Good morning, ladies and gentlemen. Welcome to Exchange Income Corporation's conference call to discuss financial results for the three and six-month periods ending June 30th, 2017. The corporation's results, including MD&A and financial statements, were issued on July 19th 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 the Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.
For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors sections of the annual information form, and Exchange's other filings with Canadian securities regulators. Except as required by Canadian securities law, Exchange does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded and broadcast live via the internet for the benefit of individual shareholders, analysts and other interested parties. I will 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. Also with me are Carmele Peter, EIC's President, David White, our Vice President of Aviation Operations, Safety, and Integration, and Tamara Schock, our CFO, who will review our financial results in greater detail in a few moments. We are pleased with our Q2 performance, setting new all-time highs in a number of financial metrics. For those familiar with our story, the growth will not come as a surprise, as we have a 13-year track record of increasing profitability of our company through investment in accretive acquisitions and in capital assets to grow our existing subsidiaries. I will discuss the results in more detail shortly, but before I do, I want to speak briefly on the timing of this report. We typically report approximately six weeks after the quarter ends, but have chosen to report earlier for this period.
The reason to report earlier was driven by the uncertainty in the marketplace, and we felt the best way to relieve this uncertainty was with facts. We are pleased to bring some clarity to those who invest or who are considering investing in EIC by releasing our results sooner than we typically do. I want to take a moment to thank Tammy and Carmele and their teams, together with those from our subsidiaries, for their tremendous efforts that were necessary to meet this timeline. I also want to take a moment to thank the team at PricewaterhouseCoopers, who altered their schedule to complete the review of the quarterly results in time for this release. I want to be clear that we made the choice to report this early based on a unique set of circumstances in the marketplace, and that the timing of this report is not the new normal.
We would consider advancing reporting in the future should the situation warrant, but we envision a return to our normal reporting schedule in future periods. As Tammy will detail later in this teleconference, with the acceleration of the release of these financial statements, we completed all of our processes and our external auditors, PricewaterhouseCoopers, completed their normal quarterly review of the statements. Returning to our second quarter results, we saw significant growth in a number of our subsidiaries, but most notably at Regional One, where we have invested significant capital in the last 30 months. These investments serve not only to increase our revenue, but more importantly, our EBITDA and our earnings on a per share basis. The following consolidated metrics were all quarterly records for continuing operations. Revenue grew by 20% to CAD 273.1 million. EBITDA grew by 23% to CAD 70.1 million.
Net earnings were up 50% to CAD 25.8 million, and earnings per share on a basic basis grew by 34% to CAD 0.83 per share. Even though we increased the number of shares outstanding by 12% as a result of the CAD 98 million bond deal financing we closed at the start of this year. These financial results should leave no doubt that our strategy of disciplined acquisition and investing in our subsidiaries for future growth not only works, it works extremely well. We have also executed on our plan to advance as much of our aircraft maintenance program as possible into the slower first half of the year. We completed a significant portion of the year's overhauls in the first half of the year, completing six in each of the first and second quarters for a total of 12, which compares with only three in the first half of 2016.
This increase was the result of two separate factors. Firstly, overhauls and heavy maintenance of aircraft do not fall on a straight-line basis quarter to quarter or even year to year. They are done based on a well-defined prescriptive requirement for how long an aircraft can fly before inspections and overhauls are required. While these timelines can be shortened and work done early, they are highly regulated and cannot generally be extended. 2017 is a year with an abnormally large number of overhauls for our larger ATR and Dash 8 aircraft. We anticipate completing an additional three or four more overhauls in the second half of 2017 for a total for the year of 15 or 16. Comparatively, we did six overhauls in the last half of last year for an annual total of nine. In a typical year, we would expect to complete 11 or 12 such overhauls.
Secondly, we have chosen to take advantage of the synergies made possible by the acquisition of Provincial Aerospace. Historically, the overhauls of these larger aircraft would have been completed by a third-party MRO facility. By internalizing this function, we not only reduce the cost of the overhaul by eliminating the margin we would pay to someone else, we gain control over the scheduling for this work. When you use a third party, we need to get the windows they have available to do the work for us, even if that window is not convenient from an operating point of view. By utilizing internal capabilities, we are able to complete most of this work during the seasonally slower period of the year. Maintaining aircraft is clearly much more complicated than scheduled heavy overhauls and includes work on engines and other components.
The overhauls are a significant portion of what drives the variability of investment in the aircraft. This is evident in the levels of maintenance capital investment we have made in the first two quarters of this year. The higher maintenance investment has increased our payout ratio to 75% in spite of our record operating performance. It is very important to realize, however, that this level of maintenance is unusually high. We expect aggregate maintenance capital expenditures to fall by 25%-35% in the last two quarters of the year. We have consistently stated our public disclosure that these investments tend to be lumpy and will vary significantly period to period, and using an average of 12-24 months to calculate indicative levels of maintenance investment provides a more accurate picture of typical required levels of investment.
These averages need to be adjusted for the growth and the size of the fleet, of course, both at the airlines and at Regional One's lease fleet. I have explained our past approach to growth investments in the past. I think a couple of key points bear revisiting. Our business model is predicated on making disciplined acquisitions and providing access to growth capital to the companies we acquire. Over the past two years, the environment for acquisitions has been particularly challenging in the U.S., given elevated multiples. It has been perhaps the greatest hallmark of our success that we have been disciplined in terms of what we are prepared to pay for acquisitions. We are fully prepared to walk away from an acquisition opportunity if the pricing exceeds our return requirements. In a period of minimal acquisition, our model has still enabled us to grow successfully.
We have used capital for internal investments, deploying more than CAD 310 million over the past two and a half years on growth capital expenditures. In essence, growth capital investment is a way that we will generate new cash flow in future periods. By way of example, we are currently building a surveillance demonstrator aircraft within Provincial that will generate new cash flow in the future when it is completed and goes into service. All of the funding for this demonstrator aircraft is growth capital expenditures. Similarly, we acquired new planes in support of our expansion into Northwestern Ontario. As this expansion will generate new cash flow, it too is classified as a growth capital expenditure. The bulk of our growth capital investments, however, over the past two and a half years, have gone into Regional One. During this two-and-a-half-year period, we have grown the size of Regional One's asset base.
The parts portfolio and our lease portfolio have grown by a total of approximately CAD 270 million. The result? EBITDA has grown by over CAD 65 million on a trailing 12-month basis when compared to 2014, our first full year of operation of Regional One. Regional One has experienced this remarkable growth by doing more of the same things it has always done. The only difference is the access to growth capital at Exchange has afforded their management team and enabled them to take advantage of more opportunities to grow their portfolio of cash-producing assets. The difference between maintaining our existing cash flow and growing our cash flow is very significant. It's why we calculate our payout ratio based on free cash flow less maintenance capital expenditures. The calculation takes into account the necessary replacement of assets to maintain our revenue streams at existing levels.
Since growth CapEx will generate future returns similar to an acquisition, these investments are not included in our payout ratio. We have used this investment approach and classifications since going public in 2004. The proof is in the pudding, as some say. Since our IPO, we have increased our dividend 12 times, made more than CAD 300 million in distributions to our shareholders, acquired 15 companies, and maintained our aggregate debt at similar levels to what it was in 2004 when we began. At the same time, we have grown our earnings on a per-share basis dramatically. We have, in fact, been the model for sustainable growth for the last 13 years. In spite of dramatic changes in resource prices and exchange rates, which can severely impact other Canadian businesses, we have regularly and sustainably grown our dividends.
