Exchange Income Corporation (OTCPK:EIFZF) Q1 2022 Earnings Conference Call May 11, 2022 8:30 AM ET

Mike Pyle - Chief Executive Officer

Darryl Bergman - Chief Financial Officer

David White - Head of Aviation

Steve Hansen - Raymond James

Cameron Doerksen - National Bank Financial

Tim James - TD Securities

Nauman Satti - Laurentian Bank

Matthew Weekes - IA Capital Markets

Good morning, everyone, and welcome to Exchange Income Corporation’s Conference Call to discuss the financial results for the three-month period ended March 31, 2022. The Corporation’s results, including the MD&A and financial statements were issued on May 10, 2022, and are currently available via the Company’s website or SEDAR.

Before turning the call over to management, listeners are cautioned that today’s presentation and the responses to questions may contain forward-looking statements within the meaning of the Safe Harbor provisions of Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors, assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors sections of the Annual Information Form and Exchange’s other filings with the Canadian securities regulators. Except as required by Canadian security law, Exchange 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. We have a lot to talk about this morning. So I’ll try and be as brief as possible and give plenty of time for your questions.

With me today are Darryl Bergman, our outgoing CFO, Richard Wowryk, our incoming CFO, Carmele Peter, our President, and Dave White our Head of Aviation. For those of you who did not had a chance to see the press release we issued yesterday, let me quickly summarize what we announced. In addition to strong first quarter results with record revenue and first quarter adjusted EBITDA, we announced that we closed two acquisitions.

First, we completed the acquisition of Advanced Paramedics Limited, a smaller tuck-in acquisition to our medevac business, which is located in northern Alberta for a purchase price of $15 million, including $2 million of EIC stock. Second, we completed EIC’s largest acquisition to-date with the purchase of Northern Mat & Bridge yesterday for $325 million including $35 million in EIC stock.

Northern Mat is Canada’s leader in providing sustainable, environmentally sensitive temporary access solutions to customers across Canada. Third, we announced an enlarged and enhanced credit facility of $1.75 billion, an increase of approximately $450 million from our previous facility. Fourth, we provided forward-looking guidance for the first time since the onset of the pandemic.

We expect adjusted EBITDA of between $410 million and $430 million for fiscal 2022 and for fiscal 2023 adjusted EBITDA of between $500 million and $530 million.

Finally, based on the strength of the results, the acquisitions and our balance sheet, we’re able to announce the increase in our dividend to $0.20 a month or $2.40 per annum. This is our 15th dividend increase in our history and the first since the onset of COVID.

Darryl will detail our financial results in a moment, but I’d like to get on some of the highlights. The first quarter is always the weakest seasonally for EIC as winter roads compete with our northern aviation business and cold weather rivets outside work for WesTower and SFI in certain markets.

With this backdrop in mind, our revenue – our record revenue of $400 million is particularly impressive as it marks the highest quarterly level we have ever achieved as improvements of 33% over last year. Adjusted EBITDA increased 4$% to $67 million, an all time best for the seasonally slower first quarter. The decline in government assistance year-over-year masked the magnitude of the improvements in adjusted EBITDA. If all government assistance is limiting from the current and the preceding year, the improvement increases to 28%.

Free cash flow less maintenance capital expenditures is essentially unchanged at $19 million. Adjusted net earnings was $0.20 a share and net earnings were $0.10 a share, down from $0.30 and $0.20 respectively.

Finally, the trailing 12 month free cash flow less maintenance expenditures payout ratio improved slightly to 59% from 62%. Operations in the first quarter were very much a microcosm of the pandemic as a whole, rapid changes, deceleration and acceleration of business activity. We entered the quarter at the grips of the Omicron variant, which had a very significant impact on our passenger and aircraft leasing business. The improvements in our volume that we had experienced in the fall of last year rapidly reversed themselves and we experienced reductions not seen since the start of the pandemic.

Omicron was particularly challenging for our passenger operations as unlike previous waves, which did not reach most northern communities in a significant way hit southern very hard with infection in some communities reaching 50% of community members. The ramp up of business in 2021 foreshadowed a significant shortage of experienced pilots and AMEs as the business returned to normal.

With this in mind, we chose not to reduce personnel through this wave as we were concerned about our ability to find qualified people when the pandemic waned. While it discerned margins in the short-term, it allowed us to ramp up quickly later in the quarter when Omicron declined as quickly as it started. By the end of the quarter, our volumes were approaching three quarters of normal and has now reached approximately 90% of normal in most markets except for northwestern Ontario where citizens are still very concerned about the risk of travel.

Fuel prices have skyrocketed in the last six months and while we have the market positioned to be able to pass these on either through fuel price surcharges or through fuel escalation causes in our contracts, there is a lag between when we experienced cost increases and when we realized the price increase. This particularly true with most contracts where fuel adjustments are based on the average price of fuel in the previous quarter.

As such, it can take a couple of quarters for prices to fully reflect the new fuel pricing. While this temporarily hurts margins in times of rapid increases, it works the opposite way in times of price declines where we benefit from the higher price for a short period of time. In short, while fuel costs are borne by our customers, there is a lag in our realizing price increase.

Even with these challenges, our aerospace and aviation business was able to improve its results over 2021. Adjusted EBITDA rose by 19% in the first quarter from the first quarter a year ago and with government subsidies are removed from both periods adjusted EBITDA increased by 46%. Our manufacturing as we all experienced the impact of supply shortages and inflationary pressures.

With the exception of our window business, our manufacturers has been able to manage these challenges and still preserve deliverable results that exceeded the previous year. West however was hit in multiple ways. Its contracts are signed 12 to 24 months in advance of production and historically have not included price escalator clause.

As such, the rapid inflation has a particularly strong impact on our margins. This was exacerbated by projects which have been delayed or in some cases canceled because of COVID. The order cycle is such that gaps in production created by projects which are materially delayed are virtually impossible to fill. This has created significant inefficiencies in both of our plants and is expected to continue for most of this year.

On the bright side however, Quest has continued to see strong demand for its product and has begun to convert opportunities into orders. Our order book grew significantly during the first quarter and our efforts to expand into new geographies began to bear fruit with our first orders in Nashville and Philadelphia. We are very excited about Quest future.

Our acquisition team has proven to be very adept at adapting our acquisition process to deal with the changes in the M&A landscape during the pandemic. During the lockdown when travel was difficult, we focused on smaller tuck-in deals which were well known to our existing subsidiaries. As the world has reopened so as the deal universe.

This is very evident with announcement of the Northern Mat acquisition, the largest in our 20 year history. Northern Mat provides temporary access solutions through the use of timber matting and bridges to remote projects across Canada. When the projects are complete, the accesses are bloom these are very little if any environmental footprints.

These solutions are becoming best practice eliminating rules and cohorts which are not easily removed and create environmental hangovers. The long-term demand for this product is expected to grow as Canada catches up to other parts of the world where they are already recognizing the appropriate means to provide short-term access.

Management is always a big part of our due diligence and Northern Mat has a team that has aligned with the very best we have ever seen. The team is deep, with decades of industry experience and in average tenure with the company of approximately 12 years led by Darren Francis, they have grown the business to an industry leader in Canada with operations of coast-to-coast.

They are very well equipped to lead the company on the next stage of its growth under EIC ownership. The entire senior teams are currently shareowners of Northern Mat and will be taking significant EIC ownership as part of the transaction. The transaction has been priced off of Northern Mat’s historical performance and is very accretive to EIC.

Given that EIC has been dealing with the pandemic over the last two years, it is somewhat misleading to describe the accretive nature of the idea by comparing it to fiscal 2020 or fiscal 2021, which were not normal runrate for our business. Accordingly, we have made our comparison to the 2019 share results as it was in “the last year of normal operations”.

