Exchange Income Corp
TSX:EIF
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Exchange Income Corp
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Ladies and gentlemen, welcome to Exchange Income Corporation's conference call to discuss financial results for the 3-month period ended June 30, 2018. The corporation's results including MD&A and financial statements are available via the company's website or SEDAR.Before the call is turned 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&A for this quarter the Risk Factor section of the Annual Information Form and Exchange's other filings with Canadian Securities Regulators. Except as required by Canadian Securities Law, Exchange does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded and broadcast live via the Internet for the benefit of individual shareholders, analysts and other interested parties. I would now like to turn the meeting over to the CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator. Good morning, everyone. Also with me today are Carmele Peter, EIC's President; Tammy Schock, our CFO, who will review our financial results in greater detail in a few moments; and Dave White, our VP of Aviation. We are happy to be with you this morning to discuss the second quarter results for 2018 and to update you on a number of initiatives which we are excited about and will facilitate our strong performance in the future.The second quarter of 2017 was an exceptionally strong period for EIC and 2018 improved on that performance. Revenue grew by 15% to $313 million, EBITDA increased by 7% to $75 million. Adjusted net earnings increased by 4% to $0.80 per share. The payout ratio when calculated as a percentage of free cash flow less maintenance capital expenditures improved significantly to 58% from 75% in 2017. The trailing 12 payout -- trailing 12 months payout ratio calculated on the same basis also improved significantly from 64% -- to 64% from 80% in 2017. The payout ratio as a percentage of adjusted net earnings was unchanged for the quarter at 68% and declined to 77% from 87% on a trailing 12 month basis.It is important to realize that these improvements in payout ratio were achieved after increasing the dividends by 4% to an annual rate of $2.19 per share. On particular note is the fact that revenue, EBITDA and adjusted net earnings and free cash flow less maintenance capital expenditures per share all established new second quarter highs for EIC. I will leave the more detailed analysis of the financial results to Tammy. But I would like to spend a moment talking about the environment in which these record results were achieved.Our aviation and aerospace segment generates a significant majority of the revenue and profit for the company. This sector faced material headwinds in the second quarter as fuel prices rose significantly while labor markets for pilots remained very tight. We managed modest growth in our legacy and provincial -- provincial operations driven by the acquisition of Moncton Flight College. But this would not have been sufficient to generate the results we've announced today. The solid growth in our manufacturing segment drove the second quarter for EIC. Revenues grew 73% to $80 million and increased to 26% of EIC's total from 17% last year. The impact on EBITDA was even greater as manufacturing increased to 19% of the corporate total from only 7% last year. This improvement was driven by the performance of Quest and by improvements in the results of the other companies in this segment.I have said it for the last 15 years and I will repeat it again here, diversification works. We have generated record results with better balance between our segments while reducing the reliance on any single subsidiary. The biggest factor driving our results is the addition of Quest which has continued to perform at a level which has exceeded our expectations.When we announced the acquisition of Quest late last year we stated that the acquisition is based on a historical EBITDA of approximately $15 million. We also stated that the purchase price will increase to $100 million if certain performance targets were hit. We fully expect the company to grow and significantly to grow -- and grow significantly and that we would payout [indiscernible] following the 2018 fiscal year.It would be disingenuous however to say that we expect it to form at the level it has thus far. In the first 6 months of the year it has generated approximately $15 million in EBITDA and about approximately equal to the last fiscal period before we purchased it. While I would caution against simply extrapolating this figure for 12 months as a number of factors have lined up to enable our existing facility to operate very near its absolute capacity. It is clear Quest will generate earnings well in excess of what is necessary for the vendors to receive the full $100 million purchase price.The growth being delivered at Quest is just the first stage of the program. With the increase in our order book to over $300 million that we announced last quarter we have committed opening a new manufacturing facility in Texas. We have signed a lease on a building with over 300,000 square feet in space. Equipment will begin to arrive later this quarter. And by the end of the year we believe we will be in a position to begin initial product run in the first quarter of 2019. It will clearly take a few quarters to ramp up the plant but when completed will provide us the capability to more than double our existing production.We knew Quest was an exciting acquisition when it was announced but the organic growth it has generated under the leadership of Martin and Jody Cash has exceeded all expectations.The balance of the manufacturing portfolio also performed well. EBITDA increase by 49% as a result of strong demand and more efficient operations. It was a challenging quarter for our aviation segment as labor shortages combined with rapidly increasing fuel prices put upward pressure on cost. We have strategies in place to deal with both of these situations and began their implementation in the second quarter. Many of our contracts allow for a direct flow through of fuel price changes. And while this make sure we are not exposed in the medium term there are often lag times before the increases take effect. As such, in times of rapid increases we experience a drag on our margins until the higher price kicks in.Other revenue streams require us to take direct steps to increase prices. It is very important to realize that most of the communities we service received their fuel over winter roads once per year and therefore did not experience the fluctuations in fuel prices than more southern centers do with regular deliveries.It is therefore imperative that we give notice of fuel price surcharges and take the time to speak with community leaders explaining why they are necessary. This also creates a lag before price changes are realized. We took steps late in the second quarter and into the third to pass on our higher cost to our customers. But we incurred a reduction of margins in the second quarter.Our ticker and fuel prices now largely reflect the current fuel pricing. And the drag on margins will be reduced in the third quarter. Although should prices continue to escalate, further action may be required.Provincial faced headwinds in the quarter in addition to the industry wide price increases and labor shortage. A strike at one of our major customer shut down their operations at the facility we service and as such reduced their demand. The strike has now been settled and demand has returned to pre-strike levels.We announced to close the acquisition of Moncton Flight College in the first quarter. MFC is one of the world's leading flight schools offering intense pilot training in a university like setting, allowing pilots to achieve full certification in approximately 1 year. MFC met all of our acquisition criteria as a standalone investment but it was the internal synergies with our existing airlines that made it such a strategic opportunity.The worldwide pilot shortage is worsening and by acquiring an internal training culpability we're now able to implement the strategy to train pilots and then retain them longer by providing increasingly senior positions within our group of airlines. This will take some time to implement as the business is running near capacity and growth in demand is already anticipated from third party customers. It is a rare opportunity that is both accretive and highly strategic. MFC performed as expected in the second quarter, which was our first one under our ownership.Regional One had another strong quarter, generating approximately USD 22 million dollars in EBITDA which is approximately $1.5 million less than the exceptional performance of 2017. Very strong sales of parts, engines and full aircraft was offset by delays in the lease up of some of the CRJ900 fleet and the lack of lease return settlements that occurred in the preceding year. The demand for the CRJ900s has grown and we now have agreements in place that will see all of the planes on lease by the end of the year.Some of the initial leases expire in 2019, but we anticipate releasing them before or shortly after their current leases are expired. We continue to diversify our aircraft offerings in Regional One. During the second quarter we have acquired a fleet of 28 ERJ145 aircraft. Some of the aircraft were leased to third parties and/or sold outright. Some of these transactions have already been completed, but most will be torn down and sold as parts.This transaction is evident in our quarter and balance sheet where inventory increased as a result of the purchase of these aircraft. Subsequent to quarter end we completed the purchase of 2 ERJ170. The expansion into this ERJ platform increases the opportunities for Regional One to continue to grow in the future.There have been some who have prophesied that EIC in general and Regional One in particular could not maintain the cash [indiscernible] generate without large investments in growth capital expenditures. The first 6 months of the fallacy of that argument. The first 6 months EIC capital expenditures including both maintenance and growth totaled $62 million dollars, down approximately 58% from $149 million invested last year. This decline is entirely explained by growth investments which were nominal at $2 million dollars this year versus $92 million dollars last year.Maintenance capital expenditures actually increased slightly to $60 million from $57 million in the preceding year. It's important to note this in no way represents a change in EIC strategy. And in fact supports of the strategy has always been which is where investment opportunities are developed and are accretive and meet the rest of our criteria we'll pursue them whether the opportunity is in acquisition or capital asset purchase. And when we don't uncover these type of opportunities, we will wait for our standards to be met. A consistent and material investment in maintenance capital expenditures preserve the earning power of our subsidiary. Growth investments are just that, investments to grow our company.Before I hand the call to -- over to Tammy, I want to focus on the significant improvement in our payout ratios. This improvement is evident whether you calculate them based on free cash flow less maintenance capital expenditures or based on adjusted net earnings per share. It is also evident whether you calculate them for the most recent quarter, the 6 month year-to-date or the 12 month period. This reduction in the payout is even more significant with the dividend increase of $0.9 to $2.19 earlier this year. That maintains our over 14 year dividend CAGR of over 5%, a track record which few, if any other, TSX listed companies can match.The quarterly and trailing 12 month ratios are discussed in detail in our MD&A released yesterday. So I'd like to take a moment to focus on the payout ratio improvement in the first 6 months of this year. Our payout ratio calculated as a percentage of adjust net earning, fell from 103% last year to 89% in 2018. Our payout ratio when calculated on a free cash flow less maintenance capital expenditure basis fell even more dramatically, from 115% to 86%.I should point out that the ratios for the first 6 months are always higher than they are for the full year because they include the seasonally weak first quarter where winter roads compete with our airline. The comparison of 2018 to 2017 for the 6 months however shows the dramatic improvement, even with the increase in dividends implemented this year.I will now hand the call over to Tammy who will give you a more detailed look at our financial statements.
