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 September 30, 2020. The Corporation's results, including the MD&A and financial statements, were issued on November 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 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 the CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. With me this morning is Carmele Peter, our President; and Darryl Bergman, our CFO. In our recent updates, we've outlined the initial impact of COVID-19 pandemic on our operations. And we have provided detail on our plans to manage through this global health crisis. We will continue to do that in our update today while also outlining the impressive performance we have achieved in the face of adverse circumstances so far in 2020. While COVID-19 continues as a drag on the global economy, and Canada is dealing with the uncertainties associated with a second wave of the virus, I am happy to report today that EIC continues to perform exceptionally. We've maintained our consistent ability to fully fund our dividend to investors, an obligation we will meet again in this quarter, while meaningfully improving the financial position of the company. We have always felt strongly that EIC's proven approach to investment drives value for our shareholders, while our strategic positioning of the company of businesses, prioritizing vital goods and services, gives us an advantage in dealing with uncertain times.COVID-19 has provided a generational test in that respect, and I believe we are passing with flying colors. Early in the pandemic, we identified the management of our cash resources as a strategic priority for EIC and is evidence of the collective strength of our companies. Our performance in that respect has been excellent during the quarter. In addition to paying our dividend, we have met maintenance capital and growth capital requirements, while reducing our net debt by $30 million before funding the WIS acquisition. Taken in combination, these measures have improved our quarterly free cash flow less maintenance capital expenditure payout ratio from 49% to 45% year-over-year even with the pandemic challenges. EIC again remained profitable through the quarter, reporting adjusted net earnings of $20.6 million or $0.59 a share. We have consistently through this pandemic paid our dividend, funded our capital investments and paid down our debt.This is a powerful strength about -- a powerful statement about our strength today and a testament to how well positioned we are to take advantage of future opportunities. In Aviation, our ability to build liquidity over this period is in direct contrast to traditional commercial airlines who have been forced to deplete cash reserves and access additional capital to finance day-to-day operations.These results validate EIC's conscious choice to diversify our services. We continue to hold significant positions across the Aviation industry, in medevac, in freight, flight training, maritime surveillance, parts sales and leasing, that supports and are complementary to our passenger business.As essential service providers in Aviation, certain of our subsidiaries in this segment have been less affected by the pandemic than others. Our passenger traffic, which decreased significantly in the early days of COVID-19, rebounded quickly in a relatively stable Q3 operating environment, achieving a high in passenger volumes of approximately 60% of normal capacity system-wide though this has declined recently with the spike in COVID-19 cases.In welcoming passengers back onto our network, we have also seen firsthand the benefit of our immediate emphasis on ensuring the safety of our employees, customers and stakeholders in combination with the proactive steps we took to evolve our service offerings in line with public expectations.As we have now seen, our passengers returned quickly in markets where COVID-19 has been controlled, even temporarily. We are more determined than ever to maintain our leadership in pandemic safety protocols. The EIC airline found we were quick to require the completion of health check questionnaires before travel. We moved swiftly to integrate passenger temperature checks during the check-in and boarding process and worked to immediately implement a mask mandate for passengers before it was required by the government. We are currently refining our boarding processes, including seating passengers in groups determined by destination, deploying separate doors for boarding and deplaning and using direct flights to communities wherever it is feasible to do so. Moving forward, EIC will continue to evaluate our operation and find new ways to enhance passenger safety as our industries and the scientific community's understanding of the virus evolves. Our passengers, our employees and the communities we serve, deserve the best, safest conditions we can provide, and we're focused on meeting that obligation. The diversity of our operation and the strong leadership teams we have in place at each of our operators has directly benefited the EIC Aviation family. We've been able to move quickly and strengthen our operations through shared learning, joint implementation of best practice and in ensuring that each of our companies has immediate access to the resources they require to continue doing business safely and efficiently.Regional One's operations continue to be significantly impacted by the pandemic, with sales and services revenues declining by 67% and lease revenue declining by 76% for the comparative period due to a drop in customer demand. Regional One has not deferred any payments for lease customers during the period and has, therefore, not seen lease receivables grow since the onset of COVID-19. The company continues to work closely with these customers and is focused on identifying opportunities to strategically position Regional One when activity picks up in regional aviation. EBITDA contributions from legacy airlines and provincial declined, negatively impacted by our commitment to -- sorry, negatively impacted by our commitment to continuing scheduled service despite reduced passenger volumes to the isolated communities we serve. Termination of service in these instances is not an option in management's view as the presence of EIC airlines is, in many instances, the only way to move passengers, goods and vital medical services in and out of these communities. Our maritime surveillance business remains stable. Now more than ever, it is vital we live up to the trust placed in us to deliver our services with hard work and integrity today and for the future.With that essential service provision in mind, despite fluctuations in passenger volumes, cargo operations across our airlines continue to remain strong and continue to deliver much needed food and supplies into Northern communities. These services have benefited directly from our combi aircraft and flexible aircraft configuration options across the bulk of our passenger fleet. Our charter operations remained steady, driven in part by EIC's ability to deploy the collective capacity of our airlines to affect direct air transportation with strict safety-first health protocols for essential medical personnel flying in First Nations communities and protecting us against COVID-19. This ongoing effort managed by EIC, operated on behalf of Indigenous Services Canada, has rotated nurses through isolated communities nationwide, moving over 2,000 passengers since the initiation of our contracted service in May of 2020. Providing these charters ensures that health care and infrastructure professionals, medical supplies and equipment required to maintain critical infrastructure such as water treatment plants, will be able to access these communities.It also provides flexibility to support our other community needs, such as emergency management responses, fuel security or medevac services as required. EBITDA improvement in Quest is the direct reflection of our successful acquisition of AWI in the fourth quarter of 2019, our successful