Approximately two years ago, during the preparation for our November 2015 strategic planning meeting of the board of directors, we established an initiative to set our aircraft operation and safety standards not simply at regulatory compliance levels, but at the highest possible level. Compliance with regulations is, of course, required to operate an airline, but we chose to set the bar higher than that. We fly in very challenging conditions in the north with short gravel strips, with no instrument landing equipment available at the airports. Quite simply, we need to be the best we can be. In order to execute on this program, we wanted to hire an industry leader who would join us at the EIC level. Our airlines are separately licensed, and each has its own core of experts and professionals within its operations.
Our new executive would look into implementing best practices across the aviation segments and look for ways to raise the bar higher. After a search of the industry, we were very happy to hire Mr. David White, whose long aviation career included 15 years at Canada's aviation regulator, Transport Canada. Immediately prior to joining us in July of 2016, he was the Associate Director of Operations, Civil Aviation. In his roles at Transport, he had the opportunity and the obligation to examine a wide range of airline operations across Canada. I've asked him to speak with you today about his experience in the industry in general and EIC specifically. David?
Thanks, Mike, and good morning, everyone. I am the Vice President of Aviation Operations, Safety, and Integration here at Exchange Income. I have 30-plus years of aviation experience, including 15 years with Transport Canada Civil Aviation prior to joining EIC a year ago. I'm a licensed aircraft maintenance engineer and worked for several Canadian aviation organizations, including airlines that service the north, such as First Air and Air Inuit, prior to joining Transport Canada. I spent the first half of my Transport Canada career as a frontline inspector. A core part of my job was auditing and inspecting aviation companies of multiple sizes and scope of operations, both regionally and nationally. I had the opportunity to visit multiple aviation organizations over the years, including some of the companies that are now part of EIC.
Later on in my Transport Canada career, I was the Regional Project Manager for Safety Management Systems in Prairie Northern Region, which included national program input in addition to regional delivery of the new SMS program. I then joined the executive ranks of the public service as a Regional Associate Director of Operations, Transport Canada Civil Aviation. As a Transport Canada executive, as well as fulfilling my own regional role, I took on assignments as Acting Regional Director, Civil Aviation, Acting Director of Standards, and Acting Lead Regulatory Program Modernization with headquarters. It was at this stage of my career the opportunity to join EIC arose. Joining Exchange Income Corporation for the latter part of my career was a relatively easy decision, even though I really enjoyed my 15 years with the aviation regulator.
The diversity and independence of EIC's aviation companies, coupled with the parent company's ability to support and positively influence the safety objectives, was significant in my decision-making process. With EIC, I am able to enhance the same goals that I was dedicated to during my time as a federal regulator. EIC's group of companies represent a diverse group of Canadian air operators with a solid history of serving the Canadian public, largely in northern remote communities, for the past 50 years. This opportunity to support our different aviation management teams, coupled with the benefit that these air operators could readily access the backing of a dynamic and well-funded parent company, solidified my decision. I'm not aware of another consortium or group of aviation companies that created a role at the parent company like the one I have here at EIC.
It allows someone with my aviation background to apply safety and quality lessons individually and collectively throughout the subsidiaries. I will speak briefly to the regulatory background of Canadian aviation to add some color to the safety environment that EIC's companies operate in. Canada has one of the safest aviation industries in the world, overseen by a well-recognized regulatory organization. Transport Canada is a member state as well as host of the International Civil Aviation Organization, known as ICAO. Transport Canada also continuously interacts with the Federal Aviation Administration, FAA, of the U.S. to harmonize North American rules. The day-to-day safety of this aviation industry is dependent on the professionalism of aviation individuals, the proficiency of Canadian operators, and the safety culture nurtured here in Canada over the past 100 years. This is particularly true in the challenging northern environment that many of our operators serve.
This high level of safety is enhanced through strict regulation and monitored through diligent oversight by the regulator. On a side note, while maintaining safe operations is a definitive regulatory requirement, the economic impact of incidents where aircraft are grounded in remote communities is worth noting. The cost associated with unserviceable aircraft at remote airports are much higher than in a major hub, where there are multiple options to access maintenance other than sending a rescue mission. This is an example where operational planning through investment in preventative maintenance meets multiple objectives of safety, regulatory compliance, and profitability. Back to the subject of regulatory interaction in Canada. In addition to communications with Transport Canada for certification and service issues on an ongoing basis, all Canadian operators, including EIC companies, are subject to routine and unscheduled inspections by Transport Canada, as well as interactive follow-up on safety or compliance-related happenings.
The thousands of scheduled and non-scheduled flights by our companies every year, frequent engagement with the regulator is required and encouraged as we are both stakeholders in providing safe transportation for Canadians. For example, all Canadian operators have events reported through the Civil Aviation Daily Occurrence Reports, known as CADORs. In comparison to industry, EIC's group of companies' number of reports is within the norm. With that in mind, it is more important to stress that regardless of the number of reports, each individual event is addressed and followed up by our operators. Safety information is shared through multiple avenues, including the regulator, to address areas of aircraft operator or industry concerns. Over the past year, our companies have received their regularly scheduled inspection as part of Transport Canada's surveillance program.
All EIC's aviation companies hold valid air operator certificates and continue to provide commercial air services under their respective approvals. In addition to meeting regulatory requirements, operational specific training and procedures, as well as suitable technology, further enhance safety operations. Here's an example of an avionics modification designed for safer flights in our operational environment. To serve our First Nations communities, our aviation companies must fly into small approved airports that have gravel runways and no instrument landing systems, much unlike major centers. To enhance safety, EIC supported Perimeter to modify the avionics suite in our fleet of Metros serving these communities by adding state-of-the-art navigation and glass cockpits. This modification program, costing CAD 68 million, was designed specifically for Perimeter and is nearing completion this year.
This was a significant investment in the Metro fleet. It's another instance where investment increases the level of safety, significantly increases the aircraft value, and furthermore enhances reliability for our operations in our challenging environment. There are multiple other examples of where our operators modify or upgrade their fleet to better serve their customers with the limited aircraft type selection available to us to best match our customers' needs. A high level of safety, compliance, and quality are fundamental to successful aviation entities. My role at EIC is to assist all of our current and new companies to continually strive for robust safety standards that consistently exceed regulatory requirements. These objectives form a crucial part of our daily goals at the individual operators, as well as here at Exchange Income Corporation. Thank you for the opportunity to be on the call today.
Thank you, David. I would now like to turn the call over to Tammy, who will review our financial results in greater detail. I will discuss our outlook in my closing comments.
Thanks, Mike. Good morning, everyone. I'd like to start by briefly commenting on the process that we undertook to enable us to report our Q2 2017 results earlier than is typical for us. Even though we have compressed our reporting timelines, we did not reduce, diminish, or eliminate any of our normal rigorous financial reporting control, diligence, or reviews in order to hit this timeline. All normal processes were maintained throughout the piece, and our independent external auditors completed their normal review processes on our financial statements. Now I'll get to my commentary on the Quarter 2 results. In the interest of time, I will restrict my remarks to the three-month period only. Consolidated revenue was CAD 273.1 million, up 20% from last year. The increase was due to a number of factors.
