Exchange Income Corp
TSX:EIF
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Exchange Income Corp
Earnings Call Analysis
Q3-2023 Analysis
Exchange Income Corp
Despite whispers of a technical recession and higher interest rates, the company achieved record financial milestones in the third quarter of 2023. Revenue soared by 17% to $688 million compared to the previous year, and adjusted EBITDA grew by 12% to $168 million. Although the company faced an additional $8 million interest expense, it managed to post net earnings of $50 million. Adjusted net earnings increased by roughly $1 million to $55 million, signaling robust growth and financial health.
The free cash flow less maintenance CapEx payout ratio stood at 58%, a slight increase from the previous year's 52%. Taking into account the dividend hikes in fiscal 2022 and the rise in share count, the company increased its annual dividend by $0.12, showcasing their confidence in the financial stability and the ability to deliver shareholder value.
The company's diversified portfolio played a crucial role in delivering strong aggregate results. Essential air service and aerospace sectors exhibited exceptional performance, with increased passenger demand leading to expanded adjusted EBITDA margins. The company also solidified long-term labor arrangements, creating a stable environment for growth and cost certainty going forward.
The company is actively investing in growth initiatives that are expected to yield significant revenue, adjusted EBITDA, and profitability increases from 2024 to 2025. They have secured long-term medevac contracts with 10-year terms, potentially extendable, requiring a $275 million capital deployment expected to be fully operational by 2025. These contracts, along with their recent agreement with Air Canada, reinforce the company's position as a leading service provider and showcases an anticipated growth in revenue and EBITDA during the latter part of the fourth quarter of 2023 and into fiscal 2024.
The recent acquisition of DryAir, a leader in portable hydronic heating equipment, aligns with the company's aim to integrate profitable, innovative, and management-strong companies into its family. Such strategic acquisitions play a pivotal role in driving long-term growth and increasing margins.
The company maintains a disciplined approach towards acquisitions to ensure strategic fits that offer accretive growth opportunities for shareholders. This disciplined approach towards acquisition, combined with prudent balance sheet management, allows the company to capitalize on growth opportunities as they arise.
The company has demonstrated consistent growth with a 15% cumulative average growth rate in revenue and adjusted EBITDA since 2019. Their strategy of diversification has proven its worth, particularly during the pandemic, allowing them to deliver financial performance independent of economic contractions. Based on this strong performance and outlook, the company has increased dividends, further advocating their confidence in sustainable growth.
President Carmele Peter has announced her retirement in fiscal 2024, but will transition to the Board, ensuring continuity of leadership and corporate culture. The company plans to announce suitable management changes in due course, highlighting the importance of internal development and seamless transitions to maintain their trajectory of success.
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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, 2023. The corporation's results, including the MD&A and financial statements were issued on November 9, 2023, 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, 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 conference over to the CEO of Exchange Income Corporation, Mike Pyle, please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us today on today's call. With me is Carmele Peter, our President; and Richard Wowryk, our CFO. There has been a lot of interest in our recent aviation contract wins. I have asked Kevin Hillier, the CEO of Carson Air; Dave White, our Head of Aviation and CEO at Keewatin, as well as Jake Trainor, the CEO of PAL, to join us to answer any questions you may have about the contracts.
Yesterday, we released our third quarter financial results for 2023. And and I am pleased to have this opportunity to share with you some of the highlights from the quarter. We set a number of record quarter watermarks, including record revenue, adjusted EBITDA, free cash flow, less maintenance CapEx, net earnings and adjusted net earnings. This was achieved despite a challenging economy, much higher interest rates and whispers of a technical recession beginning to emerge.
Even more importantly, this performance was achieved while we are beginning to deploy the capital from our bought deal common share offering in the second quarter for several of our growth initiatives previously discussed, including our contracts there. Canada and the medevac contracts in the provinces of British Columbia and Manitoba.
We anticipate seeing adjusted EBITDA at bottom line for the Air Canada investment in the latter part of the fourth quarter of 2023 and on the medevac contracts as we progress through 2024 and 2025. Taking a step back, our portfolio of companies remains resilient. Announcements of acquisitions, strengthening of our balance sheet and new contracts were the theme of our second quarter. Strong operating performance and the execution on those investment opportunities for the new contracts defined our third quarter.
In terms of absolute financial metrics, we recorded a record quarter results in almost all key metrics. Revenue increased 17% to $688 million, up from $587 million in the previous year. Adjusted EBITDA grew to $168 million from $150 million last year, an increase of 12%. Free cash flow less maintenance capital expenditures increased 8% to $74 million, while on a per share basis, it declined marginally by 6% to $1.60.
Net earnings were $50 million despite an increase in interest expense of $8 million over the previous period. Net earnings per share was $1.06 which is a decrease of approximately 12% and adjusted net earnings was $55 million, up approximately $1 million. Our results across the board were record results for any quarter. However, on a per share basis, certain of the metrics were lower than the prior years. The primary reason for this reduction was the increase in the number of shares outstanding due to the bought deal offering in the second quarter.
The proceeds from such an offering are being used to fund our significant growth capital expenditures related to the Air Canada contract and our 2 medevac contracts in British Columbia and Manitoba. The financial effects of such contracts will have significant positive effects in subsequent quarters as we have previously discussed. Our trailing 12-month free cash flow less maintenance CapEx payout ratio was 58% as compared to our watermark level of 52% experienced in last year's third quarter.
This payout ratio includes the impact of 2 dividend increases in fiscal '22 and the increase in the absolute number of shares. In fact, the 12 months dividends increased by $18 million for 2023 compared to the prior year. The payout ratio also includes a large increase in interest costs for the trailing 12 months of $43 million. With the results posted for the quarter, coupled with our confidence in 2024 and due to the significant investments in Air Canada and these medevac contracts, we have announced a $0.12 increase in our annual dividend or approximately 5%, increase from $2.52 to $2.64.
This maintains our 20-year record of a 5% CAGR and bears testament not only to the strength of our current results but our confidence in the future. The third quarter continued to provide evidence of the power of our diversified model, considering our strong aggregate results, which were achieved with some subsidiaries delivering solid performance to those who experienced some more challenging period.
Essential air service and aerospace continued to deliver exceptional results. Virtually, all revenue streams improved over the prior period. Strengthening passenger demand realized in the most notable improvement and resulted in expansion of adjusted EBITDA margins. Our northern air operators have continued to experience higher demand driven by the increasing population in the north, the continuous need for medical travel and the ongoing need to provide essential passenger and freight movements.
The capital investments made in previous periods in our fleet of fixed rate and rotary aircraft drove higher revenues Diligent cost management in concert with the greater load factors drove improved margins. It is also important to note that we have completed long-term arrangements with a number of our unions, the majority of our aviation subsidiaries and are working on the last couple of remaining contracts. This will provide us with contract and cost certainty.
Our aerospace business also benefited from more flying compared to the previous period with both maritime surveillance aircraft built for the contract in the Netherlands in full operations. Furthermore, the force multiplier also continued to fly significant hours for the U.K. government. We are very excited about the future contract opportunities and are currently awaiting the RFP from the U.K. home office for its new contract.
