Exchange Income Corporation

Welcome to Exchange Income Corporation's conference call to discuss the financial results for the three and nine months ended September 30, 2024. The corporation's results, including the MD&A and financial statements, were issued on November 7, 2024 and are currently available via the company's website or CDER+. Before turning the call over to management, listeners are cautioned that today's presentation and responses to questions may contain forward-looking statements within the meaning of the safe-hybrid provisions of Canadian financial securities laws. Forward-looking statements involve risks and uncertainties, and a due 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 to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the quarterly and annual MD&A, 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 by 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 third quarter results for 2024. Our third quarter performance was extremely strong, highlighted by our highest free cash flow and free cash flow less maintenance capital expenditures per share metrics, and our second highest net earnings per share in our 20-year history. We also recorded all-time high watermarks for revenue, adjusted EBITDA, net earnings, and adjusted net earnings. These incredible results were during a period where there was significant increase geopolitical and macroeconomic uncertainty in the world. Speaking of our 20-year history, I want to point out that by the end of this year, we will reach $1 billion in dividends paid to our shareholder, which we view as an incredible accomplishment. Our results were driven by our aerospace and aviation segment. However, we continue to see some positive signs in our manufacturing segment, based on our near-record levels of inquiries and are starting to see those inquiries being converted into firm, fixed orders within our various businesses over the last several months. With me today are our normal participants for this call, including Richard Waurach, our CFO, who will speak to the financial results, along with Jake Traynor and Travis Muir, who will expand on our outlook. Also joining us is Adam Turwin, our head of acquisitions, to answer your questions on the Spartan acquisition we announced last night. It's going to be a busy call and we will attempt to be as brief as possible in our opening remarks to leave as much time as possible for your questions. Before passing the call over to Reg, I wanted to highlight some of the key performance metrics achieved during the quarter. We set records for revenue, adjusted EBITDA, free cash flow, and free cash flowless maintenance capex, adjusted net earnings. All per share amounts were either records or the second best in our 20-year history. This demonstrates the execution of our strategic deployments of capital, whether it be for organic growth or by the way of acquisition by Adam and his team. Not to be lost in the record results is that we also announced the highly strategic acquisition of Sparta. I had previously spoken about our desire to grow the business in the eastern part of Canada, and we have successfully executed on that strategy, including the acquisition of Duhamel. The other strategic priority was the expansion of our environmental access solutions business line into the U.S., and finding a complementary composite mat product line. With yesterday's announcement, we have achieved both strategies. We had looked at the number of the players in the U.S. market, but none met our rigorous and disciplined acquisition requirements. Then we approached Spartan. Spartan is one of the three composite mat manufacturers in the United States market. They have a strong management team that will continue on with the EIC family. and the acquisition is accretive for our shareholders on a stand-alone basis. The timing of the acquisition was perfect, as the current owners and management had embarked on a new growth phase with the development of the System 7 XT Max and they recently added significant manufacturing capacity to their plants in Rockledge, Florida. When we met with management, they immediately liked our EIC philosophy and they will be a great cultural fit within our environmental access solutions business. We expect to add additional growth capacity as the company adds to its manufacturing capacity in 2025, which will allow the company to grow and reach its lofty goals in later 2025 and 2026 and beyond. The company also holds patents and manufactures a construction interest map solution called FODS or FODS. Both the FODDS trackout and the composite mats will allow for greater product diversification in our Canadian operations, especially in the transmission and distribution industry segment where the composite mats are primarily used in the United States. I will leave it to Adam to answer any questions you may have later in the call. One of the more important trends was the continued positive momentum experienced by our manufacturing subsidiaries. We talked about We talked for the last number of quarters about how we are quoting at record or near-record levels. And in the last conference call, I spoke about how we had booked in excess of $100 million of furniture projects in our multi-storey Windows Solutions business line. That booking momentum has continued through the quarter, and we believe that as the macroeconomic and geopolitical uncertainties continue to abate, that the number of bookings will also increase. The largest competitor to our results was our previous investment in the businesses, and we are starting to see the fruits of those investments. Fiscal 23 and 24 were years characterized by several announcements, including our BC, Manitoba, and Newfoundland medevac wins, an extension of our Nunavut medevac contract with increased pricing, and our new maritime surveillance contract with a European allied nation, and of course our Air Canada commercial agreement. Speaking of the Air Canada