Exchange Income Corporation

Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the three-month and six-month periods ended June 30, 2023. The corporation's results, including the MDNA and financial statements, were issued on August 10, 2023 and are currently available via the company's website of CEDAR. Before turning the call over to management, Listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter. The Risk Factors section of the Annual Information Form and EIC's Other Filings with Canadian Securities Regulators. Except as required by Canadian securities law, EIC does not undertake to update any forward-looking statements. Such statements speak only as of the date 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 interest 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. With me today is Carmel Peter, our president, and Richard Waurick, our CFO. Yesterday, we released our second quarter financial results for 2023, and I'm pleased to have this opportunity to share with you some of our highlights from the quarter. and I'm proud to report that despite the broader economy being challenged with continued and persistent inflation, tightening monetary policy with corresponding increases in interest rates, and an uncertain economic outlook, EIC has produced record quarterly revenue, set new second quarter benchmarks. Our portfolio of companies remains resilient, strong operating performance, coupled with the execution of multiple initiatives to facilitate further growth in 2024 and beyond, will define our second quarter. In terms of our financial results, because of deliberate choices and investments we have made in our past, we have generated second quarter records in revenue, adjusted EBITDA, free cash flow, net earnings, and adjusted net earnings. Revenue increased 19% to $627 million, up from $529 million last year. Adjusted EBITDA grew to $147 million from $115 million last year, an increase of 28%. Free cash flow after maintenance capital investment increased by 24% to $59 million, while on a per-share basis it improved 12%, to $1.34. Net earnings were $37 million, which represents a 23% increase, despite an increase in interest expense of $13 million. Net earnings per share were 85 cents, which is an increase of 12%. And finally, adjusted net earnings of $43 million was up 13% to $1 per share. Our trailing 12-month free cash flow, thus maintenance CapEx payout ratio, was consistent at 57%, in spite of two dividend increases over the last 12 months. The second quarter of the year highlighted the power of our diversified model, considering our strong aggregate results were achieved with some subsidiaries delivering solid performance to offset the others who experienced a more challenging period. Essential air service and aerospace both delivered exceptional results. While all revenue streams improved over the prior period, strengthening passenger demand realized the most notable improvement. Capital investments in previous periods in our fleet of fixed-weight and rotary aircraft and ramped-up flying owing to more normal passenger volumes drove higher revenues. diligent cost management in concert with the increased flying improved margins. Our aerospace business also benefited from more flying compared to the previous period, with both maritime surveillance aircraft built for the contract in the Netherlands in full operation. The force multiplier also commenced significant hours for the UK government in the second quarter. Multi-story window solutions continue to improve because of a more normal production schedule and commencement of projects where prices reflect rates negotiated after the start of inflationary pressure and supply chain issues, labor costs, and interest costs. The acquisition of BV Glazing mid-quarter also contributes to the improvement over the previous quarter. We expect to see continued improvement in future quarters, Order books remain strong at approximately $1 billion, with active inquiries continuing to be realized. Inquiries for new projects are at an all-time high, although the time to convert these inquiries to confirmed orders is longer than normal because of the higher interest rate for developers. But the demand is there. Precision manufacturing and engineering also delivered strong performance. including Hanson Industries, which was acquired in the quarter. While both of our environmental access solutions and aircraft sales and leasing experienced industry headwinds. Within our environmental access solutions, revenue increased over the prior period, owing to a full quarter of results being recognized. And although the results continue to exceed those for which the acquisition was priced, The unfavorable dry and hot spring weather conditions and historic wildfires this year delayed projects and thus reduced demand for mats in the current period. Added to this was increased industry-wide supply of mats compared to the previous period, resulting in a lower mat fleet utilization, which reduced results in the second quarter of the year. But I should reiterate, the company continues to perform at levels well in excess of our expectation at acquisition. True to our expectations, aircraft sales and leasing realized fewer larger transactions in the second quarter compared to the prior year, which were well above historical norms and characterized as high-dollar, low-margin events, but the leasing portfolio which earns better margins, continue to strengthen as utilization continues to recover. Generating stellar results in the second quarter was not accomplished at the expense of focus on setting the foundation for future growth. The second quarter saw this focus on the future taken to levels not seen in the past. Many of our investors believe our growth only comes from acquisitions. Our actions in the second quarter emphasized that we not only invest in new acquisition, but also invest significant