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Discovery Air Inc. (DA.A)
F3Q08 (Qtr End 10/31/07) Earnings Call
December 13, 2007 11.00 am ET

Executives

David Taylor – President, Chairman and Chief Executive Officer
Rick Jankura – Chief Financial Officer
Shawn Clarke – Chief Operating Officer

Analysts

Greg McLeish – GMP Securities
Scott Kaplanis - Macquarie Securities
John Grandy – Westwinds Partners
Greg Colman - Wellington West Capital Markets
Stephen Gould – EAU Claire Securities
Jaques Kavafian - Research Capital
Cameron Doerksen - Versant Partners
Bert Griffin - Berkshire Securities

Presentation

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Discovery Air Inc. third quarter 2008 results conference call. (Operator instructions) I will now turn the conference over to David Taylor, President, Chief Executive Officer and Chairman. Please go ahead.

David Taylor

Good afternoon ladies and gentlemen. We certainly appreciate you taking the time today to join us for Discovery Air’s fiscal 2008 third quarter conference call. Joining me today are Discovery Air’s Chief Financial Officer, Rick Jankura as well as Discovery Air’s Chief Operating Officer, Shawn Clarke. My intention this afternoon is to provide you with a brief overview of the business activities of Discovery Air’s operating subsidiaries over the corporation’s fiscal third quarter which commenced August 1st 2007. Following this I will hand the call over to Mr. Jankura who will provide you with an overview of the corporation’s third quarter financial performance.

In order to facilitate an organized question period and to ensure that all parties have equal opportunity to participate, we will allow each participant one question plus a single follow-up question before the moderator will proceed to the next caller. If you have additional questions the moderator will place you at the end of the queue. We will be pleased to address your subsequent questions once those callers who are in the queue ahead of you have had the opportunity to ask their questions.

Now I will ask Tammy Aston who’s our corporate counsel to read the…

Tammy Aston

Forward-looking statements? There may be statements made from time to time which relate to the future and are forward-looking statements. By their very nature, forward-looking statements involve inherent risk and uncertainties, both general and specific and risks exist that predictions, forecasts, projections and other forward-looking statements will not be achieved. Participants are cautioned not to place undue reliance on these forward-looking statements as a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to, our ability to secure operating contracts; the strength of the Canadian economy in general and the strength of the local economies within Canada in which we conduct operations; the effects of changes in interest rates; the effects of competition in the markets in which we operate; inflation; capital market fluctuations; the impact of changes in the laws and regulations regulating aviation services; changes in tax laws; technological changes; unexpected judicial or regulatory proceedings; weather conditions in the geographical regions in which we operate; and our anticipation of and success in managing the risks implicated by the foregoing.

The foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Discovery Air does not undertake to update any forward-looking statements that are made from time to time.

David Taylor

Thank you Tammy. Q3 was an active period for Discovery Air which included the closing of our latest acquisition Top Aces Inc. an approved supplier to the Canadian Federal Government of combat airborne training services to the Department of National Defense as well as the signing of a letter of intent to purchase Yellowknife based Discovery Mining Services Inc. Discovery Mining is a leading provider of remote exploration camps, expediting, logistics and staking services to a broad spectrum of gold, base metal, uranium, and diamond exploration companies operating in the Northwest Territories, Nunavut, Northern Alberta and Northern Saskatchewan. We expect to close this transaction early in the fourth quarter.

We believe that these activities continue to support Discovery Air’s commitment to enhance shareholder value through the acquisition, integration, and organic development of niche aviation service businesses. These businesses have been brought together to form an alliance which is able to realize synergies and economies of scale in order to enhance revenue, reduce operating costs and improve margins.

Great Slave Helicopters: Great Slave had another solid quarter driving Q3 revenue flight hours up 10% year-over-year. The company continues to drive organic growth through disciplined cost control and improved operating efficiencies. Demand for rotary wing air transport services increased materially in Q3 in both government services and oil and gas sectors notably in the Satu district of the Mackenzie Valley delta region. This increase in demand was accommodated by Great Slave’s Hughes 500 fleet and translated into revenues in excess of $500,000.

A significant driver of the increased demand for rotary wing services in the oil and gas sector may be attributed to the fact that oil and gas exploration companies have been motivated to look for new opportunities outside of Alberta as a result of the province’s decision to increase royalties.

