Earnings Call: Q1 2017

May 10, 2017

Earnings release

Good morning, ladies and gentlemen. Welcome to the Exchange Income Corporation's Conference Call to discuss Financial Results for the Three Month Period Ended March 3137. The Corporation's results, including MD and A and financial statements, were issued on May 9 and are currently available via the company's website or SEDAR. Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward looking statements within the meaning of the Safe Harbor provisions of Canadian Provincial Securities Laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements, please consult the MD and A for this quarter, the Risk Factors section of the Annual Information Form in Exchange's other filings with the 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 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, our President and Tammy Schoch, our CFO, who will review our financial results in greater detail in a few moments. At first glance, our first quarter results look very unremarkable with revenue up 2% and EBITDA down 2% and a decline in per share amounts. But this is not the real story as we're actually ahead of our internal plan. We designed and successfully executed a plan to not only internalize the overhaul of our larger aircraft but to shift the timing of those overhauls into the first portion of the year when customer demand is the weakest because of winter roads. Those of you who have followed our story for a prolonged period know that maintenance capital investment in operating aircraft vary substantially quarter to quarter and year to year, depending on which aircraft require work since overhauls are not required on an annual basis given the level of flying we do. 2017 is a year where we have more maintenance overhauls to be done than in both 2016 or than in a typical year. By eliminating third party maintenance and by aggressively scheduling, we were able to largely complete this program in the first third of the year, allowing capacity in our busy season and facilitating our expansion into Northwestern Ontario. This program was not without its cost as we chose to rent third party capacity during the overhaul period at a cost of $3,000,000 This ensured that we had the necessary capacity to look after our customers in an appropriate manner and avoid the problems we faced in the fourth quarter of last year. The need for this chartered capacity ended in April, and all rental aircraft returned at that time. Additional aircraft purchased to facilitate our expansion into Northwestern Ontario will eliminate the need for these kind of rental aircraft in future years. To give you a feel for the magnitude of what was accomplished, we completed six heavy overhauls in the first quarter of twenty sixteen. This compares oh, pardon me, we will complete another six in the second quarter, leaving only two in the balance of the year. As I mentioned earlier, we expect 2017 to be a heavier year than most for aircraft overhauls, with approximately 50% more overhauls than in 2016 and twenty five percent more than a typical year. With the substantive investment we have made in the first two quarters, maintenance capital expenditures in our airlines will decline to and perhaps below historical levels in the second half of the year. Some may question why we would push so much into a single quarter at the expense of profitability for that period, and the answer is very, very simple. We do not manage our business quarter to quarter. We make decisions that we feel will maximize our performance over the longer term while maintaining a high level of service to our customers. You have to invest in order to harvest. And we have proven over the last fifteen years that this model works, with a dozen increases in dividends over that period while maintaining a rock solid balance sheet. Long time followers of our companies will know that adverse winter conditions sometimes play a role in our Q1 performance by softening demand for passenger and cargo services while increasing some transportation costs at the same time. Although we made considerable effort in recent years to mitigate the impact of seasonality factors resulting by being more diversified, extreme winter conditions like the ones experienced in Atlantic And Central Canada for much of this winter can still play havoc with operations. Our legacy airlines in particular were impacted by flight cancellations and the effects of a winter road season that were longer than a typical year. This past winter, we lost fourteen fifteen flights due to bad weather, more than double what we lost in 2016. And I'd like to clarify that that's simply cancellations from weather. That's not anything related to our capacity or mechanical issues or those sorts of things, simply from weather. The impact of these cancellations was an EBITDA impact of approximately $1,000,000 The length of the winter road season also led to softer demand for cargo transportation services, reducing our top line performance. The first quarter saw Regional One continue its amazing track record of growth. Investments made in 2016 and early twenty seventeen facilitated EBIT growth of approximately 27% over the previous year. And more importantly, this is a trend we not only expect to continue for the balance of the year, we expect it to accelerate. Regional One purchased an additional four aircraft in the first quarter of twenty seventeen, net of aircraft which have been sold. And these aircraft, as they are leased out in coming months, will add further to our bottom line. In of in dollar terms, Regional One accounted for the largest share of the aggregate investment in growth capital of $58,000,000 most of that being focused in the CRJ900s, which we previously announced. Our relationship with Bombardier is strong, and we expect continued opportunities to invest in accretive growth as a result. While for competitive reasons, we do not disclose detailed financial results for each of our subsidiaries individually, I feel it's important to give our shareholders an idea of the quantum of the growth that we have achieved at Regional One. We have stated many times that Regional One was purchased off an EBITDA of approximately US16 million dollars By the end of twenty seventeen, we expect that we will generate an annual total of approximately five times that amount. Of course, we have continued to invest in additional assets to generate this growth, but the returns have met our required threshold and help fuel the cash flow necessary for our demonstrated dividend growth. There are some that criticize EIC for investing more in growth capital investments than we generate in free cash flow internally. I believe that this is a profound misunderstanding of the situation. Our goal is to increase the amount of cash flow available for distribution to our shareholders. And quite frankly, we're indifferent if the opportunity for growth comes from an acquisition or if it comes from an investment in organic growth. No one expects acquisitions to be completed purely from cash flow in the period the transaction is completed. So why should organic growth be any different? The key is that the growth is accretive to our shareholders on a per share basis after taking into account the investment in capital that will be required to maintain the investment and sustain that level of cash flow. Our per share results have grown consistently while maintaining constant leverage. If we were to stop investing in new opportunities, it's not going to result in a reduction of our ability to pay dividends as the cost of maintaining that cash flow is fully accounted for in our maintenance capital investments. We would simply grow slower. And I have no intention of apologizing for accretive investments. Quite the opposite. We are proud of it. Regional One's