Exchange Income Corporation

Good morning, everyone. Welcome to the Exchange Income Corporation's conference call to discuss the financial results for the three months ended March 31st, 2024. The corporation's results, including the MD&E and financial statements, were issued on May 7th, 2024 and are currently available via the company's website 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 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 quarterly and annual MD&E, the risk factor sections of the Annual Information Form, and EIC's other filings and Canadian Securities Regulators. except as required by Canadian securities law, EIC does not undertake to update any forward-looking statements, such as statements speaks only as a 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 interested parties. And I would 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. Yesterday was the 20th anniversary of our IPO and the completion of our first acquisition of Perimeter. And I will talk about the history of EIC and what makes us successful shortly. Yesterday, we also released our first quarter results for 2024. In announcing our results, we reported several records for our first quarter financial results, and this set the foundation for the remainder of the year. We set records for revenue, adjusted EBITDA, free cash flow, and free cash flow less maintenance capital expenditures. Subsequent to the quarter end, we also completed the extension and upsize of our corporation's credit facility to $2.2 billion, which includes a new $200 million social loan tranche. The social loan is one of the first syndicated social loans in Canada and is in alignment with the social loans principally established globally. This was a great achievement by Rich and his team as this provides us with significant liquidity to fuel our growth, whether by organic growth or acquisition, which I will touch on later in today's call. Our results demonstrate the success of our strategy. Firstly, we buy proven companies with excellent management teams. Secondly, we invest in those companies and nurture their growth. And lastly, in doing so, we can provide stable and growing dividends for our shareholders. This strategy has been the blueprint for our success for the past 20 years and is even more relevant today. The secret sauce is the disciplined nature of our acquisitions and investment in growth capital in our businesses and operational execution by our underlying subsidiaries. EIC preserves the cultures in our acquired entities and creates an environment where their management and employees can thrive. With me today is Rich Walrich, our CFO, who will speak to our financial results, and Carmel Peter, our president. who expand on our outlook for the second quarter and beyond. I will limit my discussion to some of the key consolidated performance indicators, and Rich will delve into the results by segment and provide some further insights on our financial performance. For our first quarter, revenue increased 14% to $602 million. Adjusted EBITDA also increased by 14% to $111 million. Debt earnings were $5 million compared to the prior year of $7 million. Debt earnings per share were $0.10 per share compared to 16% in the prior year. Free cash flow less maintenance capital expenditures grew by $4 million or 19% to $23 million. Adjusted debt earnings were $10 million compared to $12 million in the prior period, and adjusted debt earnings per share were $0.20 compared to $0.27 cents. The payout ratio on a free cash flow as maintenance capital expenditure basis remained very strong from a historical perspective at 58%, even with three dividend increases in the last 20 months. We are very pleased with these results, and they show the resiliency and the diversification of our business model. The main contributor to the results was the continued investment in resulting growth in our operating subsidiaries. 2023 was a year characterized by several announcements of acquisitions and contractual wins, whether it was our BC and Manitoba METAVAC wins, our UK home office contract, or our Canada commercial agreement. Speaking of the Air Canada contract, we anticipate the expansion of this contract with additional routes, which will bring the total aircraft used for Air Canada from four to six by the end of 2024. We remain hopeful of the prospects being able to announce further contracts and acquisitions in the second quarter and throughout the remainder of 2024. The positive momentum achieved in 2023 is expected to continue into 2024. Let me delve into some of the opportunities that we are currently seeing. However, to be clear, we have not included any acquisitions or significant contract wins in our 2024 