Q3 2019 Earnings Call
Good morning, everyone. Welcome to exchange income Corporation's conference call to discuss the financial results for the three month period ended September Thirtyth 2019, the corporation's results, including the M. DNA and financial statements were issued on November 7th 2019 and are currently available via the.
Company's website or Sadar.
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 to 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 and making forward looking statements. Please consult the m. DNA for this quarter the risk factor section of the annual information form and exchanges other filings with the Canadian secured.
These regulators I.
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 into that individual shareholders analysts or other interested parties.
Yes.
When I like to turn the call over to the C.O. Smith of Exchange income Corporation like pile. Please go ahead mr. pile.
Thank you operator, good morning, everyone.
Joining me this morning.
Yeah She's crescent.
Our CFO David White card.
[laughter].
The doctors on Investor day.
Wendell Blonigan Mississauga, Ontario.
[laughter] showcased the multiple operation.
By the better understanding of request product offerings.
Sure the progress of the ramp up in Texas.
First I'd like to take a moment to thank everyone that.
I never want to help make this success.
No I would think few minutes to discuss some of the highlights what was another very strong core.
We remain focused on successful execution of our strategy.
Long term.
Accretive acquisition organic.
Testing, it and growing our portfolio subsidiary companies and again, we achieved all time quarterly highs and most financial metrics, including revenue EBITDA and or.
We generated adjusted.
Dollar three which is a new milestone for us and it was the first time of the company's history.
Adjusted.
Net earnings exceeded the dollar per share for core.
Our three per share was an increase of 10% or the same period last year.
Even more rapidly Corning, 17% to 90 cents for the core.
[noise] Daryl to discuss our financial performance for this quarter in detail, but I would like to stress the nine months in Tonight 29.
Excellent results for the culmination strong contributions from many players in our diversified group.
Security companies.
The importance of this diverse.
I should highlight work as we generated record setting financial result, despite the temporary.
Regional want lost a significant customer bankruptcy, which resulted in a bad debt expense of approximately six.
[noise] regional one word to smaller carriers around the world and as a result, except a higher level of risk.
This risk tolerance, however that helps us drive above average industry returns, while there is an elevated level but.
We're adapting.
And just the first material write off we've incurred censored acquiring a company over six years ago.
Our investment maintenance capex can be vary from quarter to quarter, depending on the timing of aircraft engine overhauls as we discussed during the first and second quarter Conference calls.
We benefited from a lower level of its investment in the first six months of this year because of the timing of Sir and General engine overhauls. This reverse itself in Q3 were me units.
Oh investment exceeded last year's level by approximately $7 million.
This was completely in line with expectations and the investment maintenance capital.
The first nine months of this year is up only slightly at 6%, which is well below the growth in revenue of 10% and EBITDA, 15%.
Hi, guys is that maintenance capex with increasing rates similar to the growth of the overall company, we're somewhat better than this guidance for nine months increased in Q3 is entirely the result of normal quarter to quarter variation.
The increase in quarterly me its investment.
And with the write off a regional want resulted in a slight increase in the free cash flow.
Capital expenditures.
For the quarter.
Sure increased to 49% for 42%.
The impact of the write off at our one.
Ratio was relatively unchanged from 2080, even with the increase in dividends.
On August 29, cheap and increase in maintenance capital expenditures I. Just described the trailing 12 month <unk> ratio, however, improved to 57% 62%.
The adjusted net earnings pair ratio improved onboard word and trailing 12 month basis.
55% from 58% and 72% from 75% respectively.
We are beginning to reap the benefits of some of the investments made in prior periods. This strong performance of the aviation sector, where EBITDA grew by 16% is a good example.
The forced multiplier went in to services generated its first meaningful revenue and is now completed assignments for both the Canadian and American governments.
It is now want to the extent admission into the first quarter of 20 Twond.
We also began the do general aviation services contactor, the provincial government in Manitoba.
And the ramp up.
Fixed wing search and rescue contract continued in the third quarter.
Well the amount of work being completed under this contract continues to grow it will not make sure runway until 2023, when all the aircraft or service and the overhaul cycle once we got.
Other projects, however are not yet at the revenues.
Two examples include the joint venture with Skywest deploying through 34, dashing engines or at least the other airlines and the new contract.
New contract provincial has entered into with the Canadian Department of Fisheries.
Skywest joint Venturing has signed leases with the legacy airlines and deliveries have forgot.
But significant work must be completed by the let's see the upgrade the aircraft before the revenue stream begin.
Which will be phased in and should be at full run rate by the end of the second quarter 2020.
As it pertains to the fisheries contract, we continue to operate under the old agreement until September of 2020.
Larger aircraft required for the new contract will go into service as the revenue will increase.
Perhaps the most significant investment does not yet contributing to our bottom line is the new quest facility in Dallas, Texas.
We're very proud of this state of the arc facility enjoyed the opportunity to show it off at our Investor Day.
We made the decision to make sure that the product of the new plant matched the quality of that generated in our Toronto and.
And therefore by get began by testing 100% of the finished goods that were produced we have been very happy with the results of this testing and have recently kinda to 25%.
He will take a few more quarters to reduce the testing to the level, we have drawn but we want to make sure. There are no declines in service from our customers point of view.
This does not tell this is a products to most of you as we've always prided ourselves I think you for wall.
And are not focused on short term results, we expect that moved profitability at either Q4 of this year or Q4, Q1 next year and will wrap its profitability from there.
We were hard work during the third quarter four separate transactions that will assist with and ensure our continued growth in 2020 and beyond.
All of these transactions is now closed.
Firstly, we completed the acquisition of two more solid companies with robust growth potential.