track record of success and expertise in one platform were factors in our decision to acquire Team Jazz for US10 million dollars in the fourth quarter. Despite challenging market conditions, which have limited our ability to find companies that meet our purchase price criteria, we're able to complete an acquisition that has already added considerable strategic value to Regional One and improved its competitive advantage in a new aircraft platform. Team JAS is a parts and maintenance repair services company that specializes in the Twin Otter platform and has worked on this platform for more than thirty years. The company has been integrated into the operations of Regional One. The result will be an expansion into a new aircraft type building on Regional One's expertise with the Dash eight ATR and CRJ platforms. TMJS performance in Q1, its first full quarter as a DIC entity was very encouraging. We purchased an additional aircraft in each of Perimeter and Kong to facilitate their continued growth. Perimeter, in particular, is expanding its geographic coverage and entering new communities in Northwestern Ontario. A new schedule was recently announced for Northwestern Ontario and will go into effect later this quarter. And while we expect competition to be strong in this market, we believe that our model that has been fire tested in Manitoba for over sixty years will allow us to exceed in Ontario as well. Keweyton was recently awarded the Medevac contract for the Kitikmeat region of Nunavut. Keweyton will now service all of Nunavut for the first time. This contract will facilitate Kuwait and its growth into the Western Arctic and will solidify its position as Canada's leading northern medevac carrier. Another encouraging development in Q1 was the recovery, albeit a modest one, that the manufacturing segment and Alberta operations in particular experienced. Their improvements were driven largely by the pent up demand for project and field services by companies in the oil sector. This positive development within the manufacturing segment helped offset the impact that rising fuel prices had on our legacy airlines. We completed the $98,000,000 equity issue announced late last year. Demand was strong and the issue was materially oversubscribed. We also completed an increase in the size of our debt facility and extended it for a four year term. We now have access to over $325,000,000 in capital and have the resources to implement our plan for the foreseeable future. I will expand on our outlook in my closing remarks. As you have heard, Q1 was marked by considerable progress on multiple fronts. Our diversification business model allowed us to overcome certain challenges, and vertical integration enabled us to be a stronger airline. The reality is that our efforts in Q1 have built a very strong foundation for us to sustain our growth and momentum throughout 2017 and beyond. I'd now like to turn the call over to Tammy, who will review our financial results in greater detail. Thank you, Mike. Good morning, everyone. Consolidated revenue in Q1 was $222,500,000 up 2% from $217,900,000 for last year. The increase was due to a number of factors. Key among them was the very strong performance by Regional One, which continued to monetize its recently expanded portfolio of assets and the continued organic growth within legacy airlines. Other contributing factors include the modest recovery within the manufacturing segment, particularly at Stainless and the Alberta operations, which benefited from the uptick in activity in Alberta and improving economic conditions in The United States. Consolidated revenue growth was tempered, however, by declines experienced by Provincial due to the completion of an aerospace modification contract at the end of twenty sixteen. Revenue growth was also impacted by delays in capital expenditures by West Tower's customers. This shift in spending is caused by the industry preparing for the next generation of technology. On a segmented basis, the Aerospace and Aviation segment, which consists of our legacy airlines Regional One and Provincial, generated revenue in Q1 of $177,000,000 which is up $3,500,000 or 2% from last year. The Manufacturing segment generated revenue of $45,500,000 up $1,100,000 or 2% from last year. The relative sizes of our two operating segments are consistent with prior periods. Our revenue and EBITDA contributions by segment continue to reflect the Corporation's strategy of diversification through both acquisition activities and growth capital investments. Consolidated EBITDA was $43,300,000 which is down $1,000,000 modestly or 2% from last year. This decline was driven by a number of factors. First was the successful implementation of our enhanced maintenance strategy that Mike described, where we internalized all of our heavy checks and shifted this work to the first quarter. This combined with the impact of inclement weather conditions that resulted in the highest number of flight cancellations in our history caused a revenue decrease of about $1,000,000 Additionally, these circumstances led us to use third party charters to ensure that our customer service was protected. The third party charters cost about $3,000,000 in the first quarter, and we feel we are positioned very well for the busier remainder of the year. EBITDA declines were largely mitigated, however, by the growth experienced by Regional One. Regional One has improved sales margins due to the ongoing monetization of its expanded portfolio of aircraft engines and parts. The Canadian dollar on average was significantly stronger in Q1 twenty seventeen than it was in Q1 twenty sixteen. However, the Canadian dollar weakened at the end of the first quarter in 2016 at levels that are relatively consistent with the first quarter of twenty seventeen. These conditions resulted in two currency related variances between 2017 and 2016. First, our revenue and EBITDA benefited to a much lower extent from the translation of our U. S. Operations and provincial U. S. Dollar denominated aerospace contracts as average rates are used in this translation. This negatively impacted EBITDA by approximately $1,200,000 Additionally, included in head office costs in 2016 was a $1,100,000 translation gain. This gain had the impact of offsetting head office costs last year. Factoring this gain out, head office costs are lower in 2017 due to a reduction in compensation expense. Based on current foreign currency exchange conditions, we do expect to see the same headwind in Q2 as the Canadian dollar has weakened relative to the same time in 2016. It should be noted that while a weak Canadian dollar is beneficial for the translation of our U. S.