Q2 2023 Exchange Income Corporation Earnings Call
Good morning, everyone. Welcome to exchange income Corporation's conference call to discuss the financial results for the three months and six months periods ended June 32023.
The corporation's results, including the M D N a and financial statements were issued on August 10, 2023, and are currently available via the company's website or SEDAR.
Turning the call over to management listeners are cautioned that today's presentation and the responses to questions may contain forward looking statements within the meaning of the safe Harbor provisions of Canadian Provincial Securities laws.
<unk> looking statements involve risks and uncertainties and undue reliance should not be placed on such statements.
Certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from those expressed or implied in such statements for additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied.
And making forward looking statements. Please consult the MD&A for this quarter the risk factors section of the annual information form and I see other filings with Canadian Securities regulators.
As required by Canadian Securities Law E. I C does not undertake to update any forward looking statements such statements speak only as of the date made.
Listeners are also reminded that today's call is being recorded and broadcast live via the internet for the benefit of individual shareholders analysts and other interested parties.
I would now like to turn the call over to the CEO of Exchange income Corporation, Mike Pyle. Please go ahead Mr. Pyle.
Thank you operator, good morning, everyone and thank you for joining us on today's call with me today is Carmel, Peter our President and Richard <unk>, Our CFO yesterday, we released our second quarter financial results for 2023, and I'm pleased to have this opportunity to share with you some of our highlights from the quarter and I am.
Proud to report that despite the broader economy being challenged with continued and persistent inflation tightening monetary policy with corresponding increases in interest rates and the uncertain economic outlook EIC has produced record quarterly revenue set new second quarter benchmarks.
Our portfolio of companies remains resilient strong operating performance coupled with the execution of multiple initiatives to facilitate further growth in 2024 and beyond will define our second quarter.
In terms of our financial results because of deliberate choices and investments we've made in our past we have generated second quarter records in revenue adjusted EBITDA free cash flow net earnings and adjusted net earnings.
Revenue increased 19% to $627 million up from $529 million last year adjusted.
EBITDA grew to 147 million from $115 million last year, an increase of 28%.
Free cash flow after maintenance capital investment increased by 24% to 59 million on a per share basis, it improved 12% to $1 34.
Net earnings were 37 million, which represents a 23% increased despite an increase in interest expense of $13 million.
Net earnings per share.
85, <unk>, which is an increase of 12% and finally adjusted net earnings of $43 million was up 13% to $1 per share.
Our trailing 12 month free cash flow less maintenance Capex payout ratio was consistent at 57% in spite of two dividend increases over the last 12 months.
The second quarter of the year highlighted the power of our diversified model considering our strong aggregate results were achieved with some subsidiaries delivering solid performance to offset the others, who experienced a more challenging period.
Essential Air service and aerospace both delivered exceptional results.
While all revenue streams improved over the prior period strengthening passenger demand realize the most notable improvement.
Capital investments.
Previous periods in our fleet are fixed rate and rotary aircraft and ramped up flying owing to more normal passenger volumes drove higher revenues diligent cost management in concert with the increased flying improve margins.
Our aerospace business also benefited from more flying compared to the previous period with both maritime surveillance aircraft built for the contracted the Netherlands and full operation.
Force multiplier also commenced significant hours for the UK government in the second quarter.
Multi storey window solutions continued to improve because of a more normal production schedule and commencement of projects where prices reflect rates negotiated after the start of inflationary pressure and supply chain issues labor costs and interest costs the acquisition of BV.
Glazing mid quarter also contributes to the improvement over the previous quarter, we expect to see continued improvement in future quarters order books remained strong at approximately $1 billion with active inquiries continuing to be realized inquiries for new projects are at an all time high.
Although the time to convert these inquiries to confirmed orders is longer than normal because of the higher interest rate for developers.
But the demand is there Chris.
Precision manufacturing and engineering also delivered strong performance, including Hansard industries, which was acquired in the quarter.
Well both of our environment, while both of our environmental access solutions and aircraft sales and leasing experienced industry headwinds.
Within our environmental access solutions revenue increased over the prior year period, owing to a full quarter of results being recognized and although the results continue to exceed those for which the acquisition was priced.
Unfavorable dry and hot spring weather conditions, and historic wildfires this year delayed projects and not reduce demand for map to the current period added to this with increased industry wide supply bass compared to the previous period, resulting in a lower mat fleet utilization.
Which reduced results for the second quarter of the year, but I should reiterate the company continues to perform well those well in excess of our expectation that acquisition.
True to our expectations aircraft sales of leasing realized fewer larger transactions in the second quarter compared to the prior year, which were well above historical norms.
And characterized as high dollar low margin events, but the leasing portfolio, which are its better margins continued to strengthen as utilization continues to recover.
Generating stellar results of the second quarter was not accomplished at the expense of focus on setting the foundation for future growth. The second quarter saw this focus on the future taken to levels not seen in the past.
Many of our investors believe our growth only comes from acquisitions our actions in the second quarter emphasized so we not only invested new acquisition, but also invest significant capital in our existing businesses through organic growth opportunities.
In our essential Air services, we announced that we had won two important long term fixed rate medica medevac contracted the provinces of British Columbia and Manitoba.
None of that.
Business has proven during our 20 year history to be resilient in all economic environments, including the pandemic and we have invested in the business regular I mean whenever the opportunity is presented.
Because of these ongoing investments we have grown to become Canada's largest and out of that provider. These new contracts strengthened our critical mass even further both contracts.
For a 10 year term and include other options to extend the.
The competitive process through which we won the contract demonstrate our strength and experience as a matter of fact sector. The significant contracts will require aggregate capital deployment of approximately $275 million.
Over the next two years with full scale flying not expected to begin until 2025 over the next six quarters, we will acquire the aircraft installed the advanced medical carriers and ready our ground facilities. Our returns on this capital investment will be most evident in 2025 and beyond.
After all of the new aircraft are acquired and retrofitted at existing aircraft or redeployed.
We also announced we finalized an agreement with Air Canada to provide regional service at Eastern Canada for up to five years.
The agreement will require up to six additional dash eight 400 aircraft and substantially.
