Exchange Income Corp
TSX:EIF
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Exchange Income Corp
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Welcome to Exchange Income Corporation's Conference Call to discuss the Financial Results for the 3-Month and 12-Month periods ended December 31, 2022. The Corporation's results, including the MD&A and financial statements were issued on February 22, 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 and EIC's other filings with Canadian securities regulators. Except as required by Canadian securities laws, EIC does not undertake to update any forward-looking statements. Such statements speak only as of the date they were made. Listeners are also reminded that today's call is being recorded and broadcast live via the Internet for the benefit of individual shareholders, analysts and other interested parties.
I would now like to turn the call over to the CEO of Exchange Income Corporation, Mike Pyle. Please go ahead, Mr. Pyle.
Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. Yesterday, we released our fourth quarter and annual results for 2022, bringing to an end one of EIC's most successful years in our 18-year history. I'm extremely pleased to announce that we have set records in virtually all financial metrics. Our strategy is our most important asset, and we executed on it in 2022 with a laser-like focus across the entire organization, which is evidenced by the strong results we issued yesterday.
It's a simple strategy by proven companies with excellent management teams, invest in those companies and nurture their growth. The strategy is underpinned by four key principles. The first is the most fundamental of the strategy, provide a stable and growing dividend. To do that, the second and third principles are that we must be disciplined in our approach to finding and investing in accretive opportunities, which are in diversified industries to enable payment of that stable and growing dividend. The fourth principle is to stay committed to the communities our operations are privileged to serve and where our team employees live, work and play.
While the strategies -- this strategy is simple. It is the key to our success and has been driven by consistent execution. The strategy, coupled with our execution has generated outstanding returns through multiple economic crises and cycles from the financial crisis beginning in 2008 to the recent pandemic. Our exemplary results give us confidence in our ability to deliver against any backdrop. We have a lot to be proud of as an organization.
However, in line with our other calls this year, we will attempt to keep our prepared comments as brief as possible to allow time for your questions. With me today is Richard Wowryk, our CFO, who will speak to financial results; and Carmele Peter, our President, who will expand further on our outlook for 2023. I will limit my discussions to the full 12-month 2022 results, while Richard will focus his remarks on the fourth quarter. For 2022, revenue increased by 46% to $2.1 billion. Adjusted EBITDA increased by 38% to $456 million.
Free cash flow less maintenance capital expenditures grew by 20% to $176 million. On a per share basis, it grew by 10% to $4.36. Net earnings grew to $110 million and net earnings per share grew 48% to $2.72. Adjusted net earnings reached $133 million, up 55%, and adjusted net earnings per share were $3.29, up 42%. Payout ratio on a free cash flow less maintenance capital expenditure basis improved to 55% from 58% and other adjusted debt earnings basis improved to 73% from 99%.
These improvements were notwithstanding 2 separate dividend increases totaling 11%, which increased our annual dividend rate to $2.52 per share. These remarkable results are driven by both organic and new investments made in each of our aerospace and aviation and manufacturing segments, which I'll briefly highlight. After more than 2 years of operating in a pandemic environment, we were thrilled to be in a position to announce a 5% increase in our dividend in May of 2022 and a further 5% increase in our dividend was announced in August of 2022. These consistent increases to our dividend payment were made possible by the consistent execution of our strategy and exceptional performance of our operating subsidiaries, delivering essential and diversified service throughout the pandemic. Consistent performance has been the driver of EIC since our inception and has led to our 20% compounded annual return to shareholders.
Key to reliable growth is our investment philosophy of being disciplined in ensuring our return on capital threshold is met. We are agnostic with respect to growth from investment in existing operations, including tuck-in acquisitions or investment in new large platforms. This means by which -- the means by which we deploy our capital varies year-to-year and ensure the growth is accretive to our bottom line and not just an increase in top line revenue. We worked hard in the first quarter of 2022 on the due diligence for two such accretive but very different acquisitions. We are excited to successfully complete the diligence and announced the acquisitions in our second quarter.
The first of those acquisitions, Advanced Paramedics located in Grande Prairie, Alberta is a tuck-in opportunity to complement our already successful world-class medevac business. Advanced Paramedic is the leader in providing medical support to air and ground ambulance in Northern Alberta. The pandemic emphasized how resilient our medevac operations were and with strong presence in the Maritimes, Manitoba, Nunavut and British Columbia, the purchase of Advanced Paramedics expanded our footprint into Alberta and will facilitate future growth into the balance of Alberta, Yukon and the Northwest territories. The second acquisition announced in '22 and the largest in our history was Northern Mat and Bridge. Northern Mat is the Canadian leader in providing temporary access solutions through the use of timber matting to remote and urban projects across Canada.
When the projects are complete, the access roads are removed leaving very little, if any, residual impact on the land traveled. Timber matting allows for the elimination of temporary gravel roads and culverts, which are not easily removed and create long-lasting environmental damage. Northern Mat is the only matting company in Canada, which is vertically integrated and manufactures its own matting product. This vertical integration positioned the company to have its best year in its history in 2022. Strong demand and long linear projects, particularly in the pipeline industry, which require a significant number of mats drove results for Northern Mat in addition to the short supply of mats in general, post-pandemic.
The outlook for 2023 remains strong as well, but I will leave that to Carmele to elaborate on later in the call. In addition to the investments made in 2022, we also benefit from the investments that were made in previous quarters, including house delivery of 2 fully missionized Dash 8 aircraft to the Netherlands Coast Guard. That 10-year contract was announced in 2020, and the aircraft successfully went into service near the end of 2022 and will provide their first full year revenue in 2023. The tuck-in acquisitions of Ryko and Telcon, that were made in 2021 to expand WesTower's operations ramped up over the year as the investment in 5G in Canada is accelerating. This expansion of an integrated service offering to the large telcos in Canada resulted in significant growth for WesTower year-over-year in 2022.
Similarly, the tuck-in acquisition of Macfab in 2021 to Ben Machine facilitated additional production capacity and diversity to their customer base. In 2022, Ben Machine continued its growth as it realized synergies and capitalize on increased capacity from the acquisition. The acquisitions of Carson Air and CTI both contributed for a full year in 2022 after being acquired in 2021. In our legacy operations, we continue to manage in a post-pandemic environment and focused on growth opportunities. We launched Trauma Flight, which is a partnership between Keewatin, our northern medevac provider and Custom, our rotary wing helicopter company.
The launch of providing rotary wing medevac services to Northern Manitoba addresses a significant gap in providing emergency medical services to remote, hard-to-reach areas, giving residents in those areas equitable access treatment. Our passenger operations have proven to be very resilient throughout the pandemic, because of their essential nature and rebounded quickly when travel restrictions were removed earlier in the year. While passenger volumes in certain Central Canada and Nunavut markets have not quite yet returned to pre-pandemic levels going to the backlog for medical and diagnostic, diagnostic I'm sorry, appointment to the South. The overall charter and passenger volumes in Eastern Canada have been strong and exceed pre-pandemic levels. This demand has enabled us to expand our route network.
Charter operations have been bolstered by new contracts we won in 2021 with increased demand from the natural resource sector in general. Regional One's business is multifaceted and has continued its post-pandemic recovery. Part sales were above pre-pandemic levels and sale of large assets have also been well above pre-pandemic levels as airlines around the world look to effectively manage their fleets and cash flow while they navigate the recovery in the industry that's been plagued by travel restrictions and now pilot shortages. While recovery of Regional One has been slower than anticipated, specifically with respect to the leasing of aircraft, we have seen activity with its engine lease portfolio improve, and Carmele will speak to that in her remarks. While Quest continued to manage through production gaps in 2022 caused by pandemic disruptions.