forecast. As discussed in last year's financial reports, contractual wins require upfront investment in capital and do take time to achieve the appropriate returns on this invested capital. There is a ramp-up period required before those investments start hitting the bottom line, as opposed to acquisitions, where the acquisitions are immediately accretive to the bottom line, of course, excluding any seasonality. Firstly, on the acquisition front, Adam and his team are working on a number of pursuits In our year-end call, I mentioned that we are seeing more high-quality opportunities that has continued throughout the quarter. We are seeing these opportunities in both the manufacturing and aerospace and aviation segments. But consistent with our 20-year history, we will only execute on transactions that are both accretive and meet other qualitative acquisition criteria. Current opportunities are focused in manufacturing and aviation segments where we are already present and represent vertical, geographic, or other expansion opportunities. On the contractual opportunities, our teams are weighting the resolution to submitted bins on a number of fronts. We remain optimistic. However, there is always uncertainty in the warrant of contracts by governments. The first contract relates to the future AirQ training contract. Skyline was named as the preferred bidder last year, and we were part of the Skyline bid team. The contract has not been formally awarded to the Prime. However, we remain hopeful that an announcement will occur in the next number of months. We also submitted our proposal to the UK Home Office for the continuation and expansion of the services that we are currently performing. The existing contract will continue until November of this year. The strategic decision to procure a second aircraft that we've started to modify to support the UK Home Office contract should we win. However, we believe that based on the geopolitical situation, such aircraft could easily redeploy to other opportunities should we not be successful as the incumbent. We would anticipate hearing about the final award in the latter part of the second quarter or perhaps early in the third quarter. The third opportunity that I wanted to mention is the Newfoundland fixed-wing medevac contract. In partnership with a strategic partner, we have submitted our collective proposal to the government of Newfoundland. Our proposed services would be for the operation of up to six medevac aircraft in the province. We believe we are one of two proponents to bid on the contract and hope to hear the result of our bid during this second quarter. Lastly, we are seeing significant interest around the world for our aerospace services. We see large opportunities in Australia, Europe, and expanded opportunities in Canada. We are very bullish about future opportunities, and these contracts are right in line with our EIC core capabilities and business model as they generate consistent cash flows throughout the term of the agreement. We brought our analysts to visit our aerospace operations in Newfoundland in April. And I think everyone left with the distinct view that we are a leader both in Canada and around the world with our capabilities. These opportunities are why we upsized and extended the credit facility are so important to us. It provides us the liquidity for significant capital expenditures to fund these hopeful contractual wins. along with Adam and his team providing dry powder to them to execute on acquisitions. The social loan component of the credit facility is a new addition for us. That loan will be used exclusively to fund the acquisition of the King Air aircraft, which are being purchased for the BC medevac contract. These new aircraft have improved performance characteristics, lower fuel burn, and provide an essential service to BC's northern, rural and Indigenous communities. In order to define it as a social loan, Rich and his team did have to provide evidence to a third party to attest that we met these social loan criteria. This provides further recognition that the essential services of our aviation entities provide across Canada. Carmel will focus on the outlook for our segments for the second quarter. But firstly, I wanted to reiterate our guidance for 2024. we confirmed that adjusted even down the range of $600 to $635 million. Our Q1 has set the foundation for the remainder of the year, and we are posed to continue to realize on the growth capital investments made in previous periods and continue throughout this year. We are excited about our future and intend to keep doing what we are doing because it works. I will now hand off the call to Richard, who will detail the first quarter results.

