Exchange Income Corporation

Good morning, everyone. Welcome to the Exchange Income Corporation's conference call to discuss the financial results for the three-month and 12-month periods ended December 31st, 2023. The corporation's results, including the MD&A and financial statements, were issued on February 22nd, 2024 and are currently available via the company's website or 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 which should not be placed on such statements. Certain material factors or concerns assumptions are applied in making forward-looking statements and actual results may differ materially from those 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 factor sections in 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 statement speaks 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 interested parties. I would now like to turn the call over to 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, we released our fourth quarter and annual results for 2023. In announcing our results, we reported several records for annual and for Q4 amounts. EIC had an incredible year in 2023 and we have set our foundation for the future. We have set records in virtually all financial metrics. In our public reports, we highlight that 2024 represents 20 years since the first acquisition of Perimeter in May of 2004. Our results demonstrate the success of our strategy. By proven companies with excellent management teams, invest in those companies and nurture their growth. In doing so, we can provide a stable and growing dividend for our shareholders. That 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 business and operational execution by our underlying subsidiaries. EIC preserves the cultures in our acquired entities and create an environment where their management can thrive. Those are going to be common themes throughout today's call. We have a lot to be proud of. However, in line with our other calls, we'll attempt to keep our prepared comments as brief as possible to allow time for questions. With me today is Richard Waurick, our CFO, who will speak to our financial results. and Carmel Peter, our president, who will expand on our outlook for 2024. I will limit my discussions to the year-ended December 31 results for the full year, while Richard will focus his remarks on the fourth quarter results. For our annual results, revenue increased 21% to $2.5 billion. Adjusted EBITDA increased by 22% to $556 billion. Net earnings grew to $122 million from $110 million. Net earnings were unchanged at $272. Free cash flow, less maintenance capital investment, grew by 15% to $202 million. On a per share basis, it grew by 3% to $4.49. Adjusted net earnings increased to $144 million, up 8%. and adjusted net earnings per share was down slightly to $3.20. The payout ratio on a free cash flow less maintenance capital expenditure basis was very strong from a historical perspective at 57% compared with 55% the previous year. The payout ratio on an adjusted net earnings basis was 80% compared to 73%. These payout and net earning financial metrics were achieved despite a $39 million increase in our annual interest expense. Lastly, we announced in November a 5% increase in our dividend to $2.64 per annum, our third such increase over the past 19 months. These remarkable results were partially due to acquisitions of Hansen, BV Glazing, and Dry Air during the year. all of which were perfect fits for EIC and were accretive immediately and fit our disciplined acquisition strategy. The other main contributor to the results was continued investment in and resulting growth in our operating subsidiaries. We will highlight those key investments, their impact on the year, and how they are expected to impact future periods. First, let me talk about our acquisitions during the year. Each of the acquisitions is accretive to our bottom line. Hansen is a custom fabricator of precision metal components and assemblies located in Richmond, BC. It joins our subsidiary overlanders and expands our sheet metal capabilities in the BC region. It also diversifies our revenue streams and capabilities to our customers, as Hansen has machining and high volume stamping capabilities. These capabilities, coupled with Overlander sheet metal and custom powder coat capabilities, lead to a full-service lower mainland precision metal business. Hence, it has already seamlessly fit into our EIC family and has already started working with our other manufacturing subsidiaries. Our second acquisition was BV Glazing. BV manufactures unitized and stick curtain wall systems and railing systems in addition to its core window wall glazing systems, similar to those produced at Quest. BV's ability to provide curtain wall and railing products allows our multi-story window business to offer a complete solution to our customers. BV is a great complement to Quest and makes us one of the largest multi-story window solution businesses in Canada. Our COO, Darwin Sparrow, has become significantly involved bringing Quest and BV together and in identifying and executing on synergies and other opportunities. Furthermore, such entities have been working with our manufacturing subsidiaries to identify opportunities to work together. Examples would include Hanson for certain installation and metal components, and Overlanders for powder coating capabilities. The last acquisition completed was Dry Air. Dry Air is an OEM manufacturer of portable, hydraulic