Earnings Call: Q1 2016

May 11, 2016

Earnings release

Good morning, ladies and gentlemen. Welcome to Exchange Income Corporation's Conference Call to discuss Financial Results for the Three Month Period Ended March 3136. The Corporation's results, including MD and A and financial statements, were issued on May 10 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 and Exchange's other filings with Canadian security regulators, except as required by Canadian securities laws. 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. Good morning, everybody. Thank you, operator. Also with me today are Carmel Peter, EIC's President and Tammy Schoch, our CFO, who will review our financial results in greater detail. We ended 2015 on an extremely high note, setting new benchmarks for our key financial and operating metrics. I'm very pleased that we've been able to sustain this momentum into 2016. We have started the year off with our best first quarter results ever in our twelve year history. Most notably, consolidated revenue grew 25% to two eighteen million dollars Consolidated EBITDA increased 43% to $44,000,000 Earnings per share climbed over 900% from $04 to $0.36 Free cash flow, less maintenance CapEx grew by 84% to $17,000,000 or $0.61 a share, up from $0.40 per share in the previous year. Our payout ratio declined from 109% to 79%. And the trailing 12 payout ratio declined to a stellar 59%. I want to take the time to put these record results in perspective for everyone, particularly for our recent followers to our company. Historically, the first quarter has always been the weakest quarter given the impact of seasonality factors have on our operations. ESC has always had significant exposure to aviation in the North. And as a result, the first quarter is always more financially challenging period as the system of winter roads provide a cost effective alternative to air travel for several weeks in February and March. Typically, this seasonality has resulted in payout ratios well in excess of 100% for the first quarter. In fact, the five year average payout ratio for the first quarter was 194%. Over the last two years, we have been able through enhanced diversification of our operations, in particular with the varied revenue streams at regional and provincial and elsewhere, and profitability enhancements to reduce this ratio from 109109% in 2015 and now to 79% in 2016. With the addition of these two companies, EIC did business in over 60 countries around the globe in the first quarter. We've become less exposed to the impact of weather through our efforts to be more diversified. Being more diversified has also meant that we are now less exposed to the rapidly changing commodity prices or to the rising and falling of the U. S. Dollar. This stability has also enabled us to focus on organic growth and profitability enhancement. Excluding Ben Machine, who were added to EIC in the summer of last year and therefore have no comparative results, EBITDA rose by 36% in the first quarter. This improvement was the result of efforts made by our existing subsidiaries to grow their business and enhance their profitability. It also demonstrates the return on growth investments that have been made in previous years. Plain and simple, diversification works. It has made us more profitable. It's helped us strengthen our balance sheet. And most importantly, it's allowed us to consistently increase our dividend distributions to our shareholders over time. As a result of Q1's record performance and our outlook for the periods ahead, our Board of Directors yesterday approved a 5% dividend increase effective for the dividend payment coming out in June. This means that we will be distributing 2.01 per share on a go forward annualized basis. This increase is our third in the last eighteen months and has grown dividends by 20%. It also is the eleventh increase in the past twelve years. It certainly cements our place in the top group of dividend paying companies on the TSX. One might be tempted to assume that given the strength of our overall results that all of EIC's subsidiaries performed at their peak in the first quarter, but this was not the case. Manufacturing in general and our Alberta operations in particular had a difficult environment with weaker than typical demand. These were cyclical as opposed to competitive challenges, and we are confident that they will rebound in future quarters. Aviation was the driver of Q1 performance. Legacy continued to generate solid results, while Provincial and Regional One provided strong growth. Provincial, which we acquired in January, was a key contributor. The company, which in itself is diversified, generated strong revenue, EBITDA and cash flow in the first quarter despite facing unfavorable condition in its principal airline market. The decline of nickel, oil and gas prices in particular have impacted several major projects at Newfoundland and Labrador, resulted in lower demand for Provincial's passenger and cargo handling service. Through its aerospace unit, Provincial was able, however, to offset these soft market conditions for its airline division, securing a five year in service support contract with a client in The Middle East. The contract, was signed in November, is valued at in excess of $150,000,000 over the five year period. You may notice a theme developing here, but quite simply, diversification works. Another key driver of our Q1 results was Regional One. Our subsidiary focused on the sale and lease of aftermarket aircraft parts and engines. The company continued its progress in monetizing its expanded portfolio of assets, principally, but not exclusively, the fleet of a dozen CRJ700s acquired over the last eighteen months. We originally acquired Regional to generate a strong standalone return and to offset costs we incur for aviation parts at our legacy airlines. In addition to its operating performance, R1 played a significant role in our strategy to internally hedge currency fluctuations. The extreme weakness of the Canadian dollar partway through the quarter put inflationary pressures on the cost of our airplane parts and overhauls, which are generally priced in U. S. Dollars. But R1 generates its profits in U. S. Dollars effectively offsetting this challenge. While Regional One has multiple recurring revenue streams, including part sales, aircraft and engine leasing, in Q1, are embedded from the sale of operating aircraft. I raised this because the sale of operating aircraft are not consistent from period to period. And as such performance may be somewhat variable from quarter to quarter depending on the number of aircraft itself. I would point out that the variance from this factor was not huge in the first quarter, simply a couple of million dollars, but rather I pointed out so that people understand that there are certain quarters when we may have exceptional performance when we sell more than the expected number of aircraft. I should also point out that our corporation's aerospace operations took advantage of more than $26,000,000 in growth CapEx investments that we made to grow its portfolio. The most significant investment was the two CRJ900 aircraft, which introduced