Exchange Income Corporation

corporation's conference call to discuss the financial results for the three-month period ending March 31st, 2023. The corporation's results, including the MD&A and financial statements, were issued on May 9th, 2023 and are currently available via the company's website or on 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 meaning of the safe harbour provisions of Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form, and EIC's other filings with Canadian securities regulators. Except as required by Canadian securities law, EIC does not undertake to update any forward-looking statements. Such statements speak only as of the date they are 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, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. With me today is Richard Waurick, our CFO, and Carmel Peter, our president. Yesterday, we released our first quarter financial results for 2023. And I'm excited to have this opportunity to share with you some of our highlights from the quarter and pleased to report that even though in both of our operating segments, the first quarter is always our slowest seasonally, EIC exceeded all our internal financial targets while at the same time executing on opportunities for future growth. This is particularly noteworthy given the volatility in the macroeconomic environment, high inflation, interest rate increases and ongoing geopolitical tensions. Despite these challenges, we stayed focused on executing our strategy. In terms of our financial results, because of deliberate choices and investments we have made in our past, we have generated first quarter records in revenue, adjusted EBITDA, and free cash flow. Revenue increased by 32% to $527 million. Adjusted EBITDA increased by 45% to $97 million. Free cash flow increased by 26% to $60 million. Adjusted net earnings were $12 million or $0.27 per share versus $8 million or $0.20 per share last year. On other financial metrics compared to the same period last year, and given the first quarter is our slowest seasonally, we're in line with our expectations. Free cash flow, thus maintenance capital expenditures, was essentially unchanged at $19 million, while on a per share basis it declined nominally to $0.44 as a result of a more normal seasonality in our maintenance capital expenditures compared to the COVID-affected results of the first quarter of last year. Our payout ratio on a free cash flow as maintenance capital expenditure basis improved modestly from 58% to 58% from 59%. You've heard me say many times before, our success is a result of our culture, the power of strategy, and our consistent execution. Our record results in the first quarter proved that once again. Our environmental access solutions business was a significant contributor to the results. as there was no comparable amount in the previous year. However, much like our aviation operations, their performance is impacted by seasonality, with the third quarter being the strongest and the first being the softest. Passenger volumes in our essential air services businesses returned to be more in line with pre-pandemic levels and replaced the $11 million of government subsidies recorded in the same period last year. Cargo and medevac demand remained strong. Charter demand also remained strong, but a tight supply of aircraft and crew limited our ability to capitalize on all charter opportunities this quarter. Our aerospace business benefited from a full quarter of operations within our Netherlands contract. Our precision manufacturing and engineering operations continued to experience strong demand for their product. and our multi-story window solutions business continues to recover from pandemic disruptions with production normalizing and strong demand. While our aircraft sales and leasing business did not generate the same level of large asset sales as they did in the same period last year, demand for aircraft parts and leasing remained consistent with the prior period. Large sales of assets and aircraft are always variable period to period, and have a bigger impact on our revenue than they do on our earnings. Managing in the short term is only part of our strategy. It is our focus on the long term that drives growth in future quarters. It is woven into our DNA. That's why in the first quarter of this year, we also made meaningful and disciplined investments into new acquisitions and organic growth in both our segments. In March, we announced the acquisition of BV Glazing Systems, and we're pleased to officially close the transaction early this month after receiving approval from the Canadian Competition Bureau. BV Glazing, located in Ontario, complements our existing investments in our multi-story window solutions business. Based on their historical profitability and strong order book, the transaction is immediately accretive to our per share metrics. In addition to the accretiveness to BV Glazing to our results, It represents the most attractive prospect in our history for creating efficiencies within our existing businesses. Complementary product offerings such as curtain wall and railings in the BV glazing business plus installation capabilities in our existing Quest business offer revenue expansion potential. The expectation of greater purchasing power and rationalization of production facilities will facilitate growth and improve margins. The strong combined order book of approximately $1 billion and positive industry outlook means hiring more people to tackle the tremendous opportunities. The impressive management team of BV Glazing led by Mike, who will stay on and run the business, was a critical element of our due diligence. Following our BV Glazing announcement