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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. Welcome to Exchange Income Corporation's Conference Call to discuss the Financial Results for the 3-month and 6-month periods ended June 30, 2022. The corporation's results including the MD&A and financial statements were issued on August 11, 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 or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied 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 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 will try to be as brief as possible and give plenty of time for your questions. With me today are Rich Wowryk, our CFO; and Carmele Peter, our President. When we reported our Q1 results in May, we announced a number of exciting things that occurred subsequent to the end of the first quarter, including the acquisition of Advanced Paramedics Limited, Northern Mat & Bridge and enhanced $1.75 billion credit facility, strong results 2022 and 2023 financial guidance, and a dividend increase for the first time since the onset of the pandemic. I am very pleased to announce that these initiatives are very evident in our second quarter results. The second quarter included only 7 weeks contributions from our new subsidiaries, but still recorded new record highs in virtually all financial metrics. In spite of the ongoing challenges from the pandemic, supply chain issues, inflation and labor shortages in some subsidiaries, our performance was so strong that we are not only able to hit record highs in absolute and per share metrics, but also enabled us to increase the 2022 guidance we provided last quarter, and for the second consecutive quarter, increased our dividend. The second quarter is typically an average quarter seasonally for EIC as it does not have the winter road issues that impact Q1. But it's not yet at peak summertime volumes, evident in our aviation and sub-manufacturing companies. Northern Mat was a large acquisition, but it does not change the seasonality profile of EIC as it is also slowest in the first quarter and busiest in the third quarter. Richard will detail our financial results in a moment, but I would like to hit on some of the highlights. The 2022 results do not include any subsidies from the government. The comparable period includes $17 million in support, making the size of the improvement over last year that much more impressive. Revenue increased 64% to an all-time quarterly high of $529 million. Adjusted EBITDA increased 42% to $115 million, also an all-time quarterly high. Net earnings grew 82% to $30 million, an all-time quarterly high and on a per share basis grew 73% to $0.76 per share. Adjusted net earnings increased by 95% to an all-time quarterly record of $39 million or $0.98 on a per share basis. Free cash flow less maintenance capital expenditures was $1.20, up 22% from last year. The trailing 12-month payout ratio on a free cash flow less maintenance capital expenditures basis strengthened to a rock solid 56% from 58%, while it improved to 87% from 118% when calculated on an adjusted net earnings basis. Our second quarter shows the impact of a long-term focus in investing and decision-making. On a micro level, the numbers were the result of solid performance across the board in our 2 segments, including our recent acquisitions. But on a more macro level, the performance was driven by the long-term focus of management during the pandemic on investments to facilitate growth when markets improve. We have purchased aircraft to facilitate freight, Medevac and charter demand. We've pursued and won surveillance contracts in new markets around the globe and completed accretive acquisitions. Our aviation business entered the quarter dealing with declines in passenger loads from the Omicron variant of the COVID virus. This variant in northern community is much harder than earlier versions of the virus. Fortunately, this was relatively short lived and volumes bounced back during the quarter. The degree of the recovery varies geographically. PAL's business in maritime has fully recovered and is at or ahead of 2019 levels. Central Canada and Nunavut will be between 75% and 95% of 2019 levels. In most markets, the rate determining step is to return to or to exceed 2019 levels is access to medical resources. While the pandemic has clearly receded and the medical system is still overwhelmed, as access to appointments and diagnostics improves, passenger levels will follow. Our Medevac and maritime surveillance businesses continue to perform as expected with strong demand and corresponding margins. The exception to this being the force multiplier, where the usage was less than normal because of government focus around the world on the situation in Ukraine. Medium and longer-term demand remains strong. The Netherlands surveillance contract begins in the third quarter, and we completed preparation of the aircraft subsequent to the end of the second quarter. Regional One continues to perform well. Parts, components and full aircraft sales remained very strong above 2019 levels. The leasing of engines continues to accelerate with the leasing of full aircraft is only improving slowly. The leasing of aircraft is hampered by a shortage of pilots. Airlines do not have sufficient labor to add flights and as such, do not require the additional lift as quickly as passenger demand would suggest they would. We expect this to continue to improve over ensuing quarters, albeit more slowly than we would like. In aggregate, however, Regional One is performing well. A quick comment on fuel prices before we move on to the manufacturing segment. Fuel prices moved rapidly higher during the quarter before moderating as we moved into the third quarter. Many of our contracts have fuel surcharge provisions and our market position ensures we are able to pass on our increased fuel costs to our customers, whereas specific contractual arrangement does not exist. The price adjustments typically lag the change in fuel costs. So there is a marginal hit during times of rapid escalation, but a reverse effect in times of fuel price decline. As such, in the long run, the price of fuel does not really impact our adjusted EBITDA, but it can have short-term impacts as pricing takes time to adjust. Manufacturing had a strong quarter, driven by continued resilient performance by our legacy companies and our most recent acquisition, Northern Mat. Demand has remained strong throughout the segment. Alberta operations has benefited from the stronger oil and gas sector. WesTower continues to benefit from the rollout of 5G systems across the country. Backlog remains strong in our precision metal businesses and stainless tank businesses. All have dealt with challenges arising from supply chain delays and inflationary pressure to a varying degree, but have been able to mitigate these challenges effectively. As discussed in the last few quarters, Quest dealt with the supply chain and inflationary pressures, but is also dealing with a disruptive production schedule from jobs which have been delayed or canceled through the pandemic. This production challenge will continue through the balance of the year. Notwithstanding this challenge, Quest materially exceeded our internal expectations for this quarter and was within $1.8 million of the high water EBITDA generated in Q2 of last year when the impact of government support received in 2021 was eliminated. Quest has continued to see strong demand for its products throughout 2022 and has been able to convert opportunities to orders. Our order book grew significantly during the first quarter and the pace of our order book growth doubled in the second quarter to $100 million. The order book has continued to grow early in the third quarter as well. In short, while Quest will deal with challenges through the balance of the year, the outlook for 2023 and beyond is strong and continues to improve. This was the first quarter in which results of Northern Mat and Bridge were included in the EIC results. Northern Mat is doing exceptionally well at the highest end of our expectations and well beyond the historical results upon which the deal was negotiated. There are a number of industry macros, which are all contributing to their success. First, there are a number of longer-term linear projects, which require a substantial number of mats, including pipelines and transmission lines. Second, the recovery in the oil market, driven by the need for domestic production strengthened the oil services segment also increasing demand. Third, many other companies in the temporary road business did not invest in new mats at the same rate as normal during the pandemic, and as such, the industry-wide availability of mats was limited. Finally, lumber to construct new mats was exceptionally expensive and availability of supply was weak. These factors added up to very strong demand for matting and limited product availability. As a result, utilization rates were very high and rental rates increased. Northern Mat manufactures its old mats through facilities in Prince George and Creston BC. The vertical integration enables them to produce mats at a lower cost than other rental companies who purchase the mats from manufacturers. More importantly, however, it