acquisition of WIS in the third quarter of 2020 and the continued ramp-up of production at our new Quest Texas plant. The completion of the WIS acquisition in the quarter is another example of the value of our strategic positioning builds, value for shareholders and supports the future success of our company. Bringing in WIS, a full-service window glazing company with operations on the West Coast of the United States, into the EIC family builds our collective strength by advancing Quest's strategic integration initiative in the manufacture and installation of our products.Gaining with synergies associated with becoming a functional single point of accountability for our customers gives us a tremendous competitive advantage in that space. We have seen the benefits that this kind of arrangement can bring through the AWI acquisition, and it has been very exciting to add WIS to the fold. The balance of EIC's Manufacturing segment collectively saw an uptick in EBITDA due in part to the acquisition of LV Control, a specialized provider in the design and manufacture of electrical distribution equipment and process control systems, which was purchased in the fourth quarter of 2019. This progress in our manufacturing center has enabled our collective operations' have been dealing with the practical challenges of maintaining production during COVID-19.Social distancing, requirements and other operational impediments continue to challenge our efficiency and throughput despite robust demand. We have also drawn again on the collective strength of exceptional management teams we have in place across the Manufacturing segment to ensure that we are sharing best practices, distributing resources and integrating lessons learned to protect both our employees and effectively meet our customer demand.I'm especially proud to report that within the segment, several of our subsidiaries have been able to shift some production to meet the government of Canada's call for increased production of much needed PPE and medical supplies to support frontline workers through the pandemic. These exceptional efforts speak to EIC's commitment to leveraging our skills and resources for the benefit of the communities in which we operate.Looking forward, over the next several months, EIC has several exciting initiatives, either built on the basis of our previous strategic investments for the future or on our ability to leverage our strength and take advantage of opportunities when they present.In medevac, EIC plans to complement our considerable existing legacy capacity to now include rotary wing services. This capability is expected to be operational in early 2021 and provides a meaningful enhancement of the service we currently offer our Northern customers, initially in Manitoba and Northwestern Ontario.Also in medevac, Keewatin Air recently received Transport Canada's approval to deploy 4 specially designed, adult-size, single-patient isolation and transport units called EpiShuttles. These self-contained units keep patients completely isolated during transport, allowing Keewatin to move safely sick infectious patients from remote communities to larger hospitals, where they would be better able to receive the proper care, an especially relevant service in the context of COVID-19. In our airlines, PAL has recently entered into the service the first of its new Bombardier Q400 aircraft, deploying it in the service of vital charter business in Labrador and our roots in the Atlantic bubble, seeing sufficient passenger volume to justify the additional capacity. The ability to offer Q400 service is an important building block for PAL Airlines. The new aircraft will further enhance the competitiveness of PAL charter services and will allow the carrier to take advantage of additional scheduled service opportunities as regional travel restrictions are gradually reduced in the coming months. Regional One remains active in the search for an additional asset and is prepared to act quickly should favorable opportunities arise. The company was able to begin acquiring several Q400 aircraft earlier in the year and will continue with their strategic acquisitions in the fourth quarter. And in Aerospace, 2 particularly exciting projects continue to progress here in Canada, while we've also had an important recent win internationally. First, the government of Canada recently officially received the first of its new Airbus CC-295 Kingfisher aircraft in Comox, BC. PAL Aerospace is responsible for the in-service support for the aircraft, covering all aspects of maintenance work not undertaken by the Royal Canadian Air Force technicians and including high-value work, such as repairs, second and third level maintenance, future modification work and depot level maintenance of the aircraft. PAL Aerospace has been working closely with the Royal Canadian Air Force with our partners at Airbus Defence and Space since the contract for these vital new aircraft was awarded in 2016. It's extremely exciting to see the aircraft arrive in Canada, and we're looking forward to supporting this critical national program, keeping our partnership with the RCAF for years to come. PAL Aerospace will soon enter into service 2 new long-term DASH 8 maritime patrol aircraft required to support the Department of Fisheries and Oceans' aerial surveillance and enforcement programs. These 2 new aircraft, which will join 2 additional new Beechcraft Air B200 aircraft already in service for the program, represent an important step forward for the government of Canada's capacity in this space. PAL Aerospace has supported surveillance needs of DFO under contract since 1990 and will continue to do so through this contract for at least the next 5 years. On the international stage, PAL Aerospace, along with partners at JetSupport in Amsterdam, were formally awarded a contract on September 30 to supply and support 2 fully missionized DASH 8 aircraft along with the provision of crew training on all systems and support the operation of the aircraft for at least an initial 10-year period for the Netherlands Coast Guard. The important contract strengthens PAL's Aerospace already extensive credentials and maritime surveillance and ISR services, establishes a key strategic foothold for the company in the European market and will build our capacity in aerospace through support for the highly skilled employment here in Canada. In closing, I'd like to briefly remark on the strength of our leadership teams, their contribution to our results, and what I think it means for EIC's future. From the start of the COVID-19 pandemic, we have learned a lot. We can't predict where the virus is headed or what it has in-store for us over the next several months. We have proven that we have a team in place capable of succeeding in this difficult environment. In many instances, our accomplishments have required remarkable efforts of leaders and employees across all of our operations. I thank them sincerely for all they have done.Over the last 2 quarters, the most challenging in the history of our company, we have paid a dividend, improved our balance sheet and grown our company. I'm very proud that we've been able to extend our track record in that regard even in today's environment. We've always been responsible in our approach to management in EIC, grounded in the understanding that our investors are counting on us to continue delivering for them, no matter the circumstances of the day.I believe we are firmly meeting that commitment. We are not going to stop positioning the company for tomorrow. Our ability to deliver results through challenges that COVID-19 has presented builds our opportunity to move quickly and strategically if investments or acquisitions make sense. In that respect, despite knowing we'll continue to be called on to address the challenges of COVID-19 in the weeks to come, I am particularly enthused about the future of our company. Thanks very much. And I will now hand the call off to Darryl, who will walk you through the third quarter financials.