-based operations and aerospace contracts, it drives the cost of aircraft maintenance up. Maintenance capital expenditures impact earnings over time through depreciation. Therefore, economically, there is a reasonable match between our U. S. Dollar exposures. However, the earnings impact of maintenance related expenditures tends to lag. On a segmented basis, the Aviation Aerospace and Aviation segment generated EBITDA of $42,800,000 which was relatively flat when compared to the $43,600,000 generated last year. The Aerospace and Aviation segment's EBITDA margin was 24.2%, down from 25.1%. This decline is primarily caused by the impact of weather and third party charter costs that we noted earlier, offset by the strong results from Regional One. Regional One's margins have grown as a result of the proportionate increase in lease revenue. The Manufacturing segment generated EBITDA of $4,700,000 which is up 3% from $4,500,000 last year. The Manufacturing segment's EBITDA margins were 10.3% in Q1 twenty seventeen, which is up from 10.2 in 2016. Growth was particularly strong within Stainless from field services projects, though offset by West Tower, which continued to be impacted by delays in customer capital spending. On a consolidated basis, we generated net earnings of $5,600,000 or $0.18 per share. This compares to $9,900,000 or $0.36 a share last year. The year over year decline was due to a number of items, including lower EBITDA, as already discussed, and a $5,800,000 increase in depreciation costs that we incurred as a result of the growth capital expenditure investments made largely in Regional One to expand its portfolio of aircraft. Our effective rate of tax was 29.7% in 2017 versus 37.1% in 2016. This reduction in income taxes was driven by two factors. First, income taxes in 2016 were higher because of of the increase in Newfoundland tax rates last year. And secondly, a greater proportion of our earnings are generated in lower tax jurisdictions, including Canada and Europe. We expect that this downward trend in our effective tax rate will continue due to expansion of our aircraft lease business into Ireland and the continued growth of that business. The year over year decline in net earnings on a per share basis was also driven by the 12% increase in the number of shares following the successful completion of our $98,000,000 spot deal financing on 01/04/2017 and the conversion of debentures in mid-twenty sixteen. It should be noted that until this new capital is deployed, it has a dilutive impact on our per share metric. We are fully confident in the pipeline of growth opportunities that we have to put this capital to work, thereby reversing this dilutive impact. Excluding the net impact of acquisition costs and the amortization of asset intangibles, we generated adjusted net earnings of $7,800,000 or $0.25 a share. This compares to 12.43 a share for last year. Turning to our other key financial metrics, free cash flow totaled $33,800,000 which is down from $34,900,000 for Q1 twenty sixteen. This slight decline was due to lower EBITDA and higher interest costs, though partially offset by lower taxes. Free cash flow on a per share basis was $1.9 down 13% from $1.26 last year. As noted earlier, our equity raise during the quarter was a major factor in this lower per share amount. Maintenance capital expenditures were $27,400,000 which is up 52% from the comparative period. The increase was largely due to the strategic decision that we made to accelerate the timing of maintenance activities and the scheduling of heavy overhauls within the legacy airlines to take advantage of our slower season. Also driving an increase in maintenance CapEx is the increase of depreciation at Regional One relating to its growing fleet of leased aircraft. Free cash flow less maintenance CapEx was $6,400,000 or $0.20 a share, which compares to $16,800,000 and $0.61 a share in 2016. We invested $58,800,000 in growth capital expenditures, which is up almost $31,000,000 or 111% from last year. The investments were made within the Aerospace and Aviation segment, largely to grow Regional One's portfolio of CRJ900 aircraft, progress with the development of a maritime surveillance capability aircraft for Provincial and to add aircraft to legacy airlines aimed at supporting business expansion, including the expansion of service into Northwestern Ontario. Our payout ratio was 250% based on free cash flow less maintenance CapEx expenditures per share. Our profitability and the payout ratio are weakest in our first quarter given the impact of weather conditions and winter roads have on demand for legacy airlines passenger and cargo transportation services. Additionally, our strategy of completing the high proportion of heavy maintenance in the first quarter has the effect of pushing our payout ratio upward in Q1 and then downward in later quarters. Over the course of the year, our payout ratio is expected to remain well within our target zone. If we look at our performance on a trailing twelve month basis, our payout ratio was 73%, which is well within our historic norms. Turning to our balance sheet. We ended the quarter with cash a cash position of $21,100,000 and net working capital of $198,600,000 a current ratio of 2.27:one. This compares to cash of $26,500,000 and net working capital of $178,500,000 last year, which equates to a current ratio of 2.05:one at December 3136. Our current assets increased during the quarter primarily due to Regional One's investment in additional parts inventory during the quarter. Our balance sheet remains strong and due to the equity raise and expansion of our credit facility during the quarter, our liquidity has been enhanced and we have $325,000,000 of available capital. That concludes my review of our financial results and I'll turn the call back to Mike for some closing remarks. Thank you, Tammy. Our outlook is very encouraging, and we are particularly bullish about sustaining our track record of growth through 2017 and beyond. We have executed on our plan to internalize and complete the heavy overalls of our airlines in the first portion of the year and positioned our airlines to provide top notch service to our customers while looking for expansion opportunities. We have built a solid foundation in Q1 through a stronger balance sheet and significant growth capital investments, as I mentioned in my opening remarks. Our outlook for organic growth continues to be favorable for both our segments in the near term. Within the Aerospace and Aviation segment, we expect that Regional One will be able to sustain its recent track record of success, driven by recent investments in additional aircraft and the impact of its enhanced relationship with Bombardier. We are excited about Kuwait and new Medevac contract and our expansion into the Western Arctic. The addition of new equipment and the acceleration of the overhaul process, together with the elimination of third party costs, will also benefit our legacy airlines, particularly as we begin our expansion into Northwestern Ontario. Within our Manufacturing segment, we expect continued improvement in all our operations, but especially at stainless fabrication and our Alberta operations. The exception to this trend will be West Tower, who continues to deal with the cyclical low of investment by cell carriers in their networks. We remain very committed to growth by a disciplined acquisition. But with evaluation multiples for target companies currently at the higher levels of normals, our focus in the near term will be to identify strategic acquisition opportunities that complement existing operations similar to Cartonau or TeamGIS acquisitions that were completed in 2016. The acquisition pipeline in Canada is stronger than it has been in some time. It remains to be seen if we will be successful in these negotiations but are upbeat on the quality of the opportunities. Pricing in The U. S. A. Generally remains prohibitively high. Before turning the call to questions, I want to address the impact of NorthWest's recent acquisition of NorthStar Aviation. NorthWest has been a long term customer of Comair, which generated approximately $14,000,000 in revenue in 2016. The pricing on this contract was very competitive, and as a result, the loss of this business will generate a bottom line impact of considerably less than $1,000,000 We entered into discussions on a new contract with North West early in 2016. But after reaching a tentative agreement on a long term arrangement, negotiations failed as North West demanded a ninety day cancellation clause, and we simply were not prepared to provide a five year price for a ninety day commitment. We subsequently agreed on an agreement where either parties could leave by ninety days' notice. We expected that based on these discussions, was likely that North West would be changing how they move their freight and internalizing this process, and we prepared for the loss of their work by entering