allows them to ensure their own supply in tight markets. Northern Mat managed with tremendous foresight and continuing to purchase fiber during the pandemic when demand for mats was lower. As demand has increased, they've been able to quickly ramp up production in the manufacturing facilities and thereby increase the size of the rental fleet. Northern Mat is expected to continue to perform well through the balance of the year and in 2023. While these factors may not align us directly as they have in the current year, so expected to meaningfully exceed what the business has purchased off of and the guidance we provided when the transaction was announced. We are very bullish on the whole matting segment to look to deploy capital to expand the Northern Mat business, whether through acquisition or organic geographic expansion. Its products are an environmental best practice, and the number of potential uses is expanding. What was simply an oilfield services play 10 years ago is now involved in electrical distribution, forestry and alternative green energy solutions. We expected a lot of Northern Mat team when they were purchased by the company and they have not disappointed. In fact, they have exceeded our expectations, and we are excited about the growth opportunities under their leadership. Our acquisition pipeline is as robust as it has been at any time in our history. It is somewhat counterintuitive, but the recent increase in the interest rates appears to have been good for our competitive position when looking at desirable companies, particularly those in the $100 million-plus purchase price range. We are looking at a number of opportunities related to our existing manufacturing companies, together with organic growth opportunities through significant government contracts in our Aviation segment. While we do not have any transactions at the stage where we know they will proceed, we are cautiously optimistic about the opportunities we have identified. Before I hand the call to Richard to detail our financial results, I would like to conclude with a quick discussion of our decision to increase our dividend for the second consecutive quarter. Those of you who have followed the company for a long time have seen that since inception, we've been focused on growing our company in a sustainable manner that will enable us to consistently and reliably increase our dividend to shareholders. During the pandemic, we were able to maintain our dividend during a very difficult period, particularly for companies with aviation exposure. This was a result of excellent focus of our management teams to make sure we look after our customers, our employees and our cash flows. But equally important was the investments made in these preceding periods, creating a diverse portfolio of companies with different economic drivers. We continually spoke during COVID about the investments we are making with an eye on growth post pandemic. After the first quarter, we provided guidance and increased our dividend. The results of the second quarter were so strong as is the outlook for the future that we have revisited our guidance and have chosen to increase the dividend for the second consecutive quarter. The work done during the pandemic is beginning to pay off. The decision to increase our dividend is always based on our operations that can sustain the payment both currently and in the future. And this increase is no different. Well, it marks only the second time in our 18-year history that we have chosen to increase the dividend in consecutive quarters, the results clearly warrant. Our payout ratio is declining from what was already a strong position and our outlook is excellent. During COVID, we preserved the dividend and now we have returned to profitable growth and increased cash flow, and we are sharing it with our shareholders. As I mentioned in my CEO message in our financial statements, the best is yet to come. I will now hand the call off to Richard, who will detail the second quarter results.
Thank you, Mike, and good morning, everyone. During the second quarter, to ensure that the corporation had capital available to support its robust acquisition and organic growth opportunities, the corporation increased the size of its senior credit facility to $1.75 billion, up from $1.3 billion while still maintaining the $300 million accordion and extended the term of the facility to May 2026. This extension, along with other convertible debenture transactions completed recently, leaves the corporation with no debt maturities until June 2025. The structured timing of debt maturities and the regular extension of our senior credit facility with exceptional support from our syndicate of lenders provides financial flexibility. During the quarter, the corporation utilized its senior credit facility to fund the acquisitions of Northern Mat and APL and invest in other initiatives that will drive growth in the future. The corporation's leverage ratio is slightly higher than its historical range with this deployment of capital, but as well within the corporation's covenant maximum 4x senior debt to EBITDA. The corporation made several investments in working capital during the period that are either temporary in nature or will drive future growth. The corporation made a $26 million refundable deposit in its rotary wing operations for helicopters that would be required if the corporation is successful in its bid on a 10-year rotary wing medical contract in Canada. In addition, the corporation has made several deposits on aircraft and engine assets that will either result in capital expenditures over the remainder of the year or will be returned if the transaction is not completed. Other investments such as increased investments made in Regional One in inventory of assets for retail will drive higher sales in the future. Finally, the corporation's manufacturing subsidiaries have invested significantly in their inventory levels to mitigate the impacts of supply chain disruptions. These inventory balances will be right tested over time as supply chain improves. Corporation has completed 7 acquisitions in the last 12 months, and those acquisitions in addition to improvements in our other operating subsidiaries drove materially improved financial performance over the prior period. The corporation's results were arguably the best in its history during the second quarter with several records set. Revenue was $529 million, a quarterly record and 32% higher than our previous quarterly record. Adjusted EBITDA was $115 million, a quarterly record and 21% higher than our previous quarterly record. The corporation's free cash flows less maintenance capital expenditures both on an absolute basis and per share basis were both second quarter records for EIC. Net earnings was an all-time quarterly high. Adjusted net earnings was an all-time quarterly high, exceeding the previous high by 16%. Per share results were also a second quarter record. On a consolidated basis, adjusted EBITDA increased $34 million or 42% over the prior period despite a $17 million reduction in government support received compared to the prior period. Improvements across both of our segments drove the increases over the prior period. In the Aerospace & Aviation segment, strong demand from reductions and in some cases, complete removal of travel restrictions and quarantine requirements have benefited our subsidiaries. In the airlines, pass-through traffic was impacted the most by these changes and to a lesser extent, lease revenue at Regional One benefited during the quarter. Regional One also took advantage of marketing dynamics and continues to set quarterly records in sales of aircraft and engines in addition to seeing record levels of part sales. Starter, Medevac and aerospace operations continue to contribute positively to the segment's results. Lessening COVID-19 impact helped our manufacturing subsidiaries as well. And although the challenges of required COVID-19-related employee absenteeism shifted to supply chain and labor challenges, our manufacturing subsidiaries work together to collectively solve their supply chain issues and fared very well considering the challenges they face. Our adjusted EBITDA margins were impacted by 3 notable factors compared to the prior year. First, CCI acquired in December of 2021, generates lower margins as capital requirements are minimal beyond working capital; second, rapid escalations in fuel prices initially impact adjusted EBITDA until fuel price escalators in our contracts become effective or until fuel price surcharges are implemented. Thereafter, adjusted EBITDA margins are still impacted as these surcharges are flow-throughs to the customer. Finally, lower government subsidies, decreased margins as there were no costs associated with those subsidies. The acquisitions completed in the last 12 months, most notably Northern Mat, Carson Air and CTI contributed to the increase in revenue and adjusted EBITDA. The increases in adjusted EBITDA were partially offset by increases in other expenses. Depreciation increased over the prior period due to investments made in growth capital expenditures, the addition of capital assets through the corporation's 7 acquisitions and increased flying completed by the corporation's airlines. Interest