Exchange Income Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

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 6 months ended June 30, 2024. The Corporation's results, including the MD and A and financial statements, were issued on August 8, 2024, and are currently available by the company's website or 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. 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.

Operator

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 section of the Annual Information Form and 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. I would now like to turn the call over to the CEO of Exchange Income Corporation, Mike Pyle.

Operator

Please go ahead, Mr. Pyle.

Speaker 1

Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. Yesterday, we released our Q2 results for 2024. Our results show the diversified nature of our business. The strong results were driven by our Aerospace and Aviation segment.

Speaker 1

While we started to see some very positive signs from a customer order perspective in the latter portion of the quarter and subsequent to quarter end in our manufacturing segment. These events, coupled with our resilient business model, allows me to confirm that we believe our 2024 EBITDA will be at the mid to upper end of our previously provided range of $600,000,000 to $635,000,000 With me today is Richard Wallerich, our CFO, who will speak to our financial results and 2 new voices, Jake Treynor and Travis Muir, both who are part of head office executive team, and they will expand on our outlook for the Q3 and beyond. Prior to passing the call over to Rich, who will delve into the numbers more deeply, I wanted to highlight some of the key performance metrics achieved during the quarter. We set records for revenue, adjusted EBITDA and free cash flow. We executed on the strategic acquisition of Duvelin in June, which will accelerate the Environmental Access Solutions strategic growth in Quebec and Eastern Canada.

Speaker 1

One of the more important highlights was what happened after the quarter end. In our multi story window solutions business, we booked in excess of $100,000,000 of future projects across several geographies in Canada and the U. S. Amongst the diverse set of customers, whether they be condo, apartment or commercial projects. These positive solutions business line provide positive momentum as we head into the second half of the year, and hopefully that extends into our other business lines.

Speaker 1

This strong order capture continued this week with the addition of another $20,000,000 contract in our window business subsequent to the publishing of our results. Our second quarter results. Revenue increased by $33,000,000 to $661,000,000 Adjusted EBITDA increased by 10,000,000 dollars to $157,000,000 Net earnings were $33,000,000 for the quarter compared to $37,000,000 and net earnings per share were 69% compared to $0.85 in the prior period. Free cash flow grew by $3,000,000 to $101,000,000 Free cash flow less maintenance capital expenditures was $52,000,000 compared to $59,000,000 in the prior period. Adjusted net earnings were $38,000,000 compared to $43,000,000 in the prior period and adjusted net earnings per share were $80,000,000 compared to $1 in the prior period.

Speaker 1

The payout on a free cash flow less maintenance expenditure basis remained very strong from a historical perspective at 61%, even with 3 dividend increases in the last 2 years. We are pleased with these results, and they show the resiliency and diversification of our business model. The main contributor to the results was the continued investments in the businesses that we are starting to see the fruits of those investments. 2023 was a year characterized by several announcements of acquisitions and contractual wins, whether it was the BC and Manitoba Medevac wins, our UK home office contract or our Air Canada commercial agreement. Speaking first of the Air Canada contract, the 5th and 6th aircraft started flying in the 2nd quarter.

Speaker 1

We continue to execute under the BC contract with our existing aircraft along with 1 new King Air, which has been received and modifying is flying under the contract. We anticipate the 2nd new aircraft being modified and flying by the end of the year. We continue to look after a larger portion of this contract with older aircraft while we wait for the manufacturer to deliver the new aircraft. Our jets under our Manitoba Vemat contract have arrived in Winnipeg and will be operating under the contract in September as previously announced. We have not formally announced any new significant contract wins, but are hopeful on the resolution on several fronts.

Speaker 1

I wanted to give you an update on the contracts that I spoke about on our Q1 call. The first contract relates to the future aircrew training contract for the Government of Canada. Skyline was named as the preferred bidder last year and we are part of the Skyline bid team. The contract is formally awarded to the Prime and we are in negotiations now to finalize our subcontract with the Prime. We submitted our proposal to the U.

Speaker 1

K. Home office for the continuation and expansion of the existing contract will continue through November of 2024. We were recently informed that the RFP is expected to be reissued based on internal issues within the RFP itself. Given the high utilization of the aircraft currently, we anticipate being able to support the U. K.

Speaker 1

Office with no gaps in coverage. The 3rd opportunity that I previously commented on was the Newfoundland and Labrador fixed wing medevac contract. We believe that we are one of 2 proponents to bid on the contract and hope to hear the results of our bid during this quarter. We are optimistic at the outcome, but are still waiting for the results of the formal bid process. Lastly, we are continuing to see significant interest around the world for our aerospace services.

Speaker 1

We see large opportunities in Australia, in Europe and expanded opportunities in Canada. We are very bullish about the future opportunities and these contracts are right in line with our EAC core capabilities and the business model as they generate consistent cash flows throughout the term of agreements. Jacob Travis will focus on our outlook for our segments for the Q3 and the remainder of 2024. But I will now hand off the call to Richard, who will detail the Q2 results.

Speaker 2

Thank you, Mike, and good morning, everyone. Revenue, adjusted EBITDA and free cash flow were all 2nd quarter high watermarks. I will delve into the segmented results and the remainder of the financial statements. Revenue in our Aerospace and Aviation segment increased by $54,000,000 or 15 percent to $427,000,000 Adjusted EBITDA increased by $27,000,000 or 25 percent to $134,000,000 The results and margin expansion were across all business lines. Looking at the Essential Air Service business line, the improvements were driven by 4 key factors.

Speaker 2

1st, previous organic growth capital expenditures in the Aviation businesses over the past number of years second, our average load factors improved, which a direct improvement on adjusted EBITDA. 3rd, the impact of the routes flown on behalf of Air Canada. And finally, the impact of the BC and Manitoba Medevac contracts. These improvements were offset by softness in our rotary wing businesses business. However, it is anticipated to reverse in the Q3 due to wildfire activity in Canada.

Speaker 2

Our Aerospace business line revenues were relatively flat compared to the prior period. However, adjusted EBITDA expanded in an accelerated fashion. This is due to two reasons. 1st, the revenues and adjusted EBITDA increased due to the expansion of the ISR business, including the impact of the U. K.

Speaker 2

Home office contract. This increase in revenue 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 decline. This margin expansion in our training business is anticipated to be temporary and is expected to normalize in the Q3 and beyond. Last, our aircraft sales and leasing business continued to grow as the leasing component of that business continued to improve.