Okay. Thanks, Mike, and good morning, everyone. As usual, I will focus my comments on the 3-month result ended June 30.Consolidated revenue for Q2 was $313.4 million, which is up $40.3 million or 15% from Q2 last year. Of the increase, $6.4 million was generated in our Aerospace & Aviation segment and $33.9 million in our manufacturing segment. The Aerospace & Aviation segment generated $233.4 million in revenue, an increase of 3%.Revenue in the Legacy Airlines and Provincial increase by $10 million or 7%. In our Legacy Airlines the increase reflects the benefit of the Kitikmeot medevac contract which commenced in Q4 of 2017. Higher fire suppression revenue and higher passenger volumes in Ontario.Provincial's revenue was positively impacted by the acquisition of Moncton Flight College. Revenue generated by Regional One declined by less than 1% in U.S. dollars, in Canadian dollars Regional One's revenue declined by approximately 5%, reflecting the impact of a stronger Canadian dollar.I would note that the second quarter of 2017 was a record quarter for Regional One. The decline in revenue is primarily related to the lease business. In Regional One, the lease revenue of Q2 -- in Q2 of 2017 included a significant redelivery settlement which did not recur in Q2 2018.Sales and service revenue was essentially flat, although there was a shift in the mix between parts revenue and aircraft sales revenue. The manufacturing segment had revenue of $80 million, up 73% or $33.9 million from Q2 last year.The largest contributor to the increase is Quest which was acquired on November 14 2017. But also contributing to this increase is the collective growth of all of our other manufacturing entities with the exception of Stainless, which had a slight decline in revenue. Both Ben Machine and WesTower had significant increases in revenue this quarter. High levels of defense spending worldwide is driving Ben's revenue increases. And WesTower is now realizing the benefit of operational changes that they have made in response to the lower levels of demand for their traditional services.Consolidated EBITDA was $75.1 million, up 7% or $5 million from the second quarter last year. The growth was driven by our manufacturing segments through both organic growth and through the acquisition of Quest. EBITDA was negatively impacted for the quarter by prevailing foreign exchange rates. If EBITDA -- if exchange rates had remained consistent with Q2's 2017 EBITDA would have been $2 million higher. EBITDA in our Aerospace & Aviation segment with $67.3 million, a decrease 4% or $3 million.The stronger Canadian dollar put significant downward pressure on the translated results of our foreign entities and Provincial's U.S. dollar contracts.EBITDA contributed by the Legacy Airlines and Provincial was essentially flat in comparison to the second quarter of last year. The benefit of increased revenue in these entities did not fall through to EBITDA. The results of our aviation entities were impacted by rapid increases in fuel costs. We are able to mitigate our exposure to rising fuel costs through fuel escalation clauses that are embedded in many of our contracts and through the implementation of fuel surcharges on noncontractual revenue stream.However there's a time lag in deploying these mitigation measures, therefore in circumstances where fuel prices rise rapidly, as was the case during the second quarter, our results can be negatively impacted. Additionally, industry-wide labor shortages caused increased over time contractor and training costs in our airlines. Our airlines are actively working to develop and implement initiatives to mitigate the impact of these issues. However, these initiatives will take time before becoming fully effective. Moncton Flight College which was acquired in March is -- in February, sorry, is a key part of our strategy in this area.Regional One's EBITDA in U.S. dollars was down 7%, the decline reflects the lower levels of lease revenue that I discussed a few moments ago and a higher proportion of aircraft sales which have lower margins associated with them in comparison to the margins that we achieve in relation to parts sale.Additionally, the stronger Canadian dollar caused a $1.1 million reduction in EBITDA. The manufacturing segment EBITDA grew by 204% or $9.8 million to $14.5 million. The acquisition of Quest drove $7.4 million of that increase. Quest's performance continues to be ahead of the expectations that we set when we did the acquisition. EBITDA from the remaining entities in the manufacturing segment was 49% higher or $2.4 million higher in comparison to the prior period.As I have noted, foreign currency rates did create headwinds for us in the translation of our foreign subsidiaries into Canadian dollars. And on a consolidated basis if we used exchange rate consistent with those prevailing in 2017, we -- EBITDA would have been higher by approximately $2 million, so that was the consolidated impact of currency.Our Canadian subsidiaries also have exposures to the U.S dollar. However because there are a variety of U.S. dollar inflow and outflows such as the costs associated with aircraft parts and the U.S. dollar revenue contracts that certain of our subsidiaries have, the net exposure in relation to our Canadian operations is not typically large. So the decline noted is flowing from translated results of foreign subsidiaries primarily.We reported net earnings of $19.5 million or $0.62 a share. These compared to net earnings of $25.8 million or $0.83 a share in Q2 2017. Earnings per share reflects an increase of 2% in the average shares outstanding during the quarter. The majority of the decrease in net earnings was driven by 2 items. First, that is the $3.9 million after-tax gain on the disposal of our partnership interest in Innu Mikun which was included in Q2 2017's results. And the second item relates to our decision to redeem a series of convertible debentures early. Although the actual redemption occurred subsequent to the quarter end, upon making the decision to redeem noncash interest which was being accreted over the term new contractual maturity as accelerated, causing an increased interest expense of $2.2 million.Interest costs increased by $5.9 million as a result of the noncash interest accretion that I just noted and as a result of increased benchmark interest rate and an increase in the outstanding debt balance.Depreciation increased by $1.5 million or 5% as a result of capital asset purchases in 2017 and the acquisitions of both Quest and Moncton Flight College for which there is no comparative amount.Amortization of intangibles also increased by $1.6 million, which was due to the intangible assets that we recorded with the acquisition of Quest. Income tax expense decreased by $3.9 million and the effective rate of tax also decreased to 23.7% from 27.9%. We have a higher proportion of earnings in lower tax -- in lower rate tax jurisdictions, and that has positively impacted income tax expense. And we also benefited from the reduction in U.S. tax rates that was passed at the end of 2017.On an adjusted basis net earnings were $25.2 million or $0.80 a share for Q2 2018, and that compares to $23.9 million or $0.77 a share for the comparative period. Adjusted net earnings exclude the amortization of intangibles, net of taxes which increased as a result of the acquisition of Quest and also excluded is the noncash interest accretion that I just discussed.The gain on disposal of our partnership interest in Innu Mikun was excluded from adjusted net earnings in the prior year. We used both adjusted earnings and -- an adjusted earnings base payout ratio and a free cash flow less maintenance CapEx base payout ratio to make decisions regarding dividend. Our payout ratio for Q2 2018 on an adjusted earnings basis was 68%, which is unchanged from the same quarter last year despite an increase in dividends.Our trailing 12 month payout ratio in the quarter was 77%, down from 87%. This improvement reflects the increase in adjusted earnings which was in excess of our increase in dividend.Free cash flow for the quarter was $58.8 million, up 14%. Free cash flow on a per share basis was $1.86, which is up from $1.66 per share last year. Our free cash flow less maintenance CapEx payout ratio was 58%, a significant improvement from 75% in Q2 2017. Our trailing 12 month payout ratio also improved from 80% to 64%.Investments in the maintenance of capital assets, primarily aircraft related assets decreased by about $800,000 in the second quarter of 2018 to $29.1 million, $8.9 million of this total is related to depreciation on Regional One's portfolio of aircraft and engines which is in line with the second quarter of 2017. The Legacy Airlines and Provincial had $19.3 million in maintenance capital expenditures compared to $20 million in the second quarter last year.Growth capital expenditures during the quarter were nominal. We continue to expect growth capital expenditures to be much lower in 2018 overall than they were in 2017. At the current time our planned expenditures for the remainder of 2018 include the new plant in Texas for Quest and aircraft and ground facilities for Keewatin to service its medevac contract in the Baffin region of Nunavut.During the quarter we completed our partnership transaction with Wasaya Group. EIC has invested $25 million in Wasaya of which $12 million was an equity investment and $13 million is a loan. Our share of Wasaya's results are included in the results of our Legacy Airline, and they are -- and are consistent with our expectations when we made the investment. The equity investment included other assets -- is included in the other assets on our balance sheet.Turning to our balance sheet. We ended the quarter with a net cash position of $85.5 million and working capital of $297.1 million which represents a current ratio of 1.98:1, this compares with a net cash position of $72.3 million and working capital of $240 million and our current ratio of 1.91:1 at the end of 2017.The consolidated cash position at both June 30 and December 31 included cash held to fund the redemptions -- the impending redemptions of convertible debentures. And I'll discuss that further in a moment.The increase in our working