expense increased over the prior period due to funding of our recent growth initiatives and acquisitions with senior debt and increases in the benchmark borrowing rates since beginning of 2022. Other costs associated with our acquisition activity, notably acquisition costs and intangible asset amortization also increased over the prior period. With a significant increase in adjusted EBITDA more than outpacing the increase in these costs, net earnings increased to $30 million, an increase of 82% over the prior period. At the same time, adjusted net earnings increased 95% to $39 million over the prior period. Free cash flow less maintenance capital expenditures increased by $11 million over the prior period to $47 million. The increase is mainly attributable to increased adjusted EBITDA, partially offset by increased maintenance capital expenditures. The corporation's trailing 12-month payout ratios improved over the prior period to 56% on a free cash flow less maintenance capital expenditures basis from 58% in the prior period and 87% on an adjusted net earnings basis from 118% in the prior period. As discussed earlier, these improvements reflect prudent and accretive investments throughout the pandemic and the beginning of realizing on those investments in a material way. In early 2019, the corporation laid out its intention of lowering its payout ratio to 50% on a free cash flow less maintenance capital expenditures basis and to 60% on an adjusted net earnings basis over a 3-year period. While we temporarily put this target on hold due to the impact of the pandemic had on our operations, we have never been in a better position to achieve these targets set back in 2019. The trailing 12-month payout ratio on a free cash flow less maintenance capital expenditures basis is now better than it was at December 31, 2019, with a clear path for continued improvement in the short to medium term. The adjusted net earnings payout ratio is improving at a more rapid pace in recent quarters as our leased aircraft and engine portfolio, despite its underutilization continued to be depreciated during the pandemic. As we exit the pandemic, margins on asset sales are at or above pre-pandemic levels, showing that our depreciation of our leasing assets during the pandemic was appropriate despite this underutilization and proving out that the value of our leasing assets are not impaired in any way. In addition to continuing to depreciate the assets on our portfolio, we did not record lease revenue for deferred lease payments during the pandemic, meaning lease receivables did not grow materially as lessees were unable to fly due to COVID-19 travel restrictions. We expect continued accelerated improvement in the adjusted net earnings payout ratio over the next 18 months and beyond. And as we indicated at the time in 2019, moving our payout ratios towards these targets would not come at the expense of dividend increases when results warranted. And here we are in the first 6 months where restrictions have lessened in a meaningful way, delivering our second dividend increase to our shareholders. That concludes my review of our financial results. I will now turn the call over to Carmele.
Thank you, Rich. This morning, I have the pleasure of discussing our outlook, which we are very excited about and is a testament to staying true to our business model of managing for today and investing in tomorrow even during the pandemic. I will first discuss the Aerospace and Aviation segment. Our airline operations are anticipating further improvement for the balance of 2022. This will be driven by continued progress in passenger traffic, capitalizing on further pullback in the maritime market from mainline airlines, increased capacity to take advantage of growing demand for charters from existing and new customers and continued strong performance in cargo and medevac operations. This segment will also benefit from the deployment in Q3 of our rotary wing trauma flight operations in Thompson to serve Northern Manitoba. Regional One will continue to see improvements in the back half of the year, although leasing has lagged recovery first due to the impacts of COVID on the airline industry as a whole and now due to the overall impact of flight crude shortages causing on the airlines to park regional aircraft and focus on larger gauge aircraft, it is a short-term issue. So while we anticipate leasing to slowly improve in Q3 and Q4, we do expect significant improvement in particular for engine leases in 2023. In the interim, Regional One has been and will continue to be opportunistic on acquiring and selling aircraft and engines and will continue to experience strong parts sales. Aerospace will also see growth for the balance of 2022 with the start of the Netherlands surveillance contract in Q3, strong operational tempo in UAE and under our DFO contract as well as robust sales for the CarteNav mission system. The Manufacturing segment will see the largest growth with the full contribution of Northern Mat for the balance of the year. Northern Mat is performing at the highest end of our expectations. This performance level is expected to continue for the balance of the year, driven by several macroeconomic events described earlier by Mike. While it is not expected that all of those macroeconomic events will continue to align as well as they have in 2022, we do expect results to continue to be notably better than the financial metrics on which we acquired Northern Mat. Quest's results for the balance of 2022 will continue to be impacted by COVID-related project delays that occurred in 2020 and 2021, which given the long order cycle, 12 to 24 months, impacts 2022 production in addition to inflationary and supply chain issues. However, these are short-term issues with the medium and long-term looking strong, evidenced by a quarter-over-quarter net increase in Quest order book of approximately $100 million. These new projects are for 2023 and 2024. The balance of the Manufacturing segment is expected to perform well in the back half of the year, driven by telecommunications industry after rollout of G5, increased activity in capital projects in the oil and gas industry in Alberta, increased demand in the defense sector and the benefit of the tuck-in acquisitions we made in 2021. Now that's not to say that there will not be challenges ahead as there will be supply chain impacts, labor shortages, inflationary cost increases will continue to put pressure on margins, but we are and we will continue to manage through these issues with our collective capability and initiatives we have put in place. So for instance, our Life in Flight program is transitioning pilots into our flight lines. Our apprenticeship programs are developing skilled workers, such as aircraft mechanics and welders for our businesses. Our labor recruitment efforts have brought in 22 Ukrainian immigrants into our workforce and our fuel surcharges are now substantially offsetting the increases experienced. We are also starting to see stabilization of import costs and in some instances, a decrease. So while challenges remain, we are confident in our management teams and the steps we have taken to mitigate them. With the expected increase in operations for the balance of 2022, we anticipate maintenance CapEx to remain close to current levels for the next 2 quarters, perhaps slightly more weighted to Q3. Although our maintenance capital expenditures are typically weighted to the front end of the year, the onset of Omicron late in 2021 and into 2022 delayed some of the maintenance activity to later in 2022. Also the acquisition of 8 businesses since the pandemic again began the capacity added in our aviation business and the maintenance investment in our leasing portfolio to take advantage of expected increases in aircraft and engine leasing contribute to the overall future maintenance investments required. Growth investments to achieve this expected performance or 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 the surveillance aircraft for the renewed Curacao contract, the completion of the new hanger required to meet obligations under our fixed wing search and rescue contract and opportunistic acquisitions by Regional One as it continues to take advantage of aircraft market dynamics. Additionally, as we have done in the past, we will look to see both organic growth opportunities and accretive acquisitions that meet our criteria. In that regard, our pipeline of potential acquisitions is robust. So as you can see, our future is bright. And with the strength of our performance for the balance of the year, we have revisited the 2022 EBITDA guidance we provided in Q1, which was between $410 million and $430 million and are increasing it to between $435 million to $445 million. At this time, we are not changing the EBITDA guidance we provided for 2023 being between $500 million and $530 million, but we will review this guidance as we complete our 2023 budget process, and we'll provide further commentary when we report our Q3 results. But not only does our outlook give us the confidence to increase our guidance for 2022, it has enabled us to reward our shareholders with a second consecutive quarter annualized dividend. 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 of Raymond James.