Thank you, Mike, and good morning, everyone. Revenue, adjusted EBITDA, free cash flow, and free cash flow, less maintenance capital expenditures were all first quarter high watermarks. Mike spoke about our key financial metrics, and I will delve into the segmented results and the remainder of the financial statements. Revenue in our aerospace and aviation segment increased by 43 million, or 13%, to 369 million. Adjusted EBITDA increased by 20 million, or 27%, to 94 million. The results in margin expansion were across all business lines. Looking at our central air services business line, the improvements were driven by four key factors. First, previous organic growth capital expenditures in the aviation businesses over the past number of years. Secondly, our average load factors improved, which is a direct improvement on adjusted EBITDA. Third, the impact of routes flown on behalf of Air Canada And fourth, the impact of the DC and Manitoba Medivac contracts, which have not been fully implemented at this point. Our aerospace business line revenues increased over the prior period, while adjusted EBITDA expanded in an accelerated fashion. This is due to two reasons. First, the revenues and adjusted EBITDA expanded due to the increase of the ISR business, including the impact of the UK home office contract. This increase was offset by a decline in revenues within our training business, However, the product shifted, which resulted in profitability expansion within the training business, even with the revenue declines. This margin expansion in our training business is anticipated to be temporary, however, likely to continue into the second quarter. Lastly, our aircraft sales and leasing business continued to grow as the leasing component of that business continued to improve. We are still anticipating that the leasing side will continue its steps improvement until it reaches pre-pandemic levels by the end of the year. The growth within this business line and specifically the leasing business resulted in an improvement in the profitability of that business line as leasing margins are much higher than other revenue streams. Revenue in our manufacturing segment increased by $32 million or 16% to $233 million. Adjusted EBITDA decreased by $5 million or 16% to $27 million. As expected, revenue in EBITDA within the environmental access solutions business line decreased by 35% and 47% respectively. As previously communicated in our year-end call, the first quarter of the comparative period had a number of seasonal anomalies. The first quarter and the second quarter of 2023 experienced an unusual number of rental masks deployed on long linear projects. This was outside the norm, and weather factors also impacted year-over-year demand. Milder weather in 2023 required greater mat utilization for projects. However, this winter experienced very low snowfall and drought conditions, which generally lessens demand. Lastly, the prior year comparative contained an unusual number of mats on rent. That's right. Lastly, as the prior year contained an unusual number of mats on rent, the impact on adjusted EBITDA was outsized related to relative revenue. Our multi-story window solutions business revenue increased by over 70% due to the acquisition of BV Glazing and adjusted EBITDA was up by over 300% due to BV Glazing coupled with improved performance due to increased throughput and increased installation activities of windows manufactured by our subsidiaries. Lastly, our precision manufacturing and engineering business experienced relatively similar revenues compared to the prior period, while adjusted EBITDA decreased by 19%. The current year includes the financial results from both Hanson and Dry Air, which were acquired in April and October in the prior year. The manufacturing segment companies experienced reduced sales, primarily driven by customers delaying large capital projects due to macroeconomic uncertainty. Additionally, the relative adjusted EBITDA decline was expected as Dry Air experiences significant seasonality as they contribute virtually all of their adjusted EBITDA in the third and fourth quarters. and have negative adjusted EBITDA in the first quarter and partway into the second quarter based on historical norms. Adjusted EBITDA margins were higher in the aerospace and aviation segments due to three factors. First, leasing revenue at Regional 1 continues its trajectory towards 2019 levels, and leasing revenue generates very high adjusted EBITDA margins. Second, aerospace contributed additional adjusted EBITDA from its own ISR assets, including in the UK, and this revenue stream also generates higher adjusted EBITDA margins. Finally, our central air services experienced higher average load factors, improving margins over the prior period. Adjusted EBITDA margins were lower in the manufacturing segment for three reasons. First, as we expected, environmental access solutions returned to more normal seasonality, which resulted in a lower number of mats on rent. In the prior period, a large number of mats were rented on a long linear project. These rentals generate much higher margins, and this was abnormal for the first quarter. In addition, drought conditions in Western Canada lessened the need for matting in certain markets. This decline in rental revenue was offset by increased mat sales in the current period, which generates lower margins. Second, dry air acquired in the fourth quarter of 2023 generates all its adjusted EBITDA in the third quarter and fourth quarters, and as we expected, generated