Expand our maritime airline operation, we completed our first flight on July the FERC using existing capacity and expect to acquire the first four aircraft to fulfill the contract and have them online in the middle of the fourth quarter.
Our returns on this contract we get much more rapidly than that of that contracts and results will be.
Readily apparent in 2024.
As previously mentioned, our aerospace business ramped up flying under our Netherlands contract as well as the recently announced contract with the United Kingdom Home office to monitor small boat migrant crossing this flying contributed notably to our second quarter success.
Both of the contracts were made possible by capital deployment to previous periods, which.
Which we are now reaping the benefit of.
In September the U K home office intends to release, a competitive tender for a three year follow on contract requiring two aircraft and more flying hours to deal with the small bolt crisis as the incumbent we are well positioned to continue to demonstrate mission success are the existing short term contract. This short term contra.
<unk> with the United Kingdom Government is exactly what's the force multiplier was developed for and why we invested in it several years ago.
These tracks fundamentally highlight our international credentials and expertise in maritime surveillance.
In our manufacturing segment, we announced the acquisitions of handset industries on April <unk>, and BV glazing, which was announced in March closed on May 1st as we discussed in our first quarter remarks, both acquisitions were highly strategic to our existing businesses with BV glazing provided complementary.
Thanks to our quest business enhancing industries, providing surge capacity driving lower mainland business.
With operations management expectations during the quarter and were immediately accretive our teams are considering.
<unk> of ways to create efficiencies like greater purchasing power.
Rationalization of production space within the existing businesses to facilitate growth and improve margins key to our well.
Defended foundation as our balance sheet.
We manage it through discipline to ensure we can execute on new or are granted growth opportunities. When they are presented in the second quarter. Despite the turmoil in the credit markets, we increased and extended our credit facility at the same pricing and terms and conditions as previously.
We went to market with a $100 million common share bought deal that we subsequently upsized owing to exceptional demand with $173 million ultimately being raised the increase of the size of the offering and the institutional interest exhibited demonstrates the market's confidence in our business and our.
Model.
Our pipeline for acquisitions is robust.
This diligent management of our balance sheet provides us with significant capital to deploy when the right investments are presented.
The rise in interest rates has reduced the number of competitive bids for acquisitions, particularly for larger transactions as buyers you entertain more leverage at EIC are constrained by financing availability. We are actively considering deals at both segments of our business and are excited about the opportunity.
That is in front of us discipline will remain one of our key principles. However, in our decision making to ensure we acquire companies with strong management teams strategic business niches and future growth activities.
Our management teams will be busy over the next number of quarters maximizing the efficiencies between the manufacturing businesses, we already acquired readying, our essential air services for the acquisition of <unk> and passenger aircraft to fulfill our contract wins and delivering on our history of excellence.
It's.
Just state operations, we continue to uphold our success and this is a testament to the tenacity and talents of our people the discipline and consistency with which we execute on our strategy and our history of managing the short term, while focusing on the long term.
Following this approach with our continued investment in our existing businesses and new acquisition gives us the ability to affirm our guidance of EBITDA of $540 million to $570 million for fiscal 2023, our future is bright as we look forward to reporting.
On our achievements in future cuts in future quarters, I will now hand off the call to Richard who will detail the first quarter results.
Yeah.
Thank you, Mike and good morning, everyone.
During the first quarter, our subsidiaries delivered results that when consolidated.
That resulted in several second quarter results in 2023, the power of our diversity was evident in these results and strong performance in some of our subsidiaries offset in more challenging environments for others.
Adjusted EBITDA was $147 million, an increase of 28% over the prior period, both the aerospace and aviation segment in the manufacturing segment drove this increase as adjusted EBITDA increased by 26% in each segment.
The increase in our aerospace and aviation segment can be summarized into two buckets. The first in a steady recovery from the impact of the pandemic on our airline operations. The second is investments we have made into our operations over several quarters and in some cases years as.
As we had our sights set on the future those investments are now providing the returns we expected increasing adjusted EBITDA over the prior period.
And it's allowed us to win contracts in the Netherlands, and the United Kingdom, which have already begun to contribute in the second quarter and we will accelerate in Q3. We also entered into a contract with air Canada, which will begin to contribute.
In Q3, and two medevac contracts, which will not be fully operational until 2025, we continue to make these types of investments to support our future growth.
Increase in our manufacturing segment was driven primarily by three factors first the acquisitions completed since the start of the second quarter in 2022, notably Northern Matt hasn't MBV glazing, all drove increase results over the prior period, Northern Matt was owned for only a portion of the prior period enhancing MBV closing were purchased in 2023.
Improved demand in the telecommunications and defense industries resulted in increased adjusted EBITDA for precision manufacturing and engineering finally improved throughput and contract prices that now reflect the inflationary and supply chain challenge World that has driven up costs in the last 24 months resulted in increased adjusted EBITDA over the prior period from.
Multi story Windows solutions.
Net earnings and adjusted net earnings increased by 23% and 13%, respectively and increased by 12% and 2% respectively on a per share basis. Our per share results were impacted by an 11% increase in shares outstanding driven by our common share offerings in the third quarter of 2022 and in the second quarter of 2023.
And shares issued at par.
<unk> issued as part of the purchase consideration on our 2022 and 2023 acquisitions the increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings was partially offset primarily by two items increased interest costs and increased depreciation on capital assets.
Interest costs increased over the prior period in lock step with increased benchmark borrowing rates over the prior period. In addition increased long term debt outstanding due to investments made increased interest costs. The impact from increased benchmark borrowing rates would have been larger had we not entered into two rates off transactions in 2020 three.
Early in the second quarter, we fixed $140 million of credit facility debt at a rate below floating rates for a period of three years. There was significant inversion in the yield curve at the time and that need fixing rates attractive this transaction.
<unk> provides us with certainty on our cost of capital and with our previous interest rate swap transactions in our Conroe Adventures also having fixed rates approximately two thirds of our debt now has a fixed rate because.
On the right trucks swap transactions executed in train train three rate changes will not have as large of an impact as they otherwise would have it increase if rates rise further in the future.