Multistory window solutions continued to improve because of 2 key reasons. Firstly, the acquisition of BVGlazing in May of 2023 with no comparative in the prior year; and secondly, a more normal production schedule. The order book remains strong at approximately $1 billion with active inquiries continuing to be realized.
Inquiries for new projects are continuing at all-time highs, although the time to convert these to confirm the order is longer because of the higher interest rate environment for developers. The long-term fundamentals of this industry remains strong. These longer-term tailwinds will be discussed further by Carmele in her outlook.
Precision manufacturing and engineering continued to deliver strong performance. The increases in revenue and profitability driven by the acquisition of Hansen in the second quarter with the strong execution by the majority of the other business line subsidiaries drove the growth of the business. Our Environmental Access Solutions business continues to exceed the metrics we have purchased it upon.
At quarter end, assuming our trailing 12 months run rate, our comparative return of capital would have been well in excess of 20%. When we compare this year's quarter end results to the prior year, the operating margins have declined. As we previously commented that the prior year was due to a unique alignment of price, supply, demand and weather along with near practical capacity for the utilization of rental mats.
That combination of factors was unsustainable in the longer term and the results were moderated. Furthermore, this year was characterized by an unfavorable dry and hot summer and historic wildfire season that reduced demand for mats. That said, in totality, Northern Mat has been a positive contributor to our results based on the acquisition matrix and its return on capital. Aircraft Sales & Leasing business continues to recover from the pandemic. The assets within the leasing pool continued to be placed on lease on a consistent cadence throughout the quarter and into further quarters.
The cadence was impacted by the worldwide pilot shortage. Furthermore, revenues in the business side were also impacted by the fewer large asset and engine sales compared to the prior period. It is important to note that the asset and engine sales in the prior period, even to the current period are high on a relative basis compared to pre-pandemic periods.
As a reminder, such asset and engine sales are generally at lower margin, higher dollar sale transactions. Management within the Aircraft Sales & Leasing business continues to diligently look for opportunities for investment in this opportunistic market. In the third quarter, we saw a record set in key metrics on an absolute basis. However, many will note that certain per share amounts are below Q3 2022, which were quarterly high watermarks.
Previously, I mentioned the fact that the Q3 per share amounts were impacted by the capital that is to be deployed on those longer-term contracts announced in the second quarter. At EIC, we have always taken a longer-term view of our investment thesis. We believe that those contracts will provide meaningful increases in revenue, adjusted EBITDA and profitability as we move through 2024 and into 2025. We like these investments for a number of reasons.
Firstly, there are a core competency of our business. Our businesses have been involved in medevac and scheduled flying services for over 4 decades. Secondly, the customers are either large corporations like Air Canada or governments. There are consistent, stable cash flows associated with these contracts. And finally, and most importantly, those contracts met our internal return on invested capital metrics. They are accretive to our shareholders over the long term on a per share basis.
We want to provide an update on these growth initiatives communicated in the second quarter. In our second quarter, we announced that we have won 2 important long-term medevac contracts with the provinces of British Columbia and Manitoba. We have grown to be Canada's largest medevac provider. These 2 contracts strengthened our critical mass even further. Both of the contracts are for 10-year terms, including options -- and include options to extend beyond that.
These significant contracts will require aggregate capital deployment of approximately $275 million, which has already begun and will continue over the next 2 years with full-scale flying not expected until 2025. During the third quarter, we acquired 3 of the 5 aircraft related to the government of Manitoba contract. Those aircraft will be retrofitted with medevac interiors over the next couple of quarters after which they will be put into service in the early part of -- early part to mid-2024.
We anticipate to receive our first brand-new King Air in the fourth quarter, after which it will be deducted into -- it will be retrofitted with the interior for the medevac purpose. This aircraft will be received in a regular cadence over the next 6 quarters. Our returns on capital of this investment will be most evident in 2025 and thereafter when all the aircraft are acquired and the existing aircraft that we use for the government of BC are redeployed.
During the second quarter, we also announced and finalized an agreement with Air Canada to provide regional service in Eastern Canada for up to 5 years. The agreement will require up to 6 additional Dash 8-400 aircraft and substantially expand our maritime operation. We completed our first flight on July 1 using existing capacity and acquired additional 4 aircraft during the third and fourth quarter.
The returns on this quarter contract will begin to be evident in the back half of the fourth quarter with the full impact available in fiscal 2024. We are also seeing growth opportunities within these new contract opportunities as discussions with the government of BC have led to additional aircraft being added to the contract and further discussions are ongoing. In the second quarter, we also started our contract with the U.K. Home Office. We anticipate the release of an RFP for the competitive bid process for a new contract with the U.K. office to occur in the fourth quarter of this year or early 2024.
As the incumbent, we are well positioned as we continue to demonstrate mission success on the existing short-term contract. In our Manufacturing segment, we are continuing the integration of Hansen and BVGlazing. Our COO, Darwin Sparrow has been spending significant amount of time with the quest of BVGlazing management team. The focus is to find innovative and creative ways to create efficiencies, leverage our collective purchasing power and rationalize our production space footprint.
These activities will facilitate further growth and increase margins in the longer term. Subsequent to the end of the quarter, we announced the acquisition of DryAir. DryAir is the leader in portable hydronic heating equipment in North America. DryAir is characterized by their innovative customer-centric approach, and we believe that it will be a great fit within our EIC family of companies.
They checked all of the boxes that we look for in our acquisitions. They are profitable, well established and have a strong management team. Both Claude and [indiscernible] who are the majority owners will continue in their previous roles. The company operates in niche markets, generate strong steady cash flows and are primed for continued organic growth within the rental market in North America.
Lastly, our work completed in the second quarter being the upsize and extension of the credit facility coupled with the bought deal offering has put us in a strong leverage position on our balance sheet, which will allow us to execute on our investment strategy as well as opportunistically to acquire businesses and assets in this market. Our pipeline for acquisitions continues to be strong, and our diligent management of our balance sheet provides us with significant capital to deploy when the right opportunities are presented.
Our model continues to resonate with owners. In our recent acquisition of DryAir, the majority shareholder wrote to me in a note. In our boardroom in July, EIC explained the philosophy and values and the culture of EIC. We felt that we had found the people we wanted to work with. I'm very proud of the culture and values that we have developed over the years.
Our subsidiaries have become our greatest champion of our business model. While we are actively considering deals, discipline will remain one of the key principles in our decision-making to ensure we acquire companies with the requisite strong management teams and strategic business initiatives with future growth opportunities that enable accretive growth to our shareholders. Our management teams will be busy over the next number of quarters, continue to integrate the business we acquired in 2023, readying our Essential Air Services businesses for the operation of the new medevac aircraft to facilitate contract wins, including the hiring and integration of crews. Other teams will be continuing to execute on our strategy to ensure that we retain our strong sustainable, diversified cash flows that our shareholders expect.
