Exchange Income Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2023

There are 13 speakers on the call.

Operator

Good morning, everyone. Welcome to Exchange Income Corporation's Conference Call to discuss the financial results for the 3 month and 9 month periods ended September 30, 2023. The corporation's results, including the MD and A and financial statements, short statements issued on November 9, 2023, 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 and uncertainties and undue reliance should not be placed on such statements.

Operator

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 and A for this quarter, the Risk Factors section of the Annual and formation form, EIC's other filings with Canadian Securities Regulators. Except as required by Canadian Securities Law, EIC 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.

Operator

I would now like to turn the conference over to the CEO of Exchange Income Corporation. Mike Powell, please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, Thank you for joining us today on today's call. With me is Karbel Peter, our President and Richard Lowreych, our CFO. There has been a lot of interest in our recent aviation contract wins. I have asked Kevin Neal Hillier, the CEO at Carson Air Dave White, our Head of Aviation and CEO at Keewayton as well as Jake Treynor, the CEO at Powell, to join us to answer any questions you may have about the contracts.

Speaker 1

Yesterday, we released our Q3 financial results for 2023, and I am pleased to have this opportunity to share with and some of the highlights from the quarter. We set a number of record quarter watermarks, including record revenue, adjusted EBITDA, free cash flow less maintenance CapEx, net earnings and adjusted net earnings. This was achieved despite a challenging economy, much higher interest rates and whispers of a technical recession beginning to emerge. Even more importantly, this performance was achieved while we are beginning to deploy the capital from our bought deal common share offering in the 2nd quarter. For several of our growth initiatives previously to discuss, including our contracts there, Canada and the Medevac contracts with the provinces of British Columbia and Manitoba.

Speaker 1

We anticipate seeing adjusted EBITDA and bottom line for the Air Canada investment in the latter part of the Q4 of 2023 and on the Medevac contracts as we progress through 2024 2025. Taking a step back, Our portfolio of companies remains resilient. Announcements of acquisitions, strengthening of our balance sheet and new contracts were the theme of our 2nd quarter. Strong operating performance and the execution on those investment opportunities for the new contracts defined our Q3. In terms of absolute financial metrics, we recorded a record quarter results in almost all key metrics.

Speaker 1

Revenue increased 17 percent to CAD688 1,000,000 up from CAD587 1,000,000 in the previous year. Adjusted EBITDA grew to €168,000,000 from €150,000,000 last year, an increase of 12%. Free cash flow as maintenance capital expenditures increased 8% to $74,000,000 while on a per share basis, it declined marginally Increased interest expense of $8,000,000 over the previous period. Net earnings per share was $106,000,000 which a decrease of approximately 12% and adjusted net earnings was $55,000,000 up approximately $1,000,000 Our results across the board were record results for any quarter. However, on a per share basis, certain of the metrics were lower than the prior year.

Speaker 1

The primary reason for this reduction was the increase in the number of shares outstanding due to the bond deal offering in the 2nd quarter. The proceeds from such an offering are being used to fund our significant growth capital expenditures related to the Air Canada contract and our 2 Medevac contracts in British Columbia and Manitoba. The financial effects of such contracts CapEx payout ratio was 58% as compared to our watermark low of 52% experienced in last year's Q3. This payout ratio includes the impact of 2 dividend increases in fiscal 2022 and the increase in the absolute number of shares. In fact, The 12 months dividends increased by $18,000,000 for 2023 compared to the prior year.

Speaker 1

The payout ratio also includes a large increase in interest costs for the trailing 12 months of $43,000,000 With the results posted for the quarter, coupled with our confidence in 2024 and due to significant investments Air Canada and these Medevac contracts, we have announced a $0.12 increase in our annual dividend or approximately 5%, increase from $252,000,000 to $264,000,000 This maintains our 20 year record of a 5% CAGR and bears testament not only to the strength of our current results, but our confidence in the future. The Q3 continued to provide evidence of the power of our diversified model considering our strong aggregate results, which were achieved with subsegments delivering solid performance to off those who experienced a more challenging period. Essential Air Service Aerospace continued to deliver exceptional results. Virtually all revenue streams improved over the prior period. Strengthening passenger demand realized in the most notable improvement and resulted in expansion of adjusted EBITDA margins.

Speaker 1

Our Northern Air operators have continued to experience higher demand driven by the increasing population in the North, the continuous need for medical travel and the ongoing need to provide essential passenger and freight movements The capital investments made in previous periods in our fleet of fixed wing and rotary aircraft drove higher revenues. Diligent cost management in concert with the greater load factors drove improved margins. It is also important to note that we have completed long term arrangements with a number of our unions, the majority of our aviation subsidiaries and are working on the last couple of remaining contracts. This will provide us with contract and cost certainty. Our Aerospace business also benefited from more flying compared to the previous period with both maritime surveillance aircraft built for the contract in the Netherlands in full operations.

Speaker 1

Furthermore, the Force Multiplier also continued to fly significant towers for the U. K. Government. We are very excited about the future contract and are currently awaiting the RFP from the U. K.

Speaker 1

Home office for its new contract. Multi story window solutions It's continued to improve because of 2 key reasons. Firstly, the acquisition of BV Glazing in May of 2023 with no comparative in the prior year. And secondly, a more normal production schedule. The order book remains strong at approximately $1,000,000,000 with active inquiries continue Inquiries for new projects are continuing at all time highs, although the time to convert these to confirmed orders longer because of the higher interest rate environment for developers.

Speaker 1

The long term fundamentals of this industry remain strong. These longer term tailwinds will be discussed further by Carmel in our outlook. Precision Manufacturing and Engineering continued to deliver strong performance. Increases in revenue and profitability driven by the acquisition of Hansen in the 2nd quarter with strong execution by the majority of the other business line subsidiaries drove the growth of the business. Our Environmental Access Solutions continues to exceed the metrics we have purchased and applied.

Speaker 1

At quarter end, assuming our trailing 12 months runway, our comparative return of capital would have been well in excess of 20%. When we compare this year's quarter end results to the prior year, the operating margins have declined. As we previously commented that the prior year was due to a unique alignment of price, supply, demand and weather along with near practical capacity for the utilization of rental vans. That combination of factors was unsustainable in the longer term and the results have moderated. Furthermore, this year was characterized by an unfavorable dry and hot summer and historic wildfire season that reduced demand for Mats.

Speaker 1

That said, in totality, Northern Mats has been a positive contributor to our results based on the acquisition metrics and its return on capital. Our aircraft sales and leasing business continues to recover from the pandemic. The assets within the leasing pool continue to be placed on lease on a consistent cadence throughout the quarter and into further quarters. The cadence was impacted by the worldwide pilot shortage. Furthermore, revenues in the business line were also impacted by the fewer large asset engine sales, excuse me, compared to the prior period.

Speaker 1

It's important to note that the asset and engine sales in the prior period and even in the current period are high on a relative basis compared to pre period. As a reminder, such asset and engine sales are generally at lower margin, higher dollar sale transactions. Management within the aircraft sales and leasing business continues to diligently look for opportunities for investment in this opportunistic market. In the Q3, we saw a record set in key metrics on an absolute basis. However, many will note that certain per share amounts are below Q3 2022, which were quarterly high watermarks.