Speaker 2

We are still anticipating that the leasing side will continue its step improvement until it reaches and ultimately passes pre pandemic run rates by the end of the year. The growth within this business line and specifically the leasing business resulted in an improvement in the profitability as leasing margins are much higher than other revenue streams. Revenue in our Manufacturing segment decreased by $21,000,000 or 8 percent to 134,000,000 dollars Adjusted EBITDA decreased by $14,000,000 or 29 percent to $35,000,000 As expected, revenue and adjusted EBITDA within Environmental Access Solutions business line decreased by 28% and 35%, respectively. As previously communicated in our year end and first quarter calls, the first half of the year of the comparative period had a number of seasonal anomalies. The Q1 and Q2 of 2020 3 experienced an unusual number of rental mats deployed on long linear projects.

Speaker 2

This was outside the norm. Milder weather in 2023 also required greater mat utilization of projects. However, this winter experienced very low snowfall and drought conditions, which generally lessens demand. Further, as the prior year comparative contained an unusual number of mats on rent, the impact on adjusted EBITDA was outsized relative to revenue. Our Multistory Window Solutions business revenues were consistent with the prior period, and adjusted EBITDA decreased by 35%, changes in product mix as the business line completed more third party installations than in the prior period, which generates lower margins.

Speaker 2

This, coupled with operational inefficiencies as certain projects pushed out of the second quarter in to later in the year reduce adjusted EBITDA. As we previously communicated, we also continued on the strategic decision to retain experienced staff to meet future increased demand as we are starting to see projects being awarded in the later part of the quarter and post quarter end. Lastly, revenue in our precision manufacturing and engineering business line decreased by 8% compared to the prior period. Adjusted EBITDA decreased by 17%. The decreases were primarily due to customers delaying projects into subsequent quarters coupled with changes in product mix.

Speaker 2

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 with increased coupled with the increased debt outstanding due to various growth capital expenditures. Our free cash flow to maintenance capital expenditures payout ratio was 61% compared to our year end and comparative ratio of 57%, while dividends increased by 12% when compared to the prior period. Depreciation on capital expenditures was also up due to growth capital expenditures and acquisition activity in 2023. Our effective tax rate was consistent with the prior period, and our year to date effective tax rate is moderating within our expected range of 27% to 29% on an annualized basis. Free cash flow increased by 3%, while free cash flow less maintenance capital expenditures decreased by 11%.

Speaker 2

Maintenance capital expenditures increased by approximately $9,000,000 primarily due to the timing of certain overall events and the Q2 of 2023 being unseasonably low. From a working capital perspective, our working capital declined compared to the prior year end. This was due to convertible debentures of $79,000,000 reclassified as current as a contractual maturity is June 2025. From cash flow perspective, the noncash investment in working capital was $68,000,000 The investment was to support the growth initiatives and increased revenues discussed above, coupled with the impact of slower collections in certain government receivables. We're actively managing our working capital and anticipate a majority of these investments will be converted to cash prior to year end.

Speaker 2

Our total leverage ratio or our senior leverage ratio increased to 2.88 from 2.47 at year end. The increase is primarily due to investments in growth capital expenditures, as we previously noted. Our organic growth results in a lag between the time investments are made and when returns become evident for our financial results. We anticipate this ratio will decline as our growth capital investments impact the bottom line along with an improvement in our Manufacturing segment adjusted EBITDA relative to our comparative results. During the Q2, EIC made growth capital expenditures of $45,000,000 These growth capital expenditures primarily relate to the Aerospace and Aviation segment and were primarily by investment in additional aircraft and infrastructure, including the King Air Simulator.

Speaker 2

Our Environmental Access Solutions business also invested $5,000,000 dollars in growth capital expenditures as it invested in its mass leased fleet to meet the forecasted demand in the future. Maintenance capital expenditures for the quarter were $48,000,000 compared to $39,000,000 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 are some maintenance events that fell outside of the quarter and will be funded in later periods. Maintenance capital expenditures for the Manufacturing segment were slightly higher than the comparative period by $1,000,000 With that being said, I will now turn the call over to Jamie Travis.

Speaker 3

Thank you, Rich. Travis and I will split up the outlook section. I'll provide focus on the Aerospace and Aviation segment and Travis will provide some context on the Manufacturing segment. Overall, we're expecting another strong quarter from our Aerospace and Aviation business as the trends highlighted in Mike and Rich's section are expected to continue into the 3rd and 4th quarters. Our Essential Air Service businesses will see growth driven by a multitude of factors when compared to prior period.

Speaker 3

These include the deployment of 5th and 6th Q400 aircraft to provide services under our agreement with Air Canada. We also expect to continue to see strong load factors and growth when compared to our 2023 due to our investments in aircraft throughout our operations. Lastly, we expect continued growth in our Medevac business with both the 10 year BC and Manitoba Medevac contracts continuing

Speaker 4

to

Speaker 3

redeploy the existing aircraft being used to service the contract in the interim. Offsetting some of these gains is the impact of continued labor shortages and supply chain challenges. Although we're not seeing a worsening of these dynamics, the challenges still remain. The Aerospace business line is also expected to have growth in Q3, primarily driven by the increased tempo of flying for our surveillance aircraft. The revenue increases are expected to be offset by declines in our training business revenue with the EBITDA margins normalizing to historical periods as Rich had commented on.

Speaker 3

Our aircraft sales and leasing business are also expected to experience growth. This anticipated growth is driven primarily by increases in leasing revenue. Although we are still slightly off pre pandemic run rates, we expect Q3 to continue to build upon the positive momentum we highlighted in the 1st and second quarters. With respect to maintenance capital expenditures for Q3, we anticipate higher levels or excuse me, we anticipate levels being higher than last Q3 as certain maintenance events moved from the Q2 into the Q3. Overall, we expect maintenance capital expenditures to increase roughly consistent with increases EBITDA in our Aerospace and Aviation segment, which is the biggest driver of our consolidated maintenance CapEx.

Speaker 3

Higher flight hours to support increased volumes together with inflation, labor shortage, supply chain issues and a growing fleet size are some of the factors that contribute to the expected relative percentage increase. Growth investments in Q3 are primarily for the Aerospace and Aviation segment and include the upgrade of the surveillance aircraft for the 2nd aircraft on the renewed Curacao contract, the first is already completed and in service. The continued construction of the Gary Simulator. Also Regional 1 is always working on opportunistic aircraft and engine acquisitions, which may result in growth investments being made in aircraft sales and leasing business. I'll now pass it off to Travis to provide some commentary on the manufacturing segment.

Speaker 4

Thanks, Jake. We're anticipating an increase in our revenues in our Manufacturing segment during the Q3. All of the businesses within the Manufacturing segment are experiencing a strong level of customer inquiry. However, due to macroeconomic uncertainty, the closing ratio of inquiries has been below historical trends. We're starting to see that trend reverse itself through our business lines.

