Q4 2021 Exchange Income Corp Earnings Call
Applied in making forward looking.
Statements.
Please consult the MD&A for this quarter the risk factors section of the annual information form and exchange other filings with the Canadian Securities regulators.
Yeah.
Except as required by Canadian Securities Law Exchange does not undertake to update any forward looking statements.
Such statements speak only as of the date made.
Listeners also reminded that today's conference 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 Powell. Please go ahead Mr. Powell.
Thank you operator, good morning, everyone and thank you for joining us this morning.
Year end conference call for fiscal 2021 for the sake of brevity My comments will be focused on the 12 month period ended December 31, 2021, I will be glad to answer Q4 specific questions. During the question and answer period following our scripted remarks.
With me today are our Eic's, President Carmel, Peter who will provide some operational commentary and provide insight into the outlook for the company in 2022, and Darryl Bergman, our CFO , who will provide a more detailed breakdown of our financial results.
21 was the second year in which we've operated in a pandemic environment Covid is anything but predictable as the intensity of the pandemic waxed and waned with each successive wave well, yeah, I see and in fact, all companies have refined operations to adopt in this uncertain environment.
Never in our history as the power of stability through diversity did more evident.
Despite considerable exposure to the shutdowns created by the government to curb the transmission of the disease, and our aviation business and supply chain and inflation issues, which hit our manufacturing businesses, we not only maintained our dividend, but also hit record highs in many financial metrics, we completed a company.
Hi, five acquisitions in 2021 invested in organic growth.
Strengthening our balance sheet and eliminated all debt maturities through 2025 quite simply diversification works.
And consistent implementation of our proven plan leads to strong execution and success even in the most difficult environments.
First I would like to.
Focus on the financial highlights of 2021.
Daryl will focus on the details later in the call, but I would like to hit on some key metrics.
Revenue reached an all time high of 141 billion, an increase of 23% over 'twenty 'twenty and an increase of 5% over our previous high in 2019.
Adjusted EBITDA also reached an all time high of $330 million, an increase of 16% over 2020 and less than 1% higher than the previous high in 2019.
Adjusted net earnings.
<unk> grew by 82% to $86 million or $2.31 per share.
Our dividend payout ratio of 58% when calculated on a free cash flow less maintenance capital expenditures basis is a significant improvement from 2020, when the ratio was 71% and only very slightly higher than in 2019. When it was an all time best 57% when Cal.
<unk> on an adjusted net earnings basis, it strengthened to 99%.
For 169% in 2020, but we're still well short of the 71% achieved in 2019.
Yeah, I see generated significant improvement over 2020, despite a dramatic decline in the level of government support in 2020, what we're most cover in programs related to operations were realized in the first half of the year.
The financial success generated in 2021 was not simply the result of management focus on adapting to the challenges that arose during the year, rather we benefited for the long term perspective taken in previous periods, which put the company in a position to prosper in 2021.
And EIC, we have always believed in taking the long term perspective to our thinking and in 2021, we laid the groundwork for future growth and enhanced profitability.
In 2021, we have invested in our internal organic growth opportunities major new contracts and acquisitions, all while enhancing our already strong balance sheet to enable us to move quickly when the right opportunity presents itself.
The challenges faced in aviation through the pandemic are well known and I do not intend to review at these at this point other than to say our passenger operations have proven to be very resilient because of their essential nature and rebound quickly when travel restrictions are less of a remote.
We've attacked it.
Other opportunities, while we wait for these operations to regain their full stride. The pandemic saw major carriers significantly reduced their coverage in ameritox, leaving many communities under serviced or without service entirely.
Palace Island flights to many of these communities and expanding our geographic range and setting up the company for further growth as markets normalize.
However, as a regional carrier and doesn't have coverage outside of eastern Canada.
Therefore entered into interline agreements with the major carriers to ensure connectivity to their complete networks.
Redeveloped new opportunities in the mining and exploration segment of our business increased activity in this sector is creating demand for contracted charter work as both the Maritimes and central Canada with a potential for greater demand and none of it as well.
Augmented existing relationships and sign new contracts to significantly grow this business.
And are bullish on further opportunities in the future.
In order to fully take advantage of our market expansion and charter growth Paul made the decision to increase the gauge of aircrafts it operate.
It had previously unifies the fleet of Dash eight 300 aircraft and replace these with the larger dashy.
Q4 hundred aircraft this increased capacity without increase in flying hours, thereby growing revenue and enhancing margins. We did not dispose of the dash eight 300 aircraft. However, as perimeter operates a fleet of dash eight one hundreds of dash eight three hundreds.
The Pal three hundreds were turned into Combi aircraft and frayed aircrafts in our deal.
Aircraft for not only the new contracted charter work, but to augment.
<unk> regular scheduled fleet.
Vision of one type of aircraft helped beat the lift demand for two of our airlines.
We also added capacity to calm air you'll see very strong freight demand persist even as passenger levels increase we added the newer generation ATR 72, 500 aircraft to our fleet enhancing both pure freighter and Combi passenger freight capacity.
This fleet rationalization will enable a stronger rebound as the pandemic comes doing that.
We saw the strong performance of our better back business during the pandemic as demand remained strong throughout theres always been a key piece of our operations, but the consistency over the past two years has increased our desire to grow our footprint, both geographically and through enhanced product offerings, we took steps.
In both areas during 2020 one in July we completed the acquisition of Carson, they're headquartered in Cologne in British Columbia.
Carson provides freight services and operates a flight school, but its core competency as bad a box. They are the main provider of fixed wing services to the government of British Columbia.
There are clearly a Canadian industry leader with an exceptional management team.
First it expands our coverage area and provides a platform from which to expand into Alberta northwest territories and the Yukon marketplaces.
Through a partnership key waiting there.
Through a partnership between custom helicopters in Kuwait and there we found a trauma flight our first entry into the rotary wing medevac and emergent care business. We obtained our first license in the province of Manitoba, We've begun operations under serviced areas of the province.
We are looking to expand this offering into B C, where we are in the process of bidding on the BC EMS Rotary wing RFP.
Utilizing key weightings proven knowledge of medical transport derived from decades as the lead and now only service provider would do it together with customs Rotary wing experience, we have built a new product offering, which we believe will augment our current fixed wing business.
We've also continued to invest in our aerospace business and our maritime surveillance business in particular in August 2020, we announced that we had won the bid to provide maritime surveillance service to the government of the Netherlands, and we've been preparing the necessary aircrafts through 2021 <unk>.
Despite the challenges of Covid and increases to the scope of the contract. We are on track to deliver the aircraft had been 2022 and go into service. Later later during this year. We also announced that we won the RFP to continue providing surveillance services incur yourself for a further 10 year period.
We are busy upgrading I'm, sorry, the aircrafts to maintain our Caribbean operation.
We also began the construction of a new large hangar at the EIC campus at the James Richardson International Airport in Winnipeg.
Hanger will be utilized by our comm air operations, facilitating the use of <unk> existing hanger as the heavy overhaul facility for our northern fixed wing search and rescue contract for the government of Canada.
We are actively searching out contract opportunities throughout the globe and are actively involved with a bid to provide aircraft to the government of Malaysia. We expect to know if we were the successful candidate later this year.
