Q3 2022 Exchange Income Corp Earnings Call
Certain statements as brief as possible to allow time for questions with me today are Richard <unk>, our CFO and Carmel Peter our president.
During 2021 in the first half of 2022, we completed a number of acquisitions and growth capital investments to drive future growth.
At the same time, we strengthened our balance sheet to ensure we had the access to capital to fund opportunities when they were identified.
We guided the market that the return on these investments will be evident in future periods.
While the second quarter of this year with strong. It did not include a full quarter's results from advanced Paramedic limited and Northern Matan Bridge Q3 marks the first quarter in which all of our investments regenerating returns.
<unk> for the new Netherlands operations, and power, which goes into service in the fourth quarter, but more on that later in our comments.
Third quarter, clearly shows the accretive nature of those investments and the value of our consistent reliable business model.
The third quarter is our strongest seasonally as our northern airlines and our northern Matt operations experienced the highest customer demand.
We would expect it to typically be the strongest financial results of the year. In 2022 is no exception. The results. However are much more significant than seasonal.
Simply being seasonally strong mark new highs in every metric whether on an absolute or per share basis.
While rich will go through the financials in more detail I would like to highlight the magnitude of the increase in these metrics revenue increased by 47% to $587 million up from $400 million last year. This was 11% higher than the previous quarterly high.
<unk> EBITDA grew 58% to $150 million from $95 million last year.
Third $50 million exceeded the previously quarterly high record of $115 million by 31%.
Free cash flow less maintenance capital expenditures increased 43% to 69 million from $48 million last year.
This is up 40% this was 43% higher than the previous high of $48 million.
On a per share basis, it rose, 34% to $1 70 from a $1 27 last year. This was 30% higher than our previous best.
Net earnings grew by 123% to $49 million from.
From $22 million last year, this was 63% higher than the previous best.
<unk> increased 107% to $1 20 from 58.
It exceeded the previous high by 33%.
Adjusted net earnings reached $55 million up 97% from last year.
The results exceeded the previous side by 42%.
Adjusted EPS was $1 34 up 84% from last year. This exceeded the previous high of $1 three by 30%.
Free cash flow less maintenance capital expenditure trailing 12 month payout ratio improved to 52% from 57% the.
The trailing 12 payout ratio on an adjusted net earnings basis improved significantly to 72% from 109%.
The strengthening of the payout ratios is even more impressive given the two dividend increases announced with our Q1 and two to results this year.
Improved performance in both our aerospace and aviation segment, and our manufacturing segment drove our aggregate results well head office costs increased marginally from the comparative period.
Our legacy Airlines operations continued to improve during the third quarter, albeit at a slower rate than earlier in the year passenger demand increased throughout the quarter, but there were geographic variations our maritime operations exceeded now exceed 2019 levels.
While central Canada, new to that are between 75, and 95% of pre pandemic volumes.
Slower recovery in Central Canada, due to the contingencies to be driven by access to medical diagnostic appointments the capacity in the medical system is still recovering from the pandemic and is expected to improve over time, there's a large backlog of patients needed to be seen and this is expected to drive strong demand for the foreseeable future.
Our freight volumes have remained stronger than prepaid barak levels in spite of the bounce back in trial and passenger travel.
As it has throughout the pandemic our medevac operations produced steady returns demand is not linked to the economy and varies only slightly from period to period, our maritime surveillance business performed as expected during the third quarter, while hitting a exciting non financial milestone we delivered the first aircraft for our.
Nevertheless, its contract at the aircraft went into service this quarter a second aircraft will go into service later in the fourth quarter and this opens our first surveillance operation in Europe .
Regional one and continued to generate strong revenues in the sale of full aircraft engines components and parts.
It's leasing portfolio is recovering more slowly than we had originally anticipated.
The way as a result of the pilot shortages across the industry, while passenger to bad. This bounce back there are not enough pilots available for the offer airlines to operate all the flight segments. If they would like as a result, they have chosen to fly the larger aircraft first because they have greater capacity and generate more revenue.
The narrow body regional jet market will recover as more pilots are available there.
Not a new aircraft alternative for these drugs and we expect the lease portfolio to improve over the next few quarters.
The pilot shortage is creating challenges industry wide.
Our investment in Moncton Flight College several years ago is assisting us with this challenge in our operating Airlines our life in flight program is now delivering for our first fully certified pilots with sufficient experienced a pilot for our airlines and the program is growing in size. We also completed the inaugural.
Year of the tick Mason and digital pilot training.
<unk> pilots for a career at aviation, while it will take a couple of years for the pilots be fully certified and have the necessary flying experience to work at our airlines. The first year was a great success and we look forward to expanding the program in the future.