Okay. Thank you, Mike, and good morning, everyone. As Mike duly noted, the unprecedented events of the pandemic continued to affect the corporation in the quarter. That said, management and staff across all our EIC companies continue to remain laser-focused and committed to managing the challenges that were faced. This focus and commitment most certainly are reflected in the successful results for the quarter. Once again, the corporation was able to maintain positive cash flow after capital requirements and payment of dividends and before the acquisition of Wiz, reduced net debt in another COVID-19-challenged quarter. As our distinct business model continues to be tested in these trying times, this quarter's results continue to support its resilience to stand up under pressure. The financial results for Q3 2020 that I will summarize here to follow were negatively impacted by the COVID-19 pandemic. I will caution that comparability of current results with that of prior period is materially impacted due to this unprecedented event. Conclusions taking into account comparability should be made carefully, given the current circumstances affecting results. Following the same order of presentation from last quarter, I will commence the discussion of our Q3 2020 financial results with comments regarding the corporation's balance sheet and liquidity. We have stated that a supporting principle to our business model is a strong focus on our balance sheet with modest leverage and good liquidity. Our commitment to this principle remains unchanged even during these troubled trying times. The size of the corporation's credit facility, as at September 30, remained at approximately $1.3 billion, with a capability of being able to access another $300 million in an accordion feature, should we choose to exercise it.This translates into the corporation being in an enviable position with readily available access to liquidity of approximately $840 million, including the accordion feature. The long-term debt, net of cash of roughly $760 million, is an increase of approximately $59 million from Q4 2019. The increase since December 31, 2019, is entirely attributed to the acquisition of WIS and the weakening of the Canadian dollar over this period.Since March 31, 2020, the last 2 quarters where the impacts of COVID-19 were most apparent for the corporation's operations, the corporation's net debt decreased by more than $20 million. In addition, it should be noted that the company has no long-term debt coming due before December 2022. In the quarter, as a measure to support our principles regarding access to liquidity, the corporation amended its senior leverage ratio from a maximum of 4x to 5x for the fiscal quarters ending December 31, 2020, through September 30, 2021. At the end of Q3 2020, our leverage ratio remained well within the 4x covenant coming in at 2.6x. Contributing to this strong covenant result are the corporation's successful efforts in managing capital expenditures along with working capital. The increase in the covenant metric provides the corporation financial flexibility during these uncertain times. It was pursued and is intended to be managed conservatively and in line with the underlying focus on our responsible management approach that has always been a core part of the EIC DNA and has served all stakeholders well throughout the history of the corporation.At this time, inclusive of impacts of all announcements to date, management continues to expect to be well within the original 4x covenant. Working capital management has been a key focus for the organization. Management and staff across the entire EIC organization have done a superb job in staying on top of working capital management and supporting our ability to remain cash flow positive during these times in dealing with the impacts of COVID-19. During the third quarter, working capital contributed to $18 million in positive cash flow. I will now turn to a summarized discussion on the financial results. A more fulsome explanation of results can be found in our Q3 2020 MD&A. In Q3, we generated $297 million, which is a decrease of $58 million or 16% over Q3 2019. Aerospace & Aviation segment revenue was down 36% from the comparative quarter in 2019 to $171 million.Revenue from the legacy airlines and provincial decreased by $34 million. While the comparison to the Q3 2019 passenger volumes were due to -- on comparison, sorry, to the Q3 2019 passenger volumes were lower due to COVID-19, we did see improvement throughout Q3 2020 from levels seen in Q2 2020.That said, volumes have declined subsequent to the quarter end due to an increase in the COVID-19 basis. Cargo volumes remained strong throughout the quarter. The strength can largely be attributed to the continued need for essential goods and supplies in the communities we serve. Medevac and charter operations were strong throughout the quarter and improved over the comparative period.The impact of COVID-19 on the aerospace operations was minimal due to the contractual nature of the work. The Force Multiplier aircraft returned to service in the third quarter and has several missions scheduled for the remainder of the year. For Regional One, revenue decreased in the quarter compared to the same period last year by $61 million. Regional One's operations have been greatly impacted by COVID-19. Regional One's business is dependent on traditional air carriers. Lower travel throughout the world has put pressure on all its lines of business, including parts sales, aircraft and engine sales and lease revenues.The sales and service revenue decreased by 67% in the third quarter compared to the same quarter last year. While we started to see improvements as the second quarter progressed, the significant rise in cases of COVID-19 in the third quarter negatively impacted revenues quarter-over-quarter. Aircraft and engine sales were down significantly from the prior period as the airline looked to defer large purchases. Lease revenue decreased by $18.4 million or 76% in the current period due to a significant drop-off in customer demand and utilization of the corporation's leased assets. The corporation has no lease revenues recorded for deferred lease payments during the period and has not seen a lease receivables growth since the onset of COVID-19.Turning to our Manufacturing segment. Revenue grew by $38 million over the prior period. The total revenue for this segment was $126 million. Quest revenue was higher than the prior period, reflecting the acquisition of AWI in the fourth quarter of 2019 and the acquisition of WIS within the third quarter of 2020, with no comparative in the prior period.The balance of this segment collectively experienced an increase in part from the acquisition of LV Control in the fourth quarter of 2019.It should be noted that all of EIC's subsidiaries within the Manufacturing segment continue to be deemed essential businesses, which has been the case since the onset of the COVID-19 pandemic. That said, management measures implemented to ensure health and safety of staff because of the impact of COVID-19 have reduced efficiency and throughput despite robust demand.Moving to EBITDA. Consolidated EBITDA was $83 million, down 6% or $6 million for the quarter compared to Q3 2019. The primary contributing factor to the decrease can be attributed to the impacts of COVID-19 on both segments. EBITDA in the Aerospace & Aviation segment in the quarter was $61 million, a decrease of 25% compared to the prior year. EBITDA generated by the legacy airlines and provincial decreased by $1 million. The corporation quickly adapted its operations to help mitigate the impacts of COVID-19 travel restrictions.Cost reduction measures that were introduced in Q2 2020 that included scheduled frequency reductions and labor rationalizations, among others, continued into the