Exchange Income Corp

TSX:EIF

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone. Welcome to Exchange Income Corporation's Conference Call to discuss the Financial Results for the 3 and 6 months ended June 30, 2024. The Corporation's results, including the MD&A and financial statements, were issued on August 8, 2024 and are currently available via the company's website or SEDAR plus.

Before turning the call over to management, listeners are cautioned that today's presentation and 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 based on such statements. Certain material factors or assumptions are implied 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 quarterly and annual MD&A, the Risk Factors section of the annual information form and EIC's other filings with Canadian Securities Regulators, except as required by Canadian Securities Law, EIC 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, Michael Pyle. Please go ahead, Mr. Pyle.

[Michael Pyle, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. Yesterday, we released our second quarter results for 2024. Our results show the diversified nature of our business. The strong results were driven by our Aerospace & Aviation segment. While we started to see some very positive signs from a customer order perspective in the latter portion of the quarter and subsequent to quarter end in our Manufacturing segment. These events, coupled with our resilient business model allows me to confirm that we believe our 2024 EBITDA will be at the mid to upper end of our previously provided range of $600 million to $635 million.

With me today is Richard Wowryk, our CFO, who will speak to our financial results and 2 new voices. Jake Trainer and Travis Muhr, both who are part of head office executive team, and they will expand on our outlook for the third quarter and beyond.

Prior to passing the call over to Rich, who will delve into the numbers more deeply, I wanted to highlight some of the key performance metrics achieved during the quarter. We set records for revenue, adjusted EBITDA and free cash flow. We executed on the strategic acquisition of Duhamel in June, which will accelerate the Environmental Access Solutions strategic growth in Quebec and Eastern Canada.

One of the more important highlights was what happened after the quarter end. In our Multi-Storey Window solutions business, we booked in excess of $100 million of future projects across several geographies in Canada and the U.S. amongst the diverse set of customers, whether they be condo, apartment or commercial projects. These positive signs by our Multi-Storey Window solutions business line provide positive momentum as we head into the second half of the year and hopefully, that extends into our other business lines. This strong order capture continued this week with the addition of another $20 million contract in our Window business subsequent to the publishing of our results.

Our second quarter results. Revenue increased by $33 million to $661 million. Adjusted EBITDA increased by $10 million to $157 million. Net earnings were $33 million for the quarter compared to $37 million and net earnings per share were [ $0.69 compared to $0.85 ] in the prior period. Free cash flow grew by $3 million to $101 million. Free cash flow less maintenance capital expenditures was $52 million compared to $59 million in the prior period. Adjusted net earnings were $38 million compared to $43 million in the prior period, and adjusted net earnings per share were [ $0.80 ] compared to $1 in the prior period. The payout on a free cash flow less maintenance expenditure basis remained very strong from a historical perspective at 61%, even with 3 dividend increases in the last 2 years.

We are pleased with these results, and they show the resiliency and diversification of our business model. The main contributor to the results was the continued investment in the businesses that we are starting to see the fruits of those investments. 2023 was a year characterized by several announcements and acquisitions and contractual wins, whether it was the BC and Manitoba medevac wins, our U.K. Home Office contract or Air Canada commercial agreement.

Speaking first of the Air Canada contract, the fifth and sixth aircraft started flying in the second quarter. We continue to execute under the BC contract with our existing aircraft along with one new King Air, which has been received and modifying is flying into the contract. We anticipate the second new aircraft being modified and flying by the end of the year. We continue to look after a larger portion of this contract with older aircraft while we wait for the manufacturer to deliver the new aircraft.

Our jets under our Manitoba medevac contract have arrived in Winnipeg and will be operating under the contract in September, as previously announced. We have not formally announced any new significant contract wins but are hopeful on the resolution on several fronts. I wanted to give you an update on the contracts that I spoke about on our Q1 call. The first contract relates to the future aircrew training contract for the Government of Canada. Skyline was named as the preferred bidder last year, and we are part of the Skyline bid team. The contract is formally awarded to the prime, and we are in negotiations now to finalize our subcontract with the prime. We submitted our proposal to the U.K. Home Office for the continuation and expansion of services that we are currently providing. The existing contract will continue through November of 2024.

We were recently informed that the RFP is expected to be reissued based on internal issues within the RFP itself. Given the high utilization of the aircraft currently, we anticipate being able to support the U.K. office with no gaps in coverage.

The third opportunity that I previously commented on was the Newfoundland and Labrador Fixed Wing Medavac Contract. We believe that we are 1 of 2 proponents to bid on the contract and hope to hear the results of our bid during this quarter. We are optimistic at the outcome but are still waiting for the results of the formal bid process.

Lastly, we are continuing to see significant interest around the world for our Aerospace services. We see large opportunities in Australia, in Europe and expanded opportunities in Canada. We are very bullish about the future opportunities and these contracts are right in line with our EIC core capabilities and the business model as they generate consistent cash flows throughout the term of the agreements. Jake and Travis will focus on our outlook for our segments for the third quarter and the remainder of 2024.

But I will now hand off the call to Richard, who will detail the second quarter results.

[Richard Wowryk, executive]

Thank you, Mike, and good morning, everyone. Revenue, adjusted EBITDA and free cash flow were all second quarter high watermarks. I will delve into the segmented results and the remainder of the financial statements. Revenue in our Aerospace and Aviation segment increased by $54 million or 15% to $427 million. Adjusted EBITDA increased by $27 million or 25% to $134 million. The results in margin expansion were across all business lines.

Looking at the essential air service business line, the improvements were driven by 4 key factors: first, previous organic growth capital expenditures in the Aviation businesses over the past number of years. Second, our average load factors improved, which is a direct improvement on adjusted EBITDA. Third, the impact of the routes flown on behalf of Air Canada; and finally, the impact of the BC and Manitoba Medevac contracts. These improvements were offset by softness in our rotary wing business. However, it is anticipated to reverse in the third quarter due to wildfire activity in Canada.

Our aerospace business line revenues were relatively flat compared to the prior period. However, adjusted EBITDA expanded in an accelerated fashion. This is due to 2 reasons. First, the revenues and adjusted EBITDA increased due to the expansion of the ISR business, including the impact of the U.K. Home-Office contract. This increase in revenue was offset by a decline in revenues within our training business. However, the product mix shifted, which resulted in profitability expansion within the training business, even with the revenue decline.

This margin expansion in our training business is anticipated to be temporary and is expected to normalize in the third quarter and beyond. Last, our aircraft sales and leasing business continued to grow as the leasing component of that business continue to improve. We are still anticipating that the leasing side will continue its step improvement until it reaches and ultimately passes pre-pandemic run rates by the end of the year. The growth within this business line and specifically the leasing business resulted and an improvement in the profitability as leasing margins are much higher than other revenue streams.

