Exchange Income Corporation

Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the three-month and 12-month period ended December 31, 2021. The corporation results, including the MDNA and financial statements, were issued on February 23, 2022 and are currently available via the company's website and CEDAR. Before turning the call over to management, Listeners are cautioned that today's presentation and their responses to questions may contain forward-looking statements within the meeting of the safe harbor provisions of Canadian provincial securities laws. Forward-looking statements involve risk and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in forward-looking and 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 differ materially from expectations and about material factors or assumptions applied in making forward-looking statements. Please consult the MD&E for this quarter, the risk factors sections of the annual information form. and exchange other filings with the Canadian securities regulators. Except as required by Canadian securities law, exchange does not undertake to update any forelooking statements. Such statements speak only as of the date made. Listeners also reminded that today's conference 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 Powell. Please go ahead, Mr. Powell.

Thank you, operator. Good morning, everyone, and thank you for joining us this morning on EIC's year end conference call for fiscal 2021. For the sake of brevity, my comments will be focused on the 12 month period ended December 31st, 2021. I will be glad to answer Q4 specific questions during the question and answer period following our scripted remarks. With me today are our EIC's president, Carmel Peter, who will provide some operational commentary and provide insight into the outlook for the company in 2022, and Daryl Berkman, our CFO, who will provide a more detailed breakdown of our financial results. 2021 was the second year in which we have operated in a pandemic environment. COVID is anything but predictable. as the intensity of the pandemic waxed and waned with each successive wave, while EIC, and in fact all companies, have refined operations to adapt in this uncertain environment, never in our history has the power of stability through diversity been more evident. Despite considerable exposure to the shutdowns created by the government to curb the transmission of the disease in our aviation business, and supply chain and inflation issues, which hit our manufacturing businesses, we not only maintained our dividend, but also hit record highs in many financial metrics. We completed a company high five acquisitions in 2021, invested in organic growth, strengthened our balance sheet, and eliminated all debt maturities through 2025. Quite simply, diversification works. and consistent implementation of a proven plan leads to strong execution and success, even in the most difficult environments. First, I would like to focus on the financial highlights of 2021. Daryl will focus on the details later in the call, but I would like to hit on some key metrics. Revenue reached an all-time high of $1.41 billion, an increase of 23% over 2020, and an increase of 5% over our previous high in 2019. Adjusted EBITDA also reached an all-time high of $330 million, an increase of 16% over 2020 and less than 1% higher than the previous high in 2019. Adjusted net earnings grew by 82% to $86 million or $2.31 per share. Our dividend payout ratio of 58%, when calculated on a free cash flow, less maintenance capital expenditures basis, is a significant improvement from 2020, when the ratio was 71%, and only very slightly higher than in 2019, when it was an all-time best 57%. When calculated on an adjusted net earnings basis, it strengthened to 99%. from 169% in 2020, but was still well short of the 71% achieved in 2019. EIC generated significant improvement over 2020, despite a dramatic decline in the level of government support in 2021, when most government programs related to operations were realized in the first half of the year. The financial success generated in 2021 was not simply the result of management focus on adapting to the challenges that arose during the year. Rather, we benefited from the long-term perspective taken in previous periods, which put the company in a position to prosper in 2021. At EIC, we have always believed in taking the long-term perspective to our thinking. And in 2021, we laid the groundwork for future growth and enhanced profitability. In 2021, we have invested in internal organic growth opportunities, major new contracts, and acquisitions, all while enhancing our already strong balance sheet to enable us to move quickly when the right opportunity presents itself. The challenges faced in aviation through the pandemic are well known, and I do not intend to review these at this point, other than to say our passenger operations have proven to be very resilient, because of their essential nature and rebound quickly when travel restrictions are lessened or removed. We have attacked other opportunities while we wait for these operations to regain their full stride. The pandemic saw major carriers significantly reduce their coverage in the Maritimes, leaving many communities underserviced or without service entirely. PAL has added flights to many of these communities, expanding our geographic range and setting up the company for further growth as markets normalize. Palo, however, is a regional carrier and doesn't have coverage outside of Eastern Canada. They therefore entered into interline agreements with the major carriers to