Among them was the return on growth capital investments that we previously made in our subsidiaries, particularly at Regional One. Regional One's revenue for the quarter was $79.2 million. This is an increase of 128% over Q2 2016. Regional One sales and service revenue accounts for over 75% of its year-over-year increase. Lease revenue also increased significantly over the prior year. Revenue also grew as a result of the improved performance by our Legacy Airlines. Its revenue grew by 7% over Q2 2016. This was driven by the growth across all revenue streams in the Kivalliq market and increased passenger volumes in our Manitoba markets. Improving economic conditions in the United States resulted in strong contributions from Stainless. Our revenue growth was partially offset by the declines experienced by WesTower, which is impacted by the cyclical reduction in capital spending by cellular carriers on WesTower's traditional services.
This is occurring due to the focus on the transition to new technology. On a segmented basis, our Aerospace and Aviation segment, which consists of Legacy Airlines, Regional One, and Provincial Aerospace, generated revenue of CAD 227 million, up 28%. This growth was largely driven by the performance of Regional One, as noted earlier. However, improvements in revenue also occurred at Provincial and the Legacy Airlines. The Manufacturing segment generated revenue of CAD 46.2 million, down 7% from last year. This decline was driven by the current demand for WesTower's traditional services, as discussed earlier. This decline was partially offset, however, by higher revenue contributions from all of our other manufacturing entities compared to last year. Consolidated EBITDA was CAD 70.1 million, up 23%. The increase in EBITDA was also driven by previous growth capital investments that we have made. I'll cover this a bit further on a segmented basis.
The Aerospace and Aviation segment generated EBITDA of CAD 70.3 million, up 29%. The Aerospace and Aviation segment's EBITDA margin was 31% compared to 30.8% for last year. Regional One contributed EBITDA of $32.2 million, which is an increase of 86% over the prior year. Provincial's EBITDA was also up 16% as a result of softening competitive conditions within its airline operations. The Manufacturing segment generated EBITDA of CAD 4.8 million, which is down CAD 6.7 million from last year.
I think down from 6.7.
Sorry. Yeah. The decrease was largely due to the market conditions facing WesTower that I covered earlier. The Manufacturing segment's EBITDA margin was 10.4%, which is down from 13.4% for the last year, and for the same reasons cited earlier. Consolidated net earnings were CAD 25.8 million, or CAD 0.83 basic per share. These compare to CAD 17.2 million and CAD 0.62, respectively, for last year. The growth largely driven by improved EBITDA performance stemming from previous growth capital investments. Net earnings were also positively impacted by a CAD 3.9 million after-tax gain on the disposal of our partnership and interest in Innu Mikun. In return for our interest in this partnership, we received a 33% interest in a new aviation partnership branded as Air Borealis.
Our per-share results improved by 34%, or CAD 0.21, even with a 12% year-over-year increase in the average number of shares outstanding as a result of the CAD 98 million bought deal financing that we closed at the start of 2017. Also influencing our outstanding shares was the conversion of debentures by unit holders at the end of the second quarter in 2016. Turning now to other key financial metrics. Free cash flow totaled CAD 51.7 million, which is up 21%. Free cash flow on a per-share basis was CAD 1.66, up 8%. Maintenance CapEx was CAD 29.9 million, up 74% from CAD 17.2 million for the comparative period. The increase of CAD 12.7 million is primarily attributable to the Aerospace and Aviation segment, where the airlines, Legacy and Provincial, had increased expenditures of CAD 9.6 million, and Regional One had increased depreciation of CAD 3.6 million. I will address our airlines and Regional One separately.
In our airlines, the increase was due to variability in the timing of overhaul events. There were more events than average in 2017, and due to our decision to concentrate the timing of heavy overhauls for our airlines in the first half of the year when winter conditions lessen the demand for transportation services due to the availability of winter roads. By way of context, we completed six heavy overhauls during the second quarter as compared to two in Q2 2016. At Regional One, the increase in depreciation is directly related to the growth capital expenditures made in the previous quarters. As a reminder, maintenance capital expenditures at Regional One are equal to depreciation. The rationale for this is that as leased aircraft are flown by the lessees, their green time is being consumed and must be replaced in order to maintain cash flows at current levels.
To ensure that our payout ratio is appropriately reflective of necessary replacement of assets, we classify an amount equal to depreciation as maintenance CapEx. I'd also like to note that when a decision is made to part out or sell an aircraft that is in our lease portfolio, the net book value of that aircraft is transferred to inventory. When this transfer occurs, the entire net book value associated with the transferred asset is reclassified, with no residual being left in capital assets. This is necessary to ensure that capital assets recorded at any given time are fully recoverable from a valuation perspective. The amount reclassified is reflected as a negative growth capital expenditure in the quarter. Free cash flow less maintenance CapEx was CAD 21.8 million, or CAD 0.70 on a per share basis. These compare to CAD 25.5 million and CAD 0.92, respectively, for last year.
Our payout ratio based on free cash flow less maintenance CapEx was 75%. This compares to 54% for the comparative period. Despite the increase, which was due to the accelerated timing of maintenance activities and the growth in the number of shares, our payout ratio in Q2 is well within the range we use to determine the sustainability of our dividend and to make decisions around changes to our dividend rate. As Mike indicated, with the bulk of 2017 scheduled heavy maintenance and overhauls behind us, we expect to reduce our maintenance CapEx in the second half of the year. Accordingly, we also expect our payout ratio to decline. We invested CAD 33 million in growth capital expenditure. The investments were largely made within the aerospace and aviation segment.
Within Provincial, we invested CAD 17.5 million towards the completion of the demonstrator surveillance aircraft and the purchase of new aircraft to support additional routes and customer volumes. Within our Legacy Airlines, we purchased new aircraft to support our expansion of service into Northwestern Ontario. The remainder of our growth capital investments in Q2 was for the purchase of aircraft by Regional One, including the final CRJ-900 from our remarketing agreement with Bombardier. We expect the correlation between growth capital invested at Regional One and subsequent returns to remain consistent with our historical experience. Now I will turn to our balance sheet. We ended the quarter with cash position of CAD 14.1 million and net working capital of CAD 203.2 million. These compare to net cash position of CAD 26.5 million and net working capital of CAD 178.5 million at December 31st, 2016.
The changes in our working capital position are primarily related to increased business volumes in the second quarter within our airlines and at Regional One. Regional One also had significant sales volumes in the latter part of the quarter and increased inventory at Regional One compared to December 31st. I would note that Regional One's inventory has decreased compared to March 31st. Overall, our balance sheet remains strong. Our leverage is well within our target range at 2.08 to one, as calculated under the terms of our credit facility and is well under the maximum allowed. We have maintained our aggregate debt at consistent levels since our inception and have at the same time grown our per share measures. This demonstrates our success with making accretive investments in growth opportunities while at the same time maintaining the strength of our balance sheet.
That concludes my review of our financial results. I'll turn the call back to Mike for some closing remarks.
Thank you, Tammy. We are excited about our expansion of services in Northwestern Ontario, Labrador, and Quebec. The formation of the Air Borealis partnership is particularly positive. We have historically partnered with the Innu through the Innu Development Limited Partnership to service parts of Labrador. The Inuit through the Nunatsiavut Group of Companies, and I apologize for my pronunciation of that word, partnered with a company who is a competitor of Provincial in other markets. We are excited to partner with both of these First Nations and extend our reach across Labrador and Northern Quebec. We have already added an additional aircraft in the second quarter. We'll add one more in the third to give us the necessary capacity to cover these additional communities. We have enjoyed a long relationship with the Innu and are looking forward to the new relationship with the Inuit.
