Exchange Income Corp
TSX:EIF
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Exchange Income Corp
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Good morning, everyone. Welcome to Exchange Income Corporation's Conference Call to discuss the Financial Results for the 3-month and 9-month periods ended September 30, 2022. The Corporation's results, including the MD&A and financial statements were issued on November 9, 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, Mr. Mike Pyle. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. The third quarter was EIC's best in our 18-year history, and there will certainly be lots to talk about. In line with other calls this year, we will attempt to keep our prepared statements as brief as possible to allow time for questions. With me today are Richard Wowryk, our CFO; and Carmele Peter, our President.
During 2021 and the first half of 2022, we completed a number of acquisitions and growth capital investments to drive future growth. At the same time, we strengthened our balance sheet to ensure we had the access to capital to fund opportunities when they were identified. We guided the market that the return on these investments would be evident in future periods.
While the second quarter of this year was strong, it did not include a full quarter's results from Advanced Paramedic Limited and Northern Mat and Bridge. Q3 marks the first quarter in which all of our investments were generating returns. Except for the new Netherlands operations in PAL, which goes into service in the fourth quarter, but more on that later in our comments.
The third quarter clearly shows the accretive nature of those investments and the value of our consistent, reliable business model. The third quarter is our strongest seasonally as our Northern Airlines and our Northern Mat operations experienced the highest customer demand. We would expect it to typically be the strongest financial results of the year, and 2022 is no exception. The results, however, are much more significant than simply being seasonally strong. They mark new highs in every metric, whether on an absolute or per share basis.
While Rich will go through the financials in more detail, I would like to highlight the magnitude of the increase in these metrics. Revenue increased by 47% to $587 million, up from $400 million last year. This was 11% higher than the previous quarterly high. Adjusted EBITDA grew 58% to $150 million from $95 million last year. The $150 million exceeded the previously quarterly high record of $115 million by 31%.
Free cash flow less maintenance capital expenditures increased 43% to $69 million from $48 million last year. This was 43% higher than the previous high of $48 million. On a per share basis, it rose 34% to $1.70 from $1.27 last year. This was 30% higher than our previous best. Net earnings grew by 123% to $49 million from $22 million last year. This was 63% higher than the previous best. EPS increased 107% to $1.20 from $0.58 and exceeded the previous high by 33%. Adjusted net earnings reached $55 million up 97% from last year.
The results exceeded the previous high by 42%. Adjusted EPS was $1.34, up 84% from last year. This exceeded the previous high of $1.03 by 30%. Free cash flow less maintenance capital expenditure trailing 12 payout ratio improved to 52% from 57%. The trailing 12 payout ratio on an adjusted net earnings basis improved significantly to 72% from 109%. The strengthening of the payout ratios is even more impressive given the 2 dividend increases announced with Q1 and Q2 results this year.
Improved performance in both our Aerospace and Aviation segment and our Manufacturing segment drove our aggregate results, while head office costs increased marginally from the comparative period. Our legacy airlines operations continued to improve during the third quarter, albeit at a slower rate than earlier in the year. Passenger demand increased throughout the quarter, but there were geographic variations.
Our maritime operations exceeded -- now exceed 2019 levels, while Central Canada and Nunavut are between 75% and 95% of pre-pandemic volumes. The slower recovery in Central Canada and Nunavut continues to be driven by access to medical and diagnostic appointments. The capacity of the medical system is still recovering from the pandemic and is expected to improve over time. There is a large backlog of patients needing to be seen, and this is expected to drive strong demand for the foreseeable future.
Our freight volumes have remained stronger than prepaid beta levels in spite of the bounce back in passenger travel. As it has throughout the pandemic, our medevac operations produced steady returns. Demand is not linked to the economy and varies only slightly from period to period. Our maritime surveillance business performed as expected during the third quarter, while hitting an exciting nonfinancial milestone. We delivered the first aircraft for our Netherlands contract and the aircraft went into service this quarter. A second aircraft will go into service later in the fourth quarter, and this opens our first surveillance operation in Europe.
Regional One continued to generate strong revenues in the sale of full aircraft, engines, components and parts. Its leasing portfolio is recovering more slowly than we had originally anticipated. This delay is a result of the pilot shortages across the industry. While passenger demand has bounced back, there are not enough pilots available for the airlines to operate all the flight segments that they would like to. As a result, they have chosen to fly the larger aircraft first because they have greater capacity and generate more revenue. The narrow-body regional jet market will recover as more pilots are available. There is not a new aircraft alternative for these routes, and we expect the lease portfolio to improve over the next few quarters.