ensure connectivity to their complete networks. We developed new opportunities in the mining and exploration segment of our business. Increased activity in this sector has created demand for contracted charter work in both the Maritimes and Central Canada, with the potential for greater demand in Nunavut as well. We augmented existing relationships and signed new contracts to significantly grow this business and are bullish on further opportunities in the future. In order to fully take advantage of our market expansion and charter growth, PAL made the decision to increase the gauge of aircraft it operates. It had previously utilized the fleet of Dash 8 300 aircraft and replaced these with the larger Dash 8 Q 400 aircraft. This increased capacity without increasing flying powers, thereby growing revenue and enhancing margins. We did not dispose of the Dash 8 300 aircraft, however, as perimeter operates a fleet of Dash 8 100s and Dash 8 300s. 300s were turned into combi aircraft and freight aircraft and our deal aircraft for not only the new contracted charter work, but to augment perimeters regular scheduled fleet. The acquisition of one type of aircraft helped meet the lift demand for two of our airlines. We also added capacity to Comair, who has seen very strong freight demand persist, even as passenger levels increase. we added the newer generation ATR72500 aircraft to our fleet, enhancing both pure freighter and combi passenger freight capacity. This fleet rationalization will enable a stronger rebound as the pandemic comes to an end. We saw the strong performance of our medevac business during the pandemic as demand remained strong throughout. It has always been a key piece of our operations. but the consistency over the past two years has increased our desire to grow our footprint, both geographically and through enhanced product offerings. We took steps in both areas during 2021. In July, we completed the acquisition of Carson Air, headquartered in Kelowna, British Columbia. Carson provides freight services and operates a flight school, but its core competency is medevacs. They are the main provider of fixed-wing services to the government of British Columbia. They are clearly a Canadian industry leader with an exceptional management team. Carson expands our coverage area and provides a platform from which to expand into Alberta, Northwest Territories, and the Yukon marketplace. Through a partnership between Custom Helicopters and Kuwait Air, we founded TraumaFlight, our first entry into the rotary wing medevac and emergent care business. We obtained our first license in the province of Manitoba. where we've begun operations in underserviced areas of the province. We are looking to expand this offering into BC, where we're in the process of bidding on the BC EMS Rotary Wing RFP. Utilizing Kuwait's proven knowledge of medical transport derived from decades as the lead and now only service provider in Nunavut, together with Customs Rotary Wing Experience, we have built a new product offering, which we believe will augment our current fixed-wing business We've also continued to invest in our aerospace business and our maritime surveillance business in particular. In August 2020, we announced that we had won the bid to provide maritime surveillance service to the government of the Netherlands, and we've been preparing the necessary aircraft through 2021. Despite the challenges of COVID and increases to the scope of the contract, we are on track to deliver the aircraft in mid-2022 and go into service later during this year. We also announced that we had won the RFP to continue providing surveillance services in Curacao for a further 10-year period. We are busy updating, upgrading, I'm sorry, the aircraft to maintain our Caribbean operation. We also began the construction of a new large hangar at the EIC campus at the James Richardson International Airport in Winnipeg. This hangar will be utilized by our Comair operations. facilitating the use of COM's existing hangar as the heavy overhaul facility for our northern fixed-wing search and rescue contract for the Government of Canada. We are actively searching out contract opportunities throughout the globe and are actively involved with a bid to provide aircraft to the Government of Malaysia. We expect to know if we are the successful candidate later this year. We have also utilized our strategy of broadening our product offering through the very recent acquisition of CTI, located in Memphis, Tennessee. CTI is a strong management team centered in its founder and has built a reliable, growing business providing training services focused, but not exclusively in a classroom setting, to the American Navy and Air Force. The transaction was very difficult to structure to ensure the Canadian public company ownership would not impair the American government contracts. But this has now been accomplished and has opened the door to the biggest market in the world for EIC services. CTI has considerable unmanned aircraft experience, which will be helpful to PAL as it looks to expand its fixed-wing service offering. Additionally, PAL has deep roots in the Middle East and through its contract in the UAE, which can help CTI grow in the region. Regional 1 has been active throughout the pandemic, looking for buying opportunities where assets in our area of expertise are available at distressed prices. While we've been somewhat surprised by the limited number of liquidation scenarios, we've been able to buy some assets which will drive future growth. Early in the pandemic, for example, we purchased a fleet of seven