Our results continue to demonstrate the resilience and sustainability of our business model. Taking a step back, in 2019, our revenues in the third quarter was $355 million and adjusted EBITDA was $89 million. Fast forward 4 years, which included the pandemic, our revenues have grown to $688 million and our adjusted EBITDA to $168 million, a cumulative average growth rate of 15% for both revenue and adjusted EBITDA. That growth was accomplished through both acquisition and organic growth.
Furthermore, our industry diversification had shown its value throughout the pandemic and has continued to demonstrate its importance today and into the future. It allows us to deliver consistent, meaningful financial performance irrespective of the economic and geopolitical conditions of the area. On that basis, as a result of our strong results on year-to-date, our confidence in 2024 and beyond, we made the decision to increase our dividend by $0.12 to $2.64 per annum.
We are focused on succession planning at our company as we grow and we realize the need for strong management teams. Carmele Peter, our President, has announced that she will be retiring sometime during fiscal 2024. But I'm pleased to say she will not be leaving EIC. She will be joining the Board sometime during that period.
We have developed people in the company, and we will be announcing the management changes to fill Carmele's shoes once she sets a final date. We're excited to have her stay with the company. Our future is bright. Our business is built on a solid foundation and our diversification and resilience are shown in our results. We are looking forward to the contributions made from our 2023 acquisitions and our growth capital expenditures as we move into 2024. I will now hand the call off to Richard.
Thank you, Mike, and good morning, everyone. The third quarter was another example of the benefits of our diversification and focus on the long term instead of focusing on one quarter at a time. Consistent with our expectations and tax exposures, the prior period was the perfect quarter for Environmental Access Solutions business and sustaining cash flows at that level in 2023 was not feasible.
That meant that our other existing operations plus contributions from our 2023 acquisitions not only covered this shortfall, but delivered strong period-over-period results. Adjusted EBITDA was $168 million, an increase of 12% over the prior period. The Aerospace & Aviation segment adjusted EBITDA increased by $24 million and was partially offset by a decrease of $6 million in the Manufacturing segment.
The increase in our Aerospace & Aviation segment can be summarized into 2 buckets. The first is a steady recovery from the impact of the pandemic on our airline operations. The second is investments we have made into our operations over several quarters, and in some cases, years as we had out sight set on the future. Those investments are now producing the returns we expected, increasing adjusted EBITDA over the prior period.
Investments allowed us to win contracts in the Netherlands and the United Kingdom. We also entered into a contract with Air Canada, which started to contribute in Q3 and 2 medevac contracts, which will not be fully operational until early 2025. We continue to make these types of investments to support our future growth.
The decrease in our Manufacturing segment was driven by the Environmental Access Solutions business as discussed above. This decline was partially offset by increases in our existing businesses due to the resilient demand for their products and our 2023 acquisitions, most notably, our pre-existing businesses in the multistory window solutions business [indiscernible] contributed strong period-over-period increases as a more normal production schedule benefited their operations.
As Mike previously discussed, during the second quarter, the corporation completed an equity offering of common shares. The offering was the largest in our history by a wide margin and was materially oversubscribed. During the significant and accretive growth opportunities we had in front of us, we took the opportunity to raise more than we initially went to market for knowing that these funds will be deployed over a period of time. While this temporarily increased our shares without a corresponding contribution to adjusted EBITDA and, therefore, negatively impacted our per share metrics we planned for the long term.
This is consistent with our past practice of always ensuring we have the capital available of what is required to ensure that when the opportunities materialize, we have capital to work. Both net earnings and adjusted net earnings increased by 1% over the prior period. The per share results declined due to a 14% increase in shares outstanding, driven primarily by our common share offering in the second quarter of 2023.
The increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings was mostly offset primarily by 2 items: increased interest costs and depreciation on capital assets. Interest costs increased over the prior period in lock step with increased benchmark borrowing rates over the prior period. In addition, increased long-term debt outstanding due to investments made increased interest costs. The increase -- this increased interest costs by $8 million in the quarter and $43 million on a trailing 12-month basis.
The impact from increased benchmark borrowing rates would have been larger had we not entered into 2 rate swap transactions in 2023. These 2 transactions fixed costs on approximately $540 million of our credit facility debt. Depreciation on capital assets increased for 2 reasons. First, the acquisition activity of the corporation contributed to the increase in 2023. Second, investments made to increase the size of our fleet and increased line of that fleet also contributed to the increase. Free cash flow less maintenance capital expenditures increased 8% over the prior period due to increased free cash flow and lower maintenance capital expenditures. Our free cash flow increased due to higher adjusted EBITDA compared to 2022. Increased interest costs partially offset the increase in adjusted EBITDA.
Our payout ratios both on a free cash flow less maintenance capital expenditure basis at 58% and on an adjusted net earnings basis at 78% remained near all-time lows on a trailing 12-month basis. We expect that the realization of returns on investments already made, including our 2 most recent acquisitions and returns to be realized on contracts that we have already won and announced will continue to drive these ratios lower over time and permit continued dividend increase consistent with our historical dividend growth.
Growth capital expenditures of $81 million were made during the quarter. These investments were focused within Essential Air Services, Aerospace, Aircraft Sales and Leasing and Environmental Access Solutions. In Essential Air Services, investments were made in additional aircraft for medevac contract and for our terminal expansion in Winnipeg.
We have also purchased aircraft for our CPA with Air Canada as we ramp up our service under the agreement. Significant deposits have been made on aircraft for our recently awarded medevac contract with Carson Air. Aerospace made investments for its renewed and expanded contract in Curacao. Aircraft Sales & Leasing made investments into additional engines for lease as the lease market continues its recovery from the pandemic -- first from the pandemic and now from a worldwide shortage of experienced pilots.
Environmental Access Solutions made investments in its rental mat portfolio during the quarter. This was strictly based on the timing of when mats are produced and is expected to reverse in the fourth quarter. During the first quarter, as we messaged in the fourth quarter of 2022, we had a material outflow from working capital, which was primarily driven by a receivable that was collected in the fourth quarter of 2022 but the corresponding payable was not due until 2023.
Working capital investment outside of this outflow was focused on investment in inventory and aircraft for resale aircraft, sales and leasing and a modest increase in working capital to support increased revenues. Other investments in the quarter for working capital -- sorry, during the third quarter, our seasonally busiest quarter was well below historical norms at $7 million.
Our senior leverage ratio at the end of the quarter remains consistent with our historical targets at 2.4x. Our total leverage ratio when including our convertible debentures, continues to decline as the debentures have not increased at the same rate as our adjusted EBITDA over the last 18 months.
Historically, our convertible debentures have represented 1x of adjusted EBITDA within our capital structure, whereas now the debentures represent approximately 3/4 of a turn of adjusted EBITDA off of 2023 guidance using the midpoints. That concludes my review of our financial results.
I will now turn the call over to Carmele.
Thank you, Rich. The fourth quarter is expected to provide a solid finish to the 2023 year. We are anticipating adjusted EBITDA for Q4 of 2023 to be higher than Q4 of 2022, driven by growth in the A&A segment. As the name suggests, our essential air service business is not in any material way impacted by the economic factors that affect mainline carriers and will experience year-over-year growth in Q4.