The pilot shortage is creating challenges industry-wide. Our investment in Moncton Flight College several years ago is assisting us with this challenge in our operating airlines. Our life and flight program is now delivering our first fully certified pilots with sufficient experience to pilot for our airlines and the program is growing in size. We also completed the inaugural year of the Atik Mason Indigenous Pilot Pathway training, indigenous pilots for our career in Aviation. While it will take a couple of years for the pilots to be fully certified and have the necessary flying experience to work at our airlines, the first year was a great success, and we look forward to expanding the program in the future.
We are ecstatic to announce that 10 of this year's 11 candidates have completed their flight test, the first step in a career in Aviation. This graduation rate exceeds most universities and colleges and was above our most optimistic expectations. Working with our pilots, we have been able to make sure we have sufficient capacity to meet our customers requirements, although there is no doubt that the lot of supply has increased our cost.
A quick comment on fuel prices before we move on to the Manufacturing segment. Fuel prices moved rapidly higher earlier in the year before moderating in the summer. Many of our contracts have fuel surcharge provisions and our market position ensures we are able to pass on increased fuel costs to our customers, whereas specific contractual arrangement does not exist. The price and adjustments typically lag the change in fuel costs. So there is a marginal hit during times of rapid escalation, but a reversal effect in times of fuel price decline. As such, in the long run, the price of fuel does not really impact adjusted EBITDA in absolute terms. But it can have short-term impacts as our pricing takes time to adjust. Conversely, in times of rapid reduction in fuel costs that can result in temporary increases to adjusted EBITDA until price reductions are implemented.
Our Manufacturing segment was the main driver of the strong performance in the third quarter. Revenue increased 78% to $223 million, while adjusted EBITDA increased by 281% to $60 million. This growth was almost entirely driven by the 3 acquisitions made in 2021 and another completed in the second quarter of this year. Looking forward strategy in previous periods was rewarded in this quarter. Our WesTower subsidiary continues to be one of the Canada's leaders in the supply, construction and maintenance of cell towers in Canada. With the rollout of 5G systems accelerating across the country, WesTower chose to become a one-stop supplier for the telephone companies, providing both towers and below ground cabling.
In order to accomplish this, we completed the acquisitions of Telcon and Ryko in 2021 to augment our underground capabilities. The underground capabilities were integrated into WesTower and generated significant year-over-year growth. That machine is growing consistently and profitably since its acquisition in 2015. The company has invested in additional production capacity to meet customer requirements. But even with the investments, the factory was nearing capacity. The decision was made to acquire Macfab, a successful competitor Ben Machine. This enabled Ben Machine to diversify its customer base while immediately and very accretively increased its production capacity. The benefits of this decision are reflected in the third quarter results.
The most significant driver of the improvement in manufacturing segment was the acquisition of Northern Mat & Bridge earlier this year. It was EIC's largest acquisition to date and as such would be expected to have a material impact on our segment and our consolidated results. Northern Mat's actual results have exceeded those expectations. For those of you who were not with us on the first and second quarter calls, Northern Mat provides a temporary access solutions to substantially mitigate, if not eliminate the environmental impact of project instruction. They provide wood matting and bridge solutions, which enable projects to be built without building temporary access roads that are expensive and very difficult to remediate. They service a wide variety of projects to electrical distribution lines to pipelines, the oil and gas production to forestry and mining.
Northern Mat experienced strong demand in the third quarter with long linear projects and pipelines requiring a large number of mats for prolonged periods. Higher oil and gas prices have resulted in increased drilling, which in turn has increased demand from matting. Uncertainty created by the pandemic resulted in many other industry players reducing their investment in new matting, and as such, overall supply was low at a time when demand was high. This problem was exacerbated by very high timber prices for matting fiber, which pushed up the price of new mats. Northern Mat's vertically integrated model and inventory of raw fiber enabled the company to ramp production quickly in response to market conditions and thereby, satisfy market demands.
I should point out the Northern Mat's business has a seasonality, which is very similar to EIC as a whole. It is slowest in the first quarter when winter conditions freeze the ground, reducing the need for matting, and while construction is also seasonally slow. Demand ramps through the second quarter before peaking in the third quarter. The fourth quarter starts strong before slowing in concert with the colder weather towards the end of the year. The strong demand and challenged supply during the third quarter further enhanced our results.
I will leave most of the forward-looking discussion to Carmele later in this call. But I would like to briefly discuss the outlook for Northern Mat going forward. We have discussed on previous calls how we believe the long-term demand for temporary matting solution is strong and will grow as it has become an environmental best practice for mitigating the effect of construction projects in a wide variety of industries.