Great Slave expect to continue to see higher utilization in the Satu district through Q1 and Q2 of fiscal 2009 due to the extension of a series of oil and gas survey programs currently being conducted in the district.

Over the course of Q3 Great Slave’s wholly owned subsidiary Hudson Bay Helicopters increased revenues by 22% relative to the same quarter last year. This improvement was driven primarily by increased demand for polar bear observation, tourists with Hudson Bay Helicopters, which Hudson Bay Helicopters supports out of Churchill, Manitoba.

Despite a wildfire season in Ontario, Great Slave and its wholly owned subsidiary Superior Helicopters were able to effectively redeploy aircraft assets to Quebec as well as the western region which resulted in the company driving favorable revenue volume from this sector over the quarter.

Air Tindi: Air Tindi’s Q3 revenue flight hours were up 3% relative to the same period last year. This is a notable accomplishment given the fact that fiscal year 2007 was an historical high for the company with respect to revenue flight hours which were driven by a busy fire season in Ontario, a reduced ice road duration, as well as a joint review panel contract for the Mackenzie Valley pipeline.

Quarterly increase in revenue flight hours was driven primarily by increased demand for off-strip work. This demand was accommodated using the Twin Otter, Single Otter and Caravan aircraft. The company expanded its Caravan fleet by one aircraft in Q2 and were able to stimulate demand which outpaced capacity resulting in an increase in aggregate Caravan fleet flight hours over Q3.

King Air 200 revenue flight hours derived from the company’s Medevac contract were on a par with last year while Dash-7 utilization rates were down slightly. As alluded to in the foregoing, the year-over-year reduction in Dash-7 utilization was a result of no demand this year from the Ontario Ministry of Natural Resources forest fire management, reduced ice road duration as well as the fact that the joint review panel flight contract was non-reoccurring.

Looking forward, Air Tindi will be increasing its Twin Otter fleet by one aircraft as a result of the expiration of a lease agreement the company has with a third party. The company intends to operate this aircraft in the Yellowknife market where it believes significant demand exists for this type of aircraft. By placing the asset in what continues to be a robust solution leveraging the company’s operational expertise, Air Tindi expects to accomplish improved yield on aircraft relative to that derived from the lease arrangement.

Air Tindi is bullish on its new business development outlook as a result of a series of productive discussions with a number of mining and oil and gas exploration companies as well as the formation of a northern division marketing and new business development team which will be headed by Rob Carroll. Mr. Carroll accepted the role of vice president of marketing and new business development on December 1st of this year. Mr. Carroll’s team will be comprised of marketing and new business development professionals at both Great Slave and Air Tindi. This integrated approach to marketing and new business development will drive material revenue synergy opportunities through, allowing both companies to leverage the well established customer relationships developed by each, stimulating cross selling opportunities amongst existing customers, and positioning the northern division to provide customers with a portfolio of comprehensive specialized air transport services.

Top Aces: Top Aces Inc. was acquired by Discovery Air August 24th, 2007, and accordingly our results only represent those generated after that date. The company is an approved supplier to the Canadian Federal Government of combat airborne training services to the Department of National Defense. Using their fleet of eight Alpha Jet fighter class aircraft and four Westwind Light Transport class jet aircraft. Top Aces provides training services to the DND throughout North America.

Looking forward, Q4 is historically the quietest flying quarter for Top Aces, as military training exercises are reduced during the holiday season. Having said this, Q4 2008 has started off very strong, with November being Top Aces’ highest month for total revenue in its existence. Top Aces expects that this strong performance in November will drive improved Q4 revenue flight hour volume year over year. Top Aces’ revenue flight hour volume does fluctuate however, in accordance with DND’s demands.

Due to the structure of Top Aces service agreement with the Federal government, as well as the quality and specialized nature of the service provided by Top Aces, revenue flight hour volumes are reasonably predictable on a year-over-year basis. However, the distribution of flight hour volumes over the annual period will not demonstrate such predictable trends.

Top Aces is well positioned for growth, taking delivery of the first two of eight Alpha Jet aircraft which will be used to support current operations as well as to develop opportunities for additional combat support operations outside the company’s current market.

Top Aces does not expect these aircraft to enter into service until July 2009 due to the time required to perform a series of performance upgrades on the aircraft systems. Additionally, Top Aces is now certified on the Westwind aircraft to complete additional target towing operations for the Navy using sophisticated sea skimming targets. The company expects that this new certification will stimulate increased demand for the Westwind target tow service.