We saw the growth in their order book in each quarter that led to a new record level of projects in their pipeline. We are excited about the long-term prospects of the business and are exploring ways to deploy additional capital into Quest to further drive growth in the future. With these type of accretive investments in our subsidiaries, entrepreneurial spirit of our management teams and disciplined management allow us to deliver consistent value to our shareholders. Fundamental to ensuring we have the capital on hand to capitalize on investment opportunities when they arise is managing our balance sheet with the same discipline as we do, considering investment returns and attributes of management teams. While the markets in 2022 were turbulent, we were able to raise $115 million in common share equity at the highest price in our history.
Demand for the issue is strong and positioned us to quickly take advantage of investment opportunities in 2023. Sustainability, although I've not always involved with that, has always been at the top of mind for EIC since our inception and one of our guiding principles to our strategy. We manage our sustainability efforts, the same way we do other areas of our business. We are disciplined in our approach, manage the short term and focus on the long term. In 2022, we continue to advance our ESG-related programs, initiatives and other efforts, including our reporting.
The focus on climate change is global, and there is a demand for climate-related disclosure that is consistent, comparable and useful for our shareholders. We are advancing our long-term and ongoing commitment to climate action in the short term, we are aligning our disclosure to this TCFD framework. Future climate reporting will evolve with our climate strategy and actions, however, setting targets or making promises that cannot be met because of a lack of suitable technology available at this time will not be considered. Our aviation companies operated what is known as a hard-to-abate sector. Real progress to reduce our carbon footprint will require decarbonation of the aviation operations and not simply carbon offset initiatives.
Decarbonation requires partnership and innovation, especially considering the north, harsh northern environments, our aircraft operate in and provide servicing. As we have in the past, with things like the development and innovation of multiblade propellers, the implementation of weight reduction programs, upgrading aviations to modern glass cockpits and up-gauging aircrafts to increase operational efficiency and thereby reduce fuel burn, we have in 2022, advanced discussions with a number of our suppliers and industry innovators in '22 to consider cleaner, alternate power and sustainable fuel surge sources for our aircraft. We look forward to sharing the results of these discussions as we move ahead. We are committed to playing our role and being leaders in pursuit of decarbonizing our fleet of aircraft that provide essential services to our northern customers. These new technology solutions take time to reach commercial availability.
So in the short term, we have looked to make investments that could have an immediate impact on protecting our environment and improving agency efficiency, such as the temporary access solutions provided by Northern Mat that facilitate the construction of clean energy sources and the inefficiency of energy-efficient windows that are manufactured by Quest. Giving back to our communities in the form of mutual economic benefits and special experiences for community members has been a core value of EIC as the companies we have acquired. In 2022, we continued with and expanded several existing programs and introduced new initiatives. Existing programs included celebrating the National Day for Truth and Reconciliation by collaborating with our Indigenous partners at the Winnipeg Blue Bomber Football Club to bring and host 1,000 Indigenous guests to CFL game. With the reduced travel subscriptions we were able to restart our Winnipeg Jets VIP experience, where in youth from our communities are hosted on a night show game to recognize academic accomplishments and promote staying in school, mental health and wellness.
We engaged the First Nations University of Canada to provide reconciliation training that addresses the history and cultures of Indigenous communities in Canada and the history of residential schools and treaties around the country. 100% of our Board, executive and senior management completed the learning, and it will be rolled out to a larger group of employees in 2023 and beyond. We were excited to introduce the Atik Mason Pilot Pathway. It's a fully funded program that provides opportunity for Indigenous community members to build a career within the aviation industry. The program was designed in consultation with MKO and remove significant barriers for individual, Indigenous individuals wanting to pursue aviation careers, including cost, location and cultural differences.
We were thrilled to celebrate 11 individuals completing the first step of their pilot training this year. I look forward to welcoming them back to Thompson in the spring of 2023 to continue their training. This program will also be expanded in 2023 to bring in additional Indigenous students. Lastly, we are excited to announce the expansion of our Perimeter terminal in Winnipeg. Construction will commence in 2020, '23.
We consulted with the Indigenous communities we serve to design a terminal with specific -- their specific needs in mind. Based on those consultations, the new terminal will include elements such as culturally sensitive variance for elders and for children to await their flights. This is especially important when you consider much of their travel is often for medical-related appointments. Those consultations with Indigenous leaders also resulted in a decision plus by those leaders to name the terminal after the honorable Gary Filmon, our outgoing Board Chair, who is committed to serve in all of these communities throughout his entire career. Exiting the pandemic in 2022, gave us a new sense of energy.
Our strategy is simple and it's proven. We know it works, and we intend to keep doing what we've always done. As the saying goes, if it's not broken, don't fix it. While economists continue to forecast some type of recession in North America and discussions centered on interest -- rising interest rates are fluid, we are not currently seeing any impacts from a slowdown in the economy on our lines of business. While our subsidiaries will no doubt face challenges as they always have.
Our diversified business model insulates our results somewhat as each operation will be impacted in different ways at different times. We have mitigated much of our interest rate risk by fixing approximately 60% of our debt and then diligently managing our balance sheet to stagger maturity of convertible debentures, none of which mature until 2025, and therefore are not subject to the interest rate risk in the near term. On the flip side, the increasing interest rates have been a positive development for our acquisition pipeline and the quality of deals we are pursuing. We often compete for target companies with financial acquirers who have a far higher appetite for leverage than we do at EIC. The higher cost of debt reduces what these companies can afford to pay for an acquisition and financing is more difficult to access.
This has resulted in EIC being more competitive on our larger acquisitions and enhances our opportunities in the M&A market. Coupled with our strong balance sheet, this positioned EIC extremely well for accretive growth in 2023. We are excited about our future and intend to keep doing what we're doing because it works.
I will now hand off the call to Richard, who will detail our fourth quarter results.
Thank you, Mike, and Good morning, everyone. Mike mentioned, I will keep my comments to the fourth quarter in the interest of time. During the fourth quarter, our subsidiaries delivered results that were higher than our expectations, meaning our Q4 and year-to-date 2022 results exceeding the guidance that we provided throughout the year and most recently updated in November. Revenue and adjusted EBITDA in the fourth quarter were both fourth quarter records and both increased by 39% over the prior period. This performance was primarily driven by the acquisitions of Northern Mat, CTI and continued growth in our Legacy Airlines and Provincial due to the realization on investments made in previous periods and lessening impacts from the pandemic.
The demand for Provincial's ISR assets, including a modest contribution from the Netherlands Coast Guard assets in 2022 was very strong and contributed to period-over-period growth. Net earnings and adjusted net earnings increased by 17% and 14%, respectively. In the prior period, a $6 million gain was realized on the revaluation of contingent consideration that did not recur in 2022, therefore, making operational results less comparable without removing this gain from the analysis. Adjusting for the gain in the prior period, net earnings per share increased by 42% and adjusted net earnings per share increased by 31%. The increases in adjusted EBITDA were partially offset by increases in other expenses.
Depreciation increased by $7 million over the prior period due to investments made in growth capital expenditures, the addition of capital assets to Corporation's acquisitions and increased flying completed by the Corporation's airline. Interest expense increased $11 million over the prior period due to increases in benchmark borrowing rates throughout 2022 and the funding of our recent growth initiatives and acquisitions with senior debts. Other costs associated with our acquisition activity, notably intangible asset amortization also increased over the prior period. Amortization of intangible assets is a noncash expense, and these assets are not replaced on an ongoing basis when they are set up as part of the purchase price allocation for accounting purposes. Free cash flow less maintenance capital expenditures decreased by $3 million from the prior period to $14 million.