While this demand will certainly vary from period-to-period depending on which projects are being built, the long-term trajectory is very promising. The outlook for the short and medium term remains very positive as there are a number of long linear projects, which are expected to continue through 2023 and beyond. It is much harder to forecast supply, which may increase next year, but this is far from certain. As such, while we are confident that 2023 will be a strong year for Northern Mat, precise forecasts are challenging.
Quest continued to see strong demand for its products in the third quarter. Even with the higher interest rate environment to continue to grow its order book in the third quarter, which continues the momentum experienced in both the first and second quarters, where the order book grew in each of those quarters as well. While we have seen a change in our product mix, towards rental properties and away from condominium projects. The aggregate demand, particularly in our American markets remain strong, while the company continued to deal with in a regular production schedules the rate of projects delayed or canceled during the pandemic, operating results were in line with our internal expectations.
Interest rate environment has continued to rise during 2022. And while this has increased the carrying cost of our floating rate debt, it is a significant positive impact on M&A. We often compete for target companies with financial acquirers who will find a higher appetite for leverage than we do at EIC. The higher cost of debt reduces what those companies can afford to pay for an acquisition and mezzanine debt, in addition to be much more expensive, is also hard to access. This has resulted in EIC being more competitive on larger acquisitions than we have been in the last few years when the capital markets were hyper liquid.
The enhanced opportunities for EIC in the M&A market, combined with our long seeded strategy of maintaining strong, liquid balance sheet, [indiscernible] to augment our balance sheet within offering common shares during the quarter. We completed an issue of 100 million of common shares, which was very well received by the public markets, and demand was so strong that the underwriters exercised their full over-allotment option, bringing the total offer to 115 million.
Finally, before I hand the call over to Rich, I want to touch briefly on the strength of EIC's diversified operations and dealing with a potential recession in 2023. Many economists are predicting a slowdown in the economy or an outlined recession next year. EIC has seen absolutely no sign of any slowdown in our business to date and our diversification and contractual revenues provide us great protection should a slowdown occur.
I will now hand off the call to Rich who will detail our second quarter results.
Thank you, Mike, and good morning, everyone. The third quarter was by every metric, both in absolute dollars and more importantly, on a per share basis, the best quarter in the Corporation's history. Corporation's investments and platform acquisitions, tuck-in acquisitions and growth in capital expenditures in previous periods bore fruit during the quarter as we have been forecasting for a number of quarters. It is our disciplined acquisition and investment strategy along with keeping consistent leverage with plenty of liquidity that has driven these results. But then again, this isn't a new phenomenon for EIC. It has driven our management philosophy for our entire 18-year history.
The record results during the third quarter were highlighted by revenue was $587 million, an increase of 47% over the prior period. Adjusted EBITDA was $150 million, an increase of 58% over the prior period. The Corporation's free cash flow less maintenance capital expenditures was $1.70 per share, resulting in the corporation's lowest ever quarterly and trailing 12-month payout ratios. Net earnings per share was $1.20, an increase of 107%. Adjusted net earnings per share was $1.34, an increase of 84% over the prior period.
All of these results were achieved despite a $5 million reduction in government subsidies compared to the prior period as the corporation did not receive any subsidies in the third quarter of 2022. The third quarter results were very strong across both segments due to operational improvements, the lessening impact of COVID-19 on our operations and the performance of our acquisitions completed in the second half of 2021 and the first half of 2022. The Corporation continued to manage through a myriad of macroeconomic factors, including decades high inflation, labor shortages and supply chain constraints for certain inputs to name a few. These issues have been mitigated to the extent possible through the collective strength of EIC and each of the subsidiaries working together to solve challenges as they arise.
One particularly relevant example of this is EIC's Life in Flight program, as Mike discussed earlier, which is starting to graduate new pilots into EIC Airlines and the inaugural Atik Mason Indigenous Pilot Pathway, which will in the future graduate indigenous pilots to fly with our airlines. The planning for Life in Flight program several years ago is helping address the current shortage and provides a competitive advantage for EIC and its airlines. This is just one example of a Made-EIC solution, helping our collective group of companies deal challenges that would be difficult for our subsidiaries to address as stand-alone companies.
Our adjusted EBITDA margins were impacted by 3 notable factors compared to the prior year. First, CTI acquired in December 2021 generates lower margins as capital requirements are minimal beyond working capital. Second, rapid escalations in fuel prices initially impacted adjusted EBITDA earlier in the year until fuel price escalators in our contracts became effective or until fuel price surcharges were implemented. Now while adjusted EBITDA in absolute dollars is unaffected, 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 [ 4 ] months, most notably Northern Mat and CTI contributed to the increase in revenue and adjusted EBITDA, along with operational improvements and lessening impact from the pandemic on our existing operations. 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 to the Corporation's acquisitions and increased flying included by the Corporation's airlines.