third quarter. Additionally, the corporation benefited from the extension of the Canadian Emergency Wage Subsidy, or CEWS program, but to a lesser extent than in the second quarter of 2020. EBITDA from Regional One, decreased by $19 million from the prior year, contributing to the lower comparables, is a decrease in revenue across all lines of business, with the most significant being the $18 million reduction in lease revenue, where EBITDA margins are historically high. In the Manufacturing segment, EBITDA was $27 million, an increase of $15 million compared to the same quarter in the prior year. The increase was driven by the same factors I noted prior for revenue. Strength in demand continues within this segment, while the CEWS helps to offset higher safety costs and job site delays. Costs related to lower efficiencies include social distancing protocols implemented at all our plants and higher operating costs from sanitation and personal protective equipment.Turning to earnings. In Q3 2020, the net earnings was $17.2 million, a decrease of $12 million compared to the prior year. A remeasurement of contingent consideration increased net earnings by $5 million in the prior period and did not reoccur in the current period. In addition, the corporation generated lower EBITDA compared to the prior period, as previously discussed. Net earnings per share decreased from $0.90 per share in the prior period to $0.49 per share in the current period.It should also be noted that in the period, the weighted average number of shares increased by 9% over the prior period, which has impacted per share amounts in the current period. Adjusted net earnings was $21 million, a decrease of $12 million from the prior period. Adjusted net earnings per share were $0.59 per share, down from $1.03 per share in the prior quarter.In Q3 2020, free cash flow was $58 million, a decrease of $9.3 million from the prior quarter or 1.6 -- sorry, $1.64 per share. The main reason for this decrease is the decrease in EBITDA and the increase in current tax expense. Free cash flow, less maintenance capital expenditures per share, increased by $0.12 per share to $1.26 per share in the quarter. The corporation's payout ratios in the quarter were also tested by the impact of COVID-19. The free cash flow, less maintenance capital expenditure payout ratio, in the quarter was 45%, which is an improvement from the comparable quarter last year at 49%. During the global pandemic, where passenger volumes initially fell by up to 90%, the corporation was still able to fund its maintenance capital expenditures, its dividends in full and have cash left over to fund future growth and pay down debt. Maintenance capital expenditures decreased materially during 2020 -- during the 2020 period as reduced flying hours reduced maintenance requirements. The timing of maintenance capital expenditures is directly impacted by the flying time of aircraft and engines. Once impacts of COVID-19 become apparent, the corporation deferred capital expenditures where appropriate. In addition, during the third quarter, the corporation benefited from maintenance capital expenditures performed earlier in the year, primarily in the first quarter of 2020.Notably for the second and third quarters of 2020 combined, the free cash flow less maintenance capital expenditures payout ratio was a very strong 57%. While slightly higher than the 50% reflective of the same periods from 2019, this is a significant achievement during the unprecedented headwinds created by the COVID-19 pandemic.The adjusted net earnings payout ratio in this quarter was 97% compared to 55% in Q3 2019. The free cash flow less maintenance capital expenditure payout ratio on a 12-month trailing basis increased to 73%, which continues to be below 100%, which was a target that was identified at the onset of the pandemic. Even now with 2 quarters of COVID-19 impacts on the business, we have maintained a respectable 12-month trailing free cash flow less maintenance capital expenditure payout ratio while continuing to be able to successfully fund requirements for dividends and maintenance capital expenditures. Before I pass the call on to Carmele, I would like to comment that it is evident the corporation's focus on being responsible in our approach to management is definitely reflected in the impressive results for the quarter.That said, our approach is not a result of the challenging times we have faced for most of 2020. The impacts and challenges of the pandemic have certainly made our true colors more vibrant. But the responsibility towards our management approach is ingrained across the corporation. It has been and remains a distinctive part of our culture, an important attribute that has been and will continue to help drive success at EIC. That concludes my review of our financial results and comments. I will now turn the call over to Carmele.
Thanks, Darryl. My comments today will focus primarily on the outlook for the balance of the year for our various lines of businesses, and then we'll shift to some more general observations about EIC's performance as a whole. While the course that the COVID-19 virus will take in the months ahead, its impact on the economy, our employees, travel restrictions and consumer confidence is uncertain, what is certain is our ability to manage through the shifting landscape, to continue to deliver service and products in a way that protects our employees and their customers, delivers profitable financial results, fiscally responsible cash management and opportunities for future growth. Our confidence in making this statement is the fact that we have been doing exactly that for the last 8 months, during which the pandemic has been with us. With the onset of the second wave of the pandemic, the recovery we were beginning to experience in our passenger business in Q3 has stalled, and there has been some pullback in passenger numbers. But they are still at levels higher than the initial loads. In Manitoba, increased case numbers caused the government at the beginning of November to move restrictions to the code red critical level, which has created more uncertainty around our passenger levels in Manitoba and Nunavut. Our passenger business, however, will rebound quickly when restrictions ease as travel in and out of the communities we serve is essential travel. This quick recovery was evidenced in Q3 when communities started to open up. Passenger volumes went from being 90% below normal in April to 40% to 30% below normal at the peak in Q3. Similarly, the second wave continues to stall the recovery of Regional One's business into 2021.Regional One's volumes materially reduced when the pandemic hit but have remained relatively consistent from the end of Q2 through to Q3, and we expect similar results in Q4. Notwithstanding these lower results, Regional One, as in each of these quarters, generated positive free cash flow less maintenance capital expenditures due to its ability to readily adjust its cost infrastructure together with the cautious management of its investments in light of the general condition of the airline industry.And although the recovery of Regional One's business will not be as quick as our passenger business, the regional jet market is expected to rebound more quickly than larger gauge aircraft, and EIC remains bullish on this sector.We do believe that Regional One's data-driven approach and superior understanding of the industry can be leveraged to acquire distressed assets at very favorable values. By working proactively to identify opportunities, we believe we can make investments that will set the table for future growth.Our Aerospace & Aviation segment business lines, which have performed strongly during the pandemic, being our cargo business, charter services, medevac business and aerospace operations, continue to do well. We