The passengers and freight re-move are driven by need, medical necessity, medical appointments, food, essential goods, not by choice or disposable income. This has driven demand pre-COVID or higher levels and has caused us to add aircraft capacity, both passenger and trader that will be operational in Q4. Also adding to the year-over-year growth and the stability of this revenue stream is our service agreement with Air Canada.
Although we started in July, providing some flight capacity with our existing fleet, by the end of the year, this will be replaced with the initial full-time Q4 aircraft. Similarly, our medevac businesses continue to grow with the additional medevac aircraft we were contracted to provide in Nova Scotia in August and increased capacity requests from BC and Nunavut.
Offsetting some of these games are the increased expenses from raising labor costs experienced by our air operators driven by the flight duty regulations and the industry-wide shortages for pilots, aircraft mechanics and medical personnel. Although some of our air operators have already been able to pass these on, others will have to wait until contract renewals. However, even absorbing these costs, our margins remain strong. As we look forward into 2024, our Essential Services business has performed strongly given the nature of its demand, the capacity we added in 2023, the Air Canada contract and will be further bolstered by the medevac contracts we won in 2023.
Our 10-year BC medevac contract will be contributing to the financial results throughout 2024, but we'll not see the full financial impact until all new medevac aircrafts are delivered and operational and our existing aircraft are deployed into other opportunities, which will take us into 2026.
The medevac contract, the one in Manitoba will slowly start contributing to financial results in March of 2024 when the first aircraft goes online and will increase to its expected run rate in Q4 of 2024 when the anticipated -- when we anticipate all aircrafts being operational. The aerospace business line is also expected to have growth in Q4, primarily driven by the full engagement of force multiplier doing maritime surveillance work for the U.K. Home Office.
Aerospace is also bolstered by the Netherlands operations, which did not commence until late Q4 2022 and the high [indiscernible] flying in the UAE and Curacao. With the force multiplier being on contract substantially all of 2024 and other key operations being under long-term contracts, such as our DFO contract, Netherlands, Curacao, Fixed Wing Search and Rescue, the Aerospace business line will provide another strong reliable source of earnings in 2024.
Although our Aircraft Sales & Leasing business continues to be challenged by the impact of industry-wide pilot shortage and MRO availability, we do expect continued year-over-year growth in Q4. This anticipated growth is driven primarily by material increases in leasing revenue, which is very encouraging. We expect the leasing portfolio to continue its recovery into the first part of 2024. Parts sales and whole aircraft and engine sales are also expected to be solid in Q4, consistent with historical levels which will continue into 2024.
Now turning to our Manufacturing segment. Our Environmental Access Solutions business is not expected to outperform Q4 of 2022, which was a fourth quarter record for Northern Mats with the perfect alignment of price demand [indiscernible]. Q4 2023 did not have the same perfect alignment and has being further impacted by less favorable weather, increased mat supply and the demobilization of large pipeline projects. As such, we expect Q4 of this year to be approximately 40% of the prior year -- sorry, prior quarter.
To put this in perspective, the expected results in Q4 will be greater than the metrics on which we purchased Northern Mats. In the 2024 year, we anticipate pricing and demand to be in line with what has been experienced in the second half of 2023. The variance in environmental access solutions will be materially offset by the growth in the multistory window solutions, which will see material growth in Q4 over prior year.
The drivers are the acquisition of BVGlazing which does not have a comparative in Q4 2022 and the increased volumes at Quest. Quoting in Canada and the U.S. continues to be extremely active, but the conversion of those quotes into backlog is being delayed with uncertain economic conditions and higher interest rates. Those same market variables are also causing some jobs to push out, which could impact demand in 2024.
However, we remain bullish on this business line as the fundamentals which drive demand, the immigration, urbanization and a lack of affordable housing remain incredibly strong. If there will be a slowdown, we believe it will be short term followed by a surge in demand. With the recent acquisition of BVGlazing, we'll be well positioned to capture this increased demand.
Also, in 2024, we expect to start to see the financial benefit of synergies being captured between Quest and BVGlazing. The precision manufacturing and engineering business will also see comparative growth fueled by this year's acquisition of Hansen and DryAir performed in 2024 is expected to be similar to 2023, normalized to the full year operations for Hansen and DryAir that were acquired during 2023.
With respect to maintenance capital expenditures for Q4, we anticipate levels being slightly higher than last Q4, higher flight hours to support increased passenger and charter volumes together with inflation, labor shortages, supply chain issues, growing fleet size and acquisitions are the factors contributing to the increase.
Growth investments for the Aerospace & Aviation segment in Q4 are focused on the upgrade of the surveillance aircraft to the renewed Curacao contracts, the construction of the Gary Filmon, Indigenous terminal, Q400 aircraft acquisitions to fulfill our agreement with Air Canada, investments in aircraft and infrastructure for the newly awarded BC Manitoba medevac contract and payment towards the construction of our King Air simulator.
With 3 completed acquisitions already this year, our acquisition pipeline continues to be as strong as it ever has been. The higher interest environment has created a leveling off of acquisition prices, which in turn allow EIC to be more competitive on more transactions, particularly larger transactions. With capital on hand from the equity raise in the second quarter, EIC will continue to be active in the acquisition market.
We are on track with our 2023 adjusted EBITDA guidance of between $540 million and $570 million trending towards the middle of that range. As we look into 2024 and take into account the contracts we have won and the timing that they will have a material financial impact, our prior investments, our acquisitions, organic growth as well as increasing cost inflation and the impact of current economic conditions on the manufacturing businesses, we anticipate our 2024 adjusted EBITDA to be in the range of $600 million to $635 million with further growth anticipated in 2025 as our new contracts mature.
This strong outlook, together with the confidence we have in our operating fundamentals underpins our decision to increase our annual dividend by approximately 5%, taking our dividend from $2.52 to $2.64 per year.
Thank you for your time this morning, and we would now like to open the call for questions. Operator?
[Operator Instructions]
Your first question comes from James McGarragle from RBC.
I just have a question on the 2024 guidance and some of the new contracts that you are coming on. The press release has seemed to allude some of those recent wins being pushed out to 2025. So I guess, can you just speak to the timing of how you expect those contracts to ramp up? And you also mentioned the BC government is increasing the amount of planes they are going to require. Can you just kind of frame that opportunity? And when we're thinking about the magnitude of these contracts, is 20% EBITDA returns, still a good frame of reference you use?
I'll take the big picture stuff, and then I'm going to let Kevin talk specifically about the contract. But the -- we said that the returns on those contracts were above our 15% threshold. I don't think I gave a specific number, so I don't want to comment on 20% per se, but it's about 15%. In terms of the rollout of the contract, we haven't even received our first airplane yet. We're starting to fly some of the areas with other aircraft we have, but the real contract doesn't really begin until we get those contracts and those aircraft in service, and that's really not going to begin until later next year and with not a full effect until sometime in 2025. Kevin, maybe I'll hand it to you to talk about like the overall contract and the size of the contract.
