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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone, and welcome to the Exchange Income Corporation's conference call to discuss the financial results for the 3-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 security 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 section of the Annual Information Form and Exchange's other filings with Canadian Securities Regulators. Except as required by Canadian securities law, Exchange does not undertake to update any forward-looking statements. Such statements speak only as 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 to leave 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 have not had a chance to see the press release we issued yesterday, let me quickly summarize what we announced. In addition to solid first quarter results with record revenue and first quarter adjusted EBITDA, we announced that we closed 2 acquisitions. First, we completed the acquisition of Advanced Paramedic Ltd., 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 and 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 were able to announce an increase in our dividend to $0.20 a month or $2.40 per annum. This is the 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 hit 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 limits 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 and is an improvement 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 improvement in adjusted EBITDA. If all government assistance is eliminated from the current and the preceding year, the improvement increases to 28%. Free cash flow less maintenance capital expenditures was essentially unchanged at $19 million. Adjusted net earnings were $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 capital 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 in the grips of the Omicron variant, which had a very significant impact on our passenger and aircraft leasing business. Improvements in 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 some 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 this hurt 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 3/4 of normal and have 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 6 months and while we have the market position to be able to pass these on, either through fuel price surcharges or through fuel escalation clauses in our contracts, there is a lag between when we experience cost increases and when we realize the price increase. This is 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 increases.
Even with these challenges, our Aerospace & 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 when government subsidies are removed from both periods, EBIT -- adjusted EBITDA increased by 46%. Our manufacturing entities have all experienced the impact of supply shortages and inflationary pressures. With the exception of our window business, our manufacturers have been able to manage these challenges and still deliver results that exceeded the previous year. Quest, 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 clauses. As such, the rapid inflation has a particularly strong impact on their 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 products and has begun to convert opportunities into orders. Our order book grew significantly during the first quarter and our efforts to expand to new geographies bear -- began to bear fruit, with our first orders in Nashville and Philadelphia. We are very excited about Quest's future.
Our acquisition team has been proven to be very adept at adapting our acquisition process to deal with changes in the M&A landscape during the pandemic. During the lockdown when travel was difficult, we focused on smaller tuck-in deals, which are well known to our existing subsidiaries. As the world has reopened, so has the deal universe. This is very evident with the 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 access is removed, leaving very little, if any, environmental footprint. These solutions are becoming best practice, eliminating gravel roads and culverts, which are not easily removed and create environmental hangovers. The long term for this product -- demand for this product is expected to grow as Canada catches up to other parts of the world, where they are already recognized as appropriate means to provide short-term access.
Management is always a big part of our due diligence and Northern Mat has a team that is in line with the very best we have ever seen. The team is deep, with decades of industry experience and an 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 from 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 team are currently shareholders 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 2 years, it is somewhat misleading to describe the accretive nature of the deal by comparing it to fiscal 2020 or fiscal 2021, which were not normal run rate for our business. Accordingly, we have made our comparison to the 2019 share results as it was, in quotation marks, "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 years of operation. So we've 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 results in 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 have a finite life and as such, require regular replacement. Given our focus on our ability to sustain and grow our dividend, we spent 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 2 manufacturing facilities located in Prince George and Creston, BC. These choice -- 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 when demand warrants. Customer diversification is a key part of the Northern Mat story. A decade ago, the company's operations were almost entirely Western-based, with revenues focused on oil and gas development. Over the ensuing decade, they have expanded coast to coast and greatly expanded the reach of the product into multiple industries. Matting was initially simply a cost-effective means of providing temporary access in wet areas. Over this period, it's become seen as the environmental best practice to allow access and preventing cross-contamination of ecosystems and quick, cost-effective removal of the access roads upon 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 how 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, which is -- such as the development of more efficient propeller systems and examining sustainable fuel opportunities, the simple fact is that there's currently no alternative to the propulsion systems used to power on our aircraft. We are very excited about electric or hydrogen alternatives, but these are years, if not a decade from being commercially viable. We provide an essential service into remote communities and as such, we need to continue with the current technology until a more environmentally sensitive one is available.