into a long term contract with our other major customer in the North to ensure that we would have the freight necessary to make our Combi flights economic. All of Northwest Freight is handled on dedicated freighters, which will allow us to quickly adjust our operations at the end of the contract in late July. We were committed to providing top notch service in Northwest, and we are sorry to lose their work. We simply cannot, however, provide a service without a necessary return. Losses there will only make a very modest impact on our bottom line until we redeploy the capacity with another customer. Afterwards, there will be no impact. We are very excited about the second quarter and taking advantage of the foundation that was laid in the first. The first quarter is typically our most difficult, and this almost always results in a payout ratio that is 100% for the quarter. While 2016 was an exception where an alignment of factors allowed us to break that trend, the fact is this occurred in 2017 is in no way a cause for concern. As we expect our performance in the balance of the year to again reduce the trailing 12 payout ratio and facilitate our Board's consideration of increasing dividends later this year. Before I open the call to questions, Carmel pointed out to me that when I gave you the indication of R1 size, I wasn't clear about the currency I was referring to. We purchased R1 off a $16,000,000 U. S. Currency, and its current results are approximately 5x that in U. S. Currency. So there's no because of the weakness of the Canadian dollar over that period, I'm not taking credit for the difference of the conversion. That's a U. S. Dollar to U. S. Dollar comparison. Thank you very much for listening, and we'd now like to open the call to questions. Operator? Thank you. Ladies and gentlemen, we will now conduct the question and answer session. And your first question comes from the line of Chris Murray with AltaCorp Capital. Your line is open. Thanks. Good morning, folks. So Mike, just maybe some more discussion around the outlook if we can. So you made the comment in your CEO's message that you expect that you're going to materially exceed the prior year comparatives for the remainder of the year. Just wondering, I kind of look at the expectations that are out there, how is your feeling for how those numbers are shaping up? And can you kind of help us maybe if Q1 was light, you sort of alluded to the fact that Q2 is improving, kind of where you guys think the numbers are going to go? And then with that, payout ratio is about 73%. But what should we be thinking about in terms of kind of trigger points for when the Board might start to think about dividends? I think the that's a good it's a really good question. I'm a little bit handcuffed in that we don't give specific guidance in terms of a precise number, But we did say following Q4, was asked whether we were comfortable with analyst forecast going forward. And I said that, yes, we were comfortable with The Street. And I've said quite clearly in our package here that we're ahead of our internal budget for 2017. And as such, if I was comfortable with analyst consensus before, I'm clearly comfortable with it now. In terms of payout ratio, it's a really good question. So the trailing 12 bumps up because we replaced last year's exceptional Q1 with this one where we made the strategic decision to really enhance our overall program in the off season. What you're going to see is as the year goes on and the growth we anticipate shows up in the statements, you're going to see that payout ratio decline into the 60s again. And we've always said that when the payout ratio is in the 60s, we're going to look at it. So I would expect that by later in the year, we will be having a discussion at our Board to see whether it's an appropriate time to increase the dividend. We've increased it almost every year since we started and there's nothing in this that would preclude me from thinking that will happen at some point in the year. Having said that, it's clearly our Board's decision and we'll have to execute on our plan, but we're optimistic. Okay. Maybe a different way to approach this. When I think about the $140,000,000 that you put into growth CapEx in Regional One in 2016, is it fair to think that, that capital and so we've had a few months since that's gone into play. I mean is that capital all going to start generating that type of return that you sort of historically have been looking for, that 15% after maintenance capital? I mean is that all deployed at this point and actually got some numbers in it? And then along those lines, any thoughts around the magnitude of further deployments? You had some pretty strong numbers in Q1 around that business. I'll answer your second question first. Most of the stuff we deployed in Q1 related to the announcement we made in Q4 of last year, which was just the execution of the purchase of those CRJ900s. We tend to be opportunistic and it's hard for me to say that I think we're going to invest at the rate we did in the first quarter. That was pretty aggressive. We had some opportunities. Having said that, when a Lufthansa type deal or the Bombardier deal becomes available, we're going to jump. That's why we carry the level of liquidity we do. In terms of whether it's generating return, I can't tell you that every single plane is on lease. I can tell you that we are tracking ahead of our internal models on deploying those aircraft. They come on and off and we part off aircraft, we sell them off. And so yes, most of those aircraft will be generating revenue in the balance of the year. But there's always some planes that are coming in at the end of a lease or being overhauled or whatever. So we're never at 100% utilization, but we're deploying them as we expected. Okay. And then my final question, just I think you've got the folks from Airbus in Winnipeg today to do some presentations and have some discussions. Any thoughts on what the magnitude of the opportunity is to work with them on maybe expanding some of the work you're going to do on the fixed wing search and rescue program? And any thoughts on what dollars could be coming with that program? I'll answer part of that question. I'm not going to steal the I'm not going speak on behalf of Airbus, but we are negotiating with them on assisting on some of the equipment that's going to go into the aircraft and some of the adaptation work that's required before the aircraft go into service. The magnitude of that is still under negotiation, but I'm reasonably comfortable we'll be participating in that. Airbus has been a great partner to work with on this. In terms of the size of the work once we begin, we're still working on that. What I can tell you is we anticipate building a significant facility in Winnipeg to do the heavy overhaul work. And we're looking at a minimum of sort of 40 high end people in that business as a starting point for the overhaul. Terms of dollar value, stay tuned, we will give you some more color over time, but I'm not in a position to provide it at this moment. All right, thanks. Your next question comes from the line of Alex Bauer with National Bank Financial. Your line is open. Hi. Good morning, everyone. This is Alex on behalf of Trevor Johnson. Good morning, Alex. Yes. Can you just remind us how many overhauls are left in the year and the timing surrounding them? And now that you guys are doing the overhauls internally, can you talk about the potential cost savings from internalization versus previous years? Absolutely. So we completed six overhauls in heavy overhauls in the I want to be clear, I'm talking about the overhauls of the larger planes. We've always done the 19 seat planes internally and continue to do that. And there really isn't a material impact on that in this quarter. It's