in March, we later announced the acquisition of Hanson Industries. We have attempted to grow our precision manufacturing business by acquisition in the lower mainland of British Columbia, specifically for a prolonged period, but have been unable to uncover companies with unique market niches and strong defensible margins until we were introduced to Hanson. Hanson meets all of our acquisition requirements and will accretively grow our operations on a standalone basis The addition of a second operation in BC provides important capacity for both companies in times where demand exceeds their standalone capacity. Amit, the president of Hanson, is a proven leader who will continue to lead our team, killing the team under our ownership. Yesterday, we were also extremely pleased to announce two significant organic growth opportunities that will provide profitable growth for years to come. First, was the engagement of the force multiplier FMX aircraft in our aerospace business. This contract will fully deploy the aircraft for 18 months, as opposed to the short-term solution that was designed to deliver. This means double the utilization we would normally expect on an annual basis. In addition to approved utilization, it represents the second European contract win for our aerospace business, which validates our collective capabilities. our collective capabilities as a differentiator in the marketplace and is a testament to our credibility on the world stage. Secondly, we are thrilled to be in a position to announce we have invested in the purchase of what will be the only civilian-owned full-motion electronic King Air training simulator in Canada. Currently, our pilots must travel to third-party locations in the United States for simulator training. Having our own simulator will not only generate an accretive financial return, it will also increase operating flexibility because we will not have to rely on third party providers for limited training spots. It will increase our pilot training capacity in the industry faced with pilot shortage. It will provide new revenue opportunities for training pilots from other airlines within Canada as we will not fully utilize the simulator's capacity. It will eliminate fuel burn while gaining all of the experience to make our fleet one of the safest in the world's skies. And finally, we'll reduce our carbon footprint by significantly reducing fuel burn and corresponding greenhouse gas emissions for both the training itself and the travel training in the United States. Fundamental to our strategy is making a balance sheet to ensure we have capital on hand to take advantage of investment opportunities when they arise. While the markets have remained turbulent in 2023, we were successful in upsizing and extending our credit facility and fixing our interest rate exposure, which positions us well to execute on investment opportunities on a go-forward basis. Richard will detail this in his remarks. We're excited about our future and intend to keep on doing what we are doing because it works. The diversification of our manufacturing segment over the past 18 months, the new investments in acquisitions and organic growth from new contract wins, and the discipline in which we've managed our balance sheet, we are in a position to revise our guidance from the previous range of $510 million to $540 million to our new guidance of 540 to 570 million. And while we are not yet prepared to provide formal guidance for 2024, we believe it is likely that we will hit the $600 million threshold in adjusted EBITDA based on current performance levels and future growth. The consistent execution of our strategy continues to deliver for all our shareholders, as evidenced in our results. We're excited to integrate our new investments into our operations and report the performance in future quarters. I will now have the call off to Richard, who will detail our first quarter results.

Thank you, Mike, and good morning, everyone. During the first quarter, our subsidiaries delivered results that were higher than our internal expectations, resulting in several first quarter records in 2023. Adjusted EBITDA was $97 million, an increase of 45% over the prior period. Both the aerospace and aviation segment and the manufacturing segment drove this increase as adjusted EBITDA increased by 17% and 195% respectively in each segment. Essential Air Services increased adjusted EBITDA by 30% despite not receiving any government subsidies in 2023 as compared to $11 million in the prior period. All revenue streams within Essential Air Services grew over the prior period. The most material increase was passenger revenue as passenger levels returned to pre-COVID levels. Within aerospace, adjusted EBITDA increased primarily due to the contribution from the deployment of the corporation's ISR assets for the Netherlands Coast Guard contract. This is the first quarter of full deployment of these assets on this contract. Within aircraft sales and leasing, adjusted EBITDA declined from the prior period. The prior period experienced a much higher level of large asset sales than we have experienced historically as airlines around the world had to start making purchases that they had put off during the pandemic to prepare their fleets for summer 2022 travel. The current period was strong relative to what would be considered normal, but it was lower than the prior period. Part sales remained strong and lease revenues increased slightly over the prior period. In the manufacturing segment, the increase was primarily driven by the acquisition of Northern Met in the second quarter of 2022. as there was no comparative in Q1 2022, but all business lines within the segment