We are ecstatic to announce that tens of this year's 11 candidates have completed their flight test the first step in her career at aviation.
This graduation rate exceeds most universities and colleges and was above our most optimistic expectations working with our pilots we have been able to make sure we have sufficient capacity to meet our customers' requirements. Although there is no doubt that the lack of supply has increased our costs.
A quick comment on fuel prices before we move on to the manufacturing segment.
Oil prices moved rapidly higher earlier in the year before moderating in the summer.
Many of our contracts have fuel.
Fuel surcharge provisions and our market position ensures we are able to pass on increased fuel costs to our customers. We're a specific contractual arrangement does not exist.
Adjustments typically lag the change in fuel costs. So there is a marginal hit during times of rapid escalation, but a reversal effect in times of fuel price decline as such in the long run the price of fuel does not really.
<unk> adjusted EBITDA in absolute terms.
But it can have short term impacts as our pricing takes time to adjust Conversely in times of rapid reduction in fuel costs that could result in temporary increases to adjusted EBITDA until price reductions are implemented.
Our manufacturing segment was the main driver of the strong performance in the third quarter revenue increased 78% to 223 million, while adjusted EBITDA increased by 281% to $60 million. This growth was almost entirely driven by the three acquisitions made in 2021.
And another completed in the second quarter this year.
Forward strategy in previous periods was rewarded in this quarter.
Our West Tower subsidiary continues to be one of the Canada's leaders in the supply construction and maintenance of cell towers in Canada.
With the rollout of <unk> systems accelerating across the country Westar chose to become a one stop supplier for the telephone companies, providing both towers and below ground cable.
In order to accomplish this we completed the acquisitions of telecom and <unk> in 2021 to augment our underground capabilities you.
The underground.
Capabilities were integrated within the West tower and generated significant year over year growth.
That machine has grown consistently and profitably since its acquisition in 2015. The company has invested in additional production capacity to meet customer requirements, but even with the investments. The factory was nearing capacity. The decision was made to acquire back that a successful competitor Ben machine.
Enable Ben machine to diversify its customer base, while immediately and very accretively increased its production capacity.
The benefits of this decision are reflected in the third quarter results.
The most significant driver of the improvement in manufacturing segment was the acquisition of Northern Mountain Bridge earlier this year.
It was <unk> largest acquisition to date and as such would be expected to have a material impact on our segment in our consolidated results.
Actual results have exceeded those expectations.
For those of you who are not with us in the first and second quarter calls northern not provides a temporary provides temporary access solutions to substantially mitigate if not eliminate the environmental impact of project construction.
They provide wouldn't adding and bridge solutions, which enabled projects to be built without building temporary access roads that are expensive and very difficult to remediate.
They service a wide variety of projects through electrical distribution lines to pipelines, the oil and gas production to forestry and mining.
Northern not experienced strong demand in the third quarter with long linear projects. The pipelines were crying a large number of bots for prolonged periods higher oil and gas prices have resulted in increased drilling which in turn has increased demand for that.
Uncertainty created by the pandemic resulted in many other industry players reducing their investment in new bad and as such over overall supply was low at a time when demand is high.
This problem was exacerbated by very high timber prices for batting fiber, which pushed up the price of new masks.
Northern mass vertically integrated model and inventory of raw fiber enabled the company to ramp production quickly in response to market conditions, and thereby satisfy market demand.
I should point out the northern that business has a seasonality, which is very similar to EIC as a whole is.
Slowest in the first quarter when winter conditions freeze the ground, reducing the need for that and well construction is also seasonally slow demand ramps through the second quarter before peaking in the third quarter. The fourth quarter starts strong before slowing in concert with the colder weather towards the end of the year.
Strong demand in challenged supply during the third quarter further enhanced our results.
I believe most of the forward looking discussion to Carmel later in this call, but I would like to briefly discuss the outlook for northern not going forward with.
We have discussed on previous calls how we believe the long term demand for temporary matting solution is strong and will grow as it has become an environmental best practice for mitigating the effects of construction projects.
Wide variety of industries.
This demand will certainly vary from period to period, depending on which projects are being built the long term trajectory is very promising.
Outlook for the short medium term remains very positive is there a number of long linear projects, which are expected to continue through 2023 and beyond.
It is much harder to forecast supply, which may increase next year, but this is far from certain.
As such while we are confident that 2023 will be a strong year for northern mass precise forecasts are challenging.
<unk> continued to see strong demand for its products in the third quarter.
Even with the higher interest rate environment to continue to grow its order book in the third quarter.
Which continues the momentum experienced in both the first and second quarters, where the order book grew in each of those quarters as well.
While we have seen a change in our product mix towards rental properties and away from condominium projects the aggregate demand, particularly in our American markets remained strong while.