Revenue in our Manufacturing segment decreased by $21 million or 8% to $234 million. Adjusted EBITDA decreased by $14 million or 29% to $35 million. As expected, revenue and adjusted EBITDA within the Environmental Access Solutions business line decreased by 28% and 35%, respectively, as previously communicated in our year-end and first quarter calls, the first half of the year of the comparative period had a number of seasonal anomalies. The first quarter and second quarter of 2023 experienced an unusual number of rental mass deployed on long linear projects. This was outside the norm.

Milder weather in 2023 also required greater mat utilization of projects. However, this winter experienced very low snowfall and drought conditions, which generally lessens demand. Further, as the prior year comparative contained an unusual number of mats on rent, the impact on adjusted EBITDA was outsized relative to revenue.

Our Multi-Storey Windows solution business revenues were consistent with the prior period and adjusted EBITDA decreased by 35%, changes in product mix as the business line completed more third-party installations than in the prior period, which generates lower margins. This, coupled with operational inefficiencies as certain projects pushed out of the second quarter into later in the year, reduced adjusted EBITDA. As we've previously communicated, we also continued on the strategic decision to retain experienced staff to meet future increased demand as we are starting to see projects being awarded in the later part of the quarter and post quarter end.

Lastly, revenue in our precision manufacturing and engineering business line decreased by 8% compared to the prior period. Adjusted EBITDA decreased by 17%. The decreases were primarily due to customers delaying projects into subsequent quarters, coupled with changes in product mix. Other items of note during the quarter were that interest costs were higher by approximately $4 million due to increased benchmark borrowing rates compared to the prior period, with increase -- coupled with the increased debt outstanding due to various growth capital expenditures.

Our free cash flow less maintenance capital expenditures payout ratio was 61%, compared to our year-end and comparative ratio of 57%, while dividends increased by 12% when compared to the prior period. Depreciation on capital expenditures was also up due to growth capital expenditures and acquisition activity in 2023. Our effective tax rate was consistent with the prior period, and our year-to-date effective tax rate is moderating within our expected range of 27% to 29% on an annualized basis. Free cash flow increased by 3%, while free cash flow less maintenance capital expenditures decreased by 11%. Main capital expenditures increased by approximately $9 million, primarily due to the timing of certain overall events and the second quarter of 2023 being unseasonably low.

From a working capital perspective, our working capital declined compared to the prior year-end. This was due to the reclassification of convertible debentures of $79 million being classified as current as a contractual maturity is June 2025. From a cash flow perspective, the noncash investment in working capital was $68 million. The investment was to support the growth initiatives and increased revenues discussed above, coupled with the impact of slower collections and certain government receivables. We are actively managing our working capital to anticipate a majority of these investments will be converted to cash prior to the year-end.

Our total leverage ratio -- or our senior leverage ratio increased to 2.88 from 2.47 at year-end. The increase is primarily due to investments in growth capital expenditures, as we previously noted, our organic growth results in a lag between the time and investments are made and when returns become evident through our financial results. We anticipate this ratio will decline as our growth capital investments impact the bottom line with -- along with an improvement in our Manufacturing segment adjusted EBITDA relative to our comparative results.

During the second quarter, EIC made growth capital expenditures of $45 million these growth capital expenditures primarily related to the Aerospace & Aviation segment and were primarily driven by investment in additional aircraft and infrastructure, including the King Air simulator. Our Environmental Access Solutions business also invested $5 million in growth capital expenditures as it invested in mat fleet to meet forecasted demand in the future. Maintenance capital expenditures for the quarter were $48 million compared to $39 million in the prior period.

In our year-end conference call, we indicated that we anticipate maintenance capital expenditures to increase in line with our adjusted EBITDA. However, there are some maintenance events that fell outside of the quarter and will be funded in later periods, maintenance capital expenditures for the Manufacturing segment were slightly higher than the comparative period by $1 million.

With that being said, I will now turn the call over to Jake and Travis.

[Jake Trainor, executive]

Thank you, Rich. Travis and I will split up the outlook section. I'll provide focus on the Aerospace & Aviation segment, and Travis will provide some context on the Manufacturing segment. . Overall, we're expecting another strong quarter from our Aerospace & Aviation business as the trends highlighted in Mike and Rich's section are expected to continue into the third and fourth quarters. Our essential air service businesses will see growth driven by a multitude of factors when compared to prior period. These include the deployment of 5th and 6th Q400 aircraft to provide services under our agreement with Air Canada. We also expect to continue to see strong load factors and growth when compared to our 2023 due to our investments in aircraft throughout our operations. Lastly, we expect continued growth in our Medevac business with both the 10-year BC and Manitoba Medevac contracts continuing to contribute to financial results in the quarter. As a reminder, the BC Medevac contract returns are expected to be muted until we redeploy the existing aircraft being used to service the contract in the interim. Offsetting some of these gains is the impact of continued labor shortages and supply chain challenges. Although we're not seeing a worsening of these dynamics, the challenges still remain. The aerospace business line is also expected to have growth in Q3, primarily driven by the increased tempo of flying for our surveillance aircraft. The revenue increases are expected to be offset by declines in our training business revenue with the EBITDA margins normalizing to historical periods, as Rich had commented on.

Our aircraft sales and leasing business are also expected to experience growth. This anticipated growth is driven primarily by increases in leasing revenue. Although we are still slightly off pre-pandemic run rates, we expect Q3 to continue to build upon the positive momentum we highlighted in the first and second quarters. With respect to maintenance capital expenditures for Q3, we anticipate higher levels -- or excuse me, we anticipate levels being higher than last Q3 as certain maintenance events moved from the second quarter into the third quarter.

Overall, we expect maintenance capital expenditures to increase roughly consistent with increases in adjusted EBITDA in our Aerospace & Aviation segment, which is the biggest driver of our consolidated maintenance CapEx. Higher flight hours to support increased volumes together with inflation, labor shortage, supply chain issues and a growing fleet size are some of the factors that contribute to the expected relative percentage increase.

Growth investments in Q3 are primarily for the Aerospace & Aviation segment and include the upgrade of the surveillance aircraft for the second aircraft on the renewed Curacao contract. The first is already completed and in service. The continued construction of the Gary Filmon Indigenous Terminal, delivery of a new aircraft for the BC Medevac contract and continued construction for the King Air simulator. Also Regional One is always working on opportunistic aircraft and engine acquisitions, which may result in growth investments being made in the aircraft sales and leasing business.