Belviq control and invest window make both companies aligned with our strategic focus of acquiring profitable well run companies each markets.
We completed an offering of common shares of yes see common shares that was very oversubscribed and allowed the underwriters to exercise the full overallotment option, bringing the gross proceeds to $80.5 million.
Earlier this week, we announced a new credit facility that significantly increases our credit capacity.
While reducing our borrowing costs.
Relaxing covenant, making the facility much more flexible.
I will leave the details to Darryl, but suffices to say when combined with the equity offering our balance sheet is even stronger than it was and we have plenty of capital attack Andy opportunity on a cost effective basis.
Well, we control is a dominant western Canadian electrical systems integrator in the agricultural material handling space with a solid margin profile it services and maintaining grade.
Unloading elevators systems to great great by quality and put it in silos automatically applying credits to farmers accounts and updating inventory positions at financial statements.
Long record of profitability in the strong relationships with many of cap as large as great companies.
The acquisition of advanced Windows of vertical integration play for quest as they are currently have very important partner for request in the eastern outside the United States.
Just as responsible for stalling until Windows is Canadian market, where customers utilize third parties to install the windows in the USA.
Yes position of ADW, Iowa quest to vertically integrate and provide a single point of contact for customers in this market area.
Not only will the simplify things for our customers. It will allow quest to share in the growth not only the production of windows, but also the growth of the installation business.
While significantly smaller than the Albion acquisition, the ability to integrate our eastern U.S.A. operations make it no less excited.
Both acquisitions the proven existing management teams have committed to stay on and run the business is for you I see.
Both of these acquisitions closed in October and we expect each of them to be immediately accretive to earnings and cash flow.
I will provide some color on our view of future later in the call, but for now I'd like to turn the call over to Dara who'll discuss our third quarter financial results I will update you on our outlook later in the call Daryl.
Thank you, Mike and good morning, everyone.
As I've noted on previous calls are 2019 financial results include the impact of Barbara.
Comparability to results from prior periods with respect to EBITDA net earnings and adjusted net earnings were impacted.
Consolidated Q3, with a strong quarter free I see we generated revenue of 355.2 million.
Which is up 47 million or 15% over third quarter of last year.
The increased 39.9 million was generated in our aerospace in aviation segment and 7.1 million comes from our manufacturing segment.
Aerospace in aviation segment revenue was up 18% to 266.5 million for the quarter with all component of the legacy Airlines and provincial and regional one positively contributing.
The revenue from the legacy Airlines and provincial increased by 15.9 million.
Increase can be attributed to the force multiplier aircraft being deployed on several missions.
And higher volumes in Newfoundland and Labrador Echo that which was due to activity and natural in the natural resource sector increased passenger in medivac volumes and the Catholic region.
And increased passion passenger revenue in them that it's open market.
For regional line revenue increased in the third quarter, two to 2019 compared to the prior period by 24 million.
As we report revenue that regional one are comprised of two main stream, which include sales and service revenue and lease revenue.
Within the quarter regional one at a higher than average volume a whole aircraft in engine sales, which is reflected in the sales and service revenue that's AD sales and service revenue increased by 22.5 million to 64.2 million.
Also contributing to the increase in revenue at regional why there was an increase in part sales.
As it pertains to lease revenues at regional while the higher utilization of aircraft within the portfolio.
And an increase in the number of assets in the portfolio portfolio at least compared to the comparative comparative period resulted in a 1.6 million dollar increase in the quarter versus the comparative period.
Turning now to our manufacturing segment.
Revenue grew by 7.1 million for the third quarter versus the comparative period.
Total revenue for this segment was 88.7 million.
The segment benefited from quest being a big contributed to their revenue growth as well as an increase in custom manufacturing high levels of defense spending worldwide increased spending from our telecommunications companies across Canada and operational efficiencies.
Before moving on to EBITDA I will stop your dimension that looking forward to the fourth quarter.
The results from both our recent acquisitions Lv control manufacturing and AAMC will be incorporated in our manufacturing segment reporting.
Moving to EBITDA consolidated EBITDA was up 9.8 million or 12% to 89 million for the third quarter of 2019.
Versus last year. This includes the $6 million onetime bad debt write off at original widened.
Because of an airline customer bankruptcy, which decreased EBITDA during this period.
I will add a comment at the end of my report with regards to this write off.
Despite the write up EBITDA performance during the quarter was very strong which is a testament is diversified investment strategy working as it is intended.
EBITDA in the aerospace and aviation segment in the third quarter of 2019 was 82 billion, an increase of 11.1 million compared to the prior period.
EBITDA generated by the legacy Airlines and provincial increased by 12.8 million.
The increase in EBITDA for the legacy Airlines was driven largely by the same underlying contributors as noted in the with the increase revenue previously discussed and cost savings associated with operational efficiencies such as capacity sharing across airline investment in additional aircraft to reduce third party.
Charter cost and fuel surcharges that were implemented later in Q3 and a prior period and remain in effect.
Again, our EBITDA grew despite industry related labor challenges.
Industrywide labor shortages resulted in continued higher overtime contractor and training costs.
The implementation of the IP license White program will help mitigate the impact moving forward, but we acknowledge this will take some time to take full effect. Yes. The actually is also developing similar similar strategies to address maintenance and labor changes.
Sorry challenges.
EBITDA in regional one was down slightly in the third quarter of 2019 versus the prior period by 1.7 million, excluding the impact of the onetime $6 million bad debt write up EBITDA increased by 4.3 million over the prior period.
In the manufacturing segment EBITDA was 12.5 million a decrease of 1.5 million in the third quarter of 2019 versus the prior period. Our main driver of this decrease were costs associated with the ramp up at quest for quite some new Dallas facility, where management continues to proceed balancing production.