Thanks, Mike. Kevin Hillier with Carson Air. We'll be receiving our first new aircraft, as Mike said, in the first quarter of 2024. That aircraft will go into service at the end of that quarter. We are operating the contract right now with the existing aircraft that we had, and those aircraft will continue in a transition phase throughout 2024 and into Q1 of 2025. We have discussed some growth opportunities and added one aircraft to the contract already at this time. And there are future opportunities as well with BC [indiscernible].
And just another question on the Windows Solutions business. There was a recent article in the Globe and Mail talking about some payment issues with the developer in Toronto, and the article mentioned $10 million payments to BVGlazing specifically, that was off past due. Are you able to comment on this? Just trying to understand this might be part of a broader issue?
I think I would say, it's a challenging time for some developers. Interest rates are higher and financings are squeezed. We don't really like speaking about individual developers. We have great relationships with these people, and we intend to keep building with them. The project that was mentioned in that article, their payments are current with us.
Your next question comes from Steve Hansen from Raymond James.
Mike, just the first [indiscernible] overarching question for you. The business continues to advance and grow in size and scale and complexity, of course, there are lot of moving parts, as I think the call has already described. But you've also described the pipeline as being robust. How do you feel about the current macro picture and continuing to push ahead with additional acquisitions here in the current landscape? It sounds like capital ability is high. How you are -- you to continue moving forward?
Yes, I think that's a really good question. We've been consistent through our history about being disciplined in what we pay for businesses, and that hasn't changed any in this environment. I will say that with interest rates where they are today, we're probably a little bit more aggressive in the returns we require because instead of paying 2% or 3%, we're paying 5% or 6% for interest rates.
And so while it hasn't changed my hurdle per se of 15%, we're very dogmatic at only picking the best stuff within that. And there are a lot of good opportunities. DryAir is a great example, Steve. I mean, it's run by a family that cares about their employees. They've built it for nothing. They're an industry leader in a very unique little market niche that has continuing upside.
And so it's kind of the company that we've cut our teeth on with the EIC, and we expect to continue to do those deals in the near term. So we're cautious because of the economic environment. But quite frankly, the best deals are done in challenging times. So that's why we raised our capital in advance and we put ourselves in a position where we can take advantage of it.
That's helpful. And just one follow-up just quickly on the force multiplier [indiscernible] business. It sounds like the short-term deal with the U.K. Home Office has been incredibly busy. There's a new opportunity on deck it sounds like. Is there a way to frame what the new opportunity might look like in terms of size, skill, tenure, term as we think about that opportunity set and maybe just broadly in Europe in general?
Sure. The contract -- the RFP hasn't come out, we have some rough ideas of parameters. I think I'll let Jake take that. That's his direct daily [indiscernible].
Perfect. Thanks, Mike and Steve, I appreciate the question. As Mike pointed out, the RFP, we're anticipating it to come out this month or certainly in this quarter. What we do know is that they are going to look for more capacity, what shape that comes in, we're not sure until we see the RFP release. So that will guide us in terms of additional assets. And to your question about Europe in general, we certainly see that as a strong market that will continue to develop. We have a great footprint with the Netherlands contract further expanded by the U.K., and that's a great base of operations to expand from.
Your next question comes from Matthew Lee from Canaccord.
This is Betty on for Matt Lee. So for the first question, I want to ask more about the medevac contract in the context of how [indiscernible] for extending the land. Is there an opportunity to upsize the contract in terms of aircraft?
Yes. Carmele mentioned that the government has already added additional capacity in some of the bases that we're in. I think it's fair, [Kevin,] to say that we're in discussions with the government to add additional aircraft and additional capacity in other markets. And so while we started with approximately a dozen aircraft in this, that could grow significantly over the next quarter or 2.
Now I would make sure I caution everyone that if we add these extra planes, we're going to have to go buy them. And so those aren't going to get here until 2025 as we add -- and the contract will be -- will start when they get here. So I mean, we're still going to have a long term on those new aircrafts. We're in discussions with the government.
I'm very happy with the state of the relationship, both in British Columbia and Manitoba as we implement these and work with the government to provide the service they're looking for. There could well be opportunities to expand the Manitoba contract as well although I think I would say that those are more preliminary than perhaps the ones are in BC where we've already added contracts. Kevin or Dave, anything you'd like to add to that?
Kevin Hillier here. And yes, I agree with everything Mike said, and we got a great relationship with [indiscernible] for 30 years, and they chose us to be the primary provider because of that track record, and we certainly hope to continue growing this contract as we move forward over the next year.
Dave White here. Same message here for the Manitoba contract, great relationship with the government, as Mike mentioned. Kevin is a little further ahead, decided little earlier in bringing new airplanes. We've accessed our airplanes, but we still have to modify them, and import them online. And there is a language [indiscernible] initial for potential. But that will be up to the government as relationship develops what services they want, but they're looking forward to it. We're looking forward to it. Great new services for people in Manitoba. And it's what we do and what we've done for decades.
And just in terms of growth CapEx, could you provide more color on this? How much are you expecting for 2024? And how much of that is related to the aircraft required for the new contract?
We haven't finalized our growth CapEx for 2024, but I can give you some color on that. Most of the stuff for Dave has already purchased, so the Keewatin project will show up in Q4 of this year. Same with the work for Jake, the initial 4 planes for Air Canada are also already purchased, some were in Q3, some are in Q4, same with Dave. And then finally, in BC, we have deposits on aircraft already.
We've made payments to the manufacturer, but we haven't taken delivery of anything yet. We have paid for one this year as we get that in the next week or 2. And then the balance will be paid off over the next sort of 6 quarters as they come into service. And to the extent the contract is extended, that would continue for the new aircraft we would add on in the back end of that order.
The other kind of major -- if you think 2024, what was the growth CapEx would include, everybody talked about is our King Air simulator, which we'll be getting in 2024 as well as the completion of the terminal expansion that we're doing for Perimeter.
Your next question comes from Krista Friesen from CIBC.
I was just wondering, looking out at your 2024 guidance, can you walk us through how you're thinking about Northern Mat for 2024? And I guess, what a more normalized year looks like, would that be similar to what we've seen this year?
Yes. Northern Mat had the perfect -- we called it a unicorn year last year where everything lined up. This year has been also a strong year, but it's the irony when you're public, that the second best year in the history of the company if it follows the best, people think it's that great. If we get a photo copy this year, I would do it.
Next year, the challenge with the business is the TMX contract. The rental mats have been returned to all the rental companies. We're still doing work on pipeline, but with their mats. And so the revenues on that have declined and you'll notice that in the first quarter of the year. There is a sight line to stronger Oil & Gas business next year, the fires or the hot weather deferred things this year.
So the outlook for that on a go-forward basis is strong together with, particularly in the back half of the year, an enhanced demand on the transmission and distribution for electricity part of the business. And so you'll see that ramp in the back half. If we want to talk -- we don't give company-specific guidance per se. But what I would say is, is that the company was bought off of a return that met our 15% guideline.