a new aircraft platform for our customers and thereby opened significant opportunities for future growth. Bed Machine, which we acquired in July, helped to mitigate some of the challenges faced by our manufacturing segment entities. Acquiring Bed Machine allowed us to expand our manufacturing segment into new geographical and product markets and effectively reducing our exposure to the volatility of oil prices, particularly for our Alberta operations. As our consolidated results show, we have never been better positioned to economic challenges and embrace new opportunities. Our success is due to our business model. It works. It's why we devoted considerable effort on our key fundamentals, being diversified, being disciplined and delivering dependable dividend. It's also why we ended Q1 with a strong balance sheet and are well positioned for growth. I will provide more commentary on our outlook and prospects for growth through 2016 and beyond in my closing remarks. I would now like to turn the call over to Tammy, who will review our Q1 financial performance in detail. Thanks, Mike. Good morning, everyone. Before I begin, I would like to point out that we have retained our two segment reporting structure in Q1 twenty sixteen. This is because we have not changed our internal management reporting structure. And as our business changes and grows, we will be considering making changes to how we internally manage our businesses. And at that time, we will reconsider our reportable segments for external reporting purposes. Financial reporting standards require that our segment disclosures are consistent with how we manage our businesses. Although we do have two reportable segments, as we've discussed before and as Mike's mentioned today, there are a number of diverse business lines within our segment. I'll also point out that our Q1 twenty sixteen results include the addition of Ben Machine, which we acquired in July 2015, and therefore, the results of Ben Machine are not included in the comparative figures. Turning to our income statement. Consolidated revenue for Q1 was $218,000,000 which is up 25% from last year. The growth was largely driven by the strong contributions from Regional One and Provincial and to a lesser extent the addition of Ben Machine to our portfolio. Our growth was tempered by the performance of the Manufacturing segment, particularly our Alberta operations, which were impacted by continued low levels of oil prices. Other subsidiaries within our Manufacturing segments performed relatively consistently with Q1 twenty fifteen. On a segmented basis, the Aviation segment generated $174,000,000 of revenue, which is up 30% from Q1 twenty fifteen. The Manufacturing segment had revenue of $44,400,000 and this is up 10% from last year, largely due to the addition of Ben Machine. Revenue from our legacy airlines was largely flat in Q1. The Aviation segment's growth came largely from the sale of aftermarket parts, engines and aircraft through Regional One and from the sale of Maritime Solutions in Provincial. The fact that our revenue growth was largely organic bears repeating. We are pleased with the performance of Ben Machine, but the majority of our growth was driven by companies that were already in our portfolio at this time last year. Consolidated EBITDA was $44,300,000 up 43% from last year. The growth was due to a number of factors. As we've previously noted, it was driven by Regional One Provincial and Benmachine. Our legacy airlines, which continued to benefit from previous efforts to streamline operations and profitability, also performed well and contributed to our EBITDA growth. On a segmented basis, the Aviation segment generated EBITDA of $43,600,000 which is up 40%. Its EBITDA margins were 25.1%, which is up from 23.4% last year. The Manufacturing segment generated EBITDA of $4,500,000 which is up 62%. Its EBITDA margins were 10.2%, which is up from 6.9% last year. We reported net earnings of $9,900,000 or $0.36 a share, and this compares to net earnings of $934,000 or $04 a share last year. The improvement was driven by factors already cited including the strong performance of our Aerospace businesses. Also contributing to this was the lower interest expenses stemming from the redemption of two series of convertible debentures in 2015. On an adjusted basis, net earnings were $12,000,000 or $0.43 a share for Q1 twenty sixteen, and that compares to $3,700,000 or $0.16 a share for the comparative period. Turning to other key financial metrics. Free cash flow was $34,900,000 which is up 46% and on a per share basis that was $1.26 up 21%. Free cash flow less maintenance CapEx was $16,800,000 or $0.61 a share and this compares to $9,100,000 or $0.40 on a per share basis last year. The resulting payout ratio for Q1 twenty sixteen was 79%. And as Mike noted, that was a substantial improvement from 109% in Q1 twenty fifteen. On our balance sheet, we ended Q1 with a net cash position of $29,400,000 and net working capital of $160,000,000 which represents a current ratio of 1.95:one. This compares to net cash position of $15,500,000 and net working capital of $135,000,000 last year and a current ratio of 1.74:one at the end of twenty fifteen. Our total capitalization and leverage ratios continue to be strong. Our senior debt leverage ratio was approximately 1.8 at the end of Q1 twenty sixteen and our leverage ratio including the convertible debentures is 2.9. We continue to have significant financial capacity through our credit facilities and we are well within our credit facility covenants. This financial strength and flexibility leaves us very well positioned to achieve our business objectives. This concludes my review of our financial results and I'll turn the call back to Mike for his closing remarks. Thank you, Tammy. As you have heard, we ended Q1 more diversified, more profitable and with a stronger balance sheet than ever before. We believe we are well positioned to sustain this momentum through 2016 and beyond. It's largely the reason we increased our dividend by 5% effective with the dividend payment in June. Looking ahead, our outlook for organic growth remains positive, particularly within our Aviation segment. More specifically, we anticipate that Regional One will sustain its performance given the growth capital investments we have made to expand its portfolio of assets, especially with the introduction of the CRJ900 platform to its portfolio mix. It's important to note that we have consistently invested in Regional One since its acquisition, and this has enabled us to continue to grow this on a profitable basis. Custom Helicopters is expected to see higher demand for its fire suppression services given the relatively dry spring we have experienced in Manitoba so far. The prospects for Provincial are also encouraging, given the number of opportunities around the world for its maritime surveillance as well as its search and rescue services. Demand for its scheduled airline and cargo services are expected to be somewhat softer, however, given the weakness of the mining and oil and gas sectors and the recent austerity measures introduced by the Government of Newfoundland and Labrador. But as mentioned earlier, our provincial is a small microcosm of EIC in that it's diversified unto itself, and in aggregate, we expect it to grow. Within the Manufacturing segment, we anticipate continued strong performance from Ben, which we believe will offset the drag on performance that low commodity prices will continue to have on Alberta operations for the foreseeable future. Over the longer term, we remain very committed to growth via disciplined acquisition. With access to approximately $200,000,000 in deployable funds and our strong balance sheet position, we are very well positioned to capitalize on acquisition opportunities that meet our very specific purchase criteria and support our goal of continued diversification and increased dividend payouts. Thank you very much for listening, and I would now like to open the call to questions. Operator? Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question comes from the line of Trevor Johnson from National Bank. Your line is now open. Hey, morning folks. Good morning, Trevor. Just start off with Regional One. I know that the economics in the market environment has been such that you've been benefiting more from leasing of late. With a couple of planes sold in the quarter, have you seen a shift in terms of that business' dynamics? And is it maybe moving back towards more of a sale model on the overhauls? Or can you still kind of see a nice appetite for the leasing front as well? It's actually both Trevor. We take a look at each aircraft and see what it's best suited for the length of the lifespan of the engines, whether it needs to be overhauled. And that's where you get into that whole kind of matrix and plugging each aircraft into it. The general economics for the plane itself or that was low fuel prices, there's demand for the aircraft. If there's demand for the aircraft, whether that's through leasing or through sale of aircraft, it depends on the individual customer. So there's really been no movement away from leasing. And in fact, I can tell you that we have all of the CRJ700s now deployed, whether that means on a lease, sold or being disassembled for parts. And we see no change to that demand environment in the near or even the medium term. As well, Trevor, the two CRJ900s that we recently acquired, they are on lease as well. Great. Yes, that was my next question just in terms of where you saw those two going. So in terms of the CapEx though, I know the IRR profile for Regional One has just been tremendous. Are you still kind of seeing those same type or at least similar type of economics on dollars that you're deploying into that business? Yes. That's a question I really wanted to get because sometimes we get a feedback about like do we continue to invest. And if you look at our returns as a company, they're growing our earnings are up ninefold this quarter. Our EBITDA is up almost 50%. It's because we're investing in our existing operations and generating exemplary returns. If I can put $20,000,000 into a business I know and generate 15% plus returns on capital rather than having to go buy a new business and the risks inherent with buying a new business, we're going to invest in ourselves before we invest in others. That not being said that we're not looking for acquisition opportunities, we clearly are. But we're excited about when we get a chance to buy like the CRJ900s at a rate of return that's more than acceptable to us, we're going to continue to do that. And that's why having a balance sheet that we do is so important. So when Hank, our CEO there says, Mike, we've got an opportunity, we can say, write the check. That's good. Provincial, any update on the contract for the marine surveillance for Canada's North? Mean, it's government, so you have to take this with the grain, the rich grain of salt it so richly requires. But both of the main bidders have been working with the government in testing whether we meet the standards and the process is moving along. The government has indicated that it may come to a head later this year. I'm not sure that I want to predict that it'll happen exactly then, but we're seeing significant progress and the change of government has had remarkably little effect on this procurement initiative. All three parties acknowledge the need for these new aircraft. So we're pleased with how it's going along and we remain confident in our chances. I think we said before that we wouldn't expect a decision before the end of the year and I think that's still where we're at now, although pleased with what we've seen to date. Our next question comes from the line of Mona Nazir from Laurentian Bank. Your line is open. Good morning and congratulations. Thanks Mona. Was a good quarter. Yes. So just a couple of questions for me. Firstly, I was wondering if there were any major one time items in the quarter that had a positive impact. You did mention the CRJ sale on the Regional One side. Can you quantify what kind of impact that would be from a revenue perspective? And are the margins there in line with historical Regional One? Just trying to get a sense of if it was a material contribution. I'll give you sort of a roundabout answer to your question because I'm not I don't really want to disclose what we're making on a given aircraft. The key thing in the first quarter is we sold more than one, which doesn't happen every quarter. And so we probably experienced extra EBITDA of in the range of a couple of million dollars from the stronger aircraft sales than a typical quarter would have. Not going to give you a sales number because then you know what I'm selling my airplanes for. And so I'm not prepared to do that. But I mean, in the grand scheme of things, it's a couple of million dollars on $44,000,000 of EBITDA. It's not a big number. But we wanted to be fulsome in our disclosure and let people know that, look, that business is always going to be lumpy in that we've got core part sales, which are really reliable quarter to quarter. We've got leases that are reliable quarter to quarter and quite frankly are fueling most of the growth as we put the new aircraft we buy onto lease and generate significant returns. But occasionally, we'll sell more than one aircraft and that will give us a little bump in that quarter. But it's not a huge number. Okay. That helps. Just secondly, you touched on it in your prepared remarks, and a keyword that kept coming up was diversification. But sustainability was another word that came up when I was just reading through the material. I just wanted some clarification on the sustainability that you're seeing. Is it sustainability of organic growth, sustainability of margin, sustainability of dividend or all of the above? And any comments on that would be great. I think it's sustainability of all of the above, but with kind of an asterisk. The first quarter is generally a slower quarter. So to generate a bigger percentage increase is possible in Q1. If you take Q3 where we made, I don't have the number in front of me, 50 something million, it will be very hard to generate the percentage increase in Q3 that we've generated in Q1. But do I expect to continue to grow in those quarters? Absolutely, we do. The