experienced increases over the prior period. Within multi-story window solutions, adjusted EBITDA increased over the prior period as projects that were bid in previous periods included adjustments for higher input costs and are starting to be manufactured for customers. We expect continued improvement over the remainder of 2023. With precision manufacturing and engineering, adjusted EBITDA increased by 32%. Investments made in prior periods to expand capacity and the benefits of the integration of token acquisitions completed in 2021 were the main contributors to the increase. Net earnings and adjusted net earnings increased by 83% and 47%, respectively, an increase of and increased by 60% and 35%, respectively, on a per share basis. Our per share results were impacted by a 10% increase in the shares outstanding, driven by our common share offering in the third quarter of 2022, and shares issued as part of the purchase consideration on our 2022 acquisitions. The increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings, was partially offset primarily by two items, increased interest costs and depreciation on capital assets. Interest costs increased over the prior period in lockstep, with increased benchmark borrowing rates over the last 12 months. In addition, increased amounts outstanding due to investments made over the last 12 months increased interest costs. Depreciation on capital assets increased for two reasons. First, the acquisition of Northern Matt in the second quarter of 2022 contributed to the increase in 2023. Second, investments made to increase the size of our fleet and increased flying of that fleet also resulted in higher depreciations. 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, and as such are excluded from our adjusted debt earnings. Re-cash flow that's maintenance capital expenditures was flat to last year as a more normal seasonal cadence to our capital expenditures offset and increase re-cash flow. Generally, our essential air services complete the bulk of their maintenance where possible in the first part of the year when they are less busy. In the prior year, the onset of the Omicron variant pushed some of these expenditures to later in the year, meaning that Q1 of 2022 was abnormally low compared to what we would have expected absent the impact of the Omicron variant. Growth capital expenditures were focused in our essential air services and our aircraft and engine lease portfolio. In essential air service, investments were made in additional aircraft, the construction of a new hangar to support growth in our essential air services, and deposits made on a King Air simulator. Leasing portfolio investments were made in assets as we increase our fleet to position our operations to respond to customer demand as the narrow body regional jet marketplace continues its recovery from the impact of the worldwide pilot shortage. During the first quarter, as we messaged in the fourth quarter of 2022, we had a material outflow from working capital, which was driven by a receivable that was collected in the fourth quarter of 2022. but the corresponding payable was not due until January of 2023. Our senior leverage ratio at the end of the quarter remains consistent with our historical targets at 2.59 times. As our adjusted EBITDA over the remainder of the year aligns with the guidance we have provided to the market, we expect this will continue to decline towards the end of the year. Our leverage ratio, when including our convertible ventures, continues to decline as the ventures have not increased at the same rate as our adjusted EBITDA over the last 18 months. Historically, our convertible debentures have represented one times of adjusted EBITDA within our capital structure, whereas now the debentures represent approximately three-quarters of a turn of adjusted EBITDA off of the new 2023 guidance using the midpoint. In addition, there are two series of convertible debentures that are now in the money, and we have started to see a limited amount of these convert into equities. Some soon to the end of the quarter, we extended our credit facility to May 9th, 2027 and increased its size from approximately $1.75 billion to approximately $2 billion. Consistent with our past practice of always ensuring we have capital available for what is required for investment, we took advantage of our optional annual renewal with our syndicative lenders to increase the size of the facility. This will provide the liquidity required as we are seeing some very exciting growth opportunities, both through acquisition and organic growth. The terms of the facility are consistent with our previous facility, and we added one new American lender to the syndicate. Despite an elevated rate environment putting pressure on banks' funding costs, we were able to complete the extension and upsize with no change in pricing. During the first quarter, the corporation fixed $350 million of 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 provided an opportunity to fix debt that was invested through acquisition and growth investments in the prior year. Subsequent to the end of the quarter, in early April, we fixed $140 million of credit facility debt at a rate below floating rates for a period of three years. As with our Canadian dollar swap, there was significant inversion in the yield curve at the time that made fixing the rates attractive. Both of these transactions provide us with certainty on our cost of capital, and with previous swap transactions and our convertible ventures both also having fixed rates, Approximately two-thirds of our debt now has a fixed rate. That concludes my review of our financial results. I will now turn the call over to Carmel.