Exchange Income Corp
TSX:EIF
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Exchange Income Corp
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Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the 3-month period ended June 30, 2020. The Corporation's results, including the MD&A and financial statements, were issued on August 12, 2020, and are currently available via the company's website or SEDAR.Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements with 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 Factors 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 reminded that today's call is being recorded and broadcast live via the Internet for the benefit of individual shareholders, analysts and other interested parties.I'd now like to turn the call over to the CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator, and good morning, everyone. Joining me this morning are Carmele Peter, EIC's President; Darryl Bergman, our CFO; and David White, our VP of Aviation. On our first quarter results call in May, we followed a unique format where we had several of our subsidiaries speak about the impact of COVID on their operations and what plans have been made to deal with it. This quarter marks the second report since the onset of the pandemic, and we will return to a more traditional format, which includes commentary from myself, our President and our CFO.On the Q1 call and in our Q1 report, we laid out our plan to manage in the COVID environment. The plan included the safety of our customers, our employees and all stakeholders. It also included adopting our service offerings to meet the changing needs of the public. It included managing our cash resources through the challenging period to ensure we have the resources to take advantage of opportunities for long-term growth that are uncovered. And finally, we prepared for increased demand as the pandemic was better controlled in the future.The second quarter was less about planning and more about execution. Putting the plans into actions, and we are very pleased with the progress that we've made. The majority of our revenue and earnings are driven by the Aerospace and Aviation segment. As such, there has been a tendency within the market to view EIC as a similar to traditional North American air carrier such as Air Canada or Delta. This comparison is fundamentally flawed. Even within the Aerospace and Aviation segment, our operations are very diverse. With medevac, freight, flight training, maritime surveillance, part sales and equipment leasing, in addition to the passenger business. In addition to this diversity within the segment, we have our manufacturing businesses that operates in other diverse marketplaces. The value of this diversification strategy has never been more apparent than during this quarter.The airline comparatives are dealing with ongoing passenger declines of over 80%, and we're describing their business in terms of how many millions of cash per day that is being lost. Our airlines experienced passenger declines of over 90% at the beginning of the pandemic. But the essential nature of the service we provide have seen volumes recovered to 40% to 60% of normal depending on the geography of the operation. We expect these levels to recover quickly when travel restrictions are reduced or lifted. Our return to pre-COVID levels will be described in weeks or months, not years when the pandemic is finally brought under control.Our revenues decreased 25% year-over-year to $244 million, and EBITDA fell by 29% to $62 million. We remain profitable with adjusted net earnings of $0.16 per share. When the pandemic began, we chose to maintain our dividend of $0.19 per month to our shareholders, which made us an outlier in the aviation business, as most cuts or canceled their dividend in its entirety. However, not only do we keep the dividend in the previous levels, we committed to fund an all-sustaining capital investments from operations without increasing our debt levels. I am pleased to report that we not only met that commitment. We have significantly exceeded it.Our payout ratio for the quarter was 78% of the free cash flow less maintenance capital expenditure basis, much stronger than the breakeven 100% payout ratio commitment. Trade management of both maintenance and growth initiatives, together with strong working capital management and a stronger Canadian dollar have enabled us to reduce our secured debt, net of cash by $40 million. We paid our dividend, funded our capital investment and paid down debt.Our focus, however, was not just on surviving the pandemic, but rather was focused on returning to expansion when the pandemic is under control. Subsequent to quarter end, we announced the closing of Window Installation Systems or WIS, a window group measure located in the west coast of the United States. WIS has served as the installer of Quest windows since it entered this market a decade ago. The acquisition of this company is very similar to the purchase of AWI in the fall of last year. AWI is the installer of Quest products on the eastern half of the United States. These 2 transitions -- transactions, I'm sorry, in addition to being significantly accretive to our shareholders are strategic. As Quest, as in Canada, will now have a -- provide a single point of contact for all customers, for both the design and purchase of windows and for their installation. Installation makes up a significant portion of the window budget and by internalizing this function, Quest now benefits from the entire project on future contracts.Provincial Aerospace, together with its partner -- local partner, JetSupport, was selected as the best bid in the Netherlands Maritime Surveillance contract. The opportunity cost of 2 adaptive DASH-8 aircraft and the contract when executing will have a 10-year term together with 2 1-year options. The contract is material financially and is expected to contribute immediately upon the planes going into service in late 2021.The award is also highly strategic as it's PAL's first major surveillance contract in Europe. It increases PAL's profile of the surveillance community and extends the strength of newer expanded contracts for the company. Work on 2 DASH-8 aircraft is expected to begin later this year, where the aircraft earmarked for the enhanced Department of Canada's Fisheries contract are completed and put into service.I'm pleased to report that as of today, the 20-day response period for this contract in the Netherlands has past, and we will now proceed to negotiating the final terms of the contract with the government.The various components of our Aerospace and Aviation segment have fared quite differently during COVID, and I will speak briefly on each of them. Carmele will add a little color on the future in her closing remarks.Our medevac business is in Nunavut where we are the sole provider of service and in many provinces where we are one of several licensed operators, saw a significant decline in demand of approximately 1/3 early in the pandemic. Many medevacs are used to transport patients who are not healthy enough to fly off a scheduled flight to the south for medical diagnostic appointments. Early in the pandemic, all but the most urgent of these trips were postponed. And as such, demand declined significantly. Over ensuing months, the demand for service has returned to near pandemic levels.Our maritime surveillance contracts were largely unaffected by the pandemic. While margins faced some pressures from the cost and safety initiatives put in place to protect our employees and to prevent workplace spread of the virus, small delays in the start of the fisheries contract and the ramp-up of fixed rig search and rescue contracts have experienced that they are not material -- nonmaterial issue. The Force Multiplier did not fly during the second quarter as governments focus on other pandemic issues.Prior to the pandemic, discussions were underway with a number of countries for deployments in the second quarter and beyond. Some of these discussions have been restarted and some shorter-term deployments have already been scheduled for the third and fourth quarters.Our freight business has been largely unaffected by the