Depreciation on capital assets increased for two reasons first acquisition activity of the corporation most significantly a full quarter of northern Matt contributed to the increase in 2020 three.
Investments made to increase the size of our fleet and increased flying of that fleet also contributed to the increase.
Free cash flow less maintenance capital expenditures increased 24% over the prior period due to increased free cash flow and lower maintenance capital expenditures in the prior period, the timing of maintenance capital expenditures were impacted by the emergence of neon and Crown variant, which saw some maintenance maintenance work performed later in the year, while the scope of our operations increased in two.
<unk> 23 compared to 2022.
Our normal cadence of our maintenance capital program in the first quarter of 2023 resulted in $2 million lower maintenance capital expenditures in the second quarter of 2023, when compared to the second quarter of 2022.
Our payout ratios both on a free cash flow less maintenance capital expenditure basis at 57%.
Adjusted net earnings basis, and 75% remained near all time lows on a trailing 12 months basis we.
We expect that the realization of returns on investments already made including our two most recent acquisitions and returns to be realized on contracts that we have already won and announced will continue to drive these ratios lower overtime and permit continued dividend increases consistent with our historical dividend growth.
Growth capital expenditures of $86 million.
Were made during the quarter. These investments were focused within our centralized services aerospace aircraft sales and leasing and environmental access solutions.
And essentially our services investments were made in additional aircraft and for our terminal expansion a lot of pain.
Significant deposits have also been made on aircraft for our recently awarded medevac contract for Carson Air.
Aerospace made investments for its renewed and expanded contract in curacao.
Aircraft sales and leasing made investments into additional aircraft in <unk>.
Engine for lease as at least market continues its recovery from the pandemic and now a worldwide charters have experienced pilots.
Environmental Axis solutions made investments in its rental math portfolio, which offset a large disposal in the first quarter and made investments in equipment to support growth in the business.
During the first quarter and as we messaged in the fourth quarter of 2022, we had a material outflow from working capital, which was primarily driven by a receivable that was collected in the fourth quarter of 2022, but where the corresponding payable was not due until January 23 2023.
Working capital investment outside of.
This outflow was the focus on investment in inventory and aircraft for resale.
Aircraft sales and leasing and a modest increase in working capital to support increased revenues.
Our senior leverage ratio at the end of the quarter remains consistent with it.
With our historical targets at 239 times.
Our total leverage ratio when including Archon rail debentures continues to decline as debentures have not increased at the same rate as our adjusted EBITDA over the last 18 months historically, our convertible debentures have represented one times of adjusted EBITDA within our capital structure, whereas now the debentures represent approximately three quarters of a turn of adjusted EBITDA.
Off of the 2023 guidance using the midpoint.
During the second quarter, we extended our credit facility to May 19, 2027, and increased its size from $1 75 billion to approximately $2 billion.
Terms of the credit facility are consistent with our previous facility and we added one new American ladder lender to the syndicate, despite an elevated rate environment, putting pressure on the banks funding costs were able to complete the extension and upsize with no change in pricing.
During the second quarter Corporation completed an equity offering of common shares when the deal was announced that $100 million plus a 15% over allotment demand greatly exceeded the size of our offering. So it was increased to $150 million plus a 15% over allotment option the andera writers exercise the full.
<unk> overallotment, resulting in gross proceeds of approximately $173 million. This was the largest offering in the corporation's history and also included the largest institutional investor interest in our history.
Consistent with our past practice of always ensuring we have capital available before it is required for investment we took advantage of our optional annual renewal with our syndicate.
If lenders to increase the size of our facility and are receptive equity market to issue common shares increasing our liquidity. Both of these transactions will provide the liquidity required as we meet our commitments under the contract, we recently announced plus provide us with the liquidity for some additional exciting growth opportunities both through acquisition and <unk>.
On aircraft that are not of this age, which they can be announced.
That concludes my review of our financial results I will now turn the call over to Carlyle.
Thank you rich Q2 had an incredible number of successes from acquisitions to seizing upon the organic growth opportunities to significant contract wins. These successes have positioned us well for the future and will assist in offsetting some short term headwinds.
Well we are.
Q3 of 2023 to be higher than in Q3 2022, driven by growth in the A&D segment are essential Air service business will experience year over year growth in Q3, driven by several factors.
The first is increased passenger load as Q3 2022 was hampered by the omicron variant, albeit to a lesser extent in Q2 of 2022.
The second is increased aircraft capacity, we have added for passenger and cargo movements, which will be operational in Q3, the third although to a lesser extent is our service agreement with Air Canada pursuant to which we have slowly started providing flight capacity with our existing fleet.
No material financial impact from that agreement will not occur until mid Q4, when we will be fully operational with our first four aircraft.
Final reason is the additional medevac aircraft, we were contracted to provide in Nova Scotia, We started to fly in August 1st.
Offsetting some of these gains are the increased expenses from rising labor costs, driven by the federal flight and duty regulations the industry wide shortage of pilots aircraft mechanics and medical personnel.
Although some of our air operators have already been able to pass these on others have to wait until contract renewals.
The medevac contract we won in D. C. At the end of May we will not start contributing to our financial results until the aircraft are delivered and configured into medevac specification, which we anticipate commencing in 2024, and we will take until 2025 to complete and the full financial impact of this contract will not be evident in our results until they exist.
In aircraft or deploy into other opportunities. Similarly, the medevac contract an amount of cobalt announced in July will not start contributing until March of 2024, when the first aircraft goes online the contract will reach its steady state run in October of 2024, when we anticipate all aircrafts being off.
You know.
The aerospace business line is also expected to have growth in Q3, primarily driven by the full engagement of force multiplier.
Maritime surveillance work for the U K home office Aerospace is also bolstered by the Netherlands operations, which we did not commence until late Q4 of 2022 and higher higher tanker tempo flying in the UAE in curacao.
Our aircraft sales and leasing business continues to be challenged by the impact of industry wide pilot shortage and MRO availability, however quarter over quarter trending is positive with increases in parts sales and leasing revenue.
These positive trends will not be sufficient to cause Q3 to exceed prior year comparative as Q3 2022 included the highest quarterly aircraft and engine sales on record, which will not be repeated this quarter. Some of the GAAP will be made up with higher leasing we expect the leasing portfolio to continue its recovery into the first part of 'twenty.