Over the course of Q3, Top Aces achieved a certified AMO designation from Transport Canada. The company expects that this certification will facilitate an expanded scope of aircraft maintenance capability which will stimulate improved operational efficiency and flexibility.

Hicks and Lawrence performance over Q3 was negatively impacted by low demand for airborne forest fire management services in Ontario. Reduced demand for these services in Q3 was a result of high levels of precipitation and cool temperatures which were experienced in north-western Ontario throughout the months of June and July. Rain volume in the western fire region increased year-over-year in the months of June and July by 181% and 81% respectively. This increase in precipitation levels resulted in fire activity decreasing year-over-year during the months of June and July by 78% and 79% respectively. The increase in rainfall due to June and July also had the residual effect on the forest fire hazard levels in August resulting in reduced number of fire incidence in the first month of Q3 as well.

The decline in demand for airborne forest fire management support services impacted both the company’s Piston and Turbine divisions. Revenue flight hours generated through the provision of Turbine air charter services to the Department of Justice, as well as the company’s corporate customer base were on par with the previous year. Hicks and Lawrence provides Turbine air charter service through the company’s turbine division, Walsten Air.

This concludes my remarks for this afternoon. I will now turn over the call to our CFO, Mr. Jankura.

Rick Jankura

Thank you David, for providing highlights of our company and its operating activities. I would like to provide a few comments about our reported results.

Firstly I would like to reinforce some comments regarding comparability of quarter-over-quarter results that were made in previous conference calls. We’ve changed our fiscal year end from October 31st to January 31st. As a result there’s been a shift in our quarters. What is the third quarter of our new fiscal year was the fourth quarter in the past.

At the time of our IPO in April 2006, Discovery Air’s operations were comprised of the forest fire suppression services delivered by our Hicks and Lawrence subsidiary. For the quarter ended October 31st last year, Discovery Air’s recorded operations were comprised of Hicks and Lawrence and Great Slave Helicopters for the full quarter.

For the nine month period ended October 31st, 2006, Discovery’s reported operations were comprised of Hicks and Lawrence for the full nine months, and Great Slave Helicopters only from June 20th, the date of acquisition, to October 31st.

The base of Discovery Air’s operations has grown quite significantly during the current fiscal period, to date, due to new acquisitions that have been completed, namely Air Tindi, Walsten, and Top Aces. This precludes any meaningful comparative analysis of results for Discovery Air over that which was reported for the same period in the prior year, year-to-date, or even prior quarters. The resulting financial impact of these acquisitions has been realized in our financial statements at various points in time.

Discovery Air has grown from a company which had revenues of $5.1 million and EBITDA of $2.3 million dollars for 11.5 months ended October 31st, 2005, to estimated revenues of $121 million and EBITDA of $31 million for the current fiscal period ended January 31st, 2008. Of course this increase in scale has also led to an increase in costs at the corporate level, in terms of staffing, travel, costs [and related] overheads. The infrastructure we’ve put in place for the last nine months positions Discovery Air well for managing this growth.

I would also like to highlight and reinforce comments that were made in pervious conference calls on the seasonality of our business operations. There’s a large degree of seasonality in our business operations. Furthermore, even within seasons, the actual timing of revenues is difficult to predict with a high degree of accuracy. There are factors related to environment, such as how long ice roads are in operation, when lakes freeze and thaw, and the degree and timing of forest fire activity, that can have am impact on Discovery Air’s results. As well, customers may change the timing of commencement of exploration projects, and the Department of National Defense does not schedule combat training services in a manner which is highly predictable on a month-to-month basis.

A great deal of our expenses are fixed in nature, but we do have expenses such as payroll costs and other direct operating costs that increase during the busier quarters. As a result, we expect a net loss position in the first and fourth quarters of our fiscal year. However, the second and third quarters are profitable quarters for us given the concentration of business activity during those quarters.

I will now shift to commenting on highlights in the financial performance recorded for our most recent quarter. In terms of revenue from operations, as highlighted in our release today, Discovery Air recorded consolidated revenue of $21.6 million for the third quarter and $101.2 million for the first three quarters of this year, on a total of 25,127, and 66,530 flight hours respectively.