pandemic. And in fact, in some markets, it has led to an increase as the community members have remained at home and not traveled to southern centers to shop. Some of this freight is delivered on combination aircraft of both passengers and freight on board. The dramatic decline in passenger revenue led to a reduction in frequency of service in northern communities, which in turn resulted in alternate freight delivery mechanisms being replied.Pure freight aircraft have lower margin than combination flights, and this did put some pressure on margins in spite of the increased volumes. Recent increases in passenger loads, however, have facilitated increased frequency, which has now alleviated this concern.Most in-flight calls was closed for a period during the second quarter as it was not considered essential service by the Provincial government. It is back in service, albeit at less than full capacity.The demand for international student training remains strong, but there could be some dislocation later this year if international travel is not available to take graduates home or bring the new students here.Passenger volumes were very dramatically impacted by the pandemic, following by 90% in early April. It was always the most essential travel being around in attempt to keep the virus out of remote communities. As the pandemic has become under better control, volumes have increased, although not evenly across the country. We are now operating at 40% to 60% of normal volumes. Travel restrictions and quarantine requirements remained in place in some markets. Nunavut, for example, requires a 14-day quarantine for anyone who is returning to the territory from a trip to the south. As these restrictions are less if not removed, passenger volumes are expected to rise very quickly.Regional One, our aftermarket parts of leasing company has been the hardest hit of our subsidiaries. R1 specialized in regional jets and large turboprop aircraft, which are operated by carriers around the world. It is very well publicized. The airlines throughout the world have dramatically reduced operations and are flying far less, which is a direct and immediate impact on the need for parts, engine and aircraft sales as well as leases.We have begun to see an uptick late in the second quarter, but the resurgence of the known cases in the United States has muted the short-term improvement. Carmele will come back to the outlook for Regional One in her comments. But material improvement in Regional One's results will not be seen until 2021 when regional jet volumes have increased.Our manufacturing sector was impacted by the virus as the process changes required to keep employees safe and prevent the spread of COVID impacted margins. Demand was surprisingly strong across the segment with the exception of our Alberta and B.C. operations, where demand was well more than normal. These operations in the 2 westernmost provinces, they have a very small part of EIC's total, less than 3%. And as such, the impact was small. LV Control, Ben Machine and stainless fabrication all performed strongly through the quarter, and the outlook remains positive.Quest also performed well in the period but dealt with the most dislocation as the result of the pandemic. COVID hit different parts of the continent at different times, and this resulted in construction job sites opening and closing at different times throughout the quarter. We also dealt with production employees becoming ill with COVID to contact outside of our plants. Our first job was that we configure our production facilities to socially distance our employees to the greatest extent possible. This was simpler in Dallas because of the size of the new plant. And much more challenging in Toronto, where we did not have the extra space to spread into. We actually chose to close the Toronto plant briefly on few separate occasions in order to ensure the safety of our team.Our order book remains robust, and we continue to be bullish on the short, medium and long-term outlook for Quest, as evidenced by our recent acquisition of Legacy. We expect there to be continued inefficiency from the adjustments to project schedules and COVID plant configuration in the near term, which will subside with the pandemic.One last topic before I hand the call to Darryl for a more detailed look at the numbers. We have received approximately $29 million in series payments of the federal government. We've utilized these funds to maintain employees who either -- otherwise we had to layoff or terminate. It also enabled us to maintain a higher level of service in certain communities that wouldn't have been possible without the program. It enabled us to do a better job in looking after our people and our customers.I will now hand the call off to Darryl, who will walk you through the second quarter financials.
Thank you, Mike, and good morning, everyone. Within the quarter that was marked with the unprecedented challenges of having to deal with the continuing COVID-19 pandemic, the Corporation through the actions of management and staff across all our EIC companies, were able to maintain positive cash flow after capital requirements and payment of dividends and reduced net debt in the most challenging quarter the Corporation has ever faced. This, in turn, is a testament that our distinct business model is sound, even in the most difficult times. The financial results for Q2 2020 that I will summarize here to follow, were negatively impacted by the COVID-19 pandemic. I will caution that the comparability of current results without a prior period is materially impacted due to this unprecedented event. Conclusions taking into account any comparability should be made carefully given the current circumstances affecting results.Before turning to the discussion on Q2 2020 financial results, I will leave with comments regarding the Corporation's balance sheet and liquidity. To begin, it is noteworthy to reiterate that the size of our Corporation's credit facility as of June 30 was approximately $1.3 billion. In addition to that, the Corporation can access another $300 million in an accordion feature, should we choose to exercise it.Utilization of the corporate credit facility was $802 million at the end of the quarter. This is a reduction of approximately $90 million from the quarter end of Q1 2020, which is comprised of a repayment of debt within the quarter and changes in foreign exchange on the U.S.-denominated debt. With the lower long-term debt and $66 million in cash on hand, net debt decreased by approximately $40 million in the quarter to $736 million, giving the Corporation near-term access to $564 million in liquidity, excluding the accordion.As Mike noted, tight management of both maintenance and growth initiatives, together with strong working capital management and a stronger Canadian dollar have enabled us to reduce our net debt. In addition, it should be noted that the company has no long-term debt coming due before December 2022. At the end of Q2 2020, our leverage ratios remain well within our covenant with lenders. Even with the current challenging environment, we are committed to the supporting principle of our business model, which has always been a strong focus on our balance sheet with modest leverage and good liquidity.Subsequent to the quarter, the Corporation amended its leverage ratio from a maximum of 4x to 5x for the fiscal quarters ending December 31, 2020, through September 30, 2021. The amendment was unanimously supported by our syndicate of lenders, reflecting a strong support for and confidence in the Corporation.Given the Corporation's opportunistic DNA, the increase in the covenant was solely intended to provide the Corporation with flexibility under the credit facility to drop further capital in the future to take advantage of opportunities that either prove an investment criteria as they present themselves.Inclusive of the impact of all announcements to date, management continues to expect to be within the original 4x covenant. Management has also not changed its attitude towards or appetite for debt. Further on our balance sheet, we ended Q2 2020 with working capital of $339 million, which represents a current ratio of 2.28%. This compares