We have also utilized our strategy of broadening our product offering through the very recent acquisition of C. T I located in Memphis, Tennessee.
<unk> has a strong management team centered and its founder and has built a reliable growing business, providing training services focused but not exclusively in the classroom setting because the American Navy and Air Force. The transaction was very difficult to structure to ensure the Canadian government the Canadian public company.
Any ownership would not impair the American government contracts, but this has now been accomplished and has opened the door to the biggest market in the world free icy surfaces.
Cdti has considerable unmanned aircraft experience, which will be helpful. Paul as it looks to expand its fixed wing service offering. Additionally, pallet deep roots in the middle East and through its contract in the UAE, which could help <unk> grow in the region.
Regional one has been active throughout the pandemic looking for buying opportunities where assets in our area of expertise or available at distressed prices.
Well, we've been somewhat surprised by the limited number of liquidation scenarios, we have been able to buy some assets, which will drive future growth early in the pandemic. For example, we pair just a fleet of seven Q4 hundred aircraft all of which have now been deployed externally internally or part of that.
Our net investment at regional one and growth capital expenditures and additional inventory climbed to $70 million in 2021 from nil in 2020.
We were also active in our manufacturing sector West Tower, Canada's leader in the supply installation and service of cell phone towers has been actually a were anxiously awaiting the roll over to five G technology with this process now underway, we wanted to make sure that we're maximizing our share of this opportunity does that end.
We have added underground capabilities in both eastern and Western Canada to our above ground expertise the phone carriers preferred a one stop solution for the <unk> integration and this allows us to provide this we accomplish this through the acquisition of telco Telecom I'm, sorry, Ed Reiko during 2020.
One who have proven expertise and capability in the underground work.
Ben Machine has performed well since being acquired by EIC and exceptionally well during the pandemic continued organic growth has been met through the addition of more production equipment.
But the outlook showed that our customer needs may exceed our capacity accordingly, we sourced additional capacity through the acquisition of map out a local company with similar capabilities, but a different customer base.
Fad was a proven entity and the acquisition was accretive on a standalone basis, but the opportunity for both revenue and cost synergy made it a very tasty opportunity.
Yes, she is a very topical matter and I would like to take a moment to review Eic's progress in 2021 yes.
Yes, she is the acronym for environment, social and governance.
We have been focused on all three of these areas since our inception and it does not the recent spotlight on the area that has driven our behavior.
A significant portion of our aircraft business involves flying aircraft, which by their very nature have a significant carbon footprint. We've been concerned about this issue.
Look for ways to make incremental improvements, we invest invested in projects like the design of new multi blade propellers, which generate more thrust with less fuel we updated our fuel storage facilities in Canada's north to prevent spills along with other projects. We are currently involved in both electric and.
Hydrogen experimental propulsion systems with the hope of replacing carbon based fuels.
We've also implemented new software to help us track, our carbon salt usage and looked for means of improvement year over year.
Social topics.
Social topics are important factors for EIC, especially in communities, where we have deep roots and are highly committed.
Community engagement is the single biggest factor and we've always been committed to investing back into the communities. We service, particularly northern first nation communities I want to take a brief moment to discuss two such investments.
Economic development is very challenging and isolated communities, Arizona as a result.
Most suffer from chronically high unemployment Fisher.
Fishing is a traditional activities that can provide economic opportunity. Unfortunately, the market price for many species of fish are not high enough for the fishery profitably export it to customers unless they are processed at the community. We were approached by one of the communities. We service with the idea of establish a plant.
Phil It flashed freeze the fish caught by local fishermen.
The first thing she did not have the necessary capital to make this happen on their own and asked for our help we have made a significant investment in this plant through forgivable loans and look forward to its completion and the economic opportunity it will undoubtedly provide.
We've also prided ourselves on our commitment.
To provide the first nation use the opportunity to travel subs and intend to major sporting event that would be very difficult for them without financial support.
We started this program several years ago, where we bring in used from a given community and hosted by the Winnipeg Blue bomber, our Winnipeg Jets home game.
Unfortunately in 2020 this was impossible as the CFL did not play in the NFL NHL played without fans as such with the CFL returned to operation in 2021 and fans and turned to the game. We wanted to make a significant investment we wanted to continue to expose us to a professional.
Morning event, but we also wanted to draw much needed attention to the every child matters campaign.
To that end with phenomenal support phenomenal partners in the assembly of Manitoba Chiefs M. Kao together with the Winnipeg Blue bombers, and the Edmonton, Alex who wore orange jerseys and warm up in recognition of the importance of this issue. We brought approximately 1001st nations people for the game.
We provided them with bright Orange bomber gear and made a very real statement about the importance of reconciliation there were not many players in the game where T. S. N cameras did not have an orange background social responsibility is just so it is not just part of our ESG commitment. It is part of our DNA.
We are following best practices in corporate governance, since our inception, and we maintain to maintain this for as long as we exist.
2021 was a challenging year, but a very rewarding one I.
I am proud that we've been able to deliver strong results in a challenging environment vibrant with many metrics set an all time high I'm also proud that we've continued to invest in our future and I can confidently say that the best is yet to come.
Thank you very much and I'll now hand off the call to Darryl who will take you through the financial results.
Thank you, Mike and good morning, everyone before I present, the financial results for fiscal year 2021 in Q4, 2021, I would like to take a moment to highlight some notable financial achievements this year.
As we have demonstrated the challenges that we faced throughout the pandemic and overcome are a testament to the resilience of <unk> business model, which continues to prevail. This is supported by strength in our management teams across the organization and disciplined focus on continued strength in diversity in our portfolio.
And attention to keeping the balance sheet strong which was evident in the year through the complete completion of the most acquisitions. The corporation. It's finalized in one fiscal year in its history and the successful completion of three separate bakio offerings for a total of $347 million along with the extension of our.
<unk> Bank credit facility out to August 2025.
Given our success in that respect and it's my pleasure to now review for you in greater detail our full year 2021 in Q4 2021 financial results.
My first comment will be to highlight the presentation change and the MBNA from EBITDA to adjusted EBITDA, which was completed to comply with the required changes the Canadian Securities administrator administrators issued under National instrument 50 to 112, non-GAAP and other financial metric disclosures.
Prior year comparative of EBITDA adjusted EBITDA are unaffected by the presentation change.
The Corporation continue through 2021 to maintain a strong liquidity and rock solid balance sheet highlights from the year include the three separate bought deals, which I will touch on.
So some of these actions have strengthened our balance sheet by increasing our equity enhancing our liquidity and after the subsequent redemption in Q1 2022, and the maturing December 'twenty two convertible debentures removed all debt maturities prior to July 2025.
All told the corporation was able to generate 153 million in additional net liquidity after cod and after the redemption of the convertible debentures that mature in 2022 and 2023.
The first is about yes, it was an equity offering in the second quarter for $88 million.
Most where most of the funds generated were utilized within the third quarter with the acquisitions of Carson Mcfadden.
The next in the third quarter was a convertible debenture offering generating $144 million, where funds were used to redeem the 2000 June 2016 debentures set to expire in June 2023, and to make a repayment against our long term debt.