businesses we're in are sustainable. Our airlines, we've proven we've been in those for over a decade and challenges come and go, but we've consistently generated free cash flow. They're reliable. Our manufacturing consistently augments that. We're going through a tough time in Alberta. But it's actually interesting because each of the other times where the oilfield has gone through a tough time, our Alberta ops have come out stronger because we can continue to invest in the slow period. We don't exit the market. We don't cease to carry inventory. So when the market recovers and it will, whether it's three months from now, nine months from now or twenty four months from now, we'll be in a position to take advantage of it. And then our aerospace, quite frankly, we love that business. With what's happening in our maritime surveillance business where we've added contracts, we're in discussions in various parts of the globe. And then Regional One, as we've talked about a lot on this call, it's expanded its reach around the world. I don't have the number right of me, but I think they did something like 55 or 60. 58 countries they sold or had sales in around the world. In the first quarter. So that kind of geographic diversity and customer diversity is what makes us sustainable. Okay. And just lastly, before I get back in queue, just turning to the dividend, third increase in eighteen months up 20%, but you remain focused on growth via acquisition. Is there any read through that if you're increasing the dividend, especially given the frequency and the magnitude of the increases, then maybe there's a slowdown in the M and A or the environment has cooled or you're not seeing potentially as large of a transaction. Just wondering if there's any correlation to the dividend increase versus acquisition outlook? Absolutely not. We're deploying capital at a fairly high rate internally. There is a correlation between the dividend and one of the things we do and that correlations with our payout ratio. We've been able to increase it three times and still be in that 60% range. We've been consistent since we started twelve years ago that we're comfortable in the 70% range and we're uncomfortable when it gets to 80%. And we're in the 60s, we're going to look at raising our dividend. We're trying to do it in bite sized pieces so that the market can say, okay, there's one. If they continue to perform, maybe there's another one coming. And so if you want to predict our dividend in the future, the best predictor of that is what you think our payout ratio is going to be. If we need money for an acquisition, we'll tap the capital markets, we'll use our credit line depending on the size of it, but we're not going to pay it out just because we got nowhere to put it. We've got lots of organic opportunities to invest. Your next question comes from the line of Derek Spronck from RBC. Your line is now open. Good morning. Thanks for taking my question. Good morning, Derek. Had the opportunity to attend a luncheon with the Federal Transport Minister, Mark Garneau. Mr. Garneau clearly indicated that improving access to northern communities was a key mandate. Do you have any more color on what that could potentially mean and how EIF may be able to leverage this? It's one of those promises that's very hard to fulfill. And I in no way doubt the sincerity of the government that they want to invest in First Nations. But when you're talking about communities of 500 to 3,000 people that are hundreds of miles away from road infrastructure, the likelihood of there being any other way to get there other than airlines is very remote. What we would hope is that they want to invest in improving the airport infrastructure. Some of these things at 3,000 foot runways and they're gravel and they're rough and it's hard on the aircraft. They could improve the quality of the service we can give them by investing in the airports. We've heard nothing that says they're prepared to do that. I think it's more likely that the government will end up providing greater funding to the First Nations. And hopefully that funding will enable them to engage in economic development, whether that be tourism, fishing, those kinds of things, which will increase the wealth of those communities and that can be nothing but good for us. Okay. No, that's great color. Just moving back to the financials, was the $28,000,000 in growth CapEx this quarter primarily due to the two CRJ900s? And going forward, are there any other type of aircraft you're looking at for Regional That's a hard question. We need to have I got to back up to be able to answer the question. For us to be to do well in an aircraft, we have to have enough knowledge of that aircraft to be able to engage in the arbitrage between parting an aircraft out, leasing it or selling the whole thing. And so we have to build that knowledge. And movement from a 700 to a 900 was fairly easy because there's a tremendous commonality of parts. And so we're very comfortable with our ability to enter into that. We've dipped our toe into Embraer aircraft occasionally. That's something we'd like expertise of because it's not something we do a lot of business in. But we're looking for opportunities and it may well be buying a company that has expertise in an aircraft, even if it's in overhaul or it's in straight leasing or straight parts. But we need to have the internal expertise to be able to engage in the entire arbitrage process to be able to generate the profits that we do in that business. So the short answer is we're looking at a bunch of stuff. The longer, somewhat more accurate answer would be that we need to do continued work to build the expertise internally to be able to do that. Yes, it makes sense. On the $28,000,000 though, was that primarily the CRJs? Yes. Yes, okay. And It wasn't exclusively that. We did buy other aircraft, but the single biggest investment in that substantially was the two CRJ900. Okay. That's great. You know what, I'll leave it there for now. Thanks Mike. Thanks. Our next question comes from the line of Chris Murray from AltaCorp. Your line is now open. Thanks. Good morning. Guys, just you've talked a little bit about the sustainability of earnings, but just thinking about the margins and some of the internal things. I guess a couple of things. One, how much did the kind of mild winter weather impact the legacy airlines this Q1? And I'm thinking about even longer term, is that the kind of run rate that we should be thinking about? And then two, you talked a little bit about in past calls about how some of the work that Provincial can do for you. Typically, Q1 is a fairly heavy maintenance quarter. Is there also some margin benefit that we're seeing out of some cross selling, if you will, between the different groups? Those are two good questions, Chris. Let's deal with the second one first. We've internalized all of our overhaul capabilities and we've been flowing that through Provincial. We've got two key benefits out of that. One is pure cost. Provincial has done it on a more cost effective basis to the third parties. And it's also given us flexibility. Flexibility on when we do it turns into higher margins in the