to working capital of $308 million and a current ratio of 2.1% at the end of 2019.I will turn to a summarize discussion on financial results, a more fulsome explanation of results can be found in our Q2 2020 MD&A. In Q2, we generated revenue of $244 million, which is a decrease of $82 million or 25% from Q2 2019.Aerospace and Aviation segment revenue was down 41% from the comparative quarter in 2019 to $140 million. Revenue from the Legacy Airlines and Provincial decreased by $61 million. Passenger volumes in the airlines were down as much as 90% early in the quarter, stemming from the reduced demand as a result of COVID-19. Passenger volumes gradually improved throughout the second quarter, operating at 40% to 60% of normal volumes, with scale of improvement varied by geographic region, depending on travel restrictions and quarantine periods specific to the region. Cargo volumes remain strong after the onset of COVID-19. The strength can largely be attributed to the communities that we service, continuing to need essential goods and supplies. Medevac and charter operations were also impacted by COVID-19 factors early in the quarter but gradually normalized to pre-COVID-19 levels towards the end of the quarter. The impact of COVID-19 on the Aerospace segment was minimal due to the contractual nature of the work, except for the force multiplier aircraft, which was idle during the second quarter while governments globally were focused on the pandemic.For Regional One, revenue decreased in the quarter compared to the same period last year by $39 million. Regional One's operations have greatly been impacted by COVID-19. Regional One's business is dependent on traditional, regional air carriers and lower travel throughout the world has put pressure on all of its lines of business, including parts sales, aircraft and engine sales and leased revenues.The sales and service revenue stream decreased by 49% in the quarter compared to the same quarter last year. The level of sales bottomed out at the beginning of the quarter, gradually improved throughout the quarter and installed at the later stages of the quarter with a resurgence of the pandemic. Aircraft and engine sales were down significantly from prior period as the airline loved to defer large purchases.Lease revenue decreased by $17 million or 71% in the current period, due to a significant drop-off in customer demand and utilization of the Corporation's lease assets.Turning down to our Manufacturing segment. Revenue grew by $17 million over the prior period. The total revenue for this segment was $104 million. Cost was higher than the prior period, reflecting the acquisition of AWI in the fourth quarter of 2019 with no comparative in the prior period and increased production at its Texas plant. AWI has consistently outperformed our expectations since acquisition, including outperforming pre-COVID-19 forecast during the second quarter of 2020. The balance of the statement collectively experienced an increase due to the acquisition LV Control in the fourth quarter of 2019. It should be noted that all of EIC's subsidiaries within the manufacturing segment redeemed essential businesses at the onset of the COVID-19 pandemic and have continued to operate. That said, management measures were implemented to ensure the health and safety of staff because of the impacts of COVID-19 have reduced efficiency and throughput despite robust demand.Moving to EBITDA. Consolidated EBITDA was $62 million, down 29% or $25 million for the quarter compared to Q2 2019. The primary contributing factor to the decrease can be attributed to the impact of COVID-19 on both segments. $4 million of the reduction in EBITDA was caused by a pending reassessment of certain input tax claims that related through several years for which a charge was booked in the second quarter of 2020. While we have conservatively accounted for the reassessment in the quarter, the Corporation does plan to pursue an appeal.EBITDA in the Aerospace segment in the quarter was $47 million, a decrease of 41% compared to the prior year. EBITDA generated by Legacy Airlines and Provincial decreased by $11 million. The Corporation quickly adapted its operations to mitigate the impacts of COVID-19 travel restrictions and implemented cost reduction measures through scheduled frequency reductions, labor rationalization and various reduction strategies and qualified for the Canadian Emergency Wage Subsidy program.EBITDA for Regional One decreased by $21 million from the prior year, contributing to the lower comparable, the decrease in revenue across all lines of business, with the most significant being the $17 million reduction in high-margin lease revenue. In the Manufacturing segment, EBITDA was $22 million, an increase of $6 million compared to the same quarter last year. The increase was driven by the same factors I noted for revenue. Margins in the Manufacturing segment continued to be impacted by lower efficiencies from social distancing protocols implemented in the plant and higher costs from sanitization and personal protective equivalent.Turning to earnings. In Q2 2020, the net earnings was $3 million, a decrease of $19 million compared to the prior period. The Corporation generated lower EBITDA compared to the prior period as previously discussed and -- which mostly explains the earnings variance from the prior period. Net earnings per share decreased from $0.68 per share in the prior period to $0.08 per share for the current period. It should also be noted that in the period, the weighted average number of shares increased 8% over the prior period which has impacted the per share amounts in the current period.Adjusted net earnings was $6 million, a decrease of $21 million from the prior period. Adjusted net earnings per share was $0.16 per share, down from $0.83 for the prior period.In Q2 2020, free cash flow was $42 million, or $1.21 per share, a decrease of $23 million from the prior quarter. The main reason for the decrease is the decrease in EBITDA. Free cash flow less maintenance capital expenditures per share decreased by $0.35 per share to $0.73 per share in the quarter.The Corporation's payout ratios in the quarter were negatively impacted by COVID-19. The payout ratio for the quarter was 78%, which is much stronger than our 100% payout ratio commitment. And given that it occurred at the height of the pandemic lockdown, management believes it is a testament to the resilience of our business model and our subsidiary operations.We were able to generate sufficient positive cash flow to fund our capital needs, our dividends and pay down debt at the same time. To allow for variations due to seasonality in the business, we continue to utilize the calculation of payout ratios on a 12-month trailing basis. The free cash flow less maintenance capital expenditure payout ratio on a 12-month trailing basis increased to 76% from 54%.Before I pass the call on to Carmele, I would like to note that within the quarter, the Corporation reviewed all available programs and government aid in each jurisdiction in which it operates.In addition to the CEWS, which Mike noted, in the quarter for the Corporation, also received modest support from the government of Nunavut in the form of a revenue guarantee, which allowed for the Corporation to continue to provide a level of vital services to our Nunavut customers. The Corporation chose not to participate in the Payroll Protection Program in the United States.Without the substitutes and aid received, the Corporation would have sought to offset a significant portion of the subsidies received by way of cost reduction to other things such as significant reductions in workforce or as it pertains to airlines and frequency of service.The federal government has recently announced a new bilateral program with the provinces and territories to support air service into isolated communities. We expect EIC Airlines to qualify for this program, but no details have been released on how to qualify or if the relevant provinces will choose to participate. We look forward to the details of this program being announced.That concludes my review of our financial results and comments. I will now turn the call over to Carmele. Carmele?