Interest expense increased over the prior period due to funding our recent growth initiatives and acquisitions with senior debt and increases in the benchmark borrowing rates since the beginning of 2022. Other costs associated with our acquisition activity, notably in tangible asset amortization also increased over the prior period. With the significant increase in adjusted EBITDA, more than outpacing the increase in these costs, net earnings increased to $49 million, an increase of 123% over the prior period. At the same time, adjusted net earnings increased 97% to $55 million over the prior period. Free cash flow less maintenance capital expenditures increased by $21 million over the prior period to $69 million. The increase is mainly attributable to increased adjusted EBITDA, partially offset by increased maintenance capital expenditures.
One of the hallmarks of EIC's balance sheet management throughout its history is always having our sights on the next investment opportunity. Even if where that opportunity will arise is not yet evident. Whether the investment opportunity arises due to organic growth, our subsidiaries identifying [indiscernible] acquisitions for their operations that will drive growth and synergies or larger platform acquisitions that are sourced by our team internally we always want to ensure that we are able to execute on investments that meet our returns thresholds.
In keeping with this principle during the third quarter, we completed a $115 million common share offering, which is significantly oversubscribed and resulted in the underwriters executing the full overall an option. The proceeds were temporarily used to repay our senior credit facility until such time as there is an opportunity to deploy that capital. As Mike indicated earlier, our M&A pipeline is very strong and we wanted to ensure that when we are ready to execute on a transaction, we can -- and are able to find it responsibly.
Our leverage ratio is now within our historical range, accelerated downwards as a result of the common share offering. Our results were already driving down our leverage ratio as improved results from previous investments were being realized throughout the year. This was tempered slightly by the significant strengthening of the U.S. dollar near the end of the quarter, which increased the translated value of our U.S. dollar-denominated debt while only having a marginal impact on our U.S. dollar adjusted EBITDA.
The U.S. dollar has come off its recent highs and our adjusted EBITDA is now being translated at a rate that is much closer to the spot rate. So it is expected that the impact will moderate as long as exchange rates remain stable as we head into 2023, it is expected that our results will continue to drive down our leverage ratio. During the third quarter, the corporation made investments in working capital to support the growth of its operations, notably in inventory. This supported Northern Mat's significant growth and will contribute positively in future quarters. On a year-to-date basis, investment in working capital also includes several large deposits on capital asset purchases that will result in capital expenditures in future period or will be returned to the corporation of the purchase is now completed as discussed in prior quarters.
In addition, investments to support growth of the business, investment in future growth and investments made to mitigate the impacts of supply chain challenges have all increased working capital during the year-to-date period. During the third quarter, our dividend increased for a second time in 2022 compared to the dividend paid at the beginning of the year, the current dividend has increased 11% or $0.24 per share on an annualized basis. This is the largest annual increase in our history and underscores management's confidence in its operations and results. To that end, one might expect to see an increasing or best flat payout ratio. In reality, the results could be further from that.
Our free cash flows means capital expenditures payout ratio is 52% on a trailing 12-month basis, the lowest in the corporation's history. The adjusted net earnings payout ratio was 72% on a trailing 12-month basis within 1% of our previous record set in 2019. This continues to demonstrate our ability to reduce our payout ratios over time without having to forgo increasing our dividend when results warrant. That concludes my review of our financial results. I will now turn the call over to Carmele.
Thank you, Rich. We're very excited about our outlook for the future. The driving force behind this optimism is, of course, the expected performance of our respective segments. I will first discuss the Aerospace & Aviation segment. Our Aviation business will have a solid finish to the year as passenger numbers continue to increase, albeit at a slower pace. The availability of pilots is improving, increasing capacity to take advantage of growing demand for charters, cargo and medevac operations will continue their strong performance, and our fuel surcharges have caught up to the fuel increases. Regional One's leasing revenues in Q4 will continue to be hampered by the overall impact of flight crew shortages, causing airlines to park regional aircraft and focus on larger gauge aircraft.
We expect leasing to start to improve in the latter part of Q2 and continue to gradually ramp up through the balance of 2023. In the interim, Regional One has been and we'll continue to take advantage of current market dynamics to acquire and sell aircraft and engines. In Aerospace, Q4 will see the commencement of revenues from the 2 surveillance aircraft for the Netherlands. The Netherlands Surveillance contract is for 10 years. So this represents a long-term sustainable revenue stream. Also, Aerospace continues to experience strong operational tempo in the UAE and under our DFO contract.