The third was in the fourth quarter, where we completed a second convertible debenture offering generating $152 million 115 billion sorry funds from the offering were used to repay indebtedness and then subsequently.
At December 31, 2021 deployed to redeemed in December 2017, debentures set to expire in December 2022.
In addition to these bought deals in the third quarter. The company also successfully extended its syndicated credit facility to August six 2025 and terms consistent with its prior facility.
Given all of this activity within the year. It is important to acknowledge the strong support we continue to receive from both the capital market and our banking partners and all of the offerings completed the broker over allotments were exercised demonstrating continued strong support from the market. Furthermore, the bank facility extension was fully supported by our bank partners.
And completed in short order again, demonstrating continued strong support.
The size of the Corporation's credit facility as at December 31, 2021 remained unchanged at approximately $1 3 billion a corporation will retain the ability to access an additional $300 million and the accordion feature should it choose to exercise it given the corporations are combined access of up to one 6 billion.
Utilization of the corporate credit facility was $711 million at the end of the period, reducing list by the $75 million in cash on hand. The result is a net debt of 300 or sorry $636 million.
As a result of the corporation is very well positioned to can continue to meet all of its needs maintaining access to liquidity in excess of $664 million, excluding the accordion.
The Corporation ended the period with networking capital of $225 million a current ratio of 147, notably the current ratio was temporarily impacted at the end of 2021 by the convertible debentures. Due on December 22, 2022 being recorded as a current liability at year end.
The successful redemption of the December 2022, convertibles subsequent to year end eliminated the current liability in Q1 2022.
As Mike noted revenue for 2021 reached an all time high of $1 4 billion, an increase of $264 million or 23% over last year.
Aerospace and aviation segment revenue increased by $230 million or manufacturing revenues rose by $34 million.
Specific to aerospace and aviation segment revenue was up 33% to $917 million revenues from the legacy Airlines and provincial increased by $155 million for the year.
During the year over year drive things driving the year over year increase was the improved demand for air travel in the second through fourth quarters of 2021, which was partially offset by the prior first year's quarter results, which reflect a more normal pre pandemic results the company.
<unk> continued to see strong demand and its cargo medevac and rotary ring up rotary wing to operations, including strong E. M S and fire suppression activity increasing support for mining exploration also contributed to the overall improvements.
The corporations on demand ISR platform also continued to perform very well and contributed positively to the annual results.
At regional one revenue increased bank revenue increased in 2021 compared to the prior year by $75 million regional ones. Two main streams of revenue include sales and service revenue and lease revenue and service revenue increased by 72% over the prior year.
Two and a half months of pre pandemic results in Q1, 2020, partially offset the overall improvement year over year.
Regional one experienced a strong recovery in sales and service revenues, specifically in larger sales of whole aircraft and engines in the third and fourth quarters of 2020, when compared to the prior period, where many of these types of sales were canceled or postponed.
Lease revenue decreased by $1 million or 2%.
Over the year.
That said the prior year included Q1 results were.
That were almost entirely unaffected by the pandemic lease revenues in Q2, Q3, and Q4 of 2021 increased over the same period from the prior year with Q4 'twenty one.
Revenues more than two times greater than Q4 2020.
Both the sales and service revenues and the progressively better results and lease revenues are reflective of air travel is starting to pick up around the world and most notably in the U S.
Yeah.
Turning now to our manufacturing segment revenue grew by $34 million over the prior year for a total of $496 million in 2021.
While still facing many of the impacts brought on by the pandemic collectively the manufacturing segments.
Revenues remained resilient the three strategic acquisitions later in the year of like Fab <unk> added some support to the increase in revenue, but more importantly increased internal capabilities and opportunities for growth.
With new customers going forward.
Turning to adjusted EBITDA.
During during the year the corporation did avail itself to the sous program offered by the government of Canada, the receipt of $18 million with used as intended under the program, which intact, which entailed in part to help offset increased health and safety costs and operating inefficiencies within the manufacturing segment comparable to 2020 Suez received.
By the corporation decreased by $46 million.
Also reaching an all time high for the Corporation in 2021 was adjusted EBITDA consolidated adjusted EBITDA was $330 million up 16% or $45 million for the year compared to the prior year generally speaking the increased adjusted EBITDA is attributed to the lessening impact of the pandemic over the course of the year and.
<unk> made in 2021 adjusted.
Adjusted EBITDA in the aerospace and aviation segment in 2021 was $288 million, an increase of $70 million compared to the prior year.
Adjusted EBIT generated by the legacy Airlines and provincial increased by 54 million the increase in adjusted EBITDA for the legacy Airlines was principally driven by the same underlying contributors contributors previously discussed as it related to revenue along with the acquisition of Carson Eric in July 2021 also.
Contributing to the improvement.
Adjusted EBITDA from regional one increased by $16 million from the prior year again, the drivers for revenues or the underlying contributors to the increase in the period.
In the manufacturing segment, adjusted EBITDA was $73 million, a decrease of $15 million or 17% compared to the prior year. Most of this decline was driven by the lower suite payments received in 2021 absent of the sous adjusted EBITDA fell 5%.
Third and fourth quarter 'twenty, what do you Wanna impacts related to supply chain disruptions, leading to increases in raw materials and transportation costs more significantly at quest all contributed to the lower adjusted EBITDA Quest.
Quest aside and excluding the impacts of the sous program in both periods collectively the balance in the manufacturing segment experienced an increase in adjusted EBITDA within the manufacturing segment. The addition of tuck in tuck in acquisitions completed in 2020 , one positive positively impacted adjusted EBITDA compare.
To the prior year.
Net earnings for the year totaled $69 million, an increase of $41 million from the prior period net earnings per share improved to $1 84, an increase of 130% from 2021, notably in the period. The weighted average number of shares increased by 6%, which partially offset the increases on a per share basis, our net earnings adjusted net.
Net earnings and free cash flow.
<unk> reported adjusted net earnings of $86 million for the 2021 year, representing an increase of $39 million or <unk> 82 per cent compared to the prior year. The company also delivered adjusted net earnings per share of $2 31 set up 71% over the prior year.
In 2021 free cash flow generated by the corporation increased by 23% over 2000 $20 million to $243 million or $6 53 per share.
This outcome is driven by the increased adjusted EBITDA in the period.
Free cash flow less maintenance capital expenditure expenditures per share increased 22% to $3 95 per share or from $3 23 per share in the prior period.
The free cash flow less maintenance capital expenditures payout ratio compared to the prior year was 58% in 2021, a significant improvement compared to 71% in 2020, and only slightly higher than 2019 at 57%, which represented Eic's all time best at the time.
Now, let's quickly turn to a short summary for the results specific to Q4 2021.
The primary explanations for the financial results and changes in the quarter are largely consistent with the drivers.
For the year to date, although the rise of the Omicron variant in December contributed to reducing both revenue and earnings in the current quarter.
Where there are notable differences I will provide additional detail.
Consolidated for Q4, EIC generated revenue of $390 million, which is up $89 million or 29% from the comparative periods of the increased 86 million was attributed to aerospace and aviation segment, and an increase of $3 million to our manufacturing segment.
Aerospace and aviation segment revenue increased by 49%.