Thanks, Darryl, and good morning, everyone. I'm going to focus my comments on the outlook for the balance of the year for various lines of business and EIC as a whole. Although no one can predict with any degree of certainty what the next chapter the COVID virus will bring, looking forward to the balance of 2020, we expect sequential quarterly improvements in our consolidated results even as the CEW subsidy is phased out. The level of recovery, however, will vary between business lines and geography.As Mike indicated, our scheduled passenger volumes are currently about 40% to 60% of normal as many of the communities we service still have travel restrictions and quarantine periods in place. As these restrictions are eased, passenger volumes will rebound quickly to historical levels as there is pent-up demand. This demand is driven by the fact that the underlying reason for movements in and out of the communities is essential or near essential travel, like medical travel, movement of health care workers, trade people and resource sector workers.The recovery we have seen to date, where we have rebounded from being 90% below normal in April, when problem restrictions were the most severe, to where we are now at about 40% to 60% of normal, with only some of the communities opening up or easing restrictions, provides a sense of the speed of recovery we expect.The slowdown in passenger travel has meant an increase in demand for freight for the reasons Mike explained. This increased demand is expected to be sustained through the balance of the year, even if communities open up although the mix of cargo will likely revert back to more historical norms. During the height of the pandemic, almost all the cargo we moved was essential goods like groceries and mail. As people start traveling out of their communities, there is likely to be some reduction in essential goods freight, but an increase in the movement of discretionary items and construction materials.Charter work is nearing normal levels and in some regions, exceeding historical volumes, assisted by the work we secured from Indigenous Services Canada to move health care workers into the north and all 10 provinces, and the resumption of various resource projects requiring movement of workers in and out of the cash.Similarly, our medevac business has returned to more historical levels as government resumed moving nonurgent medical patients who cannot travel for medical treatment on scheduled flights. We expect both of these trends to continue. The Aerospace division will continue to perform materially unaffected by COVID for the balance of 2020 and will be assisted by the resumption of operations of e Force Multiplier after being idle in Q2 and the start of a new DFO contract towards the end of the year. The resiliency of the Aerospace sector is perhaps most evident from the fact that the Netherlands Surveillance contract tendering process was completed. PAL Aerospace, together with its partner, JetSupport Holding, were selected as the successful bidder, and a contract will all be concluded in the middle of the pandemic. This contract solidifies PAL Aerospace as a leader in international ISR solutions and builds on expertise in operations in Canada, the Caribbean, the UAE and now in the European Aerospace market.Regional One is a subsidiary that has been hit the hardest and will be the slowest to recover as it is dependent on the improvement of traditional regional carriers. The regional jet market is expected to return to service sooner than larger body aircraft. For mainline carriers trying to restore their networks under the weight of the pandemic, passenger volumes will be very low to begin with. To minimize those losses during low demand, mainline carriers will look to utilize regional aircraft. The role of regional aircraft and recovery of the airline industry will create increased demand in regional aircraft parts and engines as customers look for economic part solutions and ways to avoid expensive shop visits. Regional One is well positioned to be that solutions provider.With the recent resurgence to new COVID cases throughout the world, the commencement of the recovery of the regional jet industry has stalled. We anticipate a measured recovery for the balance of 2020 with no material improvements until 2021. However, with challenge comes opportunity. Regional One data-driven knowledge and discipline has always enabled it to acquire assets that are in the money, such that the end of asset value is greater than the acquisition value. However, the environment created by COVID-19 provides even greater opportunities to access assets at favorable values. The lower acquisition prices enhance potential returns, provide a greater cushion of time and flexibility to monetize the asset and create new opportunities for Regional One's customers to step up into aircraft that they could not previously afford. These investment opportunities will drive future growth.We expect demand overall in our manufacturing segments to remain strong, but with continued reduced demands in some project deferrals due to the impacts of COVID. Our manufacturers have settled into the norm of operating in a COVID environment and are focused on finding different ways to mitigate the impact of the virus. This is included, for example, overall in shift structures to attain social distancing but increase overall production hours. Also, the recent acquisition of WIS, together with the purchase of AWI late in 2019, now vertically integrates Quest in all of its markets and provides a strong foundation for further growth.Turning now to our CapEx outlook. Our maintenance CapEx is primarily driven by our Aerospace and Aviation segment and moves in line with our scope of operations. As flight hours decrease, as we did in Q2, so did our maintenance CapEx. This level of maintenance CapEx is expected to gradually increase over the balance of the year as our flight hours increase.Material growth capital expenditures for the balance of 2020 are comprised of completion of the DFO aircraft, which will be operational by the end of the year and the acquisition and the start of the missionization of the 2 DASH 8 aircraft required for the start of the Netherlands Coast Guard contract, which are required to be completed in about 17 months. No other material growth CapEx is expected. However, we will take advantage of opportunities if they arise.Although there is much uncertainty in the world, our conscious has been our business model and our execution of it. Our business model has developed to achieve -- has been developed to the 3 objectives, which we have set out in each and every MD&A since our inception. Since the best predictor of the future in the past, I thought it useful to conclude that this outlook section by seeing how we fare in achieving our objectives in the most difficult times and how this bodes for the future of EIC. EIC's first objective is to provide shareholders with stable and growing dividends. Q2 was undoubtedly the most challenging quarter in our history, yet we were able to generate free cash flow from our operations and manage our working capital to not only pay all of our capital expenditures, our dividend but also pay down our debt by more than $10 million. And we are just getting stronger, as is our confidence in our ability to continue paying the dividend.Our second objective is to maximize shareholder value through ongoing active monitoring of and investment in our operating subsidiaries. What did we do in the midst of a pandemic? We secured a new long-term maritime surveillance contract in the Netherlands, we invested in Q400 aircraft to meet the growing demand of the customer, we modified 2 DASH-8 aircraft, increased cargo capacity, just to name a few examples.The strength of our balance sheet allows us to not simply focus on cost-cutting to manage through the pandemic. It allows us to cash or opportunities to add shareholder value and come out of this crisis well positioned for growth. And we will continue to invest in our companies to create shareholder value. For example, we are assessing the void left by other air carriers, the opportunities to access new revenue streams with larger gauge turboprop aircraft, and investigating and providing alternative service delivery models in the Aerospace sector as governments look to outsource services to lower costs and reduce debt.The current objective is to continue to acquire additional businesses or interest therein to expand and diversify EIC's investments. We have done exactly that as is evidenced by our acquisition of WIS at the end of July. And the pandemic will not stop us from pursuing additional acquisitions, whether that be standalone businesses, tuck-in or asset purchase opportunities at Regional One.So what can you expect in the future? More of the same. Continued tenacity in the execution of our business model and achievement of our objectives. Finally, before moving on to questions, I want to thank all customers, shareholders and stakeholders for their ongoing support, and all the people who put themselves at risk to look after the rest of us.We would now like to open the call for questions. Operator?