While the company continued to deal with in a regular production schedule as the rate of projects delayed or canceled during the pandemic operating results were in line with our internal expectations.
The interest rate environment has continued to rise during 2022 and while this has increased the carrying cost of our floating rate debt. It has a significant positive impact on M&A.
Often compete for target companies with financial acquirers.
Our higher appetite for leverage that we do at EIC, the higher cost of debt reduces what those companies can afford to pay for an acquisition and mezzanine debt. In addition to be much more expensive is also hard to access. This has resulted in <unk> being.
More competitive on larger acquisitions than we have been in the last few years, where the capital markets were hyper liquid.
Enhance opportunities for EIC in the M&A market combined with our long stated strategy of maintaining a strong liquid balance sheet that is first to augment our balance sheet with an offering of common shares during the quarter. We completed an issue of 100 million of common shares which was very well received by the public markets.
And demand was so strong that the underwriters exercised their full over allotment option, bringing the total offer to $115 million.
Finally, before I hand, the call over to rich I want to touch briefly on the strength of Eic's diversified operations dealing with a potential recession in 2023.
Many economists are predicting a slowdown in the economy or an outright recession next year.
He has seen absolutely no sign of any slowdown in our business to date, and our diversification and contractual revenues provide us great.
Protection should a slowdown occur.
I'll now hand off the call to rich, who will detail our second quarter results.
Thank you, Mike and good morning, everyone. The third quarter was by every metric both in absolute dollars and more importantly on a per share basis, the best quarter in the corporation's history corporations investments and platform acquisitions tuck in acquisitions and growth capital expenditures in previous periods bore fruit during the quarter as we had been.
Forecasting for a number of quarters. It is it a disciplined acquisition and investment strategy, along with keeping consistent leverage with plenty of liquidity that has driven these results. But then again this isn't a new phenomenon for EIC. It has driven our management philosophy for our entire 18 year history.
The record results during the third quarter were highlighted by <unk>.
Revenue was $587 million, an increase of 47% over the prior period adjusted EBITDA was $150 million, an increase of 58% over the prior period. The corporation's free cash flow less maintenance capital expenditures was $1.70 per share, resulting in the corporations lowest ever quarter.
And trailing 12 month trailing 12 month payout ratios net earnings per share was $1 20, an increase of 107% adjusted net earnings per share was $101 34, an increase of 84% over the prior period.
All of these results were achieved despite a $5 million reduction in government subsidies compared to the prior period as the corporation did not receive any subsidies in the third quarter of 2022.
The third quarter results were very strong across both segments due due to operational improvements the lessening impact of COVID-19 on our operations and the performance of our acquisitions completed in the second half of 2021 in the first half of 2022.
Corporation continued to manage through a myriad of macroeconomic factors, including decades high inflation labor shortages and supply chain constraints for certain inputs to name a few.
These issues have been mitigated to the extent possible through the collective strength of EIC in each of the subsidiaries working together to solve challenges as they arise one, particularly relevant example of this is eic's life in flight program as Mike discussed earlier, which is starting to graduate new pilots into EIC Airlines and the inaugural <unk> indigenous pilot pathway, which.
We'll see.
Which will in the future graduated indigenous pilots to fly with our airlines the planning for life in flight program. Several years ago is helping address the current shortage and provides a competitive advantage for EIC and its airlines. This is just one example of our made at EAC solution, helping our collective group of companies dual challenges that would be difficult for our subsidiaries to address a standalone company.
<unk>.
Our adjusted EBITDA margins were impacted by three notable factors compared to the prior year first CGI acquired in December 2021 generates lower margins. That's kept broke will answer garments are minimal beyond working capital second rapid escalation in fuel prices initially impacted adjusted EBITDA earlier in the year until few price escalators in our contracts became effective.
Until fuel price surcharges were implemented now while adjusted EBITDA in absolute dollars is unaffected margins are still impacted as these surcharges are flow throughs to the customer finally, lower government subsidies decreased margins as there were no costs associated with those subsidies.
The acquisitions completed in the last 12 months, most notably in northern Matt and CCI contributed to the increase in revenue and adjusted EBITDA.
With operational improvements and lessen the impacts.
From the pandemic on our existing operations.
The increases in adjusted EBITDA were partially offset by increases in other expenses.
Depreciation increased over the prior period due to investments in growth capital expenditures, the additional capital assets of the corporations acquisitions and increased flying completed by the Corporation's Airlines.
Interest expense increased over the prior period due to funding our recent growth initiatives and acquisitions with senior debt and increases in the benchmark borrowing rates since the beginning of 2022.
Other costs associated with our acquisition activity, notably intangible asset amortization also increased over the prior period.