I'll now pass it off to Travis to provide some commentary on the Manufacturing segment.

[Travis Muhr, executive]

Thanks, Jake. We're anticipating an increase in our revenues in our Manufacturing segment during the third quarter. All of the businesses within the manufacturing segment are experiencing a strong level of customer inquiry. However, due to macroeconomic uncertainty, the closing ratio of inquiries has been below historical trends. We're starting to see that trend reverse itself through our business lines.

As Mike had mentioned, in the past 45 days, we saw over $100 million of bookings in our Multi-Storey Windows solutions business line. Those bookings were across several geographies and customer segments. We're also seeing a recent uptick in our orders in our other business lines. This positive development provides excitement for our teams as we believe when the dawn breaks and the customers get more confident in the economy, those orders that were delayed will be converted into bookings in the near term. That being said, the Multi-Storey Window Solutions business line is expected to be consistent with the prior year. Quoting in Canada and the U.S. continues to be extremely active. We remain bullish on this business line as the longer-term fundamentals being immigration and a lack of affordable housing remain incredibly strong throughout various regions across Canada and the U.S.

Further, we're agnostic to whether a product is a condo developments and apartments for the government or commercial business. We've demonstrated our expertise in each of those customer segments. We're seeing further efficiencies from our integration efforts led by Darwin Sparrow, but we do anticipate some costs from integration, which may offset some of those profitability gains in the shorter term.

As we talked about last year in our first quarter call, the Environmental Access Solutions business line comparative results started to normalize in the third quarter of 2023, and therefore, we anticipate results materially consistent with the prior year for the third quarter assuming no adverse impacts from wildfires or other weather events and excluding the acquisition of Duhamel. The acquisition of Duhamel is going to be a growth catalyst for further expansion of the business into Quebec and Eastern Canada.

Precision metal and engineering business lines are expected to improve over the prior period due to the acquisition of DryAir in October 2023, which there is no comparative in the third quarter. Similar to our Multi-Storey Window Solutions business line, we're experiencing a significant number of inquiries, and we anticipate the 2 interest rate reductions in Canada and increased optimism of an interest rate cut in the U.S. will lead to further bookings in the third quarter.

The anticipated maintenance capital expenditures are expected to be slightly higher for the manufacturing statement than the prior year due to the timing of the replacement cycle. We're also anticipating growth capital expenditures to be incurred in each of the business lines. We anticipate that growth capital expenditures will be slightly higher in our Multi-Storey Window Solutions business as we continue to integrate the businesses and acquire new machinery.

We also anticipate some growth capital expenditures in our Environmental Access Solutions business line as they continue to adjust the rental fleet for demand in Eastern and Western Canada, although the amounts are expected to be lower than the Q3 comparative from 2023 of $13 million.

I'll now pass the call back to Mike, who will talk about our acquisition pipeline and wrap up our prepared remarks.

[Michael Pyle, executive]

Thanks, Travis. On the acquisition front, Adam and his team are working on a number of pursuits. We are continuing to see more high-quality opportunities and that has continued throughout the quarter. We are seeing these opportunities in both manufacturing and aviation aerospace segments. But consistent with our 20-year history, we'll only execute on transactions that are accretive and meet our acquisition criteria. . Overall, we remain confident that we are on track to meet the mid to upper end of our 2024 adjusted EBITDA guidance. This confidence is underpinned by the essential nature of our businesses. Recent strength in inquiries being converted into bookings in our manufacturing segment and the fact that a significant portion of our revenues are backed by long-term contractual arrangements. The growing need for aerospace solutions, the continued recovery of our aircraft leasing business and investments we have made in prior periods for our future growth. Thank you for your time this morning, and we'd now like to turn the call over for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Steve Hansen from Raymond James.

[Steven Hansen, analyst]

Look, Mike, the order flow that you described is pretty encouraging. I think you said $100 million past 45 days, another $20 million this week. How should we think about the timing of that ramp-up of the order flow as it should hit the P&L over time? What kind of backlog are you sitting on now. And how will that ultimately sort of start to flow? And just as a related point, do you think it's just interest rates is driving this? Or what do you think is ultimately triggering this opening up of the order flow?

[Michael Pyle, executive]

Yes. We've talked about the order book, like our bids outstanding for the last few quarters being remarkably high. We've added people to be able to manage those bidding opportunities. The developers with -- particularly in Canada, with the change from a condo environment to apartment environment, largely driven by the fact that it's hard to get mortgages at the interest rates with -- combined with the requirements to qualify. And so it slowed presales, which has slowed the initiation of projects. But at the same time as that, the need for that housing has greatly accelerated and Canadian developers are getting their heads around, well, maybe I need to build apartments, not condos.

With the decline in interest rates, I think you're seeing a new confidence amongst those developers. The guys who are closest to going are starting to step off the curb. And what I'm most excited about is that the new orders we got were not Toronto-centric. While we did well in Toronto, that's our biggest market. We added things in Western Canada, Calgary and Vancouver, Seattle and in the states, in Dallas and Washington. And so I really want to caution people we're excited, but don't extrapolate. This is early in the process and maybe this may be the first little surge, and it could fall back.

But with the interest rate news coming about the U.S., where they're looking to follow Canada and these rates, and that will give Canada more courage to cut further faster and the big demand, we expect to see continued growth perhaps not at the rate we've seen in the last 6 weeks, but continued growth into the future.

In terms of our order book, it had declined slightly during the quarter as we built more than we replaced. But now that's gone the other way. We're now booking orders faster. You'll recall that typically, this business is kind of an 18-month order to delivery cycle. One of the very interesting things we've seen early in the cycle here is some of that has shortened up. And we actually have stuff that will be delivered by next -- mid next year. So you'll see the beginnings of this little surge in 2025. But where you'll really see it is in 2026.

[Steven Hansen, analyst]

Okay. That's great. That's really good context. Just switching over to the matting business. There's another period of year-over-year declines. I know the comps are still tough, but how should we think about the trajectory from here? You've got the new acquisition on your belt, that gives you the foothold of East. It sounds like you might be building some incremental mat inventory based upon the CapEx commentary. Just trying to get a sense for where we're at in sort of the cycle of the biorhythm here and what we should expect for the balance of this year and into next, next?

[Michael Pyle, executive]

I think the best predicator of what we actually think is what we're doing with building mats. We -- mats, sort of come back off of the Trans Mountain Pipeline and there'll still be some coming back from that for us and for other people. So that increases supply. But there's other major projects getting going [indiscernible] gas and their stuff, a lot of T&D work, which really where the future is in the medium term in Eastern Canada. It's why we bought Duhamel and so to see that operation, we're continuing to build that.