The decrease was primarily due to the timing of maintenance events during the 2022 period, where in 2022, the impact of the Omicron variant in the first quarter meant that maintenance would have -- that would have historically been performed in the first quarter or early in the second quarter, moved into the subsequent quarters, including the fourth quarter. This is not unexpected and the maintenance capital expenditures in the fourth quarter is consistent with the guidance provided for the fourth quarter during the third quarter conference call. All of these results were achieved despite a $2 million reduction in government subsidies compared to the prior period as the Corporation did not receive any subsidies in the fourth quarter 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 these challenges as they arise.
One particularly relevant example of this is EIC's Life in Flight program, 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. On planning for the Life in Flight program several years ago is helping address the current pilot shortage and provide a competitive advantage for EIC and its airlines. This is just one example of the benefits -- of benefits our group of companies realize as being part of EIC. Even with these programs, however, the competition for skilled pilots is intense. Our adjusted EBITDA margins were impacted by two notable factors compared to the prior period.
First, CTI, acquired in December of 2021 generates lower margins, capital requirements beyond working capital are minimal. Second, rapid escalations and fuel prices initially impacted adjusted EBITDA in early 2022 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-through to the customer. This is the first quarter where the impact of both of our 2022 dividend increases is fully apparent, which Mike pointed out, increased the per share payout by 11%. The dividend increase of $0.24 per annum per share was the largest annual increase in EIC's history.
At the end of 2022, our trailing 12-month dividend payout ratio on a free cash flow less maintenance capital expenditures basis, was lower than it has ever been at the end of the year. At 55%, the payout ratio improved over the prior year-end were going to finish at 58%. This further enforces previous statements we have made that EIC will not have to sacrifice dividend growth to reduce its payout ratio over time. Our trailing 12-month adjusted net earnings payout ratio was 73%, a significant improvement over the prior period, which was 99% and was within 2% of our pre-pandemic best on an adjusted net earnings -- adjusted net earnings basis. 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.
As Mike indicated earlier, our M&A pipeline is very strong, and we want to ensure that when we are ready to execute on a transaction, we can and we are able to fund it responsibly. We are confident that our balance sheet is in a position that allows us to execute on future transactions, and we'll seek additional capital as required if several acquisitions or large projects approach the finish line at the same time to ensure that we fund acquisitions and growth projects as we always have, accretively with consistent and modest levels of leverage. During the fourth quarter, EIC made growth capital expenditures of $49 million. This was primarily driven by investments in additional capacity to meet demand within our airlines, the completion of the new terminal buildings for the fixed wing search and rescue contract and investments made in the leasing portfolio to prepare a fleet of engines for lease in 2023. Our leverage ratio at December 31, 2022, is within our historical range, accelerated downwards as a result of the common share offering earlier in the year and improving operating results.
Our operating results were already driving down our leverage ratio earlier in the year as improved results from previous investments were being realized throughout the year. This was tempered slightly by the strengthening of the U.S. dollar in the latter half of the year, which increased the translated value of our U.S. dollar-denominated debt, while having less than a full year impact on our U.S. dollar adjusted EBITDA.
Our adjusted EBITDA is now being translated at a rate that is much closer to the spot rate, so we expect this impact will moderate as long as exchange rates remain stable into 2023. As we head into 2023, we expected that our results will continue to drive down our leverage ratio. Let's go to the end of the year, the Corporation fixed $350 million Canadian credit facility debt at a rate below floating rate for a period of approximately 3 years. The inversion in the yield curve in mid-January was more pronounced than it is today and provide an opportunity to fix debt that was invested through acquisition and growth investments throughout the 2022 year. This has resulted in approximately 60% of the Corporation's debt considering both senior credit facility and our convertible debentures in totality bearing a fixed interest rate.
During the fourth quarter, the Corporation had an inflow from working capital of $79 million. This -- the reason for this inflow was primarily related to the timing of receipt of a large receivable where a corresponding payable was not due until 2023. Therefore, the corporation expects a large outflow of working capital in the first quarter of 2023 and is working to mitigate the impact of this large outflow as we manage other areas of our working capital. In addition to this timing difference, management of working capital in the fourth quarter was strong as investments overall were nominal despite strong operating performance. That concludes my review of our financial results.
I will now turn the call over to Carmele.
Thank you, Rich. We were very proud of the results we achieved in 2022, and our outlook for 2023 is for continued growth driven by the stability of our business model and investments we have made in prior periods to build our future, but more on those later. I want to first discuss our outlook for Q1 of 2023. As a reminder for those less familiar with EIC's operations, the first quarter is always our most seasonally challenging as winter roads lessen demand for air services. The winter season also slows down output at our Canadian infrastructure companies such as Northern Mat and WesTower.
Overall, we are anticipating adjusted EBITDA for Q1 of 2023 to be materially higher than in Q1 of 2022, driven by significant growth in the Manufacturing segment with the Aerospace & Airline segment experiencing more modest growth. In our scheduled passenger business, unlike last year where our airlines were impacted by the quick onset of Omicron, we expect our operations to be at or above pre-pandemic volumes other than in Central Canada, where our passenger levels correlate to available medical diagnostic capacity in Southern centers, which continues to be strained. Q1 2022, however, benefited from $10.7 million of subsidies. The additional revenue from increased operations will definitely fill the gap. However, unlike subsidies, there are costs associated with generating this increased revenue.
Cargo revenue, which was very strong in Q1 of 2022, we'll likely see a bit of a decrease as with increased passenger traffic, there tends to be a corresponding reduction in demand on freight movements. We anticipate charter demand to continue to remain strong, and we are increasing our capacity to capture more of this business. Similarly, we expect medevac revenues to remain strong in Q1, boosted by Trauma Flight program, which was not fully operational until the second half of last year. All of our air operators are experiencing increased costs from rising labor rates driven by industry-wide shortages for pilots, aircraft mechanics and medical treatment. These increases will impact margins until such time as we are able to pass these costs on to our customers.
Aerospace will continue the strong performance it experienced last year in Q1 and in addition, we'll have the benefit of its Netherlands operations, which did not go into service until Q4 of 2022. With respect to Regional One, we will continue to see below pandemic leasing revenues, however Regional One is seeing increased activity in leasing opportunities, in particular in Europe, as carriers look to ramp up to take advantage of the anticipated high passenger levels for summer travel. As such, leasing revenue is expected to start to improve in Q2 and continue to ramp up through the balance of 2023. In Q1 last year, Regional One experienced materially higher than average aircraft and engine sales and although aircraft and engine sales will continue to be elevated in Q1 of 2023, they will not be at the same levels experienced in Q1 2022. Part sales will be higher than last year, which will partly offset the difference.
Our Manufacturing segment will see the largest growth in Q1, driven primarily by Northern Mat, which is no comparative in Q1 as it was acquired in May of 2022. While enhanced supply from other industry players may soften pricing in 2023, utilization of mats is expected to remain strong throughout 2023. As such, we expect Northern Mat to continue to materially exceed the performance metrics on which it was acquired. Since Northern Mat business is seasonal with Q1 tending to be its slowest period as cold temperature slows, construction projects and frozen terrain lessens the need for access mat solutions, we do anticipate Q1 results to be lower than Q4. Quest Q1 performance will continue to be impacted by pandemic-induced production -- production gaps and job pricing that predates the significant spike in costs experienced after these contracts have been concluded.
We expect Quest will start to see margins increasing later in Q2 with the benefit of higher pricing it took to the market over a year ago to address the substantially higher out -- sorry, input costs. The second half of 2023, we'll also start to see the benefit of steadier production schedules with increased jobs for 2023. Quest backlog grew each quarter in 2022, and we exited the year at new record level. To date, demand has not been impacted by rising interest rates or a potential slowdown of the economy. For the balance of this segment, we are expecting more moderate year-over-year growth for Q1 with increasing customer demand being largely offset by the impact of inflation, supply chain and labor shortages.