We also completed the calculation utilizing a standard EIC balance sheet in terms of leverage. On a deal of this size, the accretive nature is highly dependent on the assumed method of financing and we have leverage levels that we have maintained for 20 year of operation. So we have used that calculation on this balance sheet.

In short, our calculation is considered to be conservative and is based on Northern’s historic performance and not its current higher trajectory and we have utilized EIC’s standard level of leverage, not the actual funding of this transaction and we have compared it to EIC’s strongest historical period.

With this in mind, this methodology resulted double-digit percentage accretion on a per share basis for both adjusted net earnings and free cash flow less maintenance capital expenditures. Northern Mat’s business is similar to our aviation business’ margin profile and capital intensity. The mats that are rented to the customers of a finite life and as such require a regular replacement.

Given our focus on our ability to sustaining regular dividend, we spend a significant amount of our diligence looking at the free cash flow the company has generated in the past and what we expect it to generate in the future after this reinvestment is funded and we are confident that it will meet or exceed our 15% return requirement.

Northern Mat builds the vast majority of its mat inventory whether they are held for resale, or added to the rental inventory at its two manufacturing facilities located in Prince George and Creston BC. These places were chosen because of their proximity to the lumber supply.

The vertical integration of having their own manufacturing capability results in a lower cost of product and the ability to quickly adapt production with demand warnings. Customer diversification is a key part of the Northern Mat’s story. A decade ago, the company’s operations were almost entirely western based with – focused on oil and gas development.

Over the ensuing – they have expanded coast-to-coast and greatly expanded the reach of the product into multiple industries. Initially simply cost-effective means of providing temporary access in wet areas. Over this period it become seen as the environmental best practice to allow access and preventing cross-contamination of the ecosystems and quick, cost-effective removal of the access roads completion of the project.

This has been very evident as the electrical transmission and distribution customers have grown dramatically over recent years and some utilities have made matting their only approved temporary access solution.

I want to take a moment to emphasize of the acquisition of Northern Mat marks a unique moment for EIC’s ESG strategy. We have always been focused on environmental matters but have been frustrated by the lack of options to meaningfully reduce our carbon footprint in our aviation business. While there are small steps we can take to make incremental improvement, such as the development of more efficient propeller systems and examining sustainable fuel opportunities, the simple fact is that there is currently no alternative to the propulsion systems used to power our aircraft.

We are very excited about electric or hydrogen alternatives that these are years if not a decade from being promotionally viable. We provide an essential service into remote communities, and as such we need to continue with the current pathology until a more environmentally sensitive one is available. There is however, much more to the environmental part of ESG that carbon footprint and we have decided to focus on improving environmental sustainability by in addition to our two existing segments investing in companies whose business model is based on helping others reduced their environmental footprint.

To be very, very clear, this in no way signals any change from our existing investment criteria of having a proven market niche with established management and a sustainable accretive free cash flow. Northern Mat is a perfect example as a company that is very attractive target from a financial point of view, while also providing strong environmental credentials.

We also announced the acquisition of Advanced Paramedics Limited located in Peace River, Alberta for $15 million. APL provides medical personnel to ground, air ambulance services to the federal, provincial, First Nation’s governments, together with other industrial customers. APL is a leader in Northern Alberta and as part of our plan to expand the geographic coverage, our medvac services we announced with the acquisition of Carson Air last summer.

I will leave the outlook to Carmele later in the call, but I do want to briefly touch on the rationale providing guidance and increasing our dividend at this point in time. As we’ve gone through the pandemic, we have seen our businesses deal with shutdowns and reopening, travel bans and comprehensive testing requirements.

And of course, these external factors have affected our financial performance. We are, however, very proud of the response of our management teams which has not – has enabled us not only to maintain our dividend, but most importantly to invest in the future. It is precisely those investments which are driving our outlook for the future.

We have seen our aviation business take big strides in returning to normal volumes. New charter, long-term charter in ISR contracts have or going into effect this summer. And our Regional One business has seen very strong sales and modest improvements to its lease strategies. Quest has seen its order book expand and increase the markets and services, while the balance of our manufacturing segment continues to perform well.

In short, our existing businesses were not quite there yet are approaching to $400 million post-pandemic adjusted EBITDA runrate that we have spoken of on previous calls. While this is combined with – when this is combined, I am sorry, with the new acquisitions and the strength of their operation, we are now comfortable providing 2022 and 2023 guidance.

With the full year of post-COVID operations, and a full year of contributions, from our recent acquisitions we expect adjusted EBITDA growth of over 50% from our pre-pandemic levels to a range of $500 million to $530 million in 2023. This will drive both lower payout ratios and increased dividends. We committed to not increasing our dividend while we were receiving government support to service into northern locations.

We believe that this support is no longer required and given the strong growth we expect in the future, we can share the success with our shareholders through the first increase in our dividends of over two years.

Thanks very much and I’ll now hand the call off to Darryl, who will take you through the financial results.

Thank you, Mike, and good morning, everyone. As Mike’s comment highlighted, it’s been quite a busy exciting and successful start to 2022. With the quarter that is historically one of the corporation’s slower quarters due to seasonal impacts within the aviation and aerospace segment, it’s exciting to acknowledge that we had all-time highs in revenue and the first quarter high in adjusted EBITDA, along with favorable improvements on our trailing 12 month payout ratios.

That said, with all the strong activity related to growth, it’s important to note that management remains diligently focused on maintaining a strong balance sheet and good access to liquidity to set a firm foundation to support growth and payments of dividends.

I’ll begin by commenting on our balance sheet and liquidity before moving on to specific results for the quarter. Q1 2022 ended with the corporation’s credit facility at approximately $1.3 billion with ability to access another $300 million in an accordion feature should we choose to exercise it giving the corporation combined access of up $1.6 billion.

However, amidst into the quarter, as announced on May 10, with strong and continued support from our entire lending syndicates, the corporation favorably enhanced the credit facility by increasing it to approximately $1.75 billion, while maintaining the $300 million accordion. This improved access to capital into the credit facility to just over $2 billion.

The increase in size of the facility provides the corporation to support its needs to continue to execute on our business model of opportunistic accretive acquisitions and investments. Pricing and financial covenants that govern the credit facility remain unchanged. Along with the increase, the credit facility term was extended to May 2026 from August 2025. Notably, the corporation has no debt maturities that come due before June of 2025.

EIC’s long-term debt in the quarter net of cash increased by $134 million since December 31, 2021. It is important to note that the increase is largely attributable to the convertible debenture transactions that crossed over periods. The December 31, 2021 long-term debt net of cash was temporarily lower as funds raised from the convertible debenture offering in December 2021 were used to repay the credit facility until being deployed in the first quarter of 2022 to redeem these debentures.

Adjusting for the convertible debenture transactions, the increase in long-term debt was lower than trailing 12 year historical average increase in the Q1 period of $40 million. Our current leverage ratio for the quarter end is 2.41 times which is well below our current credit facility covenant requirement of 4 times and within the Corporation’s senior debt to equity range of 1.5 to 2.5 times.

Further out our balance sheet, we ended the period with net working capital of $348 million, which represents a current ratio of 1.89. This compares to working capital of $225 million and the current ratio of 1.47 at the end of 2021.

As I turn to revenue and adjusted EBITDA, I will focus on highlighting key quarter-over-quarter changes. A detailed analysis of both can be found in the quarter’s MD&A released on May 10.

In Q1 2022, EIC’s revenue had an all time high of $400 million, which is an increase of $99 million or 33% from Q1 last year. The aerospace segment revenue increased by $98 million while the manufacturing segment revenues increased by $1 million. Aerospace and aviation segment revenue was up 54% to $282 million without prior year comparative the acquisitions on Carson Air and CTI acquired on July 5th, 2021 and December 16th, 2021 respectively positively contributed to the revenue in the current period.