the larger planes that we're talking about, our Dash 8s and our ATRs. We completed six in the first quarter. We're anticipating completing six in the second quarter and we're largely finished that work already, leaving two to be completed in the balance of the year. Using last year as a comparative, we've only completed one in the first quarter compared to six this year. And then we completed another pardon me, eight through the balance of the year. The last year was an abnormally light year. A typical year would have something in the 10%, 11%, 12% range in terms of overalls. This year is a higher than normal year with 14%. And again, it's really important to understand, folks, that that's got nothing to do with operations in that period. These things come up every so many cycles or every so many hours, and it's always going to be irregular. And we've said that from 2004 when we started, you have to look at averages for maintenance CapEx cost because some quarters are high and some quarters are low. These two happen to be cyclically high quarters. What's unique about now is we've said, you know what, we're not doing those in the second half of Q2 and Q3 and Q4 when demand is really high and we need the capacity. We had challenges in Q4 with capacity last year. We're not going to make that mistake again. And so that's why we moved it forward. Secondarily, on your other question about the cost, it's hard to define exactly, but what you're taking off is the profit margin. And so you're probably looking at something in the 10 to 15% range in terms of the cost of an overhaul. And overhauls vary wildly depending on what work needs to be done. They can be as cheap as $1,000,000 or as much as 2,000,000 or $3,000,000 per aircraft depending on what needs to be done on that given overhaul. But one of the key things that's really hard to put a precise value on in the short term, but has a bigger value over the long term, as we have our own people overhaul the planes, We get great advice from them on things we can do to prevent challenges with corrosion or to shorten the time required for the inspection. Many of us have experienced the thing when you take your car and then all of a sudden you thought it was running fine and they've got $3,000 worth of suggestions for you. When we do it internally, we avoid that concept and plus we have ways of then improving our day to day maintenance to reduce future overhaul costs. So the financial impact is bigger than the pure cost saving on the individual overhaul. It saves us money on future overhauls as well. Great. Thanks for the color on that. And then just one last one for me. Do you guys have an estimate on the impact that weather in the economy in Newfoundland has affected results at Provincial? The economy is hard to speak to because it has slowed demand for for passenger travel in certain places, particularly government travel. We've been reasonably good on the competitive front there at maintaining and in fact growing our market share. So it hasn't been dramatic. The weather impact was dramatic, particularly in March in Newfoundland when that sort of hurricane force storm came. I included the impact of that in the $1,000,000 weather number I talked about. That was the aggregate of legacy at Newfoundland. The wind was so strong there, it knocked down or severely damaged one of our hangars, and we're still working on the repair and or the replacement of that. It's fully insured, so it's not a matter of a financial impact, but it certainly has completed some new work that our guys at Newfoundland weren't expecting. Your next question comes from the line of Mona Nazir with Laurentian Bank. Your line is open. Good morning and thank you for taking my questions. Hey, Mona. Hi. I was just wondering, firstly, I know you kind of touched on 2017 consensus estimates from an EBITDA perspective, but wondering if you could discuss the seasonality of Q1 further. It seems that estimates may be high, especially when factoring in some of the strong performance last year. Just wondering if you could look at the weighting of Q1 versus the balance of the year and how should we think about that annual breakdown between the quarters? Well, can't give you precise numbers for each quarter. But what I will do is I can tell you that when you look at last year in Q2 Q1, I'm sorry, we had one sort of anomaly with exchange rates where we picked up a couple of million dollars. One was the low rate throughout the quarter, which increased the value of our U. S. Performance. And then the dollar spiked right at the end of the quarter, which created a balance sheet gain. There's $2,000,000 right there that sort of jumped off the page. And we only did one overhaul. So our costs were in terms of rentals and other stuff were very low, together with a pretty good weather period. When you look at those and you take into account the stuff we know about, our numbers were very close to what to the analyst consensus for Q1. It was more about the strategy that people didn't factor in effectively. Given that we've said that we're comfortable with consensus and different people calculate it differently with the general range, think it's pretty straightforward that the inherent shortfall from forecast in terms of EBITDA in the first quarter would get picked up over the balance of the year. Okay. That's helpful. Thank you. And then secondly, just turning to your Bombardier partnership or that agreement that was announced by them in Q1, it was originally for 13 aircraft. And I believe that you started that purchase program in Q4 of last year. You stated you purchased four aircraft this quarter. But I'm just wondering, looking at the entire contract, how many aircraft We yeah. Still have to purchase. We we've completed the last the last one under that purchase agreement was completed in April, so there is in q two. Having said that the agreement is much more significant than than those aircraft that were covered by it. We have a strategic relationship with them and we're working at placing aircraft as they come off under their buyback guarantees. Conversely, they're providing us with ideas on marketing the aircraft from their knowledge of where customers are going. So it's a two way street that helps us both on a go forward basis. The deal we announced was specific to eight aircraft that we had already done five prior to the agreement, so it was 13 aircraft. Those 13 are done, but it doesn't mean the relationship is done, it means that specific purchase was completed. We still look and are working with them for further purchase opportunities as well, as Mike indicated, potential placements. So they also assist us in being able to market those that we already have acquired. So it's a dynamic relationship. Okay. And lastly for me before I hop back in queue. The Kewatin Medevac contract where you're the primary supplier in Nunavut, does that agreement potentially offset the lost bottom line contribution that stemmed from Northwest? In terms of revenue, yes. In terms of revenue, no. It's smaller in terms of revenue, but in terms of bottom line, it would be better. Much better. That's it for me. Thank you. Your next question comes from the line of Raveel Afzal with Canaccord Genuity. Your line is open. Good morning. Thank you for taking my call. Have a couple of questions on CapEx. So first of all, what is the cost the average cost of a major overhaul? That's a meaningless number, Raveel. It's it could be it could be they're they're always in the millions, but how many millions depends on what they find and what we have to do. Just as a little background for the people who aren't familiar, when you do a major overhaul, you're literally taking everything off the plane. You're open taking the engines off. You're taking the landing gear off. You're opening up