I think Q2 would kind of be the end of the last cycle, and Q3 is the beginning of the next cycle. I just need to really remind everybody when we bought Northern Mat, we told everyone that this is a super cycle. We got -- we did at normally well for a 3- or 4-quarter period. And right now, we're heading into the next up cycle, pretty confident in the business or we wouldn't be building more mats. But it's not dramatic yet. There isn't a shortage of mats in the business the way there was in the last cycle.

So slow and steady growth and particularly Eastern Canada and within Eastern Canada, we're very bullish on Quebec. The acquisition of Duhamel, we're already building the big heavy crane mats there. And they give us a Quebec facing sales arm to deal with the Quebec government, which is good for us. And so I would say we're pretty optimistic about that. It builds slowly. And we've finally -- we've rolled off of the really high comparatives.

[Operator]

And your next question comes from the line of James McGarragle from RBC Capital Markets.

[James McGarragle, analyst]

Just on the Duhamel acquisition again. I know you flagged being able to serve the Quebec market and more generally, Eastern Canada. But a lot of that infrastructure money is getting spent in the U.S. Are you able to serve the U.S. at all within your current footprint? And is that a market that you might be interested in looking at kind of in the medium term?

[Michael Pyle, executive]

Absolutely. We believe the fundamental investment ceases. In Northern Mat when we bought it was T&D. We did a lot of work on what's coming. Around the world, economies are trying to electrify, reduce their reliance on petrochemical fuels. And so we believe there's a big part of that coming, and that's not just a Canadian story.

Adam and his team are very busy on looking for opportunities in the U.S. We need to find the right partner. We believe we've got the industry leader in Northern Mat with our management team there. And we want somewhat of a similar capability in the U.S. We may go organically, James, if we don't find something to buy that we think is worth the price we're paying for it. The market is so big. There's a great opportunity there. But my first choice is to give ourselves a beachhead by getting an industry leader.

Even if it's a smaller company in a given area and in the medium term, you're definitely going to see Northern Mat in the U.S. one way or another. And in terms of what Duhamel is bringing to the table, a big part of the mat business, this is going to sound silly is storage, like do mats go from project to project, you need places to put the mats. You need places to clean the mats and then redeploy them. Duhamel gives us that. Duhamel gives us surge production capacity. They're building the big heavy crane mats there. We are currently doing a lot of math on whether we should be building them in Creston and in St. George has been shipping them to Quebec or building them there. Lumber supply, it makes -- it's not an obvious answer. Ultimately, I believe we will build stuff there, but we aren't doing it yet. And with the opportunity to do that, they're very strong operators. Duhamel, the management team is exceptional. That's going to give us a great interface with Hydro-Quebec and the Quebec government.

[James McGarragle, analyst]

And then just on the Windows segment. It seems like things are starting to potentially turn around there from the order side. But can you just talk a little bit about where you are from a capacity perspective on the Windows side, I know you flagged some additional costs on the integration between Quest and BV. Was that kind of expected? Or is that something that was unexpected? Just trying to get your comfort level from an operational perspective to be able to execute on what seems like it's going to be a pretty near-term ramp-up in production. And I can turn the line over after that.

[Michael Pyle, executive]

Sure. The window -- I've talked for a while that if I were to fast forward 6 quarters, and we're having this call. I think we're going to be talking a lot about the Window business. And the reason simply is we're at the beginning of a brilliant cycle for that construction business. We don't have enough housing. The continued urbanization trend. I know we all thought after COVID that we were going to go live on the outskirts and not cities. It's just -- that's just not what's happened, particularly in Canada, the vast majority of immigrants end up in 2 or 3 cities, both, all of which have shortages of land and single-family housing that's too expensive.

So the demand profile is exceptional. We're starting to see it come during the slow period, there was a temptation and 1 or 2 of our competitors decided to be ultra aggressive on pricing. We always treat our customers fairly and we were competitive, but we didn't want to take things that we'd regret later. I like where that puts us now as the market begins to open up. Well, I'm super excited about it. You just have to remember it's 12 to 18 months. If we take an order today, it's very rare that you would produce it in the same year. It does happen occasionally. It's usually when a competitor drops the ball and you got to step in and help out. But we're very bullish on that. And we're in the process of amalgamating our business in Ontario. We have too many buildings way too much real estate footprint. Darwin and the team at Quest and the team at BV are doing a great job of bringing those 2 companies together. We're going to be abandoning one facility later this year, which will greatly reduce our overhead costs.

In terms of production capacity, we've got lots. We could be double the size we are now for a very modest investment in certain pieces of equipment. So capacity is not an issue. And we talked a little bit. I think Rich mentioned in his comments that we kept people that if we were a pure window business and as all we did, we might have had to reduce our staff during this. We made a choice to keep those people, the learning curve in putting together custom windows because remember, every job is a new job. We don't build anything into inventory.

So you need people that have the skills and have seen things before, and we've kept that. So it's almost like a capital investment in people. And so we're ready to go. We still got some more work to do to get the best efficiencies and the best combination of those 2 teams in terms of production of our windows. But the Dallas plant, as an example, is now running 2 full shifts, and we're starting to really see how efficient a purpose-built Window building can be, and I'm excited about it. I wish I could fast forward 3 or 4 quarters, so some of the new stuff would be in the plant already. But having said that, I was really excited when we had put the $100 million number into our releases and then we got another one afterwards. There's always a risk that it's an anomaly when you get a surge like that, landing another one makes me that much more confident that we're seeing the beginning of a longer-term trend.

I'm not suggesting that $100 million every 6 weeks is the new cadence. I'd like it if it was, but I think that's a bit of a surge, but we're definitely seeing a change in the developers. And one of the things that makes me most confident about it is it's not just discussion about price. It's how fast can you build these and can you guarantee me on getting factory space. And that tells you the mindset of some of our customers that, hey, okay, if a whole bunch of us go at once. Are we going to be able to get steel are we going to be able to get concrete. And so I remain very bullish about the medium term on our window business.

[Operator]

And your next question comes from the line of Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

Maybe a follow-on to Steve's question. Like I know there's a lot of moving parts in manufacturing, but can you just maybe walk through how we should think about the build of Q3 and Q4 EBITDA from the $35 million this quarter. And it sounds like you'll get flat year-over-year EBITDA from environmental, a bit of return in Quest from revenue that was pushed back. And then we'll probably see a couple of million a quarter from DryAir. If I stack it all together, does that mean we should be thinking about positive year-over-year EBITDA growth in the back half for manufacturing?