The Manufacturing segment will see the largest growth in Q4 and throughout 2023. Although the acquisition of Northern Mat will be the single biggest contributor to the increase, it is far from the only reason. In fact, we are expecting growth from each of our manufacturing entities, notwithstanding the impact of inflation, supply chain and labor shortages. Growth is being driven in these entities due to a number of factors, including increased customer demand, efficiencies from tuck-in acquisitions and the increased capital spending for telecommunication infrastructure as 5G ramps up.
Quest, in line with our expectations will continue to be impacted by the production gaps in Q4 driven by project delays that occurred during the pandemic. However, these are short-term issues with the medium and long term looking strong, evidenced by continuing increasing order book. In 2023, Quest will start to see margins increasing with the benefit of higher pricing it took to the market over a year ago to address the substantially higher aluminum pricing. It will also start to see the benefit of a steadier production schedule with increased jobs for 2023.
A few comments about Northern Mat. Q4 results are expected to be very strong but need to be put in perspective with the seasonality of Northern Mat's business. The third quarter is Northern Mat's strongest quarter with performance in the fourth quarter lessening as a train freezes up and construction projects slow down. As such results in the fourth quarter are typically lower comparatively than in the fourth and in the third quarter. This will be particularly the case this year given the perfect alignment of demand supply and price in the third quarter, producing record results. Although many of the factors that aligned in Q3 to produce record results will continue into Q4, seasonality of demand, together with the possibility of pricing softening and the daily rental rates will result in adjusted EBITDA in Q4 being lower than Q3, but at the upper end of our expectation.
Looking into 2023, although we do not anticipate the perfect market conditions, which existed in Q2 and Q3 of 2022 to continue we do expect demand to remain very strong and results to continue to be notably better than the financial metrics on which we acquired Northern Mat. We anticipate maintenance CapEx for Q4 to be similar to our Q3 maintenance CapEx, although our maintenance CapEx expenditures are typically weighted to the front end of the year, the onset of the Omicron variant late in 2021 and into 2022, delayed some of the maintenance activities to the latter part of 2022.
Also, the acquisition of 8 businesses since the pandemic began and the capacity added in our aviation businesses to support growth contributed to the overall future maintenance investment and its requirements. Growth investments for the balance of the year are our commitments we have disclosed previously being the final portion of the investments for the Netherlands Surveillance Aircraft, investments in connection with the upgrade to the surveillance aircraft for the renewed Curacao contract and the completion of the new hanger required to meet obligations under our fixed wing search and rescue contract.
Additionally, as we have done in the past, we will look to see both organic and growth opportunities and accretive acquisitions that meet our criteria. Our pipeline of potential acquisitions is robust, and with our recent equity raise, we are prime to seize the opportunities. There is much uncertainty in the world with the Ukraine Russia conflict, unpredictable weather events, rising interest rates, inflation, and expectations of a recession. Against that backdrop is the consistency and reliability of EIC's business model, proven by the results it has generated over its 18 years of history that has included the financial crisis and in 2008, the COVID pandemic, high and low oil prices and fluctuating Canada-U.S. exchange rates. How do we do that? We acquire mature companies with dependable cash flows and diversified industries, which allows EIC to weather economic cycles very well. Look at the makeup of our companies. Our airline businesses are effectively in essential service, provided either directly for government or government funded.
Our aerospace business is backed by several long-term government contracts, and our Manufacturing segment produces specialized industrial products, not retail goods, which are much more impacted in a recession. In addition to these foundational protections against economic uncertainty, we have significant momentum going into 2023, with strong order books at all of our manufacturing companies. We have Northern Mat for a full year, improved margins and volumes at Quest, a full year of surveillance work in the Netherlands and expected improvements in RO1 leasing business. It is with that confidence that we expect our adjusted EBITDA to be at or above the high end of our previously guided range of $435 million to $445 million for 2022 and update our guidance for 2023 to be between $510 million and [ 400 ] -- sorry, $540 million.
Thank you for your time this morning, and we'd now like to open the call for questions. Operator?
[Operator Instructions] Your first question will come from Steve Hansen of Raymond James.
Northern Mat sounds like been operating superbly, Mike. It's hitting the ground running for you guys bumping into capacity limits by the tone of your MD&A. I'm just curious if the seasonal slowdown in Q4 allows you to bolster your fleet capability at all to get ready for added deployment in '23?
That's a good question. We've been running our production capacity effectively at capacity of a single shift for -- well, basically since we've owned it in before that. And so while the business slows in the winter, we will not slow our production manufacturing. We've maintained strong inventories of wood fiber. And as the winter goes occasionally, they're harder to obtain if cutting is cut back by the lumber producers, but we're confident that we're going to continue to grow it because we want to make sure we've got the necessary inventory to look after our customers next year because we believe the demand profile is every bit as good next year as it was this year.