Speaker 4

As Mike had mentioned, in the past 45 days, we saw over $100,000,000 of bookings in our multi story window solutions business line. Those bookings were across several geographies and customer segments. We're also seeing a recent uptick in our orders in our other business lines. This positive development provides excitement for our teams as we believe when the dam breaks and the customers get more confident in economy, those orders that were delayed will be converted into bookings in the near term. That being said, the multi story window solutions business line is expected to be consistent with the prior year.

Speaker 4

Quoting in Canada and the U. S. Continues to be extremely active. We remain bullish on this business line as the longer term fundamentals being immigration and a lack of affordable housing remain incredibly strong throughout various regions across Canada and the U. S.

Speaker 4

Further, we're agnostic to whether a product is a condo development, an apartment for the government or a commercial business. We've demonstrated our expertise in each of those customer segments. We're seeing further efficiencies from our integration efforts led by Darwin Sparrow, but we do anticipate some integration which may offset some of those profitability gains in the shorter term. As we talked about last year in our Q1 call, the Environmental Access Solutions business line comparative results start to normalize in the Q3 of 2023 and therefore we anticipate results materially consistent with the prior year for the Q3 assuming no adverse impacts from wildfires or other weather events and excluding the acquisition of Duomo. The acquisition of Duomo is going to be a growth catalyst for further expansion of the business into Quebec and Eastern Canada.

Speaker 4

Precision Metal and Engineering business lines is expected to improve over the prior period due to the acquisition of Dry Air in October 2023 for which there is no comparative in the Q3. Similar to our multi storey window solutions business line, we're experiencing a significant number of inquiries and we anticipate the 2 interest rate reductions in Canada and increased optimism of an interest rate cut in the U. S. Will lead to further bookings in the Q3. The anticipated maintenance capital expenditures are expected to be slightly higher for the manufacturing statement than the prior year due to the timing of the replacement cycle.

Speaker 4

We're also anticipating growth capital expenditures to be incurred in each of the business lines. We anticipate that growth capital expenditures will be slightly higher in our multi storey window solutions business as we continue to integrate the businesses and acquire new machinery. We also anticipate some growth capital expenditures in our Environmental Access Solutions business line as they continue to adjust the rental fleet for demand Canada although the amounts are expected to be lower than the Q3 comparative from 2023 of $13,000,000 I'll now pass the call back to Mike who'll talk about our acquisition pipeline and wrap up our prepared remarks.

Speaker 1

Thanks, Travis. On the acquisition front, Adam and his team are working on a number of pursuits. We are continuing to see more high quality opportunities and that has continued throughout the quarter. We are seeing these opportunities in both manufacturing and aviation aerospace segments. But consistent with our 20 year history, we only execute on transactions that are accretive and meet our acquisition criteria.

Speaker 1

Overall, we remain confident that we are on track to meet the mid to upper end of our 2024 adjusted EBITDA guidance. This confidence is underpinned by the essential nature of our businesses, recent strength in inquiries being converted into bookings in our manufacturing segment and the fact that a significant portion of our revenues are backed by long term contractual arrangements, the growing need for aerospace solutions, the continued recovery of our aircraft leasing business and investments we have made in prior periods for our future growth. Thank you for your time this

Operator

Your first question comes from the line of Steve Hansen from Raymond James. Please go ahead.

Speaker 1

Good morning, Steve.

Speaker 5

Yes. Good morning, guys. Thanks for the time. Appreciate it. Look, Mike, the order flow that you described is pretty encouraging.

Speaker 5

I think you said $100,000,000 past 45 days, another $20,000,000 this week. How should we think about the timing of that ramp up, the order flow as it should hit the P and L over time? What kind of backlog are you sitting on now? And how will that ultimately sort of start to flow? And just as a related point, do you think it's just interest rates that's driving this?

Speaker 5

Or what do you think is ultimately triggering this opening up of order flow? Thanks.

Speaker 1

Yes. We've talked about the order book like our bids outstanding for the last few quarters being remarkably high. We've had added people to be able to manage those bidding opportunities. The developers with a particularly in Canada with the change from a condo environment to an apartment environment, largely driven by the fact that it's hard to get mortgages at the interest rates with combined with the requirements to qualify. And so it slowed presales, which has slowed the initiation of projects.

Speaker 1

But at the same time as that, the need for that housing has greatly accelerated and Canadian developers are getting their heads around, well, maybe I need to build apartments, not condos. With the decline in interest rates, I think you're seeing a new confidence amongst those developers. The guys who are closest to going are starting to step off the curb. And what I'm most excited about is that the new orders we got were not Toronto centric. While we did well in Toronto, that's our biggest market, we added things in Western Canada, Calgary, in Vancouver, in Seattle and in the States, in Dallas, in Washington.

Speaker 1

And so I really want to caution people, we're excited, but don't extrapolate. This is early in the process and maybe this may be the first little surge and it could fall back. But with the interest rate news coming about the U. S, where they're looking to follow Canada at these rates and that will give Canada more courage to cut further faster and the big demand. We expect to see continued growth, perhaps not at the rate we've seen in the last 6 weeks, but continued growth into the future.

Speaker 1

In terms of our order book, it had declined slightly during the quarter as we built more than we replaced. But now that's gone the other way. We're now booking orders faster. You'll recall that typically this business is kind of 18 months order to delivery cycle. One of the very interesting things we've seen early in the cycle here is some of that is shortened up and we actually have stuff that will be delivered by next mid next year.

Speaker 1

So you'll see the beginnings of this little surge in 2025, but where you'll really see it is in 2026.

Speaker 2

Okay, that's great. That's really

Speaker 5

good context. Just switching over to the matting business, there's another period of year over year declines. I know the comps are

Speaker 6

still tough, but how should

Speaker 5

we think about the trajectory from here? You've got the new acquisition under your belt that gives you the foothold out east. It sounds like you might be building some incremental mat inventory based upon the CapEx commentary. Just trying to get a sense for where we're at in sort of the cycle or the by rhythm here and what we should expect to the balance of this year and into next? Thanks.

Speaker 1

I think the best predicator of what we actually think is what we're doing with building mats. We have this mats that have come back off of the Trent's Mountain pipeline and there will still be some coming back from that for us and for other people. So that increases supply, but there's other major projects getting ATCO, gas and there's a lot of T and D work, which really where the future is in the medium term in Eastern Canada. So why we bought Duhamel. And so to seed that operation, we're continuing to build Mats.

Speaker 1

I think Q2 would kind of be the end of the last cycle and Q3 is the beginning of the next cycle. I just need to really remind everybody, when we bought Northern Mat, we told everyone that this is a super cycle. We got we did abnormally well for a 3 or 4 quarter period. And right now, we're heading into the next up cycle, pretty confident in the business or we wouldn't be building more mats, but it's not dramatic yet. There isn't a shortage of mats in the business the way there was in the last cycle.