In addition, the increase was further supported by improved demand for passenger services as a result of reduced travel restrictions, increased charter activity and continued strong demand for the corporation’s cargo operation.

Revenues at Regional One were stronger and up considerably 110% over the prior period. The increase was driven by a significant increase in sales and service revenue which increased by 134% and higher lease revenue which increased by 20% compared to the prior period. The return of air travel in certain jurisdictions, most notably in the United States has been positive and continues to pick up driving the increased sales and service revenues. The manufacturing segment revenue increased by $1 million or 1% over the prior period to $119 million.

Now on to adjusted EBITDA, consolidated adjusted EBITDA came in the quarter at an all-time first quarter high of $67 million, up 4% or $3 million compared to the prior period. The increase was entirely attributable to the aerospace and aviation segment, partially offset by a decrease in the manufacturing segment.

The consolidated increase was achieved despite overall government funding in the first quarter of 2022 decreasing by $20 million compared to the prior period. Decreasing by $10 million, sorry my mistake. When the government subsidies are excluded from both periods, adjusted EBITDA increased by 28%. Adjusted EBITDA in the aerospace and aviation segment in Q1 2022 was $63 million, an increase of $10 million compared to the prior period.

The corporation benefited from the addition of both Carson Air and CTI in the current quarter results. Regional One’s strong increase in aircraft and engine sales and parts sales over the prior period also positively benefited the current period.

Offsetting results in the quarter were higher operating cost due to several factors including fuel pricing which for EIC’s contracted services where price escalation causes exist lagging time to implement. In addition, the impact of the Omicron wave which persisted coming into Q1 2022 and declined near the end of the quarter also impacted cost within the quarter.

Lastly, $6 million less in government support was received by the aerospace and aviation segment in the first quarter of 2022 compared to the prior period, which negatively impacted adjusted EBITDA. In the manufacturing segment, adjusted EBITDA was $11 million, a decrease of $7 million compared to the prior period.

Excluding the impact of decreased sues received, the manufacturing segment adjusted EBITDA decreased by only $4 million. Specifically, at our Quest operations, what can be categorized is that pandemic hangover is working its way through the production scheduling. Normal course is for Quest projects to be booked more than a year in advance.

In prior period markets reacted to uncertainties from the pandemic by pricing projects on hold or shifting them out which created gap in production scheduling, but in the shorter term could not be filled. These gaps are working their way out and demand is good as evidenced by an increase in their order book of 12% since the end of 2021 and the receipts of contracts in two new U.S. markets as Mike mentioned.

The balance of this segment collectively experienced an increase in adjusted EBITDA. Demand in the manufacturing segment continues to be strong and the corporation is actively looking at managing supply chains, labor challenges and added capacities to the segment to meet the demands of our customers as illustrated with our tuck-in acquisitions of Macfab, Telcon and Ryko in the prior year.

On this quarter’s call, I would like to speak to adjusted EBITDA margins which were reflected in the quarter’s result as lower in Q1 2022 versus Q1 2021 on a consolidated basis by approximately 4%. Driving the change were a few notable differences. One being the inclusion of CTI in the quarter and it generates lower margin than experienced at our other aerospace and aviation segment subsidiaries as the capital requirements for the business are minimal.

Second would be the reduction in government subsidies in the current period. Adjusting for these subsidies in both periods, consolidated adjusted EBITDA would have been essentially flat.

Net earnings for the quarter were $4 million and adjusted net earnings were $8 million representing decreases of $3 million each over the prior period. These decreases are the results of increases in two items. First being the depreciation of capital assets and the second being interest cost. Depreciation increased with investment in several new assets within the corporation’s airlines and increase in the number of assets available for lease at Regional One and depreciation on capital assets that were acquired as part of the acquisitions completed in the back half of 2021.

Second would be interest cost which increased by $2 million as a result of non-cash accelerated interest accretion from the redemption of the December 2022 convertible debentures. Net earnings per share was $0.10 in the quarter, down from $0.20 in Q1 2021. Adjusted net earnings per share was $0.20 in the quarter down from $0.30 in Q1, 2021.

It should be noted that in the period, weighted average number of shares increased by 9% which will partially offset results on a per share basis in net earnings, adjusted net earnings and free cash flow.

In Q1 2022, free cash flow increased by 14% over the comparative period to $47 million or $1.22 per share. These results are driven by the increase in adjusted EBITDA and a decrease in current taxes. Free cash flow less maintenance capital expenditures and adjusted net earnings payout ratios on a 12 month trailing basis are strong indicators that the corporation utilizes to assess its ability to actively manage cash flows and its ability to pay an increased dividend.

The trailing 12 months free cash flow less maintenance capital expenditures payout ratio improved to 59% at March 31, 2022 from 62% in the comparative period. The 12 month adjusted net earnings payout ratio improved to 105% at March 31, 2022 from 145% in the comparative period.

That concludes my review of our financial results. I’ll now turn the call over to Carmele.

Thank you, Darryl. For our second quarter my comments have been focused on discussing the outlook for each of our lines of business. Landmark continue to that approach as we are resuming providing guidance for EIC. First a comment on why we are resuming guidance. The last two years have been showed with incredible uncertainty, certain of the complete unknown of what COVID-19 would bring to the development of vaccine, the vaccine shortages, to new variants, the community shutdowns to overburden medical systems and supply chain issues.

This created a volatility of demand in particular for our Aviation businesses and Regional One, which made it impossible to provide guidance with any confidence. But times are changing. Although we do continue to expect supply chain issues, commodity price increases, rising fuel cost and labor challenges through the balance of 2022 and into 2023, our businesses are managing through these issues and returning to a new norm.

For instance, our passenger businesses are returning to historical levels and we expect by the end of Q2 our airlines will be fully recovered other than in Northwest Ontario, which has experienced a lagged recovery throughout the pandemic. Given the recovery at our airlines, we do not expect any further government subsidies.

Regional One has experienced material year-over-year growth, although lease revenues will likely not resume to pre-pandemic levels until later in the year. New aviation and aerospace contracts won in recent periods like The Netherlands contract have begun or about to begin over the balance of the year. Demand at Quest has accelerated and we have seen a 12% increase in our order book since the end of 2021 and have won contract in two completely new markets.

The acquisitions we made last year have performed as expected and the recent purchases of Advanced Paramedics and Northern Mat have grown our portfolio and will make solid contributions in future periods. Advanced Paramedics is the largest air ambulance provider in Alberta and further extend EIC’s leading medevac presence across Canada.

As you have heard this morning, Northern Mat is our largest acquisition to-date and will result in double-digit accretion to our adjusted net earnings calculated on historical results. And only does this provide us with confidence for our adjusted EBITDA estimate for 2022, but its future performance is planned for further growth and provides a solid foundation for adjusted EBITDA estimate for 2022.

As there is a global momentum towards corporate environmental stewardship, Northern Mat’s access solutions are poised to take advantage of increasing demand for its products. The use of access math is already best practice in the west and is evolving in that same direction in the east. Environmental regulatory requirements and permitting conditions are increasing.

Northern Mat is the largest and the best-in-class provider of matting solutions in Canada and as such it’s well positioned to meet growing customer demand. Demand for its product is also supported by long linear contracts such as electrical transmission lines or pipeline. So as you can see, our future is bright and much more predictable.

Against this backdrop that we now prepared to provide the following guidance: we expect adjusted EBITDA to be between $410 million and $430 million for 2022 and between $500 million and $530 million for 2023. This guidance includes the benefit of the growth CapEx commitments we have disclosed previously being the final portion of the investments for The Netherlands surveillance aircraft and investments in connection with the upgrade of a surveillance aircraft for the renewed – contract awarded in December of 2021 and the completion of a new hanger required to meet obligations under our fixed wings search and rescue contract.

