Exchange Income Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

Key Takeaways

  • EIC reported record Q1 results, with revenue up 14% Y/Y to $602 M, adjusted EBITDA up 14% to $111 M and free cash flow less maintenance capex up 19% to $23 M.
  • The company upsized and extended its credit facility to ~$2.2 B, including a $200 M social loan tranche for BC medevac aircraft, boosting liquidity to about $1.1 B for growth initiatives.
  • Expansion of the Air Canada contract was announced, increasing aircraft from 4 to 6 by end-2024, which should bolster route capacity and elevate load factors.
  • While manufacturing revenue rose 16% to $233 M, adjusted EBITDA fell 16% due to seasonal softness in Environmental Access Solutions, only partly offset by the BB Glazing acquisition.
  • EIC reaffirmed its 2024 adjusted EBITDA guidance of $600–$635 M, underpinned by ongoing contract ramps, organic growth capital investments and a strong acquisition pipeline.
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Earnings Conference Call
Exchange Income Q1 2024
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good morning, everyone. Welcome to the Exchange Income Corporation's Conference Call to discuss the Financial Results for the 3 months ended March 31, 2024. The Corporation's results, including the MD and A and financial statements, were issued on May 7, 2024, and are currently available via the company's website on SEDAR Plus. 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.

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 quarterly and annual MD and A, the Risk Factors sections of the Annual Information Form and EIC's other filings and Canadian Securities Regulators. Except as required by Canadian Securities Law, EIC does not undertake to update any forward looking statements such as statements speak only as of 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. And I would like to turn the call over to the CEO of Exchange Income Corporation, Mike Pyle.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. Yesterday was the 20th anniversary of our IPO and the completion of our first acquisition of Perimeter. And I will talk about the history of EIC and what makes us successful shortly. Yesterday, we also released our Q1 results for 2024.

Speaker 1

In announcing our results, we reported several records for our Q1 financial results and this set the foundation for the remainder of the year. We set records for revenue, adjusted EBITDA, free cash flow and free cash flow less maintenance capital expenditures. Subsequent to the quarter end, we also completed the extension and outsize of our corporation's credit facility to 2 point 1 of the first syndicated social loans in Canada and is in alignment with the social loans principally established globally. This was a great achievement by Rich and his team as this provides us with significant liquidity to fuel our growth, whether by organic growth or acquisition, which I will touch on later in today's call. Our results demonstrate the success of our strategy.

Speaker 1

Firstly, we buy proven companies with excellent management teams. Secondly, we invest in those companies and nurture their growth. And lastly, in doing so, we can provide stable and growing dividends for our shareholders. This strategy has been the blueprint for our success for the past 20 years and is even more relevant today. The secret sauce is the disciplined nature of our acquisitions and investment in growth capital in our businesses and operational execution by our underlying subsidiaries.

Speaker 1

EIC preserves the cultures in our acquired entities and creates an environment where their management and employees can thrive. With me today is Rich Wallerich, our CFO, who will speak to our financial results and Carbel Peter, our President, who will expand on our outlook for the Q2 and beyond. I will limit my discussion to some of the key consolidated performance indicators and Rich will delve into the results by segment and provide some further insights on our financial performance. For our Q1, revenue increased 14% to 602,000,000 dollars Adjusted EBITDA also increased by 14% to $111,000,000 Net earnings were $5,000,000 compared to the prior year of $7,000,000 Net earnings per share were $0.10 per share compared to 16% in the prior year. Free cash flow less maintenance capital expenditures grew by $4,000,000 or 19 percent to 23,000,000 dollars Adjusted net earnings were $10,000,000 compared to $12,000,000 in the prior period and adjusted net earnings per share were $0.20 compared to $0.27 The payout ratio on a free cash flow as maintenance capital expenditure basis remained very strong from a historical perspective at 58%, even with 3 dividend increases in the last 20 months.

Speaker 1

We are very pleased with these results and they show the resiliency and the diversification of our business model. The main contributor of the results was the the of acquisitions and contractual wins, whether it was our BC and Manitoba Medevac Wins, our U. K. Home office contract or our Canada commercial agreement. Speaking of the Air Canada contract, we anticipate the expansion of this contract with additional routes, which will bring the total aircraft used for Air Canada from 4 to 6 by the end of 2024.

Speaker 1

We remain hopeful of the prospects being able to announce further contracts and acquisitions in the Q2 and throughout the remainder of 2024. The positive momentum achieved in 2023 is expected to continue into 2024. Let me delve into some of the opportunities that we are currently seeing. However, to be clear, we have not included any acquisitions or significant contract wins in our 2024 forecast. As discussed in last year's financial reports, contractual wins require upfront investment in capital and do take time to achieve the appropriate returns on this invested capital.

Speaker 1

There is a ramp up period required before those investments start hitting the bottom line as opposed to acquisitions where the acquisitions are immediately accretive to the bottom line, of course, excluding any seasonality. Firstly, on the acquisition front, Adam and his team are working on a number of pursuits. In our year end call, I mentioned that we are seeing more high quality opportunities that has continued throughout the quarter. We are seeing these opportunities in both the Manufacturing and Aerospace and Aviation segments. But consistent with our 20 year history, we will only execute on transactions that are both accretive and meet other qualitative acquisition criteria.

Speaker 1

Current opportunities are focused in Manufacturing and Aviation segments where we are already present and represent vertical, geographic or other expansion opportunities. On the contractual opportunities, our teams are waiting the resolution to submitted bids on a number of fronts. We remain optimistic. However, there is always uncertainty in the award of contracts by governments. The first contract relates to the future AirQ trading contract.

Speaker 1

Skyline was named as the preferred bidder last year and we were part of the Skyline bid team. The contract has not been formally awarded to the prime. However, we remain hopeful that an announcement will occur in the next number of months. We also submitted our proposal to the U. K.

Speaker 1

Home Office for the continuation and expansion of the services that we are currently performing. The existing contract will continue until November of this year. The strategic decision to procure a second aircraft that we've started to modify support the UK home office contract should we win. However, we believe that based on the geopolitical situation, such aircraft could easily be redeployed to other opportunities should we not be successful as the incumbent. We would anticipate hearing about the final award in the latter part of the Q2 or perhaps early in Q3.

Speaker 1

The third opportunity that I wanted to mention is the Newfoundland fixed wing Medevac contract. In partnership with a strategic partner, we have submitted our collective proposal to the government of Newfoundland. Our proposed services would be for the operation of up to 6 medevac aircraft in the province. We believe we are 1 of 2 proponents to bid on the contract and hope to hear the result of our bid during this Q2. Lastly, we are seeing significant interest around the world for our aerospace services.

Speaker 1

We see large opportunities in Australia, Europe and expanded opportunities in Canada. We are very bullish about future opportunities and these contracts are right in line with our EIC core capabilities and business model as they generate consistent cash flows throughout the term of the agreement. We brought our analysts to visit our distinct view that we are a leader both in Canada and around the world with our capabilities. These opportunities are why we upsized and extended the credit facility are so important to us. It provides us the liquidity for significant capital expenditures to fund these hopeful contractual wins, along with Adam and his team providing dry powder to them to execute on acquisitions.

Speaker 1

The social loan component of the credit facility is a new addition for us. That loan will be used exclusively to fund the acquisition of the King Air Aircraft, which are being purchased for the BC Medevac contract. These new aircraft have improved performance characteristics, lower fuel burn and provide an essential service to BC's northern, rural and indigenous communities. In order to define it as a social loan, Rich and his team did have to provide evidence to a third party to attest that we met these social loan criteria. This provides further recognition that the essential services of our aviation entities provide across Canada.

Speaker 1

Carmel will focus on the outlook for our segments for the Q2, but firstly, I wanted to reiterate our guidance for 2024. We confirm that adjusted EBITDA in the range of $600,000,000 to $635,000,000 Our Q1 has set the foundation for the remainder of the year and we are posed to continue to realize on the growth capital investments made in previous periods and continue throughout this year. We're excited about our future and intend to keep doing what we are doing because it works. I will now hand off the call to Richard, who will detail the Q1 results.