And if next year were to be in that range, which I would expect that it will, it gets you an EBITDA depending on how you do the calculations of $70-something million. That's not a specific forecast, but more a general comment about that's where it needs to be to generate our 15% return.
Yes. We'd also look to see some greater activity in Eastern Canada than what we saw this year. So we look at that as potential growth as well and we look forward to fill some of the gaps that we've seen in the larger projects what you see in [indiscernible].
The one other thing I would point out is we've taken advantage of the slightly slower year this year to renew our fleet and upgrade our mat inventory by putting more newer mats into the fleet as opposed to selling those to third parties, which puts us in a position as we ramp again later next year to have a fleet that's ready to go and generate higher revenue. So the average age of our mat and our fleet will be improved significantly by mid next year.
Okay. Great. And just on your M&A pipeline, as you look at it right now, would you say that it splits more towards the Manufacturing segment versus Aviation? And are you looking more at these smaller acquisitions versus larger ones like Northern Mat?
I would say, in terms of number of number of opportunities, I would agree exactly with what you said. There's more on the Manufacturing side than there are on the Aviation side. There are bigger opportunities, there's fewer of them. And the bigger opportunities would fall into both categories. But I think it's important when we look at M&A as a general thing for us is it's just a natural progression of us to move towards a slightly more of a balance between Manufacturing and Aviation, not because we're driving it there by choice, but by the sum total of the opportunities.
We are already the dominant carrier in niche airlines in Canada. And so by definition, the number of things left to acquire is shrinking. And if we could find more PAL aerospaces, we're going to jump all over them, and there are opportunities, but we're fishing in a declining barrel in that. And there are international opportunities that we look at. But the number of things that are related to our manufacturing enterprises are virtually limitless.
So I mean, if we're something like 70-30 today, if we look at this 5 years from now, I think that will be closer to 50-50, not because we like aviation any less just because there's less items left in the store for us to buy.
Your next question comes from Konark Gupta from Scotiabank.
Appreciate the color, Carmele provided on 2024 EBITDA drivers. Wondering if your guidance for '24 includes any unannounced acquisitions or contracts?
No. Those -- anything that's announced subsequent to this would be a result an increase of our guidance.
Moving on the Regional One side, we're seeing sort of an uptick here a little bit in terms of their -- the leasing business clearly, it's not back to the pre-pandemic levels yet. And obviously, those sales and services are kind of pretty lumpy. The industry has like faced a lot of challenges. We saw these incremental challenges on MRO capacity side and engines, like the freight issues and all that. Anyway, like on the Regional One side, how do you see the demand for leasing versus outright sales for aircraft or engines?
Quite honestly, Konark, there's greater visibility on the leasing side. It's grown month-over-month, continues to grow. And I mean, it's one of those things that's never fast enough. You always wish it was quicker, but we -- by the time we get into next year, our lease utilization rates start to match what they were pre-COVID. And we got a pretty good view into that with leases that have already been signed or letters of intent or we had a pretty good idea where a lot of those assets are going. On the big asset side, it really truly is an opportunistic kind of thing. If someone wants one, and we can generate the right margin, we'll sell them.
To be honest, our core business is our parts business. Everything else is there to support the parts business. And you mentioned it earlier, the thing that makes me probably other than the leasing portfolio most bullish is we're actually starting to be able to get MRO opportunities to strip down some of the aircraft to get them into our parts inventory. It's frustrating when you got a plane, you got a landing gear, and you got a customer, and you can get the landing gear off the plane to sell it to the customer.
And so we've seen some improvement in that. To be clear, the MRO capacity is still tight, but it's getting better. That will help our parts business. The leasing business will strengthen because of demand. And I wish I could give you a better answer on the big sales other than to say it's spotty and it will continue to be that. Having said that, it remains reasonably strong. The numbers we had this quarter were good. Q4 also looks good. But beyond that, in terms of big asset sales, we wouldn't know about what is going to happen in February already or we would do it this quarter.
And just a couple of additional comments on the leasing side. Where we're seeing the opportunities is more focused in Europe and Africa. And on the engine side, in fact, a lot of our actual whole aircraft are already on lease. So we see greater opportunity on the engine side.
I appreciate that. And last one from me. It's a big picture question, perhaps. As we grow the number of subsidiaries under the umbrella, do you see an opportunity to consolidate some of them to create synergies? We have seen some roll-up trucking companies in Canada finding a lot of success with this consolidation strategy.
I think we're doing that. I think you're right. You see with Darwin championing our project on our window businesses, where we've got BVGlazing and Quest, and we recently bought WIS and help me with the other glazers, AWI. That's really under one group of people now.
Our airlines, while we've got multiple brand names, we have interchangeable assets, like we share planes to a greater extent than we ever have. We bid our overhaul work together. We buy parts together. There are advantages, particularly in aviation to having separate entities for operating certificate reasons and for union reasons. And so those businesses will continue to be autonomous, but we're trying to scoop the cream off in terms of the synergies we're taking.
And you can see that as our margins have increased. And quite frankly, our ability to purchase. Regional One has been a [indiscernible]. I'm not sure we could have got up and running on Jake's Air Canada business. I'll give it to him to talk about that maybe, but we're [indiscernible] (00:21:49) it would be tough to find those aircraft.
Well, not only aircraft, but again the parts, because every aircraft require inventory to make the aircraft -- the operations continue on and Regional One plays a very big role giving us an access immediately to bring these aircraft instead of the operations quickly.
And I think one of the things, from our perspective, it may be us doing a better job telling the story because we're not buying acquisitions and relying on the synergies to hit our returns kind of using Mike's analogy, they're kind of the sprinkles on the sundae. We don't -- maybe we don't do a good enough job of letting the market know of these types of opportunities as we're executing on them.
Your next question comes from Cameron Doerksen from National Bank Financial.
Maybe just sort of 2 questions from me. Maybe the first sort of on the 2024 outlook here of your guidance. I mean, we all know the tailwinds here from some of the new contract opportunities. I wonder if you could just maybe talk about what you kind of assumed as potential headwinds in some of the other businesses? I mean, you talked a bit about Northern Mat, but what about some of the other businesses? Like what's your kind of underlying assumption as far as end market demand, I guess, broader economic conditions?
I think the only -- on the Aviation side of the business, there's virtually no impact of the economy. And I shouldn't even say virtually, there's no impact to demand for our core passenger freight business are very high. And you can tell it by the fact we're adding airplanes. We wouldn't be buying if we didn't have demand. So I'm quite confident on that side of the business.
Same with our medevac business outside of the contracts like our existing stuff, the utilization of the aircraft remain high. So really not -- we've talked about Regional One's assumptions, we expect to see it continue to return and then ultimately surpass pre-COVID levels. So I think that covers off -- and our maritime surveillance business is, I mean, quite frankly, is almost as good as it can be.