261 million for the quarter revenue from the legacy and provincial and provincial increased by $50 million over the comparative three month period for regional one revenue in the fourth quarter 2021 increased by $36 million or 112% compared to the prior period.
<unk> during the fourth quarter, both revenue streams sales and service and lease revenues increased compared to Q4 2020.
Now turning to our manufacturing segment revenue grew by $3 million in the fourth quarter versus the comparative period. The total revenue for this segment was $129 million.
Adjusted EBITDA generated in Q4, 2021 was $89 million, an increase of 9% or $7 million from the comparative quarter in 2020.
Adjusted EBITDA contributed by the aerospace and aviation segment in the fourth quarter increased by $17 million to 78 million compared to the prior period.
Adjusted EBITDA generated by the legacy Airlines and provincial increased by $5 million.
Regional one contributed adjusted EBITDA of 21 million for the quarter, an increase of 130% from the prior period.
In the manufacturing segment adjusted EBITDA was $19 million, a decrease of $6 million in the fourth quarter of 2020 one versus the prior period.
That said, despite the supply chain challenges, leading to the increased raw material and transportation demand in this segment remains strong.
And again, the tuck in acquisitions in 2021 add new internal capabilities and opportunities for continued growth.
Net earnings in Q4, 2021 were $23 million, an increase of $10 million compared to the prior periods net earnings per share in the period were 61, an increase of 61% compared against the prior period.
The Corporation.
Recorded adjusted net earnings of $28 million in the fourth quarter 'twenty, one 2021 and an increase of $9 million or 49% compared to the prior period adjusted net earnings per share increased by 40% to 74 compared to 53 in.
In Q4 last year.
Again, it should be noted that in the period the weighted average number of shares increased by 7% again this impact per share amounts for net earnings adjusted net earnings and free cash flow during.
During the fourth quarter of 2021 free cash flow generated by the corporation was $72 million, an increase of $12 million or 20% from the comparative period.
The primary reason for the increase.
Is the 9% increase in adjusted EBITDA and a decrease in the current tax expense.
Free cash flow less maintenance capital expenditures increased by approximately 2 million or 4% over the prior period.
Finally, despite the continued challenges associated with the pandemic faced in the quarter. The corporation's free cash flow less maintenance capital expenditures payout ratio was a respectable 50% in the period.
That concludes my remarks for today for today I will now pass the call over to Carmel. Thank you Carol I'm going to start my comments today by discussing the outlook for each of our lines of business and for investments in growth and maintenance Capex. I'll, then wrap up by discussing how those expectations translate into anticipated results for.
She has a whole.
First a general comment we're very encouraged by the ramp up of our businesses and particularly the airlines through the fourth quarter.
But in late Q4, we experienced the onset of Omnicom, which came quickly and hit hard impact of Omnicom combined with the fact that first quarter is always our most seasonally challenging as winter roads lessen the demand for air services is going to put pressure on Q1 results. However, it appears the speed at which omnicom.
<unk> is equally the speed at which we are seeing it cycles through which I will speak more specifically about as I discuss our respective segments.
Let's first look at our passenger business in the first part of Q1, we have changed the full impact of Omnicom, which resulted in increased travel restrictions quarantine requirements and community shut down.
Measures have driven down passenger volumes, albeit to different degrees, depending on region and maritime to have pushed down to approximately 70% of pre pandemic travel levels, while central Canada and unit saw passenger levels dropped back to about 50%. However, the reduction in passenger volume seems to have peaked in the <unk>.
First week of February and we are starting to see passenger numbers trend upward setting up for a rebound in Q2.
The resurgence of Covid in Q1 and continues to drive very strong cargo and charter volumes, which are trending higher than prior year supported by the need for a central supply online shopping COVID-19 relief charters and resource work.
As community restrictions ease and winter roads opening up Cardinal volumes are anticipated to draw, although we expect volumes to remain above at pre pandemic levels.
Yeah, She's medevac operations have not been materially impacted by Omnicom and continued their solid performance.
Also on impacted in any material way by Covid is the aerospace division with 90% of the company's aerospace revenues in 2022 under contract subject to variable flying we anticipate another very strong year.
Similarly C T I a recent acquisition in mid December almost has most of its revenues under contract for 2022 and has not been impacted by Covid T. T. I wont be reported together with provincial aerospace.
We should all watch pandemic recovery was on track entering into December , but with the onset of omnicom and its impact on air travel generally are one has seen some changes.
The upward trending in leasing revenue is okay, but its not slip backwards. We anticipate that this will push the full recovery leasing revenues to later in the year part sales has not been materially impacted and continue at pre pandemic levels also the elevated level of aircraft and engine sales that we saw in the latter part of 2021 is.
We're going to continue in the first part of 2022 as we have mentioned before large aircraft and engine sales tend to vary significantly from quarter to quarter and the recent level of sales are abnormally high and are not anticipated to be the new run rate, but they do illustrate the index nature of regional one to be opportunistic and changing.
<unk> dynamics.
Our manufacturing segment saw an uptick in employee absenteeism with omnicom, but that impact has leveled off.
What were the impact.
COVID-19 has had on supply chain is increasing as is the challenge with labor shortages and he is impacting margins impact on companies in our segment vary by region and industry, but include price escalations on direct inputs delays on deliveries and freight increases in many of our companies. There is an ability to pass on it.
Incremental commodity prices relatively quickly, but in others like quest for the industry norm is fixed price contracts. There is not in the short term also as we have previously discussed in respect of quest production gaps and resulting reduced revenues will persist in 2022 due to pandemic related project deferral.
Long term demand remains healthy and quest has seen sales inquiries gradually returning to pre pandemic levels and steady order book.
Also the balance of the segment continues to experience consistent robust demand, which should be further bolstered by the acquisitions of mixed fab Telkom and brightcove in the latter part of 2021.
Turning to maintenance capital expenditures as a result of increased flying a larger fleet of aircraft and with regional one preparing its lease portfolio for increased activity anticipated to occur as omni crime subsides, we will experience a significant increase in maintenance capital expenditures in 2022 with the expenditure is being <unk>.
Towards the first half of the year.
As for growth capital expenditures Q1 will see GIC, adding capacity to its air operators to fulfill increased customer demand in the resource sector for cargo movements and in our rotary and medevac operations investment will also continue in the two surveillance aircraft required under the Netherlands Coast Guard contract.
What's will continue through the end of confused at which time investments to upgrade the surveillance aircraft for the renewed curacao contract awarded in December will commence and continuing through 2023.
Other areas of investment focus will be the completion of the new hangar required to meet obligations under a fixed wing search and rescue contract and our one opportunistic asset purchases immaterial reduction in government subsidies for airlines worldwide combined with the further financial impact of Omnicom is creating opportunistic purchase.
Yes.
Now turning to ESG as a whole our businesses have done a tremendous job weathering the pandemic and positioning for growth as we move towards a new norm on the Crown is the fifth wait and just like we have done in each of the four previous waves, we will successfully navigate through based on the experiences of our businesses Omnicom looks at.
A shorter cycle than previous waste S case counts and hospitalizations are trending downward and we are seeing restrictions ease with some provinces looking to eliminate all restrictions in March so although I'm a carnival negatively impact our results in Q1, causing them to be lower than our Q1 2021 .