There is, however, much more to the environmental part of EIG -- ESG than carbon footprint. And we have decided to focus on improving environmental sustainability by -- in addition to our 2 existing segments, investing in companies whose business model is based on helping others reduce 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 of 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 Paramedic Ltd. located in Peace River, Alberta for $15 million. APL provides medical personnel to ground, air ambulance services for the federal, provincial, First Nations governments, together with other industrial customers. APL is a leader in Northern Alberta and is part of our plan to expand the geographic coverage of our medevac services that 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 for 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 reopenings, 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 and ISR contracts have or are going into effect this summer. And our Regional One business has seen very strong sales and modest improvements to its lease revenue. Quest has seen its order book expand and increase the markets it services, while the balance of our manufacturing segment continues to perform well.
In short, our existing businesses, while not quite there yet, are approaching the $400 million post-pandemic adjusted EBITDA run rate that we have spoken of on previous calls. While this is combined with -- when this is combined, I'm sorry, with the new acquisitions and the strength of their operations, we are now comfortable providing 2022 and 2023 guidance.
With a full year of post-COVID operations and a full year of contributions from our recent acquisition, 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 manage 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 2 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 comments highlighted, it's been quite a busy, exciting and successful start to 2022. Within a quarter that is historically one of the corporation's slower quarters due to seasonal impacts within the Aviation & Aerospace segment, it's exciting to acknowledge that we hit all-time highs in revenue and a 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 to $1.6 billion. However, subsequent to the quarter, as announced on May 10, with strong and continued support from our entire lending syndicate, 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 under the credit facility to just over $2 billion. The increase in size of the facility provides the corporation the support it 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 transaction, the increase in long-term debt was lower than trailing 12-year historical average increase in a Q1 period of $40 million.
Our current leverage ratio for the quarter end is 2.41x, which is well below our current credit facility covenant requirement of 4x and within the corporation's senior debt to equity range of 1.5x to 2.5x.
Further on 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 hit 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 & Aviation segment revenue was up 54% to $282 million. With no prior year comparative, the acquisitions of Carson Air and CTI, acquired on July 5, 2021 and December 16, 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 operations.
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 & Aviation segment, partially offset by a decrease in the Manufacturing segment. Consolidated -- 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 & 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 costs due to several factors, including fuel pricing which for EIC's contracted services where price escalation clauses exist, lag in 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 costs within the quarter.
Lastly, $6 million less in government support was received by the Aerospace & 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 [ SUs ] received, the Manufacturing segment adjusted EBITDA decreased by only $4 million. Specifically, at our Quest operations, what can be categorized as a 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 periods, markets reacted to uncertainties from the pandemic by placing projects on hold or shifting them out, which created gaps in production scheduling that 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 2 new U.S. markets, as Mike mentioned. The balance of the 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 adding capacity 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 results 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 as it generates lower margins than experienced at our other Aerospace & 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 period -- prior period. These decreases are results -- sorry, these decreases are the result of increases in 2 items: First being the depreciation of capital assets; and the second being interest costs. Depreciation increased with investment in several new assets within the corporation's airlines, an 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 costs, which increased by $2 million as a result of noncash 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 and increase dividends. The trailing 12-month 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 the last several quarters, my comments have been focused on discussing the outlook for each of our lines of business.
Today marked a change to that approach as we are resuming providing guidance for EIC. First a comment on why we are resuming guidance. The last 2 years have been filled with incredible uncertainty starting with the complete unknown of what COVID-19 would bring, to the development of vaccines, to vaccine shortages, to new variants, to community shutdowns, to overburdened 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 costs and labor challenges for the balance of 2022 and into 2023, our businesses are managing through these issues and returning to a new norm. For instance, our passenger business is 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, one in recent periods, like the Netherlands contract, have begun or are 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 contracts in new -- in 2 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. Not only does this provide us with confidence for our adjusted EBITDA estimate for 2022, but its future performance is primed for further growth and provides a solid foundation for adjusted EBITDA estimates for 2023. 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 mats 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, is well positioned to meet growing customer demand. Demand for its product is also supported by long linear contracts such as electrical transmission lines or pipelines.