Q400 aircraft, all of which have now been deployed externally, internally, or parted up. Our net investment at Regional 1 in growth capital expenditures and additional inventory climbed to $70 million in 2021 from nil in 2020. We were also active in our manufacturing sector. West Tower, Canada's leader in the supply, installation, and service of cell phone towers, has been anxiously awaiting the rollout of 5G technology. With this process now underway, we want to make sure that we are maximizing our share of this opportunity. To that end, we have added underground capabilities in both Eastern and Western Canada to our above-ground expertise. The phone carriers prefer to have one-stop solution for the 5G integration, and this allows us to provide this. We accomplished this through the acquisition of Telco, Telcon, I'm sorry, and Ryco during 2021, who have proven expertise and capability in the underground work. Ben Machine has performed well since it's being acquired by EIC and exceptionally well during the pandemic. Continued organic growth has been met through the addition of more production equipment, but the outlook showed that our customer needs may exceed our capacity. Accordingly, we sourced additional capacity through the acquisition of MacFab, a local company with similar capabilities but a different customer base. MACFAB was a proven entity, and the acquisition was accretive on a standalone basis. But the opportunity for both revenue and cost synergy made it a very enticing opportunity. ESG is a very topical matter, and I would like to take a moment to review EIC's progress in 2021. ESG is the acronym for Environment, Social, and Governance. We have been focused on all three of these areas since our inception, And it is not the recent spotlight on the area that has driven our behavior. A significant portion of our aircraft business involves flying aircraft, which by their very nature have a significant carbon footprint. We have been concerned about this issue and have been looking for ways to make incremental improvements. We have invested in projects like the design of new multi-blade propellers, which generate more thrust with less fuel. We updated our fuel storage facilities in Canada's north to prevent spills, along with other projects. We are currently involved in both electric and hydrogen experimental propulsion systems with the hope of replacing carbon-based fuels. We have also implemented new software to help us track our carbon salt usage and look for means of improvement year over year. Social topics. Social topics are important factors for EIC, especially in communities where we have deep roots and are highly committed. We view community engagement as the single biggest factor, and we've always been committed to investing back into the communities we service, particularly northern First Nation communities. I want to take a brief moment to discuss two such investments. Economic development is very challenging in isolated communities. And as a result, most suffer from chronically high unemployment. Fishing is a traditional activity that can provide economic opportunity. Unfortunately, the market price for many species of fish are not high enough for the fish to be profitably exported to customers unless they are processed in the community. We were approached by one of the communities we service with the idea of establishing a plant to fillet and flash freeze the fish caught by local fishermen. The First Nation did not have the necessary capital to make this happen on their own and asked for our help. We have made a significant investment in this plan through forgivable loans and look forward to its completion and the economic opportunity it will undoubtedly provide. We've also prided ourselves on a commitment to provide First Nation youth the opportunity to travel south and attend a major sporting event. That would be very difficult for them without financial support. We started this program several years ago where we bring in youth from a given community and host them at a Winnipeg Blue Bomber or Winnipeg Jets home game. Unfortunately, in 2020, this was impossible as the CFL did not play and the NHL played without fans. As such, when the CFL returned to operation in 2021 and fans returned to the game, we wanted to make a significant investment. We wanted to continue to expose youth to a professional sporting event, but we also wanted to draw much-needed attention to the Every Child Matters campaign. To that end, with phenomenal partners in the Assembly of Manitoba Chiefs, MKO, together with the Winnipeg Blue Bombers and the Edmonton Elks, who wore orange jerseys in warm-up in recognition of the importance of this issue, we brought approximately 1,000 First Nations people for the game. We provided them with bright orange bomber gear and made a very real statement about the importance of reconciliation. There were not many plays in the game where TSN cameras did not have an orange shirt in the background. Social responsibility is not just part of our ESG commitment. It is part of our DNA. We have followed best practices in corporate governance since our inception, and we intend to maintain this for as long as we exist. 2021 was a challenging year, but a very rewarding one. I am proud that we've been able to deliver strong results in a challenging environment with many metrics at an all-time high. I am also proud that we've continued to invest in our future, and I can confidently say that the best is yet to come. Thank you very much, and I will now hand off the call to Daryl, who will take you through the financial results.