With important.
Quality requirements and risk management.
The balance of the manufacturing segment collectively experienced growth in EBITDA.
The segment benefited and benefited from an increase in custom manufacturing high levels of defense spending worldwide increased spending from telecommunications companies across Canada and operational efficiencies.
Gross capital expenditures made in the career and previous period enabled segment to respond to increased demand from customers, resulting in increased EBITDA.
Turning to earnings net earnings into period was also strong coming in at an all time quarterly high of 29 million.
Which is an increase of 4.8 billion to the prior period a year ago.
Net earnings per share increased by 17% in comparison to prior period to 90 cents. This.
This is an all time quarterly high.
It should be noted that in the period the weighted average number of shares increased by 3% partially offsetting the increase in net earnings.
We had adjusted net earnings of 33.1 million for the third quarter of 2019, representing an increase of 3.5 million or 12% compared to the prior period.
As Mike mentioned, he actually reached a new milestone with regards to adjusted net earnings per share seeing it increased to about one dollar.
In the quarter adjusted net earnings per share increased to one dollarsthree compared to 94 cents in Q3 of last year.
During the quarter of 2019 free cash flow improved by 5% over the prior period to 67.2 million or $2.08 per share.
The main reason for this increases the 9.8 million or 12% increase in EBITDA, partially offset by the principal payments on rate abuse lease liabilities.
Free cash flow was impacted by the onetime bad debt write off previously noted excluding the write up free cash flow increased by 13% in the quarter over the period prior period.
Free cash flow less maintenance capital expenditures fell 13% to $1.14.
I share from a $1.31 per share in Q3 2018, the decrease can be attributed to again the impacted the onetime bad debt write off at regional wine and an increase in maintenance capital expenditures in the quarter compared to the prior period.
Maintenance Capex expenditures were higher by approximately 7.5 million in the quarter as expected as earlier anticipated expenditures were real reallocated to the back half of 2019.
On a quarterly comparative our adjusted net earnings payout ratio improved to 55% from 58% in the prior period.
Free cash flow less maintenance capital expenditure payout ratio increased to 49% from 42%.
If we were to exclude the onetime bad debt write off at regional wine comparative free cash flow less maintenance capital expenditure payout ratio would have been essentially flat to the prior period.
Also affecting the current period would be the dividend increase and increased maintenance capital expenditures in the current period.
As a refresher we've noted in previous call. The trailing 12 month payout ratio on an adjusted net earnings and free cash flow less maintenance capital expenditure basis is a better grammar a payout ratios given the seasonality of our aviation aviation operations.
On an adjusted net earnings basis, the trailing 12 month payout ratio improved to 72% from 75% the prior period well on our free cash flow less maintenance capital expenditure basis, it improved to 57% from 50 to 62.
The improvement in free cash flow, let's maintenance capital expenditure payout ratio was driven by the increase in the cash flow generated by the company through the 12 month trailing period.
Looking at working capital during the third quarter. The corporation experienced the cash inflow from working capital of 2.6 million compared to a cash outflow of 44 million in the prior period.
During the third quarter 2019 regional one monetize several assets, resulting in a decrease in working capital.
In the prior year regional went invested significantly in its inventory of assets for resale, including two large aircraft, which resulted in a large investment in working capital.
This different highlights the nature and very timing a regional one sales and investment cycle. The inflow from the monetization of regional ones assets in the third quarter of 2019 was partially offset by the investment in working capital required to support the corporations remaining subsidiaries during the corporations busiest quarter, particularly.
Airlines.
Our leverage ratios remained within our target range and well within covenants with our lenders.
In addition, now with the new credit agreement under our belt, we have approximately 600 million of available capital and another 300 million. In addition to that in an accordion feature should we choose to exercise that.
Subsequent to the ended the quarter, we announced and completed two significant financing activities that further demonstrate yankees ability to opportunistically access capital and add even greater strength to our ability to execute on our business model of accretive acquisitions and investment in the organic growth.
Of our subsidiaries.
At the end of October we closed in equity offering with the syndicate of banks, which consisted of a bought deal that resulted in gross proceeds of 80.5 million.
This operating was well received by the market and was well oversubscribed, indicating strong support and confidence in the company's ability to execute its strategy.
The net proceeds of the offering were $76.5 million and we're used to repay debt drawn earlier in the month to complete the acquisition at LD control any Wi.
Also this week, we announced it has entered into a new credit facility.
We were extremely pleased with our bank syndicate entering this around quickly and for their ongoing support with this investment grade equivalent credit agreement, which gives us more favorable pricing more flexible covenants and extended for year term and increases the facility from 1 billion to approximately 1.3 billion in.
Addition, the accordion feature has increased from 100 million to 300 million, which.
Yes, these option to execute would provide the company access to a facility of 1.6 billion.
Further the new credit agreement provides improved pricing on both amounts borrowed under the facility and standby target date for the Unutilized portion of the facility.
The company companies maximum leverage ratio has been increased from 3.25 times to four time.
And the maturity of the facility is now November 2023.
Before I pass the call back to Mike I would like to make a couple of concluding comments.
First with respect to the bad debt write off at regional one for the airline bankruptcy.
The write off was the first experienced any IC 60 year history with regional one.
Well the write off is unfortunate management continues on an ongoing basis to actively managing monitor all credit exposures regional one competes in a market that is characterized by higher risk that said this higher risks also drives higher returns.
It's important to note due to management ongoing monitoring it allows them to take quick quick action. Once the bankruptcy was imminent and all aircraft. Other assets were recovered and returned immediately to be redeployed as soon as possible.