Our additional growth investments and further acquisitions would serve to increase this guidance and as we have done in the past, we’ll look to cease opportunities to continue to provide our shareholders with accretive growth. Our shareholders have stood by us throughout the pandemic as we have maneuvered through its various and constant challenges.

We are very proud that throughout this period, we were able to manage our businesses so as to sustain our dividend, perhaps the only company with significant exposure to aviation to do so. Today, we are equally proud that our approach of managing for today and investing in tomorrow even during the pandemic and staying true to our business model has set us up for growth in 2022, 2023 and beyond.

This provides us with the ability and confidence to increase our monthly dividend for the 15th time in our history by 5.3% to $0.20 per month for an annualized rate of $2.40. We say, actions speak louder than words and we believe our actions say a lot about our future.

Thank you for your time this morning and we would now like to open the call for questions. Operator?

[Operator Instructions] Your first question comes from Steve Hansen from Raymond James. Please go ahead.

Yeah. Good morning, guys. Good morning. Congrats on this Northern Mat deal and it looks exciting on the surface. Mike, can you give – maybe give us a sense for the valuation paid and how you arrived at the purchase price here? Just trying to get a sense for the valuation cycles that might exist and what the opportunity was like where the asset came from, et cetera?

Yeah, it’s - we had the opportunity of working Northern Mat when the vendors considered selling it a couple of years ago. No transaction was completed at that time when the opportunity to look at it again very recently. We were excited about the progress that have been made, particularly in diversifying the company’s customer base and industries it served. And so, we took a look and because it’s a rental business, it has a very strong EBITDA margin that it generates, but it also has significant capital requirements to maintain those margins and buying back. So, we spent a lot of time looking at the free cash flow it generated over the last number of years and we used that as our basis for coming up with a value. And based on that, we are comfortable with our 15% kind of free cash flow returns that we’ve talked about on numerous occasions. The exciting part about this is it meets our requirements historically, but the company is growing and growing quite rapidly with opportunities with the long linear projects that Carmele talked about. So, we expect to do probably better than the historical numbers, but the accretion kind of discussions we had during the call were all based on those historical numbers. So, bringing that all back answered your question. We value this historical free cash flow. We are comfortable at least in the medium – short to medium term that we are going to exceed that with the growth opportunities that we have on our flights and it’s a best-in-class environmental sustainable business with a strong management team. So, actually one of my institutional shareholders called me last night and was chatting about the business and he says, Mike, people don’t like environmental that – sorry, Northern Mat, they just don’t like your business model. And I am gone, I had in thought of it that way, but that’s a really good explanation of the business, its management, its cash flow and it’s in the segment we like.

That’s good context. When you required large platforms in the past, you’ve often seen pent-up growth opportunities, whether it’s through additional M&A or material capital investment like Regional One, where Carmele has provided little bit context, so can you just maybe drill into the growth plan here a little bit more detail? Is this is going to be a M&A driven thing or capital investment plan and is it’s sector broadening like in terms of further diversification or how do you get deeper into the businesses you are already in?

It’s a good question. I think what you’ll see is, as utilities adopt – is the best environmental practice, Hydro One has done that as an example. I suspect you’ll see that in Hydro Quebec, in Manitoba Hydro and the other electrical companies. So when they are building they are replacing transmission lines that’s going to create long-term demand for us. I think you’ll see investment in the business. Darren and his team are regularly looking at the pace we are building that how fast we can do that. What we should do to take advantage of the opportunity in Canada. And then, maybe in the short to medium term, we believe there is maybe opportunities to expand our business into the states.

Northern Mat has always been built on providing the best service offering. There are other people who build mats and sell them or rent them. But Northern Mat is different in that, we help you go build the access row and we’ll bring it in and will bring the bridges and then when you are done, we’ll go pick it up for you and we’ll clean the mats and put them away. And so, it’s an integrated service model that we think will ultimately serve us well in other geographies that we are not in today. In Canada, I would suspect that it’s more of an organic growth kind of model. If we would enter to the U.S. I think there is a reasonable chance we would do that with at least an initial base of an acquisition. But for now, the Canadian markets is at least our initial focus.

Okay. Very well, guys. Thanks. I will jump back in the queue.

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

Hey, good morning, everyone. So, I wanted to follow-up on Steve’s questions on the Northern Mat acquisition. Obviously, you mentioned that this is a more diversified business today than maybe when you looked at it a few years ago. Can you maybe just discuss how you kind of view this cyclicality of this business? Obviously there is some long-term demand here from the change and I guess the way the companies looking to build out temporary access. But just what sort of the cyclicality that you would sort of think about in this business? What are the key drivers from an end-market perspective?

Yeah, it’s a really good question. And the business is quite different than it would have been ten or five years ago. The business history was driven by oil and gas development. And so, new well drilling very much drove the demand for the product. With the prolonged difficult period that the oil business has been in up until recently, the company saw the need to diversify its offerings and moved into the pipeline business and then ultimately into forestry and into the electrical transmission business. And so, the fact that there is multiple segments greatly reduces the cyclicalty of the business. There is certainly a chunkiness to the business when you get a big project like a pipeline, the Trans Mountain pipeline as an example, that’s a big customer. It’s going to provide strong demand for the next couple of years. Those things help and those projects are all the time. So there is some lumpiness to the business. But it isn’t so much cyclical and then with economy is good this good or vice versa, it’s more a when good projects are on the government side whether they’d be pipelines, transmission lines, those kinds of things help. And then, when we bought the company early, so we are doing – or thinking about the company. We hadn’t put a lot of emphasis on the resurgence in the oil market, but with the unfortunate occurrences in Eastern Europe and the time to realization that energy self-sufficiency matters, we see a bounce back in that business which isn’t all reflecting in their operations yet but as the oil and gas business bounces back these guys do a great job of limiting the environmental footprint in that drilling. And so we see that growing as well in the near-term.

And as we see environmental regulatory requirements increase, I think you are going to see previously whether it’s been optional for kind of longer term projects to use matting or instead of gravel, it’s going t become mandatory. So that’s going to help, I think with the ebbs and flows, as well.

Okay. And actually on that, I mean, I was – maybe my other question was kind on the sustainable angle – sustainability angle here. I mean, I guess, industry-wide, I mean, what percentage of these types of construction projects are using mats today versus, say, building a gravel road? I just kind of – I want to get a sense of if there is an environmental push here, I mean, how much runway is there for the business to kind of continue to grow just to, I guess, gaining market share for more traditional temporary access construction?

Well, I am not sure I have a percentage there, I’d be comfortable quoting. But I think I can give you a qualitative discussion of that. If we went back five years ago, the company was essentially a 100% driven by Western Canadian operations. The expansion into Eastern Canada is now about half the business and that’s largely driven by a couple of projects at Hydro One and a little bit of pipeline work. The opportunity to do what’s being done for Hydro One, Quebec or Manitoba are those kinds of places has been the start up. So we are kind of at the infancy of expanding this and in BC as an example with forestry the government now changes royalties, rates, to subsidize the use of temporary access roads because they are better to the environment. So, instead of building the roads that the forestry people historically have built is now a government incentive its environmental best practice. So, well, I don’t have a percentage number. The way I describe it is to use a baseball analogy and we are in the early innings of the environmental game. Northern Mat is not in the early innings of their business. They’ve been around a long time and they understand this well and one of the great advantages for us is they come with such a deep talented management team. But in terms of the ability to expand this into non-traditional matting areas, we think we are just at the beginning.

Okay. No, that’s great color. I’ll pass along. Thanks very much.