expect continued strong cargo demand through the end of the year, focused largely on the transportation of essential goods like groceries and mail, particularly considering the second wave of COVID-19 we are currently experiencing. Our charter services have continued their strong performance through the pandemic, nearing and in some regions, exceeding normal levels. While the traditional core of our charter business, moving workers and cargo in and out of camps in the resource sector, has come back to pre-pandemic levels, strength in that segment continues to be bolstered by the charters EIC continues to operate transporting essential medical personnel to remote First Nation communities across Canada. Our medevac business was initially impacted by the onset of the pandemic, but once communities implemented the respective COVID-19 protocols and isolation plans, volume steadily increased to near-normal levels, which are expected to be maintained. Our Aerospace division will continue to perform consistently and materially unaffected by COVID-19 for the balance of 2020. The force multiple -- Force Multiplier aircraft returned to service in Q3 and has contracts confirmed through Q4, which will support positive results. A further evidence of the relative imperviousness of the business, PAL Aerospace has originally participated in arrival ceremonies for the first Canadian C295 Kingfisher aircraft, is on track to enter 2 new DASH 8 maritime-controlled aircraft into service on behalf of the Department of Fisheries and Oceans, and was formally awarded the contract to supply and support 2 new maritime surveillance aircraft for the Netherlands Coast Guard. Beyond the significant task of managing all this activity in the middle of pandemic, PAL Aerospace achievements continue to establish the company as a clear leader in the international ISR solutions. Our Manufacturing businesses continue to have strong demand, but with reduced margins and some project deferrals due to the impact of COVID-19, particularly at Quest. This leads to lower revenues at Quest in the short term as it is not possible to backfill these production gaps given the long lead times on these projects.Long-term demand remains strong. Also, the recent acquisition of WIS, together with AWI, now vertically integrates Quest in all of its markets and provides a strong foundation for further growth and enhancing our competitive advantage. As for EIC as a whole, in the fourth quarter, we normally experience a sequential quarter-over-quarter decline in EBITDA of approximately 15% from the third quarter due to seasonality.Last year, the decline was much less as we had 2 material acquisitions, AWI and LV, in the third quarter. This year, due to the resurgence in the number of COVID-19 cases and lower CWS to help offset COVID-19-related inefficiencies and expenses, the decline may be somewhat greater than our 15% historical decline.Turning now to our CapEx outlook. Our maintenance CapEx is primarily driven by our Aerospace & Aviation segment and moves in line with our scope of operations. As we experienced a decrease in flight hours due to the impact to COVID-19, our maintenance CapEx is similarly reduced to match the level of flying. This has resulted in lower levels of maintenance CapEx for Q2 and Q3 than experienced in comparative quarters in 2019.This lower level of maintenance CapEx is expected to continue through the remainder of the year. Gross capital expenditures in the fourth quarter were largely related to the acquisition and the start of the missionization of the 2 DASH 8 aircraft required for the Netherlands Coast Guard contract. No other material growth CapEx is expected. However, we will take advantage -- advantage of opportunities if they arise. While the circumstances of the pandemic continue to evolve around us, EIC's business model and our approach to its implementation and management remain unchanged. We are still focused on our 3 core objectives, and I continue to believe it is instructive to check in on our progress towards those objectives through the last quarter. EIC's first objective is to provide shareholders with stable and growing dividends. Through Q2 and now again in Q3, in the face of the unprecedented challenges, we have again demonstrated our ability to generate free cash flow from our operations to pay our dividend, while meeting our capital obligations and paying down our debt. The second objective is to maximize shareholder value through ongoing active monitoring of and investment in our operating subsidiaries. In Q2 and Q3 2020, while managing our way through a generational global health crisis, we have also meaningfully expanded our business through acquisitions, consequently growing the range of products and services we offer, expanding our airline network rather than contracting it and extending EIC international in Aerospace and across North America in our Manufacturing segment.Again, our careful approach to management and our emphasis on sound financial fundamentals has allowed us to focus on being bold and entrepreneurial at a time when others are focused on costs or simply trying to keep operations running. Our third objective is to continue to acquire additional businesses or interest therein to expand and diversify EIC's investments. In Q3, we completed the WIS acquisition, and the pandemic will not stop us from pursuing additional meaningful opportunities to strategically acquire assets or stand-alone businesses that advance our long-term objectives. Over the last 2 quarters, I believe EIC has demonstrated at every turn how our careful proven approach to investment and management delivers value for our shareholders. We have shown how strong our foundation is, and we've tangibly advanced our position through the future. Finally, before moving on to questions, I want to thank all customers, shareholders and all stakeholders for their ongoing support and also to express my gratitude for all the front line workers who put themselves at risk through this pandemic to look after the rest of us. We would now like to open the call for questions. Operator?
[Operator Instructions] And your first question here comes from the line of Steve Hansen from Raymond James.
Just a quick one on the legacy in Northern airlines, if I may. Just trying to get a sense for the best of your ability here to understand what the step down might be like into Q4, recognizing that medevac will be strong, cargo will be strong and charter will be strong. Passenger, in particular, sounds like it will be the point of weakness. Too early to tell, I know. But can you just give us a sense for what kind of drawdown you've seen thus far? And how we should think about that into Q4?
Well, the hard part, Steve, is that code red has been really recent in terms of its implementation. So it's hard to see exactly how far back the core travel for medical is going to move back. I don't see us moving to Q2 levels, where we were down 90%. I don't see that kind of response. We will certainly see a decline, particularly in Manitoba and Northwestern Ontario, where we had the biggest bounce back during Q3. Things were relatively stable in Nunavut. And things remained reasonably strong on the East Coast at PAL. So I think we'll see a material pullback, in particular, in perimeters operations but limited. And then we see how fast as soon as these restrictions comes off, how fast the market bounces back.
Fair enough. I understand it's still pretty cloudy. Just on the -- one follow-up, if I may, just on your Quest operations. You've historically disclosed backlogs there. I'm just trying to get a sense for how that backlog gets progressed through the pandemic, again, recognizing you had some operational -- I'll call them inefficiencies at this point. But just trying to get a sense for the backlog and sort of your projected outlook there?