24.
Now turning to our manufacturing segment, the environmental access solutions business was not expected to outperform Q3, 2022 which was a record setting quarter for northern Matt was a perfect alignment price demand and supply Q3, 2023 does not have this perfect alignment and it's being further impacted by.
Canada's more wild fire season on record a drier summer, creating less demand for match increased mass supply, which in turn is also impacting pricing and the demobilization of a large pipeline project.
We expect Q3 of this year to be approximately 60% of prior year quarter.
But to put this in perspective, the expected result in Q3 will be greater than the metrics on which we purchased northern Matt.
The multi storey window solutions will see material growth in Q3 over prior year. The acquisition of BV and May is a significant contributor to the growth, but also playing a factor is the increasing volumes and higher pricing now being captured at quest.
Though we are starting to see each company leverage the others products, we do not expect any material synergies between BB and quest can be captured and impact financial results until 2020 for quoting in both Canada and the U S is extremely active but conversion time to backlog, particularly in the U S is taking longer as developers address.
Economic uncertainty and higher interest rates.
Backlog for multi storey window solutions remains strong and is being maintained at approximately $1 billion.
At precision manufacturing and engineering business will also see comparative growth fueled by the acquisition of Hanson in April of 2023. The business line will also be bolstered by increased volumes in the telecommunication infrastructure operations and stainless steel tanks field projects.
With respect to the maintenance Capex expenditures for Q3, we anticipate levels being higher than last Q3.
The higher flight hours to support increased passenger volumes together with inflation labor shortages and supply chain issues growing fleet size and acquisitions are the factors contributing to the increase.
Growth investments for the aerospace and aviation segment in Q3, our focus on the upgrade of the surveillance aircraft for the renewed curacao contract. The construction of the Gary Philbin Indigenous terminal Q4 hundred aircraft acquisitions different fill our agreement with air Canada deposits for the medevac aircraft for the newly awarded.
C N medevac, Manitoba, medevac contracts and payments towards the construction of our King Air simulator.
The investments for our two medevac contracts are significant and although they will not contribute to our financial results for several quarters. They are tied to long term 10 year plus options government contracts, which will provide the foundation for our future growth.
Additionally, as we have done in the past, we will look to see both organic opportunities and accretive acquisitions that meet our criteria. The increase in interest rates has been a positive development for acquisition opportunities and the quality of the acquisitions, we are pursuing as such our pipeline of potential acquisitions is robust in both sides.
And quality.
Our adjusted EBITDA guidance for 2023 was updated after our Q1 results and following the acquisition of B V enhancing to be between $540 million and $570 million, we confirm this guidance.
Been both positive developments and some headwinds in supervision of that guidance, but taking all these factors into account. We believe the current guidance continues to be reasonable and appropriate we will provide guidance for 2024, and our Q3 conference call, which coincides with the completion of our 2024 it budget process. Thank.
Thank you for your time this morning, and we would now like to open the call for questions operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
You will hear a three told prop acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the two.
If you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Matthew Lee with Canaccord. Please go ahead.
Hi, Good morning, guys may seem high class morning Mig.
Yes, maybe we can start on the airline profitability really nice results here could you maybe chat about the impact of mix between segments on our margins and maybe how sustainable you feel that high 20% EBITDA margin ranges.
It's a good question Matt.
What we've seen is the recovery of our passenger business.
To sort of.
In quotation marks normal levels that that product mix is consistent with our seasonal performance.
And I don't see a reason why margins would that would decline off of that a go of course on a seasonally adjusted basis. So Q3 is another strong period for aviation margins, which declined slightly in Q4 and Q1.
According to our normal cadence.
Yeah. The other thing on the passenger side as we were able to take advantage of the fact that the aircraft that we're flying we're adding passengers to the seats that were already available. So it really helps them drive their results. The bottom line. When we're able to do that have full capacity aircrafts and then of course and certainly a recovery on our leasing them for.
No one.
Obviously thats high EBITDA.
Business line of revenue so that has helped with margins as well.
That's greater than maybe in terms of the new contract that you signed with AC started in July can you maybe talk about some of the early progress and.
Maybe the potential for a longer term relationship between the two companies.
Okay.
Go ahead Carl.
Alright, I'll I'll start Mike joined in.
So you know that the relationship has been very very positive and we started to fly all he is very limited because we can only use our existing capacity is weak.
Our our required aircraft and get them online, but they've been very supportive of.
Whatever capacity, we can provide we've been working very well together and aligned.
Some of which are necessary for their respective bookings and we think that will be flying for them for quite some time and you know the relationship has been very good to date and we expect it to remain in and perhaps that enhance as the years go by.
Albeit on a limited sample size our on time performance.
Good as any air Canada has.
Through the additional part of the.
An action of this contract. So we're very happy to be doing a good job early in the process.
Alright, Thanks, guys I'll pass the line.
Your next question comes from James Mccarthy.
With RBC capital markets. Please go ahead, Sir good morning, James Hey, Good morning, Mike and congrats on another good quarter here.
I wanted to ask first on that.
Skyline deal for.
Due to the military training within the government of Canada, what I heard that that training center was in Manitoba.
The thought of you guys are you guys.
Involving that contracted all in.
Any potential opportunity for you there yes.
Yes.
We're really excited to be a part of the Skyline group I'll, maybe hand, it to Carmela talked about that Ashish.
Your hands on that than I am.
Sure Dan.
Yeah, we're very excited about the announcement, where skyline was named the preferred bidder.
We are part of the skyline team propel aerospace and we're a tier one supplier.
Where we are now in the process is the Skyline group is negotiating the final terms of the contract with the federal government and we expect that to probably go into the early part of 'twenty 'twenty four following which.
We will negotiate ours final contract with skyline.
We expect the scope of the work that we will be doing to be a.
Subject to finalizing obviously their respective terms in the scope that we do for fixed wing search and rescue and are part of that will be focused on.
Providing the center aircraft training, which is currently done actually by the federal government that was part of the bid. This go around and so that's where our focused efforts will be in that aspect of the business, which will be run out of Manitoba, we expect to add several in employees through when it.