capital at June 30, 2018, in comparison to year end is primarily related to 3 items, an increase in Quest's working capital because of the growth in its business volumes and its expansion into the U.S. and increase in inventory at Regional One as a result of the purchase of 28 ERJ aircraft, 17 of which were classified as inventory for resale. And lastly, an increase in the accounts receivable in Regional One due to the sale of an aircraft with an extended term. The receivable is secured by a letter of credit from the customer. Other changes in our working capital are typical for the second quarter as business volumes in many of our subsidiaries are higher in the summer months.As I noted a few moments ago, the debentures that were due in March 2020 were redeemed early on July 17, 2018, for approximately $65 million. The redemption was funded with the proceeds from the offering of a new series of unsecured debentures.In June the syndicate of underwriters exercised their full overallotment option on our debenture offering and we issued $80.5 million of 7 years 5.35% convertible debenture. As a result of this offering and the subsequent redemption of the March 2020 debentures, we are now positioned such that we have no debt maturing until 2021. We have also reduced liquidity risk as the maturity dates of our outstanding debentures are staggered off across a number of years. Additionally, we have mitigated the potential dilution from conversion to a material increase in the conversion price relative to the convertible debentures that were redeemed.In spite of a much longer 7-year term of these debentures, the interest rate remained unchanged at 5.35%. During the quarter the credit facility was amended to increase its size by $250 million extended term to May 2022 and add a new financial institution to the signature -- to the syndicate, increasing the number of syndicate members to 11. At the same time pricing was amended favorably and the covenants within the facility were amended to allow us greater flexibility to take advantage of growth opportunities quickly.The end results of these financing and -- financings and redemptions is that the company's balance sheet and capital resources are strong. Our leverage ratios are well within our target range. And the available capacity within our credit facility now sits at approximately $350 million. So we are very well positioned to take advantage of growth opportunities when they are identified. And that concludes my comments on our financial results. And I'll turn the call back to Mike for some closing remarks.
Thank you, Tammy. In our first quarter we announced that Keewatin had been successful and winning the RFP for the Baffin medavac contract. This left Kivalliq which expires later this year as the only contract that was under our long term arrangement. I'm pleased to inform you that Keewatin recently entered into a new 5-year contract for this region. This marks the first time all 3 new contracts have been held under long-term contracts by Keewatin.The Provincial [indiscernible] government has issued an RFP for the 3 components of government air operations. Medevac, including a lifeline program which specializes in very emergent cases, firefighting and general charters. We're very interested in the medevac contract. Currently the less emergent cases are handled by all 4 carriers on a rotational basis. Under the RFP all this work together with the lifeline program which is currently handled by government care awarded to a single carrier. Perimeter has served the [indiscernible] in this area for decades and the new combined format will very closely resemble the service the Keewatin provides in all of Nunavut. We are excited about this opportunity and believe we have a proven track record. We will also be pursuing -- excuse me, we are pursuing the RFP and expect significant competition. We're also examining the other 2 areas of this RFP.We've been working on our short-term rental maritime surveillance aircraft the force multiplier for over a year and are very excited that it is on the verge of completion. We are in the final stages of certification process and expect it to go into service by the end of this quarter.Interest of governments around the world has been very high for its tech capabilities and quick deployment. In fact, we completed a project in the second quarter using one of our King Air surveillance aircraft where the original inquiry was for the Dash 8 force multiplier. We used the staffing and processes set up for the multiplier and an existing aircraft to be in a customer request. Submission was very successful and bodes well for the launch of the multiplier later this quarter.Our investment in growth capital expenditures of the first 6 months has been very modest. We expect that they will be somewhat higher in the second half of the year as we complete the new factory of request and the investment in Keewatin and for its enhanced benefit and it's enhanced Baffin medical contrast.We will of course be true to our longstanding business model of moving quickly where opportunities are discovered. But at this time our expectation is the Quest and Keewatin programs are our only planned investment outside of normal activity on Regional One. We have strengthen our balance sheet over the first 6 months of this year by replacing existing convertible debentures with a new series of longer maturities, lower interest rates and lower potential dilution as a result of higher [ strike ] prices for conversation. We extended and expanded our secured credit facility with lower interest rates and more flexible covenants. As a result, our balance sheet is an excellent shape with $350 million of liquidity and no debt maturing until 2021. We're in an excellent position to be able to execute our model with no need for capital in the foreseeable future.We've seen some of the companies in the airlines sector experience challenging quarters and reduce their guidance for future quarters. Well, there is no doubt we have felt the effects of higher fuel costs in Q2 and to a lesser extent in Q3 and that the stronger Canadian dollar has reduced the value of our profits of our U.S. operation.I am pleased to tell you that there is no such reduction in our guidance. At the beginning of the year we stated that we expected both EBITDA and adjusted net earnings per share to grow between 10% and 20% this year. We also guided that there would be a significant decline in growth capital expenditures and that maintenance capital investments would increase slightly. I am pleased to affirm all of this guidance.In spite of the challenges with higher fuel costs and a very tight labor market for pilots, we fully expect to deliver on the guidance previously provided. The strength of our diverse operations has never been more evident. We would now like to open the call to questions. Operator?
[Operator Instructions] Your first question comes from Mona Nazir with Laurentian Bank.
Well my first question, and you kind of touched on this in your remarks, but there was another quarter of no growth capital investment. Yes, consolidated results remain strong and even over a longer term trailing on -- trailing 12 month basis we saw growth CapEx down 80% and yet Regional One performed with $75 million in revenue this quarter. There's been a strong correlation or belief that growth CapEx is driving your revenue and EBITDA. But looking at the last few quarters there seems to be a disconnect. So I just wanted to briefly confirm the statement that I think I just heard that there would be no significant growth CapEx for R One this year. And if that's the case, what kind of revenue and EBITDA could do we expect from R One with the minimal spend and just speak about the dynamic between growth CapEx and your revenue and EBITDA generating power.
Thanks, Mona. The R One is a complicated beast because we're buying and selling assets at the same time as we're investing in long-term assets. And so when you look at our CapEx it's the some -- the aggregate CapEx is the sum of our maintenance CapEx and our growth CapEx. We use depreciation as a proxy for our maintenance CapEx because when we're flying our lease fleet we're using it up over time, but we need to replace that. So the first $8 million or so we invest is just replacing what we use up. And if that's all we did for the foreseeable future, the EBITDA would grow modestly without further investment. We're very opportunistic on when we invest in Regional One. When the right deals are there we will move. And I wouldn't go so far as to say there'll no growth capital investments in Regional One. When the right opportunities come we'll jump on them. But there is absolutely no expectation in the near term of returning to the sort of $100 million-plus investments we've made in a couple of years before where we invested in a fleet of CRJ900s. Bottom line is that all we need to do is invest in our maintenance capital expenditures to maintain the cash flow that that company generates. And when the opportunities come and when we do put something into growth, that will allow us to grow to a new level in the future.
Okay. And just to confirm, so we shouldn't expect really any material trend-down in R One performance?
Absolutely not. I mean the only start I put on that is the Canadian dollar affects how we convert that. So when I talked about it I speak of it in U.S. dollars. If the Canadian dollar weakens it improves the financial statement presentation of their profits. If the Canadian dollar strengthens it weakens it. But absent that there's no reason to expect a decline in their performance.
Okay. And just secondly for me, I mean you're keeping your guidance unchanged at 10% to 20% EBITDA in EPS growth. Despite having over 70% aviation aerospace exposure, the significant increase in jet fuel prices and also some of the aviation peers recently revising the down the guidance. Now this may connect your ability to pass through fuel surcharge, but I'm just wondering if you could speak to the business model and your reiteration of guidance. And also you quantify that FX translation had a 2 million negative impact on quarterly EBITDA. But I'm just wondering if you could quantify the same for jet fuel.