Results, we are the view that a recovery will resume in Q2.
Although this will push our achievement of a 400 million run rate by about a quarter and we still believe barring. These setbacks from COVID-19 that we will exit 2022 with an EBITDA run rate of 400 million.
Although the world tires or restrictions in vaccine mandates and pandemic waves, we remain opportunistic optimistic as we look out into 2022, but what we have accomplished through the pandemic and how we have it at each turn capturing growth opportunities. We completed five acquisitions in the second half of 2020 one.
Further bolstering both segments, which no one is experiencing an active deal pipeline.
Other lines contract will commence in Q3, expanding our footprint to Europe .
Our award of the Curacao contract in December some insurers that Paul when we came that worked for another 10 years. The resource sector is growing giving us opportunities for dedicated charters and rotary wing work a matter of a business has never been stronger with the addition of Carson air to the family and the commencement of trauma flight, which combines our Rowley.
Wing capability with Keewatin medical expertise, we have opportunities to pursue through the leveraging of C. T I's and pals respective capabilities customer relationships contacts and reputation, including taking advantage of cgi's accessed to the American market for power Aerospace services.
So by effectively managing our operations through the pandemic for the long term following our principles for strategic investment and executing on opportunities that meet our criteria. We have position D. E continue accomplishing great things for the future. Thank.
Thank you for your time this morning, and we would now like to open the call for questions operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from no minus <unk> from Laurentian Bank. Please go ahead.
Hi, good morning, everyone.
Good morning, gentlemen.
So in your prepared remarks, you've mentioned about the payout ratio on our free cash flow minus maintenance Capex has declined to 58% from 71% and net earnings when it's down to 99% I'm just wondering if if youre now looking at increasing the dividend.
Oh, that's a good question.
You look at our our payout ratio versus historic norms. When we get into 50 something percent range is typically what we would increase the dividend and that's something our board is discussing at each quarterly meeting.
We've been pretty clear, particularly in Q3 loss of this year, where are we said that we're not going to increase the dividend at a period, where we still have.
Government support and clearly in 2021, the government has helped us maintain support into some of the northern communities that Werent economic so its clear why we didn't do it in 2021, but oh.
Very likely you will see US continue our track of increasing dividends at the current year given the level of performance we generated.
Okay. Thank you that's a that's a great color and just on the quest that business. You mentioned that there are some fixed price contracts that impact the margins I'm. Just wondering when do you expect those sort of contracts to fall off and the new contracts would have relatively better margins.
The sales cycle in quest is between one and two years, depending on the project.
The stuff, we're talking about with the weaker margins and stuff, we signed probably during 2020 or 2019.
And that stuff would tend to roll off by the end of this year and when we get into 2023, you see the stronger margins one of the thing I want to point out requests while we're talking about it is while we do have these short term bumps with both the.
Inflation issue in supply chain and the deferred some of the projects.
The general industry macros are really quite good. There is development is the main cities Toronto is remarkably robust source some of the U S centers, we're in and so the pipeline is quite frankly as good as we've seen it we're in the midst of slowly starting to convert that the order book and so the medium term.
This is remarkably positive yeah, we got a few bumps to go through in the next few quarters, two or three quarters before we come out of next year, we're going to be in a market, where there's high demand. We've got our distribution set up in the U S. Through the deals we did it with city Wi that beautiful new plant in Dallas.
Quest is going to be the growth story for us once we get through this little bumpy patch.
Okay, That's fair and just one last one in in terms of the cargo business you highlighted that you've added aircraft and for growth Capex youre going to spend some money there as well. So I'm just wondering if you could provide any additional color are you flying any new routes or have you seen any new customer demand just trying to get a sense. If that is an area of growth.
Our focus for you either to organically or maybe through M&A.
Yeah. It's a good question when you look at freight.
If we start with our core business, which is servicing the first largely first nation and you with communities that we serve as we've obviously seen a big jump up as people are traveling less so they order more one of the ongoing things with that.
Unforeseen part of the pandemic as its change people's buying habits, and so even though traveling is increasing the free does remain a hot and so part of what we see is just more afraid to the communities. We service. We've also seen opportunities adding services for other other air carriers, we do.
Some work for cargo Jack.
In with.
With <unk>, we've seen some work for some of the mines and so it's a combination of really all the kinds of freight we do.
Both on Combi aircraft, which is our core business and then calmer in particular has seen an increase of the pure afraid her work and that's why we've added some of the ATR 72, 500 aircrafts as in newer generation pure freighter to make us more efficient as a pure play business.
In addition to free we've also added capacity to expand some of the routes that we have out in the Maritimes to filling the gaps that exist there as it came back to mainline carriers is adding capacity in our medevac operations. As there is increased need from our main customer owned in D. C. There's resource sector new mining customers.
We picked up and also on the rotary side, we've got increased the manner I E. A mass as well as on the resource sector there.
Okay. No. That's that's great color that's it from me thanks for taking my questions and congrats on the year. Thank you.
Thanks Thomas.
Your next question comes from Cameron Darksome from National Bank Financial. Please go ahead.
Thanks, So much good morning. Good morning, So just a question I guess on the Q1 outlook I mean, I think we all appreciate whats going on there, but I guess have been a little curious about I guess the comment Carmel made just with regards to your expectation that I guess are your EBITDA will be lower year over year, and I guess, maybe a little bit surprised just given.
They've made some acquisitions and you're basically in a kind of a lockdown situation a year a year ago as well I mean should I think about maybe the biggest difference being the fact that you have lower government support this year versus last year is that kind of part of the reason why we would expect a year over year decline.
It's the only reason the.
With support largely ended in a material way above this year.
2021, Theres little bits of stuff. We've recognized later on as we've Oh finalize the programs, but you're looking into 2020. The beginning part of this year, we've had shutdowns, but no new support and.
Exactly where that number shakes out is yet to be seen it depends on how fast things accelerate we're seeing some good signs.
We're excited we've done one of the things we never like to do is over promise and so we.
We arent going to see government support to help US. We continued fine we didn't really cut back during cyber fraud thing in any material way, we serviced all of the communities and we're going to continue to do that gap. So it is very much a short term issue we will in terms of pure business money generated the.
Be ahead of last year, if you exclude the <unk>.
The subsidies reached the one in particular is much higher than it was a year ago.
The large asset sales have continued in Q1 and we're starting to see.
Some very severe significant leasing opportunities as well so that bullish for the rest of the year.
It's really just the factor are airlines are operating.
And in the short term overcrowded shutdown without any kind of real government support.
Right no that makes perfect sense.
Maybe just a second question for me just thinking about the most recent acquisition you've made the crew training can you just talk a little bit about the margin profile. There I mean, it's a little bit of a different business than the rest of your businesses are being maybe less capital intensive. So if he can talk a bit about that but also you were the growth prospects are obviously, you've got some some opportunities.
You know two to find some synergies with with Pal, but just what's their kind of caught new contract opportunity outlook look like for the next couple of years.
Okay C. T I is a trading business, but it is unlike our flight training business in Canada, It's largely got down on the aircraft. It's done in a classroom setting so it's a lower capital environment.