Base here and of course Polaris Phase has a base here through fixed wing search and rescue and they run some of the maintenance that they do here and their facility in Winnipeg.
That's awesome.
A question on <unk>.
Quest here, so the backlog was flat quarter over quarter, but.
You talked to that it seems like the demand is there. So can you just talk a little bit about that dynamic and then as a follow up on quest.
Some very positive trends in pricing and on the production gap.
It seems like a really good set of longer term.
But I know the Toronto facilities full.
Dallas facilities ramping up so can you just talk about the medium term strategy there.
How long before the business is operating kind of at a revenue or margin profile, that's kind of in line with your expectations and just.
Some of the strategy that your team can execute on.
Get to those revenue and margin targets longer term.
Sure, let's talk about demand first.
Our book was consistent quarter over quarter, so are our bookings matched our belt.
But the number of things in our hopper in terms of Ah.
Projects, we're quoting on and working with developers on is that a high as we've never seen before.
The time to convert those to the order book is longer we think driven by challenges for the developers with interest rates keep moving.
We're waiting for a surge when things.
Stabilizing the interest rate environment and the developers can proceed with these projects, but there is such a buildup of demand if you try and rent an apartment in Toronto for example.
The what comes available it's rented out within within hours if not days.
And so.
We're really bullish on the medium term.
Demand for the projects.
In terms of our ability to produce Darwin is working with our two Ceos of quest at BV.
And we're looking at how we streamline the number of facilities, we operate to maximize what our skilled employees can look after.
Key part of that is going to be increasing production at our state of the art Dallas facility.
While we reconfigure our Toronto production.
Not something that'll happen overnight James Thats, probably into next year before we can announce the processes that we're following and how quickly that will occur, but it will enable us to produce more product at a better price. So.
The window business remains one of the things we're most bullish about it is improving every day with that.
Better contracts that we're working on now that were priced during the inflationary environment and the outlook for the medium term for demand is very strong.
I appreciate that.
So are there I think I put out as you know, yes, or buckhead or backlog is maintained but it's actually increased quarter over quarter, because as we're producing more obviously we need more.
New contracts that can fill the hole. So we're actually quite pleased with Directionally, where that's headed.
And there's also when we look forward I think leveraging bvs inquest respective capabilities that the other does not have so whether that's rail and curtain wall that BV has quest does enter U S installation capability that quest has MBV doesn't.
I think that that's going to definitely provide some increased opportunities and quite frankly, increasing margins because otherwise quite so they've had to go out and you know third party that work now we can internally provided.
Yes, I appreciate the call and a quick one for me on a capex before I turn it over.
I don't know you talked about some could you you gave some color on the timing of some of the big spend associated with your new contracts, but can you give a specific guide and I know this is hard because the growth capex is kind of unknown will be dependent on opportunity, but a numerical guide for 'twenty three 'twenty four and 'twenty five just so you know in RF.
You can kind of model for that free cash flow inflection that I think is going to happen in 2025, but just some color on there so we cannot.
Point to point investors to that yes.
Got it.
As part of our when we give 2024 guidance, we will give you a little more detail on that what we can say is.
I think it's a fairly.
Reasonable assumption that if you were to take the money we've talked about for the amount of that contracts and divided over the next six or so quarters, you'd probably be pretty close.
It may not be exactly that it depends on what the manufacturers can deliver as aircraft, but I think that's reasonably close.
In terms of the other major projects.
The other thing so we've committed or the.
Aircraft for the Air Canada contract, which will be.
Acquired during this year, so there'll be in Q3, and Q4 of this year and the completion of the Gary Philbin terminal at the airport will happen between now and the end of next year.
So those would be carve out what I'm missing anything I think thats the major projects to give a rough cadence for when we will invest the money.
No and that's correct.
A couple of things so.
The Air Canada, one it's.
It's a quick spend and a quick I guess turnaround with respect to its earning capabilities. So you'll see that probably most of the spend in Q3, but then we start operating call. It mid Q4.
And the skyline that we just opportunity that we spoke about earlier that does not require capital and I, probably should've mentioned that so that is.
Service contract as I said very much like fixed wing search and rescue but another way to make you had picked up all of the major components of our growth Capex and tiny.
Yeah.
Okay.
Your next.
It comes from Steve Hansen with Raymond James. Please go ahead good morning, Steve.
Yeah. Good morning, guys. Thanks for the time.
Mike maybe I'm reading into it a little bit too much but in your M&A pipeline remarks, you suggested that you guys are now looking at opportunities on both sides of the business.
I think you know over the past several quarters at least you've really been focused on the manufacturing side I think that's borne out in the transactions completed has there been new developments on the aviation side that have gotten you more excited than perhaps where does those lie within the portfolio or the bolt ons larger deals just some context on that would be helpful.
We're looking at.
Things on both sides of the business and quite frankly, one of the things. We're most excited about Steve is just.
A variety of size of transaction historically.
Our disciplined approach to purchasing.
Sort of priced us out of the market ASCII cross through that sort of $150 billion barrier with the higher interest rates.
We're competitive on bigger transactions. So both segments, we've got traditional sized deals in the $50 million to $100 million range and we're also looking at things.
<unk> $400 million range and beyond so it's a bit of both.
Within aviation, it's stuff that's tangential to what we do it's not really tuck in kind of things like when we bought car severe where it was another matter that carrier it would be things that are related to what we're doing but would represent expansions to the markets. We're in.
Okay. That's very helpful. Thanks for color and then just as a related.
No, but on the organic side that the new contracts for the force multiplier overseas is encouraging it sounds like that birds flying pretty hard.
That's something we can think about in terms of growing capabilities around the force multiplier program.
Does that contract that you are currently in place continue to extend I'm, just trying understand the broader strategy overseas for them that surrounds perspective.
Okay.
Force multiplier.
<unk> concept.
Put together a number of years ago with the idea that they were going to be opportunities could.
To jump into a need for a government somewhere in the world, where they need it a fully constructed and fully staffed aircrafts that can move quickly.
The opportunity with the home office.
Great Britain was exactly that they needed the plane they needed it to fly as quickly as possible.