We haven't published recently a precise calculation on jet fuel, on the cost because we're in the midst of putting price increases through in the quarter. It's in the low single digits of millions of dollars than that cost to us in the second quarter. It's important to understand because of our market position and who we service and the relative, the vast majority of where we service, the relative pricing for elasticity we can push the price increases through when our costs go up. But it's a matter of doing it in a politically appropriate manner. And when it's under contract, as an example, our government -- our contract with the government in Nunavut for passenger service has a quarterly escalator so -- or deescalator depending on fuel. But you have to go through the whole quarter of the increase before the following quarter you get to change your prices. And so our -- we get hit in times of rapid expansion of fuel prices, it takes us a while the catch up. Conversely, if prices fall it takes us a little bit before we reduce the prices. So net-net it's pretty efficient, but you could see there would have been a couple of $3 million of net fuel price impact in the quarter. And I think the other piece of this is quite frankly is that because of our diversity not everything moves in the same way at the same time. And you see it this -- in these results. The aviation had a tougher quarter not unlike you see with the WestJet, Air Canada [indiscernible] World, although we had nowhere near the impact they had on their performance. The strength of manufacturing right now easily carried the day and the continued growth of Quest helped a ton. And I point out that Quest is still doing that with 1 factory and it will be till next year. But it's tracking to do -- if you double the $15 million it's $30 million, which is double what we bought it off of. That may be a little aggressive simply because we have the factory running at almost absolute capacity in the first 6 months of the year. Hopefully we'll be able to do the exact same thing in the second half. But even if it's slightly less than that, the organic growth in that is just spectacular. And then we're super excited to go adding a 300,000 square foot facility in Dallas next year.
Your next question comes from Steven Hansen with Raymond James.
Just a quick one on Quest, Mike. Can you just describe how the sales pipeline is evolving there as you continue to advance this new plant? I'm just trying to get a sense for how the book relates to the new capacity that you're building.
Yes, we're starting to -- we're booking stuff for the new factory but on a very limited basis for the beginning part of next year. There's always challenges when you ramp up a new facility. And so as we book out later in 2019 and into 2020 we're taking orders for that factory. The order backlog continues to grow. Notwithstanding we're using up 25 million of it roughly a quarter in new revenue. As we get moving into the new factory and gets ramped up in the first half of next year we will -- you will see the sales grow significantly in the back half as we start booking sales into that plant. We're very reticent to book it too quickly, Steve, simply because if we're late, we shut down the developer's project. We can't be late. And so for us the relationship with the developers and the architects is paramount. And so we're going to make sure that that factory is fully ready to go, and we ease it into production because notwithstanding it's all the same technology we have in Toronto. You don't just turn a plant on and have it run it. We have to get the bugs out first.
No, I understood, that seems prudent. And then just quickly, if I jump over to the Provincial side and in the force multiplier in particular, so ready for certification, entering the service, that's great. Can you -- are you going to start to give us some sort of sense as to how the bookings for that platform is going to look as we think about our model little bit? And just as a broader question, you described the King Air opportunity I think as well, and should we think about this being a growing portfolio over time?
I think there has to be a "but" to that. Your answer is yes. I think you should think of it as a growing portfolio over time, but we want to prove it out before we put the money out. And all I can tell you is the demand for that aircraft is exceptional. We're not taking a hard date booking until we have full certification. The last parts of that we can say could take 1 day and they can take 3 weeks. And so when it's done later this month we have a strong degree of interest both within North America and outside of North America. And so I think by the time we report Q3 we will give you an idea of what actual flying we did this quarter and then an outlook into Q4 and ongoing of what it looks like. We were ecstatic that we were able to jump up and look after a contract. It wasn't for the Canadian government, it was for another government. I can't disclose which one it was. But they were looking for the force multiplier. We took one of our Canadian surveillance aircraft that had a extra time and ran a multi-week mission for them and it was a tremendous success. So will we build that portfolio over time, it's a growth engine for Provincial. Having said that, you'll see the results before you see any more investment.
Your next question comes from Cameron Doerksen with National Bank Financial.
So just a couple questions I guess on contracts as well. I am thinking about this [indiscernible] government services opportunity. I am just wondering if anybody sort of sized that, I mean you mentioned that Perimeter is doing some of the existing works. Now that's shared with some other airlines. I guess how big could it be if you were to win that business? And what would potentially be the impact if somebody else wins it and you sort of lose that portion that you currently have?
Cameron, I'll be very careful on how I answer this just because I don't want to put ourselves at a competitive disadvantage by giving other people numbers that aren't readily available. But I think it's safe to say there is 4 other -- there's 3 other main players in the medevac business in Manitoba. And the majority, something like 3/4 of the work is already done by private people. So if you said we were an average player, we're probably slightly better than that. We've got about 20% of this market. And so if you had it all you'd have 4 or 5 times as much. And we do slightly in excess of 10 million dollars of medevac work in Manitoba now.
Okay. No, that's very helpful. I guess…
The interesting part about it is that, like I say there's a lot of competition, so we don't want to get ahead of ourselves. And the government has to realize significant savings or I'm not sure they'll even award the RFP. So it's going to depend on what the government thinks of all of our bids. But what makes us excited about this is we are one of the few carriers in Canada that has experience in emerging cases. We've worked in Nunavut where we've provided all the medevac services in various regions for over a quarter century. So we're used to dealing with the most extreme, most emergent unstable patient which is a skill set which is very limited in Canada and we think puts us in a great position to work with the province of Manitoba. Having said that, we've got good competitors, and so it's going to be a competitive situation and we will see if the government even awards the contract.
When do you expect a decision by the government?
I think that the schedule has it later towards the end of this year, beginning of next year. It's a very complicated process. It wouldn't shock us if it got pushed out a little bit, but it's a -- we're busy working away on our bid as we speak.
Okay. Just second question on the [indiscernible] Department of Fisheries and Oceans. I think there's some commentary in the -- in the MD&A here. But I just wonder if you can comment on when the timing is for a decision there. And if -- assuming that you're able to win that work again, does the size of it change at all or is there -- is it basically the same as what you're kind of doing now?
That's [indiscernible] you're winning the contest for the most complicated question. The bid for the maritime work in Canada will be awarded some time we think end of this year, beginning of next year. We have a contract through most of 2019. There will be 2 or 3 very good competitive bids or not. We've held it for a long time, so we are cautiously optimistic. But every time you bid, you're bidding, there's going to be other people trying to do it. We think in all likelihood over time the scope of work will increase. We've given -- the RFP isn't as simple [Indiscernible] this is the way we do it. We've given the government options. And so we believe there's upside for growth in that over time. But we'll have a better flavor for that probably early in the New Year.
Okay, okay. That's great. Maybe just last a quick one, hopefully less complicated. Just on at the latest medevac I guess win here, nice to see that you've got all 3 of these in Nunavut. Is that a -- basically a -- you know I guess the question is that -- is that an expansion at all of the business that you're doing there or is it essentially kind of -- just kind of a renewal at the same kind of rate?
The Kivalliq one is very similar. In Baffin we added an extra basin. It grew the size of the contract. The Kivalliq one is really just a -- it's basically the same -- it's basically the same contract but sort of inflation-adjusted pricing. Guys, it sort of kicked me a bit here why I used 10 and maybe a little closer to the mid-teens on our existing share of the market, It maybe something more like $15 million.
And your next question comes from Konark Gupta with Macquarie.
So Mike, on Quest. I just wanted to understand what would be the factors that keep you from annualizing that EBITDA, the $15 million we saw in the first 6 months. And any sense on the timing of doubling the annualized EBITDA with the new Texas facility? I mean, like would that be a 2019 thing you think or could be a late-2019 thing?
I answer your second question first. It wouldn't be a 2019 thing because our -- what will run through there in the first half of the year would be a fraction of its capacity. We have deliberately not booked in full because we want to make sure we get the bugs out and don't delay any of our customers. So I think you're -- by the time you're looking at kind of -- we'll hit a run rate by the end of 2019 that you'll see in 2020. And in terms of why we wouldn't extrapolate it, it's just because it was we ran the plant at a 100% capacity, we didn't have any breaks between jobs. We are able to maximize what runs through there. When I say extrapolating, it might be aggressive. I am not suggesting there would be a material decline but 7.5 per quarter with one facility is effectively our maximum capacity. And then depending on whether we're doing a U.S. job or a Canadian job, the margins are slightly different. And so the product mix could change quarter-to-quarter depending on which building we're doing at a given time. So the -- all I'm saying is that it's not a slam dunk because we did it for 2 quarters we'll do it for 2 more quarters. But we're sold out through -- for the foreseeable future, so there's no reason to expect a material difference.