So as you can see, our future is bright and much more predictable. It is against this backdrop that we are 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 investment for the Netherlands surveillance aircraft and investments in connection with the upgrade of the surveillance aircraft for the renewed Curacao contract awarded in December of 2021 and the completion of the new hangar required to meet obligations under our Fixed-Wing Search and Rescue contract. All additional growth investments and any further acquisitions would serve to increase this guidance. And as we have done in the past, we'll look to seize 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 as 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. They 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.
Congrats on this Northern Mat deal. It looks exciting on the surface. Mike, can you 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 different valuation cycles that might exist. And what the opportunity was like, where the asset came from, et cetera?
Yes. It's -- we had the opportunity to look at Northern Mat when the vendors considered selling it a couple of years ago. No transaction was completed at that time. When there was an opportunity to look at it again very recently, we were excited about the progress that had been made, particularly in diversifying the company's customer base and the industries it served. And so we took a look at -- 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 in buying mats.
So we spent a lot of time looking at the free cash flow it generated over the last number of years. And we use that as our basis for coming up with a value. And based on that, we're 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've had during the call were all based on those historical numbers.
So bringing that all back to answer to your question, we valued this off historical free cash flow. We're comfortable, at least in the medium -- short and medium term, that we're going to exceed that with the growth opportunities that we have on our plate 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, if people don't like environmental mat -- or sorry, Northern Mat, they just don't like your business model." And I've gone -- I hadn't thought of it that way, but that's a really good explanation of the business, it's management, it's cash flow and it's in a segment we like.
That's good context. When you acquired 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 a Regional One. I'm just -- or Carmele has provided a little bit of context, but can you just maybe drill into the growth plan here a little bit more detail? Is this going to be an M&A-driven thing, a capital investment plan? And is it sector broadening like in terms of further diversification? Or how -- do you get deeper into the businesses you're already in?
It's a good question. I think what you'll see is as utilities adopt matting as 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're building or 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're building mats at, 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 may be 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 out. But Northern Mat is different in that we help you go build the access road, we'll bring it in. We'll bring the bridges. And then when you're done, we'll go pick it up for you and we'll clean the mats and put them away. And so it's that integrated service model that we think will ultimately serve us well in other geographies that we're not in today.
In Canada, I would suspect that it's more of an organic growth kind of model. If we were to enter the U.S., I think there's a reasonable chance we would do that with at least an initial base of an acquisition. But for now, the Canadian market is at least our initial focus.
And your next question comes from Cameron Doerksen from National Bank Financial.
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 the cyclicality of this business? Obviously, there's some long-term demand here from the change and I guess the way companies are looking to build out temporary access, but just what's sort of the cyclicality that you would sort of think about in this business? What are the key drivers from an end market perspective?
Yes, that's a really good question. And the business is quite different than it would have been 10 or even 5 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 are multiple segments greatly reduces the cyclicality of the business. There's 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 aren't all the time. So there is some lumpiness to the business, but it isn't so much cyclical in that when the economy is good, this is good or vice versa. It's more when are big projects on the, on the government side, whether they be pipelines, transmission lines, those kinds of things help.
And then when we bought the company, or at least when we were doing our thinking about the company, we hadn't put a lot of emphasis on a resurgence in the oil market. But with the unfortunate occurrences in Eastern Europe and the kind of realization that energy self-sufficiency matters, we see a bounce back in that business, which isn't at all reflected in their operations yet. But as the oil and gas business bounces back, these guys do a great job of limiting the environmental footprint of 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're going to see previously what have been optional for kind of longer-term projects to use matting or instead of gravel, it's going to become mandatory. So that's going to help, I think, with the ebbs and flows as well.
Okay. And actually on that, I mean that was -- maybe my other question was kind of on the 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 want to get a sense of if there is an environmental push here, how much runway is there for the business to kind of continue to grow just through, I guess, gaining market share from more traditional temporary access construction?
Well, I'm not sure I have a percentage that I'd be comfortable quoting. But I think I can give you a qualitative discussion of that. If we went back 5 years ago, the company was essentially 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 with Hydro One and a little bit of pipeline work. The opportunity to do what's being done for Hydro One, Quebec or Manitoba, or those kinds of places, hasn't even started. So we're kind of at the infancy of expanding this. In BC as an example, with forestry, the government now changes royalties rates to subsidize the use of temporary access roads because they're better for the environment. So instead of building the roads that the forestry people would historically have built, there's now a government incentive to follow the environmental best practice.