Speaker 1

So slow and steady growth and particularly Eastern Canada and within Eastern Canada, we're very bullish on Quebec. The acquisition of Duhamel, we are already building the big heavy train mats there and they give us a Quebec facing sales arm to deal with the Quebec government, which is good for us. And so I would say we're pretty optimistic about that. It builds slowly and we're finally we've rolled off of the really high comparatives.

Operator

And your next question comes from the line of James McGarrigle from RBC Capital Markets. Please go ahead.

Speaker 7

Hey, good morning and thanks for having me on.

Speaker 1

Good morning, James.

Speaker 7

Yes, just on the Dumoulin acquisition again, I know you flagged being able to serve the Quebec market and more generally Eastern Canada. But a lot of that infrastructure money is getting spent in the U. S. Are you able to serve the U. S.

Speaker 7

At all within your current footprint? And is that a market that you might be interested in looking at kind of in the medium term?

Speaker 1

Absolutely. We believe the fundamental investment thesis in Northern Malvern we bought it was T and D. We did a lot of work on what's coming. Around the world, economies are trying to electrify, reduce their reliance on petrochemical fuels. And so we believe there's a big part of that coming and that's not just a Canadian story.

Speaker 1

Adam and his team are very busy on looking for opportunities in the U. S. We need to find the right partner. We believe we've got the industry leader in Northern Bath with our management team there and we want someone of a similar capability in the U. S.

Speaker 1

We may go organically, James, if we don't find something to buy that we think is worth the price we're paying for it. The market is so big. There's a great opportunity there. But my first choice is to give ourselves a beachhead by getting an industry leader, even if it's a smaller company in a given area. And in the medium term, you're definitely going to see Northern Mat in the U.

Speaker 1

S. One way or another. And in terms of what Duhamel is bringing to the table, a big part of the mat business, this is going to sound silly, storage. When the mats go from project to project, you need places to put the mats, you need places to clean the mats and then redeploy them. Duomo gives us that.

Speaker 1

Duomo gives us surge production capacity. They're building the big heavy crane mats there. We are currently doing a lot of math on whether we should be building them in Creston and in St. George and then shipping them to Quebec or building them there. Lumber supply, it makes that it's not an obvious answer.

Speaker 1

Ultimately, I believe we will build stuff there, but we aren't doing it yet. And with the opportunity to do that, they're very strong operators. Duhamel, the management team is exceptional. That's going to give us a great interface with Hydro Quebec and the Quebec government.

Speaker 7

Windows segment, it seems like things are starting to potentially turn around there from the order side. But can you just talk a little bit about where you are from a capacity perspective on the windows side? I know you flagged some additional costs on the integration between Quest and BV, was that kind of expected or is that something that was unexpected? Just trying to get your comfort level from an operational perspective to be able to execute on what seems like it's going to be a pretty near term ramp

Speaker 1

up in production? And I can turn the line over after that. Thanks. Sure. The window I've talked for a while that if I were to fast forward a 6 quarters and we're on this call, I think we're going to be talking a lot about the window business.

Speaker 1

And the reason simply is we're at the beginning of a brilliant cycle for that construction business. We don't have enough housing. The continued urbanization trend, I know we all thought after COVID that we were going to go live on the outskirts and not cities. That's just not what's happened. Particularly in Canada, the vast majority of immigrants end up in 2 or 3 cities, both all of which have shortages of land and single family housing that's too expensive.

Speaker 1

So the demand profile is exceptional. We're starting to see it come. During the slow period, there was a temptation and 1 or 2 of our competitors decided to be ultra aggressive on pricing. We always treat our customers fairly and we were competitive, but we didn't want to take things that we'd regret later. I like where that puts us now as the market begins to open up.

Speaker 1

And while I'm super excited about it, you just have to remember that it's 12 to 18 months. If we take an order today, it's very rare that you would produce it in the same year. It does happen occasionally. It's usually when a competitor drops the ball and you got to step in and help out. But we're very bullish on that.

Speaker 1

And we're in the process of amalgamating our business in Ontario. We have too many buildings, way too much real estate footprint. Darwin and the team at Quest and the team at BV are doing a great job of bringing those two companies together. We're going to be abandoning one facility later this year, which will greatly reduce our overhead costs. In terms of production capacity, we've got lots.

Speaker 1

We could be double the size we are now for a very modest investment in certain pieces of equipment. So capacity is not an issue. And we talked a little bit, I think Richie mentioned During this, we made a choice to keep those people. The learning during this. We made a choice to keep those people, the learning curve in putting together custom windows because remember, every job is a new job.

Speaker 1

We don't build anything into inventory. So you need people that have the skills and have seen things before, and we've kept that. So it's almost like a capital investment in people. And so we're ready to go. We still got some more work to do to get the best efficiencies and the best example, is now running 2 full shifts.

Speaker 1

And we're starting to example, is now running 2 full shifts. And we're starting to really see how efficient purpose built window building can be. And I'm excited about it. I wish I could fast forward 3 or 4 quarters to some of the new stuff would be in the plant already. But having said that, I was really excited when we put the $100,000,000 number into our releases and then we got another one afterwards.

Speaker 1

There's always a risk that it's an anomaly when you get a surge like that. Landing another one makes me that much more confident that we're seeing the beginning of a longer term trend. I'm not suggesting that $100,000,000 every 6 weeks is the new cadence. I'd like it if it was, but I think that's a bit of a surge, but we're definitely seeing a change in the developers. And one of the things that makes me most confident about it is, it's not just discussions about price, it's how fast can you build these and can you guarantee me I'm getting factory space.

Speaker 1

And that tells you the mindset of some of our customers that, hey, okay, if a whole bunch of us go at once, are we going to be able to get steel? Are we going to be able to get concrete? And so I remain very bullish about the medium term on our window business.

Speaker 2

Operator?

Operator

Thank you. And your next question comes from the line of Matthew Lee from Canaccord Genuity. Please go ahead.

Speaker 8

Good morning, Matt. Hey, good morning. Thanks for taking my question. Maybe a follow on to Steve's question. Like I know there's a lot of moving parts in manufacturing, but can you just maybe walk through how we should think about the build of Q3 and Q4 EBITDA from the 35,000,000 this quarter.

Speaker 8

It sounds like you'll get flat year over year EBITDA from environmental, a bit of return in Quest from everything that was pushback and then we'll probably see a couple of 1,000,000 a quarter from dry air. If I stack it all together, does that mean we should be thinking about positive year over year EBITDA growth in the back half for manufacturing?

Speaker 1

My guys are just pulling up numbers. They don't let me have the specifics. So I'll let them actually speak to facts. But we are seeing outside of the ones you mentioned, Matt, there that we really struggled on in West Tower for a bit with the telephone companies just not spending any money. That dam broke in the last couple of weeks where the awards of new tower construction have really taken off.