The challenge with Quest isn't the absolute level of the backlog, it's the timing of the backlog. Certain projects that we thought would be done during 2021 maybe moved into 2022. So when we report Q4, we'll give an updated outlook of what that overall backlog looks like. There hasn't been a big decline in absolute numbers. It's just -- it's sort of in transit in terms of which projects are getting done when, which has put some stress on to our team as this project accelerates, if this project gets moved back, as to what we put in each of the factories. But the overall demand, the number of things we're bidding on and stuff remains solid.
Your next question comes from the line of Chris Murray from AltaCorp Capital Inc.
Maybe just thinking about Regional One here for a little bit. You talked a little bit about -- we're going to be at a lower level for -- it looks like a little while. But I'm thinking how do we think about that business coming back at some point? Some of the longer-term partnerships that you guys have had, maybe those come apart a little bit. So I'm just trying to think about a return to normalcy there and what you're seeing in the lease market? And how we should think about this maybe later into '21 and into '22.
I think when you look at the types of aircraft we're flying there, Chris, whether it's the Embraers or to a greater extent, the CRJs, those remain a big part of people's regional fleets. And as those fleets begin to fly and the hours increase, those will go back into service. We've talked a little about it in past quarter about our relationship with SkyWest, which remains strong, and European carriers. It's really just a matter of when do those planes start flying.And again, we'll ramp up the parts revenue first and the lease revenue underneath it. But there isn't an alternative to those aircraft. And as those markets open up, they're going to open up to smaller regional aircraft first. So not much has really changed in our outlook. We were really excited in Q2 when we saw the business start to ramp, and we started to have meaningful discussions on redeploying some assets. And then as the second wave hit, that's kind of slowed down. So I don't anticipate any real improvement in that until the beginning of next year.I think when you look at the SkyWest as the biggest operator in the world, and when you see what their idea is on how volumes will ramp, I think that's a pretty good proxy for the demand for the type of aircraft we have. Obviously, we have a lot more customers than one, but I believe they're a public proxy for the regional business.
Chris, just a couple of additional comments. We think parts will come back first. And we think there'll be some pent-up demand because, obviously, there's still been some continued flow of traffic. And as a result, what airlines have looked to do is effectively scattered what they had either on their shelves or through aircraft that they weren't currently utilizing. But there'll come a point when you start seeing an uptick, where they'll have to go out and start replenishing what's been on the shelf.So definitely see when it does come back, that there will be some pent-up demand. On the leasing front, the -- I guess, the beauty of R1 is its ability to shift and, our lease assets are not long-term leases. They're short term. And we have the ability to easily pivot to lease just engines. And we think there's going to be a pretty strong demand for engines because operators are not going to want to spend $1 million overhauling an engine. So we think that's an opportunity going forward, and we're certainly looking at that. And just generally, and we look at the industry, R1's also been very bullish on the kind of their step-up strategy, where operators, again, will take the advantage of pricing today to move into, if they were in CRJ200s, to move up to 700s or 900s. So we're well positioned to help our customers do that. And there's been a lot of discussion about kind of reevaluating airframes into kind of low-density configuration so that there's more space. We've seen the popularity of the CRJ550. So again, those are spaces where we think that we can materially contribute.
Okay. That's helpful. And then a couple of questions around your passenger airlines. So I'll ask both questions, and I'll let you guys answer these as a pair. So first of all, there's been some discussion around the federal government wanting to support what we'll call like smaller communities, where your airlift is strategic, but it was happening to be done at the -- in conjunction with some of the provincial governments. We've seen agreements like that in Nunavut and Yukon. I'm wondering, is there anything like that you see coming up in maybe the Atlantic provinces or Manitoba or even Northern Ontario where you operate that you could receive some support to continue to operate, as you highlighted -- you're continuing to operate even though you're at low loads? And then the other question I have for you is around Atlantic travel. Can you just discuss a little bit what you're starting to see now that you've seen some of the major carriers exit that market? And is there any concern that they could reenter and sort of screw up any of your operations at this particular point?
Okay. I'm going to take your first question, Chris, and I'll give the second one with the maritimes to Carmele. The government subsidies were much more quickly put in place in the far North in the territories, in Nunavut, in Yukon, in the Northwest Territories. And we had support during the first main quarter, this is our second quarter from them. As revenues improved, there is only -- there's no material support in our third quarter. We have recently executed a new long-range agreement with the government in Nunavut and indirectly, the federal government, which provides for revenue support if ticket sales fall below certain levels to make sure we can maintain the service.Similar discussions are underway in Manitoba and Northwestern Ontario. Quite frankly, we aren't looking to government to support our profits. It's to help us when there are certain markets that are simply uneconomic to fly to. And we've done it for 7 months. We need the help of the government with some of those, and we're in good discussions right now with the provincial government in Manitoba and the provincial government in Ontario. Both of which will have the support of the federal government in those programs. We have not reached any arrangements at this point. But I would be cautiously optimistic that, that will help us particularly in some of the uneconomic businesses we need to keep going through. I want to be crystal clear. We don't need the government to help us with our business. We need the government to help us with service into certain communities where we have a moral responsibility to continue.
So Chris, let me answer your question on the kind of Atlantic travel and the withdrawal that we've seen from the mainline carriers in that region. So that -- we've certainly seen an uptick, in particular in the smaller communities going into the hubs. And we've made it clear to all those communities that PAL Airlines, as we've been for decades, is there to provide whatever lift is required. And PAL has a several different riding gauged aircraft. So we can match the aircraft of the demand. We recently extended service, a new route from St. John's to Moncton, and we were seeing actually really good demand on that route. It slightly reduced when Moncton went into a code orange, but as it removed the code orange into, I believe it's yellow, if I've got my colors right, we saw demand resume.We intend to extend that to Ottawa once the bubble is removed, and we think we're well positioned to be able to drive that traffic. As it relates kind of more generally to what opportunities exist, we obviously carefully monitor that. We also think that we would be well positioned to work with any of the mainline carriers to ensure that the flow of traffic into the communities, which maybe makes more sense for them to fly in, that we're there to support that. So we're cautious in where we go. We want to make sure that all our members of the communities we serve are well served and look for opportunities as they arise.