So while I don't have a percentage number, the way I'd describe it is to use a baseball analogy and we're 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 it comes with such a deep talented management team. But in terms of the ability to expand this into nontraditional matting areas, we think we're just at the beginning.
And your next question comes from Chris Murray from ATB Capital Markets.
If we can just go back to maybe the financial performance of Northern Mat. So just thinking about how this changes the number, 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 can just kind of maybe give us an idea, are they purchasing all the materials? Is there a factory or facility? Or is that an opportunity down the road where you guys could maybe work into some make versus buy decisions?
Okay. Well, let's start with that one first. Historically, they've used 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 are certain specialty kind of mats, they make a rigging mat that makes up a small portion of our business, which we do get from our outsourced, 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 have access to the underlying raw materials to be able to build the mats. From a financial point of view, you're bang on, it's capital intensive. I mean you're taking a mat that's going to have a lifetime of 3 to 6 years, depending on how it's used and what it's used for. So you're constantly reinvesting in your mat pool. And so when we did our analysis of this, we're really anticipating the depreciation is fully utilized to maintain your mats. And as you grow, you'll 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 sort of subtract off that maintenance CapEx, you've got the purchase price, we've talked about free cash flow less maintenance being above our 15% return.
So you can work back to a free cash flow number and then historically, depreciation of the business is the $20 million range. So you can work back to where the business has generated 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, we'll also build 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, though, is there any sort of thoughts around integration? I don't really see a lot of synergies with any of the other groups, but maybe I'm missing something here. So is it just a sort of a -- it's integrated and standalone at this point?
Largely, yes. There's 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 management of those, much like we've done with engine overhauls in our Aviation business, is something we're looking 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 I think the synergies are relatively limited to the stuff they can do with WesTower.
The other comment I'd make is kind of First Nations relations. They're very, very strong with the First Nations relationships. They have several joint ventures in pretty much every province. One of the provinces where they, I think, only have 1 joint venture is actually Manitoba. As you're aware, Chris, we obviously have lots of relations with our First Nations customers. So we see some synergy potentials there as well as perhaps into Quebec, too, because we've developed relationships there.
All right. Good. Maybe just changing over to some of the parts of the Aviation business. I guess a couple of things. One, some of your government contracts, particularly Fixed-Wing Search and Rescue, I know you mentioned that you were working on some facilities and stuff like that, but it does look like there's 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're seeing that business coming back? I know it's 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're looking at delays, kind of 4-ish to -- 4 to 5 years. Long story short, 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 revenues go 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's a delay that perhaps in the future, we may be able to provide additional capacity for the program to help them speed up their time frames.
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 your R1 typical kind of opportunistic buying and selling. So they've excelled at that and then the last several quarters, I think we've chatted about those large sales. We still see that probably likely for a couple of more quarters.
Lease income, that's slower to recover because what's going on in more of a 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. But we expect that to, hopefully, by the end of the year, be back to where it is.
On leasing, though, the focus previously was on kind of leasing a whole aircraft. I think you're going to see us, and in fact, we started more engine leasing as airlines struggle to get engines or get into overhaul shops to get their engines overhauled, leasing or buying engines is certainly an alternative that they're looking for. It's economic, it's much of a shorter-term fix.
Okay. And just to confirm, you guys don't have any Russian exposure or Ukrainian exposure with your aircraft fleet at this point?
We do not.
And your next question comes from [ Jan MacGargle ] from RBC Capital Markets.
And congrats to the team on the acquisition of Northern Mat.
Thank you. It's something we're really excited about.
On the growth pipeline now looking ahead, I know you just announced a very large deal. But given the guidance, your leverage is going to come down very quickly to well within your targeted range. So is there a period of time that you need to wait and oversee the integration on Northern Mat? Or could we see another deal of size when the opportunity presents itself and whether that's through a large organic investment or potentially on another acquisition? And can you talk about in general what the pipeline for organic investment and M&A is looking like right now?