[Michael Pyle, executive]

My guys are just pulling up numbers. They don't let me have the specifics. So I'll let them actually speak to facts. But we are seeing -- outside of the ones you mentioned, Matt, there -- we really struggled on -- in WesTower for a bit with the telephone companies just not spending any money. That [indiscernible] broke in the last couple of weeks sort of the awards of new tower construction have really taken off so we expect to see strength in that business in the back half our LV Control business in Winnipeg and the ag space has also seen an increase. That one probably we realized more in the beginning of next year than in Q3 and Q4. So in aggregate, I think it's reasonably positive across the board. I'm not sure that we really want to put out a segment forecast, but I think you'll see it strengthening clearly because the 2 things that hurt us here, the Window business with the weaker margins in Q2 and that business up against a tough comp, both go away.

And as I say, we're starting to invest in growth CapEx in mats, which I think we would do if -- we didn't have something to do with the matter. I'm not comfortable putting out a number at something we typically do, but you'll see strengthening in the manufacturing segment. And the other thing I'd like to point out while we're here on this topic is we've seen this twice before. In 2016 and in 2020, the 6 months before the U.S. Election, I have certainly slowed down the awarding of things.

And then when the election actually came to a close, the big burst in company confidence and it really was independent of who won. In 2016, the Republicans pulled off a surprise win and took the presidency and then in '22, the Democrats took it back. I really don't think this is a matter of the market saying, one has to win or the other has to win. I think it's more just about getting the noise of an election out of the way. So we're getting close to that. So by the time we talk again, we'll know who the President is and that's probably good for us.

[Matthew Lee, analyst]

Right. That's fair. And then maybe just on the regional one side. Great to see leasing coming back, sales above our expectations. Maybe just talk about what's driving the uptick in demand for regional aircraft and the sustainability of the leasing kind of business as you see it right now?

[Michael Pyle, executive]

Yes. The change is that for -- when we came out of COVID, the shortage of pilots and the uncertainty in the business meant that some of the smaller aircraft weren't being used, not just ours, ones owned by the airlines. And so a lot of our stuff is out of the ground. The first improvement came when the aircraft engine leasing business started to improve because as the planes were backs were into service, they had overall engines that were deferred and they were putting rental engines on. So that continues.

And now Europe, in particular, although Africa is also very strong. The demand for the regional jet is strengthening, particularly on the CRJ-900 side.

We've made a lot of money in the past on the 200s and the 700s. The number of those available is infinitesimal, we can't get any. The ones that were out there have been soaked up by the big airlines in the U.S. who are converting them into 50 seats jets and turning them into 3 classes. So a CRJ has about -- 700 has about 70 seats. They're taking out rows of seats and putting in a business class, a premium economy and a regular economy to maximize the revenue on those while staying within the flight attendant contracts. So they have less staff on the plane.

Now that there's less of those available, they've moved to turning the 900s into what they're called 650s, which is exactly the same process. And so been active on buying up 900s wherever we can find them. We like those we are probably the leader of remarketing CRJs in the world, together with probably slightly larger gauge ERJs. And we're earlier in the cycle with those. So when we buy ERJs, they tend to come with leases or are going on longer-term leases.

So that was a really long answer to get to the point that we see continued strength in this business. We're really looking for more opportunities to deploy money in this area. And the actual EBITDA in the quarter would have been the best quarter we've ever had in Regional One. And we continue to see that. Now that's good, but it's not as good as it sounds because we've invested in Regional One. So we get dry powder that we still got to deploy some of this stuff. So we expect continued growth. And by the end of the year, I think it's a number that I'll be really happy with. Not that I wasn't really happy with this one.

[Operator]

And your next question comes from the line of Cameron Doerksen from National Bank Financial.

[Cameron Doerksen, analyst]

Question on, I guess, where we are on the ramp-up of the 2 medevac contracts that you won, B.C. and Manitoba. I mean I guess maybe if you could sort of describe how long the process we are as far as getting up to full ramping up? And also, if you could just maybe discuss what CapEx is left on those 2 programs from here?

[Michael Pyle, executive]

Okay. Manitoba one is easier. We're finished with that one. I don't know if there might be some odd expenses that struggle into Q3, but we have all the planes now. We started flying them. We'll have the full impact, Dave White sitting across the table from me, and I'm staring at him as I say this. Well, the full impact of the Manitoba contract starting in September.

In BC, you'll recall that the government required brand-new aircraft and the -- our aircraft supplier has had some challenges, and so planes are late getting to us. So there's still a significant piece of that $200 million yet to be spent. But on the revenue side, we have helped the government. We found some other older aircraft that we've deployed. And we're now doing a significant piece almost all of that contract with other aircraft. And so a lot of -- we're starting to and you will see in Q3 get most of the contract in. But I bring you back to a comment we've been making for a while. We own part of that business before we won the contract. And so I've got a great fleet of aircraft that we're going to redeploy.

And when I talk about redeploy, it's other contracts. So we just, this week, we'll submit our bid for the Northwest territories met of that contract. If we win that BC is going to lose some of those planes they'll go there. If we are successful in Newfoundland, negotiating there, some of the planes are likely to end up there. So the full impact in our financial statements is 2 things. It's flying all the BC work. which we're starting to get close to doing now. But then it's taking the assets we used to have in BC and doing something else with them. So you'll see a gradual continued growth in that business.

[Cameron Doerksen, analyst]

Okay. So that's great color. So it's fair to say that Yes. No, that's really helpful. So fair to say that if you are successful in Newfoundland Northwest territories because you already have the planes, the CapEx would be fairly minimal.

[Michael Pyle, executive]

Like I wouldn't suggest that any of those would just be those planes. They may have certain ones that have a large door requirement or they may want a jet or a [ Platz ] as part of it. So it's never as simple as just one but a bulk of those planes could go into those contracts.

[Cameron Doerksen, analyst]

Okay. That's very helpful. Maybe just secondly for me, I just wanted to ask about I guess a question on the balance sheet. The converts that are due in June next year went current in the quarter. Obviously, maybe somewhat depends on what the share price is over the next 12 months. But any thoughts on what your plan is for those?

[Michael Pyle, executive]

This is going to be the least satisfying answer of the day. we're looking at all the options on that. Like with what we've got in the book, some of the things that are coming. I think the most likely alternative is that the stock gets into the mid-50s and they convert and they go away. That's the most likely. If that were not to happen for someone general market conditions or whatever, I think you would see us probably pay them off out of our line. Although we could do a replacement issue as well not particularly big on that alternative. But depending on the opportunities, I may not want to use capital out of my debt -- my secured debt side, if we got enough stuff cooking, that I might just replace them.