All our planes are flying. We're bidding on new work. It's in a great shape. I'm confident in our ability to renew our contract in the UAE. I'm hopeful we'll have something to speak on that in the near term. So all good there. In the manufacturing, there's a little bumpiness in order books in some of the smaller companies, but nothing dramatic as it relates to EIC as a whole.
I would say, the one economic piece that's variable that I think has significant upside for us, maybe not until the back-end of the year or 2025 is quite frankly, is the window business. I've talked about this a lot. The number of things we're bidding on is unprecedented. We actually hired people to keep up with the bidding. People are waiting to pull triggers on things.
And the government keeps pouring fuel on this fire. Whether it's in Canada, where they're taking taxes off of the construction of these projects or President Biden in the United States announcing $30 billion towards the conversion of office struck buildings into residential buildings. The opportunity for that business to grow significantly in the medium term, I think, is significant.
I can't say -- it's kind of like predicting when the interest rates have peaked. We're starting to see things that make us think it's coming and coming sooner rather than later. But it's too early for me to give you a hard thing on that. So I think the window business is kind of bump along in 2024, but we could see on the horizon, we could see it coming.
And I honestly think it's not going to be very long before I'm complaining about the fact that we're struggling with capacity to take advantage of the opportunities in that business. But in the near term, that business, I think just kind of chugs along, we've got a flat order book. Some of the projects have been delayed a little bit. But not dramatic. The upside there is significant.
I think one other thing, I've had a couple of people talk to me offline about the forecast for 2024 -- guidance for 2024 and why maybe it should be higher. Quite frankly, it's 2 things. One is, there's nothing in that forecast that isn't already announced and paid for or contracted for. So we always grow, we always add things, and I expect that's not going to change in this period.
Second thing is I think there was perhaps a slight misconception and maybe we didn't do a good enough job of talking of all the work that had to be done to start flying medevacs. Even if you have the plane, what's it going to take us, Cameron, for aircraft too, in terms of time to turn them from an airplane into a medevac plane.
2.5 months per...
Yes. So we've got over a dozen of them going there. We've got -- Dave's got another 5 there. And so that -- I think there -- we may not have done a good enough job of delineating when that stuff is going to hit our income statement. And then quite frankly, we've always provided guidance that we're confident we're going to make. And I think our track record shows that when we give you a number, it's usually that number or higher.
And so we're not going to make frothy forecasts. I'm comfortable with where we're at. I'm confident that there's ways we could beat that number. And most importantly, I'm really confident that we've got growth going into the next year. Like if this -- if we hit our 635 this year, we're going to be well on our way to changing that first digit in the following year. If Adam finds just one deal in there, then we're probably on our way to breaking through the 700 barrier. So I would say, it's a matter of slow and steady, and that's why I put that commentary in about the third quarters since 2019, where we've generated 15% growth year-over-year through a pandemic, which I think is -- if you -- any of the comparatives people use for us, don't match that.
Yes. Absolutely, no. Definitely solid visibility here running much past 2024. So that's helpful. And maybe can just very quickly just ask about where things are on the pilot front. I sort of asked because you obviously have some hiring needs here with the medevac contracts. I guess what's your level of confidence of being able to staff all these aircraft that are coming in over the next 18 months?
I'll maybe let my guys talk about their experience. I think at a general level, there's still a shortage of pilots in the industry. I would describe it as having gone from a crisis shortage to a really annoying shortage. We're proud of the fact that we saw this coming in 2017 or 2018 when we bought Moncton Flight College.
We had the ability to train up our own pilots. And I think some of our bigger airline comparatives are now talking about their flight school as well. Quite frankly, it's a little late to the dance, but I'm glad they're doing it because the more of their own pilots they train, the more they are in the industry. So we're happy to see that. I'll open it up to my 3 guys. They got [indiscernible].
Thanks, Mike. It's Dave White here. I've talked about pilot situation before in the call. And as Mike said, it's been an industry challenge across the board. It was at a crisis level probably last year and now it's settled down, but doesn't settle down for us just because there's more violence, more about creating pipelines. As Mike mentioned, MFC, our license light programs that we've been able to generate a flow out of that. It's also our pay scales across the airlines, niche markets were in are very competitive. We offer a good work life balance across a multitude of operations where people actually get a choice in their pathway when they joined the EIC group of companies. So we have a lot of attraction features that help us deal with this on a daily basis. But we don't take our foot off the gas.
As they say in respect of this, we know we got new contracts, we know we have expansions, but what we have to do is sell that to the pilot community to get them interested and our retention rates have improved as well as our recruitment rates. So [indiscernible] wants to add to that.
Yes, Kevin Hillier here. And echoing what Dave said, yes, certainly, the lifestyle is attracting pilots to our operation, work life balance, doing meaningful work in our ambulance services, long-term consistent work in [indiscernible] we've got it for 10-plus years. We had good success attracting pilots internationally and the opportunity to come to Canada and do this work and have a great schedule and fly brand new airplanes has really got us some traction on the hiring. So we're confident in our ability to start these aircrafts.
I think the one other thing I would just add to that is and Carmele mentioned the flight simulator for the King Air. We've got our fleet to the size where we're investing $20 million in a full motion flight simulator to help us attract, but more importantly, to make sure our new pilots are best trained, best available pilots in the industry. This is the first private health King Air full motion simulator in Canada. It's a statement about our commitment to the long-term investment in being the best of what we do. Typically, in the old days, we would have sent people to Dallas or Kansas to go get this done. Now we could do it for ourselves. And quite frankly, we'll have some of our competitors using the extra space we have in that. So we're really excited about seeing that get installed next year as well.
And what -- I'll just add, because we're now in the marketplace where basically perhaps they can make the same amount at any place they go to for a comparable job. This really comes down to choice, what do you have to offer them. And EIC as a whole, we have a great culture. We have opportunity. We have fabulous training. So it is a great destination point to go to, and that's the draw that I think a lot of other carriers can't offer. We can -- if you want to go fly out in the Middle East, we've got opportunities there. If you want to do medevac, we've got opportunities there. If you want to be at home, you can do that with us. And there's growth that you can move around. So we think that is certainly something that gives us a leg up with respect to other carriers.
Your next question comes from Jonathan Lamers from Laurentian Bank.
My questions were largely covered. Just would you happen to have the dollars of the growth CapEx to date that was related to the 3 new contracts? And how much will fall into 2024?
I don't -- I mean, we've talked about $275 million for the 2 medevac contracts. I don't have the precise breakdown of what's done this year and what's next year. I mean, I can say the stuff that relates to Manitoba is going to be largely funded this year. There may be some conversion costs and some ground costs but not in terms of the aircraft we largely purchased. The initial 4 for Air Canada are all purchased. And there aren't -- that was a little simpler because we don't have to convert the aircraft. We just have to get them certified.
And -- whereas we talked a lot about the majority of the extent in BC is still [indiscernible] top because the planes haven't arrived although from a cash point of view, we do have significant deposits with the manufacturer. I apologize, I don't have specific numbers. We haven't really finished our final CapEx budgets for next year. So broad brush, I would say the Keewatin's project is largely funded, PAL's project is funded and [indiscernible] is not funded.