heating systems. They sell their products to the growing rental company industry in North America. Dry Air has been meeting with various manufacturing subsidiaries and has identified several opportunities to work with our other manufacturing entities on existing and new products. Our acquisition process is very disciplined and we are very excited to welcome these three companies into our EIC family of companies. However, Equally important as these acquisitions are the growth capital investments in the businesses we already own. We had several contractual wins this year, which will result in accretive growth in the future on both the top and bottom line basis. The first announcement pertained to the commercial agreement with Air Canada for the provision of regional services in Eastern Canada. The agreement commenced in July of 2023 and required the company to invest in additional Q400 aircraft to service the contract. To date, four aircraft are flying the regional route and by all accounts has been a success. During the year, we announced two contracts for the provision of fixed wing medevac services for both BC and Manitoba. Both contracts are long-term contracts for 10 years with renewal options in addition. The BC contract will require us to purchase 12 brand new King Air aircraft. The first of such modified aircraft was received in the fourth quarter and is currently undergoing its conversion to a medevac configuration. Since November, we are servicing the BC government with existing aircraft in our fleet, coupled with the assistance of other legacy providers. The Manitoba contract requires a fleet of five planes, being a combination of jet and turboprop aircraft. The turboprops have been modified and placed into service during the first quarter of this year, with the jets coming online in the latter part of 2024. Both of these contracts are important for several reasons. Firstly, they demonstrate our capabilities as one of Canada's largest medevac providers. Secondly, they're all long-term contracts and are accretive to the company. And lastly, they provide us with opportunities to expand our services of provinces as well as provide opportunities in other regions. Both contracts require significant upfront investment for aircraft, interior modifications, and additions to our infrastructure. These costs are borne up front, and the full benefit of the contract will be more evident in the latter portion of this year and into 2025, especially with the BC contract, where the existing key area assets will be redeployed and continue to generate income. We announced the deployment of the force multiplier with the UK Home Office for an 18-month period. The UK Home Office has issued an RFP for a long-term contract and we submitted our proposal in January. The interim contract will provide meaningful returns as the force multiplier asset will be fully utilized for the vast majority of this year. We also announced the acquisition of a full motion King Air simulator, which will be located in Winnipeg. We have become one of the world's largest operators of King Air aircraft. and the full motion simulator will allow for the simulation of the exact landscapes, environment, and runways that our pilots will encounter. This will enhance our pilot skills and will have a number of benefits, including improved safety, reduced travel costs, and corresponding reduced greenhouse gas emissions. This is an investment in our people and will enhance our ESG journey, which will be further discussed in a moment. I will take the remainder of my time to discuss our operating segment performance for this year and some highlights and drivers of these great financial results. Our aviation subsidiaries are experiencing strong demand across our portfolio. We have made meaningful investments over the last number of years, including adding aircraft to the fleet. These investments have been a success as our revenues in aviation and aerospace have increased by 12%, while our adjusted EBITDA has increased by 23%. The drivers of the revenue increase in margin expense was in all three lines, all three business lines. Firstly, the prior year's first and second quarters were impacted by COVID, therefore results were muted. Returning to normal volumes drove revenue increases in our essential air services. The return of normal traffic was important. However, the real driver was our past fleet investments, that bolstered our rotary wing and scheduled and charter businesses. Furthermore, the expansion of the East Coast with Air Canada contract was also a significant driver. More importantly, our margins grew due to the investments in assets and higher load factors impacting our bottom line. Our aircraft sales and leasing business continued on its upward trajectory. our leasing revenue increased by close to 20 million, or 59%. The lease revenue increase has an outsized impact on adjusted EBITDA. The parts and asset sales component of the business remains strong, although they were down from the prior year, as last year was exceptional and above historical norms. Lastly, our aerospace business had a very strong year, due to the Netherlands Coast Guard contract that started in the fourth quarter of 2022 and the UK home contract that I just spoke about. Those increases in asset utilization drove a meaningful increase in adjusted EBITDA during the year. Our manufacturing business also had a great year. It surpassed $1 billion in revenue and generated