Speaker 1

Previously, I mentioned the fact that the Q3 per share amounts were impacted by the capital that is to be deployed on those longer term contracts announced in the Q2. At EIC, we have always taken the longer term view of our investment thesis. We believe that those contracts will provide meaningful increases in revenue, adjusted EBITDA and profitability as we move through 2024 and into 2025. We like these investments for a number of reasons. Firstly, they are a core competency of our business.

Speaker 1

Our businesses have been involved at Medevac and scheduled flying services for over 4 decades. Secondly, the customers are either large corporations like Air Canada or governments. There are consistent stable cash flows associated with these contracts. And finally and most importantly, those contracts met our internal return on invested capital metrics. They are accretive to our shareholders and over the long term on a per share basis.

Speaker 1

We want to provide an update on these goals In our Q2, we announced that we have won 2 important long term medevac contracts with the provinces of British Columbia and Manitoba. We have grown to be Canada's largest medevac provider. These 2 new contracts strengthen our critical mass even further. Both of the contracts for 10 year terms, including options to and include options to extend beyond that. These significant contracts will require aggregate capital deployment of approximately 275,000,000, which has already begun and will continue over the next 2 years with full scale flying not expected until 2025.

Speaker 1

During the Q3, we acquired 3 of the 5 aircraft related to the Government of Manitoba contract. Those aircraft will be retrofitted with Medevac Interiors over the next couple of quarters, after which they'll put into service in the early part of early part to mid-twenty 24. We anticipate the receipt of our first brand new King in the Q4, after which it will be retrofitted with the interior for the Medevac purpose. This aircraft will be received in a regular cadence over the next six quarters. Our returns on capital in this investment will be most evident in 2025 and thereafter, when all the aircraft are acquired and the existing aircraft that we use for the government of BC are redeployed.

Speaker 1

During the Q2, we also announced and finalized an agreement with Air Canada to provide regional service in Eastern Canada for up to 5 years. The agreement will require up to 6 additional Dash 8 of the 4 100 aircraft and substantially expand our maritime operation. We completed our first flight on July 1 using existing capacity and acquired the initial 4 aircraft during the 3rd Q4. The returns on this contract will begin to be evident in the back half of the fourth quarter with the full impact available in fiscal 2024. We are also seeing growth opportunities within these new contract opportunities as discussions with the Government of BC have led to additional aircraft being added to the contract and further discussions are ongoing.

Speaker 1

In the Q2, we also started our contract with the U. K. Home office. We anticipate the release of an RFP for the competitive bid process for a new contract with the U. K.

Speaker 1

Office to occur in the Q4 of this year or early 2024. As the incumbent, we are well positioned as we continue to demonstrate mission success on the existing short term contract. In our Manufacturing segment, we are continuing the integration of Hansen and BV glazing. Our COO, Darwin Spero, has been spending and a significant amount of time with the Quest and BV Dising management team. The focus is to find innovative and creative ways To create efficiencies, leverage our collective purchasing power and rationalize our production space footprint.

Speaker 1

These activities will facilitate further growth and increase margins in the longer term. Subsequent to the end of the quarter, we announced the acquisition of dry air. Dry air is the leader in portable, hydronic heating equipment in North America. Dry Air is characterized by their innovative customer centric approach, and we believe that it will be a great fit within our EIC family of companies. They ticked all of the boxes that we look for in our acquisitions.

Speaker 1

They are profitable, well established and have a strong management team. Both Claude and Merlin, who are majority owners, will continue in their previous roles. The company operates in niche markets, generate strong semi cash flows and are primed for continued organic growth within the rental market in North America. Lastly, our work completed in the Q2, being the upsize and extension of the credit facility coupled with the bond deal offer and assets of this market. Our pipeline for acquisitions continues to be strong and our diligent management of our balance sheet provides us with Significant capital deployed when the right opportunities are presented.

Speaker 1

Our model continues to resonate with owners. In our recent acquisition of dry air, the majority shareholder quote wrote to me in a note. In our boardroom in July, I see explained the philosophy and values and the culture of EIC. We felt that we found the people we wanted to work with. I'm very proud of the culture and values that we have developed over the years.

Speaker 1

Our subsidiaries have become our greatest champion of our business model. While we are actively considering deals, discipline will remain one of the key principles in our decision making to ensure we acquire companies with the requisite strong management teams and strategic business missions with future growth opportunities that enable accretive growth to our shareholders. Our management teams will be busy over the next number of quarters, We continue to integrate the business we acquired in 2023, running our readying our essential air services businesses for the operation of the new Manacraft aircraft to and contract wins, including the hiring and integration of Cruise. Our other teams will be continuing to execute on our strategy to ensure that we Our results continue to demonstrate the resilience and sustainability of our business model. Taking a step back, in 2019, Our revenues for the Q3 were $355,000,000 and adjusted EBITDA was $89,000,000 Fast forward 4 years, which included the pandemic, our revenues have grown to CAD688,000,000 and our adjusted EBITDA to £168,000,000 a cumulative average growth rate of 15% for both revenue and adjusted EBITDA.

Speaker 1

That growth was accomplished through both acquisition and organic growth. Furthermore, our industry diversification had shown its value throughout the pandemic and has continued to to demonstrate its importance today and into the future. It allows us to deliver consistent meaningful financial performance irrespective of the economic and geopolitical conditions of the day. On that basis, as a result of our strong results on a year to date, Our confidence in 2024 and beyond, we made the decision to increase our dividend by $0.12 to $2.64 per annum. We are focused on succession planning at our company as we grow and we realize the need for strong management teams.

Speaker 1

Carmel Peter, our President, has announced that she will be retiring sometime during fiscal 24. But I'm pleased to say she will not be leaving EIC. She will be joining the Board sometime during that period. We have developed people within the company and we will be announcing the management changes to fill Carmel's shoes when she sets a final date. We're excited to have her stay with the company.

Speaker 1

Our future is bright. Our business is built on a solid foundation and our diversification and resilience as shown in our results. We are looking forward to the contributions made from our 2023 acquisitions and our growth capital expenditures as we move into 2024. I'll now hand the call off to Richard.

Speaker 2

Thank you, Mike, and Good morning, everyone. The 3rd quarter was another example of the benefits of our diversification and focus on the long term instead of focusing on 1 quarter at a time. Consistent with our expectations and past disclosures, the prior period was the perfect quarter for our Environmental Access Solutions business and Sustaining cash flows at that level in 2023 was not feasible. That meant that our other existing operations plus contributions from our 2023 acquisitions not only covered this shortfall, but covered strong period over period results. Adjusted EBITDA was $168,000,000 an increase of 12% over the prior period.

Speaker 2

The Aerospace and Aviation segment adjusted EBITDA increased by $24,000,000 Partially offset by a decrease of $6,000,000 in the Manufacturing segment. The increase in our Aerospace and Aviation segment can be summarized into 2 buckets. The first is a steady recovery from the impact of the pandemic on our airline operations. The second is investments we have made into our operations over several quarters and in some cases years as we had our sights set on the future. Those investments are now producing the returns we expected, increasing adjusted EBITDA over the prior period.