Speaker 1

So we expect to see strength in that business in the back half. Our LV control business in Winnipeg in the ag space has also seen an increase. That one probably we realized more at the beginning of next year than in Q3 and Q4. So in aggregate, I think it's reasonably positive across the board. I'm not sure that we really want to put out a segment forecast, but I think you'll see it strengthening clearly because the two things that hurt us here, the window business with the weaker margins in Q2 and mat business up against a tough comp both go away.

Speaker 1

And as I say, we're starting to invest in growth CapEx in mats, which I think we wouldn't do if we didn't have something to do with the matter. I'm not comfortable putting out a number. It's not something we typically do, but you'll see strengthening in the Manufacturing segment. And the other thing I'd like to point out while we're here on this topic is we've seen this twice before. In 2016 and in 2020, the 6 months before the U.

Speaker 1

S. Election, uncertainty slowed down the awarding of things. And then when the election actually came to a close, the big burst in company confidence, and it really was independent of who won. In 2016, the Republicans pulled off a surprise win and took the presidency and then in '22, the Democrats took it back. I really don't think this is a matter of the market saying one has to win or the other has to win.

Speaker 1

I think it's more just about getting the noise of an election out of the way. So we're getting close to that. So by the time we talk again, we'll know who the President is, and that's probably good for us.

Speaker 8

Right. That's fair. And then maybe just on the Regional One side, great to see leasing coming back, sales above our expectations. Maybe just talk about what's driving the uptick in demand for regional aircraft and the sustainability of the leasing kind of business as you see it right now?

Speaker 1

Yes. The change is that for when we came out of COVID, the shortage of pilots and the uncertainty in the business meant that some of the smaller aircraft weren't being used, not just ours, ones owned by the airlines. And so a lot of our stuff sat on the ground. The first improvement came when the aircraft engine leasing business started to improve because as those planes went back into service, they had overall engines that were deferred and they were putting rental engines on. So that continues.

Speaker 1

And now Europe in particular, although Africa is also very strong, the demand for the regional jet is strengthening, particularly on the CRJ900 side. We've made a lot of money in the past on the 200s and the 700s. The number of those available is infinitesimal. We can't get any. The ones that were out there have been soaked up by the big airlines in the U.

Speaker 1

S. Who are converting them into 50 seat jets and turning it into 3 classes. So a CRJ is about 700 is about 70 seats. They're taking out rows of seats and putting in a business class, a premium economy and a regular economy to plane. Now that there's less of those available, they've moved to turning the 900s into what they're called 650s, which is exactly the same process.

Speaker 1

And so we've been active on buying up 900s wherever we can find them. We like those. We are probably the leader of remarketing CRJs in the world together with probably slightly larger gauge ERJs. And we're earlier in the cycle with those. So when we buy ERJs, they tend to come with leases or are going on longer term leases.

Speaker 1

So that was a really long answer to get to the point that we see continued strength in this business. We're really looking for more opportunities to deploy money in this area. And quarter would have been the best quarter we've ever had in Regional One. And we continue to see that now. That's good, but it's not as good as it sounds because we've invested in Regional One.

Speaker 1

So we get dry powder that we still got to deploy some of this stuff. So we expect continued growth. And by the end of the year, I think it's a number that I'll be really happy with. Not that I wasn't really happy with this one.

Speaker 8

Well, all right, I'll pass the line.

Operator

Thank you. And your next question comes from the line of Cameron Doerksen from National Bank Financial. Please go ahead.

Speaker 1

Good morning, Cam.

Speaker 9

Yes, thanks. Yes, good morning. Question on, I guess, where we are on the ramp up of 2 Medevac contracts that you won, BC and Manitoba.

Speaker 2

I mean, I guess, maybe if

Speaker 9

you could sort of describe how long the process we are as far as getting up to full ramping up? And also if you could just maybe discuss what CapEx is left on those two programs from here?

Speaker 1

Okay. Manitoba one is easier. We're finished with that one. I don't know if there might be some odd expenses that straggle into Q3, but we have all the planes now. We start flying them.

Speaker 1

We'll have the full impact. Dave White sitting across the table from me and I'm staring at him as I say this. We'll have the full impact of the Manitoba contract starting in September. In BC, you'll recall that the government required brand new aircraft and the our aircraft suppliers had some challenges and so planes are late getting to us. So there's still a significant piece of that $200,000,000 yet to be spent.

Speaker 1

But on the revenue side, we have helped the government out. We found some other older aircraft that we've deployed and we're now doing a significant piece, almost all of that contract with other aircraft. And so a lot of we're starting to, as you will see in Q3, get most of the contract in. But I bring you back to a comment we've been making for a while. We owned part of that business before we won the contract.

Speaker 1

And so I've got a great fleet of aircraft that we're going to redeploy. And when I talk about redeploy, it's other contracts. So we just this week will submit our bid for the Northwest Territories Medevac contract. If we win that, BC is going to lose some of those planes, they'll go there. If we are successful at Newfoundland negotiating there, some of the planes are likely to end up there.

Speaker 1

So the full impact in our financial statements is 2 things. It's flying all the BC work, which we're starting to get close to doing now, but then it's taking the assets we used to have in B. C. And doing something else with them. So you'll see a gradual continued growth in that business.

Speaker 1

Okay. So that's great color. So it's fair to

Speaker 9

say that yes, no, that's really helpful. So it's fair to say if you are successful in Newfoundland, Northwest Territories because you already have the planes, the CapEx commitment would be fairly minimal?

Speaker 1

It depends like I wouldn't suggest that any of those would just be those planes. They may have certain ones that have a large door requirement or they may want a jet or a Pilatus as part of it. So it's never as simple as just one, but a bulk of those planes can go into those contracts.

Speaker 9

Okay. That's very helpful. Maybe just secondly for me, I just wanted to ask about, I guess, a question on the balance sheet. The converts that are due in June next year went current in the quarter. Obviously, maybe somewhat depends on what the share price is over the next 12 months, but any thoughts on what your plan is for those?

Speaker 1

This is going to be the least satisfying answer of the day. We're looking at all the options on that. Like with what we've got in the book, some of the things that are coming, I think the most likely alternative is that the stock gets into the mid-50s and they convert and they go away. That's the most likely. If that were not to happen for someone, general market conditions or whatever, I think you would see us probably pay them off out of our line, although we could do a replacement issue as well.

Speaker 1

Not particularly big on that alternative, but depending on the opportunities, I may not want to use capital out of my debt my secured debt side. If we got enough stuff cooking, then I might just replace them. But the first plan is to just see them convert. We'll be patient with that because it's not a huge amount of money. If we got to write a check out of our line, it's not a big deal.