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

Good morning. Maybe would you go back to maybe the financial performance of Northern Mat. So just in thinking about how this changes the numbers? So, I guess, you alluded to the fact fairly high EBITDA margin. You made the comment about a 15% free cash return. Can we just walk through how we think about these businesses, because historically they’ve been very, very capital-intensive? And if you could just kind of maybe give us an idea, are they purchasing all the materials? Is there factory or facility or is that an opportunity down the road where you guys could maybe work into some make versus buy decisions?

Okay. We’ll start with outlook first. Historically, they view it’s a combination of third-party mats and their own. Currently we make virtually all of our own mats. I think that’s the future of the business. There is certain specialty kind of mats that make ready mats and they make up a small portion of our business, which we do get for outsource. But the vast majority will come from either Creston or Prince George. And that ability to ramp up and ramp down and quite frankly our relationships with the forestry companies in times of tight supply serve us well to be able to access the underlying raw materials to be able to build the mats.

From a financial point of view, then you bang on it’s capital-intensive, I mean you are taking a math that’s going to have a lifetime of three to six years depending on how it’s used and what it’s used for. So you are constantly reinvesting in your mat pool. And so, when we did our analysis the best, we are really anticipating the depreciation is fully utilized to maintain your mats and as you grow you will invest more in that product. And so, the corresponding EBITDA margins are quite high, equivalent or even higher than our aviation business. And when you subtract off that mean that’s CapEx, you got the purchase price with free cash flow less maintenance being above our 15% return. So, you could work back to a free cash flow number and then historically depreciation in the business is a $20 million range. So you could work back to where the business is generally historically. That will vary period-to-period however depending on whether it’s pure rental revenue or how many mats we sell in that period will also new mats for large projects where the developer wants to own their own and so, we do that as well. That would be obviously probably a lower margin than our rental business is at.

Okay. That’s helpful. Just thinking about integration with these folks, is there any sort of thoughts around integration? I don’t really see a lot of synergy with any other groups but maybe I am missing something here. So is it just a sort of a – it’s integration standalone at this point?

Largely yes, there is a couple of very interesting opportunities between Northern Mat and our WesTower business. Both have huge fleets of pickup trucks. And so, integrating our purchase and as with it goes, much like we’ve done with engine overhauls in our aviation business is something we are working to and quite frankly they both need geographic yards across Canada. And so the ability to use them for both I think will enable easier expansion for both businesses. But generally speaking, this business has different drivers than the rest of our manufacturing businesses. So, if the synergies are relatively limited to the stuff they can do with WesTower.

Yeah, they would come and make – kind of First Nation’s relation. They are very, very strong with your first nation’s relationships they have. Several joint ventures in pretty much every province. One of the provinces where they I think only have one joint venture it’s actually Manitoba. As you are aware, Chris, we obviously have lot of relations with our First Nation’s customers. So we see some synergy potentials there, as well as perhaps into Quebec because we have developed relationships there.

All right, good. Maybe just changing over to some of the parts in aviation business, I guess, a couple of things, one, some of your government contracts pretty good Fixed Wing Search and Rescue, I know you mentioned that you were working on some facilities, and stuff like that, but it does looks there is a pretty big delay in that contract. So just wondering what if any impact that might have on you folks? And then, maybe just any color around Regional One and how you are seeing that business coming back? I know it has been pretty volatile, but just any color on how that’s picking up and how you see it moving through the year would be helpful.

Sure. So, Chris, let’s talk first about Fixed Wing Search and Rescue. Yes, as you’ve seen in the press, they are looking at delays and kind force to four to five years, once we are sure it’s not going to impact us, we get, we have a fixed price contract. We get paid on a capability not kind of on a unit cost. Now, what you might see is our revenue is still down a little bit, but our margins are going to absolutely be retained perhaps slightly up. So, we also see that as a potential opportunity, given that there is a delay that perhaps in the future we may be able to provide additional capacity for the program to help them speed up their timeframes.

Regional One, we’ve seen very strong parts sales, parts sales are back to pre-pandemic levels and very, very strong kind of acquisition and sales of large aircraft and engines. So, that’s been kind of the R One typical kind of opportunistic buying and selling. So they’ve excelled at that and then in the last several quarters, I think we’ve chatted about those large sales. We still see that probably likely for a couple more quarters.

Lease income, that’s slower to recover, because what’s going on and more of the reliance when it comes to leasing on Europe and Europe has been kind of slower to restart with respect to kind of the aviation industry as a whole. So we expect that to hopefully by the end of the year, be back to where it is.

On leasing though, we focused previously whereas on kind of leasing a full aircraft. I think you are going to see us in back we started more engine leasing as airlines struggle to get engines or get into overhaul shots to get their engines overhauled leasing or buying engines is certainly an alternative that they are looking for is economic, it’s much of a shorter term fix.

Okay. And just to confirm, do you guys have a rushing exposure or you are creating exposure with your aircraft fleets at this point?

Okay. Thanks folks. I’ll turn the line.

Thank you. And your next question comes from [Indiscernible] from RBC Capital Markets. Please go ahead.

Hi, Mike. Thanks. Congrats to the team on the acquisition of Northern Mat.

Thank you. We are some we are really excited about.

On the growth pipeline looking ahead, you guys announced a very large deal, but given the guidance your leverage is going to come down very quickly well within your targeted range. But is there a period of time that you need to wait and oversee the integration on Northern Mat? Or do we see any deal of size when the opportunity presents itself and whether that’s through a large organic investments or potentially on another acquisition? And can you talk about in general what the pipeline for organic investment and M&A is looking like where you are now?

Yeah. The advantage we have on a deal like Northern Mat is it’s coming with a fully integrated management team. There is very little we need to do and quite frankly there is very little we could do to improve this business. Go and have access to capital, work with some strategic planning and with our other businesses, but quite frankly, Darren and Scott and the team there are going to be the folks to drive the business like they had in the past. So, the addition of this while it’s going to be glitch and the guys in the accounting have to add up more veins. It’s, no I am going to change our business fundamentally in terms of our capabilities. So, we are still very active looking. The pipeline is remarkably strong. There is more – I am not sure there is more deals that we are looking at, but there is more deals that we like. And then it kind of like you really remember and so, while clearly there is nothing at the finish line, because we’ve been going, hard for us to close two deals, especially one of these of this size that takes a lot of our capabilities. But there is lots of opportunity in the pipeline. So, I think it’s reasonable to expect that we’ll continue to transact when we find the right opportunities and we are seeing a lot of interesting things. In terms of organic investment, we’ve bought a fair number of aircraft over the last few quarters to grow our operating airlines, particularly on the charter side whether it’s in Labrador for power, or it’s gold mining opportunity, it’s both at [Indiscernible] in Northwest Ontario for other airlines. So we made investments into those aircraft already. I think where you may see more investment quite frankly is the Regional One. There is a number of deposits on our balance sheet for things contracts we are working on and where we got a chance to buy something at the right place and redeploy them we were going to jump all over that. Again, it’s basically based on opportunism. We’ve got the credit facilities and I got to say there is a lot of people who complain about banking in Canada. We just don’t get where our banks syndicate led up by their guys in National and CIBC and CD, have treated us unbelievably well. We went in – and then moved to our facility resulting from this deal. We added almost $0.5 billion to our assets more - in less than three weeks. And so, we are well-serviced, we are well-capitalized and we are ready with the opportunities we are going to take them.

Okay. I appreciate that color and turning to Quest, I know cost inflation has been a big headwind in recent quarters just given the longer term nature of some of those contracts. But can you talk about those two new agreements that you had announced at Quest? And was there any push back from customers on some of the higher pricing that you were passing through higher margins with the new cost inflation were you able to pass that all through the margins versus what they were pre-pandemic? And do you potentially see those price increases affecting your ability to grow Quest going forward? And after that I’ll pass over the line. Thank you.