Mike, it sounds like Northern Mat has been an outstanding addition, particularly in light of its integrated manufacturing capabilities here. Is it fair to assume that Northern is taking incremental share through the cycle given these unique capabilities? And could you just perhaps speak to those in the context of the broader industry?
Steve, help me with incremental shares, what are you asking me?
Just how unique is the manufacturing capability of Northern Mat and does that allow you to take share?
Yes. It's a huge advantage to be able to ramp up and ramp down your production under your own control. We've seen through all of the pandemic that lumber prices were at all-time highs. And on top of that, supply of the wood required for matting was very hard to get because they're large timbers and they're not always available. So with the fact that Northern took a longer-term view, they continue to buy fiber throughout the pandemic. And as such, we're well stocked to be able to run our plants at one shift capacity. And so we have access to new products taking advantage of the opportunity. So it makes us more efficient. It's cheaper than buying them from third parties. But most importantly, it gives us access to the mats in periods like this, which lets us ramp the size of our rental pool to take advantage of demand in the marketplace.
And management has a really good relationship with lumber suppliers. So it's enabled us to get access to lumber when others perhaps were having a little more difficulty in that area.
Okay. Very helpful. And just quickly on Regional One, also hitting stride. How difficult is it for Regional One to source parts in this type of environment where they do sound like they're becoming very tight?
Not really. I mean we've always been opportunistic in that business, Steve, so we make our money to be honest in how we got. And so a lot of the stuff is moving things from your lease fleet to your inventory. And so at the right time, we tear things down if the demand for the parts exceeds the demand for the aircraft to term parts. And we've been doing that through this. The demand for components has been exceptional. To be honest with you, it's probably even exceeded our internal expectations, and it looks strong in the future, particularly as the pilot situation gets better. There's a whole bunch of underserviced communities and underserviced passengers in North America and in Europe. And as those planes start to fly, I think the demand, particularly on the engine front will continue to accelerate. There's only so many slots at the engine overhaul facilities, and those are booked. So as they fly more, they're going to need temporary engine solutions, and we're glad to help people with that.
And it's a good question, Steve, because it really does highlight how Regional One effectively manages their assets, so you take our leasing portfolio, we have the ability if there's a high demand in parts to be able to tear down those aircraft because the leasing is just burning off the green time or take components off, keep the engines in the pool, but then take the parts which are needed and put it through our parts sales. So it's that ability to ensure that we're maximizing the value with the aircraft based on demand in the marketplace.
Your next question comes from Cameron Doerksen of National Bank Financial.
So I just had a couple of questions on the Manufacturing segment and maybe a follow-up to Steve's question on Northern Mat. If I look at the margin in the Manufacturing segment, obviously, very, very strong. Is it safe to say that, that would be largely driven by the inclusion of Northern Mat. Maybe you can just talk a bit about the margin profile there.
Sure. The legacy part of our manufacturing business did well. It kind of gets lost to a certain extent with the acquisition of Northern Mat. So even with the challenges they faced, they were able to maintain margins in a little more difficult environment. So we're very happy with that. but the delta comes from Northern Mat. Northern Mat has a big rental business. And as such, that's going to have high EBITDA margins. Now it's somewhat offset by maintenance capital expenditures, as Carmele talked about in her comments. We're going to invest $20 million a year plus in that business in maintenance CapEx. The math remain a word and they have a finite life spend 4, 5, 6 years, depending on how they're used. And so that pushes up the profile. But even within that, the utilization rates are great, and the pricing is strong. So those strengthen an already strong margin profile. I would almost look at Northern Mat in terms of its margin profile, Cam, almost like an airline. The airlines typically have higher margins than our manufacturers because they have higher reinvestment requirements. And that would be the same with Northern Mat, although their reinvestment requirements wouldn't be as high as the airlines, but conceptually, the tracking is the same. Our rental fleet generates higher return profiles. And even when we sell that, those are at higher margin returns that we would get in a typical manufacturing environment.
Okay. No, that makes sense. And just secondly, on manufacturing. Obviously, Quest had a very good quarter as far as bookings, big backlog growth there. I guess it's safe to assume you're not seeing any indications of a slowdown in multiunit residential construction. Maybe you can just describe the backlog growth there. I mean, where are you seeing the strength? Is it existing customers? I mean, obviously, you've got some new markets as well. So just any color there.
Yes. I asked this question as recently as 2 days ago when the guys are in town. And we've seen no decline in demand and opportunities to look at. And quite frankly, we've seen kind of a bit of a bump in closings. And we think it's because people are locking in costs at the current rate. If there has been any change in the business in certain markets, particularly Canadian markets, there's perhaps a move or a thought of a more rental-based project than condo projects. I mean from our point of view, they're exactly the same. You can't tell the difference between a condo apartment and a rental apartment. And the U.S. has always been a rental market, continues to be. We've probably seen the biggest improvement in demand in the U.S., and I would suggest that's largely because Canada never saw a decline, Canada was remarkably resilient through all of this. And the U.S. had a slight decline during COVID and we're seeing that normalize. So we find it very encouraging. The level of growth with $150 million pickup in that order book. That order book is now at all-time high. It's better than it was pre-COVID and materially higher. Now it's a bigger business because we own our installers. But even without taking that into account, the order book is as strong as it's ever been.
And the backlog is relatively consistent in all our traditional markets with a slight uptick on the West side of the U.S., California and Seattle, which was actually a little slower than on the East side. So it's a little bit of pickup there, but strong demand across our markets.
Your next question comes from Chris Murray of ATB Capital Markets.
So just maybe turning back to Northern Mat for a couple of seconds. I'm just trying to maybe understand how you guys are thinking about this. So we certainly saw the higher margins working through, I think, as you guys described. Some of the CapEx, just so I understand, because I mean, one of the things about Northern Mat was a higher EBITDA margin, but it also had higher CapEx. Are you considering the ongoing building, call it, normal inventory. Is that running through CapEx? Or like can you just kind of walk us through how that's going to show up in the balance sheet and cash flow demands?
Yes. Chris, I'll take this one. So it's no different than how we deal with our Regional One lease portfolio and our Regional One lease assets versus inventory. So as the time management builds the, sorry, just to start, raw materials will always be in inventory. So they buy the timber from the providers, they put in inventory. Once they build the mat, management will take a look at the asset and say, am I going to lease it or sell it to a third party. If they're going to lease it, it will go immediately into their capital assets and then show up either as maintenance or growth CapEx depending on if it's at or below if it's below the depreciation level, it'll show up as maintenance CapEx to the extent that it exceeds depreciation for the quarter, it will show up as growth CapEx. If they plan to record it or sort of plan to sell it to a third party, it will show up in the inventory and will be sold out of inventory.