As a result, the return on sales is lower because you're not having to fund the purchase of assets, but the return on capital in the transaction is very much on our target. So when you look at the business you're going to see a lower percentage of revenue, but a similar return on return.
On the investments that we see in other acquisitions.
When we look at the areas for growth. This is the part that's so exciting to be C. T. I understand alone basis is growing there, they're strong and with the Air Force strong with the Navy they are making headway with the army.
Got their first bit of work in the middle East.
And through the relationships that powerhouses in the middle East, particularly in the UAE, we think theres going to be the opportunity to expand <unk> business into that part of the world.
When we look at the other side of that relationship Powell has been very limited on selling into the U S. Because of the extremely complicated.
Sourcing requirements in terms of ownership and how you're qualified to provide service to the U S. The deal with C. T. I took us almost a year to structure to ensure that we had the appropriate.
Structure to make sure. The government review this appropriately and we have that in place and that will provide a conduit for the two companies working together to sell our ISR capabilities into the United States. So when you look at it there's three kinds of pieces of growth that are going to come out of this one.
Is <unk> standalone stuff that they were working on before we bought them too as <unk> growth with with power capabilities, and then pals growth through Cgi's contacts.
Okay.
That's a great explanation I'll pass along thanks very much.
Thank you.
Your next question comes from Steve Hansen from Raymond James. Please go ahead.
Good morning, Steve.
Yeah, Good morning, guys.
I was just curious Mike if you could give us a bit more color into sort of the growth that you expect on the passenger side or the recovery I suppose on the passenger side I know you described omicron hit hard.
Q1, that's understandable, but are you seeing it in passenger bookings are you or are you seeing it in sort of the medical systems inclination towards more elective surgeries. What gives you the confidence that you'll start to see the recovery here as the virus subsides.
It's two things, it's our actual bums and seats and started to improve over the last three weeks.
I think kind of right at the end of January was the worst part for us in terms of where our revenues where they've grown consistently since then our future bookings are strengthening.
We have two kinds of different businesses power and.
Calm air tend to have larger future bookings, whereas perimeters tends to be very short term people are booking within a week of travel so perimeter bombs in seats is a better a better indicator, whereas future bookings is is easier to use that pallet com area and these are all situations where seagate.
A significant oh.
A significant decrease.
And we're pretty confident coming out of this quarter, we're gonna be through most of the omicron issue.
The governments are peeling off the restrictions in a more meaningful way.
Then they did in the previous.
Waves and so I think as we come out of Q1, and I think even in the back end of Q1, we'll see some strong numbers. It's just we know January was tough win.
Omicron hit the first nations a lot harder than the other waves did I think you may have seen some of the coverage for example, with bare skin Lake where 50% of the community out in at once.
And the other side of that story and the upside is no. One required hospitalization. There were very few in fact, I don't think any fatalities as a result, and the communities through the thing entirely now and so overcrowd hit hard but also left quickly so.
Yeah, Let me give you just one example, because I think this really is a great way youre in great indicators whenever it community called us up and they're actually looking to host a hockey tournament, we haven't seen a hockey tournament in like two plus years. So it's an indication of the mindset that the community have that they're going to go back the neuroma and go back to normal fast so yeah.
The little anecdote, there, but I think it's very telling as to what why we're so optimistic on where our passenger numbers are heading and the other piece. Steve just said that's really important you mentioned it is now.
Medical system. The medical system is finally, starting to see a decline or the pressure on it that's going to take a bit we've got some tired medical professionals they've done some amazing things to keep us healthy.
During during this two years, but there is a massive backlog if there's a big backlog in southern centers well, it's it's exponentially worse in the north and so we're going to see a prolonged period of higher than normal demand as we come out of this and we're going to see demand.
Grows slowly as the.
I should say grow quickly, though as we get back to normal and then grow above that slowly at the medical system can handle more and more ah patients. So.
The short term looks good the medium term will cheaper battery.
Okay. No that's really helpful and just one follow up and it's a similar flavor to our first question, but on regional one specifically, you've obviously seen some pretty outstanding growth off of the bottom.
Try to get a sense for do you guys have a sense for how big the parts deficit is in the fleet out there right now in the repo market do you have a sense for are.
Or are we talking about a two quarter tailwind still or are we talking about a multi year tailwind I'm trying to get a sense for the opportunity set to get back to where we were pre pandemic and or above.
Well.
Thank you.
The parts, but the deficit.
And I'm not it's regional.
American aircraft are getting closer to ready to go but theres people changing fleets in the U S market.
I don't want to go too much into detail to bore people, but the the 50 seat market was kind of forgotten about with the C. R. J 200, starting to come out of service and the airlines wanted to maintain their presence in that so they're taking <unk> seven hundreds which are 70 seat aircraft turning them into 50 <unk>.
Plains, which is creating some of the big asset requirements as they are looking for fuselages and things to be able to make that change, but then the ongoing parts business as those continue to fly and highly active corridor is going to remain strong for the foreseeable future.
Movement of.
Of the 70 seat into 56 markets has created demand for the 90 seat aircrafts as they start to fulfill some of the 70 seat.
Market so.
There are some transitional things, but the ongoing parts demand should be strong for the foreseeable future as those planes fly.
Where are the uptick count remains to come is in the European and the African part of our business.
Europe has reacted more like Canada has with more shutdowns and so the airlines are still behind where they would be in the U S.
We're starting to see some very good signs of England recently announced they were taking off all Oh restrictions and as you see that we're going to see a big bounce back in those marketplaces, and that's where our lease fleet sets.
We're seeing increased demand, particularly for engines.
And so we expect sort of mid year, we're going to be getting that that lease business kind of back up to where it should be over a.
A few months period, and so exiting the year, we're going to see lease stuff at or above historical levels, depending on how much more we can invest and we're actively looking right now at opportunities to buy some fleets that may be available.
So in summary.
<unk> business is strong for the foreseeable future.
The whole aircraft business is good for the next.
For what we can see it we know that it's not.
Predictable overlay the parts business is so it's been very strong in Q3 Q4 Q1.
We'll see after that.
But the recovery of the business is such that by late in the year.
We see no reason, we arent that are ahead of 2019 levels. Yeah. The other thing that I look at is kind of an MRO shop capacity and shops are so busy like you can't get a slot that to me is an indicator that there's going to be continued demand for quite some time.
Very helpful guys. Thanks.
Your next question comes from Chris Murray from ATB. Please go ahead.
Yes, thanks, Congrats good morning.
Okay.
Just thinking about your outlook I mean, Mike I appreciate the fact that there's puts and takes on this but.
Can you talk about what you guys think you might be able to do to mitigate.
Some of the some of the earlier Q1 impacts and what I'm trying to understand maybe is there anything that you have.
Moved from Q1 to Q2 or future quarters.
Or anything else that you think you can do to kind of kind of maybe fix some of these issues near term or is it just something we're going to have to absorb over the next several quarters.
It's not really we don't need to absorb stuff over the next few quarters.
We ended January was a tough month February is getting better and we're pretty optimistic about March.
So the passengers people that didn't move.