And my final comment.
I will will be with respect to the new credit facility.
It is important to note. It has taken the IC 15 years to utilize approximately 700 million of credit.
The fact that we have now I've asked us up to an additional 900 should in no way be viewed as a change in our balance sheet strategy.
Our aggregate leverage as doing stayed quite consistent over the past 15 years, and we do not intend tend to change that now.
That concludes my review our financial results in comment for the third quarter 2018.
I will now turn the call back to Mike to provide comments on our outlook for the balance of the year Mike.
Thanks, Darryl at the risk of repeating ourselves I think it is very important to reiterate that we have absolutely no intention to change our appetite for debt for over 15 years, we've maintained a balance sheet those remarkably consistent in terms of leverage another served us well in strong and difficult.
Markets alike, and has allowed us to take advantage of opportunities whatever they are available.
The exact acquisition of Comair in early 2009.
During the financial crisis as a good example of this there's no doubt that this new facility is a significant improvement from our previous facility and reflects the bank civic syndicates view of sees credit quality. It does provide access to more capital of lower pricing with far more.
A couple covenants, which will help fuel our growth of the future, but it is no way signals change to our strategy.
The third quarter was a microcosm of yes. The strategy on many levels I would like to take a brief moment to explain out this is the case.
For those of you followed the company for a while this will not be new information for those who are newer to the story. It will show how the consistent implementation of our business model has led to a 15 year, 5% CAGR, our dividend and a stop that has dropped five fold over that period.
We produced record results as the third quarter, achieving adjusted net earnings of one dollar three per share a full 10% better than our previous high.
This headline number however, does not give a clear picture by itself.
This performance was achieved in spite of an unusual write off at our watt.
Losses out a new quest facility as we slowly and methodically rapid into production, which were offset by a gain on contingent consideration.
The diversity of our subsidiary operations allowed us to set new earnings highs at the same time as tackling. These issues. We have built a strong portfolio of operations that are not directly correlated and allow for resilient if challenges in a part of our company are are incurred.
Quite simply diversity works.
We also continued to invest in the future both through growing our subsidiaries and through accretive acquisitions.
We added additional assets to our one who continued to generate strong return.
We continued to invest that additional equipment the provincial for the new Department of Fisheries contract, which goes into effect later in 2020.
And we executed on our plants requests plant online, it's such a positive that our customers will see the seem high quality products. They are used to from our strong facilities.
In addition to investing in the future we realize the benefits of past investments as projects such as the forced multiplier went into service and begin to contribute meaningfully to our results.
We continue to grow through acquisition with.
With the purchase of Lv control and a Wi both are accretive transactions and will grow and strengthen our manufacturing segment.
Lv will give us exposure to the agricultural economy, and ADW arrival vertically integrated to quest enhancing our return requests future growth.
We strengthened our balance sheet with an equity offering and a new debt facility. We're pleased with the response to these capital initiatives as both were materially oversubscribed and bear witness to our ability to access to capital market whenever needed for the business.
In short I'm very happy with the quarter, Yes, we generated record earnings, but quite frankly that is just the tip of the iceberg.
We are now three quarters of the way through the year and I'm pleased to confirm that we're comfortable with our previous guidance for the year.
We are in the midst of our 2020 budget process and are not yet ready to provide formal guidance for this period, but I am able to tell you that we anticipate the growth of 20, Tony will match and likely exceed that in 2019.
We will provide formal guidance to the market when we report our year end results in February .
Finally, before moving on to questions I want to thank all of our customers employees shareholders and all stakeholders for their ongoing support we would now like to open the call to questions operator.
Thank you we will now conducts the question and answer session. If you have a question. Please press the star followed by the number one on your Touchtone phone you will hear a tone acknowledging your request your questions will be pulled in the order that they are received please ensure that you lift the handset if you're using the speaker phone before pricing any Keith.
And your first question here comes from the line of reveal of so from Canaccord. Please go ahead. Your line is now open.
You guys. Thank you for taking my call and congratulations on another strong quarter.
Speaking about your 2019 EBITDA guidance now are you have you just said that you are able to meet that guidance. Now are you factoring in the bad debt expense also the ramp up at West and you still think you can meet this 10% to 15% EBITDA guidance can you just provide us with some more color on that.
Absolutely, there's no doubt that a $6 million hit will move us closer to the lower end of our guidance.
As I wasn't factored in we will provide the guidance, but we continued growth in things like forced multiplier enhanced profitability in our airlines who are.
Really hitting their stride.
Improvements request in the fourth quarter well.
US plant will be contributing in any meaningful way at that point will be closer to it and as such we're comfortable getting into that range of the tend to sell to 15% growth year over year remember of course that that doesn't include $20 million in.
Increased EBITDA from.
The IRS 16, so the growth is really 10% to 15% plus an additional 20 million.
Got it and how are you factoring in the M&A into that.
Guidance range.
Yes today will help somewhat in the fourth quarter.
But he.
Those are the those deal that those companies or project oriented and we're only getting a part of a quarter. So.
The amount, they're going to contribute will be will be modest in that period sites not a big impact on the results make sense and then just moving on to force multiplier. Congratulations on the strong demand that you are witnessing a flood the.
On demand so balance between now and.
What type of what type of.
Metrics that you guys using before you determine whether this is a broader type that you want to expand more and get more fulsome as it plays out in the marketplace.
Are you assuming unit our board meeting I think I answered this exact question yesterday.
It's really what we want to see as the consistency of demand we have a lot of anecdotal demanded it took us.
A few months to figure out how to get the governments to be able to use it when they want to.