Okay. So maybe to dumb it down. So the expectation would be that we will see CapEx going into Northern Mat showing up in either the maintenance or the growth lines as you suggest and that's just the way you'll be treating the construction of Mat's as capital assets is the way to think about it and then making a decision after the fact.
Yes. So when we build the mats, unless we intend to flip it immediately, it will end up in our long-term assets. And then the breakdown between maintenance and growth sounds complicated, but it's really not. We need to maintain the ability to earn income that get used up and chewed up when heavy trucks drive on wood, things happen to it. So we invest an amount equal to that decline in the existing thing to maintain it. Those are maintenance CapEx. And then we build extra mats beyond what we need to maintain if that's a growth CapEx because that will drive future lease revenues higher. So it's actually pretty straightforward.
Okay. That's helpful. And then my other question is maybe turning around to new growth opportunities. So I guess there's 2 parts of this. One is you did allude to the fact that the M&A pipeline is pretty healthy, but the multiples are coming in with, I guess, with interest rates moving higher and maybe making it more difficult for other buyers. So the first part of the question is just how are you thinking about things in terms of just magnitude of acquisitions? And how should we be thinking about timing? Or is there anything we should be aware of? And then the other part of my question is just sort of new contracts for particularly aviation. I know there's some specific contracts that might be coming up. Just any update you can provide on new contract opportunities for PAL would be great.
Okay. Your first question, about the acquisition market is a good one. What we've seen is the change in interest rates, well, it does affect our cost of capital modestly. It doesn't have a big impact. But we've always been very disciplined with what we're prepared to pay, and we want that 15% unlevered return after maintenance reinvestment. Historically, for the last 5, 6 years with the hyper liquidity in capital markets, we were up against a lot of private equity people that were prepared to put a lot more debt on than we were. And as a result, we're prepared to pay more, which limited our competitiveness on larger transactions. For the sake of EIC, we'll call larger transactions, transactions with a purchase price in excess of $100 million. Now in the higher interest rate environment, while the cost of secured debt has gone up, the cost of subordinated or second tier debt has gone up even more. And so these highly levered models don't work as well. And so to the extent that we compete against them, they can't pay as much as they did in the past. And so while we did most of our deals under the $100 million threshold over the last few years, we did the Northern Mat deal at 300 plus, which is the biggest deal we've ever done. And the number of the transactions we're looking at now would be in excess of $100 million. Perhaps the easiest way to look at it is I would suggest that the number of transactions that we're very interested in is higher than historically. But I would say the average size of those transactions are higher because of what's going on. And the other thing I'd add to this is I personally find a bit surprising because I don't think the interest rates have moved that far is one of the things that's becoming a huge issue with vendors is certainty of closing. The proven ability to close a transaction, have the money to close the transaction and that they have certainty that you're going to proceed has helped a lot. There's been a number of transactions, I believe, on the private equity side that have been postponed, renegotiated or canceled and it's made vendors concerned. And so our proven track record of closing when we say we're going to close also helps us in this environment. The second question...
I can take it.
Do you want to take that...
Sure. So Chris, let me give you an update, maybe to put everything in perspective. So we have our kind of core contracts for provincial fixed wing search and rescue, DFO, UAE, Curacao was we've had for a number of years. It got renewed for 10 years in December of 2021. So we're busy updating those aircraft and the new aircraft, given the lead times for sensor equipment, probably not going to see those actually go into the new contract on both first part of 2024, but we're working a way on that. In the meantime, we continue to obviously hold that contract. Netherlands, we are putting the first aircraft in operation this month. Second one is scheduled to go end of September. Then as far as outstanding bids, Malaysia. So as we've, I think, commented before, we're down to 2 bidders, Powell being one of them. We completed technical visits in beginning Q3. And we expect a decision sometime this year, hard to exactly say when given these procurement processes, but that's the time frame that we're expecting to hear. There's also the future aircrew training bid, which we are bidding as part of a consortium with Skyline. The Powell portion of that would be the rear crew training aspect of that. Those bids are probably required either end of this year or the beginning of Q1 2023 and take the federal government about a year to assess that. So contract award, think of it probably beginning 2024.
Your next question comes from Matthew Lee of Canaccord.
So just maybe a housekeeping question to start on the convertible shares. I noticed that in this quarter, you kind of include them into your fully diluted despite none of them really reaching the conversion price. Is there just an assumption change there? Or is that something that has changed about business?
No. So when we assess whether something is dilutive or not, we have to assess when you add back the after-tax cost of the interest and look at the debentures on an if-converted basis. So then you add back the number of shares that would result from that conversion. If by adding the interest back and adding the shares in your earnings goes down or whatever metric you're talking about, then it's dilutive, in instances where you add back the interest and add back the shares and the earnings go up, it's not dilutive. So here, it's just a function of the earnings in that specific quarter. And when earnings or any metric is low, the dilution impact will generally won't be a dilution impact. So it just speaks to how good the quarter was when you see the debentures being dilutive because as we add back the interest cost, there's a greater impact from adding the shares back in. And so generally, when you look at industry, we wouldn't have had dilutive impacts in Q1 and depending on as we move throughout the year, you see the dilutive impact as you move further into the year as earnings increase.
Great. And then maybe on the Regional One side, were there any large onetime lower margin sales, maybe full aircraft sales in the quarter, just because the revenue number was certainly kind of much larger than expected, but it didn't really slow down to EBITDA if you talk about that quickly.
The mix of revenue at Regional One changes quarter-to-quarter, Matt. The pure parts sales is reasonably consistent quarter-to-quarter, and the margins on those are fairly consistent. The number of larger piece sales varies and the margins on those are lower. And you're correct that there were a few larger transactions during the quarter, which deliver absolute dollars in margin, but at a lower percentage terms. So your analysis is correct.
Your next question comes from Krista Friesen of CIBC.
Congrats on a great quarter. I was just wondering if you can speak to what you're seeing in the labor market. I know there are certainly labor issues on the aviation side. But on the manufacturing side of the business, what's it like there? And how's the turnover? And are you needing to pay up for labor at this point?
Yes, it's a good question I'm cautiously optimistic on this or maybe just optimistic, period. But we have seen in the last 30, 60 days, a stabilization of the labor force. And I'm not speaking of any company in specific, I'm speaking generally. Perhaps a discussion of a recession and the increase in interest rates has let employees where they're happy to stop chasing around for relatively small increments. So is there wage pressure? Yes, that's still there. I would describe it as modest. It's real, but it's not massive. And the churn of our employees has declined. And so while it's still hard to grow your labor force, the ability to maintain our labor force has actually improved somewhat, I would say that it's a relatively short period. It's less than a quarter, we've seen that for. But we're hoping that perhaps the impact of the Fed changes and staff has led people to go, okay, I'm good where I am. We're happy. We're going to stay. And we still are focused on growing it in some of our places in Quest as we ramp up, we'll want more employees, both in Toronto and in Dallas and other places. So the hiring will continue. It's not easy, but it's on the right side. It's getting better.
