Exchange Income Corp
TSX:EIF
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Good morning, everyone. Welcome to Exchange Income Corporation Conference Call to discuss financial results for the 3 and 9 months period ended September 30, 2018. The corporation's results including MD&A and financial statements were issued on November 8 and are currently available via the company's website or SEDAR.Before turning the call over to management, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian Provincial Securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&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 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 call over to CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator. Good morning, everyone. Joining me this morning are Carmele Peter, EIC's President; Tammy Schock, our CFO; and David White, our Executive Vice President of Aviation.Our third quarter was one of the strongest in our 15-year history. We continued to invest in and grow our subsidiaries, while generating new record highs for revenue, EBITDA, adjusted net earnings and free cash flow less maintenance capital expenditures.The fact that we had new highs in these metrics on an absolute basis is important, but not unexpected given the investments that have been made in the last 2 years. What is significant, however, is the absolute increases have translated into new highs on a per share basis, demonstrating how accretive this growth has been. The per share results for adjusted net earnings and free cash flow less maintenance capital investment, both exceeded the previous quarterly record by 12%.The third quarter was not an anomaly nor was it a turnaround. In fact, it is in line with our performance for all of 2018 as the year-to-date metrics are also record highs. Adjusted net earnings per share and free cash flow less maintenance capital expenditures per share were also 9-month records.EIC has a long track record of increasing dividends we pay to our shareholders. Earlier this year, we increased our dividend rate to $2.19 per annum. It is the strong performance I just highlighted that enables us to consistently grow our dividend. Even with the new higher dividend rate, our payout ratio has declined significantly, both for the third quarter and for the year-to-date. This improvement is evident whether the calculation is based on a free cash flow less maintenance capital expenditure basis or on an adjusted net earnings basis. Based on the free cash flow less maintenance investment basis, the payout ratio for the quarter improved to 42% from 45% and on an adjusted net earnings basis, strengthened to 58% from 63%.On a trailing 12 basis, these payout ratios improved to 62% and 75% from 73% and 86%, respectively.As pleased as we are with our third quarter and year-to-date results, what is more impressive is that our recent performance is merely in line with the strong growth that we have been achieving for over 14 years.We converted from an income trust into a corporation in 2010. And as such, our financial metrics are directly comparable over that period, and I will focus my next comments on that period specifically.In the 9 months of 2018, revenue, EBITDA and adjusted net earnings per share grew by 19%, 12% and 16%, respectively. For comparison, for the same 9-month period over the past 8 years since 2010, we have grown EBITDA by 22% and 26%, respectively. That is very consistent and a remarkable track record that few companies on the TSX can compare to. We issued shares to fund some of this growth, which allowed us to maintain our strong balance sheet with consistent leverage. That being said, the accretive nature of this growth is evident in the fact that adjusted net earnings per share had a CAGR of 11% over that 8-year period. At the same time, we have consistently grown our dividend, while achieving a significant reduction in our payout ratios.The diversity of our businesses, including industries, capabilities and geographies creates resilience and durability and has enabled us to amass an impressive track record of growth even in times of economic uncertainty and volatility, regardless of swings in resource prices or the value of the Canadian dollar.Once again, our third quarter financial results reflect the ongoing successful execution of this diversification strategy. Our revenue growth in the quarter was attributable to both acquisitions and organic growth in both the Aerospace & Aviation segment and the Manufacturing segment.And while the manufacturing segment as a whole achieved an EBITDA increase of $8.5 million for the quarter, Quest accounted for $6.1 million of that increase and continued to exceed our internal expectations. Quest has contributed EBITDA of approximately $21 million for the year-to-date, which exceeds the threshold to fully trigger the payout of the $15 million earnout that was included in the purchase agreement. The strong EBITDA growth for Manufacturing segment more than offset a 2% or $1.3 million decline in the Aerospace segment.While Regional One's EBITDA was up for the quarter, Legacy airlines and Provincial were impacted by higher operating costs from continued fuel price increases and lagged the nature of fuel surcharges implemented throughout the quarter. Although certain contracts have embedded fuel escalation clauses, most lag in time and general fuel surcharges were implemented only after it became evident that the hike in fuel prices were not going to be temporary.The worldwide pilot shortages received considerable media attention lately, and EIC is not immune to this challenge. What is less well known is the shortage of other aviation trades, particularly, maintenance engineers, which are also a challenge. The industry-wide shortage of personnel has resulted in higher costs for our airlines in Q3, as overtime, contractor and training costs were all up in 2018. The pilot shortage highlights the strategic importance of our acquisition of Moncton Flight College. Our airlines are actively working with Moncton Flight College to develop and implement initiatives to mitigate the impacts of the industry-wide pilot shortage. The breadth of our aviation and operations has enabled us to vertically integrate our training through an investment which is immediately accretive to our shareholders. Implementing a plan to train our pilots will take time to design and implement.I would now like to turn the call over to Tammy, who will review our financial results in greater detail, and I will update you on our outlook later in the call.