Speaker 1

And with the decline in interest rates and the fact that we got hit pretty hard last fall when interest rates went higher for longer, I'm pretty bullish with that and our strong guidance in some of these contracts that Jake promised me is going to win. I'm pretty confident that we could just make things go away the way we usually have, which is converting. Okay, perfect. That's a great answer. That's all

Speaker 9

for me. Thanks very much.

Speaker 3

Thanks.

Operator

Thank you. And your next question comes from the line of Krista Friesen from CIBC. Please go ahead.

Speaker 1

Hey, Krista.

Speaker 10

Good morning. Thanks for taking my question. I was just wondering on the Air Canada contract. I believe last quarter you mentioned that they had started discussing exchange possibly flying cross border routes for them. Has that started yet?

Speaker 10

And are there any additional opportunities with Air Canada given the great relationship you

Speaker 8

are building with them?

Speaker 1

I am going to give that one to Jake.

Speaker 3

And first of all, I'd say that our relationship with Air Canada continues to strengthen and we're very happy with that partnership as we build. We're planning to start flying cross border to 2 destinations starting October 1, Boston and New York. So that's always been in our operational plan and we continue to ramp up resources to undertake that.

Speaker 1

We got a scheduled date for that? October 1. October 1. Okay. Sorry.

Speaker 1

Go ahead, Krista.

Speaker 10

I was just going to ask if there were I mean, I know you're adding the 2 additional aircraft, but is there any more room on that contract or just with Air Canada

Speaker 11

to maybe do additional flying for them?

Speaker 3

Under the terms of the existing arrangement, we've kind of hit the limit there. But I'd characterize it by saying again we're interested in the growth. We first and foremost have undertaken a lot of activity here. We need to make sure we continue to deliver effectively on our commitments. So again, I think there's interest and there will be growth, but for now we're making sure that we effectively execute on this.

Speaker 3

There's preliminary discussions with Air Canada, but there's nothing

Speaker 1

imminent.

Speaker 10

Okay, great. And then just on the window business, can you speak to what the competitive environment is like right now and how the pricing is on some of the projects that you're bidding on?

Speaker 1

The competitive environment is strong. There's the it's kind of an oligopoly in that there aren't ton of players, but all the players have capacity. And the difference there's differences between the companies, some do only window wall, some do predominantly curtain wall. We now do everything and we're probably the leader at that. We're clearly the leader in Canada and a significant player in the U.

Speaker 1

S. So pricing has tight and I would suggest it will remain competitive for a bit. But as orders book, I think developers are going to want to pay for certainty and they're going to deal with people who can provide a complete solution to their project and most importantly, deliver them on time. When you're in an apartment environment, they've got 100% of the capital in, unlike when you're doing a condo when you've got owners' capital if it's delayed. And so timing in an apartment world is even more important.

Speaker 1

It's important in everything, but it's even more important. So I think as the market strengthens, pricing will strengthen, but the stuff in the past has been the last 6, 9 months has been very competitive. Operator?

Operator

Thank you. And your next question comes from the line of yes, and your next question comes from the line of Konark Gupta from Scotiabank. Please go ahead.

Speaker 1

Hey, good morning, Konark.

Speaker 6

Good morning, Mike and team. Thanks for taking my question. I wanted to ask you about the wild fires a bit here. You guys obviously saw some benefits I guess last year in Q2, there were some early fire activity this year. I think we had a huge sort of fire breaking out in Jasper sub area, right, in Q3.

Speaker 6

I think you alluded to that. So your growth to reaming flying could see some benefits here in Q3. Is there like how should we think about sort of the net net impact on your fundamentals from wildfires? You know like Northern Nat might see some decline because of fires usually or should there be no offset?

Speaker 1

I'll take some on Northern Matt and then I'll let Jake grab on the flying part. There's no doubt that the ultra dry conditions don't help us any in Northern Alberta, whether it's burning or not. When it's burning, they can't do anything. But even when it's not burning, it's so dry, they might often don't use matting. So that's not good for our business.

Speaker 1

It's no worse than it was last year. It's probably less bad than it was last year in terms of the matting business. I think it's something we need to come to grips with certain parts of Northern Alberta, Northern Saskatchewan and even to an extent Northern Manitoba where that's going to be an ongoing issue. But the geographic diversity and the growth in the East who just simply don't have that problem will help buttress that for us. Maybe add if

Speaker 3

you Sure. And then on the flying, Konark, you're going to see enhanced helicopter activities in the various wildfires and we have some of our heavy helicopters engaged right now in Alberta. So you'll see an uptick through Q3 with that.

Speaker 6

Okay, that's great. Thanks. And on the BC MediVac contract, I think it seems like you guys are using some temporary aircraft there as OEM deliveries are delayed. Is there any implication from these temporary aircraft on CapEx or profitability in Q2 or Q3?

Speaker 1

Short answer is no. The BC government made the choice to have new aircraft. And when we bid, we bought slots. Like we went out and put deposits down. So we were kind of pot committed we better win or we had planes for something else.

Speaker 1

But the problem is, is this the demand for King Airs and some of the supply challenges our manufacturer is having has delayed those. The government is fully aware that's beyond our control, and it's not causing us any problems on the contract. And in fact, I would say we've probably won some kudos with the government with how we've been able to belt and suspenders the service up and make sure we're looking after everybody. What it really does, Konark, the single biggest impact is it pushes out the CapEx on the new planes. The problem that creates for me is knowing exactly when I'm going to have those other planes back to redeploy them.

Speaker 1

Like I can't pull them from BC until I don't need them in BC, but I've got other opportunities coming. So I've got we're probably the 2nd or 3rd biggest King Air operator in the world and will soon be the biggest King Air operator in the world. So we have some ability to shuffle between operations to help a bit, but I would really like to get a hardwired exact dates for when we're going to have them available because we've got opportunities to put them out. And that's where you really see the jump in our profitability because I own them already. And they're depreciated or maybe not fully depreciated, but largely depreciated on our books.

Speaker 1

So the returns both from a cash flow and profitability are stronger. So we're pushing Textron to get the aircraft, but our understanding of the challenges they face.

Speaker 6

Great. Makes sense. Thanks. And last one for me. Working cap was a bit of a drain in Q2.

Speaker 6

I think you kind of called out as beyond normal this time. It seems like you guys are investing in some regional jets at Regional One, etcetera. In terms of magnitude of how much could potentially reverse from working capital to cash in Q4, Or can you give us some sense and like what's going to be the bigger driver there? Is it like those Lucian Jet sales or parts?

Speaker 1

It's a really good question. Inventory is part of it. Quite frankly, a bigger part of it is when you deal with governments, their payment record, they always pay. They don't always pay when you expect them or they tell you they're going to pay. And so we've got a material receivables build in aviation that I think largely will reverse itself by the end of the year.

Speaker 1

I never did they've told us. Rich, do you want to jump in?