adjusted EBITDA of $181 million. When we delve into the components of the increase a little deeper, we see that the revenue increased in our environmental asset, environmental access solutions by 20%, as Northern MAP was acquired on May 10th, 2022, and therefore only had a partial year comparative, a partial year comparative period. During 2022, the first quarter of 2023, and partway through the second quarter, the business experienced a unique alignment of price, demand, supply, and weather that drove results far beyond our expectations. The first part of that second quarter were also buoyed by long linear projects winding down in Western Canada that resulted in an abnormal number of rentals during those winter months. Fast forward to the third and fourth quarters of 2023, the results have moderated consistent with our acquisition metrics, which the deal was priced upon. We are happy with those returns and they are creative to our business. Looking back, we were very fortunate to acquire the business when we did in 2022 and have experienced those abnormally high returns. Our multi-story windows business continued to improve. It was driven by the acquisition of BV Glazing. Adjusted EBITDA expanded by 110%, which was more than the revenue growth in that business line. The improvement in profitability was driven by enhanced scheduling, increased throughput at our facilities, and specifically the ramp-up of our Texas plant, and increased pricing on projects which flowed through the bottom line following the increases in cost. We did experience some higher costs in the business, but we feel that the supply chain and inflationary pressures have started to normalize. Lastly, our precision metal and engineering business continued to reform. Revenues increased 11% and adjusted EBITDA by 26%. The increase in revenues and adjusted EBITDA were partially driven by the Hanson and Dry Air acquisitions. Another contributor was product mix. resulting in higher margins across several subsidiaries. Our maintenance capital expenditures during the year were $175 million, an increase of 12%. This was compared to our adjusted EBITDA increase of 22%. The maintenance capital expenditure increase were driven by an increase in the fleet, increased flying hours, and inflationary cost pressures. Our growth capital expenditures for the year were $303 million compared with $125 million in the previous year. As previously discussed, the growth capital expenditures were primarily related to the contract wins previously discussed. We apply a similar discipline to growth capital expenditure decisions as we do to our acquisitions. The only difference is that the certain growth capital expenditures require time to ramp up for the returns to be obvious in our bottom line. And looking at our business, 2023 was about existing on our existing business, executing on our existing businesses, coupled with the investment in the future, whether it be by way of acquisition or growth capital expenditures. Our future is bright and this is driven by our entrepreneurial management teams and disciplined execution. That has allowed us to deliver a consistent growing dividend to our shareholders. In order to take advantage of the opportunities we have to make sure we have our finances in order, we have always ensured that we have capital on hand to capitalize on investment opportunities when they arise. We manage our balance sheet with the same discipline we do when we consider investment returns on acquisitions and growth capital expenditures. During the year, we amended and extended our existing term facility, resulting in an upsize of the facility to approximately $2 billion, and the term was extended to 2027. We don't have any debt coming due until our 2018 debentures are due in the June of 2025. Furthermore, we executed a bought deal financing, the largest in our history in June of this year. These proceeds are being utilized to fund the growth capital expenditures related to the Medivac and other contractual wins. These financing activities mean that we'll be able to continue to be conservatively levered, and we have available capital to pursue opportunistic acquisitions or further investments in our existing businesses. On a stakeholder front, I wanted to take to talk about our people at EIC and our customers in the communities we serve. Our people are what drives this company, and our family-based culture aligns with us. I want to say thank you to each and every team member throughout our company, which is now over 8,500 people strong. In relation to people and communities, I want to talk briefly about some internally developed programs. Several years ago, we saw an upcoming shortage of pilots. That was obviously exacerbated by the pandemic, but we started our journey back in 2019 with the life and flight program. This was done proactively to address the shortage of pilots and AMEs in the industry and to create our own EIC solution to a broader issue. In 2022, we announced the start of the ATIC Mason indigenous pilot pathway program. And this program continues to grow and has exceeded all of our expectations. We were proud to see six students from our first class return in 2023 and 12 new Indigenous members commence their aviation journey in 2023. Five of those students have either graduated or are near graduation and all five have accepted employment opportunities in either our airlines or at MFC training for 2024. This is an incredible