Earnings Call: Q3 2016

Nov 10, 2016

Earnings release

Good morning, ladies and gentlemen. Welcome to Exchange Corporation's Conference Call to discuss Financial Results for the three and nine month periods ended September 3036. The corporation's results, including MD and A and financial statements, were issued on November 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 responses to questions may contain forward looking statements within the meaning of the safe harbor provisions of Canadian provincial securities laws. Forward looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward looking statements, please consult the MD and A for this quarter, the Risk Factors section of the annual information form and Exchange 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'd now like to turn the meeting over to the CEO of Exchange Income Corporation, Mike Pyall. Please go ahead, Mr. Pyall. 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. I'm excited to speak with you today. It's an exciting day for our company and for our loyal shareholders. Not only have we delivered another strong quarter of operating performance, but this performance, have been able to increase our dividend again. This marks the second increase in 2016 and the fourth increase in the last twenty four months. The increase announced with our Q2 twenty sixteen pardon me, Q3 twenty sixteen results raises our payment by to $1.175 per month or $2.1 on an annualized basis. This is an increase of 4.5% and brings this year's total increase to 9.4%. More remarkably, it brings the total increase in the last twenty four months to 25%. This contrasts inflation that has totaled less than 3% and very low interest rates. Our shareholders have benefited from a reliable and growing dividend. Most importantly, we have been able to fund this dividend with this increased dividend, by growing our profitability and maintaining our payout ratio at the very low end of our target range. In fact, the third quarter payout ratio, which already includes three of the four dividend increases I've discussed, was a solid 54%. Our balance sheet is strong, and we are in a great position to continue to take advantage of growth opportunities, whether organic or through acquisition into the future. As I will detail a little later on, we have been able to accomplish this level of performance in spite of less than optimal conditions in both our manufacturing and rotary wing businesses. The disciplined implementation of a diversified acquisition strategy has enabled our strong performers to not only offset the challenges in the weaker ones, but to grow our bottom line and ultimately thereby our dividend. The strength of Q3's payout ratio was echoed by the new record highs established in several key metrics. More specifically, EBITDA grew 11% to $60,000,000 Net earnings were up 29% to 20,600,000.0 and free cash flow less maintenance CapEx was 26,500,000 up 6%. On a per share basis, we earned EPS of $0.72 our best result in over a decade. The diversity of our operations was in fact the key driver of these record results, given the opportunities and challenges that each of our operating segments faced in the quarter. Our consolidated earnings were the result of strong performance in our Aerospace and Aviation segment, where EBITDA declined $8,000,000 to $57,600,000 This was partially offset by a decline of $1,800,000 to £6,400,000 in the Manufacturing segment and a marginal increase in head office costs of $300,000 In Q3, Regional One generated strong revenue and EBITDA growth that was primarily driven by new aircraft leases. These leases were made possible by the continued investment in additional aircraft, which began with the purchase of a fleet of CRJ700s from Lufthansa airline and has continued with other purchases over the last two years. In other words, our previous investments delivered a very healthy rate of return and helped fuel our growth. I will come back to this later on, but it's very important to understand that our growth capital expenditures made in a given period generally don't impact that period. They are laying the foundation for growth in future periods. Based on Regional One's successful track record, we made strategic and opportunistic decision to acquire nine aircraft in the third quarter, net of sale of one aircraft to an existing lease customer. These acquisitions were the primary factor driving our overall $53,000,000 of growth capital expenditures made in the quarter. Also within the Aerospace and Aviation segment, Provincial made strong contributions in Q3. In particular, it continued to benefit from the five year $150,000,000 in service contract signed with a client in The Middle East in November. Provincial's diversity of operation, like EICs, was a key to its success in Q3. Revenue and EBITDA contributions from the Aerospace division were offset by unfavorable economic conditions in Newfoundland and Labrador. Recent austerity measures implemented by the provincial government, coupled with depressed oil and gas and mining sectors, caused a drag on Provincial's airline performance. This impact lowered revenue and EBITDA contributions from its scheduled flight and cargo services. But as I mentioned earlier, this was offset by the strong performance of its aerospace business. Our legacy airlines in contrast experienced strong profit gains. Their progress was largely due to previous investments made to streamline their fleet, optimize ride schedules and benefit from a more coordinated procurement activities across our aviation entities. This progress was muted somewhat by the wet weather conditions that Manitoba experienced for most of the summer. These wet conditions resulted in considerably lower demand for fire suppression services, primarily provided by custom helicopters. Historically, firefighting work generates strong EBITDA contribution seasonally in the second and third quarter. Firefighting work after a fast start in early May was virtually for the remainder of the summer. Our Manufacturing segment faced a challenging quarter. The very low natural resource prices generally and oil and gas specifically reduced demand and lowered revenue in our Alberta operation. Uncertainty in The