Okay. As it relates to Quest, I think the industry went through a bit of a shock with some of the changes in prices of aluminum and concrete and all the things that go into build a high rise apartments. But it hasn’t changed demand at this point, we are still seeing strong bidding for new projects and we are not the only ones facing this inflation. So it’s part of the whole construction process. We’ve been able to get appropriate pricing on the new projects. We don’t see any sign at this stage that the inflation is stopping the development process. I mean, at some point things get too expensive, but they have to understand that the housing that’s been built that Quest is involved and it’s typically high rise housing which is the lowest cost if people are going to be in urban – in the certain urban centers. So it’s not like there is a lower cost alternative for people to benefit you. So we remain pretty bullish on the environment for that business and while you could have ups and downs in various markets, the fact that we are only participants in limited markets, we do a lot of stuff in Toronto, a little bit on the Eastern Sea board and then a little bit – a fair bit down the Western Sea board in the U.S. There is whole swaps in the company, whether it be Dallas or Houston or I use to say Nashville, but I can’t tell you more where they are now and we are into Philadelphia, there is Tampa, there is Miami, there is a lot of places we are not. And so, beyond just the scope of the growth of the business, there is geographic growth where we are going to cover. So, we see Quest as one of our stars in terms of future growth as we come out of COVID and get rid of – as Carmele put it clear or Darryl put up the COVID hangover.

Yeah, and we are seeing the highest pricing we’ve ever seen and it’s not shying away projects or developers. So that’s a very good sign now, again, because of our lead times from the time we did and the actual time we do a work, the impact to margin is like a year and a half away, but we are going to see improvement as kind of the next year goes by. With respect to the two new regions we are in Nashville and Philadelphia, those are both very large projects for customers we’ve done work for in other regions. So it’s a great kind of entrance into a area that we haven’t been before with an existing customer and then that we just leveraged because of the quality of the work that we provide.

Appreciate the color. Thank you.

Thank you. And your next question comes from Konark Gupta from Scotiabank. Please go ahead.

Good morning, Mike. Best wishes to Darryl and Richard on the recent announcement and congrats on the Northern Mat deal. Not sure if Adam is relieved or more stressed, because the acquisition has to live up to the guidance now. Anyway, so first question, what’s included or not included in the 2023 guidance, Mike, particularly when I look at Northern Mat’s growth plans here, new acquisitions you may have in the pipeline and your kind of assumptions for Quest in 2023?

So, when we look at that, if we start with Northern Mat, it’s based on kind of the core model, we bought the company off of, it doesn’t include big growth capital expenditures. There may be some in terms of bumping up the size of the mat fleet, but not a material reinvestment. So, it’s not about – does not include any M&A or other additions to Northern Mat. It’s Northern Mat as it is today. And in terms of – what was your other …

In terms of Quest, maybe, I’ll give you Carmele.

Sure. So, in terms of Quest, what we have included is, we are calling Quest to recover, we don’t expect Quest before recover until 2024. So, it’s not fully to where we think it’s capable of going in 2023. There will be some further growth in 2024.

And it doesn’t – the forecast include no further M&A. So it’s basically only the stuff we own or we’ve announced. So, it includes things like our Netherlands contract. It includes the ramp up of the – contract. It includes what we expect to be doing under the Fixed Wing Search and Rescue contract, it includes a new gold mine contracts for the aircraft charter business. But nothing in addition to what we already have.

That makes sense. Thanks. And then, as a follow-up, we leave with this strong EBITDA growth you are expecting over the next couple of years, do you see the cash flow payout ratio potentially going not just kind of the historical levels but even below or lower than the historical records you have seen, which kind of creates maybe an opportunity to accelerate dividend growth now. How do you think about the dividend next year?

I’d say it’s a really good question. I mean, when you fall through when we achieved the 500 plus EBITDA kind of target it’s definitely going to make a material increase in the cash flow available to pay dividends. You’ve been with us for a long Konark, you’ll remember before COVID we talked about a goal of getting to 50% on free cash flow less maintenance CapEx basis and 60% on adjusted net earnings basis. I am not going to tell you exactly when we expect to meet that yet, but that target will be met and – but the beauty of the growth and the stuff we have in the pipeline now is that we can continue to grow our dividend. We are really proud of the 5% CAGR we had in it. We had to take a pause during COVID for good reasons. We are back out of that now. And so, we not only see a reduction in our payout ratio, but continued growth in our dividend over that period. That’s our core business model, that’s who we are. And with the transactions we’ve completed to-date, we anticipate being able to continue to raise the dividend in the future.

Okay. Thanks and lessons within the door. I think in the MD&A, you mentioned you have all you are acquiring more than 50 Embraer ERJ 140 jets over the next several quarters. Any color with respect to the purchase cost for those assets as well as the plans and what you need to do with those leasing or strip them out?

It’s a good question. I think that, as I mentioned that was one of someone else in the industry decided to held my secrets, but yes, we are behind a significant number of those Embraers. Now lot of them been on the ground for a while. So they are going to be part of the candidates. Some of them will be flyers and we’ll probably combine multiple aircraft into single aircraft for leasing opportunities. But much like where we bought a series of Embraers a few years ago, where we had a big fleet and then liquidated them through a combination of parting out and leasing. I think you’ll see the same thing here. They are on a per item basis relatively inexpensive. So it is not a huge investment.

Okay. That’s fair. That’s all the questions. Thank you.

Not sure for competitive reasons I want to tell you exactly what we paid aircraft but…

We expect to do well on.

Yeah. And the demand is significant because there is no 145s left in the market. So, we think there is strong need for these aircrafts and many will be leased and sold in the rest tear down as Mike indicated and then obviously, the ones we tear down, we take the engines and put those in the leasing pool.

Okay. Congrats again. Thank you.

Thank you. And your next question comes from Matthew Lee from Canaccord. Please go ahead.

A great quarter and thanks for having me on the call. You sort of mentioned that Northern Mat is somewhat project-based, does that kind of mean that is revenue scheme is reliant on the construction of new projects or maintenance work will be done by its current clients being suggest sustainable revenue?

Yes. It’s both. I mean, when they are working on pipelines as an example, maintenance requires matting as they run new projects. Our people are familiar when we talk about pipelines and things like big new projects like Trans Mountain, but there is a lot of the links and smaller projects that are done which also use the matting stuff. And same as it relates to transmission lines, maintenance and replacement, Canada and the American Northeast have amongst the oldest transmission lines anywhere. And so there is going to be a lot of work in the utilities at the upgrade or maintain or replace these structures. So it will be a little bit chunky that this project finishes and that one hasn’t started yet. So there will be some variability period-to-period and that’s why we bought that off of the historical number, not the best number they’ve ever had. We see really good demand for the foreseeable future. But it will vary period-to-period.

Right. And then, maybe if I think about the guidance, it suggests that your leverage is around three times net debt to EBITDA , where do you actually feel comfortable in terms of leverage especially in the context of the M&A strategy?

We’ve always thought of in terms of our secured debt within the 1.5 to 2.5 range and that’s where we are comfortable and when you see the 500 kind of plus EBITDA for next year, apply that we are well within that range today. If we found other opportunities we’d make sure we strengthen our balance sheet when appropriate. We have been to do that at this point, but depending on the opportunities in the future, we would look at that. We got a very consistent track record of using modest leverage effectively and we see no change to that here. It’s a higher level of leverage on this deal per se but when you add it to the pent-up EBITDA we have coming in 500 times doing that is more than the amount of debt we will have, so.

All Right. That’s it for me.

Thank you. And your next question comes from Tim James from TD Securities. Please go ahead.