Thanks, Mike, and good morning, everyone. As usual, I will focus my comments on the results for the 3-month period to quarter. On a consolidated basis, we generated revenue of $308.2 million, which is up $54.8 million or 22% compared to the third quarter of last year.Revenue in the Aerospace & Aviation segment increased by $22.6 million with the Aerospace & Aviation segment revenue from Legacy airlines and Provincial was up $13.2 million or 9%. The addition of Moncton Flight College was the largest contributor to Provincial's revenue increase during the quarter.Legacy airlines benefited from the Kitikmeot contract, which commenced in the fourth quarter of 2017 as well as higher passenger volumes in Ontario during the year.Revenue at Regional One was up $9.3 million or 17% for the quarter. Sales and service revenue within Regional One was up 28% with higher amount across all revenue streams.While the largest gains were made in the aircraft and engine asset sales, part sales were also up 16%. Part sales comprise the largest proportion of revenues in the sales and service category for representing approximately 3/4 of the sales and service revenue in the quarter. Other service fee revenues showed a strong increase but continues to be a smaller component of revenue.While lease revenue was on par with the prior year, the quality of that revenue improved. In Q3 of last year, lease revenue included a significant redelivery settlement and there was no corresponding transaction in this year. Excluding the redelivery settlement, lease revenue increased by about 11%, Regional One fleet of CRJ900 aircraft generated stronger lease revenue as there was greater utilization of those assets by customers during the busy summer months. The weaker Canadian dollar during the quarter resulted in a $2.1 million increase in Canadian dollar revenues overall for Regional One.The Manufacturing segment's revenue was up $32.2 million or 65% for the quarter. This growth was attributable to the added contribution from Quest, which was acquired midway through the fourth quarter last year as well as increases from WesTower, Ben Machine and Stainless. WesTower continues to benefit from operational changes made in the last 18 months and the expansion of its service offering. Ben Machine again benefited from higher levels of defense spending worldwide and is seeing returns on prior growth CapEx made to expand its production capacity. Stainless is also starting to experience returns on the growth CapEx made in previous periods to increase its plant capacity.Consolidated EBITDA was $79.2 million, which is up $7.2 million or 10% from Q3 of 2017. The growth was driven by our Manufacturing segment, which had EBITDA of $14.1 million for the quarter, including the addition of $6.1 million from Quest, as Mike mentioned earlier. But it wasn't just Quest driving the growth, the balance of the segment achieved a collective 43% increase in EBITDA compared to Q3 of 2017.We reported net earnings of $24.2 million or $0.77 a share compared to $23.9 million or $0.78 a share in Q3 2017.Our higher EBITDA for the quarter was mostly offset by increases to depreciation, amortization of intangible assets, interest costs and acquisition costs. The slight decrease in earnings per share reflects an increase of 2% in the average shares outstanding during the quarter.Higher long-term debt outstanding on her credit facility and increases in benchmark borrowing rates resulted in higher interest costs. They were up $4.5 million over the prior period. There was also a $1 million of noncash interest accretion recorded in relation to the earn-out liabilities of both Quest and Moncton Flight College.Depreciation increased by $1.6 million and that is the result of purchases of capital assets during 2017 and throughout '18 and the depreciation of capital assets that we acquired with the purchases of Quest and Moncton Flight College.Income tax expense was down $2.7 million and the effective tax rate has decreased to 19.8% from 26.7%. The proportion of pretax earnings has shifted to lower tax rate jurisdictions in comparison to Q3 of 2017. Additionally, the tax rate applicable to earnings in the U.S. has decreased in comparison to the prior year.On an adjusted basis, net earnings increased 15% to $29.6 million for the quarter, resulting in an adjusted net earnings per share of $0.94, which is up from $0.84 in the Q3 of 2017. That's an increase of 12% over our previous high in Q3 of 2017.Our payout ratio when calculated as the percentage of adjusted net earnings strengthened to 58% from 63% for the quarter and improved to 75% from 86% on a trailing 12-month basis. Again, the improvement reflects the increase in adjusted earnings, which was in excess of our increase in dividend.Free cash flow for the quarter was up 15% to $64.2 million. On a per share basis, free cash flow was $2.04, which is up from $1.81 per share last year. Our free cash flow less maintenance CapEx payout ratio improved to 42% from 45% last year. Our trailing 12-month payout ratio also improved from -- to 62% from 73%.Looking at our balance sheet, we ended the quarter with a cash position of $25.2 million and working capital of $309.7 million, which represents a current ratio of 2.32:1 and that compares to cash of $72.3 million and working capital of $240 million and a current ratio 1.9:1 at the end of 2017.Our cash balance at December 31, 2017, included $56.8 million to fund the redemption of our convertible debentures, which were redeemed in January of 2018.The entire earn-out for Quest and a portion of the earnout for Moncton Flight College will be paid within a year and has now been included in the current section of our balance sheet. Our working capital has increased through the first 9 months of 2018 and those increases are largely attributable to investments that we have made at Regional One and to increased receivables from higher business volumes in our airlines and in the Manufacturing segment, particularly at Quest.We expect our working capital position to decline during the fourth quarter as it typically does. The government receivables associated with our increased business volumes in our airline business have been substantially collected subsequent to quarter-end.We also expect Regional One's working capital to decline. But investments in working capital at Regional One relates to the purchases of both ERJ145 and ERJ170, which are included in inventory and both are expected to generate sales volumes and positive impacts to earnings in the fourth quarter. Sales associated with those investments as well as the collection of a secured receivables from an aircraft sale in the first quarter will result in a reduction to working capital as well.The monetization of working capital during the fourth quarter will reduce both our debt and our leverage ratios. Our leverage ratios remain well within our target range and we have approximately $320 million of available capacity within our credit facility. So in short, we are very well positioned to take advantage of future growth opportunities as they arise. That concludes my review of our financial results, and I'll pass the call back to Mike for some closing remarks.
