Exchange Income Corporation

Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the three-month and nine-month periods ended September 30, 2023. The corporation's results, including the MD&A and financial statements, were issued on November 9, 2023 and are currently available via the company's website or CEDAR. Before turning the call over to management, Listeners are cautioned that today's presentation and the responses to questions may contain forelooking statements within the meeting of the safe harbor provisions of Canadian provincial securities laws. Forelooking 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 and formation form, 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 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 conference over to the CEO of Exchange Income Corporation. Mike Powell, please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us today on today's call. With me is Carmel Peter, our President, and Richard Waurick, our CFO. There has been a lot of interest in our recent aviation contract lens. I have asked Kevin Hillier, the CEO at Carson Air, Dave White, our head of aviation and CEO at Kuwait, as well as Jake Traynor, the CEO at PAL, to join us to answer any questions you may have about the contracts. Yesterday, we released our third quarter financial results for 2023, and I am pleased to have this opportunity to share with you some of the highlights from the quarter. We set a number of record quarter watermarks, including record revenue, adjusted EBITDA, free cash flow, less maintenance capex, net earnings, and adjusted net earnings. This was achieved despite a challenging economy, much higher interest rates, and whispers of a technical recession beginning to emerge. Even more importantly, this performance was achieved while we are beginning to deploy the capital from our bought deal common share offering in the second quarter. for several of our growth initiatives previously discussed, including our contracts with Air Canada and the Medevac contracts with the provinces of British Columbia and Manitoba. We anticipate seeing the adjusted EBITDA at bottom line for the Air Canada investment in the latter part of the fourth quarter of 2023 and on the Medevac contracts as we progress through 2024 and 2025. Taking a step back, Our portfolio of companies remains resilient. Announcements of acquisitions, strengthening of our balance sheet, and new contracts were the theme of our second quarter. Strong operating performance and the execution on those investment opportunities for the new contracts defined our third quarter. In terms of absolute financial metrics, we recorded a record quarter results in almost all key metrics. Revenue increased 17%, to $688 million, up from $587 million the previous year. Adjusted EBITDA grew to $168 million from $150 last year, an increase of 12%. Free cash flow, that's maintenance capital expenditures, increased 8% to $74 million, while on a per share basis it declined marginally by 6% to $1.60. Net earnings were $50 million, despite an increase of increased interest expense of $8 million over the previous period. Net earnings per share was 106, which is a decrease of approximately 12%, and adjusted net earnings was $55 million, up approximately $1 million. Our results across the board were record results for any quarter. However, on a per-share basis, certain of the metrics were lower than the prior year. The primary reason for this reduction was the increase in the number of shares outstanding due to the bought deal offering in the second quarter. The proceeds from such an offering are being used to fund our significant growth capital expenditures related to the Air Canada contract and our two medevac contracts in British Columbia and Manitoba. The financial effects of such contracts will have significant positive effects in subsequent quarters, as we have previously discussed. Our trailing 12-month free cash flow less maintenance CapEx payout ratio was 58%, as compared to our watermark low of 52% expressed in last year's third quarter. This payout ratio includes the impact of two dividend increases in fiscal 2022 and the increase in the absolute number of shares. In fact, the 12-month dividends increased by $18 million for 2023 compared to the prior year. The payout ratio also includes a large increase in interest costs for the trailing 12 months of $43 million. With the results posted for the quarter, coupled with our confidence in 2024, and due to the significant investments in Air Canada and these Medevac contracts, we have announced a 12-cent increase in our annual dividend, or approximately 5%. Increase from 252 to 264. This maintains our 20-year record of a 5% CAGR, and bears testament not only to the strength of our current results, but our confidence in the future. The third quarter continued to provide evidence of the power of our diversified model, considering our strong aggregate results, which were achieved with subsidiaries delivering solid performance to off those who experienced a more challenging period. Essential Air Service Aerospace continued to deliver exceptional results. Virtually all revenue streams improved over the prior period. Strengthening passenger demand realized in the most notable improvement and resulted in expansion of adjusted even to margins. Our northern air operators have continued to experience higher demand, driven by the increasing population in the north, the continuous need for medical travel, and the ongoing need to provide essential passenger and freight movements. The capital investments made in previous periods in our fleet of fixed-wing and rotary aircraft drove higher revenues. Diligent cost management in concert with the greater load factors drove improved margins. It is also important to note that we have completed long-term arrangements with a number of our unions, the majority of our aviation subsidiaries, and are working on the last couple of remaining contracts. This will provide us with contract and cost certainty. 