Speaker 2

Yes. I think just for context both in the prepared remarks and in the MD and A, we just put in there that we expect the majority of the $68,000,000 so more than half of it to reverse before the end of the year. Q3 being our busiest quarter, while we may get the benefit of some of those things rectifying themselves in the quarter, you may not see it when you look at the cash flow from working capital number because the offset will be there from a significantly busier quarter and you'll see then the drawdown that you're expecting in Q4. So we're actively

Speaker 4

Okay. And to

Speaker 6

Okay. And to clarify, Regional 1 is not part of this reversal equation or Regional 1 will contribute in that reversal in Q4?

Speaker 1

And we have receivables there, too. It's not just in the ones. It's across the board in aviation. But there's nothing out of the normal course of businesses. They go up and down and Regional One has got continued opportunities where you will see strong performance in that company for the balance of the year.

Operator

And your next question comes from the line of Tim James from TD Cowen. Please go ahead.

Speaker 1

Hey, good morning, Tim.

Speaker 8

Good morning.

Speaker 11

Good morning. Thanks for the time. My first question is just turning to Duhamel for a minute, and I realize it's not a large transaction, but can you give us a bit of a sense for what portion of revenue will be to 3rd parties versus what portion I assume is generated by Northern Match? Just trying to get a sense kind of the materiality, if at all, of the revenue contribution in terms of reported revenue from that transaction?

Speaker 1

I think if you I think the easiest way to look at that without spilling information that I haven't put in the public sphere is that Duomel was an accretive acquisition on its own with returns in the 15% to 20% range on an IRR unlevered basis as we always talk about. So when you model that in, you guys can do the math backwards and pick a number. And then where you'll see the difference from on Northern basis is more sales in Northern. Our financial statements are really going to matter which company I flow it through. And in fact, that's really more of Rich's area.

Speaker 1

But the end of the day, if Quebec sales go up, it will be managed through there. But in the matte business, the core business that they're in already, you could calculate reasonably accurately because it's not a big number based on the size of it with that sort of 15% to 20% return.

Speaker 11

Okay. Just a quick clarification. When you use the term returns in the outlook section of the MD and A, should I can we

Speaker 2

assume that that is

Speaker 11

a reference to EBITDA, like dollars of EBITDA when you talk about sort of forward looking returns?

Speaker 1

It's probably more of a free cash flow return we're talking about than just a pure I've got my guys flipping to see where the precise paragraph it's in. But generally speaking, when we talk about returns, because of the great difference in maintenance reinvestment requirements between Aviation and Manufacturing, we're generally talking about the number after the maintenance reinvestment requirement, Tim.

Speaker 2

Okay. Okay. That's helpful. That's helpful.

Speaker 11

And then my last question, just turning to the Windows Systems business. Correct me if I'm wrong, but I think the second quarter, the revenue did not come through quite as expected. It was weaker than you anticipated when you reported the first quarter results. And again, I'm just sort of interpreting this based on the language in the Q1 discussion versus the numbers that came through. Could you just help us understand, because this, as you pointed out, is a fairly long lead business, 18 months normally, it sounds like it's getting shorter.

Speaker 11

But what sort of transpires in this business in such a short timeframe that can make the outcome different than what you had anticipated?

Speaker 1

We had a project that backed up. They weren't ready for our windows, so we couldn't deliver them because for job site specific issues slowed it down. The revenues weren't, to be honest, as far off as the EBITDA was and the EBITDA was off because when we were delayed on some of our own projects, we substituted 3rd party work installing other people's things. That's part of the Glaziers business we do particularly in the U. S.

Speaker 1

And so while that margin that's positive margin dollars, they're not at the same percentage as they are as our own. So while our revenue was a little bit off of our internal expectations, it wasn't as much as the product mix affected our EBITDA margins.

Speaker 11

Just a follow-up question on that. You mentioned it was the customer that wasn't ready to take deliveries. Is that something like how common is that?

Speaker 3

Is that really unusual or do

Speaker 11

you see that a handful of times over the course of the year?

Speaker 1

That is Travis, do you want to grab that?

Speaker 4

Yes. No, that's like normal, right? So when you think about sort of a construction project, it's dependent upon the concrete being formed, the curing of that, getting the various trades in and out and sort of the availability. So they when we produce these, we have our projects plan, but generally there's always adjustments. And so the team is very cognizant in looking at their project planning for various jobs and moving this job here that job there.

Speaker 4

But it is relatively normal in the business. We try and stick with our production plans, but sometimes those become out of our control.

Speaker 1

And it's more evident in a period where it's not as busy because you don't have something to pull forward. A lot of normally when this stuff happens, Rich's project got delayed because the contract guy the concrete guy didn't get his work done in time, but Travis is on schedule or maybe ahead. So we pre build Travis' job and do Rich's job later. When it's softer, it's harder to pull things forward. And it's not a business where you want to build in the inventory.

Speaker 1

We don't do that generally. Sometimes we will if a specific customer asks for it. But so in a softer period, the delay of a contract has a bigger impact than it does when we're busy. I'd add, we did our Q2 meetings here in Toronto. Normally, we would do this in Winnipeg, and we took our Board out to see a site.

Speaker 1

And it was incredibly informative to see the difference between the window products. So the job we went to happened to be at 1 young, 100 storey mixed use hotel condo project, but it's got every product we make in it from stick window wall to balconies, curtain wall and window wall. And one of the things I'm thinking about doing is perhaps asking our analysts if they'd like to come see the project. I think it would be a great insight. We've had you guys in the factory.

Speaker 1

Our developer there has allowed us on occasion to bring people to see what's going on. And I think it might help understand exactly how these things go. That project, like with 100 floors, we could build a floor or 2 a week. So even if you're bang on, you're talking about something that's multiyear in nature to build that many floors.

Speaker 8

Okay. That makes

Speaker 2

a lot of sense. That's helpful. Thank you.

Operator

Thank you. And your next question comes from the line of Chris Murray from ATB Capital Markets. Please go ahead.

Speaker 1

Good morning, Chris. Thanks.

Speaker 12

Good morning. Thanks. I guess my first question, thinking about the aerospace business

Speaker 1

and we're starting to see

Speaker 12

some rise in the U. S. Or sorry, in the U. K. Around immigration issues.

Speaker 12

We kind of looked at the numbers, kind of flat growth on the top line, but certainly some EBITDA expansion. Kind of expect that with the new U. K. Government, some of the issues they're having, they're going to want maybe an operational tempo upgrade into ISR work. So just kind of wondering, a couple of questions here.

Speaker 12

First of all, what's your ability to flex with ISR work at this particular point now? I think force multiplier has been kind of eaten up already by a lot of stuff, but not sure how much more capacity is available to you. And then as we start seeing these issues kind of multiply, I know there's some other contracts that are out there. I was wondering if you could give us maybe some updates on where some of the other major ISR contracts around the world might be standing?