U. S, perhaps driven by the acrimonious U. S. Presidential election, slowed the award of major projects at Stainless, although customer orders interest increased dramatically going into the fourth quarter. Both Overlanders and Ben Machine experienced slower than normal third quarters, although in these businesses we expect a rebound in the fourth quarter. West Tower, by contrast, experienced a modest improvement in its margins, largely due to a change in its product mix. While demand for new tower construction was reducing as a result of the CRTC's decision allowing the sharing of cell phone towers among wireless telecom carriers, demand has grown for higher margin, more intensive equipment upgrade and service work. We expect this trend to continue in the periods ahead until a new technology platform emerges to replace the current four gs. Subsequent to the end of the third quarter, we're able to complete a US10 million dollars acquisition that will add considerable strategic value to Regional One and expand the number of aircraft types in which it has a competitive advantage. We require Team JAS as a parts and maintenance repair service company that has specialized in the twin OTTR platform for more than thirty years. Over time, Team JAS will be 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 Dash eight ATR and CRJ product lines. It will also provide an internal source of parts for provincials who operate that aircraft. The tuck in acquisitions of Cart Nav and Team JAS, together with the opportunistic accretive growth capital expenditures, will fuel our growth into the future. I expand on our I will expand, sorry, on our outlook in more detail in my closing remarks. But now I would like to turn over the call to Tammy, who will review our financial results in greater detail. Thanks, Mike. Good morning, everyone. In the interest of time, I'm going to keep my remarks focused on our third quarter results rather than the year to date. But consolidated revenue for Q3 was $224,600,000 which is up 6% from last year. The growth was largely driven by strong contributions from Regional One and Provincial and also from our legacy airlines. As Mike mentioned, our growth was tempered by the performance of our Manufacturing segment. Our Alberta operations, in particular, continued to be impacted by low commodity prices and the after effects of the Fort McMurray fires. On a segmented basis, the Aerospace and Aviation segment generated $178,800,000 in revenue, which is up 14%. Major drivers of this include the benefit of previous capital investments made in Regional One, the benefit of the performance based logistics contract in The Middle East and increases across all revenue streams with the exception of fire suppression in our legacy airlines. The Manufacturing segment had revenue of $45,900,000 This was down 17% from last year and reflects the conditions in Alberta that we mentioned earlier, as well as lower volumes in the stainless business. Since 2014, we have completed a number of transactions and made significant growth capital investments that have increased existing revenue streams, introduced new revenue streams, new products and services and new geographies to our portfolio. The growth capital investments in Regional One, the acquisition of Cardenav for $17,000,000 during the third quarter and last week's acquisition of Team JAS are recent examples of our activity. As a result of these and previous efforts, our operations continue to be well diversified. Our two segments and their combined 13 entities operate around the world at working with a very diverse customer base. It bears repeating that the Aerospace and Aviation segment is made up of multiple product lines that generate many different revenue streams. Consolidated EBITDA was $60,000,000 up 11% from last year. The growth was driven by a number of factors that we've already noted, namely the strong contributions from Regional One Provincial and our legacy airlines. Despite the significant headwinds faced by our Manufacturing segment, which caused a drag on our consolidated performance, Q3's EBITDA of $60,000,000 represents a new high for our consolidated operations for any quarter in our history. The Aerospace and Aviation segment generated EBITDA of $57,600,000 up 16%. Its EBITDA margins were 32.2%, up 70 basis points from 31.5%. The Manufacturing segment's EBITDA was $6,400,000 which is down 22%. Its EBITDA margins were down 80 basis points to 14% from 14.8%. We reported net earnings of $20,600,000 or $0.72 a share. These compare to net earnings of $16,000,000 or $0.64 per share last year. The improvement was driven by the factors that we've already cited, including very strong performance in our Aerospace and Aviation segment as well as reduced acquisition costs and reduced interest costs. On an adjusted basis, net earnings were $23,100,000 or $0.81 a share for Q3 twenty sixteen. These compare to $18,800,000 or $0.76 per share for the comparative period. Adjusted net earnings exclude acquisition costs and amortization taken on intangible assets. Turning now to our other key financial metrics. Free cash flow was $45,900,000 which is up 9%. Free cash flow on a per share basis was $1.6 which is down from 1.7 per share last year. The decline on a per share basis was due to an increase in the number of shares as a result of the conversion of our debentures primarily. Free cash flow less maintenance CapEx was $26,500,000 or $0.93 a share, and this compares to $25,000,000 or $1.01 on a per share basis last year. Our free cash flow totals exclude the growth capital investments of 53,300,000 that were principally made for the expansion of Regional One's portfolio of aircraft. Our payout ratio for Q3 twenty sixteen was 54%, which compares to 46% in Q3 last year. The increase was tied to the recent growth in our dividend rate and the growth in the number of shares. Our Q3 payout ratio is below our historical range that we use to determine the sustainability of our dividend and that we use to make decisions to increase our dividend. Given this strong payout ratio and our positive outlook, our Board of Directors approved the decision to increase our dividend distribution to $0.01 $75 per share on a