With respect to maintenance capital expenditures for Q1, we anticipate materially higher levels than in Q1 of 2022 for several reasons. Q1 2022 was played with the Omicron variant, which significantly slowed activity and pushed maintenance capital expenditures from a traditional Q1 time frame into subsequent quarters. Secondly, our air operators are experiencing increased flying hours as activity picks up to pre-pandemic levels, leading to increased maintenance CapEx. Thirdly, labor shortages and supply chain issues have driven maintenance expenditures higher. The anticipated increase in leasing activity in Q2 for Regional One will be increasing its maintenance investments in Q1 to ready its leasing portfolio.
And lastly, there's no comparative maintenance CapEx for Northern Mat in Q1 of 2022. Growth investments for the Aerospace & Aviation segment in Q1 are focused on increasing Regional One's exposure to the ERJ platform, the upgrade of the surveillance aircraft for the renewed Curacao contracts, additional aircraft capacity to increase charter demand and increase opportunities for maritime, regional connectivity and the start of the construction of the Gary Filmon Indigenous Terminal, which will align our terminal capacity to the growth of the communities we serve. Growth investment for the Manufacturing segment will be concentrated on the expansion of Northern Mat rental fleet and rolling stock in order to capitalize on the strong and continuing demand and to position the fleet for future growth. Ben Machine will also be procuring new equipment in order to meet the significant growth requirements of one of its major defense industry customers. Additionally, as we've done in the past, we will look to see both organic growth opportunities and accretive acquisitions that meet our criteria.
The increase in interest rates has been a positive development for our acquisition opportunities and the quality of the acquisitions we are pursuing. As such, our pipeline of potential acquisitions is robust in both size and quality, particularly in businesses in which we are already in and see further growth potential. As a final comment, I want to address the overall expected performance of EIC for 2023 in light of increased interest rates, potential inflation, geopolitical uncertainty and labor shortages. And more specifically, why despite this uncertainty, we are undeterred in our views of EIC continued success for 2023. The short answer is our business model and long-term investment philosophy of always investing in the future.
By purchasing mature companies with dependable cash flows in diversified niche industries, EIC is able to weather economic cycles. But not only do we expect to weather the potential uncertainty in 2023, we expect to grow, and that's because of prior periods, that's because of the investments we have made in prior periods, which will reap the benefits in 2023. For example, our purchase of Northern Mat will provide a full year results. The investments we made in the two surveillance aircraft for the Netherlands will provide revenues throughout the year. The investment in additional aircraft capacity is increasing aviation revenues and our acquisition of aircraft during the pandemic for Regional One's leasing portfolio will start generating revenue as leasing demand rebounds in 2023.
In addition, we will be able to take a more fully advantage of the investments in the Dallas plant as we ramp up production to meet demand with an increasing order book. As such, at this time, we are comfortable reconfirming the 2023 adjusted EBITDA guidance we provided with our Q3 results of between CAD510 million and CAD540 million. Thank you for your time this morning.
We would now like to open up the call for questions. Operator?
[Operator Instructions] Your first question will come from Steve Hansen at Raymond James.
Mike, I was hoping you could speak to the M&A pipeline in a little more detail. Your MD&A commentary and Carmele's remarks both suggest the pipeline is relatively full, and you might even be advanced on a few processes. So maybe just provide us a little bit of color around what you're seeing there and whether -- what specific verticals you're looking at? And then how they would complement your existing business?
Sure. I think there's sort of three parts to the question you're asking. First of all, generally speaking, we continue to see high-quality opportunities. And in talking about that, I'm not saying that the absolute number of transactions being contemplated in the economy is particularly high. I would describe it as average.
But what I would say is the companies that are coming to market are of higher quality and the competition for those is much more rational. The exuberant kind of highly levered private equity model is much more difficult to execute on as the debt is harder to get and the debt that's available is more expensive. So that inherently, while we haven't changed our pricing thresholds, it makes our pricing threshold more competitive. Secondly, where we're seeing most of our opportunities tends to be on the manufacturing side of the business. And I don't want that to be taken as we're less interested in aviation.
But we are a significant player in the niche aviation marketplace, and we're effectively fishing into shrinking bond. As we acquire more and more companies, there's less and less available to us. So we continue to look for great opportunities like the Carson Air's of the world, and we will continue to grow there. But more of the things we're seeing would be on the manufacturing side. And at the same time, within that, well, we opened a brand-new area with Northern Mat this year or last year, I guess, now.
Most of the things we're looking at now would be related or whether they be vertically integration opportunities, geographic expansion opportunities, reducing competition. There's a lot of different opportunities that we're facing are seeing, but they are almost all at this point in businesses that are related to our manufacturing businesses. Finally, I would say that stage-wise, while we completed a bunch of stuff midyear last year. Our acquisition team has been working on transactions and digging deep into some stuff. And so we would be farther down the acquisition road than we would have been a quarter ago.
And while that doesn't mean anything is going to necessarily come to fruition. We do have opportunities that are closer to the end of the process and where we know we're one of a reduced number of potential purchasers. So I would describe myself as cautiously optimistic we'll be able to accomplish something on the acquisition front sooner rather than later. Obviously, if we had something to say now, we would say it, we don't. But Adam and his team have done a lot of diligence and have done a lot of negotiating.
So I would say we're probably closer to the end of some of those negotiations that we have been since the summer.
That's very helpful. And just maybe on the organic side for growth capital. Are there opportunities that you continue to pursue around new contract wins, either domestically or abroad that we should be thinking about for '23?
Yes. It's exciting on -- yes, where as I said before, most of the growth was on the manufacturing side. The contract opportunities would tend to be on the aviation side of the business. There's a couple of very substantive medevac contracts in British Columbia that have been let, and we expect the government to announce the winner during this quarter at some time. Both would involve major investments in the $200 million range for each investment.
We don't know if we're going to win 2-1 or none. So time will tell. We're excited about getting to -- hearing from the government on that. How is looking at opportunities in countries where we already operate with the UAE. We're expanding our Curacao contract. We've got the first full year of the Netherlands contract. We're still working on an opportunity in Malaysia.
So, pure airlines we're also looking to expand our kind of connectivity capability out in the Maritimes. As you've seen kind of the major players focusing on a discrete regions. We think we can play a bigger role on providing the connectivity that they both would be looking for in more of the regional sector. It's not changing what we do, but just doing more of what we do and do well. And then on the resource sector, obviously, more activity happening there. So we're seeing additional opportunities for contracts to provide that support, whether it's moving people or goods into various camps where they're having exploration done.
Your next question comes from Cameron Doerksen of National Bank.
Just a follow-up on that question from Steve. Yes, just to follow up on that question from Steve, on some of the contract opportunities. You mentioned the [BC] medevac. I'm just wondering what the status is on the Manitoba potential contract there, where that decision, I guess, time frame stands?
The Manitoba one, it's important to define which contract it is, because a couple of years ago, they talked about letting up overall contract for all licensed carriers in Manitoba. And people made bids on that. The government decided not to proceed with that. So it's still done on a more fragmented basis with a number of carriers. Excuse me.
But on the enhanced medical part where we're talking about very emergent care, the government has let the contract. They've gone to the final stages of negotiation with a limited number of potential providers. And we anticipate that probably by midyear, they'll announce the winner of that. I can say that we remain actively engaged in those negotiations.
Okay. No, that's great. And just on the Northern Mat, I mean, it certainly sounds like your expectation, notwithstanding some of the seasonality, your expectation for the first half of the year is for still very strong activity levels there. Can you talk about maybe a little bit what you're seeing, I guess, to the overall I guess, just from a demand perspective in the second half of the year and as we look ahead to 2024, I mean, what's your expectation for activity levels there for Northern Mat later in the year and into next year?