Still need to go the demand he go see the orthopedic guy or their cardiac surgeon. Those are just more compressed demand and as Carl mentioned, we're already starting to see that pop with things like hockey tournaments are non medical travel people are just tired of being in the community. They wanted to come out and we're managing that.
With which.
With seed sales and things to do.
Spur that on so I think really what we're talking about is just we had a challenging short period of time with overcrowding in the aviation business and that's going too quickly.
Quickly subside as we see over crime going away and quite frankly, the outlook for that gets better every day. So.
It really doesn't have a tailwind into the future. It's really it actually in some ways will create excess demand as we go forward.
And the demand in our manufacturing business has been strong throughout this so as people get back to work, there's less absenteeism, it'll help with workforce issues, which will in turn help with margins. So I really don't see this is a.
And ongoing issue it was really something that happened for a month or two and quite frankly, we've been through five waves in our four waves.
The nice part about overcrowding it was much briefer than most of the other waves, it's going away faster, although it was a hit steeper and quite frankly, if we had anything remotely close to the level of of government support in Q1 than we had last year, we would see significant improvements in our Q1 over one.
It's just there's a whole bunch of stuff that's gone now.
Okay.
That's helpful. My other question is a little more theoretical than it is around the regional one business, but we saw there was announcement I think I remember you are talking about maybe stopping development of the 275, we've had a couple of other the Oems.
It really hasnt started manufacturing new aircraft Mitsubishi hasn't been doing any new aircrafts.
Sort of wondering at what point or how do you see.
Kind of the fleet availability of new aircraft or even aircraft.
And the regional aircraft around regional one if there is really no new aircraft because there I mean, there is a hierarchy of things but.
I mean is there a risk that down the road you know essentially the business for lack of a better term just ages out.
No.
What happens with US and this is this is a really good question Chris is as aircraft age we get into the when they get to sort of midlife, we start participating in the things we buy.
Small inventory smaller fleets get our feet wet develop the knowledge because the secret sauce of our business is understanding the value of the used parts. That's what drives the business and so we're constantly moving into the next play.
It's always ongoing if you take a look for example at the turboprop business.
When we bought <unk>.
Regional one they had some exposure to the dash eight one hundreds worked in 200 to three hundreds it certainly weren't at 400.
As time has gone on the three hundreds will become a core part and now we are in the 400 business as those aircrafts engaged at a level that we could participate what changes overtime, which aircraft. It is but there is always an aging aircraft.
The other thing that's quite bullish in the medium term here is.
Until someone manufacturers another 90 seat plane the aircraft that the airlines only opportunity is to use the ones they've got that.
That's great for us because we sell the aftermarket parts were better at that than anybody else and then 90 seat market isn't going away. The 70 seat market isn't going to matter of fact, the 50 seat market isn't going away and you can see that by the investments being made by United by go jet and others into being.
Able to convert bigger planes into 56 planes. So.
But what drives us.
Aircrafts getting to mid life, so that theres part out opportunities, we're not a long term leasing business. We are at a cost of capital play where an arbitrage play where we understand younger lying value of those assets better than anybody else that you could see it as we started to play a bigger and bigger embry errors as those.
Age I'd, we participated in those we bought something we've liquidated some and I think you'll see more of that overtime, Chris. We just do it slowly we're not prepared to make big bets as we till we understand exactly what things are worth and so you see a slowly expanding disease states.
Just like with the 400, where we bought that Austrian fleet.
A year or two ago and now it's all gone and we're looking to buy some more.
Yeah fair enough alright, thanks folks.
And your next question comes from Matthew Li from Canaccord. Please go ahead.
Hey, good morning, guys. Good morning, a question.
I wanted to maybe start with a bigger picture question in terms of capital allocation, you know between acquiring planes acquiring parts, making acquisitions and returning capital to shareholders. You know what do you kind of see as the most important thing going towards way too.
Oh, that's a really good question I'm going to turn it on its ear a little bit too is that I think one begets the other our investment.
Organic growth is rather return capital to our shareholders. We've increased our dividend 13, 14 times and we're going to continue to do that our DNA and our commitment to our shareholders as a growing reliable dividend.
To do that we need to grow the underlying cash flows and that's why you've seen us take steps to strengthen our balance sheet, we've enhanced our equity box, we've enhanced our liquidity. So we could fund growth opportunities and we've proven for almost 20 years that our investment in those drives future.
Profitability. The fact that we're ahead of 2019 in 'twenty 'twenty. One is the absolute best proof of that some of our core businesses are still our airlines as an example are still not back to full normal but we're still ahead of 2019, how can that be possible.
Adjustments we've made.
In opportunities and so when we look at the capital allocation part of your question. Our thing is to read exceptionally disciplined on the returns we expect to generate.
And so if regional one brings me $100 million worth of opportunities that meet our 15% threshold, we're going to find out if Adam brings me another great acquisition like GTI Carson or any of the other ones, we're going to do that and because we have the balance sheet capability to do it and because it's.
That investment this year that'll fund next year's.
Dividend growth.
Our shareholders. There's it all sports they were one of the coaches the Minnesota Vikings coach Green says, we are exactly who they thought we were.
And that's kind of what we view ourselves here is we're in a dividend company a growing dividend company and the dividend you can rely on and we showed that during the pandemic and we're going to continue to show it as dividends increase in the future, but dividend increases don't compete.
With investments investments create dividend increases.
As we deploy capital not allocate it so as long as it's accretive growth and meet our thresholds we will do it.
Great. That's helpful. And then maybe just in the legacy and provincial business. You know are you seeing any margin pressure associated with rising fuel costs related to increased oil prices.
Yeah.
The long term answer that as no.
Uh huh.
Many of our contracts has flowed through provisions. So it's automatic the ones that don't we tend to have market share that enables us to pass it on and the tickets arent, particularly price elastic so.
These people need to travel they travel we're able to pass it on where there's a slight impact on margins is where you get a really rapid increase in fuel prices. It takes us a few weeks to get the print surcharges. It twice, we don't increase surcharges before we have increased prices of fuel so sure for short term periods. It pinches your margin just wildly.
We're implementing the price increase but that's a very short period of time and then Conversely, when you have declines in fuel prices. It takes a bit to take those off so at the end of the day.
Prices in terms of our long term margins or a medium term margins.
Don't prevent.
Brokers that much of an issue.
They do provide short term mismatches, but.
Our market share in our contracts protect us from virtually all of that.
Alright, Thanks, that's it for me.
Yeah.
Yeah.
Your next question comes from James <unk> from RBC capital markets. Please go ahead.
Hey, good morning, everyone.
James I'm on for Walter This morning.
I wanted to ask a question on the M&A.
Well I wanted to ask a question on M&A.
You look at the balance sheet, there's definitely capacity for more deals in that the conditions are prepared to be improving.
Could we see in our 2022 M&A in line with what we saw in 2021.
It's hard to answer that because it's a little more you're not sure which ones are going to close what I can say is that our.
Our.
Our pipeline is better than it was a year ago.
And there's a big difference I would say is in last year's pipeline. There was a lot of small deals that we talked to you and so if you look at the aggregate capital invested last year, even though it was five deals there wasn't a huge amount of money.
We still have some of those small tuck ins available to us and we're working on those but we're also working on some bigger sizes of transactions and so the opportunity for M&A.