Speaker 2

Investments allowed us to win contracts in the Netherlands and the United Kingdom. We also entered into a contract with Air Canada, which started to contribute in Q3 and 2 medevac contracts, which will not be fully operational until early 2025. We continue to make these types of investments to support our growth. The decrease in our Manufacturing segment was driven by the Environmental Access Solutions business as discussed above. This decline was partially offset by increases in our existing businesses

Speaker 1

due to

Speaker 2

the resilient demand for their products and our 2023 acquisition, most notably, our pre existing businesses in the Multistory Window Solutions business, line contributed strong period over period increases as a more normal production schedule benefited their operations. As Mike previously discussed, during the Q2, the corporation completed an equity offering of common shares. The offering was the largest in our history by a wide margin and was materially oversubscribed. Knowing the significant and accretive growth opportunities we had in front of us, we took the opportunity to raise more than we initially went to market for, Knowing that these funds will be deployed over a period of time, while this temporarily increased our shares without a corresponding contribution to adjusted EBITDA and therefore negatively impacted our per share metrics we planned for the long term. This is consistent with our past practice.

Speaker 2

Practice of always Ensuring we have the capital available for it is required to ensure that when the opportunities materialize, we have capital put to work. Quarter, both net earnings and adjusted net earnings increased by 1% over the prior period. The per share results declined due to a fourteen increase in shares outstanding, driven primarily by our common share offering in the Q2 of 2023. The increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings, was mostly offset primarily by 2 items: increased interest costs and depreciation on capital assets. Interest costs increased over the prior period in lockstep with increased benchmark borrowing rates over the prior period.

Speaker 2

In addition, increased long term debt outstanding due to investments made increased interest costs. The increased interest This increased interest costs by $8,000,000 in the quarter $43,000,000 on a trailing 12 month basis. The impact from increased benchmark borrowing rates would have been larger had we not entered into 2 rate swap transactions in 2023. These two transactions fixed costs on approximately $540,000,000 of our credit facility debt. Depreciation on capital assets increased for two reasons.

Speaker 2

First, the acquisition activity of the corporation contributed to the increase in 2023. 2nd, investments made to increase the size of our fleet and increased flying of that fleet also contributed to the increase. Free cash plus maintenance capital expenditures increased 8% over the prior period due to increased free cash flow and lower maintenance capital expenditures. Our free cash flow increased due to higher adjusted EBITDA compared to 2022. Increase in interest costs partially offset the increase in adjusted EBITDA.

Speaker 2

Our payout ratios both on a free cash flow and capital expenditures basis of 58% and on an adjusted net earnings basis at 78%, remained near all time lows on a trailing 12 month basis. We expect that the realization of returns on and permit continued dividend increases consistent with our historical dividend growth. Growth capital expenditures of $81,000,000 were made during the quarter. These investments were focused within Essential Air Services, Aerospace, Aircraft Sales and Leasing and Environmental Access Solutions. In Essential Air Services, investments were made in additional aircraft for our Kuwait and Medevac contract and for our terminal expansion in Winnipeg.

Speaker 2

We have also purchased aircraft for our CPA with Air Canada as we ramp up our service under the agreement. Significant deposits have been made on on aircraft for our recently awarded Medevac contract with Carcinaris. Aerospace made investments for its renewed and expanded contract in Curacao. Aircraft sales, we recently made investments into additional engines for lease as the lease market continues its recovery from the pandemic 1st from the pandemic and now from a worldwide shortage of experienced pilots. Environmental Access Solutions made investments in its rental map portfolio during the quarter.

Speaker 2

This was strictly based on the timing of when masks were produced and is expected to reverse in the 4th quarter. During the Q1, as we messaged in the Q4 of 2022, we had a material outflow from working capital, which was primarily driven by a receivable that was collected in the Q4 of 2022, but the corresponding payable was not due until 2023. Working capital investment outside of this outlook was focused on investment in inventory and aircraft for resale in aircraft sales and leasing and a modest increase in working capital quarter, our seasonally business quarter was well below historical norms at $7,000,000 Our senior leverage ratio at the end of the quarter remains consistent with our historical target at 2.4 times. Our total leverage ratio, when including our convertible debentures, continues to decline as the debentures have not increased at the same rate as our adjusted EBITDA over the last 18 months. Historically, our Cabrillo debentures have represented one times of adjusted EBITDA within our capital structure, Whereas now the debentures represent approximately 3 quarters of a turn of adjusted EBITDA off of 2023 CapEx using the midpoint.

Speaker 2

That concludes my review of our financial results. And I'll now turn the call over to Carla.

Speaker 3

Thank you, Rich. The 4th quarter is expected to provide a solid finish to the 2023 year. We are anticipating adjusted EBITDA for Q4 of 2023 to be higher than for 20 quarter. 2, driven by growth in the A and E segment. As the name suggests, our Essential Air Service Business is not in any material way impacted by the economic factors that affect mainline carriers and will experience year over year growth in Q4.

Speaker 3

The passengers and freight we move are driven by need, medical necessity, medical appointments, food, essential goods, not by choice or disposable income. This has driven demand pre COVID or higher levels and has caused us to add aircraft capacity both passenger and in Q4. Also adding to the year over year growth and the stability of this revenue stream is our service agreement with Air Canada. Although we started in July providing some flight capacity with our existing fleet, by the end of the year this will be replaced with the initial 4 full time Q4 aircraft. Similarly, our medevac businesses continue to grow with the additional medevac aircraft we were contracted to provide in Nova Scotia in August and increased capacity requests from BC and Nunavut.

Speaker 3

Offsetting some of these gains are the increased expenses from raising rising labor costs experienced by our air operators driven by the flight and duty regulations and the industry wide shortages for pilots, aircraft and medical personnel. Although some of our operators have already been able to pass these on, others will have to wait until contract renewals. However, even absorbing these costs, our margins remain strong. As we look forward into 2024, our essential services business The situation performed strongly given the nature of its demand, the capacity we added in 2023, the Air Canada contract and will be further bolstered by the Medevac contracts we won in 2023. Our 10 year BC Medevac contract we'll be contributing to financial results throughout 2024, but we'll not see the full financial impact until all new Medibank aircraft are delivered and operational and our existing aircraft are deployed into other opportunities, which will take us into 2026.

Speaker 3

The Medevac contract won in Manitoba will slowly start Turning to financial results in March of 2024 when the first aircraft goes online and will increase to its expected run rate in Q4 of 2024 when we anticipate all aircraft being operational. Aerospace business line is also expected that have growth in Q4, primarily driven by the full engagement of force multiplier doing maritime surveillance work for the U. K. Home office. Aerospace is also bolstered by the Netherlands operations, which did not commence until late Q4 2022 and the high tempo flying in the UAE and Curacao.

Speaker 3

With the Force Multiplier being on contract substantially all of 2024 and other key operations being under long term contracts such as our DFO contract, Netherlands, Curacao, Fixed Wind Search and Rescue, the Aerospace business line will and provide another strong reliable source of earnings in 2024. Although our aircraft sales and leasing business continues to be challenged by the impact of industry wide pilot shortage and MRO availability, we do expect continued year over year growth in Q4. This anticipated growth is driven primarily by material increases in leasing revenue, which is very encouraging. We expect the leasing portfolio to continue and its recovery into the 1st part of 2024. Parts sales and whole aircraft and engine sales are also expected to be consolidated Q4, consistent with historical levels, which will continue into 2024.