Thank you, Tammy. At the beginning of the year, we stated that we expect both EBITDA and adjusted net earnings to grow between 10% and 20% this year. We also indicated there will be a significant decline in growth capital expenditures and that maintenance capital expenditures would increase slightly. Our 9-month numbers demonstrate we are well on our way to meeting this guidance. We expect continued growth in the fourth quarter.We are still finalizing the impact of the new IFRS standards as they relate to revenue recognition and leases. While we own our aircraft fleet, it will result in some changes to the accounting for real estate leases. While not material from an earnings perspective, they will increase EBITDA and interest expenses. We will provide forward-looking guidance for 2019 when we report Q4. At this point, we expect growth absent these changes in the high single digits to low double digits and we will refine this for you early in 2019.Looking ahead, we are excited about the strong performance from Quest, and even more so for its future prospects.We remain on schedule to open the new Quest facility in Texas early in the New Year. We will begin trial production runs in the first quarter and expect the plant to contribute to results in a meaningful way in the second half of the year. We are excited about getting the plant into production as our order book continues to grow, and we look forward to taking advantage of sales opportunities that we could not move on previously because of our lack of production capacity.Our flight training business at Moncton Flight College is expected to help us on multiple fronts. Currently, most of the revenue is from international students, as we get contracts from international airlines who bring in up to 50 students at a time. On that side of the business, we have seen very strong demand for the foreseeable future. And then there are synergies in terms of our own airlines where we're going to work to build our own pilot streams, providing the airline with a significant competitive advantage in an extremely tight pilot market.On October 29, we announced the Force Multiplier has, following a complex process from the highly modified state and technical capabilities of the airports has -- of the aircraft, I'm sorry, has received the final approval from Transport Canada. It went into service and will contribute to results in the fourth quarter. This specialized aircraft sets new benchmarks for flexibility and quick response for intelligence, surveillance and reconnaissance clients globally. We are excited about the demand we have seen thus far, and we look forward to updating you on the progress as the plane serves customers around the globe.We are proud of our track record of profitable growth and ever-increasing dividend to our shareholders. We have accomplished this by remaining true to our philosophy of buying strong niche companies, believing in management and helping them grow. We are constantly working on fine-tuning our model and improving our results, but we believe in our strategy and have remained true to it for 15 years.As an investor, you will know that we are committed to a strong balance sheet, accretive investment in both acquisition and organic growth. We have demonstrated that this model generates increasing per share profitability, which has turned into -- in turn facilitated our 5% growth in dividend rate since our inception. This is a track record, which few, if any, can match.We are excited about the fourth quarter. Investments in previous periods will drive fourth quarter results. As Tammy mentioned in her section, a temporary bump in investment in Regional One inventory will drive fourth quarter as these aircraft are sold. The investments in maintenance capital expenditures made earlier this year at the airlines will ensure we have the necessary capacity to look after our customers during the very busy Christmas season.We will continue to ingest the accretive acquisitions of Quest and Moncton Flight College. And in short, we look forward to speaking you -- with you again in February with the full results -- full year results.Before I move onto questions, I want to take a moment to thank all of our stakeholders for their support over the last years. There has been significant volatility in our stock and some inaccurate allegations made by people trying to undermine our stock. Thank you for staying with us, and I'm glad that we have been able to consistently generate the results that show the efficacy of our business model and our ability to meet your expectations in the past, the present and the future.We'd now like to open the call to questions. Operator?
[Operator Instructions] And our first question comes from the line of Mona Nazir from Laurentian Bank.
So my first question just has to do with the Aerospace & Aviation segment, which comprised 89% of the segment mix. EBITDA was essentially flat year-over-year, and I am just wondering if you could talk about this performance, particularly in light of the rising fuel cost environment, wherein a number of Canadian peers reported either a significant decline in profitability, missed estimates or reduced outlook?
I appreciate that, Mona. It was a tough environment, particularly, early in the quarter as fuel prices were moving quickly up and the pilot shortage creates challenges. We have been able to maintain a full roster of pilots, but the cost of training them to make sure they meet your standards is high. And we have been able to offset that by being able to pass on these price increases to our customers and by the tight management of our people, we've foreseen the challenge with pilots and have been working on strategies well in advance of the problem showing itself the way it has. That's enabled us to -- while it was a slight decline in our performance quarter-over-quarter, it wasn't particularly material and we see that continuing to improve in the fourth quarter as fuel prices have moderated, while the full year -- full quarter impact of the surcharges we've got in place and we've got a full roster of pilots in each of our companies.