[Operator Instructions] First question comes from Chris Murray with ATB Capital Market.
Just maybe turning back to the government of Canada support announcement for remote communities. As part of that announcement, they also put out a, I guess, what they call a background document. And just sort of connecting the dots, it really does look to impact a lot of your operations in Manitoba, Ontario and Nunavut. And I also get the impression that the Nunavut program that you've been running or participating in is maybe tied to this somehow. Can you give us some more color on what you think that they're proposing? And I mean is this intended to be, call it, a direct subsidy or is it more to treat the, I guess, the service as a utility and just kind of give you a minimum guaranteed return?
I think -- first of all, good, I [indiscernible] we haven't seen the precise details. This is from discussions we've had over the last 3 to 4 months till this was put in place. But the concept is they understand that we can't stop flying into certain communities because it's the essential service. And they know that you could only lose money for so long flying to those communities. So the idea is to provide some revenue effective guarantees to make sure that you can afford to continue to provide the service. The plan had at Nunavut that was similar to that in the past. That period -- program expired at the end of the quarter where they made sure that if we made a certain schedule, they would buy a certain number of tickets, and we did get some modest support of that of $2 million or $3 million out of that program. We expect that the new program will be similar, but the challenge is going to be that it's meant as a bilateral program with these comments. So they've got to lay down these parameters of the province, then we have to negotiate with these province. So while we're very exciting to see this, we view this as we're just kind of getting started. We got to talk to the government, tell how it's going to work. And I think it will be very important should we face a second wave and we see a decline in volumes again. I think this is as a backstop will be very valuable. Hopefully, if we don't see that, we'll outgrow this program very quickly because volumes will be such that we won't require it.
All right. And the activity level would apply. Essentially, in a lot of ways, it's almost like you're running a CPA on behalf of them because you're probably being indifferent to passengers or cargo, just to maintain the support to the communities, is the way to think about it?
Yes, exactly. I mean as much as a pounded passenger is about the same as a pounded freight. The beauty of the passenger is they go south and north whereas freight largely goes just south to north and the planes are to fall. So the more active the passage of business is, the more efficient the business is.
Okay. Fair enough. And then my other question is just on the quarterly cash flow. You made a comment about you're able to manage your working capital and cash flows in such a way that you're able to fund the dividend and your maintenance capital expenditures. So I guess a couple of questions about that. I mean, first of all, you received the Q2 payment in the quarter. And just any thoughts around what that might do to Q3. But a dwell, certain companies have been telling us that they've received other benefits, tax deferrals, things like that. So I guess just trying to think about the rest of the year, how should we be thinking about, call it, an unusual quarter of levers pulled to manage working capital? And how that might unwind through the back half of the year?
Well, I think if we start with working capital, as the business grows, we'll undoubtedly have a growth in receivables because we're doing more business. And I wouldn't expect to see any more funds generated from declines in working capital, but we will stay on top of that to make sure that the bills of working capital to the extent there is one is at a bare minimum. As it relates to other support, we really haven't taken advantage of any deferrals. We paid those sort of as they do. We have taken advantage of the CEWS program. It helped us maintain more employees than we otherwise could have. They're skilled employees that you don't want to lose, and it's helped us not do that. We certainly expect to see that phase out over this quarter or certainly phase down dramatically. But the growth of the business is expected to more than offset that, and we're expecting sequential improvement. So we're bullish on that.And I think the final thing I'd like to point out is, there were other programs we had the option of tapping into. The most obvious one being the PPP program in the U.S. And we qualified based on the pure rules of the program, we chose not to access it because the program was intended to support businesses that might not been able to get through the period without the support. That was never in the case with us and we thought it was disingenuous to draw those funds. And as a result, we chose not to. And so as we exit this, the way support program is the only current EIC program, size program, materials EIC, the relationship with the government due to this has been awesome. They've been a great partner. And that's a big part of how comm's been able to do what they do. But at an EIC level, that's a very modest-sized program.
Okay. And just to follow-up, so just wanted to know if I understand correctly. So the staffing levels that you maintained in Q2, which were offset by the CEWS program. Your expectation is the activity levels in Q3 will probably be able to absorb all that staffing kind of in a normal fashion, is a way to think about it then?
The -- that will be the shortest answer of the day. Yes.
Next question comes from Cameron Doerksen with National Bank Financial.
So I guess, maybe a question on the restrictions that are still preventing a fair amount of the ramp-up in flying activity, do you have any sense of when some of these things are going to be eased, like in Nunavut, for instance? And I guess there's even individual communities in Manitoba, for instance, that have restricted access? What's your sense on when some of these things are going to start to ease up?
Discussions with the government of Nunavut are ongoing. We believe they're going to go to a model in the near future. So that's weeks to a short number of months where they will test when people return to the community. And that will -- and then quarantine within the community as opposed to quarantining in the south, which will have a dramatic impact on the number of people buying that sometime. I mean, it depends on what happens with the number of cases, but the government intends to move forward with that. Our understanding is over the next 60-day kind of thing, again, I'm just thinking on behalf of somebody else, and there's always a huge risk in doing that.In terms of Manitoba, it's highly variable, same in Ontario, it's highly variable based on the commuters experiences in the past. Northwestern Ontario as an example, experienced a very difficult time with the SARS outbreak a decade ago. And as a result, the restrictions in northwestern Ontario would be far higher than they are in Manitoba. And so ones at the high end of that range was at the low end. Having said that, as governments have come to grips with the fact that this is going to be about managing COVID, not eliminating it, I think you're going to see programs because to travel more simply because the medical needs that those people are traveling for, whether it's to go see their orthopedic surgeon about their hip or go see the cardiologists or go see the kidney doctor, those aren't going away. And you could only defer those for a period of time. And so we expect that those volumes will continue to rise over the Q -- the third quarter. They likely plateau somewhat less than 100% of normal, which is some of the pure discretionary stuff may not come back to variant things like fishing lodges and those kinds of things may not return until next year. On top of that, we anticipate continued growth in those passenger loads sort of on a progressive basis over the ensuing period with the big asterisk that if something else happens with COVID, it could change.