Thanks, good morning. Good morning, Mike. Good morning, everyone. Just go back to the Fixed Wing Search and Rescue contract for a minute, is that going to ramp up both in 2023 and 2024 there will be incremental year-over-year revenues there and then it starts to mixture a little bit, I guess, by the time we get to 2025 is that the right way to think about that?

Tim, because of the delay, I think what you’ll see is probably revenues being pretty much constant to what you see today. Margins maybe going up slightly more than what we have seen historically. It’s effectively like the basis or that we were still to stand up or now kind of pushed off a couple of years. So, we’ll maintain the margins on those, but the revenues, I mean, because we are not having to actually turn them up right now, we’ll obviously not be part of our financials, but we will maintain the cash flow. As it relates to kind of a ramp up, I think you are going to see now the ramp up actually push out for a couple of years until the government is ready to accept and start operating these aircrafts.

We still are, I mean, we are paid for the investments we made. So, if kind of our AGM today at Tom’s Building, you will see a beautiful new building three quarters in the way up that’s being built specifically for the Search and Rescue contract. The delay in the government’s implementation in no way impacts the return of our capital as we’ve invested in that. So, we look forward to the government ramping up, because quite frankly we think we are going to be able to help with more things that are in our contract today. But we patiently await the arrival of the aircraft.

Okay. Thank you. My second question and you sort of touched on this in your – throughout the call, but I am wondering if you can help reconcile the – or walk us through the relative contradiction of the incremental $100 million in EBITDA that you have in your guidance in 2023 and I am sure you can get in this, maybe even just the order of significance from the new acquisition being 12 months or the two acquisitions being full 12 months in 2023 versus growth in other key aspects of the business. Just to give us a sense for what maybe in order of significance or if you can provide a rough proportion of what the contributors are through that $100 million incremental EBITDA.

Yeah, I can give you some qualitative help with that and then there is – I can point you on directions of how based on a couple of assumptions you can make on how to get that quantitatively. We have previously put out that we thought our runrates coming out of COVID was about $400 million. That when we thought we wouldn’t get to that we might be at it by the end of the year and that implies most of the recovery in Quest in there, perhaps not all of it. And so, if you start working off of a $400 million post-COVID number, you’ve got the impact coming out of that of the full year of the contracts in aerospace business we talked about like The Netherlands, you’ve got the – contract, then you’ve got the gold mine contracts in the aviation business. You put those on top of that. But then the big driver is a full 12 months in 2023 of Northern Mat’s and of Advanced Paramedics. We’ve talked about a 15% return. So you can easily work backwards off of the purchase price to get to a free cash flow number, add on a depreciation number and less the maintenance CapEx and then you are going to see that a significant portion of that next $100 million is coming from a full 12 months of the acquisitions, together with an improvement at Quest as it comes out of the production hauls we have in our cycle. And then, the balance of our aviation business returning, we will back to 90%, we are not back to a 100% and the last 10% is highly profitable obviously, because there are extra people on the same airplane, but…

Or leasing it or one which has …

Exactly, that we see at Regional One will almost flows directly to the bottom-line. So, those are the main drivers. The single biggest driver between 2022 and 2023 is the 12 months of the acquisitions and 12 months of the new contracts, the other would be improvement to Quest.

Just one other thing to add, the $400 million runrate we first mentioned it in our Q3 conference call. So we did complete a couple of acquisitions after that as well which was contributing to the EBITDA of $500 million.

Great. Great. Okay. Okay, that’s helpful. And I just want to reconcile the commentary and again, maybe I am missing something on my math is off here, there is a reference to the Q1 being the best quarter in Quest’s history. And yet, when we look back at the manufacturing segment overall, Q1, the EBITDA was still, I think roughly 40% below or 40% of – I don’t have the number in front of my, but significantly below its previous peak. I am just trying to get street in my head, how Quest can have – and be such a – obviously it’s a strong contributor to that segment how it can be a record and yet there is such a decline still from the previous peak in the segment overall.

But perhaps one did spoke, I think Quest has had a challenging quarter. They are nowhere near their level of performance from a year ago as an example. They’ve got their order book has began to grow again, but that’s future orders. That’s not something affects the current quarter. Their returns would be at the low end of history not the high end.

Yeah, I think what we said in our MD&A with that Q1 2021 was, it’s high as Q1 ever and so that – the comparative that we are matched up against for Q1 2022.

Yes. Q1 2022 was Quest’s best Q1, not 2022.

Yeah, that’s my mistake. Yeah, exactly. That’s what I was looking at not interpreting that as 2021. Okay, that’s – that helps. Thanks very much.

Okay. And the next question comes from Krista Friesen from CIBC. Please go ahead.

Hi. Thanks for taking my question. Good morning. Thank you. Congrats on the quarter and thank you for all the color on the acquisition. I was just wondering if you can help us with how we should think about margins through the rest of the year? And maybe on a segment basis, especially in aviation as you start to kind of recoup some of those fuel costs?

Yeah, I think, you’ll see margins strengthened for a few reasons in aviation. One is, you’ll see the leasing business improve at Regional One which flows to the bottom-line and you’ll see better passenger loads which drive better returns. I think offset is that the government subsidies go away which we had last year which were a 100% margin. So if you look at it sequentially, you will see improvements quarter-over-quarter. When you compare to the last year, I hesitate for people to use COVID quarters from a EBITDA margin percentage point of view. They are misleading, because we have subsidies that convinced us to keep flying into areas where we wouldn’t otherwise been able to flow because we are losing money in those markets. So the subsidy is making look like the margin as a percentage basis is stronger than it is. The absolute dollars are relevant. And you’ll see continued growth in that and I think you’ll see sequential improvement not only because of seasonality in Q2 and Q3 but because of the strength in the lease portfolio performance, higher yields on our passenger business and just the seasonal improvement quarter-over-quarter.

You also see the lag of the fuel cost implementation being implemented going forward.

Yeah, the challenge with the fuel thing to see a huge improvement in Q2 just as its continuing to go up. So we are catching up some of the improvements at the expense clause in Q1. But Q2 has continued to decline. So, take us basically one quarter after the clause plateau and we haven’t really plateaued yet. The rate of increase has declined, but fuel prices are still very, very high. So, we’ll see improvement there and it will take us essentially whenever there was plateau out, it will take us a quarter or so to fully achieve the price increases.

Yeah, it’s both of the contracts are based on an average of the pricing in the quarter before. So, if you are trending upward, you are not picking up all of the incremental cost in one quarter either.

But conversely we don’t give it all back in the first quarter when they go down. So, it’s a net neutral to our margins, but in times of increase, it hurts us for a quarter or two.

Thanks. That’s great color. And then, I was just wondering if you can provide a little bit more detail on what you are seeing on the labor front and so far through Q2, you are starting to see some improvements there or if it’s a challenging labor environment?

I would say it’s a challenging labor environment across the board. It’s industry-specific and geography-specific of where it’s worse than others. The pilot shortage is real and it’s going to be here for a long time. The aviation business got wrapped by the pandemic and laid off a bunch of people which they had to do. But the problem was as people continued to retire through that period, but no new pilots were trained. So if you look back to 2019, Krista, we were talking about a shortage of pilots pre-pandemic. Then we shut the business down for two years and we had two years worth of pilots retire and now we are ramping back up and we have a shortage and we created a bigger one as an industry by not training enough. So, that’s going to be a challenge. That’s why we have Moncton Flight College, that’s why we continue to work at Carson with our flights. I mean, Dave, maybe you want to provide some color on that.