Speaker 2

Thank you, Mike, and good morning, everyone. Revenue, adjusted EBITDA, free cash flow and free cash flow less maintenance capital expenditures were all 1st quarter high watermarks. Mike spoke about our key financial metrics and I will delve into the segmented results and the remainder of the financial statements. Revenue in our Aerospace and Aviation segment increased by $43,000,000 or 13% to $369,000,000 Adjusted EBITDA increased by $20,000,000 or 27% to $94,000,000 The results and margin expansion were across all business lines. Looking at our Essential Air Services business line, the improvements were driven by 4 key factors.

Speaker 2

First, previously our net revenues, organic growth capital expenditures in the aviation businesses over the past number of years. Secondly, our average load factors improved, which is a direct improvement on adjusted EBITDA. 3rd, the impact of routes flown on behalf of Air Canada. And 4th, the impact of the DC and Manitoba Medevac contracts, which have not been fully implemented at this point. Our Aerospace business line revenues increased over the prior period, while adjusted EBITDA expanded in an accelerated fashion.

Speaker 2

This is due to two reasons. First, the revenues and adjusted EBITDA expanded due to the increase of the ISR business, including the impact of the UK Home Office contract. This increase was offset by a decline in revenues within our training business. However, the product mix shifted, which resulted in profitability expansion within the training business even with the revenue declines. This margin expansion in our training business is anticipated to be temporary, likely to continue into the Q2.

Speaker 2

Lastly, our aircraft sales and leasing business continued to grow as the leasing component of that business continued to improve. We are still anticipating that the leasing side will continue its step improvement until it reaches pre pandemic levels by the end of the year. The growth within this business line and specifically the leasing business resulted in an improvement in the profitability of that business line as leasing margins are much higher than other revenue streams. Revenue in our manufacturing segment increased by $32,000,000 or 16 percent to $233,000,000 Adjusted EBITDA decreased by 5 16 percent to $27,000,000 As expected, revenue and EBITDA within the Environmental Access Solutions business line decreased by 35% and 47% respectively. As previously communicated in our year end call, the Q1 of the comparative period had a number of seasonal anomalies.

Speaker 2

The Q1 and into the Q2 of 2023 experienced an unusual number of rental mass deployed on long linear projects. This is outside the norm and weather factors also impacted year over year demand. Milder weather in 2023 required greater mat utilization for projects. However, this winter experienced very low snowfall and drought conditions, which generally lessens demand. Lastly, the prior year comparative contained an unusual number of mats on rent sorry, lastly, as the prior year contained an unusual number of mats on rent, the impact on adjusted EBITDA was outsized related to relative to revenue.

Speaker 2

Our Multistory Window Solutions business revenue increased by over 70% due to the acquisition of BB Glazing and adjusted EBITDA was up by over 300% due to BB Glazing coupled with improved performance due to increased throughput and increased utilization activities of windows manufactured by our subsidiaries. Lastly, our Precision Manufacturing and Engineering business experienced relatively similar revenues compared to prior period, while adjusted EBITDA decreased by 19%. The current year includes the financial results from both Hanson and Dry Air, which were acquired in October and their April October in the prior year. The manufacturing segment companies experienced reduced sales primarily driven by customers delaying large capital projects due to macroeconomic Additionally, the relative adjusted EBITDA decline was expected as dry air experiences significant seasonality as they contribute virtually all of their adjusted EBITDA in the 3rd Q4 and have negative adjusted EBITDA in the first quarter and partway into the Q2 based on historical norms. Adjusted EBITDA margins were higher in the Aerospace and Aviation segment due to three factors.

Speaker 2

First, leasing revenue at Regional One continues its trajectory towards 2019 levels and leasing revenue generates very high adjusted EBITDA margins. 2nd, Aerospace contributed additional adjusted EBITDA from its owned ISR assets, including in the UK and this revenue stream also generates higher adjusted EBITDA margin. Finally, our essential air services experienced higher average load factors improving margins over the prior period. Adjusted EBITDA margins were lower in the manufacturing segment for 3 REIT. 1st, as we expected, environmental access solutions returned to more normal seasonality, which resulted in a lower number of mats on rent.

Speaker 2

In the prior period, a large number of mats were rented on a long linear project. These rentals generate much higher margins and this was abnormal for the Q1. In addition, drought conditions in Western Canada lessened the need for matting in certain markets. This decline in rental revenue was offset by increased MAX sales in the current period, which generates lower margins. 2nd, dry air acquired in the Q4 of 2023 generates also adjusted EBITDA in the 3rd and 4th quarters and as we expected generated negative adjusted EBITDA margins in the Q1 of 2024.

Speaker 2

Finally, within our precision manufacturing and engineering business lines, business was a little slower than in the prior period due to certain customers' deferring capital spending and the impact of general economic uncertainties. Other items of note during the quarter were that interest costs were higher by approximately $4,000,000 due to increased benchmark borrowing rates compared to the prior period, coupled with increased debt outstanding due to the various growth capital expenditures in the prior year. However, when looking at our payout ratio, it remained consistent with our year end ratio and prior quarter ratio of 57% 58% respectively. Business increased by 16% when compared to the prior period. Depreciation on capital assets and amortization of intangible assets were also up due to the growth capital expenditures and acquisition activity in 2023.

Speaker 2

Lastly, our effective tax rate increased relative to the prior year due to 3 factors. First, being the tax allocation waiting between higher tax jurisdictions. Secondly, the prior periods contained a non taxable contingent consideration gain. And lastly, the implementation of new tax regime resulted in additional current taxes. The proportion of our earnings by jurisdiction in any given quarter can have a significant impact on our tax rate, but this is particularly true in the Q1 of the year.

Speaker 2

In addition, the impact of non deductible items such as acquisition costs and meals have an outsized impact on our tax rate in our seasonally slowest quarter as we generate our lowest earnings for taxes in this quarter. We would anticipate our effective tax rate to be in the range of 27% to 29% on an annual basis. Free cash flow and free cash flow as maintenance capital expenditures increased by 4% and 19%. Free cash flow reached a record $62,000,000 in the Q1 and free cash flow to maintenance capital expenditures increased by $4,000,000 to $23,000,000 which is also a Q1 record. Lastly, from a working capital perspective, our working capital remained virtually flat

Speaker 1

with the

Speaker 2

prior year end. The non cash investment in working capital was $19,000,000 and is fully explained by the collection of a large $30,000,000 receivable prior to December 31, 2023 with the corresponding payable settled in the Q1 of this year. This is consistent with the prior year Q1, which also had a similar transaction. We continue to actively manage our working capital and are proud of the successes amongst our various subsidiaries. As Mike had mentioned, we amended and extended our credit facility.

Speaker 2

The net result was an increase in facility to approximately $2,200,000,000 from approximately $2,000,000,000 with an extension in maturity to May 2028. This was achieved with consistent pricing with the prior facility. Included within our new facility is a dedicated $200,000,000 social loan tranche, which will be used to fund the purchase of the new King Air aircraft for the BC Medevac contract. This fortifies our balance sheet and provides us with liquidity of approximately $1,100,000,000 to utilize and to execute growth capital expenditures and potential acquisitions. The $200,000,000 social loan tranche included within the new facility permits the ASE to draw on that portion of the facility as the new aircraft are delivered and modified for medical purposes.

Speaker 2

As Mike mentioned, as part of the transaction, ISS Corporate provided a second party opinion and concluded the loan is in alignment with the social loan principles as issued by the Loan Market Association. While the social loan is new to EIC, this is simply a validation of the work our subsidiaries have been doing since their inception. This loan specifically will fund the purchases for Carcinara's BCEHS contract. We also provide essential medical services from coast to coast to coast in Canada across ESE subsidiaries and have done so for decades. We are proud of the work that our subsidiaries do and receive recognition of the social benefits that we provide publicly, both from our syndicated lenders who supported the deal and through the second party opinion was satisfying.