Speaker 3

Now turning to our Manufacturing segment. Our Environmental Access Solutions business is not expected to outperform Q4 of 2022, which was a 4th quarter record for further math with the perfect alignment of price demand and supply. Q4 2023 did not have the same perfect alignment and is being further impacted by less favorable weather, increased mass supply and the demobilization of a large pipeline project. As such, we expect Q4 of this year to be approximately 40% of the prior year sorry, prior quarter. But to put this in perspective, the expected results in Q4 quarter will be greater than the metrics on which we purchased Northern Mass.

Speaker 3

In the 2024 year, we anticipate pricing and demand to be in line with what have been experienced in the second half of twenty twenty three. The variance in environmental access solutions will be materially offset by the growth in the multi storey window which will see material growth in Q4 over prior year. The drivers are the acquisition of BB Glazing, which does not have a comparative in Q4 2022 and the increased volumes at Quest. Moving in Canada and the U. S.

Speaker 3

Continues to be Extremely active, but the conversion of those quotes into backlog is being delayed with uncertain economic conditions and higher interest rates. Those same market variables are also causing some jobs to push out, which could impact demand in 2024. However, We remain bullish on this business line as the fundamentals which drive demand, the immigration, urbanization and the lack of affordable housing remain incredibly strong. If there will be a slowdown, we believe it will be short term followed by a surge in demand. With the recent acquisition of we will be well positioned to capture this increased demand.

Speaker 3

Also in 2024, we expect to start to see the financial benefit of synergies being captured between Quest and BB Glazing. The Precision Manufacturing Engineering business will also see comparative growth fueled by this year's acquisition of Hanson and Dry Air. Performance in 2024 is expected to be similar to 2023, normalized to the full year operations for Hanson and Dry Air that were acquired during 2023. With respect to maintenance capital expenditures for we anticipate levels being slightly higher than last Q4, higher flight hours to support increased passenger and charter volumes together with inflation, labor and the impact of the sales force. The increase in supply chain issues, growing fleet size and acquisitions are the factors contributing to the increase.

Speaker 3

Growth investments for the Aerospace and Aviation segment in Q4 are focused on the upgrade of the surveillance aircraft to the renewed Curacao contract, the construction of the Gary Philman indigenous terminal Q400 aircraft acquisitions to fulfill our agreement with Air Canada investments in aircraft and infrastructure for the newly awarded BC and Manco Limonevat contract and payment towards the construction of our King Air Simulator. With 3 completed acquisitions already this year, our acquisition pipeline continues to be as strong as it ever has been. The higher interest environment has created a leveling off of acquisition prices, which in turn allows ESE to be more competitive on more transactions, particularly larger transactions. With capital on hand from the equity raise in the Q2, EIC will continue to be active in the acquisition and market. We are on track with our 2023 adjusted EBITDA guidance of between $540,000,000 $570,000,000 trending towards the middle of that range.

Speaker 3

As we look into 2024 and take into account the contracts we have won and the timing that they will have and material financial impact, our prior investments, our acquisitions, organic growth as well as increasing cost, inflation and the impact of current economic conditions on the manufacturing businesses, we anticipate our 2024 adjusted EBITDA to to be in the range of $600,000,000 to $635,000,000 with further growth anticipated in 2025 as our new contracts mature. This strong outlook together with confidence we have in our operating fundamentals underpins our decision to increase our annual dividend by approximately 5%, taking our dividend from $2.52 to $2.64 per year. Thank you for your time this morning, and we would now like to open the call for questions. Operator?

Operator

Thank you. We will now conduct the question and answer session. Your questions will be pulled in the order that they are received. One moment please for your first question. Your first question comes from James MacGregor from RBC.

Operator

Please go ahead.

Speaker 4

Hey, good morning and thanks for taking my question.

Speaker 1

Good morning, Dave.

Speaker 4

Yes, I just have a question on the 2024 guidance and some of the new contracts that you have coming The press release, it seemed to allude to some of those recent wins being pushed out to 2025. So I guess, Can you just speak to the timing of how you expect those contracts to ramp up? And you also mentioned the BC government is increasing the Amount of planes are going to require, can you just kind of frame that opportunity? And when we're thinking about the magnitude of these contracts, is 20% EBIT returns still a good frame of reference to you?

Speaker 1

I'll take the big picture stuff and then I'm going to let Kevin talked specifically about the contract. But the we said that The returns on those contracts are above our 15% threshold. I don't think I gave a specific number. So So I don't want to comment on 20 per se, but it's above 15. In terms of the rollout of the contract, We haven't even received our first airplane yet.

Speaker 1

We're starting to fly some of the areas with other aircraft we have. But the real contract doesn't really begin until we get those contracted, those aircraft in service and that's really not going to begin until later next year and with not a full effect until sometime in 2025. Kevin, maybe I'll hand it to you to talk about like the overall contract and the size of the contract.

Speaker 5

Thanks, Mike. Kevin Hillier with Carsten here. We will be receiving our first new aircraft, as Mike said, in in Q1 of 2024. That aircraft will go into service at the end of that quarter. We are operating the contract right now with the existing Aircraft that we had and those aircraft will continue in a transition phase throughout 2024 and into Q1 of 2025.

Speaker 5

We have discussed some growth opportunities and added 1 aircraft to the contract already at this time. And there are future opportunities as well with BCDHS.

Speaker 4

I appreciate the color. Thanks. I appreciate the color there. And just another question on the Window Solutions business. There was a recent article in the Global Mail talking about some payment issues with the developer in Toronto and the article mentioned $10,000,000 payment to the BB Glazing specifically that was past due.

Speaker 4

Are you able to comment on this? Just trying to understand This might be part of a broader issue.

Speaker 1

I think I would say it's a challenging time for some developers. Interest rates are higher and financings are squeezed. We don't really like speaking about individual developers. We have great relationships These people and we intend to keep building with them. The project that was mentioned in that article, their payments are current with us.

Speaker 4

I'll turn it over. Thanks for having me on.

Speaker 1

Thank you.

Operator

Your next question comes from Steve Hansen from Raymond James. Please go ahead.

Speaker 1

Good morning, Steve.

Speaker 6

Yes. Thanks. Good Good morning, guys. Thanks for the time. Mike, just a first broader overarching question for you.

Speaker 6

The business continues to advance and grow in size and scale and complexity, of course. There are a lot of moving parts, As I think the call has already described, but you've also described the pipeline as being robust. How do you feel about the current macro picture And continuing to push ahead with additional acquisitions here in the current landscape, it sounds like capital availability is high. How are you to continue moving forward?

Speaker 1

Yes. I think that's a really good question. We've been consistent through our history about Being disciplined in what we pay for businesses and that hasn't changed any in this environment. I will say that with interest rates where they are today, we're probably A little bit more aggressive in the returns we require because instead of paying 2% or 3%, we're paying 5% or 6% for interest rates. And so, well, it hasn't changed my hurdle per se of 15%, we're very dogmatic at only picking the best Stuff within that and there are a lot of good opportunities.