monthly basis. On our balance sheet, we ended Q3 with a net cash position of $16,000,000 and net working capital of $150,800,000 which represents a current ratio of 1.9:one. This compares to a net cash position of $15,500,000 and net working capital of $135,300,000 and a current ratio of 1.74:one at the end of twenty fifteen. This concludes my review of our financial results, and I'll turn the call back to Mike for some closing remarks. Thanks, Tabby. I want to take this opportunity to speak with you about the value of diversity in how we grow as a company. I've already spoken in detail about the diverse nature of our existing operations, but of equal importance is the power of diversity in how we grow. I've spoken in recent quarters about how the low interest rates and high liquidity in The United States has resulted in purchase prices for companies being unrealistically and unsustainably high and beyond what we are prepared to pay. While the situation in Canada is similar, it is not nearly to the same extent as in The United States. As a result, we are selective in what we are purchasing and deals tend to be smaller and more strategic in nature. Does this mean, however, that our growth is limited in this period of high acquisition pricing? The answer is an unqualified no. In addition to making acquisitions, we have the capability to invest money in our existing operations and generate rates of return that are equal, if not better, than what we have generated in past acquisitions. Regional One is a prime example. We purchased Regional One off an EBITDA of approximately USD 16,000,000. And by the end of twenty sixteen, in less than four years, we have more than tripled that amount by continuing to invest in that company. And this brings me to an issue that I think is very important for our issues to understand. How does EIC calculate what our growth capital expenditures are? On a qualitative basis, it's a very simple formula. If the expenditure is made in order to create a new source of EBITDA, then it is a growth capital expenditure for us. If it is made to preserve the earning power of an existing asset or replace an existing asset, then it's a maintenance capital expenditure. In all of our subsidiaries, for Regional One, the split between maintenance and growth is done by the nature of the investment being made. For example, an engine overhaul creates no new revenue stream and is therefore a maintenance capital expenditure. Contrarily, new aircraft purchased to facilitate Perimeter's expansion into Northwestern Ontario will create new revenues and therefore would be classified as growth. Regional One is different, however, because of the size of our portfolio of leased aircraft. Each month, these aircraft are flown and generate lease revenue, but the assets are slowly used up as they are flown by the lessee and their ability to generate revenue in the future declines. We need to replace this decline in earning power with new assets in order to maintain our cash flow over time. Accordingly, we classify all asset expenditures, even if they generate new revenue, as maintenance capital until they exceed the depreciation incurred in a period. Some may see this as overly conservative. We, however, view it as appropriate. Any investment in excess of this amount will therefore increase our ability to generate revenue and is therefore classed as a growth expenditure. It is very important to note that purchases of aircraft or aircraft parts where they will be sold as parts are shown as inventory and are not included in capital expenditure calculation. One final note on the methodology. When a leased plane reaches the end of its useful life as an operating aircraft, it is generally torn down and sold as parts. When this occurs, it is treated as a negative CapEx as it is no longer available to generate lease revenue. The value is transferred to inventory and relieved from the balance sheet as cost of sales. Sales of whole aircraft are also treated as negative growth CapExes. Our investments in growth CapEx in Regional One have generated exceptional returns, equal and in many cases superior to what we can achieve in acquisitions at our target price purchase multiples. We have average returns in excess of 15% on an unlevered basis after accounting for maintenance reinvestment requirements, but before tax. You can see why we are so excited about the possibilities, whether they be an additional aircraft for Regional One, new contracts at Provincial such as the contract in The UAE to maintain aircraft from last year or the recently bid Government of Canada fixed wing search and rescue contract or the geographic expansion of our legacy operations. The returns we generate enable us to grow even in periods where we do not uncover acquisition opportunities that meet our stringent criteria and are available at an accretive price. We look to invest in any of these growth activities that meet our return requirements and risk profile as they enable us to grow our dividend on a sustainable basis year over year. These investments generally have very little impact in the current period. Rather, they provide growth and profitability in future periods. Investments in 2015 fueled 2016 and beyond, and current investments will help us grow our returns into 2017 and thereafter. There are some that are concerned when these growth expenditures exceed the cash generated from operations to fund them. This is quite simply a concern that we do not share. We are fully prepared to utilize our debt or equity capital to fund these opportunities as they are accretive on a per share basis without increasing our overall leverage. We would not refuse a suitable acquisition opportunity because the purchase price exceeded the period free cash flows nor would we pass up a suitable growth capital investment opportunity for the same reason. The proof of this strategy is in our results. We have been able to increase our dividend by 25% in two years while maintaining a low payout ratio and the same low leverage ratio. Diversity of operations and diversity in operations to grow and approaches to growth work just as well. Regional One's strong prospects were also behind our decision to acquire Team Jazz. The