With the significant increase in adjusted EBIT more than outpacing the increase in these costs net earnings increased to $49 million, an increase of 123% over the prior period at the same time adjusted net earnings increased 97% to $55 million over the prior period free cash list means capital expenditures increased by $21 million.
Over the prior period to $69 million. The increase is mainly attributable to increased adjusted EBITDA, partially offset by increased.
Maintenance capital expenditures.
One of the hallmarks of ESG as balance sheet management throughout its history has always having our sights on the next investment opportunity, even where that opportunity will arise is not yet evident.
Are there any investment opportunity arises due to organic growth our subsidiaries identifying tuck on acquisitions for their operations that will drive growth in synergies or larger platform acquisitions that are sourced by our team internally, we always want to ensure that we are able to execute on investments that meet our return thresholds and keeping with this principle during the third quarter, we completed a $115 million.
And share offering which is.
Currently oversubscribed and resulted in the underwriters executing the full over allotment option. The proceeds were temporarily used to repay our senior credit facility until such time as there is an opportunity to deploy that capital as Mike indicated earlier, our M&A pipeline is very strong and we wanted to ensure that.
When we are ready to execute on a transaction, we can and are able to find it responsibly. Our leverage ratio is now within our historical range accelerated downwards. As a result of the common share offering our results were already driving down our leverage ratio has improved results from previous investments were being realized throughout the year. This was tempered slightly by the significant strengthening of the U.
Don near the end of the quarter, which increased the translated value of our U S dollar denominated debt, while only having a marginal impact on our U S dollar adjusted EBITDA.
The U S. Dollar has come off its recent highs and our adjusted EBITDA is now being translated at a rate that is much closer to the spot rate. So it is expected that the impact will moderate as long as exchange rate exchange rates remain stable.
As we head into 2023. It is expected that our results will continue to drive down our leverage ratio during the third quarter. The corporation made investments in working capital to support the growth of its operations, notably in inventory.
This supported northern Matt.
Difficult growth.
And.
It will contribute positively in future quarters.
On a year to date basis investment in working capital and also includes several large deposits on capital asset purchases that will be the result in capital expenditures in future periods or will be returned to the corporation of the purchase is now completed as discussed in prior quarters. In addition to investments to support growth of the business investment in future growth in.
And investments made.
Made to mitigate the impact of supply chain challenges have all increased working capital during the year to date period during the third quarter, our dividend increase for a second time in 2022 compared to the dividend paid at the beginning of the year. The current dividend is increased 11, 11% or <unk> 24 per share on an annualized basis. This is the largest annual increase in our history and underscores managements.
Confidence in its operations and results.
And one might expect to see an increasing or at best flat payout ratio in reality. The results couldn't be further from that our free cash flow means capital expenditure payout ratio was 52% on a trailing 12 month basis, the lowest in the corporation's history.
Adjusted net earnings payout ratio was 72% on a trailing 12 month basis within 1% of our previous record set in 2019.
To demonstrate our ability to reduce our payout ratios over time without having to forego increasing our dividend when results warrant.
That concludes my review of our financial results I will now turn the call over to come out.
Thank you.
Yeah.
We're very excited about our outlook for the future the driving force behind this optimism is of course, the expected performance of our respective segments I will first discuss the aerospace and aviation segment.
Our aviation business will have a solid finish to the year as passenger numbers continue to increase, albeit at a slower pace.
The availability of pilots is improving increasing capacity to take advantage of growing demand for charters.
Cargo and medevac operations will continue their strong performance in our fuel surcharges have caught up to the fuel increases.
One leasing revenues in Q4 will continue to be hampered by the overall impact of flight crew shortages.
Airlines to park regional aircraft and focus on larger gauge aircraft.
We expect leasing to start to improve in the latter part of Q2 and continue to gradually ramp up through the balance of 2023.
In the interim regional one has been and will continue to take advantage of current market dynamics to acquire and sell aircraft and engines.
And Eric I guess Q4, we'll see the commencement of revenues from the two surveillance aircraft for the Netherlands, The Netherlands surveillance contracted for 10 years. So this represents a long term sustainable revenue stream also aerospace continues to experience strong operational tempo in the UAE and under our contract.
Our manufacturing segment will see the largest growth in Q4 and throughout 2023, although the acquisition of northern Matt will be the single biggest contributor to the increase it is far from the only reason.
In fact, we are expecting growth from each of our manufacturing entities, notwithstanding the impact of inflation and supply chain and labor shortages.
Growth is being driven in these entities do a number of factors, including increased customer demand.
Proceeds from tuck in acquisitions, and the increased capital spending for telecommunication infrastructure and.
Ram cap.