The industry demand profile is strong. The big projects in the marketplace like the TMX pipeline and things like that aren't going to be completed until sometime next year. And when that's finished, they then nearly move into a maintenance cycle where they testing. So we envision that, that part of the business remains strong. With oil and anything remotely close to the prices today, the exploration in Alberta and development of new wells creates demand.
So that remains strong. And with the big move to electrification, particularly in transportation, the enhanced distribution is required everywhere. And so while I really don't have a feel yet for exactly when some of these transmission lines will be built. There's -- the medium term for that looks excellent. So as far out as we can accurately predict, we see the demand part of the business being strong.
We suspect our competitors will be better prepared this year than last, where there was a significant shortage of that. This year, we expect that there'll be more products available. I don't think that's going to change our utilization very much. It may suppress pricing somewhat. But the simple fact is this business is going to perform at levels well in excess of what we hypothesized when we bought the company.
Okay. That's great to hear. I'll leave it there.
One other thing just before we go on, just on Northern Mat, because it's new. People understand the seasonality of our aviation business because of winter roads. Northern Mats, when the ground is frozen, less matting is required because it's easier to travel over the ground, but also because there's just less work is done. The part where the business could vary year to year is when it starts to get soft, as the need for mats is accelerated. So we have a great start to the year in terms of the number of mats we have on rent already. And if depending on how the spring weather goes, that could be accelerated further. But it's the one part of the year where weather does impact how many are needed in the short term. Next question, operator?
Your next question comes from Matthew Lee at Canaccord.
Congrats on the good quarter and great year. I just wanted to start off with the focus on maintenance capital. So I know there's a bit of maintenance outpush into Q4 on the aircraft side as well as some addition in Northern Mat. But can you just maybe help us understand the cadence and levels of maintenance expected for 2023?
Yes. I would suggest that like the timing of things gets moved through the year, year-to-year. But generally speaking, in our business, we tend to try and do as much maintenance at the beginning of the year on the aviation front as we can simply because we're slightly less busy in that period. The other big piece of that falls when we could build mats at Northern Mat. And so that can vary year-to-year.
But I think what you'll see is that off the cuff, I think we gave a little over $40 million in maintenance CapEx in Q4 of this year. I would think on an annualized basis, that might be slightly lower than a run rate simply because we'll have a full year of Northern Mat and a full year of replacing mats. They have a 5-year life span. So we're constantly going to be building mats to make sure we maintain the ability to generate revenue, and we'll be adding additional operating iron in that business to make sure we can deliver the mats when the opportunities are there. So I would suggest that an annual run rate would be slightly above the $40 million per quarter.
Again, it won't be equally broken down. There'll be a certain random nature quarter-to-quarter. But on an annualized basis, the bigger we get, the easier this is to predict. It's somewhere between $40 million and $50 million on an average is probably about the number of years.
All right. That's helpful. And then maybe on the surveillance contract, I know you delivered 2 aircraft late in the year. So I assume relatively little impact on financials in the quarter. But can you maybe help us quantify kind of the financial impact of that in 2023 of that new contract?
Yes. I mean, it's -- there's some competitive issues with being too specific here, but we are very consistent in how we describe the returns we're looking for. And what we're looking for in this contract is no different. So free cash flow returns in the 15% plus range. And if you add back in the reasonable level of depreciation because we are -- maintenance CapEx because we are operating those aircraft, I think you could work back into an EBITDA contribution pretty easily. But it gets material given the size of the investment in the two aircraft. Carmele, anything do you want to add to that?
Yes, no, that's a good description. I mean from a comparable size, it would be more than what you'd see from a contribution from Fixed Wing Search and Rescue. So it's more than that, and probably slightly above. I can give another comparison, our contract in Curacao as to what we make there. They're the same aircraft. They're both Dash 8-100s, providing maritime surveillance. So that gives you kind of a proxy for the level and nature of the service.
Your next question comes from James McGarragle at RBC Capital Markets.
I hope everyone is keeping well, and congrats on another strong quarter. I had a question on Regional One and some of the investments you're making in the business kind of despite some of the current headwinds. In the MD&A, you referenced some E-140 aircraft being required in recovery beginning in Q2. So what kind of line of sight do you have into the recovery in the pilot shortage? And kind of given some of the current headwinds, are you thinking about allocating any of these assets out of Europe to potentially some more attractive operating environments?
On the Embraer question first, we are clearly the leader in the world on the CRJ platform. And so investing in that clearly is a declining sum game. There's -- we have a big piece of that market and the amount of market available for us to grow is limited. We've been working hard to increase the secret sauce as it relates to the Embraer by learning the value of the parts, the engines and the leasing rates. And so we're excited to see that as a growth part of our business.
And so we've expanded our investments there. I think we'll continue to do that. As for line of sight on that, yes, we do have reasonable line of sight in the near-term. We have some equipment that will go on engines in particular, which go along lease early late in the first quarter, early in the second quarter, and we see that accelerating through the year.
In Europe, we're actually seeing quite a bit of opportunity as they focus -- curious focus in on what's anticipated to be a pretty significant demand, in particular in the summer. And the one thing about Europe, although, obviously, pilot shortage throughout the world, a little less so in Europe because there's more pilots turned out in their military than we've seen in North America. So they're in, I guess, less of a worse state than as I said, North America. So active there and they're significant CRJ users in Europe. So lots of opportunities there as well as Africa. We've got lots of dialogue occurring there and some opportunities to lease aircraft in that region as well.
Okay. Appreciate the color. And I have another question on Quest, with the new facility opened up and the record order book, the order book implies to me that revenue kind of going to increase out to 2025. It seems like there's some good line of sight to that. And with production gaps improving, that margin is going to increase meaningfully as well. So what type of recovery do you have in production gaps built into the 2023 guidance? Any issues you see ramping up capacity into 2024? And as a quick follow-up to that, it seems like Quest could drive mid-single-digit type of growth on the consolidated EBITDA into 2024, just on the record order book and improving margins. Is that kind of the right way to think about it into 2024?
Yes, except, I wouldn't limit it to 2024. Quest is the most underappreciated growth engine we have. We -- the demand for the products is very strong. And I think there's a -- if I could step back to the industry a little bit, a little bit of misunderstanding about what interest rates is doing there. Well, it does create uncertainty for a given developer in a given place, do I press the button now or in six weeks from now.
The simple fact is there's massive immigration into Canada about one out of every three immigrants to Canada end up in the Greater Toronto area. Single-family housing isn't an option. It's too expensive. And the higher interest rates are, the more it's not an option. That forces people into rented housing, which drives high-rise buildings.
So the medium-term and long -- short, medium and long-term, all look very strong. We've seen that through our order book growing. And we've seen it as we've grown geographically in the United States, we're doing deals in Nashville. We're doing deals in Dallas and different places we've never been before. So I think you're going to see continued growth in this business.
Incrementally, it's not a light switch. So we do two projects in Q1 and making up the number and three in Q2 and maybe 4 in Q4. And that won't end in any given period. We see that growing dramatically because we have tons of excess capacity with the beautiful facility we built in Dallas. And with the addition of vertical integration things we did with AWI and WIS in the U.S., enabling us to grow our installation capability.
Quite frankly, we really like this business, and there are certain parts of it that we don't do yet that we want to add to our product offering. As an example, they would be the railings for the balconies on -- virtually every department has a balcony. And right now, we have to outsource the supply of those railings. So we lose the margin on it. But probably more importantly, we lose control of the supply of the product and that we're reliant on someone else to meet our customers' requirements.
So over time, I think you're going to see us whether it be through a pure green expansion and starting to build those products ourselves or acquiring another group that can do it. We're excited about this space. And I think you'll see additional capital go in it. And over the next couple of years, you're going to see why as it flows through our income statement.