airlines because if they have an opportunity, we postpone an overhaul for two weeks or move it up so that we're doing it at the best time for our operators. So we've experienced significant savings as a result of that. On a correlated basis, because we're doing it all in one place, we've done things like putting out an RFP for our engine overhaul work for the big engines that we don't do internally. And that RFP has significantly reduced the price where the individual companies were paying for their overalls on a one or two or three off basis. Can you refresh me what your first one was? Well, margins and whether they're sustainable. The weather in Q1, quite frankly, didn't do anything to really help us in Q1. It will help us later on in the year. What happened was because of the mild winter, the winter roads had a shorter season. So they were open less long, so less materials, things construction materials, food that sits on the shelf for a long time like cans of soup or cans of Pepsi got into the communities. So as those are used in the communities, they'll have to be replaced through the air, which will ultimately create demand for us over the summer and into the fall. But in the quarter itself, the impact was negligible. I think the other indirect effect will be on the fire season. The fact that the snow was melted sooner and the forests are drier, we're already experiencing challenges in the Eastern Part Of Manitoba. And we've all seen the horrible disaster in Alberta. While that's had absolutely no impact on our business, it shows how quickly things like that can happen. And when that does happen, it does tend to drive demand for our services, whether it be to evacuate people or to fight the fire. And Chris, just one further comment on the overhaul, that capability that we've internalized because it's not necessarily intuitive. It's added a potential revenue stream to Regional One that wasn't there before because in the past, an aircraft that was reaching the end of its green time and needed significant overhaul would have been parted out by Regional One. We now have the potential of sending that to provincial to get overhauled and now there's an additional aircraft that can either form part of Regional One's leasing pool or be sold off as an operating aircraft. And we do that with kind of sunk labor. We put a couple of those planes in the back. We call them project planes. So when we've got a gap between scheduled overhaul work, whether it be ours or for third parties, we're going to pay those people anyway. So we might as well have something for them to do. So they work on those project planes and it's a means of recovering a sunk cost. Okay, great. Interesting. Just turning to the balance sheet for a second. I guess you've got the Series J debentures still out, but you've got a call available to you at the May. The thing the Series Js, I think, are kind of unusual and they also have a secured component to them in terms of the balance sheet. Any thoughts about bringing that in, freeing up that security and maybe doing something different just even on the interest arbitrage? Yes. We're always looking at those securities to get the best return on our money. One of the things that's always been really important to us, Chris, is maintaining the stability of our balance sheet by not having too much renewal risk. And so we try try and deal with these things in advance when it's appropriate to do it. And we did that while you saw last year where we cleaned up two series of convertible debentures and we continue to look at opportunities in the future. We want to make sure that as each of these debentures come due, none of them are a significant enough amount of money that we couldn't just write a check out of our bank line. So it's a long winded answer to say, yes, we look at all those things. No decisions have obviously been made or we'd have told you about them, but that's something we look at. Okay. Thanks, guys. Our next question comes from the line of Konark Gupta from Macquarie. Your line is now open. Thanks. Good morning, Mike, and congrats on a good quarter once again. Good morning. Thank you. Mike, just a couple of questions here. Just following up on Trevor's question on Regional One. Can you remind us after selling the CRJ700s in the quarter, how many are basically on lease and are being stripped out or kind of available for sale? And what are your sort of prospects on the CRJ900s? Would you like to opportunistically acquire more of those and put them on a similar kind of business model? Thanks. Yes. I'll deal with your second question first. The CRJ900 is newer and so it's still largely in service with Tier one carriers. So this is our first toe dipping in and they're still relatively expensive for us. So I would love to buy more of them. I suspect it will take a couple of years for us to meaningfully increase our fleet of those simply because they're still on lease with the Tier one carriers. The Lufthansa update, we really have deployed all of them. As of today's date, we've parted out, I believe, three of them. We've sold a couple of them and the rest would be on lease. Remember that we have bought more than just the ones from Lufthansa. We bought a couple others. So I think we have something in the neighborhood of while I don't have the numbers in front of me, I think we got seven or eight of them on long term lease, medium term lease. We don't do long term leases, but so ranging from a year to a couple of years. Okay. That's great. And have you seen or noticed any change in dynamics because of the recent blip, I would say, in the fuel price or the oil price because the regional jets are typically not as fuel efficient as other aircraft are. So have you seen any kind of impact of that fuel price? Does that make your customers sort of nervous about operating them on short term basis? That's a really good question. The fuel prices kind of been all over the place this quarter. We've seen really low prices. It's bumped up and fallen back down. But the key thing to look at it that is you have to look at a much longer term curve of pricing. And the price of jet fuel now is still materially lower it's been for the last few years. And so if oil bumps up to $50 or $60 a barrel, then it's still relatively cheap and the dynamic of the efficiency of those engines continues at that kind of oil pricing. You need to see oil going back into perhaps not 100 but closer to that before the efficiency argument on the engines has a dramatic impact. So I would suggest at least in the medium term that the demand for these aircraft is solid and that's what we're seeing in our demand. Okay, thanks. And think it's evidenced by the fact that when we bought those two years suggested that we were going to part out a significant portion of them. And quite frankly, we haven't been able to because the demand for the whole aircraft is too high. Right. And just moving on to the manufacturing side, I understand obviously band machine is doing pretty good given its exposure to A and D market. However, stainless Alberta operations and other businesses basically, they are not obviously as robust at this time. So what could be one or two