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 operations. Furthermore, the force multiplier also continued to fly significant towers for the UK government. We are very excited about the future contract opportunities and are currently awaiting the RFP from the UK Home Office for its new contract. Multi-storey window solutions continue to improve because of two key reasons. Firstly, the acquisition of BV Glazing in May of 2023, with no comparative in the prior year. And secondly, a more normal production schedule. The order book remains strong at approximately $1 billion, with active inquiries continuing to be realized. Inquiries for new projects are continuing at all-time highs. although the time to convert these to confirmed order is longer because of the higher interest rate environment for developers. The long-term fundamentals of this industry remain strong. These longer-term tailwinds will be discussed further by Carmel in her outlook. Precision manufacturing and engineering continue to deliver strong performance. The increases in revenue and profitability driven by the acquisition of Hanson in the second quarter with the strong execution by the majority of the other business line subsidiaries drove the growth of the business. Our environmental access solutions business continues to exceed the metrics we have purchased it upon. At quarter end, assuming our trailing 12 months runway, our comparative return of capital would have been well in excess of 20%. When we compare this year's quarter end results to the prior year, the operating margins have declined. as we previously commented that the prior year was due to a unique alignment of price, supply, demand, and weather, along with near practical capacity for the utilization of rental maps. That combination of factors was unsustainable in the longer term and the results of moderating. Furthermore, this year was characterized by an unfavorable dry and hot summer and historic wildfire season that reduced demand for maps. That said, in totality, Northern Math has been a positive contributor to our results based on the acquisition metrics and its return on capital. Our aircraft sales and leasing business continues to recover from the pandemic. The assets within the leasing pool are continually replaced on lease on a consistent cadence throughout the quarter and into further quarters. The cadence was impacted by the worldwide pilot shortage. Furthermore, revenues in the business line were also in impacted by the fewer large asset and engine sales compared to the prior period. It's important to note that the asset and engine sales in the prior period and even in the current period are high on a relative basis compared to pre-pandemic periods. As a reminder, such asset and engine sales are generally at lower margin, higher dollar sale transactions. Management within the aircraft sales and leasing business continues to diligently look for opportunities for investment in this opportunistic market. In the third quarter, we saw records set in key metrics on an absolute basis. However, many will note that certain per share amounts are below Q3 2022, which were quarterly high watermarks. Previously, I mentioned the fact that the Q3 per share amounts were impacted by the capital that is to be employed on those longer-term contracts announced in the second quarter. At EIC, we have always taken a longer-term view of our investment thesis. We believe that those contracts will provide meaningful increases in revenue, adjusted EBITDA and profitability as we move through 2024 and into 2025. We like these investments for a number of reasons. Firstly, they are a core competency of our business. Our businesses have been involved in Medivac and scheduled flying services for over four decades. Secondly, the customers are either large corporations like Air Canada or governments. There are consistent, stable cash flows associated with these contracts. And finally, and most importantly, those contracts met our internal return on invested capital metrics. They are accretive to our shareholders and over the long term on a per share basis. We want to provide an update on these goals and issues communicated in the second quarter. In our second quarter, we announced that we have won two important long-term medevac contracts with the provinces of British Columbia and Manitoba. We have grown to be Canada's largest medevac provider. These two new contracts strengthen our critical mass even further. Both of the contracts are for 10-year terms and include options to extend beyond that. These significant contracts will require aggregate capital deployment of approximately $275 million, which has already begun and will continue over the next two years, with full-scale flying not expected until 2025. During the third quarter, we acquired three of the five aircraft related to the government of Manitoba contract. Those aircraft will be retrofitted with metal back interiors over the next couple of quarters, after which they will be put into service in the early part to mid-2024. We anticipate the receipt of our first brand-new King Air in the fourth quarter, after which it will be inducted into service It will be retrofitted with the interior for the medevac purpose. These aircraft will be received in a regular cadence over the next six quarters. Our returns on capital this investment will be most evident in 2025 and thereafter when all the aircraft are acquired and the existing aircraft that we use for the