We now have the playing out until later in the first quarter at potentially longer than that add to the extent that the demand remains resilient to particularly if we got more than one customer want to get at the same time and quite frankly, there are those discussions ongoing as we speak that would see us out another.
Another or more than one more to the fleet to this short term rental market.
The interesting thing with it is of the planes paid off the identical we may have the force multiply that we've built as a dash eight platform. We may build another one of those we may have built the smaller played or we may build the plane that's more like the ones. We built for the government of UAE, which have even more equipment on them it really depends on the specificity.
Of the demand we out at just one other thing while we're on the forced multiplier, though our pointed out. This is the way to understand Deicing, we announced that more than two years ago. It took us a while the build that we had done certified and that we had once you get certified it took us away a long time.
To get.
To figure out how the government's could utilize it because it's expensive on a per hour basis. Both look it is now contributing in a meaningful way and so we're we're making these investments we're not making them for what's going to happen to the next 15 minutes and Thats why when you look at Quested people ask really well lines of taking six months.
To wrap it up because we're doing it the right where we did build for the next 10 minutes. We built for the next at years add is my team. There. We just finished a tour. There yesterday are just doing an exemplary job of building a state of yard facility and we're excited with that's going to give us a 2020 quite.
We had beyond.
Thank you for that and then.
You guys mentioned that you guys.
Thank you good net debt to EBITDA as pretty consistent levels, but now with the substantial increase in your credit facility are you guys looking at much larger acquisitions than you have been the boss does that change that.
The scale of the acquisitions that you guys will look at now what's the previously.
The short answer to that Ravi is no. It doesn't change what we're looking at we've looked at bigger transactions in the past.
Well, we bought Pal as an example was a acquisition that was well over 200 million. We were very close on up another acquisition in the manufacturing side that was of that size earlier. This year that we decided not to do so we continue to look at those but the key thing with the facility is sometimes you got.
To move fast.
To be able to close these things and we're now in a position with the access to capital we have.
It 50 years, we've invested 700 million, we now have access to 900 million. So.
We could do with ever we think is the right deal.
With the capital we have but it's important I understand it's not going to be not by levering up the balance sheet in the long term if we have to move faster growth something maybe we'll use of it that rebalance. The credit facility are the balance sheet afterwards, but our commitment is to remain in that sort of two it out to three and half time.
As of aggregate debt to EBITDA.
Including our convertible debentures around the Atlanta is Dara I might add on the new debt facility again, it's more a matter of also timing when you access the market. So when we looked at it and we looked at.
How competitive we could get rates and lines at this point in time and it was opportunistic time for us to do that so thats why were able to.
During this quarter.
And your next question here comes from the line of Konark Gupta with Scotia Bank. Please go ahead. Your line is now open.
Hi, This is immuno speaking for corner group, Sir you mentioned that the regional one.
That expense.
All the aircrafts back is it a onetime expense or do you plan on writing down the customer and how many aircrafts are there and.
When do you plan to on speed deploying the aircraft the others.
There's a few questions buried in there.
First of all the the aircraft per fully recovered so we don't need to write down anything else as it relates to the transaction.
The aircraft, there's five of them we're on.
Service with that without airline their active discussions.
With a number of airlines to place those and I anticipate those being in place.
By the end of the year or so.
Certainly by the first quarter next year.
We're in active discussions on that so.
No further write down for this and the plane should be redeployed shortly.
Okay I do have a question.
The Canadian operations Quest, there's incremental growth to support.
When do you plan on achieving the steady state.
Well the steady state really as it related to the Canadian I don't think I think you're asking me what the correct me if I'm wrong and I think you're asking me when quest will reach a steady state again I really.
I'm, hoping go where soon the business continues to grow we built the.
The plant with tons of extra capacity in terms of profitability will be there next year, but there will be as.
Certainly, hoping there's not going to be a steady state largest promised me that the demand continues to grow and quite frankly, our leases are up in trauma. We mentioned this on our.
Investor day that that leases are up in a couple of years and it's highly likely that you'll see us.
Redo, our trauma manufacturing facility into a single building.
More square footage at that time so.
I really don't see a steady state or a plateau anytime in the near future.
Thank you don't have any more questions.
Your next question comes from the line of Chris Murray with Altacorp Capital. Please go ahead. Your line is now open.
Thanks, Good morning folks.
Hey, Mike.
Maybe I'll ask you a question a little differently.
Think about 2020.
And.
As you said you know your expectation is there that you'll see the growth.
Is it fair to think that you've got everything in the portfolio today already kind of locked and loaded so we're not talking about any sort of.
Excess investments are going to need to make or anything like that for growth or any sort acquisition grow. So basically that your baseline number is a is that fair way to think about it.
Absolutely the only thing Chris that we would continue to invest it there's still going to be 10 or $20 million $20 million for that to continue to.
CFO contract.
Start till September so we're building out and we already have the contract to the investment won't be finished help sort of mid point to next year, but absent that everything else is lock loaded it paid for.
Okay.
And then just kind of thinking about some of the stuff that's maybe not.
Super transparent.
The Skywest agreement you can talk about that but also kind of curious about what crj production shutting down.
How you guys are seeing kind of the market value for some of the aircraft original one and where do you kind of moved from here I mean, a just some parts and stuff like that and just as I'd actually make it more attractive at this point or does it start raising some supply issues for you.
In the in the medium term and by that I mean.
Multiple years, it really has no impact.
The challenge that we have in regional ones business today is not a lot of demand, that's where a lot of supply planes.
Continued to be used their strong demand around the world even the two hundreds which are the oldest of the crj fleet or and strong demand. The challenge is is that no. One anticipate those plans still be service. So there's a shortage of overhaul time availability for the engine.
And so.