You are absolutely right. The pilot shortage and the ramp up we’ve seen post-pandemic, it’s been a little exaggerated. We have seen some of the startups in the industry on new airlines how long they all stick around to be lush with the bigger mantle. But that’s attractive as Mike said, some of the pilots that were available and at the same time there wasn’t as much flow because of the two year shutdown and for experienced pilots. So we will see a blip, but I can prove all precisions with Southern Ontario flights go with Carson, with Moncton Flight College, our licensed flight program for example did not shutdown. It’s one of the pilot projects that was maintained in Canada unlike the airline ones. So we’ve got some flow through there. We also are seeing an uptick in some of the resumes coming into for people that are interested in joining the diversified organization that EIC is and having opportunities here. So, as Mike said, it will be a challenge. And we’ll have to explore the side of the box, but we are comfortable that we can take it on.

Yeah, let me give you an example of kind of one of the – I think attractions that we have to employees. I mean, it becomes a destination, there is opportunities not just within the company that they join, but obviously throughout our network of operations and if that network of operations that gives us the ability to shift resources to where it’s needed, I’ll give you specific examples of WesTower had some welders that we could spare to move into our manufacturing operations out in BC. So we actually have some of our WesTower employees, welders that we’ve moved to our manufacturing operation in BC and we shifted kind of the demand – those welders are doing at WesTower to another production facility at WestTower elsewhere. So, it’s that capability of maneuvering and shifting when and as needed.

But I think, it was a macro answer, because I think the labor shortages are something businesses going to have to deal with for the foreseeable future. I am less concerned about the inflationary stuff, because I think, a large portion of this is going to be transitory if the supply chain lessens and we are seeing in certain places maybe some anecdotal evidence of that starting to occur to really and that’s a real strong opinion. But I think the employment problems are structural and particularly in certain skilled jobs, it’s going to be something we are going to be working on for a while and that’s why the whole vertical integration of developing your own people, whether it’s welders, AMEs or pilots, I think it’s going to be have to be a long-term part of people’s business models if they want to grow because the idea of taking them from somebody else is going to get harder and harder.

Thanks. I appreciate that. That’s great color. I’ll jump back in the queue.

Thank you. And your next question comes from Nauman Satti from Laurentian Bank. Please go ahead.

Yeah, morning, Mike. Yeah, so the first question is, more just to understand the knob in that business a bit, can you share what’s the revenue mix between the rental and the field mix and you mentioned that the cycle is or that year is for these matter six to seven in terms of its age, how does it work, like for rental, can you like replace them to another project or do you have to improve those mats again, put some capital investment in that and then do it? Just trying to better understand how that works. If it’s a long-term rental contract, is that a better one or a short term one is a better one, just the economics around it?

Your first question about revenue where it comes from, that’s highly variable period-to-period. Depending on the availability of mats and what projects they are, the rental business is the stable part of the business, the sale takes the bounce around depending on what projects they started. In terms of how the mats work, they start off and they are beautiful. We’ve got pictures at our AGM. We are going to show you the yard and we are going to show you what a beautiful thing mats looks like and it looks like that for about 48 seconds and then they put it in the field the big trucks drive over and they get shipped up and they don’t look the same, but they are functional for a long period. And so, typically mats – if we rented them out would last in sort of a five year range as a pure rental mat and the greeting we give them internally changes over that time. And at certain points, there would be money put into fixing them up, fixing a broken board, maintaining the mat and then ultimately sometimes they are sold off at the end of their life where they become part of a permanent structure if it’s a really wet area and they want to bury them in the ground and those kinds of things. Some of them do become effectively permanently used and other ones are destroyed at the end of their life and quite frankly, we have a zero waste policy with them. We actually tare them apart in our yard in Prince George, ship them up and they are actually used there, they are put into an incinerator who drives the torn sheet. So, from sort of cradle to grave, it’s very much an environmental process. But each individual mat has a different life. Some of the projects are short, they are weeks, other ones are months or even years. And things like a pipeline or a hydro electric line, the mat will be put down, they would build past it, they would pick it up and go drop it down the line, again, pick it up and they’ll move it again. So, the signal where is the mats out is actually the movement of the picking them up and putting them on the truck, taking them truck and putting them in the new place that heavy and the actual process of actually cleaning the roads is hard on the mats themselves. So, they become lower quality over time that are used for different things and then ultimately they need to be replaced.

Okay. Now, thank you. That’s great color. And just a second one from my end, in terms of M&A, now you have given guidance of over $500 million in adjusted EBITDA. I am just wondering, what’s the M&A opportunity is that you are looking at in terms of size. Is law of larger number sort of catching up? What’s the thought process around if you are still going to do smaller acquisitions and then one-off big ones or just focus on the big ones now, because the smaller ones maybe will not move the needle at the stage where you are now?

That’s a great question and the answer is pretty emphatic. With the smaller deals are profitable and they make our operating businesses better and more resilient. So we are doing tuck-in like a Ryko or a Macfab, those are making Ben Machine a better company or making WesTower a better company, because we are bringing in new skill sets and new capabilities. So the fact that we were able to land a big deal like this no way lessons are interested in the small deals. The big deals aren’t always available at pricing we are prepared to pay. If you look at our history now, we did a big deal back in 2009, we are a $60 million company and bought Com which was a $60 million deal is a huge bite for us. In 2013, we added Regional One and it’s – we had a huge jump and then we added PAL in 2015, which was $250 million deal. So that size of deals isn’t always available. When we have ones like Northern Mat, we are going to be all over them. But our core, our day-to-day meat and potatoes are the small and mid-sized acquisitions where we can create value for our shareholders and even if they are moving the dial in smaller increments, in terms of enhancing our profitability on free cash flow, they are still an important part of our model. And then the other piece, I guess, it kindly goes out and said these are investments in our existing businesses. We invest more money growing our businesses than we do buying them and that’s how you take PAL or Regional One from $16 million in EBITDA in 2013 where we bought it to $100 million in 2019. It’s the investment in our existing businesses and not is a core value and never say always, but it’s always going to be part of our core value.

Fair enough. Thank you. Appreciated. Thanks for taking my and congrats on the announcement today. Thank you.

Thank you. And your last question comes from Matthew Weekes from IA Capital Markets. Please go ahead.

Good morning. Thanks for – good morning. Thanks for taking my question. I think just one for me, at this point I think some good commentary provided on the guidance. Directionally most things sounds like sort of trending positively. I am just wondering as the effects of COVID-19 sort of dissipate do you see any of the maybe tailwinds such as higher amount of cargo volumes sort of reversing a little bit and providing a little bit of an offset to the tailwinds that you see going forward?

I think the answer to that is probably. We haven’t seen it yet, even with the bump in the traffic, we’ve seen today, but there is no question that as “leisure travel” and I don’t mean leisure in the sense of having off on a family vacation, but as people come out of the north to shop in the south, they are going to bring stuff back that we’ve been probably shipping in. So, it maybe changes from a freight to extra luggage on the aircraft. But the one thing that we are seeing remarkable resiliency is the population growth of north is higher than anywhere else. And so, over the two years, there is more people there. There is more stuff flowing through whether the Arctic Cooperative Store and the Independent Store or even people ordering through Amazon or any of those things, I think we are going to see this as maintained at a higher level than pre-COVID. Whether it stays the COVID, peak I think is probably questionable. But there is definitely going to be some offset as passenger travel replaces freight to a certain extent.

Okay. Thanks. That’s helpful. I’ll leave it there. That’s everything for me. Thanks.

Thank you. And there are no further questions at this time. Mr. Pyle, you may proceed your conference.

Thank you for joining us today. It was long. We have a lot to talk about when it’s fun when you talk about a lot of good things after two years of talking about pandemic. We are excited. We got our AGM later this morning. For those you can join us, it’s great. We are going to have our new Northern Mat team present on the company at our AGM.

So I look forward to speaking with many of you again in a couple of hours. Thanks for calling and have a great day.

Ladies and gentlemen ,this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.