Okay then, that's helpful. Then on Moncton, so I'm going to guess it's obviously embedded in Provincial. Any sense on what the contribution is looking like, what is your expectation right now, and what is the growth strategy there like? And can you give us any sense of timing or magnitude there?
Yes, I'll give you -- qualitatively, yes, quantitatively we haven't released that and I'm not sure I'm comfortable doing that. It was right -- it was slightly ahead of our projections for the quarter where we gave you the historical rates. It's growing off of that. We would expect a more significant growth in 2019 based on the contracts we have in hand for international pilots, and that's what drives its earnings right now. What we're trying to spend most of our time working on is bolting on to the core business our internal training so that we get help ourselves with the strategic part of the business. We're confident based on the contracts in hand that we'll see good growth in that business in 2019.
Yes, I can provide a little additional color on that. I mean the limitations for growth is certainly not demand nor getting the airplanes needed to provide the training, it's really the pilot. So part of the strategy which will take some time is to grow our pilot pool, pilot training pool so that we have the instructors available to be able to grow to the students that we can provide training to.
Okay, and that's great color. And last thing on the capital priorities, Mike. So you have this Quest now, force multiplies almost done, and then obviously there are 3 others contracts you might be spending on. Where do you see the capital priorities after these investments?
Well I think for the balance of the year you're going to see us finish the Quest plant, you're going to see us do a little bit of stuff for Keewatin. In the grand scheme of the magnitude, that's a much smaller number. And if there's any opportunistic things in Regional One. I think those are all we really see in the current year. Things can always change. So I think you're going to see modest investment. We're always looking for opportunities with Regional One or with some of these contracts. And if we're successful, for example, on the surveillance -- maritime surveillance contract with Provincial next year, we will invest in that contract and build more infrastructure because the contract is bigger. But for the balance of this year I think you will see continued modest spending on growth CapEx outside of the 2 projects we've told you about.
So the M&A is not really in the near-term thing you're looking at? I mean, I guess that's [indiscernible].
Well we're looking at M&A. I -- thanks, Konark, I didn't answer that part of the question. Adam is very busy, we've got some unique stuff, some exciting stuff in our pipeline. But with the number of deals we closed earlier this year, we're sort of in earlier stages. We're ramping back up. We used most of our horsepower for us to do the Quest deal last year, then Moncton Flight College and then [indiscernible]. We burned most of our horsepower closing those deals, so now we're ramping back in. So we're sort of in the beginning to middle parts of those transactions. There could be stuff happen by the end of the year on the M&A front. But I wouldn't expect anything closing in the third quarter.
Your next question comes from Chris Murray with AltaCorp Capital.
Turning back to capital spending and maybe we can walk through this a little bit because maybe I'm a little confused on Regional One. So you think about the quarter, you acquired 28 all big and smaller aircraft, I guess you sell them back out again. But I'm thinking call it USD 4 million to 5 million a copy maybe for those aircraft. Help walk us through how that business is changing? And where exactly you're starting to source that kind of volume of aircraft at this point?
Okay. Well, first of all -- well, I'm not going to give a precise number for ERJ145s, they're nowhere near that per copy, they're less than $1 million an aircraft, that we bought some of them and been parked for a while. We divided them up. Tammy gave the breakdown. I think it's 17 and 11, I think 17 of them are in inventory and 11 of them are in capital assets. We actually leased and then sold some of them in the quarter. So they were in and out of the capital assets number. The rest are in inventory. They will take a while to work through as we park them out and sell them off. And I think that I don't have that precise number in front of me but I think, yes, we had about a $4 million or $5 million increase in our inventory at Regional One at the quarter which was the net impact of those 17 aircraft, yes. Tammy, [indiscernible]. So the -- just want to finish off your question, Chris, because I don't think I answered the other half of it. The business really hasn't changed at all. It's just the opportunities for fleets. This was a unique one where we had worked with some groups on ERJs and developed some comfort and then developed a plan to deal with that fleet. If you try to buy 1 or 2 or 4 or 5 of those aircraft you would have paid a lot more than what we paid for them. But because we took the whole fleet off the hands I believe that was from an investment bank that didn't really know what to do with them, they had been sitting for a while. And so we had a plan to turn some of them into flyers and some of them into parts. There aren't many opportunities to buy 28 aircraft at once. That was a unique opportunity and we jumped on it. More typical was 1 or 2 aircraft at a time. And again, typically the older the aircraft the more fleet opportunities there are. So the CRJ200s are more likely to get 5 or 6 of those at a time than you would on say CRJ900s. So we continue to be opportunistic. We basically maintained our maintenance reinvestment over the year but we haven't found enough to turn it into growth investment simply because not only are we depreciating the existing ones, we're selling some of them. So just to stay in the same place we invest millions of dollars each quarter.
Okay. Fair enough. Yes, no -- and I guess the ERJ170s that's you're bringing in, the 2 of those will just go to the lease pool, is that fair to think?
Well, potentially or we may remarket them. But they're certainly not part-outs, those are either lease aircraft or resale aircraft, they're not part-out aircraft. They're materially more expensive.
Yes, no, fair enough. And then just trying to wrap my head around back half capital spending, fair to think -- and I'm even thinking into 2019, just the seasonal pattern, your maintenance CapEx should come down I guess Q3, Q4, and then should we expect again front-half loaded into 2019 for maintenance and repairs like you've done or is there something changing in your availability over Provincial to do your -- to do your kind of maintenance right now?
You're bang on in terms of the seasonality. And in Q3 when we report I'm going to give you a guidance for next year. Big picture, at this point we don't expect any material increase in maintenance investment next year. We have a big year for engines this year. So potentially it could be a little less next year but we're not in a position to give any sort of meaningful guidance on that yet, we'll do that at the end of the next quarter. But in terms of the trend and the seasonality you're bang on, Chris.
Okay, great. Just I guess the other, one of the other contracts or other investments that we haven't talked about too much was Wasaya. Can you maybe kind of walk through the logic behind doing that? Was that just maybe they reduced some competition to that Northern Ontario region? Or anything that you want to add in terms of understanding what the opportunity is there?
Sure. It's really it's slightly different than what we've done in the past because it's the first time we didn't take a 100% of an acquisition, we took approximately half. And half of the $25 million was a recapitalization. I think it is fair to say that Wasaya had some financial difficulty and they needed to be recapitalized. We were competing with them in certain parts of the market, other people competing in other parts. And one of the great strengths of that company is the support it has from its component First Nations. And we made the decision that we're trying to expand into the Northwestern Ontario and in those communities it is hard to go in where they're competing with their own airline. And so for us by partnering with them and helping that grow it was win-win, it enhanced our relationship with the First Nations in Northwestern Ontario. We helped them recapitalize to take advantage of growth opportunities. And then we are able to -- we're in the process of rationalizing service between the 2 air carriers both to reduce costs and to improve the schedule for the customer. It makes no sense for Perimeter and Wasaya to fly a flight right on top of each other when we both fly out of the community at 9:00 a.m. on side-by-side. We're better off to provide serviced at 2 different times of the day to improve it for the customer. And then we're working together on streamlining the cost by us providing services for them and vice versa. We started to supply them with some parts and fuel in certain situations and they actually have helped us back us up when we had some fire work in Manitoba where we did not have enough capacity. They came in and helped us. So you can see it in our Perimeter numbers. There is some growth because of the transaction there. And in terms of Wasaya's number, it is not material at this point. But as we rationalize their business with them and help them return to growth you will see it in the future. And Carmele is kind of the champion of this project, I'll maybe see if I missed anything.
No, I think Mike covered the main parts. The only thing I will add is the partnership that we formed also gave them access to our aviation experience and our buying power as a kind of aggregate group of airlines and the sharing of resources and best practices, et cetera. So it is certainly a win-win transaction.
Okay, great. And then I guess my last question just -- and this is about the force multiplier, just thinking about this contract with the government should you win it. Would that require you to start building billing multiple like -- would that contract actually essentially commit the force multiplier to that program and then you are then left thinking about do you build another one for other opportunities or do you need additional aircraft just to support that opportunity as it stand?