capital in our existing businesses through organic growth opportunities. In our essential air services, we announced that we had won two important long-term sixth-wing medevac contracts in the provinces of British Columbia and Manitoba. The medevac Business has proven during our 20-year history to be resilient in all economic environments, including the pandemic, and we have invested in the business regularly whenever the opportunity is presented. Because of these ongoing investments, we have grown to become Canada's largest medevac provider. These new contracts strengthen our critical mass even further. Both contracts are for a 10-year term and include other options to extend. The competitive process through which we won the contract demonstrate our strength and experience in the medevac sector. These significant contracts will require aggregate capital deployment of approximately $275 million over the next two years, with full-scale flying not expected to begin until 2025. Over the next six quarters, we will acquire the aircraft, install the advanced medical interiors, and ready our ground facilities. Our returns on this capital investment will be most evident in 2025 and beyond after all the new aircraft are acquired and retrofitted and existing aircraft are redeployed. We also announced we'd finalized an agreement with Air Canada to provide regional service in Eastern Canada for up to five years. The agreement will require up to six additional Dash 8-400 aircraft and substantially expand our maritime airline operation. We completed our first flight on July the 1st using existing capacity and expect to acquire the first four aircraft to fulfill the contract and have them online in the middle of the fourth quarter. The returns on this contract begin much more rapidly than that of that contract and results will be readily apparent in 2024. As previously mentioned, our aerospace business ramped up flying under our Netherlands contract as well as the recently announced contract with the United Kingdom Home Office to monitor small boat migrant crossings. This flying contributed notably to our second quarter success. Both of the contracts were made possible by capital deployment in previous periods, which we are now reaping the benefit of. In September, the UK Home Office intends to release a competitive tender for a three-year follow-on contract requiring two aircraft and more flying hours to deal with the small boat crisis. As the incumbent, we are well positioned to continue to demonstrate mission success on the existing short-term contract. This short-term contract with the United Kingdom government is exactly what the force multiplier was developed for and why we invested in it several years ago. These contracts fundamentally highlight our international credentials and expertise in maritime surveillance. In our manufacturing segment, we announced the acquisitions of Hanson Industries on April 1st, and BV Glazing, which was announced in March, closed on May 1st. As we discussed in our first quarter remarks, both acquisitions were highly strategic to our existing businesses, with BV Glazing providing complementary products to our Quest businesses and hence in industries providing surge capacity to our lower mainland business. Both operations met management expectations during the quarter and were immediately accretive. Our teams are considering innovative ways to create efficiencies like greater purchasing power and the rationalization of production space within the existing businesses to facilitate growth and improve margins. Key to our well-defended foundation is our balance sheet. We manage it through discipline to ensure we can execute on new or organic growth opportunities when they are presented. In the second quarter, despite the turmoil in the credit markets, we increased and extended our credit facility at the same pricing and terms and conditions as previously. We went to market with a $100 million common share bought deal that we subsequently upsized owing to exceptional demand with 173 million ultimately being raised. The increase in the size of the offering and the institutional interest exhibited demonstrates the market's confidence in our business and our model. Our pipeline for acquisitions is robust, and this diligent management of our balance sheet provides us with significant capital deploy when the right investments are presented. The rise in interest rates has reduced the number of competitive bids for acquisitions, particularly for larger transactions, as buyers who entertain more leverage at EIC are constrained by financing availability. We are actively considering deals in both segments of our business and are excited about the opportunities in front of us. Discipline will remain one of our key principles, however, in our decision-making, to ensure we acquire companies with strong management teams, strategic business niches, and future growth activities. Our management teams will be busy over the next number of quarters maximizing the efficiencies between the manufacturing businesses we already acquired, readying our essential air services for the acquisition of medic and passenger aircraft to fulfill our contract wins, and delivering on our history of excellence, in our existing operations. We continue to uphold our success, and this is a testament to the tenacity and talents of our people, the discipline and consistency with which we execute on our strategy, and our history of managing the short term while focusing on the long term. Following this approach with our continued investment in our existing businesses and new acquisitions gives us the ability to affirm our guidance of EBITDA of $540 million to $570 million for fiscal 2023. Our future is bright, and we look forward to reporting on our achievements in future quarters. I will now hand off the call to Richard, who will detail the first quarter results.