Thank you, Mike, and good morning, everyone. Before I present the financial results for fiscal year 2021 and Q4 2021, I would like to take a moment to highlight some notable financial achievements this year. As we have demonstrated, the challenges that were faced throughout the pandemic and overcome are a testament to the resilience of EIC's business model, which continues to prevail. This is supported by strength in our management teams across the organization, a disciplined focus on continued strength and diversity in our portfolio, and attention to keeping the balance sheet strong, which was evident in the year through the completion of the most acquisitions the corporation has finalized in one fiscal year in its history and the successful completion of three separate bought deal offerings for a total of $347 million, along with the extension of our syndicated bank credit facility out to August 2025. Giving our success in that respect, it is my pleasure to now review for you in greater detail our full year 2021 and Q4 2021 financial results. My first comment will be to highlight the presentation change in the MD&A from EBITDA to adjusted EBITDA, which was completed to comply with the required changes the Canadian Securities Administrators issued under National Instrument 52112, non-GAAP and other financial measure disclosures. Prior year comparatives of EBITDA to adjusted EBITDA are unaffected by the presentation change. The corporation continued through 2021 to maintain its strong liquidity and rock-solid balance sheet. Highlights from the year include the three separate BOT deals, which I will touch on. The sum of these actions has strengthened our balance sheet by increasing our equity, enhancing our liquidity, and after the subsequent redemption in Q1 2022 of the maturing December 22 convertible debentures, removed all debt maturities prior to July 2025. All told, the corporation was able to generate $163 million in additional net liquidity after costs and after the redemption of the convertible debentures set to mature in 2022 and 2023. The first of the buy deals was an equity offering in the second quarter for $88 million, where most of the funds generated were utilized within the third quarter with the acquisitions of Carson and McFab. The next, in the third quarter, was a convertible debenture offering generating $144 million, where funds were used to redeem the June 2016 debentures set to expire in June 2023 and to make a repayment against our long-term debt. The third was in the fourth quarter, where we completed a second convertible debenture offering generating $115 million. Funds from the offering were used to repay indebtedness and then subsequently to December 31st, 2021, deployed to redeem the December 2017 debenture set to expire in December 2022. In addition to these buy deals, in the third quarter, the company also successfully extended its syndicated credit facility to August 6th, 2025, on terms consistent with its prior facility. Given all this activity within the year, it's important to acknowledge the strong support we continue to receive from both the capital market and our banking partners. In all of the offerings completed, the broker over allotments were exercised, demonstrating continued strong support from the markets. Furthermore, the bank facility extension was fully supported by our bank partners and completed in short order, again, demonstrating continued strong support. The size of the corporation's credit facility as at December 31, 2021, remained unchanged at approximately $1.3 billion. The corporation retains the ability to access an additional $300 million in the accordion feature should it choose to exercise it, giving the corporation a combined access of up to $1.6 billion. Utilization of the corporate credit facility was $711 million at the end of the period, reducing this by the $75 million in cash on hand. The result is a net debt of $636 million. As a result, the corporation is very well positioned to continue to meet all of its needs, maintaining access to liquidity and access of $664 million, excluding the accordion. The corporation ended the period with networking capital of $225 million, a current ratio of 1.47. Notably, the current ratio was temporarily impacted at the end of 2021 by the convertible debentures due in December 2022, being recorded as a current liability at year end. The successful redemption of the December 2022 convertibles subsequent to year end eliminated the current liability in Q1 2022. As Mike noted, revenue for 2021 reached an all-time high of $1.4 billion, an increase of $264 million, or 23%, over last year. Aerospace and aviation segment