he passed recently. When we took over the province and basically consolidated it into 1, I suggested a price increase. And Bill says, no, I think we should do the opposite. I think we should look at reducing fares. He says, we wanna make a little bit of money for a long time, not a lot of money all at once. And so I'm always a bit uncomfortable when I talk about our, our market position that enables us to pass fuel price increases along, we can do that But it's important we're responsible. We're the sole source of people traveling in and out of a community, and we take that very seriously. So where we pass fuel price increases on, we make sure it's reasonable. And sometimes it takes us a while and that's that that headwind we had in this quarter and maybe a little bit into Q3. But conversely, we get it back when the prices come down. So we've been servicing these communities for decades. We're long term partners with our stakeholders and we want to keep it that way. So we are very sensitive to this. Okay, it makes sense. And just lastly, any update around the competitive environment in your legacy airline business just with some of the new incumbents, low cost incumbents and, and, just wanted an update on the competitive if you're seeing any changes in the competitive environment? The only change in the competitive environment we have seen in the last quarter would be in Northern Manitoba. A small airline from Alberta started flying with, 1 King Air into 1 or 2 of our communities. The impact at this point has been negligible. We have great relations with the communities, in that region and we've, had great support from them. So, outside of that, there really hasn't been much change, Northstar, which is the subsidiary of, Northwest Company continues to grow its internal freight business. But as we mentioned earlier, we had largely, lost most of that business a year ago. We had continued to help them with a couple of markets that's largely complete now. But I can say that's not a material impact in any way, shape, or form on our business. Okay. And what's stopping other airlines, though, making a more aggressive move into some of your markets? Does it just not financially make sense for them and in the infrastructure? Most of the markets we're servicing don't support 2 airlines over any kind of period of time. When you've got, when you've got 6 or 8 or 10 people moving at a time or even 20 people moving at a time, when you split that over 2 aircraft, there isn't enough. We've got all the infrastructure. We've got fuel farms in the north. So if you want to fly to pick up community, Shimadewa, you have to take return fuel. We have fuel in the community, so we don't have to. We have separate terminals at the Winnipeg airport. So you don't have to go through the international terminal. There are no other separate terminals. There's a whole bunch of, infrastructure we've built to ensconce our position with those communities. It doesn't mean people don't come and try like Northern Air has, And it doesn't mean they will continue to drive. But in the long run, we've been there 50 years and there's a reason it's because we have the right planes and the right model. And, well, we don't love new competition. We don't really worry that much about it. Could the community, though, push back and say they want competition or another service provider? We have commute, but we have community partnership agreements with most of them where they do precisely the opposite. They say they want to deal with us. As their airline, because we put money back into the community. We take our position very seriously. We do profit sharing with the communities, We give them discounted funeral and bereavement services. We do economic development. We're working with the out of late communities. On helping them establish a local fishery. We're partners in the communities, Chris. And so, we keep our prices as low as we possibly can. We listen to them on service issues, and, we put back into the community. So Could they ask for 1? Sure. But I mean, I think the track record is the best. Take a look at perimeter for the last 10 years. Okay. Alright. That that's great. And, It's we're we're having this Derek Chris thing again, but it's okay. Thank thanks for taking my questions, Mike. And we do not have any questions. I promise to call them by the right name. And we do not have any questions at this time. I will turn the call over to the presenters. Given that there's no further question, I want to thank everyone for participating on today's call. I'd like to thank our stakeholders for their support over the last quarter, and I look forward to updating you on our progress in quarters in the future. Thanks for calling, and have a great day. This concludes today's conference call.

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