Similar to the second quarter, consolidated flight hours and revenue for the quarter were impacted by the wet weather conditions in northern Ontario that led to a lower demand for fire suppression services provided by Hicks and Lawrence, and Great Slave’s Superior Helicopters in Ontario. However strong demand for services in other markets serviced by Great Slave Helicopters helped to offset these weak fire suppression market conditions in Ontario.

Based on internal management information provided to us by the operating entities related to pre-acquisition flight hours, the combined flight hours for Great Slave and Air Tindi were 8% higher in the current quarter than for the same comparable period in the prior year, in spite of the weakness in the Ontario fire suppression market. Hicks and Lawrence saw its hours reduced by 48% in the recent quarter, as compared to the same quarter in the prior year.

Discover Air’s basic earnings per share for the quarter were $0.05 per share, compared to $0.05 per share for the same quarter in the previous year. Year-to-date earnings per share were $0.11 per share versus $0.14 per share for the same nine month period in the prior year.

Year-to-date earnings per share results are not comparable as the prior year’s earnings only included Great Slave’s for the period from June 20, to October 31, the period in which Great Slave is highly profitable.

Due to the cyclicality of Great Slave’s business, losses would have been incurred during some of the months in the period from February 1, 2006, to June 19, 2006. These would have had the effect of lowering the year-to-date earnings per share in 2006 had this period of operations been included in Discovery’s consolidated results.

In terms of rotary wing division, Discovery Air’s rotary wing division recorded quarterly revenue of $23.3 million on flight hours totaling 16,262 hours. The actual flight hours booked were 10% higher than the flight hours flown in the same period in the prior year. On a year-to-date basis, the rotary wing division recorded revenues of $61.1 million on 43,375 hours flown, an increase of 11% in the hours flown for the same nine months last year.

In the first quarter of this year, total revenue was lower than expected due to the mix of fleet assets from which revenues were generated and the late delivery of the new purchased and leased Eagle Singles helicopters. While the rotary wing division’s revenue generating opportunities in the second and third quarters were impacted by the weak Ontario fire suppression market, strong growth in our natural resource related markets as well as the ability to redeploy aircraft in other forest fire markets resulted in a strong year-over-year growth in hours flown for the most recent quarter in year-to-date.

In terms of our fixed wing segment, in the most recent quarter, Discovery Air’s fixed wing division generated revenues of $18.3 million on 8,865. On a year-to-date basis this division’s generated revenues of $40.1 million on 23,155 flight hours. Since Air Tindi, Walsten and Top Aces were not included in the prior year’s results, a meaningful comparison of quarter-over-quarter and year-over-year is difficult for this division.

In the first quarter, Air Tindi’s revenue was negatively impacted by the long winter road conditions, which resulted in less (flight) hours than expected. As well, a threshold hour level was triggered in one of Air Tindi’s contracts that led to a significant temporary flight rate reduction for an approximate two month period during the quarter.

The company generated sound revenue levels during the last two quarters, helping to offset the weakness in revenues for the first quarter, and that was in spite of the non-recurring Mackenzie delta work, as well as the Ontario fire work.

Flight hours in the most recent quarter were 3% higher than the flight hours logged by Air Tindi in the same period last year. For the most recent nine months, flight hours are 1.2% higher than the prior year. We are pleased with this performance, given that 2007 did not present the strong revenue generating opportunities arising from the conditions that existed in 2006.

Hicks and Lawrence, which included the results of Walsten for the full quarter, recorded lower than expected revenues due to wet conditions in Ontario that led to fewer flight hours than expected. Flight hours arising from forest fire suppression were 48% less than that recorded in the prior year and 41% lower for the nine months into October 31st ,2007. Hicks and Lawrence’s Walsten division recorded 364 flight hours for the quarter and 993 hours year to date. A significant portion of Walsten’s revenue is derived from the internal forest fire suppression activity as well.

The weak market conditions in this segment of its business had an impact on revenue-generated potential in the second and third quarters of this year. Top Aces recorded 692 flight hours in the most recent quarter, which includes the period from August 24 to October 31, these hours were lower than expected for the period. The revenues for Top Aces are relatively predictable over a 12 month period but can vary greatly from month to month depending on its customer’s priorities. Indications are that November has been a very strong month for Top Aces in terms of hours flown and should have a favorable impact on the fourth quarter.