acquisition, small by our usual standards of USD 10,000,000, but we expect that it will deliver significant strategic value in the long run. It broadens Regional One's experience into the Twin Otter platform and provides the opportunity to expand the offerings within Regional One's. Just as important, the acquisition of Team JIS will enable us to streamline the procurement of parts for Provincial, which features twin otters amongst its fleet of aircraft. Our strong results in Q3 and the latest dividend increase may lead some to ask, can we maintain this rate of growth? We believe the answer is an unqualified yes. The outlook is encouraging and we were particularly bullish about sustaining our momentum into 2017 and beyond. Before I open up the call to questions, I want to reiterate our commitment to growth via acquisitions as well. Our last three acquisitions, namely Ben Machine, Cart Nav and Team JAS, should reflect this even though the transactions were relatively small in size, representing a combined total value of approximately $70,000,000 The size of these indications is more an indication of the trend towards upward acquisition multiples for target companies than it represents a shift in our strategy. Our goal is not to make big deals for the sake of making deals. Even as multiples climb, we're not prepared to pay any price. Being disciplined has led to our success. We're not prepared to change what has worked for us over the past dozen years. Unless acquisitions satisfy all of our criteria, including price, we will walk away. In fact, we are prepared to keep our powder dry or invested in internal growth opportunities. As always, we remain focused on extending our track record of providing our shareholders with a dependable and growing income stream through steady, disciplined and consistent execution of our strategy. I want to thank you very much for listening, and we would now like to open the call to questions. Operator? The first question comes from the line of Derek Spronck from RBC Capital Markets. Your line is open. Good afternoon. Thanks. Good morning, Derek. Good morning. When we look at 2015, I think I know the answer to this, but just getting your view. Can we assume that the current organic growth rates in your subsidiaries plus some operational improvements? And then on top of that, the growth kicker based around the anticipated returns around the growth CapEx you spent in R1, is that a good way to kind of frame 2017? That's exactly the way I would look at the business. I would take a look at our organic growth rate in some of the businesses, which we would expect to improve in manufacturing as the economy strengthens into 2017. We've delivered consistent growth that exceeds the inflation rate in the legacy airlines, both through the organic growth in the number of passengers we service, enhancements in our efficiencies and now growth into Northwestern Ontario. And then at Regional One, we've been pretty forthcoming on what kind of returns we expect and we've been able to generate in the past on those expenditures. As I said in my comments, though, we don't turn into free cash flow the second we buy an aircraft, we have to do something with it first. We have to find a customer and lease it out. So that takes a quarter or two. But if you apply a drag and then put in the expected levels of return that we've generated in the past, I think that gives you a reasonably accurate picture of what we would expect. Okay. Yes, that makes sense. And the CRJ900, I mean, with the scope clause changes with the airlines, I mean, it's a very marketable, good aircraft. Are you finding purchase prices higher than you anticipated? Are you finding good deals and or I guess the opportunity to place them into leases? What is that market like? The 900 market is interesting simply because the plane is still in production. You can still go buy a brand new CRJ900 from Bombardier. So that supports the number of people flying the aircraft. It's right on the edge of entering into a Regional One type investment because the value as an air full operating aircraft requires us to lease it for a slightly longer period, but then we move with the 700s. But because those planes are so interchangeable with our customer base, our ability to leverage our knowledge of the 700 into the 900 makes it an exciting growth opportunity for us. And it's earlier in its life cycle than the 100s, the 200s and the 700s that we've already played in quite significantly in the past. So the 900 is clearly a part of our future growth. It's just entering into the stage of its lifespan where we will participate. But our initial experience with the plane has been very, very good. And Derek, the other thing to remember about the 900s is that they have the same engines as the 700s, the parts are probably about 80% interchangeable. Okay. No, that's great. And just one more quickly here. A couple little tidbits I saw on the MD and A. One is that in Provincial, you invested in a demonstrator aircraft. Is that just for future sales purposes? Or is it tied to a specific potential bid? It's not tied to a specific bid, but it's really for two reasons. One of the things that we've experienced in the last twenty four months since we've owned it working with the provincial team is that occasionally things come up in the world that you don't have lead time on, whether it be when the Ebola crisis broke out and people needed maritime surveillance aircraft in two days, not two months or two years. And so we wanted to be able to have an aircraft that's available and flexible to jump into those opportunities. But more importantly, in jumping into those opportunities, we want to show our long term capabilities to these potential customers. So it's really a door opener, the one that will generate revenues while it's in that position. We may well, in fact, and if we're successful, I think you'll see us put that into a short term opportunity, which may become a long term opportunity. We may sell plane operated for someone else and then build another one. The point is we want to have one available for our potential customers so we can react faster than the marketplace. The other gap it feels is for those customers