kind of things that you might kind of see changes in over the next, call it, six to twelve months? Like would you expect the West Tower, for example, to kind of slow down in terms of declines in revenue and stabilize at some point? Or would it be stainless or overlanders or something else? I think you'll see stainless has been fairly stable to begin with and we don't see any declines there. Overlanders as well is a fairly stable business, give or take very small amounts. It's very predictable. West Tower is in a period where there's less new technology being installed. We're nearing the end of four gs LTE and waiting for the next. So again, we see that business as being fairly stable at a level lower than it was a couple of years ago, but I don't see a continued decline in the business. And quite frankly, Alberta has kind of plateaued. I hesitate to hang my hat on it because it's a short period, but we've seen relative stability in the last couple of months in that business. Again, relative stability at numbers I'm not thrilled with. But having said that, what they do is an essential service in the production of oil and in agriculture. It will come back. And so we'll be patient. We'll continue to have the inventory in place, look after our customers and our market share will undoubtedly grow as Alberta comes out of its doldrums. Our next question comes from the line of Steven Hansen from Raymond James. Line is now open. Good morning, guys. Mike, I just wanted to follow-up on the opportunity for internal investment. Do you have a guys have a budget for the balance of the year as these opportunities have been evolving? Can you just give us a sense for the magnitude of capital you expect to deploy internally for the balance of the year? That's a great question. It might be the hardest question I've had today to answer because the act would we make our money in Regional One based on how we buy, not on how we sell. We know what to buy, when we can buy it at a price that's going to generate the returns we have. So by the very nature, it's opportunistic. We don't anticipate four quarters that look like Q1 in terms of the amount of money invested, but I anticipate making meaningful investments throughout the balance of the year. In terms of the non aerospace business, so outside of Provincial and Regional One, growth capital investment is very small. Completed a lot of work in the airline business. We bought the Kivoletco operations of First Air a year ago and we continue to digest that, but the invested capital required to do that is all in the business. And so we'll see continued improvement in that performance as we digest it. But the only place I see material money going into would be in the aerospace side. And I wish I could give you a hard number. 20 is a big number for a quarter, but it could be that again or it could be smaller than that. I don't see it being much over that in a given quarter unless we have Lufthansa like opportunity. And I'll be very excited to tell you about it if we find one. Sure. That helps with some goalposts. And then just on I mean, clearly, appetite for the aerospace side has been improving of late. You described it earlier in your remarks. But if you're thinking about the acquisition pipeline outside of the internal opportunities, I mean, you hunting in that landscape? You described your need to get additional capabilities on other platforms as an example. Can you buy those capabilities? And would the pipe just give us some sort of sense for where you're looking in the pipeline from a sector or geographic perspective? Geographically, we're entirely agnostic. We are actually looking at stuff around the world right now. It's got to be clear, if it's outside of North America, it's going to need a certain amount of scale to make it worth the effort of adding it to our portfolio. But geographic diversity strengthens our dividend paying capability. In terms of sector, we are looking for anything that augments the two existing areas we're in. So maritime surveillance, maybe we'll have a company like Ben that helps us make parts. Maybe we'll have MRO capabilities that help us adapt aircraft and put them into a surveillance configuration. We're looking at the means of expanding SFI's production capability. We've been factory landlocked for a number of years and we're looking for opportunities in that business. And people have heard me say this for a long time and we haven't been able to find it yet, but we'd still like to find one more leg of business at the right multiples. That's one of those things that's either a glass half full or glass half empty thing. We haven't found anything that fits and we've still been able to grow the business dramatically, move our dividend. But the other side of that is we haven't chased deals for the sake of doing them and we won't change that. We'll look and when we find it, we'll do it. But I think in terms of sectors where we're going, there'll be less in pure aviation. There aren't as many opportunities there. Having said that, when the right deal comes, we'll jump. Things that are tangential to our existing aerospace business we like and the ability to grow SFI is something we like. Okay, that's helpful. And just the last one if I may, just because I'm thinking about it as you described what you're doing. Is there any appetite to prune at all, Mike? Some of the smaller businesses dating back ten, fifteen years now, they're quite small and you acquired them, they've grown to a certain degree. But have you ever thought of pruning just to simplify the business platform at all as you've added on some larger sort of lump sized acquisition here in recent years? It's an interesting question. The short answer is no. Our business is built upon being able to pay dividends. And so we know these businesses and they generate cash flows that we like. So if someone were to come to us and say, Hey, I'll pay you. We're doing a strategic roll up of whatever business and we really want your such and such business. I'm agnostic. They're not children, they're just businesses. Having said that, you're going have to pay me more than we think they're worth. I don't want to sell it to record a capital gain on paper, send some money down to Ottawa in taxes or to Washington to pay our tax bill and then have to take the money I have left and go out and find a new company to replace that cash flow stream. So barring a situation where someone thinks something is worth more than what we think it's worth or barring a situation where we don't think we can manage it, I don't think you're going to see much in the way of sales. Our next question comes from the line of Mark Neville with Scotiabank. Your line is now open. Hi, thanks. Good morning. Maybe just a couple of housekeeping questions. Just on the Regional One, how many planes did you actually sell in the quarter? I'm not really sure I want to disclose that. It was two or three, but they weren't all big aircraft. There's other things we sell. I've got to be careful about competitively sensitive information, but I would tell you that it's more than normal. And I think I already stated that it probably brought in a couple of million dollars