Operating expenses, consolidated operating expenses were largely inline with management’s expectations subject to offsetting variances between the business units. Year-to-date the corporate support function occurred higher than the normal period cost related to stock option expense, investor relation activities and personnel. Year-to-date stock option expenses were $1.6 million. Generally accepted accounting figures require a (inaudible) of during an investment period. The options have a life of 10 years.

Discovery believes that company ownership by its employees to stock options is an important tool for aligning stake holder interest and for regaining employees.

In terms of the balance sheet I just have a few observations I’d like to make. The corporation typically develops its capital plans for the next fiscal period in the fourth quarter of each fiscal period and we’re just going through that planning process with our operating units.

Cash and (inaudible) through our most recent quarter through cash generated by operations. The portion of the cash generated by operations was used to complete funding of the Top Aces transaction, invest in sustaining capital expenditures and make debt repayments. Discovery continues to have a liquid balance sheet with $21.5 million mortgage in capital and availability under its offering line of credit.

The leverage of the balance sheet remains at acceptable levels with funded debt equity reached at a 0.067 if convertible (debentures) are considered a component of equity rather than debt then the ratio falls to 0.48. Total debt to equity is 0.94. If convertible debentures are considered a component of equity rather than debt this ratio falls to 0.71. This concludes the formal part of our conference call. Do you have any questions? David, Shawn and I would be prepared to answer them.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Greg McLeish from GMP Securities please go ahead.

Greg McLeish – GMP Securities

Hi guys. A lot of my questions have been answered, I just had one question regarding EBIDTA margin out of the rotary wing division. It looks like its declined over the last sort of while. I’m just wondering if that’s a product mix issue?

Rick Jankura

It definitely was as David had mentioned there was a lot of demand for the light and intermediate aircraft and that seemed to be where a lot of it (inaudible) and the resource industry was geared towards which of course aircraft was the higher margin than the mediums so that has to deal with the growth that they experienced.

Greg McLeish – GMP Securities

Okay and what is the rationale that the medians are not flying out as much the light and intermediates?

Rick Jankura

Well the medians were still up year over year it’s just that the higher demand seemed to be in the intermediates and the other thing too is that mediums are used largely for forest fire suppression services so of course Ontario would impact that somewhat.

Greg McLeish – GMP Securities

And do you know what the statistics were for the quarter on the year over year decline in forest fires?

Rick Jankura

No. We don’t have that. We try to get that from the ministry but we couldn’t get it in time.

Greg McLeish – GMP Securities

Great I’ll get back in the queue, thanks guys.

Rick Jankura

Thanks Greg.

Operator

Your next question comes from Scott Kaplanis from Macquarie Securities please go ahead.

Scott Kaplanis - Macquarie Securities

Hey guys just a couple of questions. First off in the past on some of your investor presentations you’ve provided guidance for fiscal 2009 in the range of about $50 million in EBIDTA, any comments in terms of the outlook for next year? I know you provided a bit for the remainder of this fiscal year.

David Taylor

Hi Scott it’s David here. Scott, we’re just in the stages of gathering up the budgets from the various operating units and then we’ll be proving them and (calculating) assumptions and so it would be a bit premature to talk about 2009 at this point. Rick plans to release an annual guidance probably in the first quarter of ’09, Rick. Yeah we’re going to go on annual basis from now on. As Rick was saying in his talk the predictability within a quarter is rather difficult although on an annual basis it’s a little easier to give guidance.

Scott Kaplanis - Macquarie Securities

Okay, just a follow question. I was wondering if you could help us out with a bit more of a breakdown on the fixed wing side, specifically I’m looking for a bit more color on revenue contribution from either Top Aces or Air Tindi, the two bigger pieces of the pie there.

Rick Jankura

Yeah. We typically don’t provide that breakdown – yeah we typically don’t provide the breakdown by operating subsidiaries. It’s a little bit hard right now.

Scott Kaplanis - Macquarie Securities

Okay. Thanks.

Operator

Your next question comes from John Grandy from Westwinds Partners please go ahead

John Grandy – Westwinds Partners

Focusing on the forest fires (inaudible) in this quarter obviously the impact on the personnel is self evident but we were a bit shocked to see there was also an impact on Great Slave and I wonder if you could talk a little bit about their business and how much of it is correlated to fire suppression.

Rick Jankura

I’m not sure exactly what the exact percentage of their overall revenues is related to that first question but they service a number of different markets, not only the Ontario market. The Ontario market in terms of revenue was down roughly $1.1 million year-over-year, now they were able to redeploy some of that aircraft in other markets but of course that requires redeployment costs to get them there and – but they were lost opportunities for the company.