Yes. The advantage we have on a deal like Northern Mat is it's coming with a fully integrated management team. There's very little we need to do and quite frankly, there's very little we could do to improve this business. We'll have access to capital, we'll work with them on 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 have in the past. So the addition of this, while it's going to make Rich and the guys in accounting have to add up more beans, it's not going to change our business fundamentally in terms of our capabilities.
So we are still very active looking. The pipeline is remarkably strong. There's more -- I'm not sure whether there's more deals that we're looking at, but there's more deals that we like than at any time I could really remember. And so while clearly, there's nothing at the finish line, because we've been going -- hard for us to close 2 deals, especially one of these -- of this size, that takes a lot of our capabilities. But there's 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're seeing a lot of interesting things.
In terms of organic investment, we 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 PAL or with some gold mining opportunities, both at Nunavut and in Northwestern Ontario for our other airlines. So we've made investments into those aircraft already. I think where you may see more investment, quite frankly, is a Regional One.
There's a number of deposits on our balance sheet for things, contracts we're working on. And when we've 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's a lot of people who complain about banking in Canada. We just don't get it. We're -- our bank syndicate, led up the guys at National and CIBC and TD, have treated us unbelievably well. We went in and asked for an increase to our facility resulting from this deal. We added almost $0.5 billion to our access. We're -- in less than 3 weeks. And so we're well serviced, we're well capitalized and we're ready. When the opportunities hit, we're going to take them.
Okay. 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 2 new agreements that you had announced at Quest? And was there any pushback from customers on some of the higher pricing that you were passing through? Are your margins, with the new cost inflation, were you able to pass that all through to protect the margins versus what they were pre-pandemic? And do you potentially see those pricing increases affecting your ability to grow at Quest going forward? And after that, I'll pass over -- turn over the line.
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 building high-rise apartments. But it hasn't changed demand at this point. We're still seeing strong bidding for new projects. And we're 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 you have to understand that the housing that's being built that Quest is involved in is typically high-rise housing, which is the lowest cost if people are going to be in -- in certain urban centers. So it's not like there's a lower-cost alternative for people to move to.
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're only participants in limited markets, we do a lot of stuff in Toronto, a little bit on the eastern seaboard and then a little bit -- a fair bit down the western seaboard in the U.S. There's whole swaths of the company, whether it be Dallas or Houston or I used to say Nashville, but I can't anymore. We're there now. And we're into Philadelphia. There's Tampa, there's Miami. There's a lot of places we're not. And so beyond just the scope of the growth of the business, there's geographic growth where we're 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, I think or Darryl put it, the COVID hangover.
Yes. And we're 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 bid to the actual time we do our work, the impact on margin is like 1.5 years away, but we are going to see improvement as kind of the next year goes by.
With respect to the 2 new regions we're 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 an area that we haven't been before with an existing customer and then that we just leverage because of the quality of the work that we provide.
And your next question comes from Konark Gupta from Scotiabank.
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 deliver for 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 '23?
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 there. So it's not about -- it does not include any M&A or other additions to Northern Mat. It's Northern Mat as it is today. In terms of -- what was your other...?
Quest.
In terms of Quest, maybe I'll give you, Carmele, the...
Sure. So in terms of Quest, what we have included is what I'll call a partial recovery. We don't expect Quest to be fully recovered 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.
It -- and the forecast includes 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 Curacao contract. It includes what we expect to be doing under the Fixed-Wing Search and Rescue contract. It includes our new gold mine contracts for the aircraft charter business, but nothing in addition to what we already have.
That makes sense. And then as follow-up, with the 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 here?
It's a really good question. I mean when you flow through -- when we achieve the $500 million-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 while, Konark. You'll remember before COVID, we had talked about a goal of getting to 50% on free cash flow less maintenance CapEx basis and 60% on an adjusted net earnings basis. I'm 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're really proud of the 5% CAGR we've had in it. We had to take a pause during COVID for good reasons. We're 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.
And last one for me and I'll hand it over. I think in the MD&A, you mentioned you have or 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, what you need to do with those leasing or strip them out?
It's a good question. I think that the mention of that was one of someone else in the industry decided to tell my secrets. But yes, we are buying a significant number of those Embraers. A lot of them have been on the ground for a while, so they're going to be part of candidates. Some of them will be flyers and we'll probably combine some -- multiple aircraft into single aircraft for leasing opportunities.