the inside of the aircraft. You're checking the wiring. You're checking for corrosion. So it depends on what work they find when they take it apart. It's kind of like if you're doing a renovation on your house, you don't know exactly what it's gonna cost till you open up the walls and find out what issues you have. And so some are are are more expensive than others. Typically, the our experience is is that when we do the second overhaul of our own aircraft, it's less than the first because we maintain them to a very high standard. And so the amount of work that's required declines over time, but it's hard to give you a precise number on that. That's not the only thing in our maintenance CapEx numbers. There's engine overhauls, there's there's Regional One. We had Regional One depreciation. The one thing that is a permanent increase and shouldn't surprise anyone is because as we grow Regional One, we use their depreciation as a proxy for maintenance CapEx in that business. In the first quarter, that would have been approximately $3,000,000 high, a little over $3,000,000 higher than last year. That jump is bigger than what you would expect in other quarters simply because so many planes went into service that weren't around last year at that point. But it's probably safe to assume that maintenance CapEx as it relates to Regional One will be $10,000,000 higher over the year, maybe slightly more than that. Yes. So our increase in maintenance CapEx of about nine point three million three point eight million dollars of that relates to Regional One, and the remainder relates to the maintenance activities in our Aviation division. Perfect. And we're also trying to get this. I know there's a cost saving goes much, much beyond just the just the overhaul itself by internalizing the function. But I'm trying to understand, you know, if if a provincial does the overhaul versus a third party, what is the cost saving, the immediate cost saving by doing it yourself? That's what our estimate on that is 10% to 15%. Okay, terrific. The margin is the immediate impact. The labor is the labor. I mean, we're paying ourselves. We're still paying our people. And to be honest, to get the stuff done in that level, we pushed Provincial to its production limits to get that much through the shop in the first four and a half months. Okay. And since you have, you know, six more planned in q two and then the planes that you guys purchased are going towards expansion as well, so why don't you need more third party aircraft in the q two? Why don't we? We because you do don't need any more. We returned the aircraft. I don't have the precise date in front of me to reveal, something like the tenth or the April 12. So there may be a few thousand dollars of third party rentals in q two. But what happened was is as the plane the first batch came back off of rental, That came back off of overhaul. I'm sorry. That went back into the fleet, and then we bought the additional aircraft. So as we completed the process, we're still ramping up volume. It's still not a we're still not at full summer capacity, obviously, and so we didn't need the the backup anymore. And and to be perfectly honest, we kept the third party rentals to make sure we did a good job. We had a choppy q four, and we wanted to make sure that we didn't regret returning the plane two weeks early to save a couple $100,000. So could we have returned those planes sooner? Probably. Did we have a little more? But we wanted to have an insurance policy while we went through this. With the planes we bought and with the fact that I don't think you'll ever see us trying to accomplish more than six in a period, we won't need to do this again. This is a much above average fiscal period with 14 of these overhauls compared to an average of about 11. And with the extra capacity we've put into the system, we'll be able to manage the overall process on our own in the future. Your next question comes from the line of Steve Hansen with Raymond James. Your line is open. Yes. Hey, guys. Mike, could you perhaps allude a little bit more to the territory expansion into Northwest Ontario and sort of the rationale there? Understandably, it's a new growth opportunity, which I understand, but you did mention in your commentary that there would be competition. And so I'm just trying to understand that relative risk reward about going after new markets but still fighting up against another competitor. Well, yes, it's a good question. There are like the reason we're expand we chose to go into Northwestern Ontario is simply because we like markets where aviation is a an essential service effectively because there's no way other than on winter roads to get in and out. And so if we were to expand west into Saskatchewan, you could drive everywhere. And as a result, the economics of servicing First Nations communities are not the same. Most of the stuff goes by ground travel, as a result, it's a very different business. In Northwestern Ontario, it looks a lot like Manitoba in terms of the type of communities and the places. And there are people servicing it today. We've had competition in Manitoba before. And our competition in Northwest Ontario, quite frankly, regularly makes comments about coming into Manitoba. They're currently flying one flight in. They may fly more. But it's an opportunity to grow our geography. We don't have much market share left to gain in our existing territory with Perimeter. So to continue to grow the business, we want to go into markets where we have a competitive advantage and we've got a business model we know works. We're very committed to putting money back into First Nations communities and treating them like partners and understanding that we make a lot of money in their community. And as a result, we have a social responsibility to put money back into those communities. And I can't discuss it now, but there's a we're excited about an announcement that's gonna be made on Friday about one of those social responsibility projects we're gonna have that will benefit communities in Manitoba and Ontario. So if you keep your eyes open, you'll see one of the things that we view as core to our business model, which is engaging our First Nations customers and putting things back into those communities, whether it be in Manitoba or Ontario or Nunavut. Okay. Yes, helpful. Thanks. And on the Medevac contract, which sounds like a nice wind, I apologize if I missed it, but were there any sort of capital requirements around infrastructure that you might need to deploy around that contract? Yes. We ought to pick up, I think, three aircraft, two or three King Airs. I don't have it in front of me. It's not huge dollars. They're relatively inexpensive because they're smaller aircraft. And we'll probably rent real estate in the near term. But what it does, one of the exciting parts for us is with having now all three territories for the government in Nunavut, What happens in the Far North is quite often you'll have breakouts of a communicable disease, whether it be a respiratory illness or whatever. And so you'll get a surge of need in a given area. By having aircraft across Nunavut, we can now essentially use ourselves to charter into the various communities as opposed to using third parties to back up. And so for a lower cost, we can provide a better service across the whole territory to the government. And we view this as a key step in the expansion of our Medevac business. There's other territories, whether they be in Northwestern Ontario, working with Orange, there's an RFP, whether it be in the Northwest Territories, Newfoundland. And so we're excited about expanding our base in somewhere where we have a core competency, and Kuwait is clearly the industry leader in this business. Okay, great. And just one last one, if I may, on Regional One