We'll be the keep the rate determining stuff is access to to engine for free time at or access to overhaul capability. So in terms of the shutdown of the Crj.
Production.
That that could impact something 10, or 15 years from now but in the near term the demand for those aircraft is so strong.
That we don't anticipate that really doing much story.
I would point out.
Announcement of one of the major Us Airlines.
As recently as yesterday.
About the moved to the Crj 550, which is sort of a hybrid which is taking the 700 and reducing the number of seat to that putting more I'm more comfortable configuration, allowing it to be operated with a single flight attendants add.
Thats, just starting and quite frankly, thats, where our skywest joint venture Dot dot airline per se, but that Crj 550 adjustment is where our aircraft this year.
Skywest are going so it was a long answer I'll pause and see if I actually answered the question anything I'd point out traces that as we've announced the skywest JV engines together with our airframe have at 10 years.
Phased in during this quarter so they reflect the demand that exists.
Together with the parts and of course to be required.
Over that timeframe.
And your next question here comes from the line of David Ocampo with Cormark Securities. Please go ahead. Your line is now open.
Good morning, I was just wondering if they do provide an update on the outstanding RFP isn't if theres anything in 2020 that you expect a bit on.
There in terms of the ones, we talked about before the government amount of total why the government has signaled that.
Now that the election is over there going to.
Reactivate the medivac, one and we would anticipate David an award of that sometime next year, yes, we measure so really tissue early to early next year would be a good business.
We were out certain yet whether they're going to have us revise our bids for things that have changed in sort of the.
Multiple quarters sets the bids are submitted or if they're just going to go off what submitted but we anticipate that will come to conclusion shortly.
The other thing is as are our provincial subsidiary is regularly bidding on other.
Our piece I.
I think over the next quarter Y'all, you'll hear about not in a position to release it at this point, but so partnerships on a couple of significant Canadian add or other government.
Opportunities, where we're going to partner with other industry players.
Got like the.
Fixed leak search and rescue contract, where we partnered with Airbus opportunities like that and they're in Canada. There in Australia, New Zealand, there in the Netherlands and.
So I'm not in a position where I can announce anything specifically other than to say, we're excited Lee exploring opportunities both on our own add with partners is not those areas.
Great and my last one years, just one quick one.
Talk briefly already about bad bad debt expense.
Do you guys provision for any analysts on alone in the income statements.
I think I.
I think if I missed by speaking sorry, I see.
If I understood you correctly do we provision we do for smaller things that we believed that the ardrey situation.
From the information we had given that the airline was going to be recapitalized and so.
When it wasn't it exceeded our provision.
Okay, that's great color.
Your next question comes from the line of NAV Malik with Industrial Lyons. Please go ahead. Your line is now open.
Yes. Thanks, Good morning, food just following on that on the the bad debt expense I. Just wanted wondering what's the customer concentration at regional one like what would be your largest customer in terms of percentage.
I'm not sure the in terms of the parts business. There's we have customers all over the world. It's very widely diverse in terms of the leasing environment.
I would have been one of our biggest slides five aircraft five aircraft. We would have similar size is a few other airlines.
Lee you asked.
Nautica.
But.
You too is fairly widely held.
Okay and I just wanted to ask for you note that you had.
Higher than average volumes of aircraft and filled in the current period.
One I guess could you describe kind of what what that was and then secondly that pull any failed from future quarters or what maybe just some more color on that would be appreciated.
You got when you look at exclude put the leases aside at regional what we're selling pick just really break this into two pieces. Your part sales were taking an aircraft breaking it into smaller parts and those are quite predictable.
Drawing on a regular basis, but aren't lumpy the sale of engines and aircraft are based off of their opportunistic transactions. So if you sell sub did you pulled from another period. While once you saw that you can't sell it again, so on top level I guess, that's correct, but it's more about it.
When do we get a price that we think it's worth it in the market that we're going to take the the belief that sell sell piece.
Add.
Our inventory levels go up and now we're buying all the time as well and so we're replacing those assets with other assets but.
We've said multiple times on these calls don't try to predict which quarter, we're going to sell an airplane as an example, we sold.
Correct me, if I'm wrong Carmel, but at least.
The up.
Crj shortage.
Our Q1 Q4, hundreds we saw I reference drug one one of those in the quarter. That's a big number we don't sell one of those every quarter. We saw that number of those IAR Jays Bebber. We bought I believe was 26 or 28 of all at once a couple of years ago. We've now sold off most of that fleet. So.
A number of those of the quarter, it's just clearly opportunistic it happens when that happens.
And Thats why the revenue the topline is hard to predict at our watt, but remember the margins on a full aircraft sale are nowhere near the percentages that you've got on the part sale and so while revenue rate jumped by $20 million, we don't get a commensurate increase in EBITDA with 20 million.
Allergan revenue, it's a much smaller percentage, but the bigger transactions and one thing that are one I mean, what they are really good.
Fine.
Here are fully that we acquired a while ago is a good example that.
What we're seeing now with strong demand for the year keep RJ platform and we were able to take advantage of that this quarter until a number of those aircraft and that's what you'll see was our one that goodbye and then they know their market.
The sale in monetizing.
Okay. Okay, and then lastly, I wanted to ask on quest I noticed that or maybe I missed it but I didn't feel backlog.
If you know this time around if you do you want to comment on.
On that or whether you'll be.
Going forward or weather.
Maybe just comment on what what do you feel there.
Hi, my intention to give like a running total update but I can tell you that it's consistently growing slightly in the quarter. Yeah. Okay. Alright. Thanks, very much fleet matter were a bit cautious till we get that plant fully available to make many promises the.