But much like when we bought a series of Embraers a few years ago, where we got a big fleet of them 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, they're relatively inexpensive. So it is not a huge investment. I'm not sure for competitive reasons I want to tell you exactly what we paid per aircraft, but it's...
It's good pricing, is what we'll say.
We expect to do well on this.
Their demand is significant because there's no 145s left in the market. So we think there's strong need for these aircraft and many will be leased and sold and the rest torn down, as Mike indicated. And then obviously, the ones we tear down, we take the engines and put those in the leasing pool.
And your next question comes from Matthew Lee from Canaccord.
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 its revenue scheme is reliant on the construction of new projects? Or will maintenance work be done by its current clients be enough to drive sustainable revenue?
Yes, it's both. I mean when they're working on pipelines, as an example, maintenance requires matting as they run new projects. And people are familiar, when we talk about pipelines and things like big new projects like Trans Mountain, but there's a lot of leaks 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's going to be a lot of work as the utilities have to upgrade or maintain or replace these structures. So it will be a little bit chunky, Matt. This project finishes and that one hasn't started yet. So there'll be some variability period-to-period.
And that's why we bought this 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 3x net debt to EBITDA. Where do you guys feel comfortable in terms of leverage, especially in the context of your M&A strategy?
We've always sort of, in terms of our secured debt, been in the 1.5x to 2.5x range and that's where we're comfortable. And when you see the $500 million kind of plus EBITDA for next year, apply that, we're well within that range today. If we found other opportunities, we'd make sure we strengthen our balance sheet when appropriate. We don't need to do that at this point.
But depending on the opportunities in the future, we would look at that. We've 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 and $500 million times 2.5 is more than the amount of debt we will have outstanding.
And your next question comes from Tim James from TD Securities.
Just back to the Fixed-Wing Search and Rescue contract for a minute. Is that going to ramp up both in '23 and '24? There will be incremental year-over-year revenues there and then it starts to mature a little bit, I guess, by the time we get to 2025. Is that the right way to think about that?
Yes, Tim, because of the delay, I think what you'll see is probably revenues being pretty much constant to what you see today. Margins may be going up slightly more than what we have seen historically. Because effectively, like the bases are -- that we were supposed to stand up are now kind of pushed off a couple of years. So we'll maintain the margins on those, but the revenues, I mean because we're not having to actually stand them up right now, will obviously not be part of our financials.
But as I said, we'll maintain the cash flow. As it relates to kind of a ramp-up, I think you're going to see you know, the ramp-up actually push out for a couple of years until the government is ready to accept and start operating these aircraft.
We still are made whole. We're paid for the investments we've made. So at our AGM today, at Calm's building, you'll see a beautiful new building, 3/4 of the way up. It's being built specifically for this 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're going to be able to help them with more things that are in our contract today. But we patiently await the arrival of the aircraft.
Okay. My second question, I just wanted to -- and you sort of touched on this in various ways throughout the call, but I'm wondering if you can help reconcile the -- or walk us through the relative contribution of the incremental $100 million in EBITDA that you have in your guidance in 2023. And I'm sure you can't get into specifics, but maybe even just the order of significance from the new acquisition being 12 months or the 2 acquisitions being a 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 to that $100 million incremental EBITDA.
Yes, I can give you some qualitative help with that. And then there's -- I can point you in directions of how -- based on a couple of assumptions you can make on how to get that quantitatively. We had previously put out that we thought our run rate coming out of COVID was about $400 million. That -- and we thought we wouldn't get to that. We might be at it by the end of the year. Now that implies most of the recovery in Quest is in there, perhaps not all of it.
And so if you start working off of a $400 post -- $400 million post-COVID number, you've got the impact coming out of that of the full year of the contracts in the Aerospace business we talked about, like the Netherlands, you've got the new Curacao contract and 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 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 as an estimate for maintenance CapEx. And then you're 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 holes we have in our cycle. And then the balance of our Aviation business returning. We're back to 90%. We're not back to 100% and the last 10% is highly profitable, obviously, because they're extra people on the same airplane.