That's great. All my other questions have been asked.
Your next question comes from Jeff Fenwick of Cormark.
So Mike, just wanted to look at the legacy in-house segment there in the margins, always a little tricky because there's so many moving parts. I know you called out the fuel surcharge, the pass-through there taking a bit of time to help you out here. But as we go forward, are we expecting the combination of utilization, passenger traffic picking up and that fuel cost pass-through catch-up? Is that something that should help you out on the margin front going forward? And I know you've got some other things coming on stream in that revenue mix. So I'm just trying to get some thoughts around how we should think about that.
This might be the shortest answer I give today. Yes. Those things, passive volumes, in particular, are the biggest driver of margins in aviation. We were doing freight flying or charter flying, those come with a fixed margin, but 2 extra bodies on an airplane makes a big difference to the bottom line of that flight. So yes, as we get that last 10% or 15% of passengers back, freight or fuel being reasonably consistent, whether it goes up slightly or down slightly, really doesn't change much as long as it's not dramatic in either direction, I would expect margins over time to get better.
Okay. That's helpful. And then maybe just one more on the M&A outlook there. Northern Mat was a little bit outside of what you've typically looked at in terms of airlines and manufacturing. How are you thinking about where you're targeting opportunities on the M&A front now if you're seeing the market open up a bit?
That's a really good question, and this answers a little bit all over. But first of all, the stuff we're looking at right now is almost all tied to businesses we're already in. So whether they're geographic expansions, vertical integration plays or taking or acquiring a competitor. Almost everything we're looking at now would be very related to something. And there's probably I would say there's a predominantly manufacturing focus at this point, not because we don't want to do aviation. Aviation seems to be a lot more on the organic side right now, where contracts we're bidding on. We'll make investments, but they're investments in ourselves. But I don't want people to think that we're not maintaining that opportunistic dent to our acquisitions. If someone would have told me we could find a temporary wood road company that I'd like as much as I like Northern Mat. I'd have said there's no way. But the ability to find unique gems, as Adam and his team uncover are a big part of the secret sauce. If you look at our big acquisitions in the past, whether it's Quest Windows or Northern Mat or Regional One and aftermarket parts companies. They are all things that don't immediately jump your brain is I really need to own that. But when you meet the right management teams with the right market is we're all over it. So those are by their very nature harder to predict. The stuff we're looking at now though is it would be very related and synergistic to things we already own.
Your next question comes from James McGarragle of RBC Capital Markets.
Congrats on the great results here. My question is on Quest. With the new facility opened up and how strong the demand has been especially in Q2 with that pretty large increase to your backlog, I'm just trying to understand was that increase to backlog included in the 2023 guide? And we have both facilities running up at full capacity, no production gaps, what kind of upside do we see going into 2023? Or is this more of an upside into 2024? Just given some of the positive demand trends that we're seeing in that business.
Yes, that's a great question, James. The improvement in the production schedule is incremental. It starts getting better at the start of the year and by the sort of 3 quarters away through the year next year, we're running with a very nice production schedule. It's been a bit, but when we opened Dallas, that plant has way more capacity than our Toronto plant does. And so when we talk about running these plants efficiently, we still have tons of room to increase production in those facilities, adding people and adding equipment. And so we're not at that. What we're talking about right now and what's a big part of our budgeting process at Quest right now is what's the best practice now that we've got demand back. Currently, we're sharing the work to make sure we maintain our workforce to make sure we keep our employees. So we aren't necessarily choosing the most efficient plant to do a given project and we're more doing it to make sure we share workload. As we go forward, we're working on, are we going to specialize certain products in certain facilities? Or are we going to do geographic-based production? We know that we have sophisticated aggregate production to meet the order books as they are ahead to absorb further growth. But the exact way we're going to flow it through those plants is still an open-ended discussion. If I were a betting man, I would think you'll see a certain amount of specialization where we have difficult patio doors to build or we have specialized window segments. I suspect you'll see those all come out of one of the plants and another plant focused on something else so that we get the best learning curves in the businesses as they ramp to higher percentages of utilization.
Yes. We've also increased capacity by just running an additional shift, an evening shift or a night shift, so we have that capability at hand as well.
Okay. Appreciate that. And I just have another one on Regional One, you made some deposits on some capital assets. It seems like you're investing heavily in that business despite kind of that pilot shortage that's going on in Europe. So I guess the first part of my question is, do you have any line of sight now that starts to improve? And then when we're thinking about building out our models for Regional One, the size of the portfolio we're comparing it to pre-pandemic has increased by a pretty large amount here. And as that pilot shortage starts to potentially alleviate, could we see kind of revenue on this side of the business kind of increase in line with that, I guess, the increase in size of the portfolio? And was that kind of included in your 2023 guidance? Just trying to understand the potential upside there.
The 2023 guidance is, bear in mind, we didn't bump that yet. We decided that we don't want to be changing guidance every quarter. That's not the point of it. And so we want to give you guys a really good number, and we're doing that as part of our budgeting. So we'll give you a number that we're pretty confident in when we complete our Q3 results. When you look at what's in the existing number, it definitely includes an improvement in the overall industry. I would caution against just using one proxy for the value of what's invested in Regional One. We have more items, but aircraft isn't necessarily exactly the same. We could have an ERJ that we've got $2 million in or CRJ900 that we have $10 million in. So the absolute number is one indicator, but it's not a perfect indicator. So If I was looking at this and we gave you guys changes in growth CapEx and investments in inventory, add those together, that gives you an idea of what the aggregate is that we're putting into those businesses. And do we see this improving? Yes. I think one of the things that makes Regional One the company it is, is Hank and Doron, are fully prepared to buy what everyone else is selling. And this is no different. Although I think if you look at the tenor of some of the calls of some of the bigger airlines, while they're not using the regional aircraft to the extent they could be now because of pilot shortages, they are still investing in those aircraft. The CRJ550 is a good example where CRJ700s are being turned into 50-seat aircraft. And that's still a very active marketplace. They're not flying yet. But the airlines know there are certain communities that are always going to be served on regional jets. And the government is not particularly in the U.S., and to a lesser extent, in Europe, not going to let these companies or cities be underserviced in a longer-term sense. And so they are training more pilots. They will get more pilots, as the pilots come, these planes are going to fly because there isn't an alternative in those markets. It's not like if you could go get some more 737, a market that carries a 60 or 70 seat plane doesn't want a 200-seat plane because you can't make money on it. And so these planes are going to come back. It's going to phase back over ensuing quarters. And quite frankly, the advantage of Regional One being part of EIC is it doesn't need to be in the next quarter. We've got lots of things going in the right direction. You've seen the long-term improvements in this with the addition of Northern Mat with the improvement at Quest and the stronger performance of the airlines. Whether it takes us 1 quarter or 3 quarters to get that lease fleet where we want it to, we know it's going there. I think it would be false for vital for me to tell you exactly when it is because we don't know, but we're really comfortable. That's where it's going. And we're really comfortable we can see some of that in 2023.