negative adjusted EBITDA margins in the first quarter of 2024. Finally, within a precision manufacturing and engineering business line, business was a little slower than in the prior period due to certain customers deferring capital spending and the impact of general economic uncertainty. Other items of note during the quarter were that interest costs were higher by approximately $4 million due to increased benchmark borrowing rates compared to the prior period, coupled with increased debt outstanding due to the various growth capital expenditures in the prior year. However, when looking at our payout ratio, it remained consistent with our year-end ratio and prior quarter ratio at 57% and 58% respectively. Dividends increased by 16% when compared to the prior period. Depreciation on capital assets and amortization of intangible assets were also up due to the growth capital expenditures and acquisition activity in 2023. Lastly, our effective tax rate increased relative to the prior year due to three factors. First being the tax allocation waiting between higher tax jurisdictions. Secondly, the prior period contained a non-taxable contingent consideration gain. And lastly, the implementation of new minimum tax regime resulted in additional current taxes. The proportion of our earnings by jurisdiction in any given quarter can have a significant impact on our tax rate, but this is particularly true in the first quarter of the year. In addition, the impact of non-deductible items such as acquisition costs and meals have an outsized impact on our tax rate in our seasonally lowest quarter as we generate our lowest earnings for taxes in this quarter. We would anticipate our effective tax rate to be in the range of 27 to 29% on an annual basis. Free cash flow and free cash flow maintenance capital expenditures increased by 4% and 19%. Free cash flow reached a record $62 million in the first quarter, and free cash flow maintenance capital expenditures increased by $4 million to $23 million, which was also a Q1 record. Lastly, from a working capital perspective, our working capital remained virtually flat with the prior year end. The non-cash investment in working capital was $19 million and is fully explained by the collection of a large $30 million receivable prior to December 31, 2023, with the corresponding payable settled in the first quarter of this year. This is consistent with the prior year first quarter, which also had a similar transaction. We continue to actively manage our working capital and are proud of the successes amongst our various subsidiaries. As Mike had mentioned, we amended and extended our credit facility. The net result was an increase in our facility to approximately $2.2 billion from approximately $2 billion, with an extension in maturity to May 2028. This was achieved with consistent pricing with the prior facility. Included within our new facility is a dedicated $200 million social loan tranche, which will be used to fund the purchase of the new King Air aircraft for the BC Medevac contract. This fortifies our balance sheet and provides us with liquidity of approximately $1.1 billion to utilize to execute growth capital expenditures and potential acquisitions. The $200 million social loan tranche included within the new facility permits the AAC to draw on that portion of the facility as the new aircraft are delivered and modified for medical purposes. As Mike mentioned, as part of the transaction, ISS corporate provided a second-party opinion and concluded the loan is in alignment with the social loan principles as issued by the Loan Market Association. While the social loan is new to EIC, it's simply a validation of the work our subsidiaries have been doing since their inception. This loan specifically will fund the purchases for Carson Air's BC EHS contract. We also provide essential medical services from coast to coast to coast in Canada across EIC subsidiaries and have done so for decades. We are proud of the work that our subsidiaries do and to receive recognition of the social benefits that we provide publicly, both from our syndicate of lenders who supported the deal and through the second-party opinion, was satisfying. I would like to thank our lending syndicate for the support provided to us in both the overall renewal and the social loan trust specifically, which was oversubscribed and above our expectations. Our total leverage ratio continues to moderate as we continue to generate returns from growth capital expenditures. As previously noted, organic growth results lag between the time of the investments are made and when returns become evident through our financial results. During the first quarter, EIC made growth capital expenditures of $39 million. These growth capital expenditures primarily relate to the aerospace and aviation segment and were driven primarily by investment in aircraft. Our manufacturing segment had negative growth capital expenditures primarily related to the sales from the matting fleet within the environmental access solutions business line. Maintenance capital expenditures for the first quarter were $39 million compared to $41 million in the prior period. In our year-end conference call, we indicated that we anticipate maintenance capital expenditures to increase in line with our adjusted EBITDA. However, there were some maintenance events that fell outside of the first quarter and will be funded in later quarters. Carmel will provide more insight in her outlook. With that being said, I now turn the call over to Carmel.