But the first plan is to just see them convert. And we'll be patient with that because it's not a huge amount of money. If we got to write a check out of our line, it's not a big deal. And with the decline in interest rates and the fact that we got hit pretty hard last fall when interest rates went higher for longer. I'm pretty bullish with that and our strong guidance in some of these contracts that Jake promised me is going to win. I'm pretty confident that we could just make things go away the way we usually have, which is converting.

[Operator]

And your next question comes from the line of Krista Friesen from CIBC.

[Krista Friesen, analyst]

I was just wondering on the Air Canada contract. I believe last quarter, you mentioned that they had started discussing exchange possibly flying cross-border routes for them. Has that started yet? And are there any additional opportunities with Air Canada given the great relationship you're building with them?

[Michael Pyle, executive]

I'm going to give that one to Jake.

[Jake Trainor, executive]

Sure. Thanks for the question, Krista. And first of all, I'd say that our relationship with Air Canada continues to strengthen, and we're very happy with that partnership as we build. We're planning to start flying cross-border to 2 destinations starting October 1, in Boston and New York. So that's always been in our operational plan, and we continue to ramp up resources to undertake that.

[Michael Pyle, executive]

We got a scheduled date for that?

[Jake Trainor, executive]

October 1.

[Michael Pyle, executive]

October 1.

[Krista Friesen, analyst]

Okay. I was just going to ask if there were -- I mean, I know you're adding that 2 additional aircraft. But is there any more room on that contract or just with Air Canada to maybe do additional flying for them?

[Jake Trainor, executive]

Under the terms of the existing arrangement, we've kind of hit the limit there. But I'd characterize it by saying, again, we're interested in the growth. When we first and foremost have undertaken a lot of activity here. We need to make sure we continue to deliver effectively on our commitments. So again, I think there's interest and there will be growth. But for now, we're making sure that we effectively execute on this.

[Michael Pyle, executive]

And there's preliminary discussions with Air Canada, but there's nothing imminent.

[Krista Friesen, analyst]

Okay. Great. And then just on the Window business. Can you speak to what the competitive environment is like right now? And how the pricing is on some of the projects that you're bidding on?

[Michael Pyle, executive]

The competitive environment, i.e., is strong -- there's -- it's kind of an oligopoly and there aren't a ton of players, but all the players have capacity. And the difference -- there's differences between the company. Some do only window wall, some do predominantly curtain wall. We now do everything, and we're probably the leader at that. We're clearly the leader in Canada and a significant player in the U.S. So pricing has been tight, and I would suggest it will remain competitive for a bit. But as orders book, I think developers are going to want to pay for certainty and they're going to deal with people who can provide a complete solution to their projects and most importantly, deliver them on time.

When you're in an apartment environment, they've got 100% of the capital in unlike when you're doing a condo when you've got owners' capital if it's delayed. And so timing in an apartment world is even more important. It's important in everything, but it's even more important. So I think as the market strengthens, pricing will strengthen, but the stuff in the past has been -- the last 6, 9 months has been very competitive.

[Operator]

And your next question comes from the line of Konark Gupta from Scotiabank.

[Konark Gupta, analyst]

I wanted to ask you about the wildfires a bit here. You guys obviously saw some benefits, I guess, last year in Q2. There were some early fire activity this year. I think we had a huge sort of fire breaking out in Jasper so area, right, in Q3. I think you alluded to that in [indiscernible] flying could see some benefits here in Q3.

Is there -- like how should we think about sort of the net -- net-net impact on your fundamentals from wildfires, like Northern Mat might see some decline because of fires usually? Or should there be no offset?

[Michael Pyle, executive]

I'll take something on Northern Mat and then I'll let [indiscernible] on a flying part. There's no doubt that the ultra-dry conditions don't help us any in Northern Alberta, whether it's burning or not when it's burning, they can't do anything. But even when it's not burning, it's so dry, they might often don't use mat. So that's not good for our business. It's no worse than it was last year. It's probably less bad than it was last year in terms of the matting business. I think it's something we need to come to grips with. There are certain parts of Northern Alberta, Northern Saskatchewan and even to an extent Northern Manitoba, where that's going to be an ongoing issue. But the geographic diversity and the growth in the East, you just simply don't have that problem will help buttress that for us. Maybe add if you can [indiscernible].

[Unknown Executive]

Yes, flying. And then on the flying Konark, you're going to see enhanced helicopter activities in the various wildfires. And we have some of our heavy helicopters engaged right now in Alberta. So you'll see an uptick through Q3 with that.

[Konark Gupta, analyst]

Okay. That's great. And on the BC medevac contract, I think it seems like you guys are using some temporary aircraft there as OEM deliveries at the light. Is there any implication from these temporary aircraft on CapEx or profitability in Q2 or Q3?

[Michael Pyle, executive]

Short answer is no. The BC government made the choice to have new aircraft. And when we did, we bought slots. Like we went out put deposits down. So we were kind of pot committed we better win or we had planes for something else. But the problem is the demand for King Airs and some of the supply challenges our manufacturers having has delayed those. The government is fully aware that's beyond our control, and it's not causing us any problems on the contract.

And in fact, I would say we've probably won some kudos with the government with how we've been able to belt and suspenders, the service up and make sure we're looking after everybody. What it really does, Konark, the single biggest impact is it pushes out the CapEx on the new planes. The problem that creates for me is knowing exactly when I'm going to have those other plans back to redeploy them. Like I can't pull them from BC until I don't need them in BC, but I've got other opportunities coming.

So I've got -- we're probably the second or third biggest King Air operator in the world, and we'll soon be the biggest King Air operator in the world. So we have some ability to shuffle between operations to help a bit. But I would really like to get a hardwired exact dates for when we're going to have them available because we've got opportunities to put them out. And that's where you really see the jump in our profitability because I owned them already. They're depreciated or maybe not fully depreciated, but largely depreciated on our books. So the returns, both from a cash flow and profitability are stronger. So we're pushing in Textron to get the aircraft, but our understanding of the challenges they face.

[Konark Gupta, analyst]

Right. Makes sense. And last one for me. Working cap was a bit of a drain in Q2, I think you kind of called out as beyond normal this time. It seems like you guys are investing in some regional jets at Regional One et cetera. In terms of magnitude of how much could potentially reverse from working capital to cash in Q4. Can you give us some sense? And like what's going to be the bigger driver there? Is it like those recent jet sales or parts?