Thank you, Mike, and good morning, everyone. During the first quarter, our subsidiaries delivered results that when consolidated, resulted in several second quarter results in 2023. The power of our diversity was evident in these results, as strong performance in some of our subsidiaries offset more challenging environments for others. Adjusted EBITDA was $147 million, an increase of 28% over the prior period. Both the aerospace and aviation segment and the manufacturing segment drove this increase, as adjusted EBITDA increased by 26% in each segment. The increase in our aerospace and aviation segment can be summarized into two buckets. The first is a steady recovery from the impact of the pandemic on our airline operations. The second is investments we have made into our operations over several quarters, and in some cases years, as we had our sights set on the future. Those investments are now providing the returns we expected, increasing adjusted EBITDA over the prior period. Investments allowed us to win contracts in the Netherlands, and the United Kingdom, which have already begun to contribute in the second quarter and will accelerate in Q3. We also entered into a contract with Air Canada, which will begin to contribute in Q3, and two medevac contracts, which will not be fully operational until 2025. We continue to make these types of investments to support our future growth. The increase in our manufacturing segment was driven primarily by three factors. First, the acquisitions completed. Since the start of the second quarter in 2022, notably Northern Matt, Hanson, and BV Glazing all drove increased results over the prior period. Northern Matt was owned for only a portion of the prior period, and Hanson and BV Glazing were purchased in 2023. Second, improved demand in the telecommunications and defense industries resulted in increased adjusted EBITDA for precision manufacturing and engineering. Finally, improved throughput and contract prices that now reflect the inflationary supply chain's challenge to worlds that has driven up costs in the last 24 months resulted in increased adjusted EBITDA over the prior period for multi-story window solutions. Net earnings and adjusted net earnings increased by 23% and 13% respectively and increased by 12% and 2% respectively on a per share basis. Our per share results were impacted by an 11% increase in shares outstanding driven by our common share offerings in the third quarter of 2022 and in the second quarter of 2023. and shares issued as part of the purchase consideration on our 2022 and 2023 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 increased depreciation on capital assets. Interest costs increased over the prior period in lockstep with increased benchmark borrowing rates over the prior period. In addition, increased long-term debt outstanding due to investments made increased interest costs. The impact from increased benchmark borrowing rates would have been larger had we not entered into two rate swap transactions in 2023. Early in the second quarter, we fixed $140 million of credit facility debt at a rate below floating rates for a period of three years. There was significant inversion in the yield curve at the time, and that made fixing rates attractive. This transaction provides us with certainty on our cost of capital and with uncertainty our previous interest rate swap transactions and our controlled ventures also having fixed rates. Approximately two-thirds of our debt now has a fixed rate. Because of the rate swap transactions executed in 2023, rate changes will not have as large of an impact as they otherwise would have if rates rise further in the future. Depreciation on capital assets increased for two reasons. First, acquisition activity of the corporation, most significantly a full quarter of Northern Matt, contributed to the increase in 2023. Second, investments made to increase the size of our fleet and increased flying of that fleet also contributed to the increase. Free cash flow less maintenance capital expenditures increased 24% over the prior period due to increased free cash flow and lower maintenance capital expenditures. In the prior period, the timing of maintenance capital expenditures were impacted by the emergence of the Omicron variant, which saw some maintenance work performed later in the year. While the scope of our operations increased in 2023 compared to 2022, a more normal cadence of our maintenance capital program in the first quarter of 2023 resulted in $2 million lower maintenance capital expenditures in the second quarter of 2023 when compared to the second quarter of 2022. Our payout ratios, both on a free cash flow less maintenance capital expenditure basis at 57% and on an adjusted net earnings basis at 75%, remain near all-time lows on a trailing 12-month basis. We expect that the realization of returns on investments already made, including our two most recent acquisitions, and returns to be realized on contracts that we have already won and announced, will continue to drive these ratios lower over time and permit continued dividend increases consistent with our historical dividend growth. Growth capital expenditures of $86 million were made during the quarter. These investments were focused within essential air services, aerospace, aircraft sales and leasing, and environmental access solutions. In essential air services, investments were made in additional aircraft and for our terminal expansion in Winnipeg. Significant deposits have also been made on aircraft for our recently awarded medevac contract for Carson Air. Aerospace made investments for its renewed and expanded contract in Curacao. Aircraft sales and leasing made investments into additional aircraft and engines for lease as the lease market continues its recovery from the pandemic, and now a worldwide shortage of experienced pilots. Environmental Access Solutions made investments in its rental MAP portfolio, which offset a large disposal in the first quarter, and made investments in equipment to support growth in the business. During the first quarter, and as we messaged in the fourth quarter of 2022, we had a material outflow from working capital, which was primarily driven by a receivable that was collected in the fourth quarter of 2022 but where the corresponding payable was not due until January 2023. Working capital investment outside of this outflow was focused on investment in inventory and aircraft sales and leasing, and a modest increase in working capital to support increased revenues. Our senior leverage ratio at the end of the quarter remains consistent with our historical targets at 2.39 times. Our total leverage ratio, when including our convertible debentures, continues to decline as debentures 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 2023 guidance using the midpoints. During the second quarter, we extended our credit facility to May 9, 2027, and increased its size from $1.75 billion to approximately $2 billion. The terms of the credit 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 the bank's funding costs, we were able to complete the extension upsize with no change in pricing. During the second quarter, the corporation completed an equity offering of common shares. When the deal was announced at $100 million plus a 15% over allotment, demand greatly exceeded the size of our offering, so it was increased to $150 million plus a 15% over allotment option. The underwriters exercised the full over allotment, resulting in gross proceeds of approximately $173 million. This was the largest offering in the corporation's history and also included the largest institutional investor interest in our history. Consistent with our past practice of always ensuring we have capital available before it is required for investment, we took advantage of our optional annual renewal with our syndicate of lenders to increase the size of our facility and a receptive equity market to issue common shares, increasing our liquidity. Both of these transactions will provide the liquidity required as we meet our commitments under the contracts we recently announced, plus provide us with the liquidity for some additional exciting growth opportunities. both through acquisition and organic growth, that are not at this stage which they can be announced. That concludes my review of our financial results. I will now turn the call over to Carmel.