That's great. And just one follow-on and I'll jump back in the queue. Can you just maybe give us some commentary around you've got a few months under your belt now, but just curious about the deployment into Eastern Canada and some of the nontraditional markets here. Do you have a good sense for the ability to diversify that business over the next year or 2?
Yes. Steve, I think one of the best kept secrets about Northern Mat, I mean, it's performed very well. So it's not a secret in terms of financial results. But I think when you look at what the business does, it helps other businesses protect the environment and reduce their footprint while they're doing projects. And if we went back in the business 10 years, it was much more driven in the West by oil and gas development. The company has done a great job in Eastern Canada of expanding that, particularly into electrical distribution, but other areas as well.
And so one of the things we're most bullish about the business is in the medium and the long term, and we've already talked to with the short term, is becoming an environmental best practice and then dealing with environmental leaders like Hydro One, who made this a priority that when they're building lines, they want to make sure they leave the environment looking the way it was before they started. And so that's one of the things we're most bullish about on our Northern Mat investment.
Your next question will come from Chris Murray of ATB Capital Markets.
Your comment about guidance into '23. Just to confirm, that doesn't include anything that you haven't already acquired as of today, correct?
That's absolutely right, Chris. It only includes things we own today and growth capital investments that we've already funded. Anything new we would do or any other acquisition would be in addition to those. That's just what's bought and paid for.
Okay. So with that in mind, just thinking about acquisition multiples and what you might be able to pull off. I mean, historically, the one thing you guys have been able to do pretty well is acquire at what I'd call fairly low-end multiples. Just wondering if I think about your available capacity for acquisitions, are these things that you're moving up large to transaction size or maybe into different types of businesses that your multiples are going to move off that historical 4x to 6x EBITDA range? Or is that kind of what we should be thinking about and what you're looking in the pipeline right now?
Chris, one of the things that has made us successful is kind of a dogmatic commitment to getting the right returns on our money. And so you talked to a 4x to 6x EBITDA multiples, that's correct. We tend to invert that and say, we want a 15% return after our maintenance reinvestment requirements, and that hasn't changed. In this environment, we're -- the thing that's changed is we're competitive on a wider variety of larger transactions. We're still very selective on what we're going to pull the trigger on. But it's exciting to have less people who are prepared to overpay. And when you had competitors who were prepared to put 6x leverage on the company, it was hard to compete with that. That's hard to do now or harder to do because of the cost of the floating rate debt and then this year accessibility of mezzanine debt.
So what we've seen is maybe not an increase in the pure number of opportunities, but an increase in the size and the quality of the opportunities we're looking at. So as part of the reason we raised the money this quarter was we wanted to make sure we had the dry powder and when you see an opportunity but Northern Mat was earlier this year, you want to be able to jump when those opportunities are there. And I'm pleased that in line with our historical practices, our balance sheet is ready to fund them.
And Chris, I think it's important that we also think -- we use the same criteria when we look at organic investments. So we expect the same growth. So we're really agnostic as to whether we're acquiring companies or investing organically in our company. So if it's further expansion for Northern Mat, we look at that, and we're as happy to invest the money in those types of opportunities.
And best example I'd be that the new contract in Europe were between $50 million and $100 million into that with the aircraft we bought and other investments we've made that's going to generate long-term returns for the next decade or more.
That's helpful. One of the potential growth internal investments. So -- and I didn't see it on the list, and we've been talking about this for a while in a new factory for Quest in Canada. Can you just update us kind of what the thinking is around that? At one point, they were kind of outgrowing the Canadian facility? I know you built a facility in Texas. Like what's kind of a longer-term path for these guys over the next 3 to 5 years?
Quest is in multiple buildings in Canada. And now that the market has sort of rationalized back to normal, we're growing, we're going to need to work on a plan to enhance efficiency of Canada and that probably means moving those into a bigger single facility. It's not going to happen in the next 12 months, but it's something we're working on. And one of the successes about Quest that I think is less well understood is Quest has been successful by really in a limited number of geographic markets. We do well in Toronto, down the western seaboard in the U.S. and a little bit in the Eastern U.S.
We've seen new markets for us in the last 6 months in Nashville in Denver and Dallas. And as we grow that geographic footprint, our need for capacity is going to grow. We've got tons of capacity in our Dallas facility, but we've seen the value of having stuff on both sides of the border to meet demand where it is. So I think you'll see us rationalize the production capacity in Toronto in due course.
Your next question comes from James McGarragle of RBC Capital.