We also in the prior quarter -- 2017 also had lease redeliveries. So comparatively, we had a fairly strong quarter in 2017.
That's very helpful. And then, just secondly, you noted that the Force Multiplier program had gone into service following the final approvals from Transportation Canada. I'm just wondering if you could describe the nature of the client work and the structure of the agreements that have been signed. I believe when you first purchased PAL, the EBITDA margin profile of the overall business was around 25%. Would that be an appropriate run rate to use for this program?
I'm not sure that I want to get quite as granular on the rate when we're just putting it out for the first few times, but we would anticipate that the Force Multiplier program will generate margins at the high end of her range simply because of the investment that's been made in the level of the technical capability of the aircraft. In terms of our customers, they truly are around the globe and it's everything from maritime surveillance to surveillance in areas of unrest. We have customers in various different governments. In terms of the revenue model, it tends to be sold on a per hour basis. And you're not phoning us up and saying, hey, I'd like a 3-hour deal because you'd have to reposition the aircraft somewhere else in the world. So the plane will go different places for weeks and months, but the revenue model is based on a per hour basis, fully staffed, where we have a crew ready to go and we could literally be anywhere in the world in 7 days.
Our next question comes from the line of Nav Malik from Industrial Alliance.
My first question, I just wanted to ask on Quest. It's obviously been very strong. Is there some seasonality in that business? Like what -- I'm just trying to think what would we expect in Q4.
There's not so much seasonality. The Q4 typically tend to be a little bit softer simply because of the lost manufacturing days at Christmas time, but it's not so much a -- because we are in multiple cities If you're only in cold weather markets, you might see a slight decline in the winter months. But because we are building in California and other places in the southern states, there really isn't a seasonality per se.
Okay. And then I also wanted to ask, I know you did touch on it a bit. But in terms of the working capital, wondering if you can maybe quantify what we could expect to see there in terms of the reduction moving forward? I don't know, in terms of maybe what the impact could be on your leverage ratio? What that could decline? What that could look like maybe at the end of the year?
Well, it's hard to give you a precise answer because we're buying and selling things all the time, but the things that are anomalies that are on the balance sheet that we know are going to change as we have a couple of aircraft that we bought for resale at Regional One, which we anticipate monetizing in the fourth quarter. We have a $10 million receivable that was related to a transaction in the first quarter. We've got north of $6 million of deposits at Quest for its expansion, which will become fixed assets. And then additionally, we do a lot of work for the federal government as -- with our First Nations customers. And there was a material slowdown in payment at the government during the third quarter, which has subsequently been corrected, so you'll see a receivable decline there as well together with the typical quarter-over-quarter decline simply because Q4 is not as big as Q3 seasonally in that business. I think you'll see a significant portion, if not all, of the increase in Q3 reverse in Q4.
Our next question comes from the line of Steve Hansen from Raymond James.
Mike, is there an ability to get the fuel surcharge to be a little bit more dynamic over time? I understand the sensitive nature to it, but I'm just trying to understand the dynamics going forward. The oil prices are, of course, dropping now quite quickly. So I'm just trying to understand, again, that mechanism was a little bit stale, I guess, is all I'm suggesting. I'm trying to get it more sensitive.
It's 2 things. You got to break our fuel surcharges into 2 types. There's ones that are contractual and there's ones that are discretionary when we implement them. When you look at the discretionary ones, I don't think you're going to see much of the change in how fast we implement them simply because in most of the communities we service in the North, we have a dominant market position. And you have to understand that the customers in those markets get their fuel delivered once a year over winter roads or by barge. And so their fuel price doesn't move up. When we go and fill our car, we go, shoot, the price of gas is up to about $1.35 a liter, now it's about $1.45 a liter. We see it and have exposure to it. Our customers don't. And one of the things we're very committed to is not doing things that would create the appearance of taking advantage of our market position. And so our presidents, Gary Bell at Calm Air and Nick Vodden, our folks at PAL literally take the time to go visit our customers and talk to each First Nations community and tell them what is going to happen before we do it. And so that results in a few-week delay sometimes in getting in place. But conversely, when you see what's going on now where the fuel prices are declining, we will take them off in the same way. So on a net-net basis over time, we fully recoup the cost of that fuel; just period to period, that may not be the case. And then the other ones I mentioned were contractual agreements. And typically, the price for this quarter will be based on an average of the price in the previous month or quarter. And sometimes when you have rapid escalation towards the end of a period, it does -- isn't fully reflected in the average price. So you have to go through a second quarter to fully recoup that. But again, it works the same way when fuel prices fall. So as much as it's a little bit frustrating and it's not perfectly matched, I'm very excited that we recoup the fuel prices and we're able to pass it on without a material effect on the overall volumes of our aviation business.
Our next question comes from the line of Chris Murray from AltaCorp Capital.
Just looking -- you made the comment on your 2019 outlook that you were thinking that probably high single-digit growth. And I just wanted to confirm. I mean, is that your thoughts around revenue or is that around EBITDA? Just any sort of clarity you can give us would be appreciated. And just -- Mike, can you somehow touch briefly on where you think the key drivers are going to be as we go into '19?