Okay. No, that's helpful. And just my second question relates to Regional One and specifically, on the aircraft leasing revenue, I mean, obviously, down significantly year-over-year. I'm just wondering how you're accounting for that? I mean, it looks to me like if you've got an airline that's leasing one of your aircraft vis-à-vis the one that -- if they're not paying you, you're not recording that as revenue. Have I got that right? Or are you actually building some receivables in there somewhere from deferred payments or anything like that?
The answer is no. We are not. We are only recording revenue that we expect to receive. And in fact, our receivables, if I were to look over Q1 and Q2, I'd say 2/3 of those have already been collected, just to give you a sense of kind of how we're dealing with this even if differed does not get recorded.
Okay. Okay. That's helpful. And maybe just quickly, a third question, just on the, I guess, the manufacturing margin in the quarter. I mean, obviously, there was some, I guess, some benefit from government subsidies in there. But I'm just wondering, what kind of a more normalized margin or sustainable margin might look like? You've acquired some business this year that I think are in the last 6 months or so that are probably positively contributing to margins. So just any commentary around sort of the go-forward manufacturing margin would be helpful?
Products make a huge part of that issue. When you look at our manufacturing stuff, where we make things in factories, so whether it's a bed machine or Quest or stainless fabrication, those tend to be higher margins. Some of the stuff we do in the field, where we're doing service work, WesTower, for example, would be lower margins. So product mix is a large driver of this. The things we've bought recently, we tend to be towards the higher end of the margin structure, whether it be the glazer or the LV controls -- and you are right, to the extent there is a benefit to the bottom line of the CEWS would be as a manufacturer because the demand remains strong for those, and we did have some benefit of CEWS in there. So that helped the margin profile in manufacturing in the quarter. We would expect, from a big picture point of view, that as things stabilize, we would see an improvement in margins over time, from margins from operations, simply because the amount of work that went into keeping our people safe, shutting down plants, COVID-proofing for a lack of a better term, is significant. And I don't want to give anybody the misinformation that, that's somehow changing. That is exactly where we're staying. We've put a lot of effort to get to where we are. But in the future, as we get to this nasty pandemic under control, we will be able to see some improvements in margins as we put more people into our factories. That's not expected in the near future, however.
And in the second quarter, we did experience, what we will call some ebbing and flowing, in particular, at Quest. And we had some of our job sites shutting down because of COVID and then reopen and they shut down again. So that was obviously challenging. And in the comments I made one of the points was that, we were settling into how we need to operate our manufacturing factories. And as such, our focus now is actually improving efficiency. So this is the new norm, but how do we get better. And we're starting to see some changes that are driving some increased efficiencies for us.
Next question comes from Steve Hansen with Raymond James.
Just a couple for me. Can you -- Mike, you referenced the opportunity set, the near term, medium and long requests in your remarks. I'm just wondering if you could speak to the near-term demand profile as you see it right now? Just trying to get a sense of how much dislocation might still be out there. There have been a number of public companies reported in the U.S. recently on the building product side. Not perfect comps admittedly, but they all seem to have very strong rebound built into their profile and even through the quarter. So just tying to get a sense for how that business is performing today relative to norm and sort of what you're seeing here through the balance of the year?
So in the near term, our biggest challenge is simply just changes in the timing of certain projects that have been delayed or not delayed and making sure we can get those delivered on time. And so it's really just shifting of capacity. We were booked to a very high level of capacity before this happened, and so just keeping up is the challenge. In the medium term, our order book is strong. The completion of new projects, the delays in terms of the final award of some of those, so you may see pockets in the next couple of years where...
As progress push out -- is everything a bid off -- what is a little more challenging as we -- looking in the medium term, if we really just pull in new workers, with an easier task a year ago. So as we saw smooth production previously to the extent something gets pushed, harder to fill, so you might, in the medium term, see a little bit of some pockets of us not being having the throughput that we have had in the past, but the demand long term is very strong. We're still definitely quoting a lot. We don't see any reduction in that regard. So still fairly optimistic in that space.
And in the long-term part of it, Steve, is driven quite simply by densification of markets. And we've seen this through dislocation before in 2008, 2009. There wasn't a hiccup in Toronto, as an example, in terms of our building. The simple fact is that people who live in major centers, it's too expensive to build low-level housing. So it's high-rise buildings, which are our strength. So we're very bullish as we -- I don't think there's any greater evidence of that than investing USD 40 million plus in the purchase of WIS.
That's a good segue. Mike. Just wanted to ask about the capability profile there now. You've got the AWI previously, now you've got WIS. I mean, do you need -- is that done? Like, do you have the complement that you see now as a service profile for the U.S.? Or do you need additional capabilities on the service side over time?
No. That covers everything off. In Canada, we always looked after our own installation. In the U.S., we use these 2 third-party companies. And the beauty of this is, as we expand into new cities, you'll recall, we're in a relatively limited number of markets with Quest, the western seaborne and a little bit in the northeast. As we move into the Dallases and the Houstons and the Miamis of the world, our window installers will grow with us. Our experts from AWI and WIS will continue. So as we move into those markets, we'll no longer have just the procurement part of the project, but we'll have the installation part of the project. So each project will be worth more money.
Next question comes from Mona Nazir with Laurentian Bank.
Congratulations on the quarter. So my first question is just maybe another way of asking a prior line of questioning. And that would be, what would reasonable expectations be, if I'm thinking about you guys receiving aid in Q3 and Q4, specifically in regard to the Canadian emergency wage subsidy? I understand that you are expecting and already seeing a pickup in demand, which would ultimately reduce that. But if the figure perhaps $5 million or $10 million versus $29 million in Q2, I'm just trying to get my head around it.