Speaker 3

Sure. This is Jay. I'll take that call. So I'll answer your question in a couple of parts here. In terms of capacity availability, a couple of quarters ago, we indicated that we had proactively started to build another ISR asset, which these often have a long lead time in terms of getting them out and it's partway through construction.

Speaker 3

So again, with that new asset plus some of the older assets that we have that have come off contracts, we do have an ability to flex upwards in terms of the ability. And that's notwithstanding having the capacity to take our existing assets under contract and just fly them more. And we're seeing that as a general trend across all of our contracts in that the utilization on these contracts or these aircraft are going upwards. Specifically to talk about a few of the opportunities out there with regards to the U. K.

Speaker 3

Kind of in late breaking news that we indicated that the RFP that we submitted back in Q1 had been canceled and then reissued as of yesterday with a new procurement process. The anticipated contract award in the new process is going to be Q3 'twenty five with an into service date at the end of 'twenty five. What we see in that is an increased optimal. They're asking for between 4,05000 hours annually. So again, that's a significant uptick from what we're doing now with 1 aircraft.

Speaker 3

And obviously, we feel we're in a very good position to compete for that. And the other thing I'd say is, we anticipate that the U. K. Government is going to need some type of interim solution as well that our asset there is very busy and will continue to be busy. The other point I'd like to note, other RFP I'd like to note is the we talked about it in several quarters is the activities in Australia and that RFP was released very recently.

Speaker 3

Again, following in a similar trend, it was actually larger in scale and scope than what we had anticipated being a 12 year contract plus 3 year option. And again, our teams are still going through to analyze the requirements, but likely a 10 to 15 aircraft operation. So again, very large. And that's just a couple of the ones that we're looking at. Again, with some of the state of the world and some instability in it, obviously, that means very a lot of activity for our ISR

Speaker 1

businesses. Jake doesn't like giving numbers on cost of things. But just to give you a broad brush on the potential size of that considerably north of $500,000,000 in investment. Considerably north of $500,000,000 in investment with ISR rates of return. It's clearly that is that's the jewel of the crown, and we will be very actively pursuing that.

Speaker 1

Earlier this year, through our process of expressions of interest, we were part of a narrowed group who've been invited to bid on this. And so by the end of the year, we will have a bid out on that. And hopefully sometime next year, we'll find out about it. It starts flying at what, 28? 28.

Speaker 1

28, yes. So if you're going to add that many ISR aircraft, that's a tight timeline. So we're excited about it. We're working hard on it. And at the same time, we're building aircraft now just without exactly knowing where they're going, but just because of the demand for ISR services.

Speaker 1

Okay. That kind of brings me

Speaker 12

to my next question. And we started I think Cam sort of started on this one, but you've got a couple of series of debentures that are probably, let's assume, will turn into equity over the next little while. But as you're getting larger, as the dollars themselves get bigger, you've always sort of operated, call it, senior debt at a couple of terms, debentures at a turn. But as you get larger, do you have to start thinking about how you construct the cap structure of the business? Is there a time to start thinking about getting a debt rating, maybe taking on, call it, tradable debt or permanent debt, maybe even in different currencies, given where you're going to be trading in the world.

Speaker 12

So I guess I'm trying to think about how the balance sheet needs to, for lack of a better term, grow up from where you've come from to probably where you're going.

Speaker 1

Chris, that couldn't be a more topical question. You've clearly been reading Rich's goals and targets for the year from our Board. Convertible debentures have been very good to us. And as we've grown, they've provided us a great source of low cost capital. But as we get bigger, they're less and less appropriate for us.

Speaker 1

And I'll never say never that we won't ever use one again. But they're not going to be a big part of our capital stack going forward. And as a result, we're probably going to need some publicly traded debt. Right now, we're working on the decision whether we do that through a rating or do we do a private placement with a pension fund. And we're working through those details as we speak.

Speaker 1

It's a little complicated because the rating agencies, if they rate us as an airline, we're not going to get potentially the rating we want. If they rate us as more of an infrastructure or more of a government services play, which we are because most of our revenue is contracted from governments, we're going to hit a great rating. So we're busy working on those. But your question is bang on. If we look out 2 years from now, the converts aren't going to be the percentage of our balance sheet they are now and they'll be replaced with a more long term fixed rate debt instrument.

Speaker 2

Just one of so I think the instrument that we choose will be heavily dependent on some of the large contracts we're looking at particularly on the aerospace side and the flexibility that we may be looking for with respect to those instruments. As you noted, thinking about different currencies, the investment currency usually U. S. Dollar on the aircraft side, but the currency we're getting paid it might be Australian dollars or again a different currency from a different jurisdiction around the world and making sure that the instrument we we have the flexibility from a swap perspective to make it make sense for us. So all things that we're considering when we look at what the next move in our capital structure is.

Speaker 12

Okay. And just maybe a follow on to that. When we think about a lot of this debt is going to be large aircraft related, would you guys look at things like double ETC, sales

Speaker 1

leaseback market? Never say never. Right now, I'm not sure that improves our cost of capital, largely because the aircraft are so manipulated and developed when you take a $10,000,000 or $15,000,000 or $20,000,000 aircraft and put $100,000,000 of stuff on it, That's not the stuff that the leasing companies are good at. So if we find a partner that understands the value of what's on the aircraft, that may be a consideration. I think it's more likely that we will use a dead instrument because we understand it, we want to own those aircraft.

Speaker 1

And quite frankly, as technology ages, it doesn't age out. It ages into lower level work for different areas. And so I think it's more likely that we would own our own assets. But if we found the right leasing partner, that could change.

Speaker 2

Especially on the aerospace side where the technology that exists within those aircraft can have top secret components to them and we're not going to want to have another party have control over the ultimate disposition about the end of the term.

Operator

Thank you. And your last question comes from the line of Steve Hansen from Raymond James. Please go ahead.

Speaker 2

Hey, Steve. Hey, guys. Sorry, I'm all good for now.

Speaker 5

I think we exhausted the questions here for today. I'll leave it there. Thanks.

Speaker 1

Thanks. Thanks.

Operator

Thank you. That concludes our question and answer session. I will now hand the call back to Mr. Paltz for any closing remarks.

Speaker 1

I just want to say thank you to everyone for joining us today. It was lots of questions, lots of good stuff to talk about. I love when we're talking about our contracts opportunities going forward. It's what's made EIC is investing in opportunities and can't wait to talk to you again in November. Have a great summer.

Operator

Thank you. And that concludes our conference today. Thank you for participating. You may all disconnect.

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Earnings Conference Call
Exchange Income Q2 2024
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