Speaker 2

I would like to thank our lending syndicate for the support provided to us in both the overall renewal and the social loan trust specifically, which was oversubscribed and above our expectations. Our total leverage ratio continues to moderate as we continue to generate returns from growth capital expenditures. As previously noted, organic growth results lag between sorry, organic growth results result in a lag between the time of the investments are made and when returns become evident through our financial results. During the Q1, EIC made both capital expenditures of 39,000,000 dollars These growth capital expenditures primarily relate to the Aerospace and Aviation segment and were driven primarily by investment in aircraft. Our manufacturing segment had negative growth capital expenditures, primarily related to the sales from the matting fleet within the Environmental Access Solutions business line.

Speaker 2

Maintenance capital expenditures for the Q1 were $39,000,000 compared to $41,000,000 in the prior period. In our year end conference call, we indicated that we anticipate maintenance capital expenditures to increase in line with our adjusted EBITDA. However, there were some maintenance events that fell outside of the Q1 and will be funded in later quarters. Carmel will provide more insight in her outlook. With that being said, I now turn the call over to Carmel.

Speaker 3

Thank you, Rich, and good morning. We are very proud of the results we achieved in the Q1, and our outlook for 2024 is for continued growth driven by the diversification and resilience of our business model and investments we have made in prior periods to build our future. As Mike mentioned, we have reiterated our guidance of 2024 adjusted EBITDA of between $600,000,000 to 635,000,000 dollars I will focus my comments on our expectations for each of the segments and trends we are seeing. Firstly, our seasonality in the split amongst quarters is discussed in the outlook section of the MD and A. Perhaps a couple of comments on the seasonality that may exist in Q2.

Speaker 3

Our environmental access solutions business is always impacted by the winter season as we generally see that fewer mats are required to navigate the frozen terrain. However, we did see an anomaly in Q1 of 2023 and partway through Q2 of 2023 as we had a couple of long linear projects in Western Canada where the matting and the rentals continued through the winter months, which is not the norm. We will continue to see that impact when comparing Q2 2020 4 to the prior year as those math came off rent partly through the Q2. The second factor is our most recent acquisition Dry Air, which is also seasonally impacted. It is a hydronic heating company and the vast majority of its revenues are recognized in the 3rd and 4th quarters.

Speaker 3

As a result, the adjusted EBITDA is negative to breakeven during the 1st two quarters based on historical seasonality. This is the norm for the business and was identified during the due diligence process. We are anticipating a flat to small increase in revenues in our manufacturing segment during the Q2. We're also anticipating a decline in adjusted EBITDA due to the seasonality factors I just spoke about relating to our Environmental Access Solutions business line and dry air. All of the businesses within the manufacturing segment are experiencing a strong level of customer inquiries.

Speaker 3

However, due to macroeconomics uncertainty, the closing ratio of inquiries has been below historical trends. We believe that the businesses are primed for growth when some of the uncertainties abate, particularly interest rates, specifically looking at the underlying business lines. As previously noted, we are anticipating a reduction in revenues and adjusted EBITDA in our Environmental Access Solutions business due to the seasonality in the long linear project previously discussed. Furthermore, Western Canada is in the midst of a significant drought to start the spring and that results in reduced mat utilization. We are continuing to monitor the weather during the quarter and have proactively been reviewing our cost structure, capital expenditures and mat fleet.

Speaker 3

There are a number of opportunities in Western Canada and Eastern Canada for mat rentals and mat sales, and we anticipate normalization of year over year comparatives after Q2. However, it's important to note that the adjusted EBITDA run rates based on projections remain consistent with our original acquisition metrics and remain accretive to the shareholders. Multi story window solutions will see moderate growth in Q2 over prior year. The primary driver is the acquisition of BV, which was acquired partway through the comparative quarter. Quoting in Canada and the U.

Speaker 3

S. Continues to be extremely active, but the conversion of those quotes in the backlog is being delayed with uncertain economic conditions and higher interest rates. We remain bullish on this business line as the longer term fundamentals which drive demand, being immigration and lack of affordable housing, remain incredibly strong throughout various regions across Canada and in the U. S. Also later in 2024, we expect to start to see the financial benefit of synergies being captured between Quest and BV.

Speaker 3

The Precision Metal and Engineering business is expected to be consistent with prior year. Although Dry Air does not have a comparative for Q2, the seasonality of Dry Air's business causes its revenue and its profits to be concentrated in Q3 and Q4. Similar to my comments on the multi story windows business line, the precision metal and engineering business line is also very active from an interest in quoting perspective. Our essential air service business will see significant growth driven by a multitude of factors compared to the prior period. These include the full quarter deployment of 42400s to provide service under our agreement with Air Canada with an additional 2 aircraft being added by the end of the year.

Speaker 3

We also expect to continue to see enhanced load factors and growth when compared to 2023 due to our investments in aircraft throughout our operations. Lastly, we expect continued growth in the medevac business with both the 10 year BC and Manitoba medevac contracts continuing to contribute to financial results in the quarter. As a reminder, the BC metevac contract returns are expected to be muted until we redeploy existing aircraft being used service the contracts in the interim. Offsetting some of these gains is the impact of the continued labor shortages and supply chain challenges. Although we are not seeing a worsening of these dynamics and in fact we are seeing stabilization of these related costs, the challenges still remain.

Speaker 3

The Aerospace business line is also expected to have adjusted EBITDA growth in Q2, primarily driven by the full engagement force multiplier doing maritime surveillance work for the U. K. Home office, which started operations in May of 2023 and the product mix shift in our training business, which will result in higher margins in that business for Q2 this year to comparatively to last year. Our aircraft sales and leasing business is also expected to experience growth when comparing to 2023 comparative. This anticipated growth is driven primarily by increases in leasing revenue.

Speaker 3

Although we are still off pre pandemic levels, we expect Q2 to continue to build upon the positive momentum we experienced in the Q1. We anticipate the leasing portfolio to continue its recovery through the latter part of 2020 4. With respect to maintenance capital expenditures for Q2, we anticipate levels being higher than last Q2. Overall, we expect maintenance capital expenditures to increase roughly consistent with increases in adjusted EBITDA, higher flight hours to support increased volumes together with inflation, labor shortages, supply chain issues, growing fleet size and acquisitions are similar factors contributing to the expected relative percent increase. Growth investments in Q2 are primarily for the Aerospace and Aviation segment and include the upgrade of the 2nd surveillance aircraft for the renewed Curacao contract, the first being completed, the continued construction of the Gary Philman indigenous terminal investments in aircraft for the BC Medevac contract and additional aircraft to support the Air Canada commercial agreement and continued construction for the King Air Simulator.

Speaker 3

Also Regional 1 is working on some opportunistic aircraft and engine acquisitions, which may result in growth investments being made in aircraft sales and leasing business. As Mike highlighted, our acquisition pipeline continues to be very strong. With liquidity on hand, EIC will continue to be active in the acquisition market. Overall, we remain confident that we are on track with our 2024 adjusted EBITDA guidance. This confidence is underpinned by the essential nature of our businesses, the fact that a significant portion of our revenues are backed by long term contractual arrangements, the growing need for aerospace solutions, the recovery of our aircraft leasing business and the investments we have made in prior periods for future growth.

Speaker 3

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 a question and answer session. And your first question will be from Steve Hansen at Raymond James.

Speaker 4

It sounds like on the matting business, it sounds like we're going to see a few continued headwinds into Q2, but then we should baseline out. Is that the way to think about it, Mike, from sort of a seasonality standpoint? Like do you expect any further downside? Or is there room for more downside?