Quest in line with our expectations will continue to be impacted by the production gaps in Q4, driven by project delays that occurred during the pandemic. However, these are short term issues with the medium and long term looking strong evidenced by continuing increasing order book in 2023 question, we'll start to see margins.
Increasing with the benefit of higher pricing it took to the market over a year ago to address the substantially higher aluminum pricing. It will also start to see the benefit of a steadier production schedule with increased jobs for 2023.
A few comments about northern Matt Q form.
<unk> are expected to be very strong, but it needs to be put in perspective with the seasonality of northern match business. The third quarter is northern that strongest quarter with performance in the fourth quarter last thing is the screen freezes up and construction projects slow down.
As such results in the fourth quarter are typically lower comparatively than in the fourth and then the third quarter. This will be particularly the case this year given the perfect alignment of demand supply and pricing of third quarter producing record results. Although many of the factories that aligned in Q3 to produce record results will continue.
See you into Q4 seasonality of demand together with the possibility of pricing softening and the daily rental rates will result in adjusted EBITDA in Q4 being lower than Q3, but at the upper end of our expectation.
Into 2023, although we do not anticipate the perfect market conditions, which existed in Q2 and Q3 of 2022 to continue we do expect demand remains very strong and results to continue to be notably better than the financial metrics on which we acquired northern Matt.
We anticipate maintenance Capex for Q4 to be similar to our Q3 maintenance capex, although our maintenance capex expenditures are typically weighted to the front end of the year. The onset of the omnicare on very late in 2021 and into 2022 delayed some of the maintenance activities to the latter part of 2022.
Also the acquisition of eight businesses since the pandemic began began and the capacity added in our aviation business to support growth contributed to the overall future maintenance.
<unk> requirement.
Gross investments for the balance of the year our commitments, we have disclosed previously being the final portion of the investments for the headwind surveillance aircraft investments in connection with the upgrade to the surveillance aircraft for the renewed curacao contract and the completion of the new hangar required to meet obligations under a fixed wing search and rescue Contra.
Jack.
Additionally, as we have done in the past, we will look to see is worth both organic and growth opportunities and accretive acquisitions that meet our.
Criteria.
Our pipeline of potential acquisitions is robust.
And with our recent equity raise we are trying to seize the opportunities.
There is much uncertainty in the world with the Ukraine, Russia conflict unpredictable weather events rising interest rates inflation and expectations of a recession against that backdrop is the consistency and reliability of Eic's business model proven by the results. It has generated over 18 years of history that is.
Included the financial crisis in 2008, the Covid pandemic high and low oil prices and fluctuating Canada U S exchange rate, how do we do that we acquire mature companies with dependable cash flows and diversified industries, which allows EIC to weather economic cycles very well.
Look at the makeup of our company our airline businesses are effectively an essential service provided either directly for governments or government funded our aerospace business is backed by several long term government contracts and our manufacturing segment produces specialized industrial products not retail goods, which are much.
More impacted in a recession. In addition to these foundational protections against economic uncertainty, we have significant momentum going into 2023 with strong order book at all of our manufacturing companies, we have northern math for a full year improved margins and volumes at quest, a full year of civilians surveillance work in.
And the Netherlands and expected improvements in our one leasing business. It is.
With that confidence that we expect our adjusted EBITDA to be at or above the high end of our previously guided range of 435 million to $445 million for 2022 and update our guidance for 2023 to be between $510 million and 400.
$540 million. Thank you for your time this morning, and we'd now like to open the call for questions operator.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
If he would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw it. Please press star followed by the number too.
Please remember to lift your handset if you are using a speaker phone before entering any piece.
Your first question will come from Steve Hansen of Raymond James.
Please go ahead.
Yes, good morning, guys. Thanks.
Thanks for the time.
Look northern that sounds like it's operating superbly, Mike it's hitting the ground running for you guys bumping into capacity limit.
By the tone of your MD&A I'm, just curious if the seasonal slowdown in Q4 allows you to bolster your fleet capability at all to get ready for added deployments in 'twenty three.
That's a good question I mean, we saw we've been running at.
Our production capacity effectively at capacity of a single shift for us.
Well basically since we've owned it in before that and so.
While the business slows in the winter, we will not slow our production manufacturing we've maintained strong inventories.
Inventories of wood fiber and as the winter goes occasionally they're harder to obtain if cutting is cut back by the lumber producers, but we're confident that we're going to continue to grow it because we wanted to make sure. We've got the necessary inventory to look after our customers next year, because we believe that.
Demand profile is every bit as good next year as it was this year.
So that's great and just one follow on and I'll jump back in the queue can you just maybe give us some commentary around you know you've got a few months under your belt now, but just curious about the deployment into eastern Canada and some of the non traditional markets here or do you have a good sense for the ability to diversify that business over the next year or two.