[Michael Pyle, executive]

It's a really good question. Inventory is part of it. Quite frankly, a bigger part of it is when you deal with governments, their payment record, they always pay. They don't always pay when you expect them or they tell you they're going to pay. And so we've got a material receivables build in aviation. That I think largely will reverse itself by the end of the year. I never could -- Dave told us. Rich, do you want to jump in?

[Richard Wowryk, executive]

Yes. I think just for context, both in the prepared remarks and in the MD&A, we just in there that we expect the majority of the $68 million, so more than half of it to reverse before the end of the year. Q3 being our busiest quarter, while we may get the benefit of some of those things rectifying themselves in the quarter. You may not see it when you look at the cash flow from working capital number because the offset will be there from a significantly busier quarter and you'll see then the drawdown that you're expecting in Q4. So we're actively managing and working through it. But yes, a couple of large government receivables that are causing that number during the quarter.

[Konark Gupta, analyst]

Okay. And to clarify, Regional One is not part of this reversal equation or Regional One will also contribute in the reversal in Q4?

[Michael Pyle, executive]

And we have receivables there, too. It's not just -- it's across the board in aviation, but there's nothing out of the normal course of business they go up and down, and Regional One has got continued opportunities where you will see strong performance in that company for the balance of the year.

[Operator]

And your next question comes from the line of Tim James from TD Cowen.

[Tim James, analyst]

My first question, just turning to Duhamel for a minute. And I realize it's not a large transaction. But can you give us a bit of a sense for what portion of revenue will be to third parties versus what portion, I assume, is generated by Northern Mat. Just trying to get a sense kind of the materiality, if at all, of the revenue contribution in terms of reported revenue from that transaction?

[Michael Pyle, executive]

I think if you -- I think the easiest way to look at that without spilling information that I haven't put in the public sphere is that Duhamel was an accretive acquisition on its own with returns in the 15% to 20% range on an IRR unlevered basis, as we always talk about. So when you model that in, you guys can do the math backwards and pick a number.

And then where you'll see the difference from -- on a Northern basis is more sales in Northern. Our financial statements, it really now us matter which company I flow it through. And in fact, that's really more of Rich's area. But at the end of the day, if Quebec sales go up, it will be managed through there. But in the mat business, the core business that they're in already you could calculate reasonably accurately because it's not a big number based on the size of it with that sort of 15% to 20% return.

[Tim James, analyst]

Okay. Just a quick clarification. When you use the term returns in the outlook section of the MD&A can we assume that, that is a reference to EBITDA, like dollars of EBITDA when you talk about sort of forward-looking returns.

[Michael Pyle, executive]

It's probably more of a free cash flow return we're talking about than just a pure [indiscernible] . I've got my guys flipping to see where the precise paragraph it's in. But generally speaking, when we talk about returns, because of the great difference in maintenance reinvestment requirements between aviation and manufacturing, we're generally talking about the number after the maintenance reinvestment requirement, Tim.

[Tim James, analyst]

Okay. Okay. That's helpful. That's helpful. And then my last question, just turning to the Windows Systems business. Correct me if I'm wrong, but I think the second quarter, the revenue did not come through quite as expected. It was weaker than you anticipated when you reported the first quarter results. And again, I'm just sort of interpreting this based on the language in the Q1 discussion versus the numbers that came through. Could you just help us understand because this, as you pointed out, is a fairly long lead business 18 months normally, it sounds like it's getting shorter. But what sort of transpires in this business in such a short time frame that can make the outcome different than what you had anticipated?

[Michael Pyle, executive]

We had a project that backed up. They weren't ready for our Windows, so we could deliver them because for job site-specific issues slowed it down. The revenues weren't to be honest, is far off as the EBITDA was. And the EBITDA was off because when we were delayed on some of our own projects, we substituted third-party work installing other people's things. That's part of the Glacier business we do, particularly in the U.S. And so will that margin -- that's positive margin dollars, they're not at the same percentage as they are as our own. So while our revenue was a little bit off of our internal expectations. It wasn't as much as the product mix affected our EBITDA margins.

[Tim James, analyst]

Just a follow-up question on that. You mentioned it was the customer that wasn't ready to take deliveries. Is that something -- like how common is that? Is that really unusual? Or do you see that a handful of times over the course of the year?

[Michael Pyle, executive]

That is -- Travis, do you want to grab that?

[Travis Muhr, executive]

Yes. No, that's like normal, right? So when you think about sort of a construction project, it's dependent upon the concrete being formed with the curing of that, getting the various trades in and out and sort of the availability. So the when we produce these, we have our project plan, but generally, there's always adjustments. And so the team is very cognizant in looking at their project planning for various jobs and moving this job here, that job there. But it is relatively normal in the business. We try and stick with our production plans, but sometimes those become out of our control.

[Michael Pyle, executive]

And it's more evident in a period where it's not as busy because you don't have something to pull forward. A lot of normally when this stuff happens, Rich's project got delayed because the concrete guy didn't get his work done in time. But Travis is on schedule or maybe ahead. So we prebuilt Travis' job and do Rich's job later. When it's softer, it's harder to pull things forward. And it's not a business where you want to build in the inventory. We don't do that generally. Sometimes, we will have a specific customer ask for it. But so in a softer period, the delay of a contract has a bigger impact than it does when we're busy.

I'd add, we did our Q2 meetings here in Toronto. Normally, we would do this in Winnipeg. And we took our board out to see a site and it was incredibly informative to see the difference between the window products. So the job we went to happened to be a one young 100-storey mixed-use hotel condo project, but it's got every product we make in it from stick window wall to balconies, curtain wall and window wall. And one of the things I'm thinking about doing is perhaps asking our analysts if they'd like to come see the project. I think it would be a great insight. We've had you guys in the factory. Our developer there has allowed us on occasion to bring people to see what's going on. And I think it might help understand exactly how these things go. That project like with 100 floors, we could build a floor or 2 a week. So even if you're bang on, you're talking about something that's multiyear in nature to build that many floors.

[Operator]

And your next question comes from the line of Chris Murray from ATB Capital Markets.

[Chris Murray, analyst]

I guess my first question, thinking about the aerospace business, and we're starting to see some rise in the U.S. -- sorry, in U.K. around immigration issues, kind of looked at the numbers, kind of flat growth on the top line, but certainly some EBITDA expansion. I kind of expect that with the new U.K. government, some of the issues they're having, they're going to want maybe an operational tempo upgrade into ISR work.

So just kind of wondering a couple of questions here. First of all, what's your ability to flex with ISR work at this particular point now I think force multiplier has been kind of eaten up already by a lot of stuff, but not sure how much more capacity is available to you. And then as we start seeing these issues kind of multiply, I know there's some other contracts that are out there. I was wondering if you could give us maybe some updates on where some of the other major ISR contracts around the world might be standing?