Again, it's hard to say specifically because there is more than one option for the government under the bid we put forward. But it will -- it will require further investment in new aircraft. Some of the aircraft we use for the existing contracts are smaller than what they want and we may upgrade the technology. So there will be an investment. The existing force multiplier plane will not play a role in that contract other than maybe in ramp up helping us get the capacity faster depending on how much capacity the government chooses for us to have. But the -- this plane is more for short-term unique opportunities around the world or to help out governments who are looking at making a purchase of a fleet and want to try this out first. And so it's -- the way I would describe it, it's our -- if you go to an auto dealer they have a demonstrator you can drive that's what this is except we charge you for the demonstration.
Okay. Just wondering along these lines, is there anything you can leverage around your relationship with Airbus that could maybe work into this space or you're fairly committed to wanting to stay on the Q300 platform?
It's a good question. Those are discussions we're having internally. We have reached a kind of conclusion. We're very busy with Airbus right now on fixed-wing SARs. And they are beginning to deliver those aircraft next year. And so we're working with them hand in glove. And I think if we do the job that we have historically done, the opportunity to do more work with Airbus will be there following that. But I think very much in the near term that's where our focus on is, is standing up that program and doing what Airbus needs us to do and what the government of Canada needs us to do.
Your next question comes from Nav Malik with Industrial Alliance.
I just actually want to ask on Regional One, the mix a business, it shifted a bit more to the parts service portion this time around. Is that -- what would you expect going forward? That kind of ratio going forward or maybe let us know what's behind that and how you see that unfolding.
Well there is 2 things. I mean we -- we mentioned in our -- on the call that we had some 900s that weren't fully utilized, that should improve which would drive lease revenue, it's almost at the stage where I don't like the word lease, it's more like rental income or where we're using up green time on aircraft because partly we don't put out a plane for 6 years and then just take a lease payment and we're a bank. We're -- there were much more transactional than that in our lease portfolio. And so sometimes the leases are returned, planes at the end. They have lease return conditions were there could be an overhaul required by the lessee before they turn it back. But if we're going to part the aircraft out any way we may monetize what the cost of that overall would have been and taken in a payment. And so that makes the lease stuff a little bit bumpy. And that is really the main biggest driver between this year's lease payments and last year's as we have lease returns last year on part-out aircraft that we didn't have this year. So I don't think that I could tell you that there is a new normal or that there even is a normal. You will see oscillations between the 2. One of the things I have always said about Regional One is don't worry so much about the revenue and don't worry so much about the breakdown, it's the trend in EBITDA in aggregate that -- that's relevant to some quarters we sell more, and we may sell parts or we may sell whole planes or we may lease out aircraft. I think last year was a great year for lease returns, and so that inflated that number a little bit compared to what we would have in this year or a typical year. But I don't think there is a strategic difference in what the breakdown is.
The base parts sale was consistent quarter-over-quarter, and then we have the decline in lease revenue that we have discussed. And then the sale of aircraft and engines will always move around depending on what the opportunities are.
Okay. Okay, and then maybe just to, if I could clarify. I know you've already talked about the fuel issue and the cost. But if I understand correctly or if I maybe just clarify, you're maintaining your guidance for the year despite increase in fuel, but does that mean you have that I guess margin pressure under control like I guess in future quarters? Like this quarter you had maybe a couple of percentage point drop in your margins in the aerospace segment. Going forward how would we expect to see that on a year-over-year basis margin-wise or -- yes?
I am comfortable answering that as it relates to the fuel. The product mix has a big impact on margins. So if you have higher or lower as an example, firefighting stuff in the summer, that's a very high-margin business. And so that can skew percentages. But the --
And lease rental…
And -- yes, the lease versus sales stuff at Regional One. But in terms of the fuel, the extra fuel cost has been in that $2 million to $3 million range in the quarter that we didn't recover back. By Q3 we will have the majority of that fixed. We'll still have some fuel drag. Again, assuming fuel prices had plateaued, if they go up again we're going to have to do the same process and we'll have the catch up process. Conversely, if they decline a little bit we'll do better than this. But I would expect that by the time we get to Q4 we fully -- we're very close to fully absorb the cost of the fuel prices. The impact we'll have on Q3 will be materially less than in Q2.
Okay, okay. And then just moving to Quest. I know in the past you've quantified the backlog. And I know it's strong obviously from your comments. But you didn't quantify this time. Did you -- is there a reason? Or would you quantify that or…
Yes, we said after Q1 it was over $300 million. It is over $300 million and it is -- and it has continued to grow. I don't want to get into tracking an exact number in this every quarter. But it has grown. We won't grow materially until we get the plant up and running because we're not going to promise production we don't have. Once we get the thing up and running both the throughput will go through and the ability to take more orders in the sort of -- end of 2019, 2020, 2021 period will come to fruition. But the demand in that business shows no signs of abatement. We are still turning down orders simply because we don't have the capacity to build them.
Okay, and then just lastly for me on the Quest, the earn out, is that payable in cash or in stock?
Cash.
Your next question comes from Tim James with TD Securities.
My first question is on Moncton Flight College and the opportunity there for that to relieve some of the pilot pressures throughout the organization. I'm just wondering if you could talk about the timeframe that you expect that to benefit. I know in the MD&A it indicates it will take a bit of time. Is it something -- by the time we get to the start of next year that that could be providing some relief? And that pressure should be dissipated or is this kind of a multi-year process?
Well it depends on whether we're talking about whether the pilots are in training or out of training, because even in an intensive situation it's a year-long process. We will have more people in training by the end of this year. So by the time they get out it's the second half of next year anyway and we'll ramp that growth over time. I think a bigger part of it, Tim, is not just training the pilots but a whole program to retain them. So we're going to bring people in and say come to Moncton, get your training. We're going to guarantee you a job as a trainer. When you come out of there you'll train other pilots for a period of time, that you'll move to one of our smaller airlines and then ultimately to one of our bigger airlines. We have union so we have to make sure everyone is on side with how we flow the people between the various companies and the complications of those things. And that's a part that takes a little while. But in terms of as simple as putting pilots in, that will happen this year. Carmele again she's the champion of this, so.
Yes, I mean part of the other issue is not simply a shortage of pilots, actually a shortage of pilots that have sufficient hours, lots of experience in order to move into the left right features of various aircrafts. So in EIC we have a destination that we can offer pilots to get them through smaller aircraft, become captains, move to larger aircraft. So we're in the process of obviously ensuring that folks know that. The other part of the strategy is taking pilots who have 250 hours and getting them sufficient or increased hours by putting them back in Moncton Flight College to become an instructor that builds their hours. We can preserve their seniority back at our airlines so as they're building up hours they're then able to immediately come in and slot into one of our aircraft which is then fulfilling the need that we urgently have on our ongoing basis. So it's an overall strategy, it will take some time, but we're attacking it in several-prong basis.
Okay. That's helpful. My next question just -- maybe for Tammy just regarding the disposition of assets in the quarter, I'm just wondering if you could provide some additional color on that, I think was a 24 -- approximately $24 million. Am I correct in assuming that was the sale of aircraft or engines from the leasing portfolio?
Yes, so the -- yes, so capital asset disposals from the least portfolio is that what the question you are asking?
Yes, I think it was -- I mean I know it's approximately $24 million there in the cash flow statement, I just want to make sure that I am understanding it correctly.
Yes, that's correct. That's where it's coming from.
Yes. And so when we talk it's important that we tie with that net CapEx number that so its total purchases less our divestitures, less our maintenance CapEx. What's left is growth. And we said in there that Regional One was slightly negative growth CapEx in the quarter and was simply because the level of purchases was not high enough to cover both the maintenance CapEx and all the assets that we saw that of fixed asset. Which is normal part of the business, we regularly buy and sell aircraft, so.
Okay, so if my math is right I can think about the growth CapEx, if you will, as I can deduct that from that kind of $24 million in dispositions and the approximately $8 million or $9 million in maintenance CapEx, is that right?
So well, if you -- yes, if you take the dispositions, and I don't know that every one of those is in Regional One. I think the bulk of it certainly is. If you take that, you add our maintenance CapEx to Regional One, that will give you a gross number. And then you add or subtract the growth CapEx to that to get the total purchase, because like I say, we're constantly buying and selling on a regular basis. So the CapEx numbers we present to you in growth are a net number. There are positives, less negatives [indiscernible].
Right. Okay. And I can't remember, is it -- could some of that disposition have been sold -- maybe sold isn't right, I guess transferred into inventory or was all of that $24 million effectively sold to an outside party?
Yes, that is cash, so that is to a third party.
We do sometimes transfer assets when a lease is, a plane is at the end of its life the way you're talking about in the cash part of the business.
Yes.
Okay, so that amount is purely to outside as opposed to a transfer?
That's right. We had -- the transfers this quarter between capital assets and inventory which reveal.