Yeah, Steve I think one of.
The best kept secrets about northern Matt I mean, it's performed very well so it's not a secret in terms of financial results, but I think when you look at what the business does it helps other businesses protect the environment.
Their footprint, while theyre doing projects and if.
If we went back in the business 10 years. It was much more driven in the west by by oil and gas development.
The company has done a great job in eastern Canada of expanding that particularly into electrical distribution, but other areas as well and so one of the things. We're most bullish about the business is in the medium and the long term.
And we've already talked with the short term.
Is becoming an environmental best practice, and then dealing with environmental leaders like hydro one.
Who made this a priority that when they're building lines. They wanted to make sure. They leave the environment looking the way it was before they start isn't so.
That's one of the things we're most bullish about on on our northern investment.
Thanks appreciate it.
Your next question will come from Chris Murray of ETB capital markets. Please go ahead.
Yeah. Thanks, good morning.
Good morning.
You're talking about guidance into 'twenty three just to confirm that doesn't include anything that you haven't already acquired as of today correct.
That's absolutely right Chris hit it.
Only includes things we own today and growth capital investments that we've already funded anything new we would do or any other acquisition would be in addition to those that's just what's bought and paid for.
Okay.
So with that in mind.
Just thinking about.
Acquisition multiples and what you might be able to pull off historically, but one thing you guys have been able to do pretty well.
<unk> acquire at what I'd call fairly low and multiples.
I'm just wondering if I think about your your available capacity for acquisitions.
Are these things that you know like you're moving upmarket into transaction size or maybe into different types of businesses that you are multiple theyre going to move off that historical Florida six times EBITDA range or is that kind of what we should be thinking about and what youre looking in the pipeline right now.
Chris one of the things that has made us successful.
Is kind of a dogmatic.
Commitment to getting the right returns on our money and so.
You talked about four to six times EBIT.
EBITDA multiples that that's correct, we tend to convert that and say we want a 15% return after our.
Maintenance reinvestment requirement and that hasn't changed in this environment.
Where the thing that's changed is we're competitive on a wider variety of larger transactions.
Were still very selective on what we're going to pull the trigger on but it's exciting to have less people who are prepared to overpay and when you had competitors. We're prepared to put six times leverage on the company. It was hard to compete with that that's hard to do now are harder to do because of the cost of the <unk>.
Floating rate debt and then the sheer accessibility of.
Of mezzanine debt so what we've seen is.
Maybe not.
An increase in the pure number of opportunities, but an increase in the size of the quality of the opportunities we're looking at so.
As part of the reason we raised the money. This quarter was we wanted to make sure we have the dry powder and you when you see an opportunity like northern that was earlier. This year you wanted to be able to jump when those opportunities are there and I'm pleased that in line with our historical practices their balance sheets ready to defend them because I think it's important.
We also think we use the same criteria when we look at organic investments. So we expect the same growth.
We're really agnostic as to whether we're acquiring companies or investing organically in our company. So if it's further expansion for northern that we look at that and we're as happy to invest the money and those types of opportunities and Best example, that'd be that.
The new contract in Europe were between 50 and $100 million into that with the aircraft. We bought another investments we've made that's going to generate long term returns.
For the next decade or more.
Okay. That's helpful. Thank you.
Sure.
Potential growth internal investment. So you can see on the list we've been talking about this for a while with a new factory for quest in Canada.
Can you just update us kind of what the thinking is around that at one point they were kind of outgrowing the Canadian facility I know you built the facility in Texas.
Comment on longer term path for these guys over the next three to five years.
Quest is in multiple buildings in Canada, and now that the market is sort of rationalize back to normal we're growing we're going to need to work on a plan to enhance the efficiency of Canada and that probably means moving those into.
A bigger single facility, it's not going to happen in the next 12 months, but it's something we're working on and.
One of the successes about quest that I think is less well understood is quest has been successful by.
Really in a limited number of geographic markets, we do well in Toronto down the western Seaboard in the U S and a little bit in the east.
Eastern U S. We've seen new markets for us.
In the last six months in Nashville, and Denver.
In Dallas, and as we grow that geographic footprint.
Need for capacity is going to grow we've got tons of capacity in our Dallas facility, but we've seen the value of having stuff on both sides of the border to meet demand where it is so.
I think you'll see us rationalize the production capacity in Toronto in due course.
Alright sounds good thanks a lot.
Thanks.
Your next question comes from James Mcgarrigle of RBC capital. Please go ahead.
Hey, everyone. Congrats on the great quarter, and I'm looking forward to seeing that theme and wanted to take this coming week.
We're looking forward to where we always love showing off our toys. So.
Alan just a couple of Dcs.
That's good to hear.
I just had a question about how you're thinking about the balance sheet longer term.