that don't need a full time surveillance aircraft, but only certain times or portions of the year are able to access or would be able to access this only when the need requires. Well, thanks so much for answering my questions. Our next question comes from the line of Mona Nazir from Laurentian Bank. Your line is open. Good morning and congratulations on another great quarter. Thanks, Mona. Good morning. So just looking at the growth CapEx side. Last quarter, you stated that you were looking to build up the CRJ900 fleet, and you had a commitment in place to purchase 11 aircraft. With the addition of net nine aircraft, is it safe to assume that this is nearing completion or completed and that it should come down, the growth CapEx, moving forward? I'm not sure that I would tie those directly in the comment on how many we were committed to. We have a number of individual transactions. But we at this point, I commitments into the future for any specific number, but we remain active in that marketplace. And so when we can go out and place a 900 under a medium term lease with the kind of returns that we expect to generate, If we can buy them at the right price, we'll buy some more. We'll buy some 700s or ATRs or Dash 8s. That portfolio, I mean, it's really important to take back a step back and look at what Regional One has done. It's gone from $16,000,000 to north of $50,000,000 in same currency. There's no Canadian exchange rates in that. That's U. S. Dollars in three years. And at the same time, kicked out free cash flow in line after we maintain those assets to make it sustainable. So from our point of view, we find it bullish, we find it exciting. Whenever we get an opportunity to buy those at our prices, we can expect we will buy them. Whether we'll be able to find enough opportunities to spend $30,000,000 again in a quarter or $40,000,000 in a quarter, That's not in every quarter occurrence. That was a really busy quarter, but an exciting quarter for us. And the aircraft that were purchased in Q3 at Regional One were it was a variety of aircraft. There was no it wasn't a single type. Okay. That's helpful. And just secondly, turning to the reduced fire suppression work. I believe prior deviances from historic patterns could positively or negatively impact EBITDA by about $2,000,000 I'm just wondering if this is accurate or similar for this quarter? That would be on the low end, to be honest. The impact on our rotary business alone would have been close to $3,000,000 and there's also an impact in our fixed wing business because we do a lot of evacuation work. So the aggregate impact is somewhere in the mid-3s to $4,000,000 from and in quotation marks normal because as much as this is a much lower than normal season, we will also have years where there's fires everywhere and we deploy every aircraft, every helicopter we have at very high pricing. So off of a median kind of year, and I would suggest last year was a median kind of year, you would see somewhere between a 3,000,000 and a $4,000,000 shortfall in this year's operations. And just turning to the federal government's announcement, there's been some changes within the aviation sector, including an increase in foreign ownership cap to 49% from 2025. The change may give way to some new market entrants, including Canada Jetliners and Enerjet. Just wondering if you could talk about the implications of this change on your business, if any. Well, the one I'm glad to talk about it. I have to put a little asterisk because the government put out a clarification yesterday saying that they don't know this is going to apply to specialty aircraft, and I have no idea what a specialty aircraft is. They specifically said that passenger aircraft and freighter aircraft are subject to the new rules. So I assume that covers us, but it's not incredibly clear from their releases. On a big picture basis, the increase in U. S. Potential U. S. Or other world investment is good for us. With our relatively modest 30,000,000 shares outstanding under the old rules. We had to stay under 25% internationally owned or about 7,000,000 shares. So we did not focus a tremendous amount of time selling our stock outside of the borders of Canada. With the new 49%, it gives us a lot more room to sell to foreign investors without creating a problem with the Canadian Transport Agency. So for us, I think it's bullish on that end. In terms of the increased competition, ultra low cost carriers aren't going to be flying to Shumatoa or St. Theresa Point. So they're not really an impact to us. That's a very, very difficult business model. And if people want to take a swing at it, more power to them. But I think it's a difficult place to be, and it really has no direct impact on our operations. Your next question comes from the line of Konark Gupta from Macquarie Capital Markets. Your line is open. Good morning and congrats on a good quarter. My first question is on, Mike, on Regional One. Can you please update us on the portfolio of aircraft that you have right now, especially on the leasing side because that tends to be very good margins, I guess. So what kind of aircraft and how many, if you can tell, are currently in the leasing right now? And how many do you expect to be parted out and held for sale? Okay. For competitive reasons, Konark, I'm not going to give you a precise breakdown of what we bought. I can tell you that the majority of the dollars invested are in the newer CRJs, maybe 700s or 900s. And those aircraft that we purchased this year are generally all being held for lease. We have parted out an aircraft, but not a lot. The demand for the aircraft in short to medium term leases is high. And so we're putting them there. And that's where I really wanted to make it clear in my comments today that when we buy one of those planes, the benefit comes in future quarters, but we are maintaining its ability to earn income by subtracting off of our free cash flow an amount equal to our depreciation. And that's because we need to maintain the earning power of those aircraft. And so as we build up that lease portfolio, that's what's going to generate the increases in dividends in 2017 and beyond. And so if we take something out of there, part it