Speaker 1

Dry Air is a great example, Steve. I mean, it's Run by a family that cares about their employees. They've built it from nothing. They're an industry leader in a very unique little market niche It has continuing upside. And so it's kind of the company that we've cut our teeth on With the IC, we expect to continue to do those deals in the near term.

Speaker 1

So we're cautious because of the economic environment. But Quite frankly, the best deals are done in challenging times. So that's why we raised our capital in advance and We put ourselves in a position where we can take advantage of it.

Speaker 6

That's helpful. Thanks. And just one follow-up just quickly on the force multiplier and surveillance business. It sounds like the short term deal with the U. K.

Speaker 6

Home office has been incredibly busy. There's a new opportunity on deck, it sounds like. Is there a way to frame what the new It might look like in terms of size, scale, tenure or term as we think about that opportunity set and maybe just broadly in Europe in general?

Speaker 1

Sure. The contract, the RFP hasn't come out. We have some rough ideas of parameters. I think I'll let Jake take that. That's his direct bailiwick.

Speaker 7

So perfect. Thanks, Mike and Steve. I appreciate the question. As Mike pointed out, the RFP, we're anticipating it to come out this months. Month or certainly in this quarter.

Speaker 7

What we do know is that they are going to look for more capacity. What shape that comes in, we're not Sure, until we see the RFP release. So that will guide us in terms of additional assets. And to your question about Europe in general, We certainly see that as a strong market that will continue to develop. We have a great footprint with the Netherlands contract further expanded by the U.

Speaker 7

K. And that's a great base of operations to expand from.

Speaker 6

Appreciate that guys. Thanks.

Operator

Your next question comes from Matthew Lee from Canaccord. Please go ahead.

Speaker 3

Good morning. Good morning, guys.

Speaker 8

This is Betty on for Matt Lee. So for the first question, I want to ask more about the Manavik contract in the context of how fixed the size of them are Aside for extending the land, is there opportunity to upsize the contract in terms of aircraft?

Speaker 1

Yes. Kev mentioned that of Indigo. The government has already added additional capacity in some of the bases and we're in. I think it's fair, Kevin, to say that we're in discussions with the government to add additional aircraft and additional capacity in other markets. And so while we started with approximately 1,000 aircraft in this, that could grow Significantly over the next quarter or 2.

Speaker 1

Now I would make sure I caution everyone that if we add these extra planes, we're going to have to go buy them. And And so those aren't going to get here till 2025 as we add them. And the contract will be We'll start when they get here. So I mean, we're still going to have a long term on those new aircraft. We're in discussions with the government.

Speaker 1

I'm very happy with the state of the relationship, both in British Columbia and in Manitoba, months. As we implement these and work with the government to provide the service they're looking for, there could well be opportunities to Expand the Manitoba contract as well. Although, I think I would say that those are more preliminary than perhaps the ones are in BC where we've already added contracts. Kevin or Dave, anything you'd like to add to that?

Speaker 5

Kevin Hillier here. And yes, I agree with everything Mike said. And we've had a great relationship with BCHS for 30 years and they chose us to be the primary provider because of that track record and we certainly hope to

Speaker 9

Same message here for the Manitoba contract, great relationship with the government as Mike mentioned. Kevin's a little further ahead, he signed a little earlier and getting Bring into airplanes, we've accessed our airplanes, but we still have to modify them, import them and put them online. And there is a language right in the initial for potential, But that will be up to the government as the relationship develops and what services they want. But they're looking forward to it. We're looking forward to it.

Speaker 9

It's a great new service for the people of October. And it's what we do and what we've done for decades.

Speaker 8

Thanks. And just in terms of growth CapEx, could you provide more color on this? How much are Pectine for 2024 and how much of that is related to the aircraft required for the new contract?

Speaker 1

We haven't finalized our growth CapEx for 2024, but I can give you some color on that. Most of the stuff for Dave is already purchased. So the Kuwaiton project will show up in Q4 of this year. Same with the work for Jake, the initial Four planes for Air Canada are also already purchased, some were in Q3, some were in Q4, same with Dave. And then finally, In BC, we have deposits on aircraft already.

Speaker 1

We've made payments to the manufacturer, but we haven't taken delivery of anything yet. We'll have paid for 1 this year as we get that in the next week or 2. And then the balance will be paid off over the next sort of 6 quarters As they come into service. And to the extent the contract is extended, that would continue for the new aircraft we would add on the back end of that order.

Speaker 3

Yes, the other kind of major, if you think 2024, what the growth CapEx would include that we've already talked about is our King Air simulator, which we'll be getting in in 2024, as well as the completion of the terminal expansion that we're doing for Perimeter.

Speaker 8

All right. Thanks. I'll pass the line.

Operator

Your next question comes from Christa Friesen from CIBC. Please go ahead.

Speaker 1

Good morning, Kristin.

Speaker 3

Hi. Thanks for taking my question. Good morning. I was just wondering, Looking out at your 2024 guidance, can you walk us through how you're thinking about Northern Knapp for 2024? And and I guess what a more normalized year looks like.

Speaker 3

Would that be similar to what we've seen this year?

Speaker 1

Yes. Northern Mat We had the perfect, we called it a unicorn year last year where everything lined up. This year has been also a strong year, but it's the irony when you're public that The 2nd best year in the history of the company if it follows the best. People think, it's not great. If we could photocopy this year, I would do it.

Speaker 1

Next year, the challenge with the business is the TMX contract. The rental maps have been returned to all the rental We're still doing work on pipeline, but with their maths. And so the revenues on that have declined. And you'll notice that in the Q1 of the year. There is a sight line to stronger oil and gas business next year.

Speaker 1

The fires and the hot weather deferred things this this year. So the outlook for that on a go forward basis is strong together with particularly the back half of the year and enhanced Demand on the transmission and distribution for electricity part of the business. And so you'll see that ramp in the back half. If we want to talk about we don't give company specific guidance per se, but what I would say is that The company was bought off of a return that met our 15% guideline. And if next year were to be in that range, which I would expect that it will, It gets you an EBITDA depending on how you do the calculations of $70 something million.

Speaker 1

That's not a specific forecast, but more a general comment about That's where it needs to be to generate our 15% return.

Speaker 3

Yes. We'd also look to see some greater activity in Eastern Canada than what we saw this year. So we look at that as potential growth as well. We look forward to fill some of the gaps that we've seen in the larger projects we're seeing in scope.

Speaker 1

The one other thing I would point out is we've taken advantage of the slightly slower year this year To renew our fleet and upgrade our mat inventory by putting more newer mats into the fleet as opposed to selling those to 3rd parties, which puts us in a position as we ramp again later next year to have a fleet that's ready to go and generate higher revenue. So the average age of about in our fleet will have improved significantly by mid next year.

Speaker 3

Okay, great. Thank you. And just on your M and A pipeline, as you look at it right now, Would you say that it splits more towards the manufacturing segment versus aviation? And are you looking more at these smaller acquisitions versus larger ones like Northern Mat?