The opportunities at quest greatly exceed our ability to fill them at this time. So it's really a matter of convincing ourselves how fast we can get that plant going as fast as as.
With a high quality production until that we aren't going to take orders we kept Phil.
And your next question here comes from the line of Stevenson with Raymond James. Please go ahead. Your line is now open.
Yeah. Good my guys, just very quickly to high level questions for me.
First might make you guys have a lot of capital into these internal growth projects in recent years and now in recent weeks, we've got a.
With acquisition.
Should we read anything into that I know you've commented in the past that acquisitions have been more expensive lately with GE capital out there should we expect liberty to become more significant going forward or should we still expect a combination of internal growth.
Patrick as well.
Oh, that's a great question.
The M&A U.S. still is generally speaking at prices.
That are outside of our comfort zone. So the opportunities in the U.S. that our price we're prepared to do are still limited Canada.
It's I don't think the cheaper, but they were always a little bit were reasonably priced so you'll continue to see us.
Given that market and with the new credit facility with the amount of money raised I don't think we make standby fees. If we did think we can deploy some of that over the short to medium term, but the key thing is it's always going to be about.
We're going to take advantage of internal opportunities at external opportunities. It stood take advantage. It's not really directly your question, but I'm going to add something do that in terms of where we're investing in these things it's.
The future we're looking to.
When you look at where we've got where we we talked about we intend to 50% growth. This year I've said that we expect to meet or exceed that acts year, it's kind of locked and loaded reinvest one year for the future years. So we have a full year next year of force multiplier, we've got the kick off of the fisheries contract we've got an expense.
Ended fixed with search and rescue.
Contribution we've got the rollout of revenue out of the.
Skywest partnership and next years, not special Thats, how we grow our business, we invest now for future returns and it's not really driven quarter to quarter, but the beauty of it is when you do take a long term perspective, it actually shows up quarter to quarter.
Sure No that's helpful and just to follow up on the Lv control a particular.
Clearly represents a step out from an industry standpoint into the AG space Green handling and logistics in particular.
And just curious if that is a.
A onetime transaction like you've done in past.
Or is there complimentary deals like advance with quest that we could see going forward I guess, just trying to understand the brought opportunity and how comfortable you are with AG.
Only speaking.
We've talked for a long time without getting into AG I think we what we definitely you for a lot I've heard me say AG a lot of times for anything actually happen Lv controls, we love because it is it has exposure to AG, but not with the season to season.
Cyclicality, because they're dealing with big grain companies, who allocate their capital numbers of years and set up projects. So we love. It is that its exposed to AG, but it's not a cyclical as some other things are and are there other opportunities. There are prices in AG still are higher than they are.
Another businesses so.
I would I'd be cautious guidance that we're going to get those dot, but we are actively looking at other opportunities in the space.
Okay very helpful Thats It for me thanks.
Your next question comes from the line of Norman Saudi with Laurentian Bank. Please go ahead. Your line is now open.
Good morning, not hey, good morning, everyone.
So just my first question for Forsman multiplier. So your legacy business I thought it grew by 10% Oriental 15.9 million is it fair to say that most of it is from force multiplier.
No I wouldn't say most of it I would say, it's perhaps the what are the largest contributors to that growth but.
The operations at our legacy Airlines were all strong in the quarter and so one of things. We've got the lot better is sharing capacity between our airlines and on any given day, you could have flat comp doing a flight for perimeter or or how big a plane across sail boat.
With a busy period and other airlines so part of it comes from not part of it comes from the fact that in Q3 last year, we were dealing with a rapid spike it.
Fuel prices at the time and it takes us a bit of tied to catch up in getting the fuel surcharge in place fuel prices of doubt plateaued at the surcharges are in place. So thats also enhance profitability, but make no doubt.
Also increased revenue, we're seeing in our in service support services.
Finally here in Canada as well.
Our operations down there, which weren't contributor for the quarter.
Thank you that's great color and just on your credit facility in your prepared remarks, you mentioned that new is the cost reduction if you could share will how much is that in the second one I think you also mentioned that banks that start to do view youre trying to provide better than what you know before if you could share if theres any.
Structurally change in Latam structural that secure that line as well.
I'll answer your first question with respect to to collateral part, yes, there is a change.
We have a lot.
Less restrictive security requirements under it well, it's not unsecured I would call. It the next best thing.
Okay.
Simple GSK over the assets at the Corporation. So it's a lot more relaxed security with respect to the cost reduction again, as we mentioned Theres a number of different elements that would go into that.
Just general pricing has gone down about 25 basis points and we also have reductions in standby charges as well.
Also costs related to.
Having in the previous credit agreement having to.
Incur cost is due liens on assets and all that every time, we did something I've gone away as well so I will jump in just add whats into a Daryl said is that the key improvement on the collateral sizes that.
Historically, the guarantees provided by our operators for were supported by.
Security instruments in those companies and now the guarantees of our subsidiaries art, our unsecured which when you take a look at a company take regional Onewest example, that sells planes on a certainly a monthly basis if not more.
When we buy those the bank would have put security on the plane. Each time, we sold that we'd have to take it off we pay our lawyers, we pay the banks lawyers. This deal is good for us it bad for the legal community.
Okay.
Okay Fair enough and just one last one in terms of your manufacturing segment other than Cwis. If you could provide an update on the other businesses and how whether they are doing.
The.
In comparison to last year at an aggregate it was a good quarter.
Our bed machine business, a precision metal guys, and Ontario continue to do very well and growth quarter over quarter.
Alberta is challenged Im not sure that it's more challenge than it was before but certainly consistently challenge. So it would be on the lower end to the performance scale and then I guess the other one is as sat Fi we've seen a bit of a decline in the award of work. There is lots to bid this is almost identical.