Your next question comes from Konark Gupta at Scotiabank.
So, Mike, maybe the first question and Pam as well, if you want to answer this one. So Q1, I know like seasonally, there's weakness and all that. But I think this Q1, we are seeing more and more than normal kind of temperatures. So just wondering if there's any kind of tailwind because of the temperatures we have seen so far?
I would describe it not so much as a tailwind. But in aviation, we've had less dislocation from bad weather. So it's a better than typical year weather-wise, but that's not a dramatic impact. The bigger one will be, if it's how soon the melt is in the West and how soon that ramps up the demand for matting as the winter conditions go away and we go into a spring construction season, where our products are required.
Winter roads might be a little shorter than is typical, which would be helpful, probably not in a hugely material way, but still helpful from a tailwinds perspective.
Okay, makes sense. Now with respect to Northern Mat, I think one of the comments in the annual report was the pricing is expected to moderate. I'm just wondering is the pricing expected to moderate from the year-end 2022 levels or is it versus the average of '22?
It would be -- where the biggest impact on pricing lies is in a very busy peak summer season with the absolute maximum number of mats that are deployed, that's where we would tend to see it. At this point, pricing remains for an off season. Pricing remains good. There's -- it's better than we would have anticipated when we bought the company and the number of mats we have out is better than we anticipated. So it's all good. It's just -- I always want to cautious when we had such an amazing quarter that we had in Q3 of last year, that not everything is going to line up perfectly every year. But having said that, it's so much higher than when we bought the company off of, I feel kind of silly cautioning people.
Okay. That helps, Mike. And then on the M&A front, I think one of the comments on the report as well was in the past 18 months or so, you have added the bench strength to complete acquisitions. Is that -- like does that speak to the complexity in closing those deals or is it just a sheer number of opportunities?
I don't think it's changed the complexity. One of the things we do is we've internalized virtually everything on our acquisitions, except for when we need industry analysis on something we don't do. So as an example, we did get some help with Northern Mat, when we bought it to make sure what we thought the industry was correct. But when we're talking about adding capacity, it's just we want to be able to close multiple transactions at the same time. And we historically really weren't set up for that. It really rattled kind of our capacity as we store people out of operating positions and things like that to help close. We've added another professional last year into that group. And so Adam and his team can handle more transactions at the same time than we could historically. And quite frankly, with what we're working through now, I'm glad we've done that.
Okay. That's great. And the last one for...
May, in fact, warrant further investment, quite frankly, in people.
Yes. Okay. And very last one for me on the payouts and the capital deployment this year. So the payouts are pretty low, obviously, and that sets up pretty well for the dividend prospects this year. How do you plan to balance the amount of growth CapEx you have this year versus the M&A and the dividend?
Yes. This is -- I appreciate the question, you're correct. This is something fundamental to understanding us in that we don't start with an assumed fixed pool of capital that we're going to allocate between those 3 things, you talked about growth CapEx, dividends and acquisitions. We start with a threshold and say, okay, let's look at our investments opportunities and how many of these meet it and how we're going to pay for them. And assuming we have 3 things that meet it, we make sure we get capital for 3 plus back up capital for things we don't know about yet.
And if it's zero, it's zero, if it's 6, it's 6. When we look at our dividend, we say, what kind of free cash flow are we generating on a sustainable basis after that maintenance reinvestment. And so over time, we've averaged about just a little less than one dividend increase a year. We don't increase in a given quarter every year because that's how we increase dividends. We increase dividends what we can afford to do it.
And you saw that this year with two dividend increases partially because we hadn't done it during the pandemic and partially because we had an exceptional year. But as we continue to grow, we're really proud of our 5% CAGR on our dividend. And assuming we continue to perform the way we have, I really don't see us giving that away. So consistent, reliable dividend growth as part of our model. And at the same time, we think we can grow our ability to pay the dividend by more than that CAGR, so over time, we will further reduce our payout ratio.
I think where we are at year-end was a great example of that biggest annual dividend increase in our history and the lowest payout ratios in our history. So I think you'll see continued modest dividend growth driven by our results, and we'll take advantage of whatever opportunities we can uncover on the other front. But opportunities to grow are not going to impact our ability to pay the dividend, unless capital markets were to change and we couldn't access capital for growth, then we'd revisit that. But in our 20 years, with our modest leverage, we've never been unable to access capital. So knock wood, we anticipate that continuing.
Appreciate the color, Mike. And congrats on a good quarter.
Thank you.
Your next question comes from Chris Murray of ATB Capital Markets.
So Mike, maybe following on a little bit of that question. If I'm kind of sitting here thinking about what your run rate on maintenance capital is and then thinking of the portfolio of, what I'll call, probably known growth ideas that you're going to do this year. I mean this might be one of the largest years for capital spending for you folks in some time. So maybe back to kind of this question trying to understand it. I mean, we're probably looking at probably close to $400 million in maintenance and growth capital this year or something approaching that before we get to acquisitions.
I guess, first of all, trying to understand if I'm kind of triangulating that correctly? And then thinking about -- is this what we should be expecting for you guys for the next few years? Like is this just where you find that you're going to be making these large-scale investments because it's been a couple of years since we've seen kind of this level of spending?
I'm not sure on the $400 million number whether that's -- it's a little high, although, if we land any of the medevac opportunities, you're not wrong. In fact, it could be more than that if we do that. So you're not wrong in the general premise to the question, the exact numbers depend on what falls out of that. In terms of what to expect, yes, if we have opportunities like we have now, we're going to deploy the capital. You saw what happened when we were able to put the money out in the last couple of years with the growth we walked into COVID in 2019 with a great year at $320 million in EBITDA, we're exiting 2022 with almost 50% more than that and another 15% growth predicted for next year.
So yes, I think you can anticipate we'll continue to invest money, but only where the right opportunities are, and that's driven by those returns. And so I think your general premise, Chris, is bang on. I can't be specific as to exact amounts because I don't know which ones -- which acquisitions we're going to win. I don't know which contracts we're going to win. But we very much view -- if we're hitting that 15% threshold, our shareholders want us to do as much of it as we can handle.
Okay. That's fair. And then maybe a different way to a different question and thinking about the manufacturing business here for a couple of seconds. And there's a lot of -- there's probably more large moving parts in that business today than there have been a while now with Northern Mat & Bridge in there. You talked a little bit about margin performance in Q3 of last year was probably as good as it was going to get, or call it, highly optimized maybe [that is charitable].
How do we think about the margin profile now between the mix of Quest, some of the other pieces of the business, Northern Mat & Bridge, like how do we think about kind of revenue, like is Q4 kind of a stable number to build from or is there some more moving pieces? And historically, we thought about the margin profile in that business kind of, call it, high teens, driven primarily by Quest, but now we look to be in the low-20s now. How do we think that this all comes together over the next couple of years?
Well, okay. First of all, in terms of where we look at an annualized basis, it's definitely going to continue to rise a little bit because of a full year of Northern Mats operations. The fact that we reset the mats, and mats have approximately a 5-year life that means maintenance CapEx is a real number. And so that inherently drives up operating margin because you got to earn the money you reinvest in. And we are making considerably above our threshold of 15% of that business after reinvestment.
But when you add back in 5 years is 20% of the asset needs to get replaced every year. So you get very much higher EBITDA margin. So I think you see those stabilize at a higher level. I think if you look at our legacy businesses, so legacy I'm defining as everything except Quest and Northern Mat. And Quest should grow materially, but slowly over a number of quarters as we ramp production, take advantage of the better pricing and see all the benefits of the vertical integration.
Quest is at the early stages of its recovery for lack of a better term. And so you'll see that flow through the statements over time. The balance, I would describe as fairly consistent, whether it's Overlanders or band or pressure systems companies, SFI, we've had those for a while. Demand is strong. Order books are good. I would describe the margins as consistent.