contract, our fifth and sixth aircraft started flying in the second quarter. And more recently, we started flying our first trans-border routes from the east coast into Boston and Newark in the US. We continue to execute under the BC and Manitoba contracts. Aircraft that were previously purchased for the Manitoba medevac were successfully deployed in September. In BC, we recently received and retrofitted our second King Air 360. The deliveries for the remainder of the King Air fleet will be extended through 25 and into 26 because of delays the manufacturer has experienced because of a strike at their plant. As a reminder, the full impact of the new contract will only be seen when we can redeploy the existing King Air aircraft into other operations, such as the new Newfoundland and Labrador contract. On this contract, we remain in negotiation with the government on the final terms of the contract. However, we were very happy to note that the contract includes rotary ring assets, which is a strategic addition from our perspective. These existing King Air aircraft could also be used in the Northwest Territories contract, which we have been on as well. We had submitted our proposals for the Northwest Territories and are waiting to hear back, however, on which proposal they will choose. That contract will require us to unseat the long-serving incumbent in the region. We also received confirmation of the extension of our medevac contracts with the government of Nunavut into 2026 with enhanced pricing. Our relations with the government of Nunavut remain incredibly strong. I want to give you an update on the other contracts that I spoke about in our first and second quarter calls. The first contract relates to the future air crew training project. Skyline was named as the preferred bidder last year, and we are part of the Skyline team. The contract was formally allotted to the Prime, and we continue to be in negotiations to finalize our subcontract with the Prime, which we anticipate will be completed by Q1 of 2025. We further anticipate that work under this contract will start sometime in the second or third quarter of next year. We announced the extension of a contract for an allied nation for ISR services. The 15-month contract includes a second ISR asset due to the required flight hours and augmented technical capabilities. We are well underway in modifying this second aircraft and readying it for its intended purpose. Lastly, we are continuing to see significant interest around the world for our aerospace services. We see significant opportunities in Australia, in Europe, and expanded opportunities in Canada. We are very bullish about the future opportunities, and these type of contracts are right in line with our core capabilities and our business model as they generate consistent cash flows throughout the term of the agreement. Stepping back and looking at EIC from a global perspective, our subsidiaries' performance have allowed us to pay a consistent and dependable dividend to our shareholders. In fact, the fourth quarter will enable us to surpass over $1 billion in dividends paid, which is an incredible achievement that I would never have thought possible 20 years ago. That figure is a credit to our business model, our subsidiaries, our management teams, and most importantly, our employees. Jake and Travis will focus on the outlook for our segments for the remainder of 2024. However, Prior to passing over the call, I want to speak about our 2025 guidance. Based on all of the contract wins and organic growth initiatives and the acquisition of Spartan, I am confident that our adjusted EBITDA will be between $690 and $730 million for the next fiscal year. Our strategy has proven itself over the past 20 years and our future is bright. I will now pass the call over to Rich.

Thank you, Mike, and good morning, everyone. Revenue was $710 million, adjusted EBITDA was $193 million, and free cash flow was $136 million, and free cash flow with maintenance capex was $81 million. All were quarterly high watermarks. Revenue in our aerospace and aviation segment increased by $19 million, or 5%, to $433 million. Adjusted EBITDA increased by $31 million, or 25%, to $155 million. The revenue increases are primarily related to the essential air service business line, while the increase in adjusted EBITDA results were driven by essential air services and aircraft sales and leasing business lines. Adjusted EBITDA within our aerospace business line was slightly down when compared to the prior year, primarily due to changes in business mix. Looking at the essential 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, including our rotary wing business. Second, our average load factors improved, which has a direct improvement on adjusted EBITDA. Third, the impact of the routes flown on behalf of Air Canada. And finally, the impact of the BC and Manitoba medevac contracts. Our aerospace business line revenues were lower when compared to the prior period. However, adjusted EBITDA did not decline to the same extent. This was due to two offsetting reasons. a greater tempo of flying within our higher margin ISR business, which was balanced by a reduction in our lower margin training business due to the timing of contract starts and stops. The product mix shifted, which resulted in profitability margin expansion even with net revenue declines. The revenue reductions are expected to be moderate as the company transitions to new contracts from legacy contracts in the training business. Lastly, our aircraft sales and leasing business line, revenue declined from the prior period due to a few large asset sales that occurred last year, lifting the comparable period. Those large asset sales are lumpy and generally lower margin transactions. The reduced large asset sales were more than offset from an adjusted EBITDA perspective by contributions from a continued step-up improvement in our leasing portfolio. The net result was a