I know there is not any maturities coming up and.
There's lots of free cash being generated in addition to some really solid growth coming up next year, but.
Given that interest rates are increasing very quickly.
Is there any change in how your team is thinking about the balance sheet longer term.
Are you starting to make any adjustments in anticipation of.
Some of those maturities coming due in 2025 26 timeframe.
It's a good question.
We've been remarkably consistent yet about what levels of debt were prepared to carry typically over time. That's about two turns of our EBITDA in secured debt and potentially up to one turn in in convertible debentures. The convertible is one of the advantages of those as.
That theyre always fixed rate pieces of paper.
But if the interest rate environment with those start coming due.
Three years from now is higher than it would increase the price of them. So it's something we keep our eye on.
But on the other hand, we are strike prices in the high <unk> on some of those and with the level of performance. We've delivered this year and what we're talking about delivering next year.
I would say.
I'm quite confident that we're not going to be refinancing most of those that theyre going to naturally flow into our equity box. So I think there is the ability to delever just from our normal growth.
<unk> pieces as our as our results increase.
And we get the returns from the things we bought already like as an example, I gave the investment in in the Netherlands contract or growth Capex in our airlines, where we built the new hangar for the fixed wing search and rescue contract as those deliver and show up in our results and when we think of our.
Our leverage we know what that's going to generate and we know that that's going to bring our leverage ratio down in and of itself.
So are we going to change our strategy as it relates to that because of the bump up in short term interest rates I don't think so I think we're going to delever naturally with the stuff we're doing now but it sure would stop ship Northern match SR showed up we would certainly be looking at that and wanting to grow the bid.
So.
In short.
<unk> been pretty consistent interest rates have changed a lot over the last 20 years, but our model really hasnt.
I think thats, what we do going forward, although I do think we delever out of the natural growth in our share price.
Okay I appreciate that.
On the M&A pipeline, you outlined some pretty significant opportunity.
You've also highlighted a lot of organic opportunity.
Is your team any way constrained and I'm not necessarily asking from a capital perspective, but.
From a management capacity perspective to evaluate all the deals.
All the organic opportunity that you seem to have available right now.
Can you just talk about kind of that high level strategy that your team execute just so you know.
I can better understand.
Hi, how you manage through all of the opportunity that's available to the team right now.
Now I'll turn it over after that thank you.
Yes, that's a good question James I think when you look at our growth opportunities you mentioned acquisitions, and you mentioned organic growth and we got to bifurcate, how we manage those.
We've increased the size of our our acquisition Department led by Adam over the last few years and so our capacity internally is higher than it's ever been to examine the opportunities. So.
I think the evidence of that would have been not so much this year, but last year in 2021, we could be the high number of smaller acquisitions, which quite frankly require the same amount of work is a big acquisition and so we've got the horsepower to take advantage of the market situation on the acquisition front.
But I think when we talk about the organic part Youre really talking about the secret sauce of EIC.
And thats that we own.
Dynamic proven management teams of our subsidiaries and the people evaluating those opportunities so whether it's northern Matt how much do we increase the size of our rental pool Darin and his team there their do it not work and they're making those decisions or whether it's increasing the size of our fleet. It.
Paul is an example, and so with the team at power, making those so the opportunity to take advantage of organic growth, whether it's through new contracts expanding our geography or just increased customer demand is in no way inhibited by capacity constraints at head office, because we're largely.
Not the ones managing that we of course, obviously are overseeing and making sure that the expected returns are in line with our expectations, but it's our ability to be decentralized and put those decisions in the hands of the people that understand those businesses that makes us successful and even for tuck in acquisitions, we lie.
Average the capability that we have in our subsidiary to help us do the diligence. So we're able to secondly, magnify our team by doing that.
Thank you very much and ill turn the line over.
Okay.
Your next question comes from Matthew Lee of Canaccord Genuity. Please go ahead.
Hey, good morning, I just wanted to start with a question on regional one I mean, you delivered another very strong quarter in part of aircraft sales.
Can you maybe talk about the sustainability of a $90 million per quarter range.
Sales going into 2023.
I would not look at regional one quite from a revenue point of view.
Thank you will see continued progression of what it generates for a bottom line point of view.
The problem with looking at revenue in regional one is in one quarter, we may sell a $10 million of aircraft, where we make a $1 billion. The next quarter, we might sell two engines for $4 million, where we make the same million dollars.
The the makeup of the revenue quarter to quarter changes significantly.
The margin we generated off of it is remarkably consistent and so while we expect the returns from the sales of parts and full aircraft to remain consistent with what we're seeing now subject to obviously variations quarter to quarter, but we don't expect that to trend down, but we do expect our leasing revenue.
To augment that.