Your next question comes from David Tyerman with Cormark Securities.
First question is just on the working cap, just wondering if you could give us an idea of the outlook for the remainder [indiscernible] into next year on that.
Yes, that's a good question. Assuming there's no aircraft sales with terms like we did earlier this year, which is not the norm, it happens occasionally where we have someone has a letter of credit and has a reason they don't want to do. We had a ramp up at Quest for 2 reasons. One was we used to do $15 million a month and now they're doing $25 million a month. So just the sales growth there and some of the other places affects your -- our working capital. That's fully into the statements now, so you shouldn't see that. And on top of that, Quest has a bunch of working capital tied up in prepaids. All the deposits we've put on the equipment for the new plant, we can't record those in a capital asset until they're delivered. So you'll see that reverse in Q3 where -- or some of them will balance in Q4 as the equipment is delivered. The aggregate working capital in the balance of the year, there should not be any significant increase in the working capital requirement.
Okay. Helpful. And then the second question, just kind of looking out to 2019 on EBITDA growth. I see a few growth drivers here, the CRJ900 leases, the force multiplier, the Moncton Flight College, are there other things besides that? And are these material as in greater than 5% in total?
We haven't given any guidance, David, out into 2019 yet. The Moncton Flight College growth is expected to be significant. I mean bearing in mind that it started at 8, so if you doubled it, it would be 16. So -- and I'm not suggesting you double it, I was just trying to give a order of magnitude of it. The force multiplier will be material when it's out again. You're talking about a $40 million, $50 million asset and we regularly talked about the returns we want, and so you can work that out. There's the beginning of the fixed-wing SARs next year. We'll start to have some revenue in it in 2019 but more materially in 2020. And Quest, you're going to see in the back half of the year you're going to see the new plan kick in which will also be material.
Would that -- would Quest be positive next year? But you'll I would imagine have some startup costs first half.
I think you'll see more startup costs in Q4 than you'll see in Q1. We should be -- I wouldn't expect to make any money the first part of the year but I'll expect to be positive on that plan before the end of the year for sure.
Okay, and the 900 leases, are they material or?
It's not a huge number but again you're talking a couple million here there makes a difference. The interesting thing with Regional One is we know what we think we're going to do each quarter, but how we get there changes every time. We think we're going to sell a big aircraft, we don't, we sell more parts or we lease something or where our lease revenue is down and we flip more planes. It's a very transactional business which is why forecasting revenue even internally for us is hard. EBITDA we're pretty good at getting to where we think we're going to be.
So when I add all those things up, like I'm thinking of the same descriptions you just gave. It doesn't sound like any of them are like really large numbers, meaning even over $10 million individually. So it sounds like it would all add up to not a big number? Am I off track there or?
I think you may be in touch with the conservative side. We -- like I say, we haven't given guidance yet, so I am hesitant to give big numbers. But if that is -- take the Quest plant as an example, take whatever you think we're going to make out of the existing plant here and say we're going to make half of that next year in the other plants or whatever number you choose to put in there, you can -- Quest in of itself could be double-digits in terms of EBITDA. I mean if we don't invest anything it's not going to grow by 25% a year with no investment, like if we don't at things, but our organic growth rates are still healthy.
Yes, okay. That's helpful. And just kind of continuing on, on Regional One, yes, can that grow or it can always grow, but I mean based -- you've made some pretty big fleet purchases in the last couple of years. You're parting out a lot of that stuff or it's in lease fleets. I'm just wondering whether the part-out fleet and the lease fleet can grow much from here or should we really be thinking of it as more of a static business or it may be even declining at times as if these bugles, go through the python?
Well I -- certainly we don't view it as declining in any stretch. And in any given aircraft type there may be the opportunity or there may not be the opportunity to grow in a given period. What we're excited about is our movement into the ERJ market which gives us that much more opportunity, that much more feel to run in. And so we certainly don't expect the investment level that we had in 2016 in the first half to 2017 in that business, but we still expect to invest in the business, so we still expect it to grow, just not at those rates.
Right. So thinking that way like that is sort of the pig in the python, because you did have a huge bulge there. That stuff, is part of that, wouldn't that imply the business might shrink a little bit unless you can find that much business again?
You're really close, David, except one piece you're missing in that assumption is that when we calculate our maintenance investment and our inventory, we're assuming we replace all that stuff. So growth CapEx, we don't get to growth CapEx until we've replaced all that stuff. And so as those 900s get used up or that more likely those are going to be around a while, because they're dual aircraft but as the 200s get used up we have to buy new 200s. We've bought, I forget the number, we've bought 5 or 6 of them already this quarter.
Yes [indiscernible].
Yes, I saw that.
So yes, might even be more than that. The work that -- there is a risk when you look at our financial statements, you see the net number, and there is this idea that we haven't bought anything and so we're using stuff up, that's a net number. We're reinvesting constantly. We're taking that cost to sales money we got where we sold off and reinvesting it and buying new equipment. New is probably new to us, used equipment.
Okay. I get the idea here. And then just last question quick question. Canada fisheries contract, how -- do you have that now? How big is that?
I don't know that we've ever published something on that.
No, we have not.
It would be -- to give you a basic idea, we're probably -- I don't have it in front of me, David, to be honest, but I think it's between $10 million and $20 million in revenue.
Okay. That's helpful. That just gives me an idea roughly.
Yes, it just gives you an order, a scale. I don't have an exact number in front of me. Perhaps from a competitive point of view I'm not sure I want to publish that.
Your next question comes from Scott Fromson with CIBC.
So most of my questions have been answered. Just one thing on the Middle East, it's been in the news lately with respect to Canada. How does this affect your business prospects in the region, particularly maintenance and surveillance? And I'm thinking of the prospects for the force multiplier.
Canada's reputation always matters, so I don't want to say that it's not something at all. We don't deal directly with the Saudi government on anything, so there's no direct impact to us. Most of our work in the region is done through UAE who's a very serious partner of Saudi. But our relationship, we're built into with long-term maintenance contracts and we do stuff with them and our relationship is great. We're always very sensitive to the political stuff in the region. But at this point we don't see any impact on our business.
Your next question comes from Raveel Afzaal with Canaccord.
First on dividends. It appears that you guys are approaching close to the lower end of targeted payout ratio. So is there possibility of further dividend increases? Or how are you thinking about potential additional dividend increases going forward?
That's a good question, Raveel. Our view on dividends is twofold. We always -- we've invested a long time in that 5% CAGR we've had. We just increased our dividend. We want to make sure that we fully fund the next one before we make a change. So we watch that regularly. But I think you're going to see us as we continue to grow our ability to pay the dividend spend it 2 ways, part of it on actually just permanently reducing our payout ratio and part of it in increasing the dividend. We've increased our dividend already this year. So I wouldn't anticipate anything barring exceptional performance in the next quarter or 2. But we're always looking at it and I think our track record speaks for itself in terms of our desire to share it with our shareholders. But I think over time you're going to see us tightening out that payout ratio a little bit at a time.
Got it. And then with respect those CRJ900s that are going back on, you mentioned that some are coming off leases in Q1 '19, so when you are signing the contracts right now for the CRJ900s, is it for all of these CRJ900s, even the ones that are coming off lease in early 2019 or if you could [indiscernible].
We're in negotiations on the ones, about ones coming off of lease, whether that be to extend the lease or a new lease. I'm talking about, there are some now they were only underpowered by the hour leases moving those to traditional straight monthly leases with reserves. And so next year we -- like it's a constant ongoing thing. The leases don't all wind up at once since we're always renewing leases. My point when I talked about it was that the demand for them has strengthened. We're getting closed by all the -- by the end of the year. We expect that lease is in place for all of them and then we'll continue to work on the ones that come due next year.
Perfect. And if possible can you quantify what sort of an increase we have seen in the inventory over the last 12 months associated with Regional One given the record performance that it continues to deliver?
I can tell you that in the last quarter it was about a $5 million increase. The net change in inventory over the last 4 quarters there, if I take Q3 and Q4 of last year and Q1 and 2 of this year would have been something in the range of $6 million or $7 million. I don't have the right number, exact number in front of me. That's for…
U.S. dollars.