We were able to ramp up into that is the great Britain opportunity, specifically, we expect an RFP.
For a longer term contract that will fall along after our our 18 month contract is complete.
We think that this puts us in a great spot.
For that contract will have been able to prove our capabilities.
And have built a relationship with the government there.
Don't take anything for granted obviously, because we have to earn that business more importantly, we have to deliver a great product in the interim.
I will say that the.
The success of this with on that contract has.
<unk>.
Caused us to revisit the.
The force multiplier concept to see whether we need that other aircraft in the future to that on time availability capability, where we can move quickly and we've reached our conclusions on that but given that they use the profitable use of force multiplier may lead us to a long term contract.
We're very much Incent me to have more availability is a temporary access fleet.
That's very helpful. Thanks, guys I'll get back in queue.
Yes.
Your next question comes from Cameron Duerksen with National Bank Financial. Please go ahead.
Morning, Ken.
Morning.
So maybe just a couple of questions on the on the northern that business. I mean, I think you were pretty clear beginning of the year that you weren't expecting a repeat of the stellar 2022, but or are you are you surprised that maybe it's a little softer than expected I'm. Just wondering what are your thoughts around that.
And I guess Additionally, you mentioned that you'd be shutting in production of new match does that have like a margin impact as we look ahead for the next couple of quarters.
In terms of the first question, which is the surprise the softness.
The impact of the environment has has surprised us in that we didn't anticipate the fires and the exceptionally dry season.
That's part of the vagaries of the business right, sometimes it's flat sometimes it's dry.
But the demand for the projects that have been delayed hasn't gone anywhere they just hasn't done so.
I don't view that as a material change to the.
Two our outlook given the longer term.
In terms of margins whenever theres more mats available it can change pricing, particularly on the rental part of the business. Thus far that has not occurred.
We're keeping our eyes on it but even with that.
They're really tough year environmentally.
Works are significantly exceeding the metrics, we bought the company off of if.
What we expect to do this year in that business that happened last year, we'd have been ecstatic. It's just we were spoiled by his incredible sort of one off year last year, and we've tried to be very transparent on that with the market.
In terms of production.
We have the ability because we're the only vertically integrated player to turn it on and off we have wood inventory and wood has normalized into costs. So that will help reduce the cost of future mats.
But we're not going to invest the labor and turning them into mass until we know exactly how and where we're going to deploy them. So our ability to ramp up and down quickly is a big competitive advantage in times of big projects coming to a close at some used mats become available.
Yeah, we really Havent season management team at northern Matt and they're really good at.
Reacting to and in fact, they proactively dealing with changes in environment and supply and demand so that they're focused on margins and maintaining them and they do an exceptional job in that regard.
Okay, no that makes sense.
Just second question I guess.
Wondering if this is a potential future opportunity for you you've got I guess for the fixed wing search and rescue contract if you're in a joint venture with Airbus.
<unk> has been selected to supply tankers for the RCA, Yes, just wondering if there is.
Anything that's a possible new contract for you there.
In conjunction with your partnership with Airbus.
We.
Go ahead Thomas.
That's a good question I mean, we obviously have a close relationship with Airbus.
And we are having some discussions I don't know what will end up but you know Airbus is aware of our capability and we have a history of working well together. So we'll see how those discussions go but.
So something will come out of that.
Okay very good alright, I'll pass along thanks very much.
Your next question comes from <unk>.
<unk>. Thank you. Please go ahead.
Good morning, Kurt.
Hi, Good morning. Thank you for taking my question. This is Ed.
Got it.
My first question.
With expected returns on investment that says the method.
Canada.
Relative to what you want them.
Acquisition.
Nothing.
And having a little trouble hearing you could you speak a touch louder. Please.
Yeah, Yeah for sure.
Thank you for the question My first question is.
The expected returns on organic investment.
That sounds maybe they might be back on track.
What do you have any.
Acquisition.
The organic stuff, we expect to hit R. R.
Well publicized 15% return criteria, we have to get.
Projects fully stand up and all the aircraft deployed.
But we would expect to earn a return in line with what we're getting on the.
Acquisitions are deals that size.
They are very competitive and we asked to stay.
Very competitive on our pricing, but we would anticipate hitting our expected thresholds.
Those contracts over time tend to expand as well as governments want to add aircraft to add.
Other services to the contracted in those cases that typically is good for the margins of the overall contract.
Okay. Thank you that's helpful and my second question is with respect to the Air Canada are there any adjustments required going forward.
Kind of the long term partners.
Hi.
We.
We tried to be clear when we had that.
We tried to be pretty clear when we announced the deal with Air Canada. It is it does it represent.
A change in our strategy.
Paul is a dominant player in the Maritimes of what we do connecting small communities.
Partnering.
Partnering with Air Canada made a lot of sense in that area, because air Canada needed capacity and we were its our area of expertise.
<unk>.
So whether we'll be able to do more of it in that area I'm not sure.
We aren't.
Trying to be chorus, they're good at what they do we're working in a given area and we're going to do a good job on this for air Canada, but it works for US is that it's an area. We have great expertise in the Maritimes and we'll do a good job on it.
Okay. Thank you.
Last question.
In terms of your M&A pipeline.
How does that valuation.
Okay.
And manufacturing basis.
And do you have a big enough pipeline in existing verticals, such that I think a new basis and is not likely in the near term.
That's a good question.
I think that the returns.
Aviation and manufacturing are fairly are fairly consistent if you look at it in terms of free cash flow.
The EBIT multiples are much higher on the manufacturing side, because the reinvestment is much lower in a manufacturing environment than it is in aviation environment, where you're constantly overhauling aircraft.
What we have seen is that we're competitive on bigger transactions now the proof will be in the pudding, if we close something that's it.
Northern mass size or larger.
Northern Mt was the biggest deal we ever did a year ago and perhaps.
If that it occurred a couple of years ago, we would have had other private equity.
Competition.
So right now I think what we're seeing is it so much.
The improvement.
Returns were getting.
It increases the size of the quality of companies that were competitive on.
Carve out what do you have anything to add to that.
No I mean, the only other thing I'd add because I think there was a question on vertical.