Total return coming out of digital what we expect to improve through 2023.
That's very helpful. And then maybe is there a way to quantify the opportunity in legacy and potential.
Once hospitals are booked into backlog.
I mean could you, possibly see double digit revenue growth in that side of the business next year off somewhat of a lower base.
The short answer is yes.
The interesting part about the legacy Airlines.
Is that during the pandemic.
Our passenger business got hit the hardest with our freight business grew and has stayed strong and our charter business has done very well in line with other parts of the economy tourism has come back.
Some of your sector resource sector is stronger so.
The one really strong part about our aviation right now is on other sort of stuff we call. Other rescue is actually quite good.
And what we still have left to go.
Call it 20% of our volume in Central Canada.
That's got to come back and Thats going to come back because.
What we're doing is essential service the demand for that Hasnt gone anywhere they just got to be able to get in to see the doctor and the doctors haven't had enough, whether it's diagnostics or direct appointments to absorb that yet so we're.
Quite optimistic that you'll see continued growth of that just when you look at it in percentage terms I understand that some of it is already performing fairly well.
Airlines.
The transition into the larger Q4 hundred can also against them additional capacity.
This opportunity is there.
Yeah.
Alright, that's very helpful. And then maybe one more question on M&A.
Does the current economic environment change your target set at all I mean are there any type of companies that you've been looking at and maybe.
Now with that.
The economy and the macro environment is changing maybe you're you're saying no. We're saying, yes to that you weren't before.
I would say generally speaking no we.
We value stability, we're paying a dividend and we want free cash flow and so we're looking for stable companies.
That continues to perform well.
Difficult times, and you can see that in our results through whether it was the pandemic or the economic meltdown or any number of things that have occurred last 18 years.
I would say that at least in the near term.
We're pretty enamored with the mining business.
In Canada and potentially in the United States, We think it's an environmental best practice and we love businesses were.
Strong profitability capability, but at the same time enhance our ESG profile, So I think our.
We do have a focus on looking for other things that our management team at northern math can do.
We are exceptionally strong and deepen that company and so we're looking for other things for them to do and hopefully we will find something.
But if not we'll grow organically.
Rather than by acquisition.
We arent going to change the returns, we expect and Thats I think something that markets can trust us on after how we've done that for 18 years.
Alright, great that's it for me.
Thank you.
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one at this time.
Yeah.
Your next question will come from Matthew Weekes of I E capital markets. Please go ahead.
Good morning, Matt.
Good morning, Thanks for taking my question. This one is just a kind of about you know.
How are you thinking about opportunities organically versus inorganically. It seems like there are a lot kind of on both and then you know across the business and I know you like to be sort of.
Opportunistic and really.
On the strength of the management teams.
Well, but with the breadth of opportunities that you're seeing how do you think about.
Sort of capital rationing, I suppose kind of between different.
Divisions, and maybe between M&A versus organic growth and you know looking at kind of what's offering the highest returns there do you kind of save some capital.
You know given that the M&A environment looking good or just how you're thinking about that generally.
Hum.
Our answer to this is remarkably simple.
Sure.
The strength of EIC for 18 years is that head office.
<unk> on the entrepreneurial spirit of the management teams, we have in our subsidiaries.
And that's driven remarkable growth.
And we've never said that Hey, Com you can have a plane because we like your plan better than key weight to this plan for a plane. So you get it at that.
It's absolute levels of analysis. So if both of them have good ideas. They could both have the money. We don't start at the best deal and then go down to a certain level and then cut it off we start with absolute standards that they have to meet.
And quite frankly.
Officers are responsible for a lot of rich and I's job is to make sure I've got enough money to buy everything Darin wants to buy.
And that's and so we've got people would say why do you need more north of half of the $1 billion of liquidity that would based on your history that would take multiple multiple years to invest and I say that because we always wanted to be able to move when the opportunities are there and if you look at our history there.
Some years, where we do a lot more than other years, but we're always doing something and so we try not to create competition for capital, but rather a high bar that if something meets the threshold. It's my job to make sure we've got the money to fund it.
The way I look at it as we deploy capital we don't allocate it. So can you meet the investment criteria our jobs to have the money to do it tomorrow. If there are no opportunities in any given period that meet our criteria. We don't do anything we're not compelled to do anything.
Okay. Thank you that's it for me I'll turn it back thanks.
Thank you.
There are no other questions at this time I will turn the conference back to Mr. Pyle for any closing remarks.
Thank you everybody for joining us on the call. It's an exciting day for US our record results and we're going to go back to work and see what we can deliver for Q4 and I look forward to speaking to all of you in February when we have results release, our year end results have a great day everyone.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank everybody for their participation and ask that you. Please disconnect your lines.
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