in EBITDA more than I would typically expect. Okay. So you're still around the twelve, thirteen planes in that business now, guess, with the addition of the new Oh, no. We a lot of other aircraft in the business, your time, but just the CRJs. We've got engines we lease out. We have Dash 8s in the portfolio. We have ERJs in the portfolio. I think we still have a couple of ATRs in the portfolio. So there's more than just the CRJs. They're getting focused because they're much more expensive planes to buy. I mean, the math, those are like when we purchased those, I think something like US7 million dollars a piece around the front of me, but maybe US6 dollars or US7 million And whereas some of these other planes were buying for 1,000,000 or US2 million dollars a piece. Okay. So in terms of the CRJs, was that what was sold in the quarter? We sold one of those, yes. Okay. That helps. Thank you. Our next question comes from the line of Tim James from TD Securities. Your line is now open. Thank you. Good morning. Just want to return to the growth CapEx. Mike, you mentioned if you kind of back out the regional one and the aircraft acquisitions, which I realize is volatile and difficult to kind of provide much guidance on. Is it possible just to wrap some goalposts around the sort of growth CapEx in the remaining part of the aviation business? I think you mentioned it was relatively small, but does that mean $5,000,000 a quarter, 10,000,000 a quarter? Just trying to get a bit of a sense It would for be materially less than that. It would be 1,000,000 or $2,000,000 It depends on maybe not even that. It would be when we upgrade a facility or something or perhaps trade in an aircraft and upgrade it, but it's a very small number. We run-in the $2,500,000 a quarter type range. Okay. Okay. Thank you. And then it looks like everything is going extremely well here. Are there any businesses where you feel changes need to be made, strategic cost structure? And obviously, than just the industry weakness that's coming from the resource sector, is there anything that concerns you at this point? Or are you really kind of firing on all cylinders here with all the business units? We're happy with where we are. But I think when you're happy, there's a risk you're complacent. And our job is to help our guys drive the synergies in their businesses and between between our airlines. So we're spending a lot of time right now on the legacy businesses, see where one business and consolidation of services can drive costs without changing the market of the company. So as an example, we put together a group called Charter Connections where we've taken the charter stuff out of all of our legacy airlines and combined it because quite often one airline will get a call for an airplane they don't have. So we have a nine seat charter for Comair. Well, Comair has no nine seat aircraft. We've taken put all of them together, put together a dedicated team and we're actually harvesting the opportunities at a higher return rate because we have access to the entire fleet of aircraft. We talked earlier about the synergies of the overhaul business. We're putting together our parts purchasing to generate savings and costs there. Training, we've also consolidated our training needs to again use our buying power to reduce costs. And the other thing that apart from the legacy that we do is, I call it nurturing growth opportunities in all of our entities, which we do on an ongoing basis. And so I think are there any big land mines? None that we see at this point. There's always competition in places and there's little ups and downs in the business. But we see continued improvement in our airline business from the efficiencies we're working on. And now clearly, we made a big jump in that area last year in 2015. The subsequent stuff, the fruits a little higher up the trade. So it won't be at the same rate of improvement, but we'll continue to see growth in that. And one of the things that our business model does, everyone wants to talk about synergies and they're very important, but we enable companies to grow. When you look at Regional One, and I'm just using it as a proxy, we could do perimeter just as easily. But we bought Regional One and they had all the expertise they have today. But we bought it off of a sort of $51,000,000 EBITDA number with a five ish multiple. They made almost that in a quarter. And what have we changed? We've given the ability for them to monetize opportunities. We let them take advantage of what they do well. Perimeter is another great example. We bought it. It was our first acquisition. It's kind of the poster child for our business. We bought it in 02/2004, it was making $4,000,000 in EBITDA. It's now making materially over 20,000,000 and generating strong cash on cash returns. And what have we done with it? We've given it access to a balance sheet so that the people there can implement ideas they always have. It's us facilitating growth. We're kind of like the steroids to our subsidiaries' performance. Okay. That's great. Thank you very much. Our next question comes from the line of Kevin Chiang from CIBC. Your line is now open. Hi, thanks for taking my question. Maybe I'll just follow-up on that point. You've had BendMachine for a couple of quarters now. Over the past couple of months here, are there opportunities you see to further nurture the growth there, either expanding the product line or geographic distribution or further tuck in acquisitions? Is there something within Bend Machines that you see in terms of growth opportunities? Yes. Actually all of those, Kevin. The relative weakness of the Canadian dollar makes us competitive in The U. S. Finding smaller other companies that we can tuck product lines in is also an acquisition front we're looking at. The only cautionary front with Ben is the nature of the customers of those tend to be slightly longer purchase cycles. So if we build a part, as an example, for the Joint Strike Fighter, the F-thirty five, well, don't change the production of that on a one month notice kind of thing. So we're working on a number of initiatives. We have significant confidence in growing that business over the medium term. How fast you're able to land programs from other suppliers is it's questionable what you can do in the very short term. Okay. That's helpful. Know synergies are a big driver as to why you make these acquisitions, but you've obviously highlighted a few in your airline aerospace segments. But within manufacturing, especially with Benmachine now in the fold, you do have a U. S. Stainless operations. I know the fabrication of the materials are totally different. But are there potential synergies, especially as you grow manufacturing here? There potential, say, The supply side synergies or cost synergies you synergies actually between the manufacturing companies per se, there really isn't very much. But from Ben to the aerospace businesses, we believe there's material opportunities there. They build the kind of parts that can be used in that. Ben is a big supplier to some of the people that are suppliers to provincial for the maritime surveillance business. So joint projects together with our