government of BC are redeployed. During the second quarter, We also announced and 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 8400 aircraft and substantially expand our maritime operation. We completed our first flight on July the 1st using existing capacity and acquired the initial four aircraft during the third and fourth quarter. The returns on this contract will begin to be evident in the back half of the fourth quarter with the full impact available in fiscal 2024. We are also seeing growth opportunities within these new contract opportunities as discussions with the government of BC have led to additional aircraft being added to the contract and further discussions are ongoing. In the second quarter, we also started our contract with the UK Home Office. We anticipate the release of an RMP for the competitive bid process for a new contract with the UK Office to occur in the fourth quarter of this year or early 2024. As the incumbent, we are well positioned as we continue to demonstrate mission success on the existing short-term contract. In our manufacturing segment, we are continuing the integration of Hanson and BV Blazing. Our COO, Darwin Sparrow, has been spending a significant amount of time with the Quest and BVizing management teams. The focus is to find innovative and creative ways to create efficiencies, leverage our collective purchasing power, and rationalize our production space footprint. These activities will facilitate further growth and increase margins in the longer term. Subsequent to the end of the quarter, we announced the acquisition of Dry Air. Dry Air is the leader in portable, hydraulic heating equipment in North America. Dry Air is characterized by their innovative, customer-centric approach, and we believe that it will be a great fit within our EIC family of companies. They ticked all of the boxes that we look for in our acquisitions. They are profitable, well-established, and have a strong management team. Both Claude and Merlin, who are the majority owners, will continue in their previous roles. The company operates in niche markets, generates strong, steady cash flows, and are primed for continued organic growth within the rental market in North America. Lastly, our work completed in the second quarter, being the upsize and extension of the credit facility, coupled with the bought deal offering, has put us in a strong leverage position on our balance sheet, which will allow us to execute on our investment strategy as well as opportunistically to acquire businesses and assets in this market. Our pipeline for acquisitions continues to be strong, and our diligent management of our balance sheet provides us with significant capital to deploy when the right opportunities are presented. Our model continues to resonate with owners. In our recent acquisition of Dry Air, the majority shareholder quote wrote to me in In our boardroom in July, EIC explained the philosophy and values and the culture of EIC. We felt that we'd found the people we wanted to work with. I am very proud of the culture and values that we have developed over the years. Our subsidiaries have become our greatest champion of our business model. While we are actively considering deals, discipline will remain one of the key principles in our decision-making process. to ensure we acquire companies with the requisite strong management teams and strategic business missions with future growth opportunities that enable accretive growth to our shareholders. Our management teams will be busy over the next number of quarters, continue to integrate the business we acquired in 2023, readying our essential air services, businesses for the operation of the new Metacraft aircraft to fulfill our contract needs, including the hiring and integration of crews. Our other teams will be continuing to execute on our strategy to ensure that we retain our strong, sustainable, diversified cash flows that our shareholders expect. Our results continue to demonstrate the resilience and sustainability of our business model. Taking a step back, in 2019, our revenues in the third quarter were $355 million. and adjusted EBITDA was $89 million. Fast forward four years, which included the pandemic, our revenues have grown to $688 million and our adjusted EBITDA to $168 million, a cumulative average growth rate of 15% for both revenue and adjusted EBITDA. That growth was accomplished through both acquisition and organic growth. Furthermore, our industry diversification had shown its value throughout the pandemic and has continued to demonstrate its importance today and into the future. It allows us to deliver consistent, meaningful financial performance, irrespective of the economic and geopolitical conditions of the day. On that basis, and as a result of our strong results on a year to date, our confidence in 24 In 2024 and beyond, we made the decision to increase our dividend by $0.12 to $2.64 per annum. We are focused on succession planning at our company as we grow, and we realize the need for strong management teams. Carmel Peter, our president, has announced that she will be retiring sometime during fiscal 2024. But I'm pleased to say she will not be leaving EIC. She will be joining the board sometime during that period. We have developed people within the company, and we will be announcing the management changes to fill Carmel's shoes when she sets a final date. We're excited to have her stay with the company. Our future is bright. Our business is built on a solid foundation, and our diversification and resilience are shown in our results. We are looking forward to the contributions made from our 2023 acquisitions and our growth capital expenditures as we move into 2024. I'll now hand the call off to Richard.