While this relationship is tied to our Provincial operation, the underlying concept is not unique to that airline. We are proud to have similar partnership relationships across our airline operations in Manitoba and Northwestern Ontario and Nunavut, many of which date back for a decade. Through these relationships and partnership agreements, we put millions of dollars back into the communities we service on an annual basis. We realize that in many communities, we are the predominant means of transportation in and out of the community other than winter roads for a short period of the year. We take that responsibility seriously and view the communities as more than customers. They are, in fact, our partners. We are particularly proud of our most recent initiative in Manitoba and Northwestern Ontario. We have partnered with the Winnipeg Blue Bombers of the Canadian Football League and the Victoria Inn Hotel chain.
Under this program, for every home game this season, we will bring 40 to 50 children from various communities together with their chaperones to Winnipeg. In most communities, we will do this through a dedicated charter where the participants will fly to Winnipeg and receive the full Bomber game day treatment, including Bomber gear, food, drinks, and perhaps most excitingly, at the end of the game, culminating with a trip to field level to meet the players after the game. We've continued to grow our medevac business with Keewatin's Kitikmeot contract, which will begin service in the fourth quarter of this year. The contract will also firmly establish Keewatin as the preeminent northern medevac provider. This will extend our service across all of the territory of Nunavut. We also recently announced Provincial Aerospace contract to provide maritime surveillances to the Netherlands government in Curaçao, has now been extended into 2020.
We also continue to advance the development of our surveillance demonstrator aircraft at Provincial. The plane, which will be used as a demonstrator to show Provincial's capabilities, will also be available as a quick response aircraft to provide services when required by governments around the globe. It will attend air shows beginning in late 2017 and will be available for use next year. We anticipate that the deployment of growth capital expenditures will slow materially in the second half of 2017. We have now completed the CRJ900 acquisition program announced in the fourth quarter of 2016. These aircraft are more expensive than most of the aircraft in our fleet, and as such, the purchase made up a significant portion of the funds invested in capital assets at Regional One.
Regional One is an opportunistic buyer by its nature and things could change quickly should the right opportunity present itself, we would expect growth investments to be limited in the balance of the year. Growth capital in the balance of the company is also expected to moderate in the second half of the year. One aircraft will be purchased in Provincial in the third quarter, which will bring to a completion the fleet expansion plan for the airlines for the foreseeable future, with the exception of Medevac aircraft for Keewatin Air's new contract, which starts in the fourth quarter of this year. We will complete Provincial search and surveillance aircraft, and we will also have a small initiative to increase production in our U.S. tank business, which is currently running very near capacity. The outlook for acquisitions in the United States remains challenging.
Companies are selling at prices that are beyond what we are prepared to pay. It is unlikely we will conclude a material transaction in the U.S. in the future. The situation in Canada is quite different. Competition for strong target companies remain high, prices are not as inflated as they are in the United States. Our pipeline is within historical norms in terms of the number of potential transactions. The opportunities we see, however, are of higher quality than in recent periods, and we are cautiously optimistic about our opportunity to grow the group of subsidiary companies. Our balance sheet is strong, with approximately CAD 290 million in available capital to enable us to move swiftly should the right opportunity be uncovered.
In the event we are unable to find a target that meets our well-defined criteria at a price that is accretive to our shareholders, we will simply wait. Growth for the sake of growth does not add value. It needs to be accretive to our shareholders, or we will pass on the transaction. We look forward to the second half of the year and continuing to deliver strong financial performance and sustainable dividends to our shareholders. We have a long track record of delivering disciplined, accretive growth to our shareholders. By no means does that mean we are without challenges. Rather, as we have demonstrated over more than a decade, the strength and the resiliency of our model allows us deliver on our promises to our shareholders without every business performing at its peak.
We are currently facing a cyclical decline in the wireless business, which is having a material impact on WesTower. While this will improve when the telecommunication companies roll out the next wireless technology in the next few quarters, we will face weaker demand until that occurs. Similarly, the ongoing softness of the mining sector, combined with a wet summer on the prairies, which has resulted in reduced demand for fire suppression work, has resulted in a challenging environment for our rotary wing business. Ongoing strength in the balance of our portfolio will enable us to meet the expectations of our shareholders in the balance of the year. We are entering the busier summer season for our airlines, with our fleet in great shape to take advantage of available opportunities and to look after the needs of our customers.
Regional One will continue to deploy the assets bought in recent periods, and the balance of our manufacturing entities will benefit from a strengthening economy and improved demand. I want to take this opportunity to thank our shareholders for their support during what has been a very challenging period in the capital markets. We are proud of the most recent quarter, but more importantly, we are pleased that it's been delivered without changing our business model that has served the company and our stakeholders so well for the last 13 years. It has worked in the past, it is working now, we have every reason to expect it will continue to work in the future. We look forward to speaking to you again in the fall with our Q3 results. Thank you very much for listening, we would now like to open the call to questions. Operator?
Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you do have a question, please press star followed by the number one on your touchtone phone. You will hear a tone acknowledging your request. Your questions will be polled in the order they are received. We ask that you limit your questions to three. Thank you. Please ensure you lift your handset if you are using a speakerphone before pressing any keys. Your first question comes from Trevor Johnson from National Bank. Your line is open.
Good morning, Trevor.
Morning, folks. Firstly, there's been some information circulating the market that the flight volumes from the Legacy Regional Airlines, specifically Perimeter and Calm Air, are collapsing. When we look at Q2 results for this segment, it doesn't suggest that this is the case. I was just wondering if you might be able to speak to this apparent disconnect.
The company has never commented on the statements about flight declines because they're, quite frankly, simply untrue. Perimeter itself had the best revenues it's had in its history in May and June, which would be simply impossible if the number of flights had declined by 80%. The flights are consistent with historical norms, with some growth because of the increased number of passengers.
Great. Just turning to Regional One, can you provide a bit more color just on sustainability of the EBITDA in Q2, specifically with respect to the leasing and parts sales component of the business that are a bit more recurring and sticky?
I think it's really important to look at Regional One as a group of things that we do. We buy aircraft, which we either sell as parts, resell as full aircraft, or lease out. If we buy it to part it out, it goes into inventory. If we buy it to lease it out, it goes into fixed assets. If it ever changes categories, we move the entire aircraft from one category to the other. The only exception to that would be in the event that we purchased an aircraft as a capital asset, decide to part it out. We may decide to lease the engines and leave them in our engine portfolio, but there is never any parts left behind or fragments left as part of a fixed asset. When the plane is moved, the plane is moved.
From a sustainability point of view, the makeup of the revenue changes slightly quarter to quarter. Two-thirds of our business is very predictable, parts revenue and lease revenue, and they've grown in lockstep with the investments we've made. Plane sales do tend to vary a little bit quarter to quarter, but it's really important to understand that makes up a very small portion of the earnings of that business. The margins on the sale of aircraft are far lower than they are on the sale of parts. When you look at the results, you could see a variability in revenue quarter to quarter if we were to sell a CRJ700 for CAD 8 million in one quarter and then not the following quarter, but the margin impact of that sale is very small.