[Jake Trainor, executive]

Sure. This is Jake. I'll take that call. So I'll answer your question in a couple of parts here. In terms of capacity availability, a couple of quarters ago, we indicated that we had proactively started to build another ISR asset, which these often have a long lead time in terms of getting them out and it's part way through construction.

So again, with that new asset plus some of the older assets that we have that have come off contracts, we do have an ability to flex upwards in terms of the ability. And that's notwithstanding having the capacity to take our existing assets under contract and just fly them more. And we're seeing that as a general trend across all of our contracts in that the utilization on these contracts or these aircraft are going upwards.

Specifically to talk about a few of the opportunities out there with regards to the U.K. kind of in late breaking news, we indicated that the RFP that we submitted back in Q1 had been canceled and then reissued as of yesterday with a new procurement process. The anticipated contract award in the new process is going to be Q3 '25 with an into-service date at the end of '25. What we see in that is an increased of tempo. They're asking for between 4,000 and 5,000 hours annually. So again, that's a significant uptick from what we're doing now with one aircraft. And obviously, we feel we're in a very good position to compete for that. And the other thing I'd say is we anticipate that the U.K. government is going to need some type of interim solution as well that our asset there is very busy and will continue to be busy.

The other point I'd like to note other RFP, I'd like to note is the -- we talked about it in a several quarters is the activities in Australia. And that RFP was released very recently. Again, following in a similar trend, it was actually larger in scale and scope than what we had anticipated being a 12-year contract plus 3-year option. And again, our teams are still going through to analyze the requirements, but likely a 10 to 15 aircraft operations. So again, very large. So again -- and that's just a couple of the ones that we're looking at. Again, with some of the state of the world and some instability in it, obviously, that means very -- a lot of activity for our ISR businesses.

[Michael Pyle, executive]

Jake doesn't like giving numbers on cost of things. But just to give you a broad brush on the potential size of that Australia deal. That's the biggest ISR contract in the world that we're aware of. And you're talking about something that will be considerably north of $0.5 billion in investment with ISR rates of return. It's clearly -- that is -- that's the jewel of the crown, and we will be very actively pursuing that. Earlier this year, through our process of expressions of interest, we were part of a narrowed group who've been invited to bid on this. And so by the end of the year, we will have a bid out on that and hopefully, sometime next year, we'll find out about it, starts flying in what? '28. Yes. So that's -- if you're going to add that many ISR aircraft, that's a tight time line.

So we're excited about it. We're working hard on it. And at the same time, we're building aircraft now just without exactly where they're going, but just because of the demand for ISR services.

[Chris Murray, analyst]

Okay. That kind of breaks into my next question. And we started -- I think [ Cam ] sort of started on this one, but you've got a couple of series of debentures that are probably -- let's assume, turn into equity over the next little while. But as you're getting larger as the dollars themselves get bigger. You've always sort of operated, call it, senior debt at a couple of terms. Debentures of a turn. But as you get larger, do you have to start thinking about how you construct the cap structure of the business? Is there a time to start thinking about getting a debt rating, maybe taking on call it, tradable debt or permanent debt, maybe even in different currencies, given where you're going to be trading in the world.

So I guess I'm trying to think about how the balance sheet needs to, for lack of a better term, grow up from where you come from to probably where you're going.

[Michael Pyle, executive]

Chris, that couldn't be a more topical question. You've clearly been reading Rich's goals and targets for the year from our Board. Convertible debentures have been very good to us. And as we've grown, they've provided us a great source of low-cost capital. But as we get bigger, they're less and less appropriate for us. And I'll never say never that we won't ever use one again. But they're not going to be a big part of our capital stack going forward. And as a result, we're probably going to need some publicly-traded debt.

Right now, we're working on the decision whether we do that through a rating or do we do a private placement with a pension fund and we're working through those details as we speak. It's a little complicated because the rating agencies, if they rate us as an airline, we're not going to get potentially the rating we want if they rate us as more of an infrastructure or more of a government services play, which we are because most of our revenue is contracted from governments, we're going to have a great ratings.

So we're busy working on those. But your question is bang on. If we look out 2 years from now, the converts aren't going to be the percentage of our balance sheet, they are now, and they'll be replaced with a more long-term fixed rate debt instrument.

[Unknown Executive]

And I think -- and just one additional piece there. I think the instrument that we would choose will be heavily dependent on some of the large contracts we're looking at, particularly on the aerospace side and the flexibility that we may be looking for with respect to those instruments, as you noted, thinking about different currencies, the investment currency usually U.S. dollar on the aircraft side, but the currency we're getting paid in might be Australian dollars or again a different currency from a different jurisdiction around the world and making sure that the instrument we choose we get the flexibility from a swap perspective to make it make sense for us. So all things that we're considering when we look at what the next move in our capital structure is.

[Chris Murray, analyst]

Okay. And just maybe a follow-on to that. When we think about a lot of this debt that is going to be large aircraft related, would you guys look at things like [indiscernible] sales leaseback markets?

[Michael Pyle, executive]

Never say never. Right now, I'm not sure that improves our cost of capital, largely because the aircraft are so manipulated and developed when you take a $10 million or $15 million or $20 million aircraft and put $100 million of stuff on it, that's not the stuff that the leasing companies are good at. So if we find a partner that understands the value of what's on the aircraft, that may be a consideration. I think it's more likely that we will use a debt instrument because we understand that we want to own those aircraft. But quite frankly, as technology ages, it doesn't age out. It ages it to lower level work for different areas. And so I think it's more likely that we would own our own assets. But if we found the right leasing partner, that could change.

[Unknown Executive]

Especially on the aerospace side, where the technology that exists from those aircraft can have top secret components to them, and we're not going to want to have another party have control over the ultimate disposition about at the end of the term.

[Operator]

And your last question comes from the line of Steve Hansen from Raymond James.

[Steven Hansen, analyst]

Sorry, I'm good for now. I think we saw the questions here for say, I'll leave it there.

[Operator]

That concludes our question-and-answer session. I will now hand the call back to Mr. Pyle for any closing remarks.

[Michael Pyle, executive]

I just want to say thank you to everyone for joining us today. It was lots of questions, lots of good stuff to talk about. I love when we're talking about our contracts and our opportunities going forward. It's what made EIC as investing in opportunities and can't wait to talk to you again in November. Have a great summer.

[Operator]

Thank you. And that concludes our conference today. Thank you for participating. You may all disconnect.