out, that's going to be a negative CapEx. It's going to reduce our earning power. So we got to go find some new planes to buy to replace them. When we pull them up, park them out, it will generate earnings in that period. But when you sell a plane off by parts, it's a period gain, not an ongoing revenue business. So we always have part sales, but we're continually refreshing that inventory. On the lease side, we want to build that portfolio because that's the most reliable earnings stream we have. Recent Okay. Acquisition of Team JAS that gives us kind of a new segment for us to pursue in Regional One with the Twin Otter. Okay. So that was actually next question. With Team JAS, does it come with any aircraft? And what kind of synergies do you expect with Regional One, like given they have a presence in Florida? The location really doesn't matter to us. We fly a reasonable number of Twin Otters in Provincial, and they have in the past bought things from Team GIS, but it wasn't their primary supplier. They will become their primary supplier, which will be very much like Regional One has supported the ATR and Dash eight platforms in our legacy airlines. So we expect that to improve efficiency there. But I think the most important part of this isn't the vertical integration play. It's the expertise in another platform and the fact that Team JS is authorized to manufacture certain aircraft parts. And so while right now they're doing that only in the Twin Otter portfolio, there's no reason we can't expand that into the Dash eight platform in particular. And so we're excited about that opportunity. And there are no aircraft in that company. I see. Okay. That's great. And the Ireland comment in your MD and A was pretty interesting because you already have a leasing business there. So are you basically looking for opportunities to expand Regional One in Ireland? Or is that going to be a different subsidiary? No, it'll be part of Regional I don't have the precise number at my fingertips, but considerably over half the world leasing aircraft leasing businesses are housed in Ireland. And so it makes sense for us to be there from an operating point of view. We'll take our business model and transplant it there. There's going be a lot of banks and other people looking to offload aircraft at the end of leases or if a particular customer has trouble. So we want to be right in geographic proximity. And quite frankly, the other reason to be there is tax rates, which are onethree of what we're paying in Florida right now. Quite frankly, Florida may well be the most expensive tax jurisdiction we could have picked to have a lease portfolio, especially when for competitive reasons, it's also not the best place to be. So we're committed to our Regional One team. They're going to manage a new subsidiary, but we're going to move that business into Ireland to take advantage of the competitive situation and a very material savings in cash taxes. Okay. And finally, Mike, airlines, the fuel price seems to be getting into a headwind mode for 2017 because it was depressed this year. So there could be some margin pressure on the airline business. But is there any way you can mitigate that margin pressure from fuel cost by passing on the fuel inflation to your customers? Or is there any other way you can offset that? You've hit the nail on the head. When the fuel prices fell in most of our places, there's a lot of our contracts that have flow through, so they automatically adjust. A lot of our business in Nunavut in particular, the price of fuel weren't different too because we pass it on to the customer. So if it goes up, they pay it. If it goes down, they reap the savings. But in the markets where it wasn't a direct pass through automatically, we passed on a portion of that savings to our customers. And we haven't taken material price increases for years in some of these communities. So quite frankly, if our fuel prices increase appreciably, we will pass that on to our customers just like when we had fuel price reductions, we passed those on to our customers. And now I don't mean to suggest we passed on 100%. Clearly, we benefited, but we shared it with our customer and we've established that our pricing is off of the current fuel pricing. So if the fuel pricing rises, so will our ticket prices. Clearly, I'd love for jet fuel to stay where it is exactly right now, although my Alberta operations may track me down and say they don't agree with that so much. We're on both sides of the equation. That's not something I'm going to lose a lot of sleep over. The next question comes from the line of Chris Murray from Morgan Stanley. Maybe, Mike, going back to some of your comments about deployment of capital and thinking about growth versus acquisition. Is it fair to think that you've always historically thought about kind of a four to five times EBITDA multiple, maybe a bit higher in terms of external acquisitions. But is it fair to think that kind of approach also goes into making decisions around internal uses of capital for growth? I mean you did reference sort of a 15% hurdle rate, but any color on how we should think about that and maybe investments this quarter? Yes. I think that's really the point I was trying to make is I think there's this disconnect with certain people where I perhaps haven't done a good enough job of explaining how the internal growth is really mimicking the effect of an acquisition. If we went out and bought a company, taking it for an example, the Lufthansa deal we did, real life example, they had a dozen aircraft in it. We bought them as assets because that's the way they were being sold. But we could just as easily have put those in a shell and bought a shell with all that stuff in it, then it would have been an acquisition. So for us, when we're buying something that's going to increase our ability to be profitable, we're looking for that same threshold return. And I mentioned it before, but to make sure everyone understands what I'm saying is we're looking for 15% unlevered. So we don't want to play around with debt to generate the returns. It's unlevered, whether it's debt or equity. 