suppliers and our customers are possible. Those are at their very infancy, those discussions. But there are opportunities between Ben and those companies. The other, whether it's Overlanders, the Alberta ops and Westar, there really isn't much. Overlanders does make parts for Alberta. That's actually why we bought it originally was as a supplier to Jasper Tank. Over time, it's become more of a standalone enterprise. But there is some synergies with Ben and the aerospace business. That's helpful. And maybe I'll just I'll end it off just following up on I think on Mono's question earlier. You've obviously raised a dividend three times in eighteen months. And as you highlighted, you focus on a payout ratio as a driver of that. But given it seems like the capital intensity in your business is increasing a little bit here just to reflect a lot of the growth opportunities you've highlighted, the ability to invest in your business and generate 20% plus returns. Is there a thought of maybe lowering that payout ratio to unlock more capital to pursue some of these growth investments, whether it's aircraft in regional or signing new contracts in PAL? Have you and the Board thought of adjusting the payout ratio you look at? Or is that pretty much set in stone as you see it today? Have we thought about it? For sure we have. Are we about to change it right now? We're not. And quite simply, the reason for that is we buy companies which have a certain cash flow attribute. And if we're going to buy them for growth sake, we're going to buy a different kind of company. And just if you take the cost of our dividend increase, Tammy, I'm going to throw it to you in two seconds here, so get ready. But we're talking about a 5% increase in our dividend, which amounts to something like $09 per share. So you're talking couple of million dollars, I might have to check my math and see whether I'm telling the truth on the exact cost of it. But saving that $2,000,000 is really not going to fund very much. What we want to do is reward our customers as we grow our business. And the other thing that's important to look at is what's our dividend payout relative to our adjusted profits. People debate about what a CapEx is and I think our disclosure is very fulsome. But if you take a look, we're now even at our new level, we're distributing less than our adjusted earnings and probably less than our pure accounting earnings. So when you look at our business, I don't think we're aggressively increasing our dividend at all. What we're doing is aggressively growing, creating the opportunity to pay the money out. Even when all the analysts on this call are going to do their pro formas. And when they do their pro formas, nobody's going to get a number that's higher than a six as the first number in the payout ratio. And with that, it's very sustainable. And bear in mind, one of the things that's super important to understand is we're now fully taxable. In the old days where we had a 70% payout ratio, there was no taxes to buffer a decline. But now with the taxes we're paying, I think our tax rate is 30%. So if we had a dollar decline, the first $0.30 is what we don't pay the government. And so we're very secure in our ability to maintain and quite frankly to continue to grow that dividend. So our business model is based on paying our profits to our shareholders. If we couldn't access capital, if there was some other reason to not pay it out, would we revisit it? I think being set in stone is dangerous. But I think being predictable is important and we want to be predictable. If we increase our profitability, we're going to pay it to our shareholders. That's what the shareholders expect. That's why they invest in us and that's who we are. We have time for one more question. Your last question comes from Raveel Abzal from Canaccord Genuity. Your line is now open. Yes, good morning guys. You listed a lot of margin improvement initiatives in the Aviation division. I'm wondering if it's possible to quantify how far along you are with these initiatives and if there's an EBITDA margin target for the Aviation division that you're targeting? No, there isn't a target because that's so product mix, Trevin. It's impossible for me to give you that. I think you will continue to see slow but consistent improvement in the margins in that business, particularly over the next eighteen months or so as we finalize the acquisition Commade and we right size that business. And then as some of the cost efficiency things bear fruit, the easy ones are done. The harder ones are underway, but there's ample opportunity in those to continue to improve our budgets. I'm not prepared to put forward a public number on that other than to say we expect margins to continue to grow albeit at a smaller rate of growth than they have in the last year. Got it. One more question on regional one. Right now it appears that it's performing really well. The demand for its services is really high because of the low oil prices. But when we look at its performance even historically when oil prices were high, it still performed really well. So how does it change its product mix when oil prices are high so it continues to deliver strong returns? Well, the bottom line is we don't necessarily change our product mix. We change what we do with the assets. And so if there's strong demand for a plane as an operator and it's better than tearing it apart, getting a short term profit, we'll leave it out. Where the demand for an aircraft to decline, there's still going to be the need for spare parts for the fleets that will remain in business. The thing with aircraft is that they don't go in and out of service overnight. They move from bigger carriers to smaller carriers over time. And as the price goes down, different people are prepared to operate them. And so we would deal with a change in demand for a whole aircraft by parting them out and selling them out as pieces and supporting the other aircraft that are still flying. And that's why Regional One is such a unique business because of their internal expertise, we can generate different revenue streams with the same asset and then tie the revenue stream to what's going on in the market at that time. It's really an intellectual property business. What they know about the value of the core underlying assets that make up the plane, the engines, landing gear, the avionics, what those are worth. And if you know what those are worth, you can then figure out what the best way to dispose of them is, whether it's through a lease, a purchase or a sale. Got it. Thank you. That's all for me. There are no further questions at this time. I'll turn the call back over to Mr. Mike Pyle for closing comments. I'd like to thank everyone for participating in today's call. I look forward to updating you on our progress in coming periods. And I would remind you that our Annual General Meeting takes place later this morning in Winnipeg. And for those of you in other cities, we are now live streaming that on the Internet. The information for how to access that is on our website. Thank you for dialing in and have a great day. This concludes today's conference call. You may now disconnect.