I was talking about EBITDA in my number. And it's very preliminary, Chris, high single digits to low double digits. I would think we're going to be in the second half of that. We just -- we're just working through exactly how IFRS 16 as it relates to the leases is going to flow through our statements, and then we'll explain the impact of that as part of the -- when we give you guidance. But in terms of the main drivers, we're going to double production capacity at Quest. And so in the second half of the year, that's going to increase our ability to run more work through and clearly grow that business. You are going to see continued significant growth in Moncton Flight College as we implement some of our initiatives there and take advantage of the strong consumer demand for our product. Force Multiplier is going to go into full use and we're very excited about that platform. Our team at PAL has worked a long time to get us to the start line now. The plane is ready to go in and it will be flying missions in this quarter. I think that is going to be a significant driver for growth. And together with profitability initiatives in the aviation side and continued growth in the Manufacturing business as a whole, if you look at our MD&A, it's not just Quest that's driving it. Ben Machine, I think, is up. Tammy, can you help me with this? I think it's...
Sure. Yes. Ben Machine, they're up like hugely within -- they've doubled their EBITDA. So they're continuing to trend upwards, so very large percentage.
Yes, we've seen 25% growth rates in some of those businesses, and the demand on the manufacturing side shows no signs of letting up. So I think those would be the main drivers of that growth, Chris. And together with if we have an opportunistic ability to buy something along the way, that's our motto and that's what we'll do. But the growth we've talked about is virtually all without any further investment. That's all stuff we've paid for already.
Our next question comes from the line of Cameron Doerksen from National Bank Financial.
Just, I guess, a follow-up question on the Quest business. Obviously, it's doing extremely well. I know you don't want to talk about where the backlog stands right now. But I'm just wondering if you can talk a bit about whether you're seeing any changes in demand for the product particularly in the U.S.? I mean -- I guess, there has been some concerns out there about housing slowdown and things like that. I'm just wondering if you're seeing that in any of the U.S. customers that Quest serves.
The short answer, Cam, is no. The demand that we are seeing both in the markets we're in and perhaps moving with some of our customers as they go into other markets is dramatic. We walked away from tens of millions of dollars' worth of work that we simply can't do it. We can't fit it into our production schedule. And as the Texas plant ramps up, we're going to have extra capacity. One of the key things of that is that plant is over 50% bigger than our Canadian plant. So as the opportunity grows, we can continually grow the production capacity in that plant as it's needed. In terms of our order backlog, I'm not sure I want to get into publishing a number every quarter, but we told the market a little while ago when we crossed the $300 million threshold. And I can tell you, it's grown again in this quarter. And that's after producing $25 million roughly of windows in the quarter. We've seen a material consistent growth in the order book. So there is, from our view of the industry, absolutely no decline in demand. If anything, it's higher.
Our next question comes from the line of Derek Spronck from RBC.
Just on the Force Multiplier, can you talk about the total investment in that aircraft now that it's been approved? And what sort of payback period are you expecting?
The second question of payback period is difficult until we've flown it and see all the demand we anecdotally have it turns into cash dollars in our bank account. I think you will see a return on capital that exceeds the average for PAL as company and for EIC as a whole because of the technological nature of the aircraft. I'm reticent to give a precise price for the thing, but I can tell you that the aggregate cost is in the range of $30 million.
Our next question comes from the line of Raveel Afzaal from Canaccord Genuity.
Can you speak a little bit about what you think with respect to the earn-out with respect to Moncton Flight School? Do you expect to pay that? And how you think that's going to impact your valuation multiples with respect to this acquisition?
That's a good question. The -- there is a material or potential earn-out. Help me here, Carmele, I think from $35 million to $55 million.
Correct, yes.
So they can earn about $20 million in addition to the purchase price. The original purchase price is based on the profitability in the period prior to our acquisition. To meet the $20 million, the multiple on that is nowhere near as high as the original acquisition multiple. And so you will see for us to pay out $20 million, you're going to need to see a material increase in the EBITDA generated by the business. We fully anticipate paying out most, if not all of that earn-out. We have no reason to believe at this point that they are not going to hit their earnout target. It was based largely on orders in hand and pricing in hand. And the team there has done a great job of executing so far. So there's a full year to reach that, a little over a year to get some of that. So I can't speak with certainty at this point where we stand now. It's highly likely we will pay out the vast majority of that earn-out.
Yes. We've reflected that liability in the financial statements because we expect that.
Terrific. And can you speak a bit little about the torque in the Manufacturing business? We absolutely appreciate the torque that we have seen coming out of Quest and now some of the other businesses in the division are also coming alive. So when you look at the peak performance of these businesses historically -- bottom performance historically, what's the delta, how much torque can we potentially see in this business?
It's -- I don't have it in those exact terms. I can talk to you briefly about the individual businesses. WesTower declined dramatically last year. There was less towers being built and we went from essentially a $9 million to $10 million EBITDA business to a one that didn't generate a material amount in last year. And we're well on our way back up that thing not so much through tremendous consumer demand, but by broadening our product offerings. And so we see continued growth at WesTower. The demand in Alberta has strengthened and we're seeing -- we're probably halfway up...
