Exchange Income Corporation

Good morning, everyone. Welcome to Exchange Income Corporation's conference call to discuss the financial results for the three and 12 months ended December 31, 2024. The corporation's results, including the MD&A and financial statements, were issued on February 26, 2025 and are currently available by the company's website or Cedar Plus. 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 unsure 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&A, the risk factors section of the annual information form, and EIC's other filings with Canadian securities regulators. Except, as required by Canadian security law, EIC does not undertake to update any forward-looking statements. Such statements speak only as of the date made. Listeners are also reminded that today's call is being recorded and broadcast live via the Internet for the benefit of individual shareholders, analysts, and other 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. With me today are our normal participants to this call, including Richard Waurick, our CFO, who will speak to our financial statements, financial results, along with Jake Traynor and Travis Muir, who will expand on our outlook for the future. Also joining us are Carmel Peter and Adam Turwin, who have joined us to answer any questions about EIC's recently announced agreement for the acquisition of Canadian North. Canadian North is a strategic acquisition for our essential air services business line, and is one of the most significant that we have announced to date. The routes flown by Canadian North are highly complementary to our existing routes, as there's essentially no overlap. We believe that we have a proven skill set in northern aviation, and we look forward to welcoming Canadian North into our family after all regulatory approvals are received. I'm very proud of our results over the last 20 years, but I'm even more excited about the future of AIC. especially with the strategic acquisitions we executed over the last two years and with Monday's Canadian North announcement. Yesterday, we released our year-end results for 2024. Our annual performance continued to be extremely strong, highlighted by our highest adjusted EBITDA, free cash flow, and adjusted net earning metrics in our history. Other key metrics, including net earnings and free cash flowless maintenance, CapEx, while slightly short of setting records, were also very impressive. These results were generated during the year where I would describe as challenging from a macroeconomic standpoint. Canada and the U.S. were wrestling with inflation and uncertainty over interest rates earlier in the year. Then we had significant uncertainty around the world, particularly in the United States. And lastly, we had a new administration in the U.S. that is providing sound bites on a daily basis, which are moving stock markets and foreign exchanges because of the risk of tariffs and other policies. With that backdrop, these results are really impressive. Our results were driven by our aerospace and aviation segment, and we continue to see positive signs in our manufacturing segment based on record levels of increase. We started to see strong momentum of increase being converted into bookings in our multi-storey windows business line in the latter part of 2024. And we saw more orders at our other manufacturing companies post-election. There are obviously some concerns and headwinds caused by the current political uncertainties. However, I believe the vast majority of our companies are not directly impacted by the potential tariffs. The greater risk lies in igniting trade wars through countervailing tariffs and the secondary risks of significant changes in foreign exchange rates and the reduction in business and consumer confidence. Our teams are regularly meeting to discuss mitigation plans should the tariffs become enacted, and we've taken proactive steps to mitigate the risk. We will try to be as brief as possible when talking about this year's record results, as I think everyone is going to be more focused on the Canadian North acquisition and other events before us. Prior to passing the call to Rich, I want to highlight some of the key performance metrics achieved during the quarter. We set records for revenue, adjusted EBITDA, cash flow, free cash flow, and adjusted net earnings on both the fourth quarter and a full year perspective. 2024 was our second best year, and second best fourth quarter from a debt earnings and free cash flow less maintenance CapEx viewpoint. These are amazing results. 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. During 2024, we executed strategic acquisitions for our environmental access solutions business line. with the addition of Duhamel and Spartan. Both businesses exceeded our expectations since acquisition, and they will be highly strategic for our matting business as we increase our growth in Eastern Canada and expand our operations throughout the United States. The system 7XT, which was the new Spartan mat developed in 24, has been a success based on our independent and real-world testing. We have seen great feedback on the MAT and the FOD's product line is continuing to expand in the U.S. Our teams from Canada and the U.S. are regularly meeting to see how we can continue to grow in the U.S. market in 2025 in the MATIC business. Our aerospace and aviation segment continued to set