revenue increased by $230 million, while manufacturing revenues rose by $34 million. Specific to aerospace and aviation segment, revenue was up 33% to $917 million. Revenues from the legacy airlines and provincial increased by $155 million for the year. Driving the year-over-year increase was the improved demand for air travel in the second through fourth quarters of 2021, which was partially offset by the prior first year's quarter results which reflected more normal pre-pandemic results. The company continued to see strong demand in its cargo, medevac, and rotary wing operations, including strong EMS and fire suppression activity. Increasing support for mining exploration also contributed to the overall improvements. The corporation's on-demand ISR platform also continued to perform very well and contributed positively to the annual results. At regional one, Revenue increased in 2021 compared to the prior year by $75 million. Regional 1's two main streams of revenue include sales and service revenue and lease revenue. Sales and service revenue increased by 72% over the prior year. Two and a half months of pre-pandemic results in Q1 2020 partially offset the overall improvement year over year. Regional 1 experienced a strong recovery in sales and service revenues, specifically in larger sales of whole aircraft and engines in the third and fourth quarters of 2021 compared to the prior period where many of these types of sales were canceled or postponed. Lease revenue decreased by 1 million or 2% over the year. That said, the prior year included Q1 results that were almost entirely unaffected by the pandemic. Lease revenues in Q2, Q3, and Q4 of 2021 increased over the same periods from the prior year, with Q4 2021 revenues more than two times greater than Q4 2020. Both the sales and service revenues and the progressively better results in lease revenues are reflective of air travel starting to pick up around the world and most notably in the U.S. Turning now to our manufacturing segment, revenue grew by $34 million over the prior year, for a total of $496 million in 2021. While still facing many of the impacts brought on by the pandemic, collectively, the manufacturing segment's revenues remained resilient. The three strategic acquisitions later in the year of McFab, Telcon, and RICO added some support to the increase in revenue, but more importantly, increased internal capabilities and opportunities for growth with new customers going forward. Turning to adjusted EBITDA. During the year, the corporation did avail itself to the SEWS program offered by the Government of Canada. The receipt of $18 million was used, as intended, under the program, which entailed, in part, to help offset increased health and safety costs and operating inefficiencies within the manufacturing segment. Comparable to 2020, SEWS received by the corporation decreased by $46 million. Also reaching an all-time high for the corporation in 2021 was adjusted EBITDA. Consolidated adjusted EBITDA was $330 million, up 16% or $45 million for the year compared to the prior year. Generally speaking, the increased adjusted EBITDA is attributed to lessening impacts of the pandemic over the course of the year and acquisitions made in 2021. Adjusted EBITDA in the aerospace and aviation segment in 2021 was $288 million, an increase of $70 million compared to the prior year. Adjusted EBITDA generated by the Legacy Airlines and Provincial increased by $54 million. The increase in adjusted EBITDA for the Legacy Airlines was principally driven by the same underlying contributors previously discussed as related to revenue, along with the acquisition of Carson Air in July 2021 also contributing to the improvement. Adjusted EBITDA from Regional 1 increased by $16 million from the prior year. Again, the drivers for revenues are the underlying contributors to the increase in the period. In the manufacturing segment, adjusted EBITDA was $73 million, a decrease of $15 million or 17% compared to the prior year. Most of this decline was driven by the lower SEWS payments received in 2021. Absent of the SEWS, adjusted EBITDA fell 5%. Third and fourth quarter 2021 impacts related to supply chain disruptions leading to Increases in raw materials and transportation costs, more significantly at Quest, all contributed to the lower adjusted EBITDA. Quest aside, and excluding the impacts of the SEWS program in both periods, collectively the balance of the manufacturing segment experienced an increase in adjusted EBITDA. Within the manufacturing segment, the addition of tuck-in acquisitions completed in 2021 positively impacted adjusted EBITDA compared to the prior year. Net