Speaker 1

I mean, you don't have a perfect set of goggles into the future, but no, we think Q2 is kind of when the inflated comps go away. We've struggled a bit with particularly at the end

Speaker 2

of Q1, beginning of Q2, which

Speaker 1

is how dry it is in some of our territories, which limits the need for matting. We're starting to see the impact of La Nina with the big rainstorm Alberta had, early Southern Alberta had. And so with a return to normalcy on that front. And then quite frankly, Steve, we're very bullish on Eastern Canada starting later in 2024 and beyond. Both Hydro One and Hydro Quebec have announced very ambitious distribution line maintenance and upgrade programs, which drive our business.

Speaker 1

And so we're really quite bullish that we may see a return in future periods to the kind of 2021 2022 performance where we actually generated a bigger percentage of our revenue in Eastern Canada than Western Canada.

Speaker 4

Understood. That's really helpful. And just maybe just sticking on the manufacturing side again, it sounds like on the precision side, understandable that the dryer is more seasonal, but even underneath that, some of the core businesses have had some slowdown. Is there any sense for, again, whether that's a trend we're seeing? You described some slower project delivery or deferred capital projects.

Speaker 4

But how do you think about that through the back half of the year?

Speaker 1

I think we were seeing we sort of have normal volumes through that period. Our bidding remains quite high. The closing rate is slightly lower, and I think it's because guys are reticent to pull the trigger. We keep getting these false starts on interest rates coming down. I think you're going to see a cascading of things when that actually changes, not because a quarter of a point makes that much difference to the viability of a project, but more so just the sentiment will make a difference.

Speaker 3

And the other thing is I just want to make it clear, we're not losing any work. This is work that's just simply not coming to fruition. And I think if you start seeing interest rates coming down, that will be helpful. I think also the U. S.

Speaker 3

Election and we've seen this trend before. We're building up to an election. It tend to have larger projects just put on hold until that occurs and then kind of a letting of those capital projects. So from our perspective, it's more timing than whether these things are going to whether the projects are going to be let. So we're hopeful towards the back end of the year.

Speaker 4

Okay, very helpful. Thanks. I'll turn it over.

Operator

Thank you. Next question will be from Cameron Doerksen at National Bank Financial. Please go ahead.

Speaker 1

Good morning, Cameron.

Speaker 5

Yes, morning. Thanks very much. I just want to get an idea on the growth CapEx sort of cadence for the remainder of the year. I mean, obviously, you're still making the investments here in the medevac fleet and then there was a few other things you've highlighted in the MD and A. But just kind of want to understand sort of over the next several quarters what we should expect from a growth CapEx perspective?

Speaker 1

Sure. Well, we look at the 2 Manavac contracts, Dave White and his team have largely made all the investments for the Manitoba marketplace. We own all the aircraft. The turboprops are flying and the jets were just finalizing the medical interiors and they'll be flying towards the end of the summer. So not much left to go there.

Speaker 1

The BC Met of that contract is a little slower than we had anticipated. Textron isn't quite hitting their delivery promises. So it's extended out the CapEx on that. I would probably see the balance of that contract being invested kind of over the next four quarters. Potentially could sneak in a little bit into Q2 2025, but most of it should be done by the end of Q1 of next year.

Speaker 1

The simulator project is well underway. We envision most of that being done in the current year, maybe a little bit into Q1 of next year. And same with Gary Feldman's terminal, we're super ecstatic that the new portion of it is going to open during the very beginning of Q3. And that's a real passion project for us at EIC. We've more than tripled the size of our terminal for our First Nations customers here in Winnipeg.

Speaker 1

And the buildings were built with our partners within EIC. We're going to be the 1st airline with Quest windows in it. So we can't wait to show that off later this year. In terms of other major projects, they would tend to be more ad hoc. It's really hard for me to predict what Hank and the team are going to find something at Regional 1.

Speaker 1

There's nothing really scheduled at this point on that. So what we've got going forward in CapEx, growth CapEx is for us relatively modest other than the VC contract and we probably got 3 quarters of that left to go. So

Speaker 3

Yes. And the other kind of 2, they're not material in the global sense of what we spend on growth CapEx, but the Curacao upgrades, that will continue throughout the year. We also have a second aircraft Q400 that we're going to acquire later in the year for the Air Canada contract. We're acquiring 1 and that's the second one, the first one's in Q2. The Carson, BC contract, my guess is that might slip a little.

Speaker 3

I'm probably not as optimistic as Mike on the manufacturer end of things. I think you'll actually see that probably trend out towards all end of 2025 as far as kind of the total spend in that regard. And then we've got bids in, as Mike spoke about in his comments that if we're successful, we'll also see some capital expenditures, for instance, the Newfoundland Medevac contract and the U. K. Home office bid where we have a second aircraft that we're working on to support either that contract or other opportunities throughout the world.

Speaker 1

Both of those that Carmel mentioned are pure new revenue for us, the BC contract, where we wanted, we had part of it. But like the Manitoba Manavac contract, where we didn't have any of that work before, we really don't have any material portion of 6 aircraft in Newfoundland. And the U. K, should we win that, the second aircraft will be more than doubling the flying we're doing with the existing first aircraft.

Speaker 5

Right. Okay. So lots going on there, but all the investments are supporting growth or future growth. So that's good. Just maybe one very quick additional thing for me.

Speaker 5

Just on Regional One, I mean, we've seen the leasing revenue continue to trend pretty positively. I mean, you're sounding pretty bullish that we'll have kind of a full recovery by end of the year. I guess, can you just talk about, I guess, the visibility you have on the leasing side of the Regional One business on getting kind of back to pre pandemic levels?

Speaker 1

Yes. The pilot crisis hasn't gone away, but it's gotten much better. And demand in the general aviation space has sort of normalized. And so what that's resulted in is airlines are now trying to put the right plane in the right place as opposed to a plane in the right place. And so the demand for our regional jets is increasing.

Speaker 1

We see a lot of change in various airlines' fleets, whether it's plans that some of the U. S. Carriers have to switch from CRJs to ERJs or taking existing CRJs and reducing the number of seats on them, making them a more business friendly airplane. So we see increased demand. We're in constant conversation, not just in North America, but in Europe and to a growing extent in Africa.

Speaker 1

The engine leasing has accelerated very quickly and we have part of the reasons we're confident about the continuing trend in the leasing is because we have contracts for things that are starting in addition to what's already out. The beauty of leasing is that once it's out, it's out, whereas each time you sell a park, you've got to find another sale to stay at the same place. So it's slightly easier to predict absent big black swan events like the pandemic was. The other thing I'd like to point out there, Cam, as it relates to that is, I said a lot a number of times that we expect to get to pre pandemic levels. We're not happy with that.

Speaker 1

We've made other investments and we intend by the end of this year and into next year to see us grow past 2024 levels or I'm sorry, 2019 levels. We use 2019 levels as kind of a benchmark or a rule of thumb, but we see growth beyond that. We're this is the most bullish we've been on Regional One's business since the mid teens when we made a big investment in assets there. We're very comfortable with our position, the aircraft we have and where the airlines are going with it. It's really the arbitrage created by one airline changing and another airline expanding that lets us step in the middle and make money.

Speaker 1

And we're excited about that with respect to Regional 1.

Speaker 5

Okay. No, that's great to hear. I'll pass it on. Thanks very much.

Operator

Thank you. Next question will be from James MacEarl at RBC Capital Markets. Please go ahead.

Speaker 6

Good morning, James. Good morning and congrats on 20 years. That's awesome for you guys.

Speaker 1

Thank you. It was a cool night. We had our Board dinner last night with a whole bunch of our subsidiary residents and there was a lot of old stories talked about. It's amazing how fast 20 years goes.