M&A to exceed 2021 definitely exists, but it would be based on a larger transaction or two I don't think it's likely that we can put a complete fiber more transactions that was kind of it is normally driven by.
Our focus on tuck in acquisitions, but the amount of capital. We're deploying is something I think.
I would be optimistic we would meet that maybe more.
And how would you be looking to finance or potentially another equity raise or how are you thinking about the balance sheet with regards to the future M&A.
Yeah, I mean, I think I think the key thing to look at our back not a balance sheet would be macro.
Yeah, depending if you're if you take our accident.
EBITDA that we've talked about a $400 million.
And apply that to where our dad is today, a six or $700 million.
And I wanted to have CIT to two times, which is at the lower end of our range. So there is some room in that to do sub debts with largely a supply purchases with largely debt financing.
Given especially that some of the deals are always equity to the vendor. So we've got some room unless we were to do a really big transactions like bigger the Pal size.
Then we would consider equity, but I don't think based on the.
The smaller medium transactions that we have any need for that while still staying within the midpoint of our.
Of our well established guidelines for leverage.
Okay. Thank you and when we look at cost inflation.
Any factoring EBITDA margins, they saw a little bit of a sequential improvement quarter over quarter I know skus are likely impacted a little bit there's likely some absenteeism related margin impact.
When we're looking at our margins you know kind of as conditions normalize.
Back half of 2022 here, how should we view what we saw in Q4 versus what we could potentially expect to see during the rest of 2022 are posted on the ground.
I mean, the challenge with the post office is just how what does inflation due in the second half of the year.
We've currently got.
We're running in those mid to high single digit inflation.
Markets.
A lot of our manufacturing people in our aviation business is to have the ability to pass that on and so it's not as big an impact, but then some of the other ones, where we have longer term contract question particular inflation will be a factor until we get to the new contract pricing.
Later this year or early next year.
<unk>.
I think where you'll see.
Pressure lesson, perhaps on our.
Our margins will be as the workforce normalizes.
And there's less absenteeism and hopefully that leads to a slightly healthier labor markets, where there isn't a shortage of employees, but there are in some markets, particularly in the U S. We have some places where it's difficult to hire people were hoping that as the.
Number of people away sick lessons, but that will strength of the labor market.
We'll also have that big of an impact as our leasing ramp.
Ramps up into our one that's higher even a dollar margin. So that would obviously have an impact on the passenger front I mean, where we're just adding passengers to existing schedule that has higher margins, obviously, they come down a little bit if we have to increase frequency, but those are two things that would tend to drive margins up.
Okay, I appreciate that and congrats on a great quarter I'll turn the line over.
Thank you.
Your next question comes from Matthew Weekes from I Eh Capstone markets. Please go ahead.
Good morning, good morning.
Good morning.
So my first question.
Maybe something that's a bit less talked about but lv control and it looks like there was an adjustment to the expected liability associated with the earn out provisions on that.
I just wanted to ask is that because that business isn't quite performing as previously expected and if so what's causing that.
Really it is a factor of of lower demand in the market or or something else thats, causing that.
Yeah, It's a really good question.
There was an earn out portion to the to the Lv controls transaction.
And during the pandemic there were certain major projects that were delayed by the grain companies.
The projects haven't gone away. They Havent lost anything it was really more of a timing issue.
And he performed quite well through.
Oh through the pandemic, but to get to the top things there were certain growth built in and that growth was deferred we were flexible and actually kind of waited as long as we could to make the call on whether we would be paying out the <unk>.
Conditional rather than the traditional purchase price.
We're very happy with the transaction the challenges faced there were really just delays in projects and when they're getting done we're actually starting to see some of those things crystallize for later during this year and so L. L. V has been everything we thought it would be I feel bad for the vendors that they saw the just going in.
The pandemic and so their earn out was based on a period.
That was abnormal but there is no under performance of the business in any material way. It was really just a delay of growth because of the pandemic.
Okay. Thank you.
My second question is just so focusing on the labor markets I mean, it seems like you could be in the whole industry really it could be in for a period of tight.
A fairly tight labor market, especially on the pilot side and in the airline.
I'm just wondering how are how you are managing about at this point and how you're looking at it and then you layer on the extra labor requirement from the changing.
Regulations from transport, Canada, which I think there's more coming in in the end of 'twenty. Two how are you looking at managing the tighter labor markets, there and an inflation associated with that.
That's.
That is probably the most.
Significant long term issue that faces aviation and I'm going to back up and explain why I think that and then I'll speak about what we're doing about it.
In 2019.
Demand for pilots exceeded the available pool and that's why you saw us buy.
Moncton Flight College, we've got another capability with it.
Our artist at Carson in BC, we're looking at adding further capacity here, but there was a structural problem in aviation as a whole they have more pilots. We're retiring that were being replaced with training and the business is growing.
We went into the two year pandemic, where people were laid off and there wasn't a shortage of pilots during that period, but over that period two years' worth of pilots retired.
And virtually no trading or Scott. So when we go back to normal later this year or 2023, there's a structural issue we didn't have enough pilots in 'twenty and 2019 now.
In 2023 and.
We've got these two years' worth of.
Retirements that we have to deal with and so that's why we said that before we need to control our destiny on us and so we built this flight school put in programs like life in flight, where we effectively promise kids coming out of high school jobs flying in an airline.
When they sign up for the school and so.
It's going to be a strong demand market for everybody.
But we believe that the investments we've already made and investments will continue to make in developing our own pilots will mitigate this problem and quite frankly, we're looking at the same issue in aircraft maintenance engineers, where we think theres going to be more demand for those than there are available we're starting our own.
Licensed flight kind of program to train our own so essentially our vertical integration is our defense against this doesn't mean, it's all going to be a problem.
I think we're just way ahead of most of the industry that we're looking further down the road or enrollment of domestic pilots at MFC is as high much higher than it has been in the past trend. We expect to continue and quite frankly, I think you'll see us announce another base for amongst in flight College somewhere else.
In Canada this year as we can.
Continue to expand that and look for opportunities to profitably.
January and our own pilots and as most programs that folks had they either put them in abeyance or terminate them. During the pandemic. Our licensing program continued to operate because we saw that this is going to be a problem coming out of the pandemic.
And that program ensures that the folks that we bring through that program commit to us for a period of time, which helps obviously provide stability in our pilot for Apollo to the other thing is that we're also looking to invest in our communities and get members from our communities indigenous folks to be able to give them the opportunity.
Some pilots now those are folks that if they can fly in their own communities are much more likely to stay with us. So it's a multi pronged approach of how do we kind of create that pool of pilots available for our organization.
Yeah.
Okay. Thank you that's helpful. That's all for me and I'll turn the call back.
Yeah.
And there are no further question at this time I will turn the call back over to the presenters for closing remarks.
I'd like to thank you all for joining US today 2021 was a challenging but exciting year, sometimes fire testing is the best way to see how our business model works. We're very pleased with what we delivered for our stakeholders in the current year and we are really optimistic about where you are.
See in 2022 so I look forward to speaking to everyone again in May I have a great day and stay safe.
This concludes today's conference call you may now disconnect. Thank you.
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