15% return after maintenance reinvestment. And that's where you get a little bit of a difference between the pure multiple of like we're paying 5.5x EBITDA. If there's very little maintenance reinvestment in the 5.5%, that will be considerably over 15%. But if you have a big maintenance reinvestment, point 5% might be too high. And so what we're really buying is the residual cash flow stream. And so that's why we're looking for a return after we maintain the asset. So just like in the Regional One thing, after we pay the maintenance CapEx to keep the planes in the air or replace them, we want a 15% cash on cash return pretax. Okay. All right. So yes, I guess we'll leave it there. Just really quickly, just thinking tax rate for 2017, I mean we've talked previously about with more mixed income in The U. Your tax rate would be coming up. The Ireland transaction, any thoughts around where kind of effective tax rates will probably look like as we as that revenue starts flowing in? I'm going to let Tammy take the percentages here. But the one thing I just want to make sure we explain is that we're going over to Ireland for the business opportunities. The tax benefits are the icing on the cake. But it will take us part of next year to get this done. It's not something that instantaneously happens. But maybe Tammy, talk about what it looks like when we're finished, when we're fully implemented there. Yes. So that there I guess I would look at it in two ways there. We should see an immediate cash tax savings once that business is up and running based on the earnings that we would be generating right now on the lease portfolio. There's a as Mike mentioned earlier, that the tax rate differential is pretty significant, up over 37% down to about 12.5%. So you can sort out that, that would have a pretty significant impact on our tax expense. The second thing that I would say is that if you look at the all the growth capital expenditures that we've been doing over the last little while, that is causing our lease revenue to grow quite significantly from one year to the next. And as we see that continuing, the relative benefit of that would also grow as that lease revenue stream gets bigger and bigger. It's important to understand that we have no intention at this point in time of moving our parts business. That is where it is. It's really the lease business that we want to move because that's where the rest of the world market is, is in Ireland. So we should be there too. It also there's also an opportunity for a pretty good lend our expertise on managing the lease portfolios to other players that are purely financing, and they don't have the whole picture expertise. So there's other business opportunities that should come along with that. Okay. That's good. And then finally, just thinking about Team Jazz, mean, of the things that happened with Regional One, certainly, as you started with Bombardier on the smaller aircraft and the older aircraft, that you've expanded your relationship into the larger aircraft. Any opportunities to maybe work with Viking in terms of different parts of their portfolio, in terms of adding additional aircraft frames that they're now supporting? That's very sorry. That's exactly what we want to do. They're a significant customer, and they're a supplier. We're on both sides with them depending on what we're doing. And so we really look to strengthen that relationship. Okay. Any interest in sub manufacturing for them or turning part of the aerospace business into a supply chain for them? Absolutely. The next question comes from the line of Kevin Chiang from CIBC. Your line is open. Hey, thanks for taking my question and thanks for the color in your prepared remarks. Maybe if I just turn back to them, maybe a question I would have on how you look at Regional One is instead of breaking it up as growth maintenance CapEx, is there a total size of the business you think this can be? So you've gone from remarkably from $16,000,000 of EBITDA to $50,000,000 of EBITDA in a very short period of time. Is this like $100,000,000 EBITDA business? And if that's the case, you obviously need to invest a certain amount of capital to get there. Is there a size of Regional One we should be thinking about when you think longer term planning within exchange? We are such a small piece of the market that we're in, Kevin. Whether it goes from 50 to 100 or 50 to 200, at this point, it depends on what other platforms we have in terms of additional aircraft type. I think the key thing is for us is balance in the portfolio. We want to make sure we don't have too much exposure to any one given aircraft. We want to make sure can get our money back. And part of the reason we are right now is it's a great time in the marketplace for us because Bvarga is the manufacturer of these, who typically be very, very active in the resale of used aircraft. But RJ is focused on preserving cash and isn't really particularly interested in the used market. So the opportunities right now are probably better than they would be in a typical part of the business cycle. And so we want to take advantage of that again, subject to making sure we're getting the returns we want. And if you take the total amount of capital deployed and the total return we're generating, that business would be I don't know what superlative is you would use to describe it. But I mean it's growing at a remarkable clip, but the free cash flow and the profit. And understand when we talk about free cash flow, Kevin, in that business, I'm subtracting depreciation from free cash flow. We're making it a maintenance CapEx. So what we're really talking about is distributing profit. Right. I guess I'm just trying to figure out if you've gone from 16,000,000 to $50,000,000 And I appreciate the difficulty in trying to goalpost this because it is If a fluid I was going to goalpost it, I think a small quarter has us buying $5,000,000 worth of assets and a big quarter might be like this. I don't anticipate many 10 plane acquisitions because it was unique, as Tammy mentioned, there is a complete blend of different types of aircraft in that. So there's some of the much more expensive 900s and some of the much less expensive 200s as well as some turboprop stuff. And so I mean there is a finite amount of