To what happens as the year, leading up to the last presidential election, and then immediately following the election.
There was a boom in terms of the amount of work a lot it and we would anticipate that as well as.
Well I suffice clearly small part of our business it would be slightly bit less busy than it was in the past.
Although opportunities we're looking at remains strong.
And your next question here comes from the line of Derek Spronck with RBC. Please go ahead. Your line is now open.
Hey, good morning, Thanks, Hey, good morning, Thanks for taking my questions.
Mike when you when you look at your portfolio of companies do you feel that you have the right balance from a counter cyclical perspective.
Oh, yes, generally speaking, yes, I mean, the airline stuff we do.
Our flying in the aviation business really is just not tied to the economy in anyway. There is a little bit Newfoundland that with where we would be flying that's affected by the general health, but the general health of the economy. There as it has been challenging for a bet.
Most of our flying is essential services refined to first stations communities and the beauty of that business is it's the same weather.
Okay. These dollars 65, or 85 wells 50, or 150, so we like the stability of that some of our manufacturing would be more exposed to the general.
Now.
Conduct bid, but even with that things like banner more tied to the military economy than they are the general overall economy and then we are excited.
I don't want overplay, because lvs not a huge acquisition, but it's what we're really proud of having and it gives us a little bit of exposure to that AG economy, which again.
Is completely different than the other thing so.
One of up when you look over 15 years, we've had.
Periods of time were Aviations carried the company is tough manufacturing time to Conversely, you get a new competitor in aviation and manufacturing carried the day. So yes. We are I think I think the our portfolio gives us stability first and foremost using it for now that.
You know regional segment of our revenue, which is contracted and we've recently renewed many of those contract.
I've spoken about a huge CFO .
Years ago, we got fixed wing fits rescue contract, which.
20, plus year contract, we've renewed or government innovate on medical transfer contract, we secured admitted that contract.
For several years.
So all of those obviously are steady state contracts that are of course not cyclical.
Okay. No. That's great color, we know you mentioned a little bit around the geopolitical environment and and macro environment. So that just more caution cautionary type of language or are you seeing anything right now that that in any particular area, that's giving you.
A little bit more caution that the normal.
I.
Largely only as it relates to that stainless fabrication you see.
Last big business to business transactions, but.
Our.
Materiality basis is yes, yet I don't have numbers in front of me, but they would be something like one or 2%.
Maybe two and half percent of our overall business. So it's not a material exposure.
Okay, Okay, and when when you're thinking about potential.
Acquisition here going forward would it be.
Right.
Are you thinking more more around a completely different business that would add additional diversification or would you be looking more towards enhancing some of the existing kind of end markets that your portfolio is currently involved and.
Putting the bought first before answer the question, but is we're opportunistic so if something comes on.
If the right to change my mind, but at this point that things were looking at are quite clearly.
Related to other businesses were it.
And your next question here comes from the line of Sean Levine with TD Securities. Please go ahead. Your line is now open.
Morning, broadening moneymaking. The report indicates that you guys expect Q4 lease revenue to be down in Q4 related to the a the customer bankruptcy. Just wondering if you can quantify that.
It depends on some discussions we're having now whether planes are going to fly here shortly but its.
Low single digits in terms of millions dollars.
I'm really not prepared to give you a precise number one I'm in negotiations but.
It's not a big number.
Okay.
Sounds based on your earlier comments that.
You wouldn't expect such an impact in Q1 20.
Q I would anticipate those places will be fine, but okay.
And then just a question on quest I know, it's still fairly early days and the ramp of the Dallas facility, but overall has the speed and kind of expenses that you you associate or that you expected from the other ramp up in line with your expectations.
I would say that we had a couple of equipment issues with stuff as it was brought over it started as affected the ramp up the plant at the beginning with some seph damaged and transport, which put US a couple of months behind our plant and we sort of stayed a couple of months behind.
But I would point out that we built this we have started to big plant like that before and if we're going to make a mistake, we're going to make a mistake on the side going to slow as opposed to going too fast the worst thing I could do that Windows show up for the 40 54 in Oakland and have them we add.
Destroy relationship with the developer where we've done 10 projects for them before we'll slowly ramp it we're making progress we're up to 180, something or 190 employees in the facility and we're we're increasing not every week and you people could say, we'll watch do it faster well.
We got to train employees and having to people being trained by one person just to pews with one person can get dot. So we'll do it slowly build that.
Joe coconut all our GM there is doing an awesome job and we're happy with where we are we're excited about getting going faster make no doubt but.
It's on track I think Mike just to comment on that to the one softer side to that too is also the safety component as you ramp up quickly you want to make sure you're doing it safely as well and that's important Daryl.
We have a big sign up in their days since our last accident and.
For now we've been able to say, it's been a year and we haven't had Eddie and that's something we're very proud of.
It's great.
And then just kind of housekeeping question.
Maintenance Capex guidance, I think a formal guidance and still for growth in line with the overall business you mentioned.
And reported year to date up 6% I'm just wondering should we continue to expect a pretty significant year over year increase in Q4 or they'll be softbank reset on normal pretty significant.
It's hard for me to do is precisely because it depends on when certain engine things get re died when we get the not for the manufacture. So I would expect the Q4, we slightly higher than last year, but I would anticipate a huge difference.
Okay, great. Thank you.
And there are no further questions at this time I will turn the call back over to Mr., Mike pile for closing remarks.
Thank you operator, I appreciate everyone participating today it was a very exciting quarter at probably even more exciting last five weeks since the quarter ended.
Forward to talking to you again suited February when we report our for full year results have a great day.
And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.