significant increase in adjusted EBITDA for the business line. Revenue in our manufacturing segment increased by $3 million, or 1%, to $276 million. Adjusted EBITDA decreased by $3 million, or 5%, to $51 million. As previously communicated, the comparative bill periods for our environmental access solutions business line normalized during our third quarter, and our revenues were 13% higher than the comparative period, while adjusted EBITDA increased by 3%. This is primarily due to a change in product mix, as this quarter had a higher amount of asset sales as opposed to MAP rentals, which have a higher EBITDA contribution percentage. Our multi-storey window solutions business line revenues decreased slightly compared to the prior period. However, adjusted EBITDA decreased by 27% due to changes in product mix, as the business line completed more third-party installations than in the prior period, which generated lower adjusted EBITDA margins. coupled with operational inefficiencies as certain projects pushed out of the quarter, as requested by our customers, reduced adjusted EBITDA. Lastly, we also made the strategic decision to retain experienced staff to meet future demand. Finally, revenue in our precision manufacturing and engineering business line was slightly ahead of the prior period, while adjusted EBITDA declined by 4%. The decreases in necessity were primarily due to changes in sales mix and customers deferring capital spending due to the U.S. election and macroeconomic uncertainty. Other items of note during the quarter were that interest costs were approximately $5 million higher due to increased benchmark borrowing rates compared to the prior period, coupled with increased debt outstanding due to various growth capital expenditures funding. Our free cash flow's main capital expenditures payout ratio was 60% compared to the prior compared to the prior period of 58%, while dividends increased by over 7% when compared to the prior period. As interest rates continue to decline, this will be beneficial to our payout ratios and earnings per share number. Based on where our interest rates are now compared to average rates throughout the year, year-to-date impact is about $6 million, and as the rates continue to decline and are forecasted to decline, over the next 12 to 18 months, our earnings will continue to benefit from the reduction in benchmark borrowing rates. Depreciation on capital assets increased by 10 million due to the growth capital expenditures and acquisition activity we've undertaken. Our effective tax rate increased slightly when compared to the prior period. However, it is within our expected range of 27 to 29% on an annualized basis. Free cash flow increased by $19 million to $136 million, while free cash flow with maintenance capital expenditures increased by $7 million to $81 million. Maintenance capital expenditures increased by approximately $12 million, primarily due to the timing of certain overhaul events, coupled with the increased activity within our aerospace and aviation segment. From a working capital perspective, we had an investment in working capital for a couple reasons. The most significant reason is the seasonality of the business, with the third quarter being the strongest quarter and therefore necessitates increases in working capital, which ultimately reversed in the fourth quarter. Secondly, our aircraft sales and leasing business made several inventory purchases during the quarter to part out and sell in the future. Lastly, there was an investment in AR due from customers on construction contracts throughout various subsidiaries. We actually manage our working capital and then working with each subsidiary to convert the increase in working capital in the cash prior to year end consistent with prior years. Our senior leverage ratio decreased slightly to 2.87 times. We managed our leverage ratio during the quarter despite it being our seasonally busiest quarter and significant opportunistic investments within aircraft sales and leasing. The increase compared to historical periods is primarily due to investments in growth capital expenditures. As we previously noted, organic growth results in a lag between the time with the time investments are made and when returns become evident in our financial results. We anticipate this ratio will decline as growth capital investments impact the bottom line along with an improvement in our manufacturing segment EBITDA relative to our comparative results. The acquisition of Spartan will not have a significant impact on our leverage ratio, And after completing the acquisition, we continue to maintain strong liquidity and are not contemplating an equity offering for the foreseeable future. During the third quarter, ESU made growth capital expenditures of $93 million. These growth capital expenditures primarily relate to the aerospace and aviation segment and were driven primarily by investment in additional aircraft in our aircraft sales and leasing business line. The second King Air purchase, along with its related interior modifications for the BC Medevac contracts, additions for the full motion King Air simulator, and additions in the aerospace for the second mission ISR asset to be deployed in the allied European nation ISR contract, along with other growth capital throughout our central air services. Growth CapEx in our manufacturing segment primarily related to environmental access solutions business life. Maintenance capital expenditures for the third quarter was $55 million compared to $43 million in the prior year. In our past conference calls, we've 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 quarter that will be funded in later periods. Maintenance capital expenditures for the manufacturing segment were slightly higher than the comparable period. That being said, we remain confident and reconfirm our 2024 guidance provided in our Q2 2024 conference call. With that, I will now turn the call over to Jake.