the CRJ market that we're prepared to own. Just not that close to it yet, and we're starting to dabble in the ERJ market. And Kevin, the other aspect of Regional One that's important to note is that we're also growing other aspects of the business. It's not just about acquiring aircraft and parts. We're also expanding our fee based income through third party asset management and lease management. So there's growth in various different ways through Regional One, which you should keep in mind. That's very helpful. And then maybe actually just you lead me to my second point. One of the comments you made there, Mike, was it sounds like opportunities are quite good, maybe a little bit more robust than you would have expected at this part of the cycle. You raised the dividend again 4x in two years, which is obviously very good. But do you think looking at dividend as part of an earnings payout ratio is maybe a little bit incongruent given what looks to be a very robust growth environment for you. It seems like there's a lot of other cash flow opportunities that generate arguably much higher return given some of these opportunities. Does it not make more sense just to plow it all into these opportunities, generate your 15% to 20% cash on cash return versus looking at earnings payout ratio Well, for your I the key thing is our shareholders are largely income based. And we've been consistent. Policies we've gone from, one of the things our shareholders can understand is we're not going to increase dividends when we can't make it sustainable. And when we're down in the 50% or 60% range, we can afford to increase our dividends. And that's the purpose of why we buy these, is to pay it out as a dividend. We don't expect this isn't like the old income trust stories where I want someone to capitalize the income stream we're saying, quite the opposite. What we're saying is we can buy assets at a price that will enable us to grow our dividend to you way faster than inflation. And that's going to create capital appreciation and ultimately that's going to be reflected in our price. I think you see that now. That's begun when we bump over $40 and our yield drops down below $5 in spite of those growth. It's because the market ultimately is going to value that stream appropriately and our ability to generate income appropriately. And as a result, that reduces my cost of capital, which makes me more effective in the business. The best use of my cash flow is to complete my promise to my customer with my to my shareholder, which is to put it in their hand. We've been a dividend paying company from the beginning. We do it responsibly. It's who we are. We don't apologize for that. Your next question comes from the line of Mark Neville from Scotiabank. Your line is open. Good morning, Mark. Excuse me, Mr. Neville, your line is now open. If you're on mute, please speak. The next question comes from the line of Raveel Azal from Canaccord Genuity. So a couple of questions for me. First of all, is it possible for you guys to quantify what the EBITDA growth was from the legacy business versus the other two businesses within the Aviation division as you have in previous quarters? EBITDA growth. Just give me a second here. Ask me the second question, and I'll see what we can Sure. Talk Okay. So just looking at your overall business, you are in the the aviation division. You're in the process of realizing synergies between the three subdivisions. I'm wondering how far along are you with realizing these synergies? You mentioned that in the MD and A. And what sort of gross margin impact are you already seeing as a result of these initiatives? And where you think that gross margin impact can go in the future? Which initiatives are you talking about, Rafael? Just one more things like consolidating buying functions and for the selling regional ones, selling parts to the other businesses? We're probably halfway through that process. The simpler stuff to do is McDonald's consolidated accounting. We're in the process of consolidating parts purchasing. We've already moved all our overhauls internally. So we've moved charters together. There's still opportunities in training. There's still opportunities interlining, like backing each other up with aircraft to prevent outsourcing and those kinds of things. So we're probably more than 50% of the way there, but there's still opportunities for us to work together more closely. Right. Is it mhmm. I I would suggest to you that the aggregate improvement in the legacies of this quarter was pretty modest. And that was largely because of what I talked with the rotary wing. When you include the rotary wing, it's pretty modest in the 10% range. But bear in mind, it was an abnormal year for that, so you're taking $3,000,000 worth of EBITDA out of that. And that's all in quarter? Yes, that's all in the third quarter. And that's not something that continues into the fourth quarter because there's never really material forest fighting in the fourth quarter. Yes. So if normalize that out, you're looking at somewhere in the 10% to 15% growth in EBITDA. Got it. Perfect. And maybe my second question, if you have that, or we can discuss that off line. Which was and in terms of a percentage on that, I really don't have one. In terms of I can just tell you that we're sort of halfway through that process. Okay. Perfect. And and then just I'm I'm moving to the EBITDA growth for the legacy versus the other two in the quarter. Well, okay. And that's how it answered. Well, that was 10 to 15. Was 10 to 15. Alright. K. K. And you've gotta exclude the the onetime change for the firefighting business. And there are no further audio questions at this time. I will turn the call back over to the presenters for closing remarks. I'd really like to thank everyone for participating in today's call. It's an exciting period for us with the growth we've been able to achieve, the dividend we've been able to pass on to our shareholders, and it's been a great opportunity for us to be able to share our strategies with you. Look forward to updating you on our progress in future quarters. Thank you very much, and have an awesome day. This concludes today's conference call. You may now disconnect.