Maybe 2/3 even.
2/3 of the way back to the norm for that business. SFI remains -- essentially sold out in our factory. We have capacity in our fieldwork, and we are actively looking for means of adding production to that business, whether it's building a factory or buying a factory. [ Butch ] and his team have done a great job of positioning us in the high end of the market and we're excited about looking for capacity for them. Ben Machine, they are up something like 25% year-over-year in that business, and it continues to grow. We've put in a few -- couple of million dollars of new equipment to add capacity in -- with defense market continues to grow. Have I missed anything here?
[ OMI ].
And [ OMI ] has essentially been running near capacity for 2 or 3 years. And they are the ones probably least affected by the ramp-up because they were least affected by the downturn. They have had strong results for the long time.
Our next question comes from the line of David Tyerman from Cormark Securities.
I have a few questions. The first, the guidance, Mike, I just wanted to confirm the EBITDA guidance for 2019. Does that exclude the accounting changes?
Yes.
Okay. Second question on the fuel. Did you say what the impact was on Q3?
Tammy's just going to look into it. I'm not sure if we've put it out quite that granularly but...
It was -- yes, the Q3 impact on a net basis was just over $1 million after we consider surcharges.
Okay. And then on the pilot side, sort of the same question. It sounds like it's costing you. Do you have an idea of roughly what it would be costing?
The pilot turnover would cost us more than the fuel does. Training a pilot -- Dave, maybe can help me with this, but we're in the range of $50,000 a pilot to get on [ tight ] training.
That's fairly consistent. Of course, it varies with size of airplanes and that -- overall, that would be a good average to get...
And so -- go ahead, Dave.
No. That's fine. And once again, it's the flow of pilots [indiscernible] we do see some increases from smaller airlines to larger airlines consistent with what you see in the industry and the charges that are associated with that.
And that's why we are so focused on the initiative to build our own pilot training capability with Moncton. It's such a unique opportunity because it's accretive and materially accretive as an acquisition on a stand-alone basis, and we're now working on a program. It's not going to be as simple as just go train pilots for us. We want to retain pilots longer. And so we're working on a program, which will enable us to have people come into the company, train at Moncton, get their pilots license, move into a training role at Moncton, help us create more pilots and then there will be guaranteed roles in our existing airline on larger aircraft types over time. So we'll be able to preserve new pilots in our system longer. A fair description?
Absolute a fair description, Mike. It's not just about, as you call it, growing the new pilot, it's about retaining the pilot, developing that pilot, [ through ] times so you don't have that turnover and training costs when you're constantly moving the pilots. The retention is as much important as the recruitment. We have a lot to offer at the EIC because of the diversity in our number of airlines versus just 1 airline, which you'll see in other companies.
Our next question comes from the line of Tim James from TD Securities.
Just want to stay on that topic of the Moncton Flight College. Just wondering if you can provide an indication of the timing of when it will provide some relief to your pilot sourcing challenges? I realize that's probably, sort of, a gradual process, but I'm just wondering at what point it will begin to have a meaningful impact? And then secondly, we've talked a lot about the benefits and the need for pilots within Exchange. Can you just provide an example of exactly how that impacts financial results, whether it's sort of an incremental revenue opportunity or how the cost savings are reflected in financial results?
[Technical Difficulty]You're back live. We can hear you fine. Our next question will come from the line of Konark Gupta from Macquarie.
Just before we go to Konark, we haven't answered Tim's questions yet about the training. I'm going to hand it to Dave and let him explain how we'll see probably starting next year with some of the benefits of our program, but I'll let maybe Dave handle that one.
Thanks, Mike. Absolutely. Quest was started with -- looking at the time frame of when we can see the benefits of pilots coming from Moncton. Of course, we saw some of the benefits right away as just the familiarity with the EIC and our involvement, we started seeing pilots right away. One of the tricks with pilot training is to make sure we have enough instructors to turn out a consistent and an increased flow of pilots. So we didn't want to, as we call the industry young, we want to make sure that flow of people increase the instructor strength. With that in mind, a pilot takes a year to train up as commercial pilots. They are already in the queue through traditional sources. And then, they'll start doing instructor training. That takes a couple of months, but the trick -- and I don't know if this is a trick -- what you want is experience, the experienced pilots. So we want to put these pilots in Moncton Flight College for up to a year of training. That will build up their time, and then they'll come in on line with our smaller operators and then the larger operators as experienced pilots. All I have to say, the flow is already there in a minor way. But what we want to do is be able to increase that over time to meet our recruitment and retention needs. And we're looking at probably a year, 18 months, 24 months and then consistently and continuously after that.
You got to fill the channel. And so it takes a while for the pilots to flow through. We have the beginnings of it, but it's a stream which will turn into a river.
And our next question comes from the line of Konark Gupta from WesTower -- from Macquarie, sorry.
Did we hire you, Konark?