Speaker 6

Yes, that's good to hear. And so just on the commentary Carmel made regarding some of the returns not being fully utilized on the medevac contracts until some of those aircraft are redeployed. I'm just trying to think about how we should be thinking about the margin impact on the Aviation segment here. Again, I don't want to get too far ahead of myself here, but 2025 consensus kind of in and around that $695,000,000 level. So we'd be now kind of anticipating a bigger step down in margin in 2025 and then a further recovery in 2026?

Speaker 6

Just want to put some numbers around that commentary.

Speaker 1

Yes. No, I wouldn't be stepping anything down. It's more about the full return. When we talk about returns, we often everything we do is based on our investment and how many dollars are left after maintenance CapEx or return on that investment. And because we had some of the BC Medevac work, we've replaced all the aircraft.

Speaker 1

So our return on the work we already had isn't as high because we're already getting paid for part of it with the old aircraft, but we have the old aircraft. And I can tell you the opportunities for them are quite good. Just as an example, not suggesting that this is the only place where we might put them, but the Northwest Territories has just put out an RFP for aircraft and the aircraft that would be coming from Carson Air would be suitable for that. So we'd be able to pick up a new contract with virtually no capital investment. And so it's redeploying those to add additional investment.

Speaker 1

I would when you're looking at margins, you're looking at a return on sales, which isn't impacted by this. It's the return on capital we're talking about, which gives us the opportunity for further accretion out of that investment. Okay.

Speaker 6

I appreciate. Yes, that makes sense. And then on the surveillance deals, I saw you made a purchase of an aircraft to assist with the UK home office contract bid. So this is kind of a 2 part, I guess, did you guys typically purchase aircraft before you have won contracts? And then as a follow-up, you mentioned that it'd be easy to redeploy this aircraft if you weren't successful.

Speaker 6

Is there any other types of opportunities you're working on there that you didn't flag in the release that you can provide some color on? Thanks.

Speaker 1

So in answer to your first question, do we normally buy the assets before we win? I would say this is definitely an anomaly as it relates to that. It's driven by it's really driven the decisions are driven by 2 things. One is the timeline to get the 2nd plane up and running is very short. And we don't want to disappoint the customer.

Speaker 1

We are the incumbent. And so we are cautiously optimistic. We don't know. There was an RFP process. We're bidding against other people.

Speaker 1

So I can't provide any certainty that we're going to win this, but we are cautiously optimistic because we're the incumbent and we don't want to drop the ball. But the second half of it and perhaps equally of equal importance is the fact that we're in discussions with other European countries. The issue about border security is not lessening, it's accelerating. We've seen even in the short period of time we've been with the U. K.

Speaker 1

Home Office that our surveillance has changed how people are sneaking into the country. They're coming from different places, creating different challenges for the government there. And what U. K. Is going through is no different than what France is dealing with or Spain is dealing with or Greece is dealing with.

Speaker 1

They're all slightly different in how they need to police it. And so basically, we're putting ourselves in the position where when we bought the Force Multiplier a number of years ago, we said there's going to be short term demand in the world that we want to be the guys that can step into. Britain has been the exact example of how that model is supposed to work. That plane has been fully deployed. Quite frankly, if we win, that plane is not going to come back.

Speaker 1

That plane is going to be permanently put on that. So in addition to the second plane that we bought already, it's highly likely you'll see us buying 1 or 2 more to replace them as our short term rental alternative. And so this is it's really part of a more comprehensive strategy. It was the decision to do it this moment was driven by the U. K.

Speaker 1

Opportunity, but it's a much bigger universe than that.

Speaker 3

And the interest is not just in Europe, I mean, Canada, for instance. I mean, we're flying at a very high tempo, our DFO aircraft, so potential opportunities there. Australia, there's opportunities that we spoke about in the past in that region. So I guess, it's a state on our world environment right now, but there's lots of areas that could use this type of capability. And so that's why we weren't hesitant at all to invest the dollars in advance of the contract to ensure that we're able to seize these opportunities.

Speaker 1

One last comment just before we leave this. The challenge is that depending on which equipment we're putting it on and we use the term surveillance aircraft like it's homogeneous and that's really not true. There's a lot of options. We you get a planes as inexpensive as $40,000,000 or 50 $1,000,000 or as expensive as what's in UAE north of $200,000,000 So depending on what sense of equipment you want. But even in the most basic configuration, you're talking close to a year to build those.

Speaker 1

If you've got the aircraft and you've ordered the parts, it will take you about a year to put it together. So we got to be ahead of the curve, not behind it.

Speaker 6

I appreciate it. And I'll turn the line over. Thanks. Thanks, James.

Operator

Next question will be from Christa Friesen at CIBC. Please go ahead.

Speaker 1

Good morning, Christa.

Speaker 7

Good morning. Congrats on the quarter. I was just wondering on the Air Canada contract, obviously, great news that you have another aircraft added there. What are the conversations like now? You guys have been a great partner for them so far.

Speaker 7

Are there conversations of being able to increase that further? What's going on there? We've

Speaker 1

one of the things we've been talking about with Air Canada to date all of our work for them has been purely domestic in the maritime area, Maritimes area. They've asked us to look at routes out of Halifax. So the same hub, same thing, but into the Northern U. S, which is a new thing for any of our airlines. We've never flown cross border on a scheduled basis.

Speaker 1

And so you can see in Air Canada's scheduling that later in the year, we will start flying into a couple of centers for them. Our relationship with Air Canada is remarkably good. Them taking the option on the next two aircraft, I think is testament to that. And we believe that there's opportunity if we continue to execute the way we have to do more in that region. And I want to be clear here.

Speaker 1

Our strategy was the stuff centered in the Maritimes and the Halifax in particular where we have a base. It's consistent with our strategy and it's consistent with our aircraft type. So while I'm not in a position to say what Air Canada is going to do in the future, there will be discussions about other opportunities with them. Assuming we continue to execute like we have on the first four as the remaining 2 go into service throughout the balance of the year.

Speaker 7

Okay. That's great to hear. And then maybe just on the matting side, we talked a lot about the kind of the environmental impact right now. Can you just comment on what's going on in the industry in terms of supply and pricing and what you're seeing there?

Speaker 8

Well,

Speaker 1

in Western Canada, because of the dryness, there's more supply than is required. Pricing has stayed reasonably consistent. It really hasn't changed a whole lot. There's stuff that's going to happen in the oil patch and there's a large number of people tend to think of pipelines as the massive ones like we just completed with Trans Mountain and those kinds of things. But there's a lot of smaller pipelines from the oil fields into the bigger pipelines and there's a bunch of that work that's imminent.

Speaker 1

And so even the long end of the short term or the medium term looks quite good, particularly as soon as we see a little normalization of weather. It's been so dry and with the forest fires or the they're not even really forest fires, tundra fires we've had in Alberta in the last year. The number of stuff has been delayed or done without mats. That will normalize as we go through La Nina. And then when you get into the back end of the year and into 2025, the stuff that's going on in Quebec and Ontario is very bullish.

Speaker 1

We've talked about potentially increasing our ability to distribute there and creating a bigger infrastructure. And we're actively looking at opportunities for that, not only in Eastern Canada, but quite frankly, in the eastern half of the United States. And so I haven't got anything tell you about for sure yet, but we're very active in those areas.

Speaker 7

Okay, perfect. Thanks for the color. I'll jump back in the queue.

Operator

Thank you. Next question will be from Matthew Lee at Canaccord Genuity. Please go ahead.

Speaker 1

Good morning, Matt.

Speaker 8

Good morning, guys.

Speaker 1

Thanks for

Speaker 8

taking my questions. Maybe to start off, just a little bit of update on the additional aircraft being deployed for AC. Can you just give us an idea on the timing of those entering service and what kind of revenue they add to the airline business?

Speaker 1

Well, if I was like I said, we don't give specifics and I don't really like giving my competitors exactly what I make. But I think the way I would look at this is, is the second one will be in service reasonably the first of the 2 new ones will be in service very soon and the other one later this year. So by the end of this year, we'll be fully running the 6 aircraft. In terms of the return on the other 2, when they're up and running, I think what I would do is these are basically $10,000,000 aircraft, give or take, in Canadian dollars. We're pretty clear about what returns we expect.