As such, the growth rate, assuming we continue to invest in maintenance capital investments, and I want to make sure that's clear, in maintenance capital investments to replace the hours we're using up in our lease fleet. The results of Regional One are sustainable, and we in fact believe will grow over time as we fully deploy the assets we've already bought.
Great. Then just the last thing, I can hop back in the queue. There's been some severe flooding in Churchill that we speculate could be of some benefit to your Manitoba Airlines. Any commentary on this opportunity or potential?
Yeah. I think it's highly political in our province right now about how that railway line will be repaired or in fact, if it will be. In the short term, the single biggest impact is in our freight business, so we have increased our number of freight flights. I don't have the number in front of me, but it's probably added a few flights a week into the community. One thing I would like to point out, though, is because of the, in quotation marks, "emergency nature" of this, no one in Churchill could have prepared for the fact that they didn't have rail service. We've actually reduced the price of our freight significantly to do what we can to help limit the impact on the community. We don't want to be seen as taking advantage of what's a very difficult situation for the people living there.
Got you. Great. Thank you.
Thanks, Trevor.
Your next question comes from Steve Hansen from Raymond James. Your line is open.
Yeah. Good morning, guys. Solid quarter.
Good morning, Steve.
Good to see you. My first question, Mike, relates to the demonstrator aircraft. You suggest it'll be available for next year. I'm trying to get a sense for what kind of pipeline you think you're going to have for that aircraft and what the opportunity is over the longer term. It sounds like it's a rapid deployment aircraft, but it also sounds like a pretty good marketing vehicle for your broader services. Just the broader sort of strategic plan for the aircraft would be nice.
When I sat back and got ready for the conference call, I expected someone to ask about this, and this is single-handedly the most difficult question to answer because our guys are so excited about the potential opportunities and the discussions they've had with, quite frankly, customers around the world who said, "If this is available, we're going to be interested in it for this or that." Its first role, when it's first ready later in this year, will be to attend a couple of air shows where people can actually go see it. One in particular, I believe, is in Dubai towards the end of the year, which is the first place it'll be seen publicly. The key with this thing is, do we get the business we think we're going to get out of it?
The last thing I want to do is overpromise and underperform. I can tell you we're really excited about it. I can tell you that we have tentative plans to do more of them in the event they're as successful as we think they'll be. The proof's in the pudding. This is something no one has done before. Let's wait and see how well the governments actually follow on in terms of the indications they've given us.
Okay. Very good. No, that's helpful. It does sound like an attractive program. Just secondly on the Regional One, if you're sort of finished through the pipeline now on the recent set of purchases, how do you think about filling the pipeline, if you will, for future purchases down the road? Is there still a reasonable number of aircraft coming available? I understand growth CapEx in the back half will be lower, but if you're thinking about future aircraft pipeline, where do you source that and how does it look?
I think there's two things to cover, Steve. Perhaps I wasn't clear a little bit on growth CapEx. We continue to look and we are very active in buying aircraft, but they tend to be one here or two there, as opposed to the program with where Bombardier and with some of the airlines in Europe where we bought those aircraft, which was an investment of north of $100 million. One, because we don't see one of those right now. There's nothing that we're looking at that meets the return requirements we have. We quite literally have opportunities to buy planes in the world, whether they're in Japan, whether they're in Europe, whether they're in the U.S., and then deploy them around the world. Understand that just to maintain our maintenance CapEx levels, to replace that green time we're using up, I don't have the exact number.
Tammy can jump in and help me here, I think we're talking about something in the range of CAD 7 million or CAD 8 million a quarter in terms of aircraft we need to.
Yep. It's just over CAD 8 million a quarter right now.
that we need to buy just to stay in the same place. In terms of what we've already bought, we've seen some of the benefit, but not all of our 900s are on lease yet. Some of them we're still working with people. There's LOIs on some of them. We expect that you will continue to see growth in the lease portfolio over the next 12 months as we deploy the balance of those aircraft.
Just as a reminder, we of course have our Ireland expansion, which gives us additional access to aircraft and our Bombardier relationship which continues on, albeit we finished the purchase of our CRJ-900. That relationship is still ongoing and a good source of information and opportunities for aircraft.
Great. No, that's helpful. Just as a derivative question to that is, have you started to dip your toe into the water any further on the alternative platforms, the E-Jets or otherwise?
We have actually bought and sold and traded in the ERJ. It would still be a, relatively speaking, smaller platform for us. Our initial forays into that have been positive. Again, we'll walk before we run. We want to make sure we have the expertise so that when we do a significant purchase and we think we're buying at the right price, we're correct like we have been on our CRJs, ATRs and Dash 8s.
Yeah. In fact, we recently just hired an individual with significant experience in the ERJ engine platform, which we think will be very helpful in continuing to delve further into this aircraft platform.
Okay. Very good. Thanks for that. I'll turn it back to you. Thanks.
Thanks, Steve.
Your next question comes from Mona Mazor from Laurentian Bank. Your line is open.
Good morning.
Morning, Mona.
Hi. My first question touches on specific balance sheet line items, and I think you might have answered this to Trevor, but I just wanted to clarify how you transfer assets between capital investments and inventory, particularly within Regional One. Touch on or discuss what portion of aircraft, if any, is placed into fixed assets and when.
Okay. Let's do a quick EIC Accounting 101 on this. When we buy an aircraft that's going into our operating airline, so the Calm Airs, Perimeters, Provincials of the world, we take that aircraft and we break it into its component parts on our balance sheet. We do that because the depreciation rates are different. Clearly, the fuselage of an aircraft has a longer lifespan than a landing gear, which has a different lifespan than an engine. When you look at our operating aircraft, they're broken down into the various component parts of the aircraft. Conversely, when you look at Regional One, we're leasing the aircraft to a third party, and we do not have visibility on what overhauls, what work they're doing on the various components. It's impossible for us to componentize that into the various parts.
As such, we take a look at the value of the aircraft when we buy it, the residual value at the end of its life, and then depreciate it over that period. That, the entire aircraft is recorded in the section of our financial statements in fixed assets called fuselages. Fuselages really includes two things. It includes just the fuselages on our operating aircraft and the whole aircraft, engines, landing gear, windshield wipers, you name it, they're all in there for the planes that are available for lease or under lease. If a plane reaches the end of its useful life at Regional One as a flying plane and we choose to monetize it by parting it out, we take the entire plane out of fuselages and move it into parts.
There are occasionally times when the engine may still have life left, in which case we would leave the engine in our engine portfolio. The balance of the aircraft ends up in parts. It's really, really, really important to understand, when it goes to parts, there's most of the aircraft in terms of volume doesn't have value. Nobody buys the tail section of a retired aircraft. Nobody buys the scratch, or very few people buy the scratched used windows, or the chairs, or the overhead bins, or the drink cart. Do we have one or two of those things in our parts thing? Sure, in case someone needs one. The vast majority of that stuff has no value and is discarded. The value is placed on the parts that actually do have value, and it ends up in parts. That was the explanation from a CEO.
I'm going to just confirm here with Tammy that what I've said is actually correct.