Everyone, congrats on the great quarter, and I'm looking forward to seeing the team at Winnipeg this coming week.
We're looking for it we always love showing off our toys. So we're glad to have analysts come to see us.
That's good to hear. I just had a question about how your team is thinking about the balance sheet longer term? I know there's not any maturities coming up in there's lots of free cash being generated in addition to some really solid growth coming up next year. But given that interest rates are increasing very quickly, is there any change in how your team is thinking about the balance sheet longer term? And are you starting to make any adjustments in anticipation of some of those maturities coming due in 2025, 2026 time frame?
It's a good question. We've been remarkably consistent at what level of debt we're prepared to carry and typically, over time, that's about 2 turns of our EBITDA and secured debt and potentially up to 1 turn in convertible debentures. The convertibles, one of the advantages of those is that they are always fixed rate pieces of paper. But if the adverse rate environment when those start coming due 3 years from now, is higher, it would increase the price of them. So it's something we keep our eye on. But on the other hand, we have strike prices in the high 40s on some of those. And with the level of performance we've delivered this year and what we're talking about delivering next year, I would say I'm quite confident that we're not going to be refinancing most of those that they're going to naturally flow into our equity box.
So I think there's the ability to delever just from our normal growth. The second piece is, as our results increase, and we get the returns from the things we bought already, like, as an example, gaining the investment in the Netherlands contract or growth CapEx in our airlines where we built a new hangar for the Fixed-Wing Search and Rescue contract. As those deliver and show up in our results and when we think of our leverage, we know what that's going to generate, and we know that, that's going to bring our leverage ratio down in and of itself. So are we going to change our strategy as it relates to debt because of the bump up in short-term interest rates? I don't think so. I think we're going to delever naturally with the stuff we're doing now. But it sure wouldn't stop us if Northern Mat sister showed up, we would certainly be looking at that and wanting to grow the business. So in short, we've been pretty consistent. Interest rates have changed a lot over the last years 20 years, but our model really hasn't. I think that's what we do going forward, although I do think we delever out of the natural growth in our share price.
Okay. I appreciate that in -- on the M&A pipeline, you've outlined some pretty significant opportunity. You've also highlighted a lot of organic opportunity. So is your team anyway constrained? And I'm not necessarily asking from a capital perspective, but from a management capacity perspective to evaluate all the deals and all the organic opportunity that you seem to have available right now. So can you just talk about kind of that high-level strategy that your team executes just so I can better understand how you manage through all the opportunity that's available to the team right now. And I'll turn it over after that.
Yes, that's a good question, James. I think when you look at our growth opportunities, you mentioned acquisitions and you mentioned organic growth, and we've got to bifurcate how we manage those. We've increased the size of our acquisition department led by Adam over the last few years. And so our capacity internally is higher than it's ever been to examine the opportunities. So I think the evidence of that would have been not so much this year, but last year in 2021, we can be in the high number of smaller acquisitions, which, quite frankly, require the same amount of work as a big acquisition. And so we've got the horsepower to take advantage of the market situation on the acquisition front.
But I think when we talk about the organic part, you're really talking about the secret sauce of EIC. And that's that we have dynamic proven management teams and the subsidiaries and the people evaluating those opportunities. So whether it's Northern Mat, how much do we increase the size of our rental pool. Darren and his team there, they're doing that work and they're making those decisions or whether it's increasing the size of our fleet, it's -- PAL as an example. And so with the team at PAL are making those.
So the opportunity to take advantage of organic growth, whether it's through new contracts, expanding our geography or just increased customer demand is in no way inhibited by capacity constraints at head office because we're largely not the ones managing that. We, of course, obviously, are overseeing and making sure that the expected returns are in line with our expectations. But it's our ability to be decentralized and put those decisions in the hands of the people that understand those businesses that makes us successful.
And even for tuck-in acquisitions, we leverage the capability that we have in our subsidiaries to help us do the diligence. So we're able to effectively magnify our team by doing that.
Your next question comes from Matthew Lee of Canaccord Genuity.
I just wanted to start with a question on Regional One. I mean you delivered another very strong quarter in part on aircraft sales. Can you maybe talk about the sustainability of a $90 million per quarter range of sales going into 2023?
I would not look at Regional One, quite from a revenue point of view. I think you will see continued progression of what it generates from a bottom line point of view. The problem with looking at revenue in Regional One is in one quarter, we may sell a $10 million aircraft where we make $1 million. The next quarter, we might sell 2 engines for $4 million, where we make the same $1 million. The makeup of the revenue quarter-to-quarter changes significantly. The margin we generated off of it is remarkably consistent. And so while we expect the returns from the sales of parts and full aircrafts to remain consistent with what we're seeing now subject to, obviously, variations quarter-to-quarter, but we don't expect that to trend down, but we do expect our leasing revenue to augment that. So the total return coming out of Regional One, we expect to improve through 2023.