Speaker 1

So I would work backwards off of that and then annualize that. Clearly, we're not going to have that in the current year. But when you're looking at for the back end of this year and into 2025, I would just come up with a return of a high single digits, dollars 10,000,000 ish price of those aircraft.

Speaker 8

Okay. That's really helpful. And then maybe in terms of the manufacturing business as a whole, it sounds like for Q1, the lighter margin was due primarily to max sales mix. But maybe help us understand the other moving parts in the overall manufacturing business and maybe how the margin trajectory looks for the rest of the year?

Speaker 1

Well, I think you're in the short term, I don't think it's a lot changed, Craig. Like It's probably slightly below historical norms because of the lower rental mats in Northern. As we get to the back end of the year, that normalizes. In the window business, while we're seeing an improvement in the results there, it's nowhere near the improvement that's the potential for there as these jobs are lapped. And so those tend to be at least 12 months out when we get them.

Speaker 1

So the impact of that on our margins, Matt, is probably a 2025 story later in the year next year as we do it. We've actually it's one of the most frustrating things in the world when we're not converting some of these things, but we've actually had to hire more engineers and more bidding people to keep up with all of the opportunities our developers are asking us about. And so I might be on the more bullish end of this of other people, but I think that's a dam and when that bursts, when 1 or 2 people step out and say we're going, I think there's going to be instantly people worried about a supply issue on the window side. And so I think you see those margins get better next year. I don't think you see a lot of that this year because even if we get new jobs, they're not going to fall into this year.

Speaker 1

And with the balance of our business, it's pretty status quo. It's slightly softer than it is, but it's almost bang on to what we saw in 2020 2016, where some people held on to the projects with the election U. S. Presidential election coming, especially at the business to business stuff like big expense expansions of stainless steel tanks and those kinds of things. Closer to the election, we'll see that go.

Speaker 1

And then the other the last piece of it is to the extent we're exposed to the defense business through bent machine and their business, that is bullish and strengthening. Much like the maritime surveillance business is, the outlook for that in the medium term is also quite good.

Speaker 3

The other thing is dry air will assist in margins in Q3 and Q4 as well.

Speaker 8

Right. So more specifically, I mean, should we be thinking about 2024 EBITDA margins in Manufacturing kind of being in like the mid teens range?

Speaker 1

That's probably reasonable. It's not I got to be honest with you, it's not how we look at the business. We look at it on business specific and you get product mixed up. But mid teens, assuming the rental business is in what we think it's going to be in that business, that's probably a reasonable estimate.

Speaker 8

All right. Thanks, guys.

Operator

Thank you. Next question will be from Konark Gupta at Scotiabank. Please go ahead.

Speaker 2

Thanks. Good morning, Konark.

Speaker 9

Good morning, Mike and team and I echo the congratulations on happy 20 year for you guys. Great achievements in the last 20 years. So maybe I can dig into EBITDA a little bit here, Mike, in terms of cadence. You're guiding 8% to 14% growth for the full year. Q1, you were already at 14%.

Speaker 9

And several contracts are ramping up over the next 3, 4 quarters. Northern Match comps are easing, but obviously you're lapping BB and Henson in Q2 and dry air in Q4. Would you expect to sustain this kind of 14% growth in each of the next three quarters, would you say? Or would there be some variations?

Speaker 1

I mean, there's slight seasonal variations. And as you mentioned, the comps change period to period. But we don't there's no big leap in a given quarter. So when you're looking at that, the 14%, we may be slightly higher than that in Q3, Q4, maybe slightly less than in Q2, but it's fairly straight line over the balance of the year. And then quite frankly, a lot of the stuff we do continues into the next year, like where you see it with Regional One as an example is that these things strengthens.

Speaker 1

By the time we rolled off Q1 next year, we're going to have 3 more months, 3 more quarters of strengthening to hit next year. And so a lot of this growth, we're not the 14% is not done this year. It rolls organically into 2025.

Speaker 9

Okay. No, that makes sense. Thanks. In dry I understand the seasonality aspect of that, but don't quite understand why it would be losing money in Q1 and Q2. I mean, is it it seems like the early subsidiary you have that incurs a loss in a few quarters.

Speaker 9

Can you explain like why is that cost issue in Q1 and Q2?

Speaker 1

Yes, it's really simple. What they're building and selling are heating capabilities. So we're selling to construction companies and to rental companies. And so they're used for various projects, whether it be replacing a boiler in a place where you need temporary heating or thawing the ground to dig something out in the winter. It's project oriented and it's almost exclusively utilized in the winter.

Speaker 1

And so when you get into the end of the winter, which is what Q1 is, the rental companies aren't going to purchase or the construction companies aren't going to purchase new equipment that sit there for the next 6 months till they need it. So the revenue is very seasonal. And I'd point out, it's exactly what we thought it would be. When you look back, I don't have the number in front of me and I'll get yelled at for guessing, but bottom line is I think we made $4,000,000 or $5,000,000 in the Q4 in this business. And we didn't even add it the whole 4th quarter.

Speaker 1

And so we sell a lot of stuff in the back half of the year. We produce throughout the year and a lot of our engineering and R and D costs are fixed. And in fact, they may even be front end weighted because they've got more time to deal with it at that point in the year. So we wouldn't buy a business as seasonal as dry air if it was as big as our airlines or whatever because that kicks our working capital needs all over the place. But it's relatively modest in size and the aggregate return when you look on it on a 12 month basis is very strong.

Speaker 1

So it's really just driven by the demand profile of our customers that they really don't want to buy these and then have them sit in their yard for 6 months. They say, okay, we'll take them in July, we'll take them in August, we'll take them in September, so that they're ready to go when the frost comes.

Speaker 9

Right. Okay. No, that's great. Thanks. And then the last one before I turn it over.

Speaker 9

Regional One leasing, obviously, you're expecting to rebound here and Q1 was pretty much in line with Q1 of 2019, so that's great. But on the sales side and service side, any incremental opportunities you have today? I think it seems like revenue is pretty stable for now in that business in the sales and service. Last year, you had some big opportunities in Q3, I guess. So any upside here you see in the short term?

Speaker 1

Yes. I would say in short to medium, the biggest challenge we have in selling parts, quite frankly, in Regional One is not demand. It's we've got aircraft to part out and the lineups to get them in to MROs to disassemble the aircraft. We're actually looking at more creative solutions like parking some of these things at our customers and actually taking the parts off as we need them, consigning them that way. We're being creative because of that relatively short labor supply, the ability to get the plates taken apart isn't as fast as we'd like it to be.

Speaker 1

And Powell, who was supposed to be our ace in the hole on this with MRO, has selfishly gone out and got all these maritime surveillance contracts. So our internal capacity that we thought was our backup is busy doing other things. So you'll see that strengthen over time as we can access more of our own inventory.

Speaker 2

I think the other thing to point out is just that the like large aircraft and engine sales can vary from period to period. So when you're talking about that wider talking about sales and service revenue in totality, when you have kind of the ups and downs of the sales and the large aircraft sales that can sometimes mask and that was the case in Q1 where we have strong parts sales, parts sales are up year over year, but they're kind of fluctuating period to period variability in the larger sales make it seem like we're not generating stronger sales on the part side, which we are, which is coming from previous investments we've made into the portfolio of parts sales or parts for resale.

Speaker 9

Thanks guys. I appreciate the time as always.

Speaker 1

Thank you.

Operator

Next question will be from Tim James at TD Cowen. Please go ahead.

Speaker 10

Good morning, Tim. Good morning. Thank you for the time. I wanted to actually stay on that Regional 1 topic in a on a quarterly basis, I guess, how much or the value of parts that are being moved from the fleet into inventory for sales and service? And guess I'm trying to get a sense for how much of the inventory investment that we're seeing is actually not really requiring any cash because it's just transferring aircraft or parts other than obviously the MRO cost to tear down the aircraft.