Speaker 1

I would say in terms of number of opportunities, I would agree exactly with what you said. There's more on the manufacturing side than there are on the side than there are on the aviation side. There are bigger opportunities, there's fewer of them. And the bigger opportunities would fall into both categories. But I think it's important when we look at M and A As a general thing for us, it's just a natural progression of us to move towards a slightly more of a balance between Manufacturing Aviation, not because we're driving it there by choice, but by the sum total of the opportunities.

Speaker 1

We are already the dominant carrier in niche airlines in Canada. And so by definition, the number of things left to acquire shrinking. And if we can find more PAL Aerospace's or We're going to jump all over them and there are opportunities, but we're fishing in a declining barrel in that. And there are international opportunities that we look at, But the number of things that are related to our manufacturing enterprises are virtually limitless. So I mean if we're something like seventy-thirty today, if If we look at this 5 years from now, I think that will be closer to fifty-fifty, not because we like aviation any less, Just because there's less items left at the store for us to buy.

Speaker 3

Great. That makes sense. I'll jump back in the queue. Thank you.

Operator

Your next question comes from Konark Gupta from Scotiabank. Please go ahead.

Speaker 1

Good morning, Conor.

Speaker 10

Thanks, operator. Good morning, Mike and team. Thanks for taking my question. I appreciate the color Carmel provided on 2024 EBITDA drivers. Wondering if your guidance for 2024 includes any unannounced acquisitions or contracts.

Speaker 1

No. Those anything we anything that's announced subsequent to this would be results and an increase of our guidance.

Speaker 10

Thanks for the clarification, Mike. Moving on the Regional One side, like we're seeing sort of an uptick here a little bit in terms of their leasing business clearly. It's not back to the pre pandemic levels yet. And obviously, those sales and services are kind of pretty lumpy. The industry has kind of like faced a lot of challenges.

Speaker 10

Recently, there's incremental challenges on MRO capacity side and engines, like the threat issues and all that. Anyway, like on the regional side,

Speaker 1

How

Speaker 10

do you see the demand for leasing versus outright sales for aircraft or engines?

Speaker 1

Quite honestly, correct, there's greater visibility on the leasing side. It's grown month over month, continues to grow. And I mean, it's one of those things that's never fast enough. You always wish it was quicker. But we By the time we get into next year, our lease utilization rates start to match what they were pre COVID.

Speaker 1

And we got a pretty good view into that with leases that have already been signed or letters of intent or We have a pretty good idea where a lot of those assets are going. On the big asset side, it really truly is an opportunistic Kind of thing if someone wants 1 and we can generate the right margin, we'll sell them. To be honest, our core business is our parts business. Everything else is there to support parts business. And you mentioned it earlier, the thing that makes me Probably other than the leasing portfolio most bullish is we're actually starting to be able to get MRO opportunities to Strip down some of the aircraft to get them into our parts inventory.

Speaker 1

It's frustrating when you got a plane, you got a landing gear and you got a customer. We can't get the landing gear off the plane to sell it to the customer. And so we've seen some improvement in that. To be clear, the MRO Capacity is still tight, but it's getting better. That will help our parts business.

Speaker 1

The leasing business will strengthen because of demand. And I wish I could give you a better answer on the big sales other than to say it's spotty and It will continue to be that. Having said that, it remains reasonably strong. The numbers we had this quarter were good. Q4 also looks good.

Speaker 1

But beyond that, in terms of big asset sales, we wouldn't know about what that's going to happen In February already or we would do it this quarter.

Speaker 3

And just a couple of additional comments on the leasing side. Where we're seeing the opportunities is We're focused in Europe and Africa and on the engine side. In fact, a lot of our actual whole aircraft are already on lease. Until we see greater opportunity on the engine side.

Speaker 10

I appreciate that. And last one for me. It's a big picture question perhaps. Yes, as you grow the number of subsidiaries under the umbrella, do you see an opportunity to consolidate Some of them to create synergies. We have seen some roll up trucking companies in Canada finding a lot of success with this consolidation strategy.

Speaker 1

I think we're doing that. I think you're right. You see with Darwin championing our project on our window businesses where We've got BV Glazing and Quest that we had recently bought, Wiss, help me with my other glazer, AWI, that's really under one group of people now. Our airlines, while we've got multiple brand names, We have interchangeable assets like where we share planes to a greater extent than we ever have. We did our overhaul work together.

Speaker 1

We buy parts together. There are advantages, particularly in aviation, to having Separate entities for operating certificate reasons and for union reasons. And so those businesses will continue to be autonomous, But we're trying to scoop the cream off in terms of the synergies we're taking. And you can see that as our margins have increased. And quite frankly, our ability to purchase.

Speaker 1

Regional One has been a bit of I'm not sure we could have got up and running on Jake's Air Canada business, I'll give it to him to talk about that maybe. But absent R1, it would have been tough to find those aircraft.

Speaker 7

Well, not only the aircraft, but again, the parts, Because every aircraft require inventory to make the aircraft the operations continue on and Regional 1 plays a very big role, giving us access immediately to bring these aircraft and stand up the operations quickly.

Speaker 2

And I think one of the things from our perspective, it may be us doing a better job telling the story, because we're not buying acquisitions And relying on the synergies to hit our returns, kind of using Mike's analogy, they're kind of the sprinkles on the Sunday. We don't Maybe you don't do a good enough job letting the market know of these types of opportunities as we're executing on them.

Speaker 10

I appreciate the time. Thanks so much.

Operator

Your next question comes of Cameron Doerksen from National Bank Financial. Please go ahead.

Speaker 1

Good morning, Cam.

Speaker 6

Yes, good morning. Thanks for Good morning to everybody there. Maybe just sort of two questions for me. Maybe the first sort of on the 2024 outlook here for your guidance. I mean, we all know the tailwinds here from some of the new contract opportunities.

Speaker 6

I wonder if you could just maybe talk about what you kind of assumed As potential headwinds in some of the other businesses, I mean, you talked a bit about Northern Map, but what about some of the other businesses like what's your kind of underlying assumption as far as end market demand, I guess, broader economic conditions.

Speaker 1

I think the only on the aviation side of the business, There's virtually no impact of the economy. I shouldn't even say virtually. There's no impact. The demand For our core passenger freight businesses are very high. And you can tell by the fact we're having airplanes.

Speaker 1

We wouldn't be buying iron If we didn't have demand. So I'm quite confident on that side of the business. Same with our medevac business outside of the contracts like our Existing stuff, the utilization of the aircraft remain high. So really not a lot. We've talked about regional loans assumptions, how we expect to see it Continue to return and then ultimately surpass pre COVID levels.

Speaker 1

So I think that covers off. And our Maritime Surveillance Business is, I mean, quite frankly, is almost as good as it can be. All our planes are flying. We're bidding on new work. It's in a great shape.

Speaker 1

I'm confident in our ability to renew our contract in the UAE. I'm hopeful that Well, something to speak on that in the near term. So all good there. In the manufacturing, there's a little bumpiness in order books in some of the smaller companies, but nothing dramatic as it relates to EIC as a whole. I would say the one Economic piece that's variable that I think has significant upside for us, maybe not till the back end of the year or 25 is quite frankly in the window business.