Okay. We'll leave it there for that then. And then just one last question, and I'm not sure who wants to take this one. Just thinking about the leasing business, if we're expecting to see that start to recover in the back half of the year, that's always had an unusual impact on your tax rates through '23. Should we expect that the effective tax rates that we've been seeing in the last couple of quarters, that will start moving down in line with what not gives us the full run rate?
I guess the simplest answer to that is yes. I mean there's a whole bunch of other moving parts depending on where we make money in our other businesses. But absolutely, the lease portfolio lives in Ireland, and Ireland would have the lowest tax rates we have. So as that business accelerates, becomes more taxable, the average tax rate will decline. That's correct.
Right.
Yes. The only difference, Chris, would be that as a proportion of our overall business as we've acquired Northern Mat, it's a lower proportion of our business. So it won't have as large of an outsized impact as it may have had in the past.
Okay. That's fair to think about.
Your next question comes from Tim James at TD Securities.
My first question for you, Mike, I just want to return to the dividend topic. And you presented a case where the dividend could continue to grow at that 5% at historical rate. And then given your view of the growth in the business long-term, that, that 5% will actually be lower, and therefore, your payout ratio will be declining. I'm just wondering if you could kind of talk to us about why that is appropriate? It implies an accelerating -- if I'm not mistaken, an accelerating investment set where like growth that's greater than the growth in the business, one would have thought?
Again, I'm kind of oversimplifying it, but as you get larger, it gets more difficult to find investments that are that much larger. Can you just kind of talk about why a declining payout ratio for the business is appropriate over time?
It's really just an extrapolation of how we've grown in the past. You've been around with us for a long time, back in closer to the income trustees as when we were a young corporation. We had -- we were comfortable with payout ratios of 70% or 80% on a free cash flow basis. And our shareholders were clear with us that, that was too much they wanted to be able to rely on it. So we've worked that down over time.
You're right that the bigger we get, the more things we have to do to maintain a growth rate. But I think we've shown at least in the most recent periods that we can grow at more than 5%. And that's really the bottom line to be able to increase our dividend, 5% and have that be a lower portion of our cash flow, that means we've got to add more than 5% to our ability to generate cash. And we use real broad-brush numbers just for the sake of simplicity. We're generating $450 million this year, $455 million in EBITDA, [ $5 million ] something next year.
If we just use $500 million for a round number to continue to grow the dividend at 5%, I got to grow my EBITDA by $25 million a year. We -- our organic growth will exceed that on a typical year. And so when you add in whether it's investment in significant growth opportunities or acquisitions, and that enables us to exceed the 5% growth rate required to maintain the 5% dividend rate. I don't think that we will -- if you take this to the medium or the long-term drive our payout ratio down to 20%, I don't think there's any desire for that. I think we want to see, as we brought up a few years ago, a free cash flow kind of methodology below 50%.
And over time, I'd like to get that -- the adjusted net earnings below [60%]. It may take us a couple of years to get that there with our continued growth, but I think it's achievable. And I think a typical shareholder of us says, we rely on your dividend, we want to be able to count on your dividend, and we want to know that your dividend is going to more than cover changes in inflation. And I think our 20-year track record says we can do it, and I'm confident that we can keep doing that. I'm not suggesting that we're going to be able to do 25% growth like we did this year, whatever the number is every year. But to exceed 5% in growth, I think is entirely achievable.
Okay. That's helpful. I mean you've shown you're in the aviation business, and you've shown that during a pandemic, you can hold your dividend, which is pretty amazing. My second question, I just want to return actually and get just some clarification, I think more than anything, maybe, Carmele, on your comments regarding the sales and service revenue stream in R1, there was a pretty significant drop-off in the fourth quarter relative to the third quarter. Was your commentary earlier suggesting that, that should sort of work its way sequentially higher over the balance of -- or through 2023 or I'm just wondering if you could kind of revisit that your expectations for the trajectory of that business line as to the extent you've got visibility here?
Yes. So sales and service, I mean, think of it aircraft and engine sales, what I'll call high purchase price, so really drives revenue lines. In 2022, most quarters were like almost double what we had seen pre-pandemic. Fourth quarter was a little lower than that. But my comments related to Q1 over Q1.
So when I look at Q1 2023, we'll still be higher than what we were experiencing in kind of pre-pandemic, but they will be -- it will be lower than what we saw in Q1 of 2022 because that was one of the quarters where we had a higher level, and I think actually Q2 and Q3 of 2022 were even higher. But just wanted to give you some perspective of that. Now sales and leasing also includes parts sales. So that's more consistent. And we've seen that actually grow, and we're beyond our pre-pandemic levels, and we continue to see that being growth more marginal, but growth on the parts side of things throughout the year this year.
Okay. That's really helpful. Then my last question, switching over to Quest again, and you've provided some great color, Mike, on kind of the challenges and the opportunity, it sounds like that Quest presents. If I step back and think to the original days when the decision was made to invest in the Dallas facility, the incremental capacity and revenue potential that generated. Is it possible to see -- say when you see Quest reaching that original plan? And I remember its capacity is significantly in excess of what your existing Toronto facility was. When do you see kind of getting to that point?
I think you'll see run rates in 2024 that approximate that level of utilization. We're going -- one of the things that the pandemic has caused us to do, which in the long run is probably a good thing. But when we initially built the plant, we built them to both do all things. So we had that Analyst Day, we walk through. We did everything and we're going to do everything in Dallas than we did in Toronto.
We've now -- we're now leaning towards specializing in certain products, in certain plants. And so we're still working on exactly what we're going to do in Toronto, exactly what we're going to do in Dallas and how much space that means we need in Toronto because that's a leased facility and how much we want to do down through our Dallas facility. The bottom line, though, is that we have tons of excess capacity at 2023 rates even at 2024 manufacturing. That's why I say when I talked about this, this has got most of the money in it that it needs to have growth for 3 years or 4 years or 5 years in increased capacity. And in terms of getting to that sort of anticipated 2019 levels, probably by the end of next year.
Okay. And...
And again, make sure when you think about Quest, don't think of it like a light switch, think of it like a ramp. As we add more and more, we build more projects each part in that, you can see that in our order book with it now being -- correct me if I'm wrong, we're a little over $600 million. Carmele is checking that I'm not making things up, but I'm pretty sure that's the number. That's the highest we've ever seen. And so how much of that we burn off each quarter goes up every quarter, and then the amount we add to it to replace it and grow the order book goes up. And that's why we're so bullish on this because what we see both in our pipeline and our order book, they're at very high levels.
Okay. That's helpful. I just want to confirm, when you refer to Quest today, you're including the AWI and the WIS tuck-in acquisitions as part of that, right? They're all included. Okay.
Yes. We view that as a single entity. Yes. There's a kind of perfect example of what a tuck-in acquisition means to EIC. It's become part of the engine that is Quest. And I think you'll see us add other stuff to that engine. Again, railings is a good example of something we really like to be able to do that we can't do right now.
Your next question comes from Jonathan Lamers of Laurentian Bank Securities.
On the growth CapEx plans that you've laid out for 2023. Mike, I know you don't like to give us numbers because there's some contracts you're trying to win and it's uncertain whether you'll win those. But if we just look at the identified projects laid out in your prepared remarks, can you quantify the growth CapEx associated with those and give us a sense of which businesses are receiving the largest allocation just as we think about the returns driven to '24?
Yes. I mean if you look at our budgeted growth CapEx, about 3/4 of it is in aviation, a little less than 25% of it would be in line with [indiscernible]. And we talked about the major areas we would look to spend that money in aviation. It's the Gary Filmon Terminal. It's...
Curacao.