and I guess more related to even TGS. You described the results as good early on to Team JS. Are you actually looking at now deploying additional capital into the Twin Otter and growing the parts supply base there? Or where are we at in terms of that sort of integration of the program? We are looking at a number of Twin Otter opportunities, everything from parts to aircraft to other players in the industry. We love the Twin Otter business. Okay, very helpful. Thank you. Your next question comes from the line of Kevin Chiang with CIBC. Your line is open. Good morning. This is Krista in for Kevin. Just another question here on CapEx. So you've noted that maintenance CapEx will be elevated in the first half of twenty seventeen. And then there are also the ongoing investments in Regional One. Would you be able to provide a breakdown on maintenance and growth CapEx for 2017 and how it should trend quarterly through the year? Well, I answered the question on growth CapEx in that because it's opportunistic, we don't have anything planned. We don't anticipate it will continue at what we had this quarter because we had signed a big contract last year, so we were closing on a number of very expensive aircraft. In terms of maintenance CapEx, I think you'll see Q2 similar levels to Q1 perhaps slightly less and then a material fall off to sort of normal levels in Q3 and Q4. So you won't see the large increment that occurred in Q1, but you'll see it stabilize at its current absolute level for a while. It's depreciation, so with that fleet of 900, it's going to be flying for a while? Tammy's referring to the Regional One maintenance CapEx, not the overall CapEx. Regional One will stabilize at the current level. But maintenance CapEx on the aviation business will remain high in Q2 and then fall to at or below historical levels in Q3 and Q4. Great. Thank you. And another one here. In your MD and A, you note that Perimeter and Bearskin are working together to expand into Ontario and that Perimeter is repurposing three Bearskin aircraft. Wondering what the strategic benefit is of both airlines working together and could you see the two banners merging given you have shrunk in the Bearskin operations from when you initially acquired it? Sure, I can take that. Effective resources that we have of both companies, when we put them together, have different talent pools that we can draw from, and we're, through looking to combine them able to use those resources to expand and assist in our expansion in Northwest Ontario. So the pool is stronger than the individual operations. So we think that is good growth potential by combining the respective operations. Great. Thank you. And then just one last one here. So you had an unusually high number of flight cancellations this past winter. Just wondering if your airline operations have normalized? And secondly, wondering if these changes if this changes how you think about your legacy airline fleet? Do you think you need different aircraft or newer aircraft? To be clear, the cancellations had nothing to do with the fleet. They were weather. We fly into largely island airports, which don't have instrument landing approaches. So you have to be able to see the ground from a much higher level than you would flying into Winnebago or Toronto or even Thompson or Churchill, where they have instrument landing approaches. And so there was an unusually extreme amount of winter weather, which canceled, caused the cancellations. We could have had any plane in the world that we wanted to have flying into a 3,000 foot gravel strip, we wouldn't have got there. And so does it change how we look at the business? Not at all because some winters are bad and some winters are good. It's part of the business. And we disclosed the number just so that the people understand the impact the weather had. Next year, it could be the same or it could be a great one where we have a quarter of the cancellations. It's part of the business and we need to be able to react to that. Nothing to do with our fleet. Okay. And if I could ask just one last one here. Regional One, how big is your fleet today, and is there a total number you're targeting? There's no total number we're targeting. I don't have it in front of me. Over We've 30 planes in our lease pool. It's also important to understand that our lease pool there isn't just aircraft, it's engines. And a lot of times on the things when we retire an aircraft or parted out in our parlance, the engines will stay in the fixed asset pool because we'll lease the engines until they're used up and part out the fuselage of the aircraft. Our pool is ever increasing, but we have over 30 planes in the lease pool today. Your next question comes from the line of Mark Neville with Scotiabank. Your line is open. I just want to follow-up a bit on the CapEx. Mike, at this point, would you give us a growth number for Q2? I don't have one. At this point, based on what we have, it would be much lower much lower than what we had in q in q one. K. It would based on what I know today and I understand that Regional One is such that they could call me tomorrow with a great deal, but I I would anticipate it's less than half of about half of what it was in q one. K. And then I think you said through the remainder of the year, at this point, nothing major planned? Again, subject to the proviso that if they find something, they find the one time deal or a deal like that before, we're we we always want the capital available, but we don't have we don't have a deal like we did with Bombardier with scheduled purchases like we did in Q4 that we announced. Okay. And then on the maintenance, I guess the way you're trying to tell us to think about it, at least how I'm interpreting it, is sort of on a run rate go forward annual basis. At this point, it's probably somewhere between 2016 and 2017, but you'd have to add the increments for Regional One. Yes. That's exactly correct. Okay. For the the other 14 that you're overhauling this year, is there ballpark number on what percentage of your fleet that is? We see we have over slightly over a 100 aircraft. But at the it's it's percentage. It does include the small ones. Right? So that would be on those out those are 20 somewhat, probably to 70. We it would be very it would be in the range of it would be probably half or or over half our aircraft of that type. K. Comp perimeter was running five. Comp was running probably twelve Twelve twelve. ATRs. And and the guy said Newfoundland would have another four. Yeah. Probably more than four. I think maybe five. So it it's it's in the neighborhood of 50%. I can get you that. I just don't have that in front of me. Okay. And I guess just how often would these again, I guess the situational, but would these types of overhauls need to happen? Is this sort of every few years? It's it depends. It's sort of between two and three years. That's where we I gave you a I tried to give a number of our expectation of about 11. I think they're Yeah. Was just, I guess, trying to get the same number and seeing if we're doing the math the same way. That makes sense. Okay. It between two or three years? It depends on how they're being used. The ones that are flown more often, comps planes put on more hours than perimeters planes do. And so they, as a result, would get overall slightly more often in terms of calendar terms. And so it's really hard for me to give you a precise answer to that. All right. No, that's all very helpful. And again, go forward, I guess this is now sort of the seasonal variation that we'll see this year is it's going to be typical on a go forward basis? Well, other than on the seasonal basis, we wouldn't expect to see the rental requirements in the future because of the fleet changes we've And I also wouldn't expect to be doing necessarily any more