John Grandy – Westwinds Partners

Yeah, so that was actually my second question which was if there wasn’t enough demand in Ontario, why not just relocate those helicopters elsewhere but I’m presuming that is quite an expensive thing to do with the rotary wing in the aircraft?

Shawn Clarke

Actually they did redeploy them. It’s just as Rick was saying (inaudible) there was a bit of a delay but actually year-over-year Great Slave’s hours were still up. It’s just that Ontario was usually wet in June and July and we don’t have the stats on how many forest fires there were but I was up there during that time and it rained almost everyday.

Rick Jankura

It also had an impact on Tindi year-over-year revenues as well because they benefited because it was such an aggressive fire season. The year before they benefited significantly.

Shawn Clarke

They would use their Dash-7s to transport fire crews and this year there was no demand for that at all.

David Taylor

Yeah, an evacuation as Shawn just said so it had a damper, a dampening affect.

John Grandy – Westwinds Partners

So it actually runs across all of your operations. I’m not sure that we fully understood that. One more quick question if I may. The utilization rates, is it possible to get the overall percentage utilization for fixed and rotary wing?

Rick Jankura

No. I don’t have those stats available.

John Grandy – Westwinds Partners

Okay. Alright Since you couldn’t answer that one I’m going to try one more. The weather is again impacting us because we had a fairly early winter and I’m curious if you think that means the ice road will open early and will have an impact?

Rick Jankura

It’s hard to tell at this point. It depends on the snow cover or how thick the ice goes, how long it stays in place, so I’m not sure what the extent the snow is covered, the lakes that are frozen. The thick snow cover means thin ice so I’m not sure if we’ll be able to. -

John Grandy – Westwinds Partners

You don’t want to take a twenty-four wheeler over thin ice, right?

Rick Jankura

That’s right.

John Grandy – Westwinds Partners

I understand. Thanks Very much guys.

Operator

Your next question comes from Greg Colman from Wellington West Capital Markets, please go ahead

Greg Colman - Wellington West Capital Markets

Hi gentlemen just focusing on the margins going forward I note in your presentation, in your reporting that you call for 31 million on a 121 million for the year, which implies around 25.5% EBIDTA margins. Could you comment on that versus what you expect going forward; I know you’re not perfect providing actual numbers on EBIDTA expectations but perhaps margin expectations?

Rick Jankura

You know we would expect EBIDTA levels to be in the 28-29% level after corporate overhead costs. We did have a number of one-time costs this year that didn’t factor a run rate on expenses.

Greg Colman - Wellington West Capital Markets

Okay and again just keeping on the same lines there. I know that $31 million on EBIDTA is down from about 37 or 38 if I recall correctly from prior presentations. Can you account for that $6 million in EBIDTA and sort of where it comes from either by division or by event or geography I suppose?

Rick Jankura

I would say it’s fairly broadly spread across the group certainly the - part of the problem that we have Greg is that most of our costs are fixed based in nature so if you take for example something like a Hicks and Lawrence, they have to have dedicated service in place whether or not there are fires or not. I mean we do have minimum hour guaranteed that do protect us somewhat but we do make a lot more money when our aircraft are in the air than when they’re on the ground. For example in the first two quarters their revenue in the last two quarters their revenue was down roughly a $1.3 million so that would drop rate to the bottom line. Similar with any of the other (inaudible) that we saw when you’ve got, with the Air Tindi in first quarter, with the ice roads it’s a similar situation, typically those dollars would drop right to the dollar line.

Greg Colman - Wellington West Capital Markets

Okay Thanks very much.

Rick Jankura

Thanks Greg.

Operator

Your next question comes from Stephen Gold from Claire Securities please go ahead

Stephen Gould – EAU Claire Securities

Good Afternoon. David this question’s for you in regards to Top Aces. Obviously it was a movement away from the other businesses that we had seen a lot in the last year and a half, having dealt with that last quarter. I’m curious do you still think you can grow that business by 20 to 30% over the next few years?

David Taylor

I’m not sure the exact percentage that we could grow it by but I certainly hold out high hopes for significant growth in that business. As you know, they’re a unique group of people with unique assets and there’s quite a demand throughout the world for that type of service. So I would see Top Aces’ service appealing to United States, UK, and with the new Alpha Jets that they’ll have soon at their disposal, I would expect some pretty significant growth.