earnings for the year totaled $69 million, an increase of $41 million from the prior period. Net earnings per share improved to $1.84, an increase of 130% from 2021. Notably, in the period, the weighted average number of shares increased by 6%, which partially offset the increases on a per share basis in net earnings, adjusted net earnings, and free cash flow. EIC reported adjusted net earnings of $86 million for the 2021 year, representing an increase of $39 million, or 82%, compared to the prior year. The company also delivered adjusted net earnings per share of $2.31, up 71% over the prior year. In 2021, free cash flow generated by the corporation increased by 23% over 2020 to $243 million, or $6.53 per share. This outcome is driven by the increased adjusted EBITDA in the period. Free cash flow less maintenance capital expenditures per share increased 22% to $3.95 per share or from $3.23 per share in the prior period. The free cash flow less maintenance capital expenditures payout ratio compared to the prior year was 58% in 2021, a significant improvement compared to 71% in 2020, and only slightly higher than 2019 at 57%, which represented EIC's all-time best at the time. Now let's quickly turn to a short summary for the results specific to Q4 2021. The primary explanations for the financial results and changes in the quarter are largely consistent with the drivers for the year to date, although the rise of the Omicron variant in December contributed to reducing both revenue and earnings in the current quarter. Where there are notable differences, I will provide additional detail. Consolidated for Q4, EIC generated revenue of 390 million, which is up 89 million or 29% from the comparative period. Of the increase, 86 million was attributed to aerospace and aviation segment, and an increase of 3 million to our manufacturing segment. Aerospace and aviation segment revenue increased by 49% to 261 million for the quarter, revenue from the legacy and provincial increased by 50 million over the comparative three month period. For regional one, revenue in the fourth quarter 2021 increased by 36 million or 112% compared to the prior period. Notably during the fourth quarter, both revenue streams, sales and service and lease revenues increased compared to Q4 2020. Now turning to our manufacturing segment, revenue grew by 3 million in the fourth quarter versus the comparative period. The total revenue for this segment was $129 million. Adjusted EBITDA generated in Q4 2021 was $89 million, an increase of 9% or $7 million from the comparative quarter in 2020. Adjusted EBITDA contributed by the aerospace and aviation segment in the fourth quarter increased by $17 million to $78 million compared to the prior period. Adjusted EBITDA generated by the legacy airlines and provincial increased by $5 million. Regional 1 contributed adjusted EBITDA of $21 million for the quarter, an increase of 130% from the prior period. In the manufacturing segment, adjusted EBITDA was $19 million, a decrease of $6 million in the fourth quarter of 2021 versus the prior period. That said, despite the supply chain challenges leading to the increased raw material and transportation, demand in the segment remains strong. And again, the tuck-in acquisitions in 2021 add new internal capabilities and opportunities for continued growth. Net earnings in Q4 2021 were $23 million, an increase of $10 million compared to the prior period. Net earnings per share in the period were $0.61, an increase of 61% compared against the prior period. The corporation recorded adjusted net earnings of $28 million in the fourth quarter 2021 and an increase of $9 million or 49% compared to the prior period. Adjusted net earnings per share increased by 40% to $0.74 compared to $0.53 in Q4 last year. Again, it should be noted that in the period, the weighted average number of shares increased by 7%. Again, this impacts per share amounts for net earnings, adjusted net earnings, and free cash flow. During the fourth quarter of 2021, free cash flow generated by the corporations was $72 million, an increase of $12 million, or 20%, from the comparative period. The primary reason for the increase is the 9% increase in adjusted EBITDA and a decrease in the current tax expense. Free cash flow less maintenance capital expenditures increased by approximately 2 million or 4% over the prior period. Finally, despite the continued challenges associated with the pandemic faced in the quarter, the corporation's free cash flow less maintenance capital expenditures payout ratio was a respectable 50% in the period. That concludes my remarks for today. I will now pass the call over to Carmel.