Curacao, the aircraft for the expanded contract there. It's the investment in the Embraers at Regional One. And those would be the main drivers there. And then on manufacturing, by far and away, the biggest part of that would be Northern Mat, whether it be [new or yellow] operating equipment to expand our capacity or additional mats to grow the size of our rental fleet. And the stuff we've kind of committed to would be -- I'm always hesitant to use a growth CapEx number because it typically ends up being more than what I say because we find something new and exciting to do or we win a contract. But I would anticipate something in -- based on what I know now and excluding any new wins would be in the neighborhood of $100 million in aggregate.
Okay. Great. And just as we think about the cadence of that flowing through the results, can you help us understand when the aircraft are being acquired at R1 and when the line rates are being taken up at Northern Mat? And I guess if you see this as potentially...
The short answer to that...
Yes. Sorry.
The short answer to that, Jonathan, is absolutely not. We're looking for aircraft. There may be nothing for 6 months or I may get a phone call from Hank saying I found a great deal, we need it all now. So I think I can't. I would -- the simple way to pro forma this stuff is pretended has no impact this year. It's in our guide, that sort of stuff is in our guidance, but most of the impact of growth CapEx this year isn't until 2024.
Right. Like Curacao, for instance, I mean, those modifications will take all of this year plus a bit of probably Q1 2024. Just to give you a flavor, right? We're investing today for tomorrow's growth.
Well, I was just -- I guess I was more excited about Northern Mat, just knowing how quickly the mats can be deployed. It sounds like the market there is pretty strong. Is it fair to say that there's been like some incremental planning to ramp up production sequentially since we last spoke to you in November? And do you see that flowing through later this year?
Well, yes, I mean, it flows into our fleet over time. Bear in mind that we have 2 facilities that we've ran at reasonably close to single ship capacity throughout last year, and we anticipate maintaining that capacity. Where you get into the vagary of it isn't so much how much we're going to produce, it's how many mats we sell. Some of our customers, particularly in the pipeline business buy their own mats and so will produce themselves. So it's hard for me to say exactly what portion of new mat production turns into rental mats versus for sale mats, and that's just opportunity-driven. Darren and his team at Northern Mat are very focused on meeting what the customer wants.
Yes. And a chunk of that growth is for yellow metal, and that has longer lead times to be able to order and receive delivery of those types of the equipment.
Your next question comes from Matthew Weekes at iA Capital Markets.
Just thinking about the growth pipeline you're seeing, clearly, no shortage of growth opportunities within the existing business, talking about the strong M&A pipeline you're seeing. I'm just wondering, as you think about kind of the current market and higher interest rates and what you're seeing in capital markets, obviously, you decided to kind of hedge some of your variable rate debt. I'm wondering how you're thinking about funding in terms of allocations between debt, equity, maybe some hybrid instruments and kind of what you're viewing as sort of attractive ways to fund opportunities right now?
That's a really -- it's a good question. In terms of the decision to fix the rates, Rich gets the credit for that. He was watching the inversion that was in the capital markets in terms of interest rates. And we thought it was inconsistent with what most people thought short-term rates were going to do, and so we jumped on it. And I think we hit very close to the maximum level of inversion in the rates. So that takes some of the risk out of it for us. In terms of funding growth, right now, we're very well capitalized. We've got about $1 billion in dry powder. But our appetite for debt as it relates to our cash flow is the same as it was in 2004. We're in that 2x, 2.5x secured debt.
We know the banks will always lend us that no matter how good or how bad the markets are. And so we anticipate staying within that range. If our opportunities mean we need more capital than that, we would probably tap the public markets at the time when we had a use for the money. Right now, we clearly don't have a requirement for that, but that could change. In terms of convertible debentures, in today's environment, I'm not sure that they would be my first choice simply because interest rates are much higher.
They're relatively speaking, more expensive. And so I think if we were to have a requirement for more than debt capital, you'd see us do it on the equity side of the balance sheet. We were either remarkably consistent or really stubborn, but -- which way you want to look at it. But the aggregate levels of leverage haven't changed much here, and I don't envision that changing. So depending on if we have a massive level of growth, we land all those contracts and Adam brings me a couple of deals and all of a sudden, I need $600 million, we would add some equity to the balance sheet. If we don't win like that, we don't need to, we've got tons of liquidity in our existing facility.
Okay. That makes sense.
Your next question comes from Krista Friesen at CIBC.
Most of my questions have been asked at this point, but I was just wondering on the aviation side of the business, you talked about it -- how it does take some time to pass through those higher costs. What sort of lag would you say there is? And how would you expect margins to kind of trend through throughout 2023?
We've got a couple of union negotiations under right now. And so as those are completed, we'll get the increase in pilot costs will hit us. In a lot of our business, whether it's at PAL or at Perimeter, we tend to have market presence enough to be able to pass those along reasonably quickly to our customers. And the pilots don't make up a huge proportion of our operating costs. So I don't anticipate it being a material impact.
In some of the medevac contracts, our increases are determined by changes in the consumer price index. So that could have a slight impact in margins in those businesses as it will take us a couple of years to get our wage increases back is -- typically, the wage increases exceed CPI at this point in the aircraft cycle simply because of the lack of qualified pilots. And by qualify, I don't mean capable. There's lots of young pilots and the training is starting to affect the number of low-hour pilots we see. It's just they're harvested so fast by the big airlines, there's a constant churn.
And I don't think that's going to change much, Krista, in the near future. I think we -- that's why we've invested in the flight schools. We've invested in Atik Mason. We've invested in the Pilot Pathway. We're going to need to be creative to solve that problem over time. But we put ourselves in the best situation we can, and we'll manage our way through it.
Great. Congrats on a good quarter.
We have a follow-up question from Tim James at TD Securities.
Just a quick one here. The intangibles balance, correct me if I'm wrong, increased quite a bit. I guess that was related to maybe purchase price allocation changes. I was wondering if you could provide some thoughts or insights on what we should expect the impact to be on the amortization of intangibles going forward? And I realize that they're an add back to your adjusted earnings per share, so not a big impact, but I'm just wondering if you could address that briefly?
Sure. So the increase kind of from previous quarters in the year related specifically to the finalization of the purchase equations for CTI and Northern Mat and APL during the year. So in terms of what we see going forward, there's kind of 2 things that impact that number, obviously, amortization falling off from previous acquisitions and amortization going forward from once we previously bought -- or that we -- kind of new purchase equations that we've set up. So I think probably Q4 is probably one that I would look to in terms of what I would expect going forward because we had the amortization recorded in there for our most recent acquisitions, and you'd start to see the impacts of amortization falling off from older acquisitions. And one of the things that would have been impacting our amortization in the last couple of years that runs off relatively quickly would be the amortization on backlog. So when we bought Quest or AWI or WIS, you have a significant portion of -- we're not seeing portion, but a large portion of the intangibles will be tied to the backlog that exists on the acquisition date, but that runs off relatively quickly. So you have a high amortization value. So when you look at a Northern Mat, you might think, okay, our intangible asset amortization on that would be high because it's our biggest acquisition ever. But relatively speaking, the amortization per year is -- doesn't jump as much as you might think because of some of the accelerated amortization that's taken on backlog, and that has run off in the Quest, AWI and WIS acquisitions in a material way.
Okay. That's helpful. So when you think about...
Q4 is -- Q4 is a good proxy going forward.
Okay. So it reflects that big -- that step-up in intangible assets. That's all I needed. That's helpful.
Mr. Pyle, there are no further questions on the phone lines. Please proceed with any closing remarks, sir.
I want to thank everybody for joining us here today. 2022 is an exciting time for our company, our shareholders, our employees and all our stakeholders. Thank you for taking the time to chat with us here today. And I look forward to speaking with you again in May and seeing some of you at our AGM. Have an awesome day.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.