Yep. I can confirm that Mike's description is accurate. I think one little bit of color I would also add to it, just around the value of Regional One's inventory is to add on to Mike's point about a third of Regional One's parts inventory is carried at zero cost because it's more difficult to move that stuff. Additionally, about 85% of the total cost on our books is approximately two years old or less. We're very diligent about making sure that the inventory we're carrying on the books is at an amount that will drive future profit. We're not carrying bad inventory there.
That inventory is value tested every quarter by the subsidiary. It's tested by our internal audit department regularly from head office. As part of the year-end audit, PwC tests the value by utilizing a third-party appraiser to test the values and make sure that they're appropriate. There is no risk or no concern on our part about the value of that inventory.
Okay. Thank you. Just secondly from me, wondering if you could run us through your ability to pay dividends if you were to stop investing in growth CapEx.
That's a good question, Mona. The growth CapEx are the things we do to increase our future cash flow. The maintenance capital expenditures we have, whether they're in the airlines or whether they're in the manufacturing companies or whether they're at Regional One, are fully sufficient to maintain the assets in those businesses. By doing that, they're fully sufficient to maintain the dividends at current levels. We do generate cash flow beyond our dividend and our maintenance CapEx, which is always going to be available for growth. Should, for some reason, we choose to stop using new capital, which I want to be clear, it's not our intention. As long as there's good opportunities, we're going to do what we've done for the last 13 years. Should we choose not to for some reason, there's no reason that the current dividend levels are imperiled.
The only challenge we'd have is it would take us longer to grow the dividend in the future because there'd be less capital deployed.
Okay. Thank you. I'll step back in queue.
Thanks, Mona.
Your next question comes from David Tyerman from Cormark Securities. Your line is open.
Good morning.
Good morning, David.
My first question is on the Legacy Airlines. The concern among some investors is that competition is negatively impacting the Legacy Airlines or could. I was wondering if you could just give us a rundown on the state of competition in Legacy and I guess also Provincial.
Yeah. In Provincial, just to start with your last question first, the competitive landscape has eased somewhat with the new deal we've done with Air Borealis and Air Labrador's exit from a number of other markets. I would suggest that the competitive landscape there is easier. In Northwestern Ontario, that's the most competitive markets we're in. It has been competitive and it still is. There's really no change there. In Manitoba, we have a very dominant market position in there. Flying into Nunavut, it's exceptionally dominant. In Manitoba, in most of the markets we're in, we are the key carrier or the only carrier. We have an airline from Ontario that has started one flight into Manitoba a day which has had a negligible impact on our company. Occasionally we have [small airline] and try and fly against us into some of our communities.
That comes and goes, and again, at this point, there's been no material impact. I want to be clear, it doesn't mean no one could show up. Someone could try.
Sure
compete against us at some point in the future. That's entirely possible. It's happened in the past, but our cost structure and our relationships are such that we're confident, were that to occur, we'd be able to deal with it. At this point in time, as you can see by the Legacy revenues, the thought that we're under massive siege is just factually wrong.
Okay, very good. Then the second question, just on the working capital. It sounds like you had a build in the receivables related to aircraft sales. Should we expect working cap to reverse and be an actual generator of cash in the second half? Or maybe you could just
Yeah
comment on that.
I guess I would make a couple of comments related to that. Our receivables do tend to be quite high at the end of the second quarter relative to the rest of the year because our business volumes are growing significantly through that period in a lot of areas. In Legacy and then obviously with the growth at Regional One, we're seeing that as well. Yes.
Yeah
We would expect it to decline, all other things being equal, because that's the way the cyclicality of our business will influence. One thing that I would also like to point out is that when we have certain large contracts in our Legacy Airlines with governments, the timing of their payment of receivables can really influence that balance at any given time.
Sure.
While we would expect it to go down, if they pay very shortly after a quarter end, you may see it appear high for that reason. That's not business volume related, that's just timing related. With large customers, that can happen.
Right.
Then the one anomaly in the quarter, and quite simply, is we sold an aircraft in a difficult part of the world. We sold it with the benefit of a letter of credit to ensure we would be paid. At quarter end, the check hadn't replaced the letter of credit. That happens regularly. It happened at the end of Q4 as well, where we sold an aircraft and then collected it in Q1. That's a normal part of the business. We make sure we've got the necessary collateral to let them have the aircraft. It's not a change in the business or an ongoing pattern. It's just tied to a particular transaction.
One last comment I would make on working capital is SFI's business volumes are starting to really grow. Those have influenced working capital position at quarter end. Depending on their continued business growth, we could see it go up or down in the third quarter.
Okay
Generally, we would expect it to come down. Yes.
Okay. That's helpful. Then the third question I had was on the Canadian dollar. I was wondering if you could comment on how you see that impacting results since it's strengthened so much.
The Canadian dollar in the last month or so has risen fairly significantly, that hurts us a little bit in the short term, and the reason is really quite simple. Regional One operates in U.S. dollars, so when we repatriate their profits, the strength of the Canadian dollar reduces the Canadian dollar value of those sales. Typically, that's largely offset by two things. One is the impact on fuel prices, which we should see in the future, because ultimately, fuel is a U.S. dollar commodity, and the cost of airplane parts. As we've talked a lot first half of this call, we chose to do a lot of that in the first half of the year. Apparently, my ability to time currency transactions isn't that good, because we spent most of that money back when the Canadian dollar was in the $0.73, $0.74, $0.75 range.
It's now in the $0.79 range. The shelter we would normally get from that isn't there. That was a very long answer to say that the strength of the Canadian dollar is likely to cost us a few million CAD in the back half of the year.
Okay. You wouldn't be the first to not get currencies right, Mike. Thanks very much.
Thanks, David.
Your next question comes from Ravil Afzal from Canaccord Genuity. Your line is open.
Yes, thank you very much.
Thanks, Ravil.
Good morning, guys. My first question is regarding your acquisition pipeline. Could you provide us with a little bit more color about the type of sectors that you guys are looking at and the opportunities there?
Yeah, absolutely. For those of you who followed our story for a while, I've talked about the desire to find a new vertical for a very long time, and we're still looking actively, but we have not found anything at this point that meets our criteria and is big enough to warrant going into something new. I can tell you that the transactions we're pretty excited about are in the sectors we're in now. They may not be exactly what we do. We're looking at some very interesting, unique opportunities within the aviation and aerospace sector, one in particular, and I can't tell you what it does, because it wouldn't be that hard for you to figure out who they are then, is an expert in their part of the field, and it's a very exciting opportunity.
We also, for the first time in a while, have a very exciting opportunity on the manufacturing front. It's not exactly what we do today, but they're a Canadian leader in a certain business, and we'll see if we're able to close any of those transactions. We also have a number of smaller transactions, again, both in those two fields, that we'll see what we can get to. We're not at a stage where we have any deals or there's anything I can report to you, just the stuff that we're excited about, and I think we're in the ballpark on pricing.
Got it. Given the age of your fleet, can you please comment on how you see the maintenance capital trend changing for your business over the next 4 to 5 years?
That's a really good question, Ravil . Aircraft, when they first come out from the manufacturer, are under warranty, and they're coming up to their first overhaul. The first segment when a brand-new aircraft comes out is very cheap for the company to operate. It goes in for a heavy overhaul, and the expenses start to change. By the time the aircraft's been overhauled a couple of times, it's reached, in quotation marks, kind of mature level. Our aircraft range from 15-30 years old. The overhauls of those aircraft, when you overhaul it at 18 years old versus when you overhaul it at 21, there's not a material difference. Now, plane to plane, you could have a variation depending on what work you choose to do on a plane at a given time.