Or it's leasing at R1, which has high EBITDA margins, obviously.
Exactly, the leasing at Regional One, will almost flow directly to the bottom line. So those are the main drivers. The single biggest driver between '22 and '23 are -- is the 12 months of the acquisitions and 12 months of the new contracts, together with the improvement at Quest.
Just one other thing to add. The $400 million run rate, we first mentioned it in our Q3 conference call. So we did complete a couple of acquisitions after that as well, which would be contributing to the [ fund ] to $500 million.
Right, right. Okay, okay. That's helpful. Then I just want to reconcile the commentary. And again, maybe I'm missing something or my math is off here. There's a reference to the Q1 being the best quarter in Quest's history. And yes, 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 me, but significantly below its previous peak. I'm just trying to get straight in my head how Quest can have and be such a -- obviously, it's a strong contributor to that segment, how its quarter can be a record and yet there's such a decline still from the previous peak in the segment overall?
Perhaps one of us misspoke during the thing -- Quest has had a challenging quarter. They're nowhere near their level of performance from a year ago, as an example. They've got -- their order book has begun to grow again. But that's future orders. That's not something that affects the current, the current quarter there. Their returns would be at the low end of history, not the high end.
Yes. I think what we said in our MD&A was that Q1 2021 was its highest Q1 ever. So that's the comparative that we're matched up against for Q1 2022.
Yes. 2021 was Quest's best Q1, not 2022.
Yes, that's my mistake. Yes, exactly. That's what I was looking at, not interpreting that as 2021. Okay. That helps.
And your next question comes from Krista Friesen from CIBC.
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?
Yes. I think you'll see margins strengthen 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 the offset is that the government subsidies go away, which we had last year, which were 100% margin. So if you look at it sequentially, you'll see improvements quarter-over-quarter.
When you compare them to last year, I hesitate for people to use COVID quarters from an EBITDA margin percentage point of view. They're misleading because we have subsidies that convinced us to keep flying into areas where we wouldn't otherwise have been able to flow because we were losing money in those markets. So the subsidies make it 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.
I think you'll see sequential improvement, not only because of seasonality in Q2 and Q3, but because of the strength of 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.
The challenge with the fuel thing, to see a huge improvement in Q2, is just that it's continuing to go up. So we're catching up some of the improved -- the expense cost in Q1, but Q2 has continued to climb. So it will take us basically 1 quarter after the costs plateau and they 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 those plateau out, it will take us a quarter or so to fully achieve the price increases.
Yes. Most of our contracts are based on an average of the price in the quarter before. So you don't necessarily -- if you're trending upward, you're not picking up all of the incremental costs in 1 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 2.
That's great color. And then I was just wondering if you can provide a little bit more detail on what you're seeing on the labor front? And if so far through Q2, you're starting to see some improvement there or if it's a challenging labor environment?
I would say it's a challenging labor environment across the board. It's -- it's industry-specific and geography-specific, 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 wracked 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 2 years and we had 2 years' worth of pilots retire. And now we're 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 flight school. I mean Dave, maybe you want to provide some color on that?
I can. You're absolutely right. The pilot shortage and the ramp-up, we've seen post pandemic has been a little exaggerated. We've seen some of the start-ups in the industry, new airlines, how long they all stick around, will be a question with a bigger [ metal ], 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 2-year shutdown for experienced pilots.
So we will see a blip, but I think we're well positioned with Southern Interior flight school, with Carson, with Moncton Flight College. Our Life in Flight program, for example, did not shut down. It was one of the pilot projects that was maintained in Canada, unlike the airline ones. So we got some flows through there.
We also are seeing an uptick in some of the resumes coming into us, 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 outside the box, but we're confident that we can take it on.
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's opportunities not just within the company that they join, but obviously throughout our network of operations. And it's that network of operations that gives us the ability to shift resources to where it's needed. I'll give you a specific example.
So 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 that those welders are doing at WesTower to another production facility at WesTower elsewhere. So it's that capability of maneuvering and I said, shifting when and as needed.