achievement. A graduation was held in Thompson this past summer and seeing the joyous of the students, coupled with the pride of their extended family, demonstrated the importance of this program to our communities. Because of its immense success, we have announced a further expansion of the program for 2024 in Rankin Inlet. We are excited to support the extended program, and the benefits are worth the financial expenditures that we will incur. The added benefit for the communities is that it creates role models for youth in those communities and opens opportunities for individuals who never thought they had a chance for a career in aviation. We have also continued our very successful partnership with the Winnipeg Blue Bombers. We celebrated the National Day for Truth and Reconciliation by collaborating with our Indigenous partners and the Winnipeg Blue Bomber Football Club to host over 1,000 Indigenous guests at a CFL game in late September. These guests were flown from across Canada, and the event was a tremendous success by all accounts. Further, last week we announced that EIC partnered with the Winnipeg Blue Bombers on a new community outreach initiative. Members of the Blue Bombers management, coaches, and team will travel the 10 northern communities to participate with the youth and the leaders of the communities in the spirit of reconciliations. We have also continued our journey to ESG reporting. In 2022, we published our second sustainability report. We continue to track and monitor our scope one and scope two emissions and have started to undertake a project to understand and measure our scope three emissions. Sustainability has been top of mind for EIC since our inception and one of our guiding principles to our strategy. We manage our sustainability efforts the same way We do with other areas of the business. We are disciplined in our approach, manage the short term and focus on the long term. ESG and its reporting is a journey as evidenced by the new standard setting bodies in Canada. We support the development of harmonized reporting standards. We continue to mature and improve our reporting each year and it is publishing our 2023 report in the near future. Carmel will focus on the outlook for our segments for 2024. But firstly, I wanted to reiterate our guidance for 2024. We confirm our adjusted EBITDA range of $600 to $635 million. We have made significant investments this year and are poised to realize on those investments this upcoming 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 fourth quarter results.

Thank you, Mike, and good morning, everyone. As Mike mentioned, I will keep my comments for the fourth quarter in the interest of time. Revenue and adjusted EBITDA in the fourth quarter were both fourth quarter records. Revenue increased by 113 million to 657 million, or 21%, and adjusted EBITDA increased by 20 million, or 16%, to 144 million. On a segment basis, adjusted EBITDA for our aerospace and aviation segment increased by $21 million to $109 million, while our manufacturing segment adjusted EBITDA decreased by $2 million to $45 million. Our revenues and adjusted EBITDA in the aerospace and aviation segment were buoyed by the expanded route network related to the Air Canada Agreement coupled with strong demand and realization of returns on past investments in our fleet. Our aircraft sales and leasing business revenues continued to improve with our leasing revenues nearly doubling over the prior year comparative. Sales and service revenues continued to be strong, although they were slightly down compared to the prior year as sales in 2022 were above historical norms due to large asset and engine sales. The manufacturing segment experienced revenue increases largely attributable to the acquisitions during the year. Adjusted EBITDA, however, declined. This is primarily due to the fact that the fourth quarter of 2022 was very strong for the Environmental Access Solutions business line, with the perfect alignment of price, demand, supply, and weather. Furthermore, Q4 of 2022 and Q1 of 2023 also had the unusual benefit of matting continuing during the winter months on a couple of long linear projects, which would be abnormal at that time of year. As a result, Revenues were down about 6% in the business unit and adjusted EBITDA was down 38%. That being said, the returns on the business in 2023 continued to be in excess of the acquisition metrics on which it was priced. We were fortunate at the time of the acquisition to have those unique circumstances. The revenues in adjusted EBITDA in the multi-story window solutions business continued to improve during the quarter. Revenues were up primarily due to the acquisition of BV Glazing during the year. Adjusted EBITDA improved by a factor in excess of the revenues due to the improved scheduling, increased throughput in the facilities, and increased pricing on certain projects. Our precision manufacturing and engineering business line had a solid fourth quarter, primarily due to the acquisition of Hanson and Dry Air, which showed increases in revenue and adjusted EBITDA. Overall, net earnings and adjusted net earnings increased by 8% and 5%, respectively. driven by the 60% increase in adjusted EBITDA offset by increased depreciation and interest expense. Depreciation increased by $10 million over the prior period due to investments made in growth capital expenditures, the addition of capital assets to the corporation's acquisitions, and