Exchange Income Corporation

Conference call to discuss the financial results for the three-month and 12-month periods ended December 31st, 2022. The corporation's results, including the MD&A and financial statements, were issued on February 22nd, 2023 and are currently available via the company's website or CDAR. 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 meanings 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&E for this quarter, the risk factor 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. Buy 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 community's our operations are privileged to serve and where our employees live, work, and play. Well, 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 Waurick, our CFO, who will speak to financial results, and Carmel 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 on an adjusted debt earnings basis improved to 73% from 99%. These improvements were notwithstanding two 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 two 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 our 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. The means by which we deploy our capital varies year to year and ensures 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 were excited to successfully complete the diligence and announce the acquisitions in our second quarter. The first of those acquisitions, Advanced Paramedics, located in Grand Prairie, Alberta, was a Tuckian 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 travel. 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 Carmel to elaborate on later in the call. In addition to the investments made in 2022, we also benefited from the investments that were made in previous quarters, including PAL's delivery of two 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 of revenue in 2023. The Tuckian acquisitions of RICO and Telton that were made in 2021 to expand West Tower'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 West Tower 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 capitalized on increased capacity from the acquisitions. 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 continued to manage in a post-pandemic environment and focused on growth opportunities. We launched TraumaFlight, which is a partnership between Kuwait, our northern medevac provider, and Custom, our rotary wing helicopter company. The launch of providing Rotary Wing Medivac services to northern Manitoba addresses a significant gap in providing emergency medical services for remote, hard-to-reach areas, giving residents in those areas equitable access to 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 owing to the backlog for medical and diagnostic appointments in 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. Parts sales are 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 has been plagued by travel restrictions and now pilot shortages. While recovery of Regional 1 has been slower than anticipated, specifically with respect to the leasing of aircraft, we have seen activity with its engine lease portfolio improve, and Carmel will speak to that in her remarks. While Quest continued to manage through production gaps in 2022 caused by pandemic disruptions, we saw their 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. It's these type of accretive investments in our subsidiaries, entrepreneurial spirit of our management teams, and disciplined management that 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 $150 million in common share equity at the highest price in our history. Demand for the issue was strong. and positioned us to quickly take advantage of investment opportunities in 2023. Sustainability, although we've not always evolved 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-obey sector. Real progress to reduce our carbon footprint will require decarbonization of the aviation operations, and not simply carbon offset initiatives. Decarbonation requires partnership and innovation, especially considering the harsh northern environments our aircraft operate in and provide services. As we have in the past with things like the development and innovation of multi-plane propellers, the implementation of weight reduction programs, upgrading aviations to modern glass cockpits, and upgaging 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 2022 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 can have an immediate impact on protecting our environment and improving agency efficiency, such as the temporary access solutions provided by Northern Bath that facilitate the construction of clean energy sources and the energy efficiency 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 and 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 the CFL game. With the reduced travel restrictions during the year, we were able to restart our Winnipeg Jets VIP experience where youth from our communities are hosted at an NHL 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 ATIC 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 removes significant barriers for Indigenous individuals wanting to pursue aviation careers, including cost, location, and cultural difference. We were thrilled to celebrate 11 individuals completing the first step of their pilot training this year and 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 were 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 their specific needs in mind. Based on those consultations, the new terminal will include elements such as culturally sensitive areas 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 Honourable Gary Philbin, our outgoing board chair, who has committed to serving Norman's 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 rising interest rates are fluid, we are not currently seeing any impacts of 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 diligently managing our balance sheet to stagger maturity of convertible ventures, none of which mature until 2025 and thus 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 in acquisitions, and financing is more difficult to access. This has resulted in EIC being more competitive on larger acquisitions and enhances our opportunities in the M&A market. Coupled with our strong balance sheet, this positions 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 exceeded 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 Met, 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 corporations' acquisitions, and increased flying completed by the corporations' airlines. 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 non-cash 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. Recountable maintenance capital expenditures decreased by $3 million from the prior period to $40 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 that would have historically been performed in the first quarter or early in the second quarter moved into 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 of Congress 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 and Flight Program, which is starting to graduate new pilots into EIC Airlines and the inaugural ATIC Mason Indigenous Pilot Pathway, which will in the future graduate Indigenous pilots to fly with our airlines. Applying for the Life and Flight Program several years ago is helping address the current pilot shortage and provides a competitive advantage for EIC and its airlines. This is just one example of the benefits our group of companies realizes 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, CCI, acquired in December of 2021, generates lower margins and capital requirements beyond working capital or minimal. Second, rapid escalations in 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 flowed 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 when it finished 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 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 building 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 of 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 it is expected this impact will moderate as long as exchange rates remain stable into 2023. As we head into 2023, it is expected that our results will continue to drive down our leverage ratio. Subsequent to the end of the year, the corporation fixed $350 million of Canadian credit facility debt at a rate below floating rates for a period of approximately three years. The inversion in the yield curve in mid-January was more pronounced than it is today, and provided 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 comparable ventures in totality bearing a fixed interest rate. During the fourth quarter, the corporation had an inflow from working capital of $79 million. 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 Carmel.