Speaker 10

But can you give us a bit of a sense of what the flow of value is from the fleet into inventory, just or even a range per quarter?

Speaker 1

This is all of my guys are pulling up numbers, but I think it's important for people who may not understand this as well as you do, Tim, is that when you look at our business model, and I'm going to simplify so people understand it. We buy an aircraft that's got green time left and we make a decision that we're going to lease it out. So we send it over to Tim Airways and he leases it for 2 years. And then we're at a stage where the plane needs a big overhaul. So we decide that it's not worth putting the money back into it, so we part it out.

Speaker 1

And then so when the plane then will move out of fixed assets and into inventory. And so you've got stuff that goes in and out of our fixed asset category. We'll buy new planes to replace the one that we just used up and then remove the cost or the net book value of that aircraft into our inventory. And so inventory goes up and down every quarter. And sometimes it's a massive use of capital and sometimes it's a provider of capital depending on what we do in that given period.

Speaker 1

So cost of sales has a cash cost, but most of what's done would be something we bought in quarters or years previous that we've moved over and become. But the other side of that story is we're going to put something back in fixed assets to replace it because if we don't, we're depleting our long term ability to generate cash.

Speaker 3

Yes. So it really varies from quarter to quarter as you would imagine. But I'll give you a sense for the quarter we just had, so Q1, it was a couple of $1,000,000 Can it be higher? Yes, absolutely. But as Mike indicated, like we're replenishing the portfolio with higher kind of cost based assets.

Speaker 3

These are depreciated and moving into inventory.

Speaker 10

Okay. That's helpful. And then that movement out of fixed assets, that does get reflected in or correct me if I'm wrong, maybe I am, when you report proceeds from disposals of assets, that shows up in that, does it not?

Speaker 1

It shows us a negative CapEx. It shows us a sale of assets. Right. Okay. But then actually what it does is we transfer it to cost of sales.

Speaker 1

So we reduce if we transferred $1,000,000 worth of parts off an airplane, we would reduce our fixed assets by $1,000,000 increase our inventory by $1,000,000 and then it would flow through cost of sales. We're taking it out of inventory when we finally sold the assets. So when we do this, yes, it comes out of fixed assets. And then when we report what we've invested, it's obviously in that number, what went out versus what went in.

Speaker 3

Right. And just to kind of give you maybe a more fulsome explanation as to why it's variable. I mean, we really look at the marketplace and demand. So we make decisions to what is it worth putting some dollars into the aircraft and continuing to rent it out? Or are parts demand such that it actually makes more sense to port out, and hence we move it to inventory?

Speaker 3

So those are the types of things that guide us from quarter to quarter as to what we do with the fleet.

Speaker 1

And quite frankly, that's why we're as good as what we are in that business is because it's our knowledge of the demand for the parts that drives this business. The leasing is actually a part of the liquidation. We're taking a plane that ultimately is going to be parts when we're done with it. But we're one of the assets we have to sell is the green time. And so we lease it up to use that.

Speaker 1

Now occasionally, we'll overhaul it and refill the Green Time, but most time, we'll part it out and then go buy another one.

Speaker 7

Right,

Speaker 10

right. Yes. I'd just like to have a bit of a sense just because it's a great I mean, you get inventory without having really a cash outflow for that component of your inventory, which is obviously a great model. My next question, just returning to kind of the seasonal change from Q4 to Q1. Obviously, comparing this year to last year is tricky in part because of dry air and other factors.

Speaker 10

But can you just sort of touch on the key factors when we think about next year from Q4 to Q1 that will be different from this year from Q4 to Q1, if in fact there are any. I mean revenue and I'm thinking, sorry, manufacturing specifically, revenue in manufacturing was down 14%, I think sequentially Q4 to Q1. What would cause it to be different from a decline of 14% next year, if at all? Or maybe that's a good proxy going forward, I don't know. Again, I don't sort of get put too fine a point on it, but just generally speaking.

Speaker 1

Yes. I don't I think the only thing you'll see as we go forward, that changes the margin profile on manufacturing is as the windows business strengthens from an increased demand, the margin profile will be stronger in all the quarters. That business isn't particularly seasonal. There's slight variations, but nothing material. So as we talked about that business strengthening, you'll see that affect all quarters.

Speaker 1

The Q1 is always going to be the lightest. But what's fascinating in our business, we did a study of this a couple of months ago where what do we expect in Q1 if we looked at the seasonality historically of what percentage of the annual EBITDA is generated in the Q1. And within 1 or 2 percentage points, it's been the same since we started. And that's really driven by the fact that aviation is always going to be slower in the Q1 because of winter roads in the north. It's mitigated by the increase in our Aerospace business, which isn't seasonal at all.

Speaker 1

And so that offsets that a bit, but then we've added some manufacturing in both Northern Mat and to a lesser extent because of its size dry air, which is also seasonal. So when you add it all up, the amount the relative amount of our business that shows up in Q1 is remarkably consistent year to year. If you're talking about margins, I wouldn't see any reason for things to be materially different a year from now other than I do expect margins to strengthen in the window business over time. Whether we'll have that by Q1 of 2025, I can't answer that yet. But on a longer term trend, the strength of the window business will because it will become a bigger piece of manufacturing, which will in turn strengthen those numbers.

Speaker 1

Outside of that, I don't see a big change. Primarily. Am I missing anything?

Speaker 2

The only one that comes to mind is just Environmental Access Solutions and just this year the severe drought that we've had and if you had a more normal while Q1 is still going to be their slowest period, March, depending on precipitation levels, can be busier for them. So if you had a more normal or a period of above normal precipitation next winter and into the early spring in Western Canada that could positively impact results in 2025 versus 2024.

Speaker 3

Yes, because their sales mix this quarter was more actual sales than lease, so obviously impacting margins in that regard too.

Speaker 10

Okay. Just a quick follow on to that then. Are there any drawbacks, Mike, to the seasonality? I mean, other than it would be great to have everything evenly distributed. But just from a cost or a planning or a business perspective, and what I'm trying to ask, I guess, is there enough of a drawback to the seasonality that you would specifically target to reduce it?

Speaker 10

Or is it just kind of a fact of life for the business and at the end of 12 months, you've got your numbers and so that's fine? Or is there any desire to reduce seasonality or it's not significant enough to have a

Speaker 1

particular We our seasonality has been roughly the same for 20 years. I mean, in a perfect world, I would find continue to find things that are really consistent quarter to quarter. But with our balance sheet and if something makes more money in Q3 than in Q1, that's okay as long as it's predictable. We've got a balance sheet that really doesn't affect much. And quite frankly, you see it because our working capital needs always go down in the Q1 because we're slightly less busy, absent that abnormal transaction that Rich described.

Speaker 1

But our core business need for cash goes down in the Q1. And then as we accelerate later in the year, it goes up. And so we're well capitalized. It really doesn't preclude us. Now when I do a $500,000,000 acquisition with Dry Air's seasonality, I'd have to think long and hard about that and see what the impact would be on our capital requirements.

Speaker 1

But as long as we're talking about modest size investments in businesses that we really like, we can withstand the seasonality.

Speaker 10

Yes. No, that's great. I'm glad to hear that. I mean, as long as the economics make sense after 12 months, that's the important thing.

Speaker 1

That's right.

Speaker 10

Last quick question. Mike, you made reference to the Air Canada agreement and flying that's being done and talked about sort of high single digit returns. Just to confirm, what earnings metric are you using in that return when you Yes.

Speaker 1

On that the high single digit, if I said that, it's not what I was looking for. We're looking for that 15% free cash flow return on the investment. So just use a notional one. If I invested $100,000,000 in something, I'd expect free cash flow after maintenance reinvestment to be at least $15,000,000 And then to get to an EBITDA number, you'd have to add back to that $15,000,000 whatever the maintenance CapEx is. So it's always going to be something higher than that in terms of an EBITDA return on the investment.