increased flying completed by the corporation's airlines. Interest expense increased by $7 million over the prior period due to increase in benchmark foreign rates coupled with credit facility draws to fund for the growth initiatives that Mike discussed earlier. Free cash flow and free capital expenditures increased by 24% on both metrics. Free cash flow reached $102 million during the fourth quarter, and free cash flow and capital expenditures increased by $10 million to $50 million. These Q4 results and results for the year are quite remarkable, considering the macroeconomic conditions that we were all exposed to. The year began with high inflationary pressures, which resulted in central banks continuing to increase interest rates to decade-long highs, along with supply chain disruptions and tight labor conditions. As mentioned, the impact of our interest rates for the quarter was $7 million. In previous years and in the current year, we made the choice to fix interest rates on a portion of our debt. In prior years, we swapped $190 million of debt, and in the current year, we entered into two additional interest rate swaps, one in the amount of $350 million Canadian and one in the amount of $140 million U.S. dollars. Without those two interest rate swaps entered into 2023, the interest rate, the increase in our interest costs would have been much higher as the swaps were entered into at a time where there was significant inversion in the forward curve. Even with the significant increase in interest expense, our payout ratio based on free cash flows paid with Capitalist Ventures was 57% at year end. With that in context, over our past 20 years, that is near historic lows. As we move throughout the year, the inflationary pressures started to abate and supply chains partially improved. The industry environment still appears to be uncertain. Timing of rate cuts are consistently moving as central banks consume conflicting data on inflation, job, and wage growth. Geopolitical uncertainty continues around the globe. This can have an impact on our supply chain for goods and services. However, it also creates opportunities for certain of our manufacturing and aerospace navigation subsidiaries. In light of these uncertainties and our opportunistic but disciplined acquisition strategy, we have ensured that we have fortified our balance sheet this past year. First, we actively manage our investment in working capital. Although our revenues and just the even are at our all-time highs, our investment in working capital is $53 million, which can be fully explained by the receipt of a large payment in December of 2022 with a course-running outflow occurring in 2023. We had a similar transaction impact this year. However, the amount was only $30 million. Therefore, effectively manage our working capital on a relatively flat basis when our revenues and adjusted EBITDA were up over 20%. During the year, we also upsized and extended our credit facility. The amended credit facility provides us with financing up to $2 billion and extends the maturity out to 2027. Lastly, to fund the contractual wins that Mike previously spoke about, we executed on our largest block deal offering in the corporation's history and raised $173 million of capital. These transactions have allowed us to make a strong balance sheet. Our current senior leverage is less than 2.5 times, which is consistent with our conservative history. Our total leverage ratio, including the impact of our convertible ventures, continues to decline and is at five-year lows. We actively manage our balance sheet and leverage to ensure that that we have available liquidity to execute on any opportunistic investments, whether it be through growth capital expenditures or acquisitions by Adam and his team. In all cases, whether it be growth capital expenditures or acquisitions, we always apply a high degree of discipline in making those decisions so that they are accretive to our shareholders. This is evidenced by our 20-year track record. Our M&A pipeline remains strong. We are confident that our balance sheet is in a position that allows us to execute on future transactions and will ensure that we fund acquisitions and growth projects as we always have, equitably with consistent and modest levels of leverage. During the fourth quarter, EIC made growth capital expenditures of $102 million. These growth capital expenditures were entirely related to the aerospace and aviation segment and were driven primarily by investment in additional aircraft, equipment, interiors, and infrastructure for the Manitoba and D.C. Medevac contracts. Manufacturing experience negative growth capital expenditure of $5 million related to the reduction in right size of the environmental access solutions rental fleet. As we repeated before, the cash outpost for the contractual wins precedes the returns on those investments. That is the reason certain per share metrics have declined in the current year due to the bought deal offering and delayed returns on the investment on those funds invested or to be invested. Maintenance capital expenditures for the fourth quarter were $52 million compared to $42 million in the prior fourth quarter. The increase was driven by the aerospace and aviation segment and was due to the increased fleet and increased levels of flying and resulting maintenance events. That concludes our review of our financial results. I will now turn the call over to Carmel.