Speaker 1

I've talked about this a lot. The number of things we're bidding on It is unprecedented. We actually hired people to keep up with the bidding. People are waiting to pull triggers on things. And the government keeps pouring fuel on this fire, whether it's in Canada, where they're taking taxes off of the construction of these projects President Biden in the United States announcing $30,000,000,000 towards the conversion of office buildings into residential buildings.

Speaker 1

The opportunity for that business to grow significantly in the medium term, I think is significant. I can't say exact it's kind of like predicting when the interest rates have peaked. We're starting to see things that make us think it's coming and coming sooner rather than later. But it's too early for me to give you a hard So I think the window business is kind of bump along in 2024, but we could see on the horizon, we could See it coming. And I honestly think it's not going to be very long before I'm complaining about the fact that we're struggling with capacity to take advantage of the opportunities in that business.

Speaker 1

But in the near term that business I think just kind of chugs along. We've got a flat order book. Some of the projects have been delayed a little bit, but Not dramatic. The upside there is significant. I think one other thing, I've had a couple of people talk to me offline about The forecast for 2020 our guidance for 2024 and why maybe it shouldn't be higher.

Speaker 1

Quite frankly, It's two things. One is, there's nothing in that forecast that isn't already announced and paid for We're contracted for. So we always grow. We always add things. I expect that that's not going to change in this period.

Speaker 1

Second thing is, I think there's was a perhaps a slight misconception and maybe we didn't do a good enough job Of talking about all the work that had to be done to be start flying MetaVax. Even if you have the plane, what's it going to take us, Kevin, Per aircraft too in terms of time to turn them from an airplane into a MediBang plane?

Speaker 5

2.5 months per aircraft.

Speaker 1

Yes. So we've got over a dozen of them going there. We've got Dave's got another 5 there. And so that I think there we may not have done a good enough job of delineating when that stuff is going to hit our income statement. And then Quite frankly, we've always provided guidance that we're confident we're going to make.

Speaker 1

And I think our track record shows that when we give you a number, it's usually that number or higher. And so We're not going to make frothy forecasts. I'm comfortable with where we're at. I'm confident that there's ways we could beat that number. And most importantly, I'm really confident that we've got growth going into the next year.

Speaker 1

Like If we hit our 635 this year, we're going to be well on our way to changing that first digit in the following year. If Adam finds just one deal in there that we're probably on our way to breaking through the 700 barrier. So like I say, it's a matter of slow and steady. And that's why I put that commentary in about the 3rd quarters since 2019, where we've generated 15% growth year over year through a pandemic, which I think is If you could any of the comparatives people use for us don't match that.

Speaker 6

Yes, absolutely. Definitely Solid visibility here running much past 2024. So that's helpful. And maybe I can just very quickly just ask you about Where things are on the pilot front? I sort of asked because you obviously have some hiring needs here with the Medifat contracts.

Speaker 6

I guess what's your level of confidence of being able to staff all these aircraft that are coming in over the next 18 months?

Speaker 1

I'll maybe let my guys talk about It's what they're experiencing. I think at a general level, there's still a shortage of pilots in the industry. I would describe it as having gone from A crisis shortage, really annoying shortage. We're proud of the fact that We saw this coming in 2017 or 2018 when we bought Moncton Flight College. We had the ability to train up our own pilots.

Speaker 1

And I think some of our Bigger airline comparatives are now talking about their flight schools. Well, quite frankly, it's a little late to the dance, But I'm glad they're doing it because the more of their own pilots they train, the more there are in the industry. So we're happy to see that. I'll open it up to my 3 guys. They got commentary.

Speaker 9

Thanks, Mike. It's Dave White here. I I talked about the pilot situation before in the call. As Mike said, it's been an industry challenge across the board. It was at a crisis level probably last year, now it's settled down, but it doesn't settle down for us just because there's more pilots, more about creating pipelines.

Speaker 9

As Mike mentioned, NFC, our life and flight programs, we've been able to generate a flow out of that. It's also our pay scales across our airlines. We're in niche markets We are very competitive. We offer a good work life balance across a multitude of operations where people actually get a choice in their pathway when they join the EIC group We have a lot of traction features that help us deal with this on a daily basis, but we don't take our For OptiGas, as they say in respect to this, we know we got new contracts, we know we have expansions. But what we have to do is Sell that to the pilot community to get them interested and our retention rates have improved as well as our recruitment rates, if anybody else wants to add to that.

Speaker 5

Yes, Kevin Hillier here and echoing what Dave said, yes, certainly lifestyle is attracting pilots to our operation, Work life balance, doing meaningful work, including our ambulance services, long term consistent work, where we know we've got it for 10 plus years, Good success attracting pilots internationally and the opportunity to come to Canada and do this work and have a great schedule and fly brand new airplanes We've got a subtraction on hiring, so we're confident in our ability to staff these aircraft.

Speaker 1

I think the one other thing I would just add to that is Carmel mentioned the flight simulator for King Air. We've got our fleet in size where we're investing $20,000,000 in a full motion flight simulator to help us attract, but more importantly to make sure our new pilots are the best trained, best available pilots in the history. This is the 1st private held King Air Full Motion Simulator in Canada. It's a statement about our commitment to the long term investment and being the best at what we do. Typically in the old days, we would have sent people to Dallas or Kansas to go get this done.

Speaker 1

Now we can do it for ourselves. And quite frankly, we'll have Some of our competitors using the extra space we have in that. So we're really excited about seeing that get installed next year as well.

Speaker 3

One thing I'd just add, because we're now in a marketplace where basically pilots are going to make the same amount at any place they can lose for This really comes down to choice. What do you have to offer them? And EIC as a whole, we have a great culture. We have opportunity. We have fabulous training.

Speaker 3

So it is a great destination point to go to and that's the draw that I think a lot of other carriers can't offer. We can If you want to go fly out in the Middle East, we've got opportunities there. If you want to do medevac, we've got opportunities there. If you want to be at home at night, You can do that with us and there's growth that you can move around. So we think that is certainly something that gives us a leg up with respect to other carriers.

Operator

Comes from Jonathan Lamers from Laurentian Bank. Please go ahead.

Speaker 11

Good morning. My questions were largely covered. Just would you happen to have the dollars of the growth CapEx to date That was related to the 3 new contracts and how much will fall into 2024?

Speaker 1

I don't I mean, we've talked about $275,000,000 ish for the 2 main Medevac contracts. I don't have the precise breakdown of what's done this year and what's Next year, I mean, I can say the stuff that relates to Manitoba is going to be largely funded this year. There may be some conversion costs and Some ground costs, but not in terms of the aircraft we largely purchased. The initial 4 for Air Canada are all purchased. There aren't.

Speaker 1

That was a little simpler because we don't have to convert the aircraft. We just have to get them certified. And whereas we talked a lot about the majority of the expense in BC is still to come Because the plates have arrived, although from a cash point of view, we do have significant deposits With the manufacturer. I apologize, I don't have specific numbers. We haven't really finished our final CapEx budgets for next year.

Speaker 1

So Broad brush. I would say that Kuwaiton's project is largely funded. Powell's project is funded And Parsadares is not funded.

Speaker 2

And just one piece I would add, Dump, Dylan, on Mike's comments there is that the split between Q3 and Q4, more than half of it that we expect to fall in this year was funded in Q3 already.