James, you will have seen in the last several quarters, Regional One being actually fairly active on the aircraft and engine transactions. Those have been up in the last several quarters. And so deposits are reflective of them continuing to take advantage of those market dynamics, which is helped quite frankly, with their results as leasing has been down, and we look for it to increase over time, as Mike said. But in the interim, they've been very effective of being able to get some profitability out of buying and selling.
Your next question comes from Konark Gupta of Scotiabank.
Good quarter. So first, maybe I want to kind of dig into the guidance here. So in comparing your 2023 and 2022 EBITDA guidance, so this like $75 million increase at midpoint, call it. And I know you will revise maybe the guidance for the Q3. But so in terms of the factors driving the growth in '23, I'm looking at maybe 4.5 months of incremental months of Northern Mat, there is 2 to 3 incremental quarters of Netherlands contract. And I guess you guys are seeing some rebound in airline traffic, Regional One leasing, Quest and some of the manufacturing businesses. What am I missing here on a very high level for '23?
You've nailed it. I mean if you look at the terms of quantum, the biggest contribution is a full year of Northern Mat. It's a big subsidiary for us. So that's a big contribution. A big contribution will be from Quest getting to a more normal production schedule, particularly as it accelerates throughout the year, is a big contributor. And then that last 10% of the airline passengers makes a big difference in that business, together with the other investments. And the thing that gets lost in this because we did a lot of smaller tuck-ins, those we get a full year contribution out of 2. They're not big numbers, but they improve the relative performance of each of those subsidiaries. So you're bang on, on adding the things together that drive that performance. And I think it's reasonable to assume, although I'm not prepared to provide any numeric background to where I think it goes. If this year's back end is higher, it's reasonable to assume that when we look at 2023, there's going to be some opportunities to increase that as well because you're bouncing off a bigger number. The offset to that is that some of the things came sooner. So we'll give you a 2023 number in November when I can give you something I'm really confident in. You guys don't want me increasing the guidance every quarter, although it looks nice. It means the guidance was too low to begin with. So we'll take a look at that once we finish our Q3 results.
That's great. That's good color. And then last one for me. You talked about the incremental opportunities you're seeing on the M&A side driven by the rising interest rate environment. The way I understand it is you are seeing an increase in the number of opportunities perhaps and perhaps average size of opportunities. But are you also able to now access any new verticals that you could not have tapped earlier?
I think there's advantages on the opportunistic front, where we couldn't get to a bigger deal for us to do something that's a little bit different than what we do. We typically want it to be a bigger size transaction. I think Northern Mat is the best example of this. But that's a $300 million-plus deal. It's 50% bigger than anything we've done in the past. And so while I wouldn't attribute our success there slowing interest rates that it is a contributing factor in the number of people competing for the transaction. And so yes, I think it does help us in other verticals. But in terms of the near-term vision, most of the things we're looking at would be very related to businesses we're already in, whether they're geographic competition purchases or vertical integration plays, most of the things we're looking at sound a lot like businesses we're already in.
Your next question comes from Tim James of TD.
My first question, for someone who looks at Exchange and these results that you put out and says, how is it generating these strong results in this environment where there's a labor shortage and equipment supply problems and inflation. I mean, is it just that Exchange, the acquisitions are kind of hiding that challenge that we're seeing through so many other companies and industries? Or is there something unique about the portfolio of businesses that mean that those external factors just aren't as significant for Exchange? And I realize and you've touched on where there are pockets of impacts for sure. It's here and there. But for somebody who looks at it overall, it just looks like it's coming out of this almost on stated and consolidated basis. I'm just trying to understand if that's just the challenge is hidden by the great M&A or if there's something else about the portfolio that's reduced your exposure to it?
No, Tim, that's a really good question. And strong M&A does make everything look good, but it's much more than that. And I would say the reason we're able to withstand some of the things may be a little easier than some other people is we tend to deal with niche businesses that have very strong market presence in what they do. They're not the biggest guys in the world, but they're really good at what they do. So they tend to get paid for what they do. So take us one of our smaller subsidiaries, as an example, stainless tanks in Springfield, Missouri. There's lots of guys who make stainless steel tanks in the U.S. and all are dealing with higher stainless prices, although that's kind of stabilized. Our guys build the best tanks in what they do, and we get paid for what we do. So we have challenges the customers who are prepared to pay for what it is, not doesn't mean we could just dump things on them, but it means if we do a good job of providing the service they want, we deal a little more easily than, say, a commodity supplier who's called to action as they're the cheapest guy in the business. Aviation is another good example of that, Tim, like we're coming out of COVID, and we're back to fully 100% in the maritimes and close to that, although not quite there in the central part of Canada. It speaks to who our customer is and what kind of business we're in. We're flying to [indiscernible], that's fundamentally different than flying to Orlando. We don't deal with the economic part of the business. We deal with just minding our business and doing a job within. And so it enables us to be more resilient than perhaps some of the more bigger commodity like names. And then finally, the third piece of it is diversity. And I know that there's a lot of people in the capital markets you believe if I want diversification, I'll diversify myself, if I want manufacturing and I want aviation, I'll buy a bit of both. But our ability to buy these things at the prices we do, which is the M&A thing you talked about earlier, combined with the fact that they don't have precise cycles that line up. And the best example I can give you is at the beginning of the pandemic, Quest sale because we had an order book projects that were 3 quarters done, you wouldn't have known there was a pandemic by their results. As we got into the back end, it's gotten more difficult because projects have been delayed, but by other manufacturing guys, when you look at the results, I don't see much impact of those macroeconomic environments. So for us, it's a combination of diversity. It's a combination of niche markets, and it's a combination of maintaining entrepreneurial management in those companies. So we're not trying to oversee them all from here. It's not a one-size-fits-all solution, how we're dealing with the problem in each business is very different.
Yes. The other, I think, strength that EIC has is its collective capability. And you say, okay, you got a bunch of airlines great. So if one airline is either short capacity, they didn't have enough pilots supply. We can rely on each other. We'll move in an aircraft from one of our other carriers to be able to ensure the customers look after or give you an example on the manufacturing side, if there were steel shortage of one of our manufacturers, one of the others was able to access it through their supplier. And we had a labor shortage up in BC, well at OMI to produce the product we needed to there. West Power had a manufacturing facility that we were able to move the product to. So having that capability of relying on one another actually really helps out in an environment like this.