There is no discernible trend on the maintenance cost of those aircraft, absent were the Canadian dollar to weaken, that will drive up the cost of those planes. Conversely, were the Canadian dollar to strengthen, it would reduce the cost of those planes, or if there was a major inflationary environment in access to the parts for those planes. The amount and the type of work required on our fleet is essentially the same today as it was 5 years ago. It is essentially the same as it will be 5 years from now.
Great. Thank you so much for that. Just finally, if you can please comment on consensus forecast for 2017. Do they make sense based on your outlook for the company?
Yes. We stated after Q1 that we thought we could meet analyst consensus. We still think we can meet that. We had a good, really strong second quarter. With that, we continue to expect that we'll be able to meet the year-end numbers. We're not without our challenges. WesTower is having a tough go of it. If I were to be honest, it's a tougher go than we anticipated. The telcos are even slower than we thought they might be.
As Mr. Tyerman asked me, the exchange rate doesn't help us any. Having said both of those things, we're still comfortable that we're going to meet the analyst consensus.
Great. Thank you. That's all for me.
Your next question comes from Konark Gupta from Macquarie Capital Markets. Your line is open.
Thanks for taking my questions. I have three questions, and I wanted to start with the simplest one first. Mike, what do you think is the total CapEx required to sustain EBITDA at the current run rate without cutting the dividend?
We haven't really given a forward-looking number on that, Konark. I think if you were to take a two-year average of this year and last year, that's probably pretty close. We've grown the fleet 5% or 10%, so you might want to add some adjustment factor. The reason I say to take a couple year look at it is last year was a very light year for us for overhauls. Timing-wise, we only had nine. This year is the opposite. It's looking at something like 15 or 16. Next year, while we haven't done our budgets and I don't have a final number, I would expect it to fall somewhere right in the middle of that, is our current guesstimate. We'll give much better guidance on that in Q3 once we've had the opportunity to do our pure scheduling for that.
I think something in the average of those two periods with a slight adjustment for the fact that, remember, the Regional One fleet has grown, and so that depreciation will grow a little bit more with the fleet. Should we do any other growth CapEx that we would tell you about, that would obviously increase it by the depreciation on the new planes.
Mike, let me be clear on this. Do you sort of imply that if you have just sustainable CapEx to maintain EBITDA, you would be free cash positive after all the CapEx and after all the dividend? Is that a fair statement?
Absolutely, completely, and unequivocally.
Okay, thanks. Second question, Mike. I know it's tough to predict growth CapEx given the dynamics at Regional One, but perhaps you can help us with some numbers here. When you say you don't have major CapEx plans in the near term, how much growth CapEx does that mean in second half and into 2018? And let's say a big opportunity shows up in the next couple of months. Where would you set your maximum limit for growth CapEx for that?
Let's deal with that question first. I don't know that I have a maximum limit. The stock's trading at a level today that I think is well below its intrinsic value, as evidenced by the fact that we've been using our share buyback capabilities pretty consistently until we went into the blackout period. I don't think you're going to see us actively pursuing new capital to expand in this environment until our stock prices were appropriately valued. For us, the size of the growth CapEx is really based on how good the return is. If the deal is good enough within our existing capital, we would look at it. In terms of the rest of the year, I kind of spelled out those projects. It will be down materially from where we are now.
Okay, Mike. Thanks. Finally, Mike, on the current leverage metrics that you have, and given the share price where it is, how do you plan to fund future growth CapEx or let's say a big M&A, in case you see a very attractive, big opportunity? Do you have some headroom in your covenants and could there be a potential divestiture of certain underperforming assets as an option?
We would always consider divesting ourselves of an underperforming or even an over-performing division if the price was right. At this point, I don't see that as a high degree of likelihood. In terms of within our existing capital, I think we have like CAD 290 million-ish available, and if we were buying EBITDA with that, so if we're using that money to buy new stuff, I could fully deploy all of that at the kind of prices we pay and stay within our covenant strength.
Okay. That's all my questions, Mike. Thanks.
Thanks, Konark.
Your next question comes from Kevin Chiang from CIBC. Your line is open.
Hey, thanks. Maybe a housekeeping question. I'll start off with a housekeeping question here. Thanks for all the details around capital assets and inventory. I've noticed, though, over the past few quarters, you've seen an uptick in your asset sales. I just wanted to confirm whether that reflects the planes that you're selling. You noted you sold three planes. Does that reflect the CAD 12 million of asset sales? If that's correct, I'm just trying to reconcile why wouldn't have that moved up into inventory and what special case would that just come out of capital assets? Did something change in, I guess, some of your estimates to lead to one accounting treatment versus the other?
Kevin, I really have no idea what you're talking about in terms of our accounting treatment. It's really quite simple. If we have a plane that's in fixed assets and someone wants to purchase it, and it's an accretive sale, that's the business we're in. I'll sell fixed assets if the price is right, and we don't have to move it to inventory to sell it. If we did, the accounting treatment would be exactly the same anyway, because if you move it out of capital expenditures and out of capital assets and into inventory, it would be a negative CapEx. We talked about that. If I sold it out of inventory, it would then reduce the inventory. Whether you sell it directly from CapEx, from capital assets, or from inventory has absolutely no impact on the financial statement.
No, fair enough.
If your question is actually about the sustainability of asset sales?
Right. Yeah. Should I be making like CAD 10 million a quarter or
I think it's reasonable to assume that we're going to continue to sell aircraft on a regular basis. Will they be exactly the same? No. In terms of what it generates in the bottom line between our leasing portfolio, our parts sales, and our aircraft sales, if the concern is that the quarter was driven by aircraft sales, I would just take a look at the financial statements. We disclosed because some of our shareholders said, "Hey, we want to know what's really going on at Regional One." We disclosed the leasing portfolio. The leasing portfolio, and Tammy help me here, the leasing revenue went up by what this quarter?
This quarter it went up by CAD 3.5 million from Q1 to Q2.
The leasing revenue quarter-over-quarter, I think, was up about CAD 10 million from last year.
Oh, sorry, from last year. Yeah, close. Third quarter is 13 point.
Yeah. Our increase in leasing revenue is approximately CAD 10 million quarter-over-quarter.
As we've discussed before, the EBITDA margin on a lease payment is high 90s. It's virtually all flow through.
Right.
When you look at the increase in the EBITDA of something in the range of CAD 15 million, CAD 10 million jumps straight out of the lease category. Absent the plane sales, the parts sales are way up, and the parts sales are way up at a much higher margin. If the concern is that the results aren't sustainable because we sold planes this quarter, I wouldn't be overly concerned about that. Could it change my revenues quarter-to-quarter a bit? Sure it can. If you sell an CAD 8 million CRJ700, that's a significant revenue hit, but the margins on the sale of aircraft are much lower.
Yeah. I would add that if you look at the relative percentage of revenue source between parts, whole aircraft, and lease, over the last 10 quarters, it's stayed pretty constant. You have the odd slight blip if you do sell an aircraft, but it's not as profound as you might be thinking, Kevin.
Yeah.
It has a fairly significant if you sell a big aircraft.
Right.