And just the one piece I would add dovetailing on Mike's comments there is that the split between Q3 and Q4, more than half of it that we expect to fall in this year was funded in [Q2 and Q3].
Okay. That's great color. And one more from me. Mike, I appreciate the discussion about the 2024 guidance and I appreciate that a lot of your organic growth opportunities would come during the year. Would you have any thoughts, like in terms of your budgeting process, at this point in the year, how much of the growth would -- I mean, how much of the organic growth would come from opportunities that you typically see during the course of the year and any typical year for the overall business?
Yes, my budgets were flat to what about I know now. There will be opportunities that come. But those -- we don't -- with the exception of Regional One, where we don't know exactly where we're going to buy and exactly where we're going to sell everything during the year, the other of my businesses are all based on what I know.
Like I said, the thing that makes me the most bullish and quite frankly, the reason we increased our dividend was what we see in our core Aviation business. Our passenger loads are higher than they were in most of our markets, pre-COVID and they continue to grow. And we're adding capacity as we could add pilots to match the capacity because there's charter work that we passed on because we want to make sure we look after our passengers on the schedule of business first.
And so there is opportunity to grow that business. And as we strengthen our pilot pools, you will continue to see it. But demand, it was a bit frustrating for me, to be honest, during the last 10 to 6 weeks where the aviation sector and the aviation-driven funds got kind of kicked in the teeth and we can't head along with it. Because the things that those similar companies are going through don't match what we're going through.
We don't have those challenges. When you have a plane on contract with the U.K. Home Office, they're flying in X number of hours a day, every day, and we're getting paid, whether it's maintaining the stuff for the government of UAE, we're getting paid every day or whether it's flying food to Baker Lake. We know that's coming. It's reliable. Yes, we had fuel issues, we had pilot costs, but we've largely dealt with that and passed it on to our customers. So we're very confident in where we are going forward. And that's what led us to be able to continue our track record of paying our shareholders.
And apologies if I missed this, but just on the dividend, past years, you've typically had one increase per year. I know there was 2 increases post COVID to catch up, how are you thinking about the path of dividend growth going forward?
We -- at our Board, I can tell you, we discuss our dividend level every Board meeting, every quarterly Board meeting or budget meeting. Typically, barring an anomaly, it's a once-a-thing and if something's exceptional, we would do more than that. We have a 20-year CAGR of 5%. It's something we're intensely proud of, and we're going to continue to grow the business to maintain that CAGR while we continue to strengthen our balance sheet and reduce our payout ratios. So if you're asking me if I anticipate a dividend increase next year, that's up to the Board. But my job is to give them the economic results to enable them to do it. And if I were a betting man, I think the past is the best predictor of the future.
[Operator Instructions] Your next question comes from Tim James from TD Cowen.
I'm just wondering, Mike, if you could talk about any businesses, if there are any, I assume there probably are, where pricing is still running well behind the cost of the inflation that those businesses have experienced over the past couple of years. I mean, I know some businesses you can pass it on very, very quickly, almost instantaneously. But are there any units where over the next couple of years, you should just be able to reprice a little higher and offset inflation that you've already experienced?
I would suggest to you that the -- it's much better, but we still have some contracts in the window business that don't fully recover what we've experienced, although we've gone through most of the older contracts, I would suggest to you the one business that we have the least ability to move quickly on pricing is our medevac long-term contract business.
Not so much in areas like Manitoba, where we do it under license, but more as an example, places like Nunavut where our contracts include price escalators for fuel and for inflation. Pilot wages have clearly exceeded inflation. And so there is some pinching there. Those contracts are coming due over the next year or so. And so we will be passing that on when we renew the [indiscernible].
We're obviously very respectful of not taking advantage of our position. But if it costs us more, we have to charge more. So the one area where -- Carmele if I'm missing anything, jump in. But I think the main one would be on contract medevac businesses which haven't been able to fully collect back the cost of the pilot increases.
Yes, that's the main one. There's maybe a couple of longer-term charter contracts that we had that, again, are coming due in the next 12 to 18 months. So again, we'll be able to reprice. But otherwise, we've been able to move that through to the ultimate price point to recover our increased costs.
Okay. And then my second question, and it's more about, I just want to make sure I'm maybe summarizing the Windows systems business and the opportunity and challenges there. So it sounds like longer term that, that business is really facing a secular growth trend, call it, related to societal shifts and government priorities when it comes to building. But shorter term -- you talked about risk of maybe some further delays in '24, in the shorter term, there's just simply interest rate-driven headwinds in terms of getting projects running. Is that a fair way of kind of characterizing it? Because I know you seem very, very optimistic on the long-term growth, but then there's a bit of a holdback in terms of the shorter term.
I think that's very fair. I mean, we're starting to see -- I'm always reticent where we're starting to see something to say too much about it because it's just the beginning. But we're starting to see cracks in the dam of stuff getting done, especially the conversion market in the U.S , we're starting to see contracts where they're turning office buildings into residential buildings.
And the interesting thing is, for us, it's essentially the same as building a new building because they're reskinning these buildings as part of that and we're starting to see that stuff getting [indiscernible]. There's very strong pressure from government to build housing. And the thing I keep coming back to about this is that notwithstanding building high-rise apartments or high-rise condos is expensive.
It's the cheapest form of housing there is to densify and bring people in. If you -- if we look at our big cities, whether it's Toronto or Washington in the U.S. or Los Angeles, the Dallas, we're doing a project Nashville, where there's a shortage of land, they go up single-family housing or small multifamily housing is cost prohibitive.
And we all know, I mean, the federal government of Canada announced their immigration targets and said they're lightening them up, and there's still 0.5 million people a year that we got to find housing for, and there's a shortage now. So I think your description, Tim, is very fair. There's short-term turmoil created by interest rates. But I think it's important to say that from our point of view, we don't think it's going to take interest rates coming way down for this to pick off. We need stability and a downward trend.
So developers are confident, they know what the most they're going to pay us and I think that dam is going to break because there's so much to that. If you had a department block built today in the major cities, it would be fully rented in a matter of weeks, it may be days.
Yes, the other thing you're seeing is government policy trying to nudge this, I guess, into actual development by the tax [indiscernible] are looking, whether it's fed government on the GST and then [indiscernible] come out. You'll probably see more of those types of things, which, again, is another indicator that this is going to be a very robust business. And I just want to add one other comment on the conversions. We've actually already done, completed 3 of them. We've got 2 more in our backlog, and we're quoting a lot more in U.S. and Canada. So that's something that we weren't even doing before, let alone the original build. So lots of promising elements wherever you look in this business line.
And there are no further questions. At this time, I will turn the call back over to Mike Pyle for closing remarks.
I want to thank everybody for joining us today. It's an exciting period for us. I think you heard it in my voice when we talked about the dividend and the fact that we're proud that we can continue that track record and deliver for our shareholders. We look forward to finishing off 2023 strong and talking to you in February with our year-end results. Have a great day, and we'll speak soon.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.