The calculation for CEWS is such advanced math, we're still running different models on exactly how to qualify because you can claim it on an individual company basis and you could comment about a consolidated basis, and you can claim it under the old program and the new program. I think it's safe to assume you will see a decline in the range of half -- and my controller is glaring at me right now for giving a number because it's really hard to determine exactly how it's going to work with the rules or where the numbers shake out, but there will be a material decline in Q3 and what's left in Q4 will be quite small. In stock, by the time we get to Q4, the amount is not material.
No, that's very helpful. That's great. Exactly what I'm looking for. Secondly, just in regard to the recent acquisition of the window installation company, in the press release, you provided the purchase price, but I was just wondering if you could give revenue, EBITDA contribution or what we could expect. I'm just -- I understand the vertical integration and complementary nature of the acquisition versus Quest and AWI, but just wondering if you've talked about your thought process of why purchase now, especially when you were looking to bring in spending.
Okay. No, I'm not telling you an EBITDA. I will tell you that when we released AWI, we told you those transactions. We're accretive on a pure equity basis. This transaction will be no different. It's at the very low end of the multiples we pay because of the symbiotic nature of the 2 businesses. We're the natural buyer. So you can work backwards off that and get a pretty good estimate. The other thing we said, when we bought AWI, which isn't much different here, the backlog of about 3 years pay us for the majority of the company. So those are 2 sort of nudges of the rate direction.In terms of why now, we were way down the road with this before COVID. When COVID hit, we literally paused because we were so busy trying to juggle the balls of this job is closed, this job is open, hurry up and catch up on this job, slowdown of this job. As we got that under control, we did a little third-party due diligence to confirm what they thought the market would look like in months and years to come, and it was directly in line with our thoughts. And so because we knew the people, because we have negotiated a deal, largely going into COVID, and because we did due diligence and because we did that we do with the order book, there was no reason to not take advantage of the profitability of the project to not close the deal now. Its strength in Quest. It's a very unique deal, Mona. In that, it's highly accretive from a financial point of view, but it's also highly strategic in terms of allowing us to grow in the future, internalize processes, and quite frankly, they get easier for our customers. They know single point of contact. And if the way those aren't installed on the right time, there's no debate about whether how the installer is late or the production was late. It's our fault, no matter what it is. So it makes it easier for the customer, easier for us and makes it easier to pay the dividend with the returns.
It also showcases the EIC business model quite well, in my view. There's a couple of different ways you can do with -- in an a pandemic. You can put your head down, focus on cost and use that as your sole tool to manage through it. That's not our view. We have a balance sheet that's strong, that enables us to seize opportunities. And for the reasons Mike stated, we felt comfortable we were able to build a due diligence on this deal, and we knew we can be very accretive. So it was an opportunity that we took advantage of. And if other opportunities like that arise, we will continue to take advantage of those opportunities. And because that will continue to recall our growth going forward.
Perfect. That's great. And I want to be cognizant of the time. But if you could just share perhaps the biggest takeaway or mostly there's been surprise while working through this pandemic?
Okay. I'll -- maybe Mike have different answers here, but I'll go first. To me, it's our people without a doubt. How they've stepped up, how they've effectively almost done the impossible in managing operations and putting themselves on frontline, given the nature of all the things that we do and products we make, it was coming up with ideas to be able to take care of need that we have as a society, whether that's the manufacturer of face shields or IV ports, everyone stepped up. And that created a big family, and we got through this successfully as these quarterly results show, and we contributed to trying to minimize the impacts of the pandemic.
Yes. I have to agree with Carmele. I think the biggest sense of price takeaway is the cross-collaboration within the organization as well. And just that overall effect of a family and making sure that, as an overall company, our health is strong going forward.
Next question comes from Konark Gupta with Scotiabank.
I would like to know at what level of capacity or loan factor did the Legacy Airlines breakeven on cash flow in the current fuel price environment?
That's an impossible question to answer because you've got -- we were profitable in the airlines in the last quarter, with the very low load levels because of the diversity of our product, with the medevacs and charters and the other things we do.On a pure schedule basis, we're profitable now with the load factors we have in aggregate. But in certain markets, we are significantly losing money where the load factors are. It's not as simple as saying, at 48% of capacity, we make money because some have more freights than others somehow. Our business is too different to simplify it in that way. But as load factors climb over 50%, we start getting closer to making money on a pure scheduled basis. We think finding an aggregate now because of our diversity.
I do have another question. What do you expect cash flow before working capital and growth CapEx to be for the next 2 quarters?
We don't provide specific guidance like that. We have said sequentially, we expect results to improve in the third quarter, increases in EBITDA with maintenance CapEx remaining modest by historical standards [indiscernible] growth CapEx profile being essentially a bit limited to the 2 aerospace projects. So we expect continued improvement in that. To look to Q4 is difficult with COVID, I mean, it changes so fast. But all things being equal, we'd expect continued improvement.
Next question comes from Scott Fromson with CIBC.
First -- just a couple of questions on Regional One. I guess it's 3 questions in 1 part. Can you give some color on the current operating situations that their carrier customers, particularly SkyWest? And do you anticipate any changes to the partnership? As well, what strategy changes and cost measures can you take should COVID-19 continue to hit those regional airline customers?
Okay. With SkyWest, we've maintained a strong partnership. The conversion of 700 to 550 is what has been slowed by this. But the main airlines, the underlying airlines, we're looking to that strategy, we're still looking to that strategy. So the implementation of it may be slowing, but the ultimate deployment of those aircraft, I don't believe, is in jeopardy. SkyWest, like all carriers, is reducing its fleet, that had some impact. Some of the older aircraft we have with them, but it's not a material issue.In terms of the strategies we can deploy, the beauty of the Regional One model is as sales slow, the amount of capital that needs to go into it declines dramatically because we have the assets available there. And it generated positive cash flow in the quarter, even though the Regional airlines were very, very slow. We fully anticipate that there's going to be a supply and demand imbalance over the next couple of quarters in terms of people trying to liquidate assets because of financial difficulty. We look forward to that because we understand the value of those assets better than anybody else. And when we can buy them at prices that are advantageous, we will do that. We did kind of small deal where we bought some Q400s at a price that was materially less than we would have paid 6 months ago. That we've already found homes for a significant portion of the planes we're purchasing.So Regional One is going through a period where it's small. There's absolutely no question about that. But there's also -- regional carriers are not going away. There may be insolvencies in the business. But if you're going to fly from Cincinnati to Cleveland, you're still going to do it on a regional jet. If you're going to go from Toronto to Montreal, you're still going to do it on a regional jet or a turboprop. And as those recover some of that business, and it will recover faster than large volume jet service. So we are in way of concerning about the long-term health and this even the medium-term health. But in the short term, it doesn't absorb cash. It's not a cash bleed. And we will ride through it, and we'll look for opportunities to make us stronger when we come out.