than six in the first quarter. The aggregate amount in the first two quarters likely goes down. Right. Okay. And then maybe just one last one. Just curious on your thoughts on a buyback. I know you've put one in place. I'm sort of curious what you think at this point. We'll take a peek and see how the stock performs. But I mean, fundamentally, nothing has changed. In fact, the things that have changed are for the positive since Q4. So I think every CEO on the Street figures their stocks on sale. But ours clearly is at this level, that's something we'll look at utilizing at this level of the stock price. Your next question comes from the line of Derek Spronck with RBC Capital Markets. Your line is open. Thank you for taking my questions. Can you hear me? Just want to double check. All good, Jared. Okay. Thanks. The 13 CRJ900s that you took from Bombardier, how many of those are currently in a lease? And do you have a can you part out the CRJ900s? It depends on the individual plate. Most of them would have too much value to part out. Some of them are under short term lease from the original vendor and we take them back and then redeploy them on longer term leases. Currently, we don't have any of them on the ground, but some of them will come back. I think something in the range of nine of them are on lease and we've got the balance of about four of them, I think it is, that are subject to negotiation on letters of intent that are outstanding. Okay. Any progress in terms of domiciling in Ireland, your leasing business? Yeah. We that's essential. I shouldn't say done. There's a few there are some of the aircraft maybe I'll let Tammy take this because she's Yes. The one dealing with So of our existing fleet, I would say we are about 80% complete in that expansion into Ireland. Every aircraft now that we buy that will be going on lease with Regional One is purchased directly by the Irish operation. So in terms of the infrastructure and the people and all of that, we're stood up in Ireland. We're operating as intended. The balance will get transferred over by the Q2. We have to make sure when we transfer the aircraft that we avoid value added tax in Europe and you have to make sure you transfer them in a very specific manner. So we're working to make sure we do that in as responsible a manner as possible. Yes, and we consider the leases that are there in terms of the novation. If it's coming off lease right away, we'll just wait and transfer it at that point. But, yeah, we're we're right right on schedule and happy with how things are going with that. Okay. That's great. And just just, like, should we would that show up in your consolidated effective tax rate? Or You're is that gonna see it primarily start to show up in q two. There was some impact in in q one, but because the the majority of our setup of that operation occurred in q one, the benefit didn't we didn't fully realize that benefit in Q1. You'll see it in Q2 going forward. Q2 will be somewhat muted by the fact that there are some tax costs to exiting the planes into the Irish company, which will mute the benefit for that quarter, but that's largely complete now. I think you'll see largely the full benefit or very close to the full benefit by the time you get to Q3. Yes. Okay, great. And just one last question on the legacy airlines. I know the markets that you serve, you're pretty well insulated. The stock, and I don't know if it was a direct impact or not, seemed to pull back a little bit when WestJet announced that they were launching an ultra low cost carrier. Is there any do you see any potential overlap there? And maybe you could touch on as well if Northwest were to invest more into NorthStar. Is there how are you positioned Sure. Those are real two really different scenarios. Let's talk about WestJet first. The vast majority of the communities we service don't fit WestJet, and the ultra low cost carrier doesn't really change much of that. Encore would have been the closest thing to what we do, and there's probably only two or three places that we service, Thompson, Manitoba potentially. But with the weakness in the mining there, would view that as very unlikely and perhaps one or two spots in our Newfoundland business. We really don't see WestJet as being in the same business as us. When we look at Northstar Air, it's very dangerous for me to comment on what someone else might do. And so I'm reticent to do that other than to say, I know that NorthWest bought Northstar to be able to control their own freight business and they'd like to do it in everywhere they operate. North Star currently covers a very small portion of that. When they take over our business in July, that's still only something, I don't know the exact number, a quarter or a third of Northwest companies' locations. They're going to be busy for a very long time building the capacity and building the infrastructure to look after their own stores. I don't think they have any interest in being in the passenger business. But again, that's a better question for the North West folks. The passenger business isn't the core value of NorthStar Air, and I don't think that's going to change in the future. Your next question comes from the line of Steve Hansen with Raymond James. Your line is open. Yes, guys. Sorry, I dropped off. So I apologize if this been asked. As I go can back you just focus a little bit more, Mike, on the acquisition pipeline here and describe Canada as being robust, which is great. But just trying to understand specifically what you're looking for. You mentioned Cardenev and Team JS, both of which were very complementary to your existing core. Or should we expect something similar to that nature? Or would you be talking about something more different, I guess? I think the stuff we're looking at on the aviation aerospace front would be similar to the TMJSPart now kind of stuff that augment something we're already doing. On the manufacturing front, we're looking at a couple of transactions that would be new standalone operations that aren't really related to anything we do other than that they'd be in our manufacturing segment. But with the Canadian market, we've got more deals that we're very actively negotiating on than we have in a while. Having said that, there's nothing that's at a stage where I can even really talk about it yet, but we're cautiously optimistic on that front in Canada. And if I may, just in a relative opportunity and cost of capital, if you will, you know, how do those acquisitions stack up relative to what I'll call relatively known returns and deploying organically into Regional One? Like, do you get a sense for whether the diversification benefit is really beneficial? Or could you just keep deploying it into Regional One? The smaller tuck in ones would be at or higher than what we had in Regional One because they're small deals in terms of buying planes. The bigger ones would be directly comparable. But what we want to make sure we do, Steve, is part of this as good as Regional One is as much as I love deploying capital there. I want to make sure I stay diversified. I don't want to have too much in any one business relative to others. To continue to stay diversified, if I want to keep putting money into Regional One, I need to keep finding other exciting opportunities that are slightly different so that I maintain our diversification. Okay, fair enough. Thanks. Appreciate it. And there are no further questions at this time. Mr. Powell, I'll turn the call back over to you. Thank you, operator. Thank you everybody for calling in. A lot of questions today. We are glad to deal with them. And I'm excited about reporting Q2 to you in three months. We'll talk to you then, and hopefully, we'll see some of you at our AGM later this morning. Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.