Stephen Gould – EAU Claire Securities

So you guys still have a preference to Canada, or an extension to that question, do you consistently go bid on various contracts out there? I’m just trying to get an idea of how this process will work.

Rick Jankura

Yeah, they’re having a look at providing additional services to the Canadian forces and also they’re having talks with the U.S. forces. I would see increased revenue flowing from additional contracts for the Canadian forces and hopefully we’ll see something in the United States.

Stephen Gould – EAU Claire Securities

Okay, if I could just sneak in just one more question here, Rick this one’s probably for you. You had talked about - from the financing charges perspective that there’s a new facility in place, give us an idea of what sort of cost savings and at least interest savings it will provide us for in 2008, well calendar 08’ and 09’.

Rick Jankura

Yeah, well we’re still working on that, with hopefully closing by the end of this month. It’s not so much the cost savings that it will drive, it will drive some interest rate savings, but it’s more so the flexibility that it provides us in terms of the structure of the credit that is attractive for us.

Stephen Gould – EAU Claire Securities

It increases the free cash flow.

Rick Jankura

It increases the free cash flow.

Stephen Gould – EAU Claire Securities

All right, thanks guys.

Operator

Our next question is a follow-up question from Scott Kaplanis from Macquarie Securities, please go ahead.

Scott Kaplanis - Macquarie Securities

Hey guys, just one more quick one. Discovery Mining, what had been the deal with delays in closing that and what’s left to be done in getting that one closed?

David Taylor

Hi Scott, it’s David. Scott, we just allowed them some more time to do some tax planning and with the Christmas season coming we’re looking at sometime in early January after the festive season is over.

Scott Kaplanis - Macquarie Securities

Okay, great, thanks.

Operator

Your next question comes from Jaques Kavafian from Research Capital. (Operator Instructions).

Jaques Kavafian - Research Capital

Hello and good afternoon, I’ll try this one more time, someone else did it before. But from Top Aces, can you break down some numbers? I know you traditionally haven’t done this, but you traditionally haven’t owned Top Aces either.

David Taylor

Yeah, I mean we gave you guys an hour (call-up) in terms of that, and really that’s where it really isn’t reflective of the potential of Top Aces. I mean the one thing that we do know is that they have, based on their current standing offer agreements, a commitment towards $35 million in revenue based on the training services that they provide on an annual basis. The problem that you have with Top Aces is that there’s no predictability from month to month when those call-ups are going to happen. So for example, while in September and October the hours of call-ups were lighter than we had anticipated, in November they were extremely stronger.

Jaques Kavafian - Research Capital

It was a record month in November.

David Taylor

It was a record month in November. So the problem you have is the quarter-over-quarter and month-over-month predictability of what those revenues are going to be for Top Aces. But we’re pretty sure because of the contracts that it is going to be at a minimum of $35 million because that is the budget allocation that has been made by the government. Plus there are some additional discretionary funds that are available as well.

Jaques Kavafian - Research Capital

And of course I don’t have (inaudible) comments are after the preliminary talk that a good portion of December and into January is (canceling) all flying during the holidays. It takes a bit of a bite out of Q4?

David Taylor

Other than that, that is about the only certainty we know in Top Aces, is that during the festive seasons there will probably be no planes flying.

Rick Jankura

Exactly, during their slow months, December, January, July, and August because of DND holiday schedules.

Jaques Kavafian - Reearch Capital

Alright, thank you.

David Taylor

Thanks Jaques.

Operator

Our next question comes from Cameron Doerksen of Versant Partners. Please go ahead.

Cameron Doerksen - Versant Partners

Good afternoon, I guess just a question on the Discovery Mining services. When you go to put that in the segmented information, where’s it going to be slotted?

David Taylor

That’s a good question; we haven’t addressed that one yet.

Rick Jankura

Yeah, probably it would fit into – well it’s interesting he asked that because we have a rotary wing and a fixed wing division and that company fits right between the two of them in Yellowknife.

David Taylor

Although I think most of their dollars are driven from fixed wing services.

Cameron Doerksen - Versant Partners

So you’re probably going to put it into one or the other and not create a new segment given the size?

David Taylor

Yeah, we’re going to have to take a look at the handbook guidance on that.