Speaker 2

Yes, the high single digit was in reference to the cost of the asset in terms of high single digit millions.

Speaker 1

Yes, high single digit millions, right. Like somewhere $8,000,000 $9,000,000 $10,000,000 in aircraft depending on which one we buy.

Speaker 4

Okay.

Speaker 10

Okay, that's great. Thank you very much.

Operator

Thank you. Next question will be from Chris Murray at ATB Capital. Please go ahead.

Speaker 1

Good morning, Chris.

Speaker 8

Good morning, folks. Hey, Mike, just maybe continuing on with a bit of a theme here. I think you're picking up on some of the seasonality and the variability.

Speaker 10

As we think about

Speaker 8

acquisitions, historically, when you guys have done acquisitions, part of the rationale anyway was to make the cash flow streams a little more predictable. I think about Regional 1 coming in to help offset some of the maintenance costs and some other U. S. Transactions that kind of helped offset currency. Dry air is maybe an extreme example of this.

Speaker 8

But I guess now that you've got a nice shiny couple of $1,000,000,000 to go play with,

Speaker 10

can you just maybe talk about

Speaker 8

what you guys are looking at in the acquisition pipeline? And even if you're maybe comfortable to your last comment about maybe picking up something because your balance sheet can absorb it that may be weighted to 1 half or one quarter over year more than something else, is there anything out there that you would think that either would dampen volatility across earnings? Or is this just going to be a function of the size of acquisitions you guys have to look at now to move the needle that maybe it's never going to be that kind of fit that you've had in the past?

Speaker 1

Yes. I don't think that we see very many transactions that are materially seasonal that we're interested in. Dry air was a rarity and so was Northern Matt. I think if we're going to get any more seasonal stuff, I think it will be in my aviation business. We haven't conquered the whole north yet, and that's our goal.

Speaker 1

And so whether it be medevacs, which aren't seasonal at all or scheduled freight and charter business, which is somewhat seasonal. The farther north you go, the less seasonal it is. It's sort of the northern part of the provinces that tend where there's winter roads that it tends to be the most seasonal. So when you look forward, as we grow our MAP business into the U. S, that will reduce the seasonality of the business because that seasonal nature isn't the same in the United States.

Speaker 1

And it's even lesser in Eastern Canada because it's warmer in the winter and the ground is still soft. So there's less of a seasonal nature in Eastern Canada than there is in Western Canada. So if I put on my Nostradamus hat, 3 years from now, the percentage of my business, all things being equal, that's in the Q1 will be equal or perhaps somewhat less than it is what it is now. But some of our core businesses, I've been talking about seasonality of Winter Road since 2004, ever since we bought Perimeter. And it's actually improved in terms of cash flow.

Speaker 1

We actually would generate negative distributable cash at certain times when we were just a smaller airline 16, 17, 18 years ago in Q1. That's no longer the case because of the diversity of the cash flow. But I don't see us being able to eliminate that with something that's got a reverse seasonality. I mean, it would be awesome if we found it, but I haven't bumped into that yet.

Speaker 2

Okay. That's fair. I'll leave

Speaker 8

it there. It's just it's interesting to see how even one acquisition can throw around the earnings pattern a little bit. So the other question I had for you was just on your core costs. You made the comment that there might be some more variability and slightly up this year. Historically, these things have tracked pretty close to growth in revenue.

Speaker 8

So you think about around $10,000,000 this quarter, you think about a little bit of growth in revenue, probably mid-40s full year would be normally what we would think about. Is there something kind of outside of that number that you're trying to highlight or something like that with that commentary?

Speaker 1

No, that's a reasonable analysis. It grows roughly it's not directly proportional, but roughly in proportion to the size of the business. I think in the last 2 or 3 years, we've had maybe a slightly disproportionate increase as it relates to building our IT cybersecurity team. And we are very proud of the fact that we're state of the art in cybersecurity. We are authorized and certified at the highest levels of that in Canada and comparable to much bigger companies like insurance companies and banks.

Speaker 1

And that's cost. So that's in the historical numbers, but I don't see a delta for that in the future other than as we grow.

Speaker 8

Okay. I'll leave it there. Thanks, guys.

Operator

Thank you. Next question will be from Suresh Yakiev at Laurentian Bank. Please go ahead.

Speaker 1

Good morning. Hello.

Speaker 11

Good morning. Thank you very much. I just had one question. It's related to the Australian surveillance contract RFP process. I was wondering if there were any updates on that and if the RFP is likely to happen in the second half of the year?

Speaker 1

Yes. They had expressions for interest, was that late last year? And we moved on. We made it through that process. We're one of a limited number of people that will be bidding on an RFP.

Speaker 1

We're excited about seeing what it looks like because it's going to be very large. How very large depends on what aircraft they want to use, how new they are, how much of its jets, how much of its turboprops. And so we're really looking forward to digging our teeth into that. Quite frankly, it's what we're good at. It's big enough that we're going to be competing with some of the biggest people in the world in this segment.

Speaker 1

But as you've seen with what we've been able to do in Europe, going from nothing to a significant player in a couple of years, we're excited about this opportunity and we're going to take a good hard swing on

Speaker 11

it. For sure. Thank you very much. That's very helpful. I'll pass the line.

Operator

Thank you. Next is a follow-up from Steve Hansen at Raymond James. Please go ahead.

Speaker 6

Yes, guys.

Speaker 4

We're running this. I'll be brief. But I just wanted to make go back to your M and A comments around similar or like businesses. Is there anything are there any assets or capabilities that you might want to acquire that would bolster your chances of winning some of these future contracts you described? I'm thinking a little bit about the Carsonera playbook here that obviously pretty instrumental in the BC contract, but particularly in the international arena as you think overseas.

Speaker 4

Is there anything that becomes a target or of interest things?

Speaker 1

I think the one thing we'd like to do is when we do our first big jet version of this, we'll have to develop some of the mods and some of the things that we've already developed from a turboprop point of view. But those are more redundant when we do it as opposed to acquiring it. I would say, Steve, that the single biggest factor in our capabilities outside of our track record was the decision to acquire CartNav a number of years ago. We have that is the lifeblood, that's the software that makes all these super high-tech disparate systems talk to one another. And a lot of what we compete against would be a signal manufacturer environment.

Speaker 1

So Saab builds a maritime surveillance aircraft. But if you buy that, you get Saab's infrared, Saab's ultrasound, Saab's radar, Saab's computer and that may or may not be what you want. I'm in no way criticizing them. But what I'm saying is where we are is, if you want the Israeli radar with the South African infrared and the American computer system, we've got the piece that makes all of those talk to one another. And it gives us such a competitive advantage.

Speaker 1

We often have our competitors ask if they could use CardNow software and you can guess that we're not really not interested in sharing our secret sauce with somebody else. But that was the key decision a while ago when we bought that. It stood alone on a cash flow basis on what it did, but the reason we bought it was to internalize the capability.

Speaker 3

The other thing we think about the aerospace environment is oftentimes we look to partner, if it's obviously in a jurisdiction that we don't have a significant presence with a local operator to bolster a bid, or kind of the nationalistic perspectives that governments have or if there's a capability that's looking that they're looking for that we don't have like UAV for instance. Those are all examples where we might look to partner and acquisition perhaps, but we look at both.

Speaker 4

Okay, very helpful. Thanks guys.

Operator

Thank you. And at this time, Mr. Pyle, we have no other questions registered. Please proceed.

Speaker 1

I want to thank everybody for joining us this morning. I look forward to seeing some of you over at our annual meeting in a couple of hours over at the Winnipeg Airport. For those of you who are out of town, we'll speak again at the end of our Q2. Thanks and have a great day.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.

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