Our next question comes from the line of Mona Nazir with Laurentian Bank Securities.
Firstly, on the payout ratios and the improvement, irrespective of COVID, there's continued low levels of CapEx, and you did touch on deferrals and the correlation of flight time and operations to maintenance in your prepared remarks. Just more of a clarification from my side. So is it fair to say that as you expect activity to rebound into 2021 and beyond, maintenance CapEx should similarly uptick at a similar pace?And then also just on the growth CapEx side, if I'm reading correctly, for the foreseeable future, it's safe to say that it would remain low. But just given pent-up demand on the R1 side, we could see some return as inventory levels decline?
Yes. It's actually a really good question on -- as it relates to maintenance CapEx. It's important that we don't give the impression that they're discretionary. Airplane engines have a defined life, landing gear has a defined life. You're going to do these things in line with the schedule. But as the aircraft are flying less, the time when those are required is extended. So as our planes ramp up, we will see our return to the "more normal capital expenditures."We're still working on the budget for next year. And as has been the case in the past, we may front-end load a little bit of that in the slower winter season when winter roads are available. Having said that, with the pandemic, the availability of winter roads is not certain. And so we aren't exactly sure exactly how that's going to play out. But to the extent that it's a normal seasonal slower period, we will probably do slightly more maintenance CapEx in the first quarter than in other quarters.As it relates to growth CapEx, you're definitely going to see the close-off of our fisheries project, which we've been working on for the last 6 to 7 quarters. And you'll see the ramp-up of the purchase and then missionization of our 2 DASH 8s for our Netherlands contract, and you'll see that over the next 4 or 5 quarters. Those go into service right at the beginning of 2022.
The additional growth that you'll see in 2021 will be the start of the building for fix and search and rescue in Winnipeg here.
As it relates to Regional One, we've maintained the inventory we need to keep that business active. But quite frankly, we are actively pursuing opportunities where there's a distressed situation. The Q400, we thought, we've done very well with. We will continue to look for opportunities to buy fleet of aircraft. We're bullish on the long-term future of that business. And so if we could buy things at distressed prices, we'll be glad to do that. But again, that's opportunistic, and we're not going to buy things for the sake of buying them. So I think your statement that you can anticipate lower growth CapEx is accurate.
Just one other comment on maintenance CapEx because this is something that is different than, I think, many other airlines. All of our assets or aircraft are flying. So unlike other airlines that have parked aircraft where you might see a tremendous uptick in maintenance just to get them operational, we won't have that. We'll just have the kind of correlation between the increased flying hours and the increased maintenance CapEx.
Okay. That's helpful. And just secondly for me, with Pfizer's vaccine announcement, rapid distribution plans are being put in place. I understand you did manufacture some PPE. And now wondering if you would be one of the Canadian companies that could transport the vaccine specifically to Northern and remote communities?
We are actively in discussions with the federal government about being able to provide that service. As you saw with our Indigenous Services Canada contract, we're bringing medical professionals to the communities across Canada and managing that on behalf of the government. I think we are quite -- we're clearly the logical provider of this service into the North. No arrangements have been reached yet. There's still some work to do because the -- at least at this point, the vaccines are expected to require exceptionally low temperatures during transport.So we're going to have to work out how we do those things. But in terms of flying into the communities we service, we've got the right assets where we've got near-national coverage, and we'll work with other companies in the areas where we don't cover, but to make sure that we can have a comprehensive solution for the Canadian government.
Yes. And this is really where the strength of EIC comes out. First of all, the ISC charter has obviously been very successful, and the complex logistics involved in that is probably beyond what one can comprehend. I mean, we moved thousands of health care providers throughout Canada, over 150 segments. So it's really a complex structure. And I think that bodes well because we've been very successful in our execution. So the government is aware of our capabilities.As it relates to the vaccine, Mike made a point about the special needs that might be required in order to transport, whether it's refrigeration or other requirements. Well, we have PAL engineering. So if there's engineering that's required to make modifications to the aircraft, we can design those and then we can get them certified internally. We can do our modifications internally. And then we've got the, of course, the aircraft in order to fly it. So we're well positioned to be the solutions provider for this.
Perfect. And just as a follow-up, is it safe to assume that if you were successful pricing, end yields would be favorable?
Yes. I mean, absolutely. It would reflect the -- obviously, the cost and the effort required in order to execute the contract.
Our next question comes from the line of Konark Gupta with Scotiabank.
This is Konark's associate. I have a question about margin strength. For the Aviation segment, we look at the sequential increase in EBITDA and revenue from Q2, and the implied margin is very strong at 47%. Can you please help us understand what played into the margin strength?
I'm not entirely sure I understand your question. But the margins in the Aviation improved with the density of the passengers on the planes. And so we were flying less aircraft that were almost completely empty over the period. You also saw in the Aviation business, it's important to understand the sequential improvement in the maritime surveillance business and the return to action of the Force Multiplier aircraft, which largely did not fly in the second quarter. And so -- and you also see increased medevac operations. And so a margin analysis, it's not like the cost structure has changed or somehow inherently, it's more profitable. It's just the business is returning to normal. And you've got more robust operations in a number of areas and better load factors on the passenger/freight aircraft.
Great. I do have another question. How is the passenger load factor trending in the Northern airlines? And what do you see for Q4?