Yes, Mike. Is the job open? No, I would love to. So I had a question, Mike, on the cash flows here because, obviously, that's a big focus point. I wanted to understand your CapEx and I'm talking about like total CapEx growth in maintenance as well as working capital investment plans as we get into 2019. And how should we think about the Regional One business from cash flow perspective -- not from EBITDA, but just from the cash flow perspective? So what's your thoughts on there?
Yes. Let's take the ones you talked about. We haven't finished our budget for maintenance CapEx, but we're well on our way. And we anticipate something that looks very similar to this year. We may see some improvements, but we'll give details on that going forward. It won't be materially different than what we've experienced this year. In terms of growth CapEx, you've seen a material decline in the level of investment in Regional One. No one should take that as a lack of interest in putting money there. If the opportunities and the right opportunities are there, we'll move. But that's a matter of being opportunistic. But at this time, in terms of big fleet purchases and the stuff that really drives that growth CapEx number, there is nothing anticipated. Not to say it can't happen or won't happen. But at this point, we would anticipate growth CapEx in the line of what's going on in this year. And then from an inventory point of view, it's really an anomaly when things move quarter-to-quarter. We bought 2 big expensive aircraft knowing where they were going when we bought them, delays in the predelivery inspections and stuff, meant that it stayed on our books over a quarter-end. And everyone goes, oh, there's a big ramp-up in working capital. And on one hand, the absolute numbers say that, but in the real world that's just in and out over time. The material level of working capital isn't going to change in that business. We also have a $10 million receivable on an aircraft. So that's going to come in. Short-term anomalies bounce it around. But fundamentally, there isn't investment in working capital required to maintain the profitability levels of that business. Again, should an opportunity to buy something and part it out like we did with the ERJs in the second quarter come along, where we invested $15 million? Sure, we'll take it again. But again, those bounce around, but you shouldn't see a material uptick. And that's why we are trying to give guidance that in Q4 we expect that working capital to decline as well. We also have seasonal issues in our working capital. Q2 and Q3 are materially higher quarters. Q4 is kind of an average quarter and Q1 is lighter. So you are always going to see receivables build in Q3, especially when you're dealing with governments. Governments always pay, but they always pay late. And so we saw that ramp-up and we've already seen the other side of that curve early in Q4 as we started to collect that. So when you are looking at this, I think, depending on how much growth you put into your model, that may require some growth investment at Regional One. But if you're modeling modest growth, that comes from the assets we already own.
And our next question comes from the line of Mona Nazir from Laurentian Bank.
Just had a quick follow-up in regard to the Moncton Flight College. I'm just wondering if you could provide revenue and EBITDA for the quarter and year-to-date, which I didn't see going through the quarterly package? And just when we're looking at the numbers that were paid, so you paid $35 million based on $7.6 million in EBITDA. And if the deal is to be increasingly accretive with the $20 million additional payment, then it's -- would it be safe to assume that you could see a 60% growth in that EBITDA run rate to around over $12 million?
I'm not sure I want to give you that level of granularity, but all of your assumptions are correct. We bought -- we paid $35 million off of the $7.6 million. Our current run rate is higher than that. And next year, we expect a material increase to fund the earn-out. When you're talking about the original multiple close to $5 million, the multiple on the earn-out is a fraction of that.
Our next question comes from the line of Derek Spronck from RBC.
Just a quick follow-up question here. How should we be thinking about maintenance CapEx in the fourth quarter?
Maintenance CapEx in the fourth quarter is probably in line or slightly higher than last year. When you gave guidance at the start of the year, we're bang on that guidance for the full year. I'm always reticent to give quarter-to-quarter too detail, I think, on CapEx simply because overall if an engine can slip from one quarter to another and it can make $1 million or $2 million difference, if we do it a quarter earlier or a quarter later, but big picture, it's in line with the preceding years, maybe slightly higher.
Our next question comes from the line of Mark Neville from Scotiabank.
I apologize if you've already addressed all this, but I just want to make sure that I'm understanding the guidance for next year. High single-digit EBITDA growth. That's without incremental growth capital or incremental levels of working cap invested into the business?
Correct. That's funded by what we have -- so as an example, it's what's invested plus what we've told we're investing. So the completion of the plant in Texas, that's going to be -- you'll see the cost of that show up in Q4. You've got the Force Multiplier, which we've already completed. And so it's those projects, but it's not new big growth CapEx, no. The other thing I'd like to point out -- and again, the guidance for next year of around 10% is preliminary. We'll tighten it down once we finish those things, but there's also 2 other things that could drive that materially up from there. There's 2 outstanding RFPs, one with the Department of Finance -- Department of Fisheries, I'm sorry, that Provincial is awaiting word on, and then the Manitoba Provincial Government has put out an RFP for all of the medevac work. And so were we to land either of those, those would both have a significant impact. And to be clear, neither of those are included in the numbers I quoted you.
Our next question comes from the line of Steve Hansen from Raymond James.
Mike, just -- can you just remind us where we're at with the third contract and your efforts there to staff up ahead of your future commitments?