Thank you, Mike, and good morning, everyone. The third quarter was another example of the benefits of our diversification and focus on the long term instead of focusing on one quarter at a time. Consistent with our expectations and past exposures, the prior period was the perfect quarter for our environmental access solutions business, and sustaining capsules at that level in 2023 was not feasible. That meant that our other existing operations, plus contributions from our 2023 acquisitions, not only covered this shortfall, but numbered strong period-over-period results. Adjusted EBITDA was $168 million, an increase of 12% over the prior period. The aerospace and aviation segment adjusted EBITDA increased by $24 million and was partially offset by a decrease of $6 million in the manufacturing 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 producing the returns we expected increasing adjusted EBITDA over the prior period. Investments allowed us to win contracts in the Netherlands and the United Kingdom. We also entered into a contract with Air Canada, which started to contribute in Q3, and two Medivac contracts, which will not be fully operational until early 2025. We continue to make these types of investments to support our future growth. The decrease in our manufacturing segment was driven by the environmental access solutions business, as discussed above. This decline was partially offset by increases in our existing businesses due to the resilient demand for their products and our 2023 acquisitions. Most notably, our pre-existing businesses in the multi-story window solutions business line contributed strong period-over-period increases as a more normal production schedule benefited their operations. As Mike previously discussed, during the second quarter, the corporation completed an equity offering of common shares. The offering was the largest in our history by a wide margin and was materially oversubscribed. Knowing the significant and accretive growth opportunities we had in front of us, we took the opportunity to raise more than we initially went to market for, knowing that these funds would be deployed over a period of time. While this temporarily increased our shares without a corresponding contribution to adjusted EBITDA and therefore negatively impacted our per share metrics, we planned for the long term. This is consistent with our past practices Practice of always ensuring we have the capital available for it is required to ensure that when the opportunities materialize, we have capital to put to work. Both net earnings and just net earnings increased by 1% over the prior period. The per share results declined due to a 14% increase in shares outstanding, driven primarily by our common share offering in the second quarter of 2023. The increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings, was mostly 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 prior period. In addition, increased long-term debt outstanding due to investments made increased interest costs. The increased interest... This increased interest costs by $8 million in the quarter and $43 million on a trailing 12-month basis. The impact from increased benchmark borrowing rates would have been larger had we not entered into two rate swap transactions in 2023. These two transactions fixed costs on approximately $540 million of our credit facility debt. Appreciation of capital assets increased for two reasons. First, the acquisition activity of the corporation 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 cashless maintenance capital expenditures increased 8% over the prior period due to increased free cash flow and lower maintenance capital expenditures. Our free cash flow increased due to higher adjusted EBITDA compared to 2022. Increased interest costs partially offset the increase in adjusted EBITDA. Our payout ratios, both on a free cashless maintenance capital expenditures basis of 58%, and on an adjusted net earnings basis at 78%, remained near all-time lows on a 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 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 $81 million were made during the quarter. These investments were focused on essential air services, aerospace, aircraft sales and leasing, and environmental access solutions. In essential air services, investments were made in additional aircraft for our Kuwait and Medevac contract and for our terminal expansion in Winnipeg. We have also purchased aircraft for our CPA with Air Canada as we ramp up our service under the agreement. Significant deposits have been made on aircraft for our recently awarded Medevac contract with Carson Air. Aerospace made investments for its renewed and expanded contract in Curacao. Aircraft sales and leasing made investments into additional engines for lease as the lease market continues its recovery first from the pandemic and now from a worldwide shortage of experienced pilots. Environmental access solutions made investments in its rental mass portfolio during the quarter. This was strictly based on the timing of when mass were produced and is expected to reverse in the fourth quarter. During the first quarter, 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 the corresponding payable was not due until 2023. Working capital investment outside of this outflow was focused on investment in inventory and aircraft for resale and aircraft sales and leasing, and a modest increase in working capital to support increased revenues. Other investments in the quarter for working capital, sorry, during the third quarter, our seasonally busiest quarter was well below historical norms at $7 million. Our senior leverage ratio at the end of the quarter remains consistent, but our historical target is 2.4 times. Our total leverage ratio, when including our convertible debentures, continues to decline as the debentures have not increased at the same rate as our adjusted EBITDA over the last 18 months. Historically, our congrove 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 2023 card dividends using the midpoint. That concludes my review of our financial results. I will now turn the call over to Carmel.