That's very helpful. And then maybe is there a way to quantify the opportunity in legacy in provincial once hospitals work through the backlog. I mean, could you possibly see double-digit revenue growth in that side of the business next year off somewhat a lower base?
The short answer is yes. The interesting part about the legacy airlines is that during the pandemic, our passenger business got hit the hardest but our freight business grew and it stayed strong, and our charter business has done very well in line with other parts of the economy. Tourism has come back. sector.
[indiscernible] sector.
[indiscernible] sector is stronger. So the one really strong part about our aviation right now is our other sort of stuff we call other revenue is actually quite good. And what we still have left to go is, call it, 20% of our volume in Central Canada that's got to come back and that's going to come back because what we're doing is an essential service, the demand for that hasn't gone anywhere. They've just got to be able to get in to see the doctor and the doctors haven't had enough -- whether it's diagnostics or direct appointments to absorb that yet. So we're quite optimistic that you'll see continued growth in that. Just when you look at it in percentage terms, I understand that some of it's already performing fairly well.
And at PAL Airlines the transition into the larger Q400 also gives them additional capacity and hence growth opportunities there.
Right. That's very helpful. And then maybe one more question on M&A. I mean, does the current economic environment change your target set at all? I mean are there any type of companies that you've been looking at? And maybe now that the economy and the macro environment is changing, maybe you're saying no or saying yes to that you weren't before?
I would say, generally speaking, no. We value stability where we're paying a dividend, and we want free cash flow. And so we're looking for a stable company that continues to perform well during difficult times. And you could see that in our results through whether it was the pandemic or the economic meltdown or any number of things that have occurred in the last 18 years.
I would say that at least in the near term, we're pretty enamored with the matting business in Canada and potentially in the United States. We think it's an environmental best practice. And we love businesses where we have strong profitability capability, but at the same time, enhance our ESG profile. So I think our -- we do have a focus on looking for other things that our management team at Northern Mat can do. We are exceptionally strong and deep in that company. And so we're looking for other things for them to do. And hopefully, we'll find something. But not, we'll grow organically rather than by acquisition. We aren't going to change the returns we expect. And that's, I think, something the market could trust us on after how we've done that for 18 years.
[Operator Instructions] Your next question will come from Matthew Weekes of iA Capital Markets.
This one is just kind of about how you're thinking about opportunities organically versus inorganically? It seems like there are a lot kind of on both ends and across the business, and I know you like to be sort of opportunistic and really lean on the strength of the management teams as well. But with the breadth of opportunities that you're seeing, how do you think about sort of capital rationing, I suppose, kind of between different divisions and maybe between M&A versus organic growth and looking at kind of what's offering the highest returns there? Do you kind of save some capital given that the M&A environment is looking good or just how are you thinking about that generally?
Our answer to this is remarkably simple. The strength of EIC for 18 years is that head office has relied on the entrepreneurial spirit of the management teams we have in our subsidiaries. And that's driven remarkable growth, and we've never said that, "Hey, Com, you can have a plane because we like your plan better than Keewatin's plan for a plane." So you get it, it's absolute levels of analysis. So if both of them have good ideas, they can both have the money. We don't start at the best deal and then go down to a certain level and then cut it off. We start with absolute standards that they have to meet. And quite frankly, head office isn't responsible for a lot. Rich and I's job is to make sure I've got enough money to buy everything Darren wants to buy. And that's -- and so we've got people would say, why do you need north of half of $1 billion of liquidity that would -- based on your history, that would take multiple, multiple years to invest.
And I said because we always want to be able to move when the opportunities are there. If you look in our history, there are some years where we do a lot more than other years, but we're always doing something. And so we try not to create competition for capital, but rather a high bar that if something meets the threshold, it's my job to make sure we've got the money to fund it.
Yes. The way I look at it is we deploy capital, we don't allocate it. So if you meet the investment criteria, our job is to have the money to do it. Similarly, if there are no opportunities in any given period, the [indiscernible], we don't do anything. We're not compelled to do anything.
There are no other questions. So at this time, I will turn the conference back to Mr. Pyle for any closing remarks.
Thank you, everybody, for joining us on the call. It's an exciting day for us, record results, and we're going to go back to work and see what we can deliver for Q4, and I look forward to speaking to all of you in February when we release our year-end results. Have a great day, everyone.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everybody for their participation and ask that you please disconnect your lines.