But I think in more of a macro answer, Krista, I think the labor shortages are something business is going to have to deal with for the foreseeable future. I'm less concerned about the inflationary stuff because I think a large portion of this is going to be transitory as the supply chain lessens. And we're seeing, in certain places, maybe some anecdotal evidence of that starting to occur.
Too early to have 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're 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.
And your next question comes from Nauman Satti from Laurentian Bank.
So first question is more just to understand the Northern Mat business a bit. Can you share what's the revenue mix between the rental and the sales mix? And you mentioned that the cycle is -- or the years for these mats are 6 to 7 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 shorter 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 there are, the rental business is the stable part of the business. The sale tends to bounce around depending on what projects are started.
In terms of how the mats work, they start off and they're beautiful. We've got pictures. At our AGM, we're going to show you the yard. We're going to show you what a beautiful new mat looks like and it looks like that for about 48 seconds. And then they put it in the field and big trucks drive over and they get chipped up and they don't look the same, but they're functional for a prolonged period.
And so typically, mats, if we rented them out, would last in sort of the 5-year range as a pure rental mat and the grading we give them internally changes over that time. And at certain points, there would be money put in to fixing them up, fixing a broken board, maintaining the mat. And then ultimately, sometimes they're 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, those kinds of things.
So 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 tear them apart in our yard in Prince George, chip them up and they're actually used there -- they're put into an incinerator that drives the town's heat. 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're weeks. Other ones are months or even years. And things like a pipeline or a hydroelectric 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 go move it again. So it's -- the thing that wears the mats out is actually the movement of them, picking them up and putting them on the truck, taking the truck and putting them in the new place. They're heavy and the actual process of actually creating the roads is hard on the mats themselves. So they become lower quality over time. They're used for different things and then ultimately, they need to be replaced.
Okay. That's great color. And just a second one from my end. In terms of M&A now, you've given guidance of over $500 million in adjusted EBITDA. I'm just wondering what's the M&A opportunities that you're looking at in terms of size. Is law of large numbers sort of catching up? What's the thought process around if you're 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?
Yes. 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're doing tuck-ins like a Ryko or a Macfab. Those are making Ben Machine a better company or making WesTower a better company because we're bringing in new skill sets and new capabilities. So the fact that we were able to land a big deal like this in no way lessens our interest in the smaller deals.
The big deals aren't always available at pricing we're prepared to pay. If you look at our history, now that we did a big deal back in 2009, we were a $60 million company and bought Calm, which was a $60 million deal, it was a huge bite for us. In 2013, we added PAL -- I'm sorry, Regional One and it's a huge jump. And then we added PAL in 2015, which was a $250 million deal. So that size of deal isn't always available.
When we have one like Northern Mat, we're going to be all over them. But our core, our day-to-day meat and potatoes are the smaller and midsized acquisitions where we could create value for our shareholders. And even if they're moving the dial in smaller increments, in terms of enhancing our profitability, our free cash flow, they're still an important part of our model. And then the other piece, I guess, it kind of goes unsaid, is our investment in our existing businesses.
We invest more money growing our businesses than we do buying them. That's how you take Regional One from $16 million in EBITDA in 2013 when we bought it to $100 million in 2019. It's the investing in our existing business and that is a core value and never say always, but it's always going to be part of our core value.
And your last question comes from Matthew Weekes from iA Capital Markets.
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'm just wondering, as the effects of COVID-19 sort of dissipate, do you see any of the maybe tailwinds such as a 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 -- in the traffic we've seen to date. But there's no question that, as quotation marks, "leisure travel", and I don't mean leisure in the sense of heading off on a family vacation, but as people come out of the North to shop in the South, they're 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're seeing remarkable resilience in is the population growth in the North is higher than anywhere else. And so over the 2 years, there's more people there. There's more stuff flowing through, whether it's the Arctic Co-Operative store or the independent store or even people ordering through Amazon or any of those things.
I think we're going to see this maintained at a higher level than pre-COVID. Whether it stays at the COVID peak, I think, is probably questionable. But there's definitely going to be some offset as passenger travel replaces freight to a certain extent.
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 had a lot to talk about, but it's fun when you get to talk about a lot of good things after 2 years of talking about pandemics. We're excited. We've got our AGM later this morning. For those who could join us, it's great. We're 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 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.