Speaker 11

Okay. That's great color. Thank you. And one more for me. Mike, appreciate the discussion about the 2024 guidance And I appreciate that a lot of your organic growth opportunities would come during the year.

Speaker 11

Would you have any thoughts, like in terms of your budgeting process, at this point in the year, how much of the growth would I mean, how much of the organic growth would come from opportunities that you typically see during the course of the year in any typical year for the overall business?

Speaker 1

My budgets reflect what I know about now. There will be opportunities that come, but those we don't With the exception of Regional One, where we don't know exactly where we're going to buy and exactly where we're going to sell everything during the year, the other of my businesses Are all based on what I know. Like I say, the thing that Between the most bullish and quite frankly the reason we increased our dividend was what we see in our core aviation business. Our passenger loads are higher than they were in most of our markets pre COVID and they continue to grow. And We're adding capacity as we could add pilots to match the capacity because there's charter work that we've passed on Because we want to make sure we look after our passengers on the scheduled business first.

Speaker 1

And so there is opportunity to grow that business. And as we strengthen our pilot pools, you'll continue to see it, but demand that it was a bit frustrating for me to be honest during the last 10 to 6 weeks Where the aviation sector and the aviation driven funds got kind of kicked in the teeth and we can't run along with it. Because the things that those similar companies are going through don't match what we're going through. We don't have those challenges. When you have a plane on contract with the U.

Speaker 1

K. Home office, they're flying at X number of hours a day every day And we're getting paid, whether it's maintaining the stuff for the government of UAE, we're getting paid every day or whether it's flying Food to Baker Lake. We know that's coming. It's reliable. Yes, we had fuel issues.

Speaker 1

We had pilot costs, But we've largely dealt with that and passed it on to our customers. So we're very confident in where we are going forward. And That's what led us to be able to continue our track record of paying our shareholders.

Speaker 11

Thanks. And apologies if I missed this, but just on the dividend, past years, you've typically had 1 increase per year. I I know there was 2 increases post COVID to catch up. How are you thinking about the path of dividend growth going forward?

Speaker 1

We at our Board, I can tell you we discuss our dividend level every Board meeting, every quarterly Board meeting, our budget meeting. Typically, borrowing and anomaly are it's a once a year thing. If something is exceptional, we would do more than that. We have a 20 year CAGR of 5%. It's something we're intensely proud of.

Speaker 1

And we're going to continue to grow the business to maintain that Gagar, while we continue to strengthen our balance sheet and reduce our payout ratios. So if you're asking me if I anticipate a dividend increase next year, that's up to the Board. But my job is to give them The economic results to enable them to do it. And if I were a betting man, I think The past is the best predictor of the future.

Speaker 11

Okay. I'll leave it there. Thanks for your comments.

Operator

Your next question comes from Tim James from TD Cowen. Please go ahead.

Speaker 12

Good morning. Thank you. Good morning. I'm just wondering, Mike, if you could talk about any businesses, if there are any, I assume there probably are, Where pricing is still running well behind the cost of inflation that those businesses have Over the past couple of years, I mean, I know some businesses you can pass it on very, very quickly almost instantaneously. But are there any units where over the next Couple of years, you should just be able to reprice a little higher and offset inflation that you've already experienced?

Speaker 1

I would suggest to you that the it's much better, but we still have some contracts in the window business that don't fully Recover what we've experienced, although we've gone through most of the older contracts. I would suggest to you the one business that we have the least The ability to move quickly on pricing is our Medevac long term contract business, Not so much in areas like Manitoba, where we do it under license, but more as an example, places like Nunavut, Where our contracts include price escalators for fuel and for inflation. Pilot wages have clearly exceeded inflation. And so there is some pinching there. Those contracts are coming due over the next year or so.

Speaker 1

And so we will be passing that on when we renew the contracts. We're obviously very respectful and not taking advantage of our position. But if it costs us more, we have to charge more. So the one area where Carmel, if I'm missing anything, Jump in, but I think the main one would be on contract Medevac businesses, which haven't been able to fully collect that, The cost of the pilot increases?

Speaker 3

Yes, that's the main one. There's maybe a couple of longer term charter contracts that we had that Again, coming due in the next 12 to 18 months. So again, we'll be able to reprice. But otherwise, we've been able to move that through to the

Speaker 12

Okay. Thank you. And then my second question, and it's more of I just want to make sure I'm maybe summarizing the Windows Systems business and the opportunity and challenges there. So it sounds like longer term that, that business is really facing a secular growth trend, call it related to societal shifts and government priorities when it comes to Building, but shorter term, you talked about risk of maybe some further delays in 2024. In the shorter term, there's just simply interest rate driven headwinds in terms of getting projects running.

Speaker 12

Is that a fair way of Characterizing it because I know you seem very, very optimistic on the long term growth, but then there's a bit of holdback in terms of the shorter term.

Speaker 1

I think that's very fair. I mean, we're starting to see and I'm always reticent when we're starting to see something To say too much about it because it's just the beginning. But we're starting to see cracks in the dam of stuff getting done, especially The conversion market in the U. S. Is we're starting to see contracts where they're turning office buildings into residential buildings.

Speaker 1

And the interesting thing is for us, it's essentially the same as building a new building because they're re skinning These buildings as part of that and we're starting to see that stuff getting left. There's very strong pressure from government To build housing, the thing I keep coming back to about this is that Notwithstanding building high rise apartments or high rise condos is expensive, it's the cheapest form of housing there is To densify and bring people in, if we look at our big cities, whether it's Toronto or Washington in the U. S. Or Los Angeles, the Dallas, we're doing a project, Nashville, where there's A shortage of land, they go up. Single family housing or small multifamily housing is cost prohibitive.

Speaker 1

And we all know, I mean, the federal government Canada announced their immigration targets and said they're lightening them up, but there's still 500,000 people a year that we got to find housing for and there's a shortage now. So I think your description Tim is very fair. There's short term turmoil created by interest rates. But I think it's important to say that from our point of view, we don't think it's going to take interest rates coming way down For this to pick up, we need stability and a downward trend, so developers are confident they know what the most they're going to pay us. And I think the dam is going to break because there's so much demand.

Speaker 1

If you had an apartment block built today in the major cities, It would be fully rented in a matter of weeks. It may be days.

Speaker 3

Yes. The other thing you're seeing is government policy trying to nudge this, Yes, I guess into actual development by the tax relief, they're looking whether it's government on the GST and then Ontario has come out. You'll probably see more of those types of things, which again is another indicator that this is going to be a very robust business. And just want to add one other comment on the conversions. We've actually already done completed 3 of them.

Speaker 3

We've got 2 more in our backlog and we're quoting on lots more in the U. S. And Canada. That's something that we weren't even doing before, let alone the original build. So lots of promising elements wherever you look in this business line.

Speaker 1

Okay. That's really helpful. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to Mike Powell for closing remarks.

Speaker 1

I want to thank everybody for joining us today. It's an exciting period for us. I I think you heard it in my voice when we talked about the dividend and the fact that we're proud that we can continue that track record and deliver for our shareholders. Look forward to finishing off 2023 strong and talking to you in February with our year end results. Have a great day and we'll speak soon.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines.

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Exchange Income Q3 2023
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