record results. It was driven by investments made in prior years along with contractual wins. The Medevac contracts in both Manitoba and BC are well underway, and the customers are very happy with our performance. During 2024, all of the Manitoba aircraft were received and put into service. We anticipate receiving eight of the remaining 10 new King Air aircraft for the BC contract in 2025. We had hoped to receive some of these aircraft in 2024. However, they were delayed at the manufacturer due to a strike in 2024. However, we've been able to use existing aircraft to service the contract, and we will be able to redeploy those aircraft when we receive the new ones. We hope to utilize some of the aircraft in our recently announced New Finland Labrador Medevac contract, which will start later in 2025. Additionally, we were recently awarded the Interim Rotary Medevac contract to assist New Finland Labrador while a new contract is being finalized. During the quarter, we also submitted our proposal to the Australian government for their maritime surveillance contract. This is the Super Bowl of maritime surveillance contracts, and we were one of three bidders on the contract. We expect to hear back from the government midway during the year as the government weighs the various options submitted by the three parties. As I commented in the past, this was a unique RFP as it was a solutions-based contract. which provided frequency and locations to be monitored. However, it was agnostic as to the type of aircraft and the equipment and where they choose to operate from. We put together a very strong bid and we expect to have as good a chance as any other bidder. We have also received interest from several other countries for ISR assets and are working through budgets and needs assessments. But as a whole, this geopolitical environment has resulted in a notable increase in demand. The future air crew training contract continues to be in the negotiation phase with the prime contractor. The scope is continuing to increase and the work should start under the contract in the latter part of this year. Lastly, our second aircraft in the UK home office contract is in the process of being modified. with the goal for it to start flying with augmented technical capabilities midway through this year. Aircraft sales and leasing continues to ramp its leasing business. The investments we have made in the past are yielding fantastic financial results. The demand for parts and engines is especially high due to parts shortages and metal shortages such as titanium around the world. Our manufacturing sector segment has shown positive momentum in the latter half of the year as we move into 2025, and we are seeing further strength. We started to see increased bookings within our multi-story windows solutions business to the tune of approximately a couple hundred million dollars since Q2. That backlog will benefit production in 2026 and beyond. Darwin Sparrow, our EIC COO, has worked with management to streamline the manufacturing footprint in Toronto. We are well set up to mitigate potential tariff risks in the United States with our Dallas facility. The uncertainty is caused by the talk of tariffs and countervailing tariffs has definitely caused some concern with our customers throughout the manufacturing subsidiaries. We have, however, very little product manufactured in Canada for customers in the United States. and we are continually revisiting our strategies as government announcements are made. Our environmental access solutions business line sees continued interest in several sectors, including transmissions and distributions, which we think have long-term tailwinds. We had record results in Eastern Canada during the year, and we see a number of potential larger products needing matting solutions in 2025 and beyond. So we are bullish about the opportunities that exist in that business, both north and south of the border. Lastly, our precision manufacturing and engineering business has noted some strong results in the back half of 2004, as we saw a significant uptick in orders in several industries, including release in capital by the telecommunications company. The demand has continued into the early part of 2025. In that business line, we've been hearing a lot of noise about supply chains and the risks of tariffs. But once again, our local teams remain nimble and ready to respond. Stepping back and looking at EIC from a global perspective, our subsidiaries' performance have allowed us to pay a growing dependable dividend to our shareholders. In fact, the fourth quarter, we surpassed over $1 billion of cumulative dividends paid. This figure is a credit to our business model, our subsidiaries, but most importantly, our management teams and our employees. Jake and Travis will focus on the outlook for our segments for 2025. However, before passing the call over, I want to speak about our 2025 guidance. Due to the regulatory approval process, we have not updated our guidance to include Canadian North. Our pre-existing guidance provided in the third quarter is continuing until we are able to announce the closing date of the Canadian North transaction. We believe that our adjusted EBITDA will be between $690 and $730 million for fiscal 2025. Our strategy has proven itself over the past 20 years, and I'm extremely excited about the next 20. I'd now like to ask the call over to Rich.