U.S. dollars for last 12 -- last 12 months or like a trailing 12 basis. And it bounces around. The biggest impact on that is when we do bigger fleet transactions. I don't think we've ever bought 17 aircraft or 28 aircraft the same time before. And 17 of them went into inventory, so it will take us a bit to chew through that. But we don't -- I don't see a material change. Like if we're looking at what is our, like we do with our growth CapEx, what is our inventory levels to maintain our free cash flow. They'll plateau, they will go up $3 million this quarter down $3 million the next quarter. That is -- when you're buying and selling it's not like we're buying shoes and we can just go to our manufacturer and pick them up. We have to be opportunistic in buying. So when I say it stays flat it bounces around, but there won't be a material trend, absent an opportunity to grow. And it's important, we haven't really talked about it a lot yet on this call, but there were -- there was a real theory put out by some of sorts that we couldn't maintain this EBITDA level without massive investment. And the last 12 months have proved that that's essentially nonsense. Our EBITDA stayed very close to where it was at record levels last year, and our growth CapEx has actually been negative. And if you include the inventory stuff, we're basically flat.
Your next question comes from Mona Nazir with Laurentian Bank.
Just a quick follow-up, so just looking at the year-to-date Quest EBITDA performance and it’s in line with annualized 2017 figures. And I am just wondering, is there anything that you've done that previously, they've been unable to achieve? Was utilization really when you purchased it? Did you change the sales process hence there was impact on demand? And just was there ever a time when the company was able to achieve $15 million kind of EBITDA run rate during the 6-month period?
They've never -- they've never been remotely close to that. I would love to say it's because of our genius guidance. That would be a massive lie. The reason was quite simply is they were building the order book before we took over. And we knew there was a ramp-up, that's why there was an earn out. The ability to generate strong margins by having the plant run at absolute capacity has been better than we anticipated it would be. And because of our ability to invest in a new plant they've had the confidence to take orders farther out and fill the order book tighter than they otherwise would have had they not built that. But the drivers of the business that have led to this kind of performance are the order book, the strength of the company and what they were doing before we bought it. We've given the financial stability to look out and plan to grow further. But what we see here is work that was largely done before we bought it.
Your next question comes from Scott Fromson with CIBC.
Maybe this is a question for Tammy, just to get a better sense of the accounting. Just taking the 28 ERJ145 aircraft purchase, can you run through how it works through the cash flow? Like what gets put in the inventory and what gets put into capital assets. Just trying to get a sense of the cash flow accounting, please.
Okay. So when we buy the aircraft we make our best estimate of what we're ultimately going to do with each aircraft in the fleet, which does change, so that's why we can have transfers between capital assets and inventory. But right now we've got 17 of them that have gone into inventory. So the purchase price associated with those 17 is going to our working capital line. And the ones that are classified as capital assets are showing up as a cash flow from the purchase of capital asset down in the investing section. Just standard accounting, there's nothing unusual about it.
Okay. The only art form to it is, is when you buy 28 saying that we're going to sell -- that we're going to part-out of 17 or 15 or 19, it depends on what the opportunities are. And so that's why you sometimes see some movement between the 2. But absent that it's pretty straightforward, we put the full value of whenever the planes were parting out are into inventory and the full value of the other ones goes into capital asset.
That make sense. Must be tough to know when you take possession.
Yes, I mean some it's easy like if you buy a CRJ900, we know that a $10 million plane is not getting parted out in the short term, it's going to go into the lease book. Whereas your buy a $700,000 plane there's a lot of things that can happen, you could put $1 million bucks into it and lease it out, you could put $1 million bucks into it as sell it, or you can just part it out. So that is -- that's what the art form of the business is.
I would assume also on a new platform it takes a while to understand the dynamics of the market and what you can sell and what you can lease and what you -- what you can part out?
You're bang on, Scott. I mean the secret sauce of Regional One is knowledge. Their ability to understand what the part out value is, the demand and who needs engines and what could we do with these aircraft is what enables them to earn the margins that they earn. And so as we ramp into a new type like the 2170s we brought, you have to get your feet wet slowly and have build up that knowledge base. So you're bang on.
[Operator Instructions] Next question comes from Derek Spronck with RBC Capital Market.
I know that a lot of question have been asked. Just quickly thinking about growth CapEx in the back half of the year. The 2 ERJ170 I would assume would be growth CapEx and then the 11 CRJ200s would be inventory?
No, I wouldn't make that assumption. Certainly the 2 170 is our fixed asset. But understand…
They may not be growth.
They may not be growth depending on what other sales we have, they may just replace other assets. When we talk about with those it's really always important to say that like we sell aircraft every quarter, we buy aircraft every quarter, you got to get to the end. And it's that number that matters. And so clearly the 170s are capital assets and the CRJs would be a combination depending on what we choose to do with them.
Okay. And then the plant for Quest, would that be recorded in the back half of this year? Or would it be -- flow through into [indiscernible].
I would think the vast majority of it will be in the back half of this year.
Okay. And just moving on to the legacy airlines. You fly into some remote locations where effectively I would assume is more -- is very little competition out there. Are there any regulatory caps in terms of what you can implement from a bare pricing perspective?
In terms of a regulatory thing, no. In some areas it's contracted. So we have a contract with the government of Nunavut for what tickets cost for their travel. So that has a straight flow-through mechanism. Whereas in places like Manitoba or North Western Ontario those are typically what the market price is. And so those would be what's a reasonable and appropriate. And like I say, we take great pride in the fact that we move slowly and we make sure we inform our customers what's going on. Bill Wehrle the founder of Perimeter when we [indiscernible] for 50 years, he was with us for 10 till he passed recently. When we took over the province and basically consolidated into one, I suggested a price increase and Bill says, no, I think we should do the opposite. I think we should look at reducing fares. He says we want to make a little bit of money for a long time, not a lot of money all at once. And so I'm always a bit uncomfortable when I talk about our market position that enables us to pass fuel price increases along. We can't do that. But it's important, we're responsible, we're the sole source of people's travel in and out of a community and we take that very seriously. So when we pass fuel price increases on, we make sure it's reasonable. And sometimes it takes us a while. And that headwind we had in this quarter and maybe a little bit into Q3. But conversely we get it back when the prices come down, so.
We've been servicing these communities for decades. We're long-term partners with our stakeholders and we want to keep it that way, so we are very sensitive.
Okay. That makes sense. And just lastly, any update around the competitive environment in your legacy airline business just with some of the new incumbents, low-cost incumbents? And just wanted an update on the competitive -- if you're seeing any changes on the competitive environment.
The only change in the competitive environment we have seen in the last quarter would be in Northern Manitoba. A small airline from Alberta has started flying with one King Air into 1 or 2 of our communities. The impact at this point has been negligible. We have great relations with the communities in that region and we've had great support from them. So outside of that there really hasn't been much change. North Star Air which is the subsidiary of North West Company continues to grow its internal freight business. But as we mentioned earlier, we had largely lost most of that business a year ago. We have continued to help them with a couple of markets. That's largely complete now. But I guess that's not a material impact in any way, shape or form on our business.
Okay. And what's stopping the other airlines from making a more aggressive move into some of your markets? Does it just not financially make sense for them in the infrastructure?
Most of the markets we're servicing don't support 2 airlines over any kind of period of time. When you've got -- when you've got 6 or 8 or 10 people moving at a time or even 20 people moving at a time, when you split that over 2 aircraft there isn't enough. We've got all the infrastructure, we've got fuel farms in the north. So if you want to fly to, pick a community, [indiscernible], you have to take return fuel. We have fuel in the community, so we don't have to. We have separate terminals at the Winnipeg airport so you don't have to go through the international terminal. There are no other separate terminals. There's a whole bunch of infrastructure we've built to [indiscernible] our position with those communities. It doesn't mean people don't come and try like Northern Air has, and it doesn't mean they won't continue to try. But in the long run we've been there 50 years and there's a reason. It's because we have the right planes and the right model. And well we don't love new competition, we don't really worry that much about it.
Could the community though push back and say they want competition or another service provider?
We have community partnership agreements with most of them where they do precisely the opposite. They say they want to deal with us as their airline because we put money back into the community. We take our position very seriously. We do profit-sharing with the communities. We give them discounted funeral and bereavement services. We do economic development. We're working with the Island Lake communities on helping them establish a local fishery. We're partners in the communities, Chris, and so we keep our prices as low as we possibly can. We listen to them on service issues and we put back into the community. So could they ask for one, sure but I mean I think the track record is the best. Take a look at Perimeter for the last 10 years.
[Operator Instructions] And we don't have…
[Indiscernible] any more questions I promise to call them by the right name.
We do not have any questions at this time. I will turn the call over to the presenters.
Given that there is no further question, I want to thank everyone for participating on today's call. I'd like to thank our stakeholders for their support over the last quarter, and I look forward to updating you on our progress in quarters in the future. Thanks for calling, and have a great day.
This concludes today's conference call. You may now disconnect.