We mentioned that earlier, that it had increased dramatically during the third quarter and then has plateaued, has declined with the implementation of code red in Manitoba and similar classifications in Northwestern Ontario. So we've seen a decline in this period. The implementation of code red is too recent for us to get a real ability to forecast other than to say we expect it to decline in the near term until the pandemic classification is reduced. I think the key takeaway on this is not trying to guess the number for every month. We've got a 6-month period after the pandemic, where we had very low load factors at the beginning of Q2 and better load factors in Q3. And if you look at the average over that, we've generated more than enough cash flow to fund our -- all of our capital requirements, whether it's our dividend maintenance or growth CapEx. So we don't anticipate that changing. We do definitely expect a decline in passenger traffic in the near term, however.
[Operator Instructions] Your next question comes from the line of Tim James with TD Securities.
My first question, just the working capital, the cash coming from working capital through the first 3 quarters has been quite strong, much stronger than most sort of 9-month periods if we look back historically. Just wondering how we should think about that in terms of the fourth quarter. Does that mean that the fourth quarter could be a little bit weaker than you would normally see during that quarter? Just trying to get a sense for what usage would look like here in the fourth quarter of this year.
It's a good question. We don't see any material further drawdowns of working capital as we've downsized the working capital with the downsize of the operation, so it's generated cash. We think we've sort of fully -- based on the size we're operating at, we don't see a material decrease in working capital. You could see a slight usage for that, depending on small variables in the quarter. But we sort of think it moves with the business from here on.
The only -- sorry, the only exception would be the -- as we disclosed in the outlook, the expectation that we will be parting out some aircraft for Regional One, so it won't be a cash usage, but it will just be a flip from CapEx to inventory in the fourth quarter.
Yes. So we may take some aircraft in Regional One and tear them down. So that would end up increasing inventory, but at the same time, reducing fixed assets. So no net cash. Thanks for the reminder on that, Rich.
Right. So that will be kind of a disposition effectively and then a build in inventory in terms of what we see because you say no cash.
Exactly right. No cash.
Okay. Okay. Okay. That's really helpful. Then Mike, just thinking bigger picture here. When you look at acquisition opportunities, do you feel you're looking now at company sizes, that we're still at company sizes that fly under the radar of other bigger private equity firms? Or are you increasingly kind of considering larger opportunities where competition from PE firms might be increasing?
That's a really good question. And it varies a lot quarter-to-quarter. Our real sweet spot is sort of the $50 million to $100 million transaction. And we do face private equity competition in some of those, but where they're the best fit with our company, where we have a very high success rate in those areas. We continue to look at deals in the $100 million price range, and that's where the competition remains very high from private equity. I would say that in the near term, the number of transactions, the number of companies being marketed has declined, but the quality of the opportunities we see remain strong. So Adam and his team remained very active on some opportunities that we're partway down the road with. The single biggest challenge in the COVID environment with acquisitions is the difficulty in traveling. You just can't get a feel for management and do due diligence on a Zoom call. And so we've tried to do as much of the work upfront from Winnipeg as we can. But ultimately, we've chosen to bite the bullet occasionally, send Adam and his team out, understanding that we're going to end up with our team quarantined when they come back. But we are so reliant on management when we buy companies because we leave them autonomous. We need to do that work. And to be honest, that slowed our ability to close transactions.
Okay. So I assume maybe just to round off that question. I mean, looking at your performance here in the third quarter, which was good. I mean, what the company has done in Q2 and Q3, the liquidity position, like are you -- you must be feeling sort of very positive in terms of M&A over the next couple of years just because you look so strong. And while others, I'm sure, are struggling in many locations, it just seems like a great recipe. Is that -- am I missing something? Or do you feel sort of very encouraged?
It's bang on. I mean, I've been doing these conference calls for 16 or 17 years. And I'm not sure I've had a quarter where we've had more challenges and more successes. To be able to land that contract in Europe has opened all kinds of new doors for PAL. Being able to vertically integrate WIS into Quest is great for strengthening that business in the long run. The work that Darryl and his team have done with our bankers to make sure that we've got flexibility and liquidity, I think it speaks to the fact that a simple business plan executed well works in all environments.And I don't want to, in any way, underplay the tremendous efforts that the team has had to have to generate this stuff at tough times, and the tough times aren't over yet by any stretch. But the last 6 months is really evidence of the strength of this model and our ability to grow this business in all markets and in all different economic times.
Your next question comes from the line of Steve Hansen with Raymond James.
Mike, sorry, I couldn't resist trying to follow-up here on your comments there on the European foothold and what that can mean. I mean how do we think about some of the opportunities that could be out there on the international stage now that you have a base of operations for PAL's maritime surveillance business? Is that something you want to delve into now? Or is it -- maybe just give us a couple of comments on how -- what that opportunity might look like over 3 to 5 years.
Yes. I think what it does is the more we can expand our international footprint, the bigger a player we are in the maritime surveillance business as a whole. There's currently a material opportunity in Malaysia to provide surveillance aircraft. There's going to be a number of areas in the South China sort of area, whether it's Australia, New Zealand, Thailand, Japan in ensuing years. And for us, we vertically integrated PAL's business with the acquisition of CarteNav a few years ago, who's an industry leader in the software that helps all these fancy sensors talk to one another and then downloading information to governments. And by the market acceptance of that, by expanding ourselves to a foothold in Europe, speaks well to our ability to further grow this business and become an international leader in this business. And it's something -- a business we really like because of the long-term nature of the contracts.
And the emerging environment, I think, also bodes well for that industry as a whole. Geopolitical tensions, even environmental awareness globally that's happening, competing for natural resources, budget tightening, just to name a few, I think, really drives a greater need for surveillance and surveillance data. Increased importance in that area, governments looking for solutions that they can afford, so that's where our on-demand kind of Force Multiplier comes into play. So PAL certainly elevated several years ago into the international stage. It continues to show why that's the case. And we certainly see it as a tremendous growth area for us.
And I'm not showing any further questions that are in the queue at this time. I will turn the call back over to Mr. Pyle for closing comments.
I'd like to thank all of you for taking the time to listen to us today. It's a challenging time in the world. And as a group, we will pull together as a country and as a people, and I look forward to talking to you again next quarter. Stay safe and take care of each other.
And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.