Thank you, Mike, and good morning, everyone. For the fourth quarter, revenue was $688 million, adjusted EBITDA was $167 million, and free cash flow was $111 million. All were fourth quarter high watermarks. Free cash flows maintenance kept at $43 million with our second highest due to the timing of certain maintenance events during the year. Revenue in our aerospace and aviation segment increased by $30 million or 8% to $415 million. Adjusted EBITDA increased by $32 million or 29% to $140 million. The revenue and adjusted EBITDA increases were primarily related to the essential air services and aircraft sales and leasing business lines. Revenue and adjusted EBITDA within our aerospace business line were lower due to planned wind-down of certain training programs prior to the start of new programs and contracts. Additionally, one of the aerospace contracts changed from a performance-based logistics arrangement to a time and materials arrangement, which results in more variability when comparing quarters. 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 business 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 routes flown on behalf of Air Canada. And finally, the impact of the BC and Manitoba medevac contracts. These have been the same consistent drivers throughout the entire fiscal period. Our aircraft sales and leasing business line revenues increased for two reasons. The first reason was the continued ramp in leasing activity due to investments in the lease portfolio over the past number of years, coupled with the continued improvement in the utilization of our portfolio. We are seeing significant demand for aircraft and even more so on the engine side. Lastly, Q4 saw an increase in large asset sales, which are generally more lumpy than our traditional parts business. The net result was a significant increase in revenue and adjusted EBITDA from the business line. Revenue in our manufacturing segment increased by $1 million to $272 million. Adjusted EBITDA decreased by $6 million to $40 million. Our environmental access solutions business line experience reduced revenues by 7% and decreased EBITDA by 16%, primarily due to reduced mass sales and service activity from the demobilization of a large project which occurred in the prior Q4. The acquisitions of Duhamel and Spartan exceeded our expectations based on our acquisition thresholds, and they partially offset those reductions. We are continuing to see demand for mat and bridge rentals and anticipate when larger projects are approved in 2025, we should have increased mats on rent ramping throughout the year. Our multi-story window solutions business line revenue decreased slightly by 1% when compared to the prior year, however, adjusted even a decrease by 29%, primarily due to three factors. First, there was a change in product mix. Second, there continued to be project delays coupled with our strategic decision to retain experienced staff, which will be required when the backlog and related production start. Last, there were additional costs as we streamlined the manufacturing facilities in the fourth quarter. We also recorded a restructuring provision, which was excluded from adjusted EBITDA and is separately reflected in the financial statements. We continue to see strong bookings, which increase the backlog. However, as previously discussed, those bookings will impact 2026 and 2027. Our overall net earnings were $28 million for the fourth quarter compared to $29 million in the prior year. The higher adjusted EBITDA was offset by increased interest costs of $5 million, increased depreciation of $9 million, and the restructuring provisions noted previously. Both interest and depreciation were elevated from the prior year due to growth capital investments and acquisitions made during the year. Adjusting that earnings were $39 million compared to $34 million in the fourth quarter of the prior year. Free cash flow was $111 million compared to $102 million in the prior year, both for fourth quarter records. Maintenance capital expenditures in the fourth quarter of 2024 were higher by $15 million due to the timing of maintenance events in our aerospace and aviation segments. Growth capital expenditures in Q4 were $43 million and were primarily driven by acquisitions of engines and aircraft in our aircraft sales and leasing business line, increased the leasing portfolio, coupled with aircraft acquisitions in our essential air services business line for additional lift, and expenditures incurred for the second aircraft for the UK Home Office. From a working capital perspective on the year, we had investment in working capital due to a couple of reasons. The most significant reason, which drove The year-to-date and quarter-to-date investment is due to several inventory purchases made within our aircraft sales and leasing business line. This was due to favorable market conditions, and those aircraft will be parted out and drive stronger results in the future. Second, the growth in the business, including revenue and adjusted EBITDA, required additional working capital investment. Third, the corporation collected a $30 million receivable at the end of 2023 for which The corresponding table was not due until 2024, which was a drag on working capital during the year. Finally, certain government receivables were behind historical collection patterns, which are expected to be resolved in 2025. We actively manage our working capital and working with each subsidiary team to convert the increase in working capital into cash. The corporation's aggregate leverage, including both the senior credit facility and convertible ventures, remained relatively consistent, increasing from 3.26 at December 31st, 2023 at 3.36 at December 31st, 2024. Subsequent to the end of the year, the corporation called its Series K convertible debentures, which saw 78 million of this series convert to equity. Pro forma, this conversion and redemption of the remaining debentures aggregate leverages 3.22. On a pro forma basis, our aggregate leverage ratio is the lowest it's been since 2019. All these ratios are calculated using the terms of the corporation's credit facility, which includes pro forma adjustments for the full year impact of acquisitions, but not the full year impact of growth capital expenditures. The growth capital expenditures that did not fully contribute in 2024 will have the effect of pulling down the leverage ratio where a full year contribution is considered. The corporation called its Series J convertible debentures during the fourth quarter, and as already mentioned, its Series K convertible debentures subsequent to year end. Convertible debentures were an effective form of financing in the past. However, we anticipate to transition to more conventional forms of financing to fund future growth. We continue to maintain a conservative balance sheet, and because of those past decisions, it allows us to execute on the strategic transactions like SPARTAN and Canadian North. Because of the financing transactions discussed above, no new equity capital will be required to fund the Canadian North transaction. Our M&A pipeline remains very strong. We are confident that our balance sheet is in a position that allows us to execute on future transactions. I will now turn the call over to Jake, who will provide an update for the 2025 outlook for the aerospace and aviation segment. Thank you, Rich.