Yes. The -- we're still at the baby stages of that contract. The first plane get delivered next year and so we'll start ramping up our staffing on the West Coast for that during 2019. And then as the planes come over the next 3 years, you'll see us staffing up our other facilities. And -- but you won't really see a mature level of revenue until 2021 in that. You'll see a constant ramp-up through there. But -- and then the only investment for that project will be likely something in 2020 in terms of a new hanger in Winnipeg for the overhauls. We have the site and we're just working on the final design, but that's really the only investment required for that because most of our work is people in that project.
Our next question comes from the line of Chris Murray from AltaCorp Capital.
Mike, just -- I'm wondering about any thoughts you may have around Bombardier sale of the Q400 including the Q1 (sic) [Q100] into the Q3 (sic) [Q300] over to Viking. I guess, a couple of pieces. One, is that something -- is that program something that you've looked at in terms of acquiring? I know you like the Q300 for some of the different applications. Any thoughts on if that creates a new sales opportunity for you or what that does with Regional One in terms of supporting the Q and the DASH 8?
We clearly are a significant player with the DASH 8 environment, particularly from our operating airlines. And so the fact that there's someone going to take it up and continue the run with it is positive from our point of view. We are committed to continuing to support customers with Regional One from the parts point of view and the ongoing production for the Q400 is good news for us. We never had serious discussions with Bombardier on that. I don't think we anticipated a sale at this point. And so we're kind of just figuring out exactly what we're going to do with it, but our discussions particularly with our Regional One guys are positive. We think this is going to create opportunities for us. We think those are great airplanes and they are going to keep flying for a long time. And so airplanes that fly for a long time need parts and that's good for us. So we are working on our strategies in a newer environment. We are looking at strategies to the extent that Bombardier were to ever monetize its CRJ platform and because we're very committed to that. At this point, it's moderately positive, but we'll have to see how it shakes out over time, exactly how that changes our strategy.
Our next question comes from the line of Tim James from TD Securities.
Actually, you addressed most of my questions here, but just one quick one. Mike, I'm just wondering with these redelivery settlements that occur in Regional One, is it possible to give us an indication on what exactly is that drives that settlement? And is there some kind of a rule of thumb we can use for the value of those relative to the value of the associated aircraft?
If there is a rule of thumb, I don't have it. What it is, Tim, is when we've got planes that are on our longer-term leases, they have redelivery conditions. So the plane has to be returned with certain maintenance completed on the plane and -- so that could be a fresh C-Check. It could be a hot engine -- hot section, overhaul of the engine. It depends on the individual plane, the individual lease, what those conditions are. Depending on what we intend to do with the aircraft and we're going to part it out. We don't intend to re-lease that particular aircraft. We may accept a monetary payment in lieu of the return conditions. And so it could be anything, but typically they are material amounts of money. They are north of $1 million typically because they're typically on planes that are out longer. When we put a plane out with a 1-year lease, 2-year lease, they typically don't have the same kind of lease return conditions on something that if we bought a plan that's on lease or we put it out for a material lease period where the lessee has to provide the plane back in a certain condition. And inherently, that's lumpy. We don't always get those and 100% of the lease return fee returns as income because we're going to park the aircraft out. And so were we put it to the aircraft, all we would be doing is reducing the value of the inventory. So it's lumpy. And last year, we had a disproportionate number of them. That's why we are so excited about the performance of our lease portfolio in the quarter in that Regional One was in line with the preceding year, but we didn't have any of those onetime bonuses in our statement this year. It was just pure ongoing, sort of, higher quality lease revenue, certainly more repeating lease revenue.
And our final question today comes from the line of David Tyerman from Cormark Securities.
Yes, just one clarification. The Fisheries contract, I think you are the incumbent on that. So if you lost it, would it have a material negative impact on guidance?
If we would have an impact, it wouldn't be a 2019 issue. If we were to lose it because the lead time on implementing it is long. The contract has asked for bigger aircraft and investment, so the new contract is a bigger -- significantly bigger value than the existing contract. It would have an impact on us, but not a material impact were we to not win it. We had that contract for 20 something years. And so we're optimistic, we're realistic. It's an RFP with the government, so there's nothing guaranteed. But we've done a good job on that contract, and we're cautiously optimistic we'll be successful on the RFP.
Okay. And it sounds like if you do win it that it will -- that the scope increase is large enough that it would -- the EBITDA guidance possibly?
Yes. But again, David, it's likely -- it wouldn't impact next year. It would impact the following year because we have to put the right assets in place. And if we were to do it, we would clarify for you what that investment is -- like -- because we'd be buying assets to meet the contract. So we would clarify should we be successful. I'm not going to do that now and give my competitors advantage of what I think it costs. But should we be successful, we will give you some guidance on what our investment will be and what we think the growth that drives is.
We have no further questions. I'll turn the call back to Mr. Pyle for closing comments.
Thank you. If there's no further questions, I want to thank everyone for participating in today's call. Again, I want to reiterate our appreciation and support from our stakeholders. We've gone through some challenging times from a volatility point of view. Fortunately, it's happened at a time when our results have never been better. And quite frankly, our outlook is as strong as it's ever been. So I look forward to meeting with you again when we announce our Q4 results. Thanks, and have a great day.
This concludes today's conference call. You may now disconnect.