Additional leg.
You mean as larger transactions become perhaps more attainable for us within <unk>.
Primary within which we look at acquisitions.
Obviously, something that we keep our eyes open for it might make it more possible on a larger level too.
And that third leg, because we would look at a third leg as an acquisition that would be on the larger side. So that did have enough.
Substantiation to be its own leg.
Alright. Thanks.
Thanks for the time I appreciate it.
Thank you.
Your next question comes from Chris Friesan with CIBC. Please go ahead.
Good morning, Thanks for taking my question good morning.
If I could just ask a little bit more on the northern mat side of the business.
Is it have you seen any any.
Significant changes in the industry or is this all just relatively normal course and it varies on on weather patterns.
I think what.
It depends on changes to what Christa I mean last year, we talked a lot about that it was a perfect storm in the right way and that we add capacity our competitors didn't and there was significant demand.
We tried to be pretty transparent that our competitors would add capacity in the half and.
There's nothing surprising in that its normal pricing within the mob business remains.
It remains good.
But as the supply and demand variations are completely normal.
We're still the business is still performing.
Above what we expected when we bought it so yes, yes, it's different than last year, but.
We expected it to be different from last year.
Great and maybe can you just remind us what your thoughts are for that business in terms of your ability to grow it whether through tuck ins or grow it geographically.
We still really like the business.
We are a big player in Canada and.
The only vertically integrated player, who both as operational capabilities leasing and installing maths and constructing the mats.
But the market is slightly different in the states in terms of product in terms of how they make the math, what they're made out of and how they are delivered.
And we liked the opportunity like we have in many of our other businesses to cross the border into the U S and we're actively looking.
For the right entrance point into that marketplace.
We've looked at a lot of different companies and our team at northern not is very particular and what attributes they're looking in our first U S. Based that will obviously try and grow off of I think it's pretty likely that if we go into the United States, we're going to go with a massive slow.
Different get structured whether it be different timber or whether it be our composite mat.
Lots of alternatives, depending on which geography, we choose in the U S. But we remain very interested in growing that piece.
Piece of our business through acquisition.
Great. Thank you congrats on the quarter and I will jump back in the queue.
Thanks Christa.
Your next question comes from Chris Murray with <unk> capital. Please go ahead.
Chris Thanks folks good morning.
Hey, if I could just maybe more of a theoretical question, but thinking about M&A.
And I guess, we're dealing with a little bit with northern that now.
The volatility.
Historically, you guys have always thought of M&A around certain verticals, but then using the diversification.
Existing parts of the portfolio.
Maybe volatility in another part.
But this seems to be I mean look the oilfield services or mining has always been a pretty volatile business and we knew that going into it as you said, it's still you still water on numbers that were based on a pay off a lower baseline but are.
Are you thinking about in the M&A strategy.
<unk>.
Volatile components to add or is it.
Like how do we think about the.
The sustainability of cash flows because I mean, it looks like I think the comments is that were we down.
Pretty substantial numbers year over year on this thing.
So just thinking about.
How you manage volatility in the portfolio going forward maybe helpful. Yes.
Yeah, I mean, we do.
Most of our businesses all businesses has some cyclicality to them as the battery business.
Does as well probably a little more than.
Than typical but.
The apparent volatility in it right now is simply because we bought it immediately before probably the best year in 20 years in the business.
And we tried to be very transparent with the market about that that hey, This is a great acquisition, it's not going to be like this all the time.
But I guess, the only place where I kind of disagree just to touch on the premise is that as that business has moved.
Move towards more work in the electrical transmission and distribution that tends to be much more consistent than the oil and gas component.
So.
We don't expect it to be wildly cyclical like an oilfield services business per se in terms of the theoretical question about general sick.
Cyclicality, we like we pay a monthly dividend so we need.
Our results to be predictable and grow consistently and.
So I think what were the other things we're looking at would tend to be.
More traditional for our portfolio.
For lack of a better term.
Okay. That's helpful. And then just just for me, it's a quick one around a regional one in the leasing.
And the parts business I guess, we can still feels like it's maybe going to be a bit more challenging.
Is there anything that you think that is going to change that I mean, we're starting to see a pretty pretty crazy numbers.
And the regional business. So you understand that folks are trying to keep aircraft going where where it is.
But is there anything that you were focusing in on the horizon that says that the leasing business.
<unk> is structurally going to change or something is going to shift.
In that business.
No not really.
We continue to invest during COVID-19 and our fleet and we have some bigger aircraft from particularly from the <unk> point of view.
But it's really just the ramp up of getting the balance of our fleet flying the way we expect it to both on an engine and a full aircraft basis.
We expect to see sequential improvement like we did this last quarter over the next three or four quarters.
But by the end of the year, we should see a sense of normalcy in the leasing Carmel would you.
Want to add anything to that.
Yeah, and the other thing I'd add is you know we kind of look at the pilot shortage to the North American lens.
If you look at Africa for instance.
Not really a significant issue there so we're seeing lots of opportunity in Africa. So.
And in time, the regional business it will come back I mean that size of aircraft.
It needs to be flying and we'll be flying.
And we have no doubt that.
We positioned our portfolio to be there and in the interim we focused on engine because there is a C.
A big demand could you can't get into MRO shops, if you do the world.
It's way too long and so we know where the solutions provider in that regard.
We're really happy with actually the trending we're seeing in the leasing and.
And see that just continuing in the right direction. So we expect it to get back early 'twenty.
The first part of 2024, so no fundamental change that from our perspective, it's really.
A timing issue.
Nothing else.
Okay. That's helpful. Thanks Brooks.
Chris.
Ladies and gentlemen, as a reminder, should you have a question. Please press star one.
Your next question comes from Jonathan Lamers with Laurentian Bank. Please go ahead.
Good morning, Jonathan.
Yeah, Good morning, Mike.
Relative to my estimates.
<unk> was in the traditional.
Legacy Airlines and provincial business.
It looks like the passenger volumes have kind of normalized.
A few quarters ago.
At what point do we kind of lap.
You know the point, where where things had kind of normalized post COVID-19 in that business.
It's a really good question, it's a little bit geographic so if we're looking at our maritime Pal business were now.