Okay. That's helpful. My next question, I'm just wondering if you could talk about your approach, and this is against the backdrop where you've obviously added 7 companies or 8 companies since the beginning of the pandemic. It's a growing list of industries that you're involved in. Could you talk about how your approach your systems, your resources, employees and otherwise for kind of tracking and staying on top of the growing list of companies, how that's changed over time? Or do you really feel that the system you put in place, let's say, going back 5 years or 10 years ago, is that scalable that it was ready for this. It didn't need to adapt or change or just if you can kind of provide a bit of an overview of how you make sure you're on top of everything that is going on in the portfolio..
That, Tim, is probably, to be honest with you, the most fundamental question of why our business model works. And what enables us to do it is we provide a working environment where people have sold their business or and/or the second in command of those businesses get the entrepreneurial control of the businesses they're running, and so they're staying and so we're betting on management teams that are fully engaged. Now we're providing capital and where we're seeing and we've got controls on so we know what's going on. But the people running the day-to-day are the people who did before we bought it. And so our ability to expand that is really controlled by how good a job we do in M&A and identifying these management teams. Northern Mat's a great example. Darren and Scott, the team in that place is so strong. They're bringing us expansion ideas and how to do stuff. We're talking about capital in the best way to deploy these things, but it's not us, it's them. And that's the fund, we should maybe use that as a slogan, it's not us, it's them. It's the people we've got running these businesses that enable us to do this. And then with the number of deals we've done during COVID, one of the things that I think were a materially better company at now than we were in 2019 is utilizing our subsidiaries to find smaller tuck-in transactions that make those companies better but don't add a new reporting piece. So we bought 2 underground companies for WesTower, as an example, to increase our ability to do the underground wiring business. Well, that's blend right straight into WesTower, that's run by my team there. And that company is better. It's 2 more acquisitions. That company is a little more diverse, but it's absolutely no more work for us at head office. It's still run by WesTower. And so I would say there is a practical limit to how many unrelated companies we do. So I don't think you're going to see us doing 2 or 3 Northern Mats a year. There will come a time when there's just too much. But if we grow in the way we have, whereas in bite-size pieces, it's in an environment where we're acquiring great management teams. And our job is to maintain capital and control. It's inherently doable. It's really the motivation and retention of key management teams that enables us to do it.
Okay. That's great. Just one more quick question, if I might kind of squeeze it in. And forgive me if this is outlined in the report somewhere, but this second consecutive increase in the dividend is obviously great news, and obviously, is a reflection of your changing or improving view on the strength in the business. I'm just wondering if you can sort of nail down to what maybe more specifically over a 3-month period kind of stepped up here? And maybe why this wasn't the setup for sort of a onetime bigger step up in the dividend and how it sort of played out in 2 parts?
Sure. It's a good question. It boils back to one thing that's been locked in our DNA since 2004 is we only increased our dividend when we can afford to pay it on a long-term basis. And so when we increased it in Q1, it was based on the investments we knew we had made and the money we knew we were going to make, and you could see it in the Q1 results already. But we had forecasted models and for Northern Mat, but not just for Northern Mat, for some of our other stuff being one of the greatest indicators of our confidence in the future, quite frankly, was Quest's order book growth. We had concerns or concerns might be overstating it, but interest rates were going up rapidly. It wasn't something we had seen in a long time. And so we wanted to see what that did to the business. even in that environment, that business continues to look bullish. And so when we look at our forward-looking payout ratios, and you'll recall back, Tim, you been with us a while in 2018, when we talked about trying to get to a 50% payout ratio on a free cash flow basis and 60% on a net earnings basis, we had said that we're going to grow the dividend while we do that. Well, if you look at our trailing drop payout ratio, it's almost at the all-time best now worth in 1% or so of the all-time best. And with the forward-looking guidance, the increase in Q3 over Q3 of last year and Q4 over Q4 tells you that's going to continue to decline. So we wanted to say to our shareholders, look, you were loyal to us through COVID when the dividend needs to stay the same because we were uncertain about how fast things were going to bounce back, but we maintained that dividend, and that was a function of the fact we didn't overextend it before. Now we're coming out of this, we could see the benefit of these things. We know where these payout ratios are going, and we know what we've invested in already. We're in a position where we're confident enough to do this twice and reward our shareholders. I don't want to give the idea that our shareholders should now expect quarterly increases in our dividend. That's not the case. But it's really a statement about our confidence coming out of COVID. And the first one was because of what we had done in the past and that the strength of our performance in Q2, I'm not speaking out of school, but it was better than we thought it would be. And our outlook for Q3 is better than we thought it would be. And our outlook for Q4 is better than we thought it would be. And we'll bring you back some forecast for 2023 next quarter. But the bottom line is if you take the low end of our guidance, the midpoint of our guidance, the high end of our guidance for this year, calculate the payout ratio, we can pay out more and still improve our payout ratio over time. So it's really confidence and ability to pay an incrementally better performance, not just in one subsidiary, but in a number of...
Your next question comes from Steve Hansen of Raymond James.
Sorry, I apologize. I know Carmele had spoken to it briefly, I think, in your remarks, but could you just elaborate on the deposit on the long-term Heli contract that you've referred to?
Sure. So the deposit was for a 10-year government contract in BC that we're currently bidding on. It's a $26 million deposit that would be refundable if we're not successful on that contract bid. The contract award we're hoping sometime before the end of the year. So we'll know we've converted that bid into a contract that's hopefully by next quarter, if not by the end of the year.
And so just to put it in perspective, so we have Carson Air, they do the fixed wing aspect of BC Medevac, This is the rotary piece, which they've now put out to tender, and that's the tender on which custom helicopter is put in a bit. I think what I made reference to was trauma flight in my comments. So that is actually, I'll call it, somewhat of a new offering. It's taking the expertise in our medical professionals at Keewatin and coupling that with our rotary wing operations and providing emergent transport services up north in Thompson, Manitoba. And that's a service that we started just in Q3.
Right. So this would be a BC-based larger contract opportunity over time. Any sense of the scale or value of that if that's available...
It's a big number. It's somewhere between $150 million and $200 million in investments.
Okay. Very helpful...
Rich, [indiscernible] on that?
Yes. No, that's round on the numbers as we're going to get to the specifics, but it's all new helicopters, hence, the deposit and refundable deposit once it's awarded. But it's a decade long and then extendable contract as well. So that's why the number becomes quite big.
Yes. In today's environment, you're not able to get pricing or even get a slot without putting down significant deposits. So hence why you see that.
There are no further questions from the phone lines. At this time, I would like to turn the call back to your hosts for closing remarks.
Given that there's no further questions, I want to thank everyone for participating in today's call. We've got lots of questions about the dividend. And if I leave you with one thing, the dividend increases 2 things. It tells you how well we're doing. But the fact that we're able to give it to our shareholders 2 quarters in a row is as much a statement of our belief in what's happening and our confidence in the future as anything. So thanks for being with us today. We'll talk to you again in November when we release our Q3 numbers. Have a great day, everyone.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everybody for your participation. Everybody, have a wonderful weekend, and you may now disconnect your lines.