Most of the sales we have are older CRJ200s, Dash 8s, those kinds of aircraft. We don't sell a lot of the bigger and newer aircraft because most of them are under lease. They do sell occasionally. When we do, the impact on the bottom line is not very big.
Yeah. I wasn't suggesting that it wasn't sustainable. I was just wondering, just from my own modeling perspective, would the three aircraft you sold in the quarter, I guess, reflect that CAD 11.5 million on the cash flow statement? I'm reconciling it correctly.
You can see it in the capital assets section of the cash flow statement.
Right. Yeah. That's all.
That's all.
Okay. Anyways, I can take it offline. It's okay.
Yeah.
Just secondly, I was just wondering, as you make these acquisitions, and it sounds like your pipeline is quite robust here, I apologize if it's somewhere that you've disclosed, and I haven't found it yet. I wonder how the board thinks about executive compensation, especially when I look at the most recent proxy, two of your more well-paid executives are from recent acquisitions in Provincial and Regional One. Does the board look at the same metric across when they judge yourself and Tammy relative to the presidents of these divisions that you're acquiring, or are they judged on different metrics? Because I presume the underlying business models are so different that a static compensation model might not reflect the associated risks with running these businesses.
When we look at an acquisition, how we determine the cash flow is based on what the ongoing compensation is of the people within those companies, what's sustainable and what we're going to pay them. The board then approves that as part of the transaction. That is because it's factored into the cash flow of the company you're paying and what you're going to continue to pay the people. If something were materially out of whack, the bigger concern, quite frankly, is sometimes in private companies, you may have an employee that's underpaid, you couldn't replace them for that value. Effectively, the cash flow you're buying is overstated. We want to make sure that the people are paid at the market for the job they're doing.
I've got no problem with what Brian makes at Provincial or the guys at Regional One when you look at the performance of that company or companies.
I don't mean, I guess what I'm not suggesting that they're not performing well. For example, if you're judged on, let's say the head office executives are judged on, I'll say EBITDA. EBITDA might not be an appropriate metric, say, for one of the businesses you acquired as a board. When they look at the variable comp for these individuals, do they make those adjustments, or are the metrics static across all executives? If it's EBITDA for you, it's EBITDA for somebody else as well, even if the underlying business model might be different.
Yeah. It's not EBITDA for anyone.
It's all about free cash flow after-
Okay.
-maintenance reinvestment, and it's about earnings.
Okay.
Each, they are slightly different. We're about generating free cash flow, and so that's a big part of everybody's compensation plan.
Okay.
The compensation plans are different between the companies.
Okay. No, that's helpful. Then just lastly, you did have a note in your MD&A about a partnership with CRJ Capital. Can you just provide some insight exactly the opportunities, I guess Regional One sees with CRJ Capital and just when you decide to make these partnerships, what exactly triggers it?
Well, generally speaking, the partnership you're talking about is with the founder of Regional One.
His initial contract was coming near its end. As I disclosed in marketing meetings over the last quarter, we've been trying to find a way to make sure we tie him up for the long run.
Right.
We've allowed him to make minority investments into certain acquisitions of aircraft, provided that the minority position is approved at the time the acquisition is made, so he can't buy in later. It's approved by head office, and he puts his capital up upfront. In return, his non-compete is extended for a period beyond the end of the life of the partnership.
Okay.
We view it as a win-win. We don't have any of those with anyone else, and at this point, we don't anticipate having any other one.
Is there an asset difference? I presume things like the regional jet stuff you prefer to keep wholly within Regional One. Does CRJ Capital maybe focus on a different aircraft type?
They would tend to be small.
Okay.
They're still largely regional jets, but they would be smaller planes and stuff that has a shorter lifespan that tends to transact more quickly. That's neither here nor there. He's making smaller investments into certain transactions, and in return, the non-competition clause is extended.
Your next question comes from Derek Spronck from RBC Capital Markets. Your line is open.
Great. Thanks for taking my questions, Mike and Tamara.
Hey, Derek.
You're comfortable with EBITDA in 2017. It's around a 13% growth rate year-over-year. Looking out into 2018 and the investments that you've made to date, consensus is roughly 10% year-over-year from 2017 and 2018. Are you comfortable with that number at this point?
Yeah. To be perfectly honest, we haven't done a budget going out that far yet. The quantum of the growth expected is entirely reasonable. At this point, I would say, yes, we are comfortable with that. By the time we get to the end of the next quarter, I'll be able to give much better, more thoughtful guidance on 2018. It's a little early in the year for us in terms of budgeting, but in terms of a big picture point of view, do we think that that's reasonable? Yes, we do.
Okay, great. David White, welcome aboard. Have you gone through the Legacy Airlines at EIC at this point? Is that still to be done? As you standardize the aircraft safety and maintenance processes across the Legacy Airlines, do you think that could lead to a higher maintenance intensity going forward?
Thanks for that question, it's a good question. I've been here a year, as I stated. I've been through the Legacy Airlines, as I've been through many airlines over the last 15 years. What we see is the higher bar standard as I talk about bringing in people from the various companies to assist in looking at different companies and bringing in those standardized practices and a way of looking at doing business. Does that translate into investing more money into the maintenance side? That's not how this program works, as Mike did a good job earlier on. When you look at maintenance on aircraft, it is fairly predictable over time. The upping the standard or upping the way we look at them and bringing me online just means we have more frequent inspection. We up the standard of how we do business.
We up the standard of how we look at how our guys are doing business. We continue to do business in the safe way we have for the past 50 years in certain areas, that doesn't translate into a financial change. That translates into a better standard across all our subsidiaries. That's more of the comparison I would make on that.
Okay. Yep, fair enough. Just two more really quickly, if I could. Are any of your fuselages in your Legacy Airlines, are they beginning to reach its end of life?
Yeah, that happens. I think in the last two or three years, I think we had one or two Metros that have reached the end of their useful life. By the time that happens, generally speaking, the fuselage has been depreciated to zero or very close to zero. When that happens, we actually literally then will harvest the consumable parts off of it. The engines will come back off, landing gear, certain avionics parts, and then we'll actually park it and we save, notwithstanding it has no value, we will save the fuselage because we may take an elevator off or some other strange part that's hard to find and have them, but they're fully relieved from the books. In terms of the average life of the asset, that's not a material issue on a go-forward basis.
We will have a small number over the next couple of years, and in which case, we would simply go get a replacement fuselage and pull it back up and overhaul it and put the glass cockpit in and do the things we do and then continue on.
Okay, great. Last one for me. Do you leverage Regional One at all to source or sell any components or parts into your Legacy Airlines?
Oh, for sure. Absolutely. When we first looked at Regional One, the very first thing we thought of was they can help source our parts for us for the Regional Airlines. We've actually set up a Winnipeg-based operation run by Regional One to provide parts to the airlines, especially in the bigger aircraft where they specialize. They're less helpful in the King Air and the Metros because they don't have a lot of expertise in that fleet type.
Yeah.
Before someone else asks, when you sell a part from Regional One to one of the airlines, it's transferred at cost in our external financial statements. There's absolutely no profit or anything recorded on that transfer.
Okay, great. That's all my questions. Thanks.
There are no further questions at this time. I turn the call back over to the presenters for closing remarks.
Given that there's no further questions, I'd like to thank everyone for participating on today's call, and I look forward to updating you on our progress in the quarters ahead. Have a great day.
This concludes today's conference call. You may now disconnect.