Well ahead of where we were in 2019.
In in Manitoba, none of it we're probably.
Average slightly above historical layers, whereas in northwestern Ontario, we would still be.
A little bit behind where we were going into the pandemic, but understand we've added capacity over that period and added contracts, particularly in the sort of <unk>.
Contractual charter business, where we're moving people to and from mines and those kinds of things. So we've actually grown the business over that period as well and so we envision that that strength continues and it really makes a big difference in our business, where we're going into a community way.
Whether it would be 234 times a day, depending on on the community.
Particularly in Nunavut, where we contractually agree how often we're going to go.
Adding those last five or 10% of passengers make a big difference to the financial returns.
Thanks.
Just on the seasonality there pre.
Pre COVID-19, our Q3 for the legacy Airlines and provincial group in terms of revenue looked a lot like Q2.
Since Covid we've seen.
Q3 become the strongest quarter of the year.
Yeah.
Now as we think about stepping off from Q2, when do you think.
The Q3 will be much stronger and much as it was last year.
Seeing the trends year over year end.
End of July .
I think the the seasonality of the business is pretty consistent.
Pre COVID-19, which is Q3 is slightly better than Q2.
Last year was exacerbated by we still have the impact of <unk> in Q2 and by Q3. It was mitigating substantive Lee so the delta between the quarters it won't be as big as we experienced in a couple of the COVID-19 years, but from an aviation point of view the busiest part of the year for us as always.
Q3.
And we don't envision that changing.
And maybe just following up on the aircraft leasing question.
Do you have any other comments on that.
Growth in demand that youre seeing there.
Anything on the contracts Youre seeing building.
And setting up for the second half and maybe for 2024.
Yeah I mean.
We have reasonable line of sight over the next couple of quarters, where we know what contracts you have already entered into.
The demand for the engine portfolio is strong and we're slowly ramping the full aircraft part of it so.
For me until way for us to lap 2019, we're going to be into early next year before we see that but we will see consistent improvements over the next two or three quarters to get there Carmel anything you want to add to that.
No well.
One other thing I mean, I think Europe is also I mentioned that I forgot, but I think Europe is another place where we're seeing the opportunities as they started getting back their regional.
Operations airline operations, both on a whole aircraft as well as engines and we've got some contracts signed up for that jurisdiction that we hope to start placing aircraft into Q, probably the latter part of Q3 and into Q4 and sometimes that the delay in getting these aircraft online is actually getting to.
Work done that needs to get done to get them online and as we've talked in the past MRO shops are really difficult to get in and then when you're there to get the work done as quickly as you'd like to have it. So that's you know push things to the right a bit as far as getting your aircraft aircraft online, but we know that as soon as they're ready to go they have a home. So we're pleased.
About that.
That's great. Thanks for your comments.
Okay.
Your next question comes from Tim James with TD Cowen. Please go ahead.
Good morning, Tim Good morning, and thanks for your time today.
My first question.
And it really I'm thinking out across the entire portfolio of businesses are there any unusual cost or margin headwinds that you anticipate relative to what you've seen in the first half of the year.
It seems like there's a long list of sort.
Coming margin.
Expansion opportunities.
But I'm just wondering if theres anything in there, whether it's mix related or ramping up some new business, where you'll actually have some cost headwinds and I'm thinking beyond just sort of the inflation that obviously is embedded in that in the business and that you have to deal with anything inside of that.
I think the only two things I would point out Theyre, both aviation related as we ramp and get close to <unk>.
Starting up the contracts.
The amount of that contract in particular, we'll be hiring pilots in advance of when we're flying because of the difficulties and flying them. So there'll be a cost drag in the quarter or two before we start flying because of.
Tired the staff and then we've completed a number of union contracts with ALPA, which have.
Reasonably significant cost increases in them and while we have the ability to pass those on in markets, where or contracts that don't specifically deal with labor costs as part of the adjustment.
Occasionally a lag until we can run it through.
CPA adjustment drawer in an annual renewal or those kinds of things. So there can be some some.
Cost bumps as it relates to the new Union contracts.
But we're getting close to the end of those we've got one or two more to go but we're largely through most of it.
Okay. That's that's exactly the kind of items I was looking for that's helpful.
My second question, Mike I don't know if you want to comment on this but I'm curious to get your thoughts.
On the.
The overall company valuation and the share price.
If you reflect back the performance of the business through the pandemic was it was quite something and really show the value.
This year.
For a business that's it's tough to have material sort of new new contracts and pieces of business you have secured many.
I think the business has performed very well yet the valuation and the multiple is hasn't in fact, arguably it's down from sort of previous levels. What are your thoughts on the share price and the valuation in your cost of equity and the implications for you over the long term.
It seems to improve in fits and starts Tim.
Yeah.
We've historically been a retail stock and so it moves.
The trading was thinner than we'd like it to have been and.
It would move emotionally we've moved now.
I think particularly because of our performance in the pandemic and post pandemic, we've increased our institutional ownership.
And we continued to perform well.
One of the things we suffer from is a tie to other aviation companies through peer aviation funds, which when they.
Have adjustments in those funds and it impacts us disproportionately.
The bottom line as the market will get it right.
We're trading at a multiple that is below our historical average at this point in time, especially.
Especially when you look forward with those contracts and stuff we've talked about that we expect to be over $600 million next year.
With those other contracts.
Our acquisition pipeline.
700 is probably not far behind that.
I'm really bullish about where it goes a 5% dividend CAGR for 20 years is largely unmatched and if you look at our aggregate annual shareholder return through the end of last year, we've averaged 20% a year four two.
Basically for 20 years, and so from my point of view, well I'd like the stock price to bet to move faster, 20% a year for 20 years is pretty darn good so.
I look at that chart every time I get a little frustrated when I don't understand why we haven't moved more quickly.
Yeah, that's a good perspective to put on it okay. Thanks very much Mike.
Thanks.
There are no further questions at this time. Please proceed.
Well I'd like to thank everyone for joining us today I'd like to thank all of our stakeholders for their ongoing support and we look forward to speaking to you again in November I have a great day and enjoy what's left of the summer.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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