And I can add a little bit more color. Sorry to interrupt. Okay. With the 550 program, we are still receiving lease payments to put some kind of reality to your question. And expect regardless of whether it's from the existing carriers or the program they shift that program, the United will remain. Also, time will tell, but that's what kind of the industry thoughts are at the moment.On the cost side, I mean, it's pretty nimble, our cost infrastructure at R1. So we can adjust that and have adjusted that accordingly. And when I look out and kind of see potential opportunities, when Regional carriers start to fly again, they're going to be looking for effective cost ways to deal with maintenance, accessing parts, engines, they're not going to want to spend $1 billion to overhaul an engine, but they might leave something in the short term until they're able to build up their maintenance reserves again. Those are all things that -- that's what we do at Regional One.And scheduled charter is actually growing some momentum in the sense that people look to perhaps they would want to travel on the typical scheduled service airline where you go to your major airport, and there's obviously lots of other people there that they want to go to private SPOs where they can get to places they need to go to on aircraft that have fewer people than you would typically see. And so people were looking at maybe buying CRJ900 by stripping out a number of seats. Again, we're there by solutions because that's what Regional One does. It's not run lessor, not just a parts provider. It is a solution provider. So we're in discussion with many of our customers to be able to make sure we're there for them, to provide thoughts from the auctions as to what they can do to be able to access the market that does exist.
That's great. That's very useful. Just another question on a little bit related to Regional One and Aerospace. How does COVID-19 an airless deterioration? How does that change your longer-term acquisition focus? Is it going to be more manufacturing focused companies that are directly related to your current portfolio? And make it -- making manufacturing a larger part of the asset portfolio, while aviation and aerospace are hampered or impaired?
I think the key parts to your question. I think if we start with the manufacturing piece, I think it's likely that you see more opportunities on that side simply because we're a bigger portion of the aviation market already, and the number of companies that need our criteria are smaller. So over time, yes, I think it's a reasonable assumption that you would see more acquisition on the manufacturing front.The one part of that would be underlying question I would challenge, though, on the Aviation front, we've seen that some parts of this business have done very well through the pandemic, and in fact, actually increased our diversity. So whether it be maritime surveillance, medevac, surveillance, we love those businesses, and COVID has probably made us like them even more. And so we're not scared away of investing in that segment. Having said that, there's probably less opportunities to do it. So if we get something that fits that would augment our -- as an example, our surveillance business, we have a new technology or something, we would jump at that opportunity. But practically speaking, I think it's realistic that there's more opportunities on the manufacturing side.
Okay. Just a couple of housekeeping questions. What's included in growth CapEx for the first half of the 2020? And I apologize if I've missed it, your disclosure is more in detail. Have you incurred CapEx for the 2 Netherlands DASH-8s? Is that included?
No, not yet. We just won the contract. And you may see a touch of that at the end of Q3, but more likely that begins in Q4. Most of the growth CapEx relate to finish the fisheries contract. That's where the lion's share of the growth CapEx we have in that. Again, to start, a part of it has been delayed a couple of months by COVID, but that stuff still goes into sort of a, what, late Q4?
Correct. Yes.
So no material impact on the start date, but most of the money we've spent is getting ready for that contract.
Okay. And just final question. How is the Quest sales backlog? And how long is it going to take you to rewarding revenue synergies with the Wiz acquisition? I assume that part of it includes expansion into new markets.
Yes. We -- obviously, the new markets, we're going to wait until we get through a little bit of this COVID stuff and things normalize. The order book would probably be down marginally quarter-over-quarter simply because people aren't finalizing projects. In terms of the inquiry book in the intent basis, that's actually up. So it's really the just variations at times of closing of that.The synergies of -- and I struggle with the word synergies on this because we're buying a service we didn't do before. So it's really mostly additive. But essentially, now, every job, new job we book, we book at 30%, 40%, 50% more than it was before because we have the installation part of that job. And so that -- but with the nature of the order book being more healthier, kind of about 18 to 24 months out, and you -- the new jobs we book don't show up until then. Until then, it's the order book we purchase is part of this to chill up. So it's instantly in our results and the organic improvement of it helps as we look new jobs, and because of the order cycle, that's probably 2022, sometime before this year.
Sure. That's 18 to 24 months for Wiz or for the whole Quest?
Well, they're all the same thing. Like the order profile, we get a job booked at the very short end, a year in advance and the larger in 2 years in advance. So what we're looking for now is it's until 2022 in terms of new orders. That's why new order book is so significant.
[Operator Instructions] Next question comes from Steve Hansen with Raymond James.
Yes. So just one quick follow-up on the force multiplier. Mike, you had mentioned it didn't fly in the period, but you had some short-term duration contracts set up for the back half of the year. Just trying to get a sense for how much activity there is in sort of the option there for that aircraft into the back half? Are you still booking additional deployments at this point to fill up the back half? I mean, how should we think about that as incremental to what we saw in Q2 as you gear up?
Sure. Steve, it's Carmele. I can take that question. So we're actually booked now to the end of the year, fully booked with a government, Canadian government. So we are now looking into 2021. We're in discussion with a couple of different governments for its use, that would be longer term as we work through those details. But we're very comfortable, obviously, with having it fully utilized for balance of the year.
[Operator Instructions] And we do not have any telephone questions at this time. I will turn the call over to the presenters.
If there are no further questions, I'd like to thank everyone for participating in today's call. And I'm consumed, I have lost the ability to speak. So have a great day, and look forward to speaking to you when we report Q3 in November.
This concludes today's conference call. You may now disconnect.