Cameron Doerksen - Versant Partners

Okay, and just sort of falling on that month you have that acquisition closed, what’s the outlook for additional acquisitions, what’s the pipe (follow on) look like?

David Taylor

Well there are a number of companies that are attractive to us and we’re in various stages of discussion with them. At this point, though we couldn’t do any, sort of, more firm guidance as to what we think the number will be that we close in the upcoming year. There are at least a half a dozen good companies that would fit nicely into our group.

Cameron Doerksen - Versant Partners

Great, that’s all I had, thanks very much.

David Taylor

Thank you.

Operator

Your next question comes from Greg Colman; it’s a follow-up question from Wellington West Capital Markets.

Greg Colman- Wellington West Capital Markets

Hi gentleman, just a last follow-up question. Coming back to the margins again, with the 28-29% (fundamental) guidance for the upcoming year, that was a little bit lower than what I was modeling and expecting. Every acquisition that we’ve seen you do has sort of had the guidance in line with our existing businesses, so I’m wondering if 28-29% is indeed what we’re going to be expecting to see from all the businesses, or if it’s sort of a little bit different than what you had expected initially.

David Taylor

Well Greg, all our businesses have EBITDA margins, except for Hicks & Lawrence this year because of the fire season, have EBITDA margins in excess of 30%. The problem is corporate expenses come off the top and also the stock option expenses, which is the equivalent of about 2% of revenues. So I mean, that needs to be taken into consideration as well.

Rick Jankura

Yeah, we’re trying to be a little conservative.

David Taylor

We’re being conservative. I mean until we have the budgets together from the operating units.

Greg Colman - Wellington West Capital Markets

Oh really? And if I may, just on the back of the question on the pipeline of acquisitions, especially in lieu of current currency performance, is that the type of thing you would anticipate executing on in the near-term or possibly mid-year or late-year, or will it be an opportunistic decision?

David Taylor

Are you referring to our new acquisitions?

Greg Colman - Wellington West Capital Markets

Well just because you have historically always guided toward a 2/3 share 1/3 cash purchase is what we’ve seen you do, at this point the share purchase component could make it incredibly expensive for existing shareholders.

David Taylor

Oh absolutely. We certainly take that into consideration if we are lucky enough to find somebody whose shares are also down, whose units are down, whose values are down. I suppose we could still look at some sort of share exchange. Bur right now of course we believe our stock is grossly undervalued, and we’d be hard-pressed to take any out of treasury at these prices.

Greg Colman - Wellington West Capital Markets

Okay, thank you David.

Operator

(Operator Instructions). Our next question comes from Bert Griffin from Berkshire Securities.

Bert Griffin - Berkshire Securities

Hey guys, my question is with all these acquisitions you’re doing, what steps are you guys putting in place doing to secure key employees? Are you tying them in for a certain amount of time? Or what are you guys doing to tie in employees?

David Taylor

Well generally Bert we have contracts for key employees so they sign contracts. We have long-term options to keep them excited; of course they’ve all taken back considerable number of shares to keep the incentive to grow the amalgamated company. So far, everyone that’s come on has been relatively younger and excited about the prospect of growing their business within the Discovery Air group. It is possible of course that we would take over a company where let’s say the founder is looking for retirement and at that point we would have to being in someone to replace him and be mentored by the founder that’s (inaudible).

Bert Griffin - Berkshire Securities

Okay, that answers my question, thank you.

David Taylor

Thanks Bert.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Hello and good afternoon gentlemen. Gentlemen, I’m calling in with a general question. There’s been some talk in the media concerning, as you probably are aware, climate change and greenhouse gasses, etc. and the issue of carbon offsets has come to the floor. I bring it actually because there is a company out here in Vancouver called Harbor Air, apparently they are going to buy carbon offsets from a company called Offsetters Climate Neutral Society and they are going to be paying for it with a surcharge from their flight services. Do you intend to do anything like that?

David Taylor

Well Steve, it’s David talking, we’ll certainly take a look at it. I’ve got some material that I think you sent to our Chief Operating Officer, so, I don’t know much about that, but we’ll take a look at it next year.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions)

David Taylor

Thanks everyone, have a Merry Christmas and a Happy New Year, we’re sitting here in London, Ontario where it looks a lot like Christmas out our window, all kinds of snow. So thank you, bye.

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Source: Discovery Air Inc. F3Q08 (Qtr End 10/31/07) Earnings Call Transcript
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