Exchange Income Corporation Q1 2023 Earnings Call
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<unk> does not undertake to update any forward looking statements.
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I would now 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 with me today is rich <unk> our CFO .
Peter.
Yesterday, we released our first quarter financial results for 2023, and I'm excited to have this opportunity to share with you some of our highlights from the quarter and pleased to report that even though in both of our operating segment. The first quarter is always our slowest seasonally yes.
We exceeded all our internal financial targets, while at the same time executing on opportunities for future growth.
This is particularly noteworthy given the volatility in the macroeconomic environment high inflation interest rate increases and ongoing geopolitical tensions. Despite these challenges we stayed focused on executing our strategy.
In terms of our financial results because of deliberate choices and investments we have made in our past we have generated first quarter records in revenue adjusted EBITDA and free cash flow.
Revenue increased by 32% to $527 million.
Adjusted EBITDA increased by 45% to $97 million.
Free cash flow increased by 26% to $60 million.
Adjusted net earnings were $12 million or 27 cents per share versus <unk> 8 million or <unk> 20 per share last year.
On other financial metrics compared to the same period last year and given the first quarter is our slowest seasonally were in line with our expectations free cash flow less maintenance capital expenditures was essentially unchanged at 19 million well on a per share basis. It declined nominally to 44.
As a result of a more normal seasonality in our maintenance capital expenditures compared to the old way.
Compared to the Covid excuse me affected results of the first quarter of last year.
Our payout ratio on our free cash flow less maintenance capital expenditure basis improved modestly from 58% to 58% from 59%.
You've heard me say many times before our success is a result of our culture.
Our strategy and our consistent execution our record results in the first quarter proved that once again.
Our environmental access solutions business was a significant contributor to the results as there was no comparable amount in the previous year. However, much like our aviation operations. Their performance is impacted by seasonality with the third quarter being the strongest and the first being soft.
Passenger volumes in our central Air services businesses return to be more in line with pre pandemic levels and replace the $11 million of government subsidies recorded in the same period last year.
Argo and better about demand really.
Strong charter demand also remains strong with a tight supply of aircraft and crew hindered our ability to capitalize on all charter opportunities this quarter.
Our aerospace business benefited from a full quarter of operations within our Netherlands, a contract or precision manufacturing and engineering operations continued to experience strong demand for their products and our multi storey window solutions business continues to recover for pandemic disruptions disruption.
With product shouldn't normalizing and strong demand.
Well, our aircraft sales and leasing business did not generate the same level of large asset sales as they did in the same period last year demand for aircraft parts of leasing remained consistent with the prior period.
Yeah large sales of assets and aircraft are always variable and period to period and have a bigger impact on our revenue than they do on our earnings.
Managing in the short term, but it's only part of our strategy. It is our focus on the long term that drives growth in future quarters. It is woven into our DNA. That's why in the first quarter of this year, we also made meaningful and disciplined investments into new acquisitions and organic growth in both our segments.
In March we announced the acquisition of BV glazing systems, and we're pleased to officially closed the transaction early this month after receiving approval from the Canadian competition Bureau, BV glazing located in Ontario, complements our existing investments in our multistory Windows solutions business based.
On their historical profitability and strong order book.
The transaction is immediately accretive to our per share metrics. In addition to the accretive this to be the glazing to our results. It represents the most attractive prospects in our history for creating efficiencies within our existing businesses cargo very product offerings, such as curtain wall and railings.
D V glazing business plus installation.
Abilities in our existing quest business offer revenue expansion potential the expectation of greater purchasing power and rationalization of production facilities will facilitate growth and improve margins with.
With strong combined order book of approximately $1 billion and positive industry outlook means hiring more people to tackle the tremendous opportunities.
Impressive management team of BV glazing led by Mike, who will stay on and run the business was a critical element of our due diligence.
Following our BV glazing announced within March.
Later announced the acquisition of Hanson industries, we've attempted to grow our precision manufacturing business by acquisition in the lower mainland of British Columbia, specifically for a prolonged period, but have been unable to uncover companies with unique market niches and strong defensible margins.
Still we were introduced the Hansen.
Hence it meets all of our acquisition of all requirements to Accretively grow our operations on a standalone basis.
The addition of a second operation in BC provides important capacity for both companies in times, where demand exceeds their standalone capacity.
The president of Hanson is a proven leader who will continue to lead our team showing the team under our ownership.
Yesterday, we were also extremely pleased to announce two significant organic growth opportunities that will provide profitable growth for years to come first with the engagement of a forced multiplier F. At Max aircraft in our aerospace business. This contract we will fully deploy the aircraft for 18 months.
As opposed to the short term solution that was designed to deliver this means double the utilization we would normally expect on an annual basis. In addition to improved utilization. It represents the second European contract win for our aerospace business, which validates our collective capability a collective.
Capabilities as a differentiator in the marketplace and is a testament to our credibility on the world stage.
Secondly, we're thrilled to be in a position to announce we have invested in the purchase of what will be the only civilian on full motion electronic King Air training simulator in Canada.
Currently our pilots less traveled a third party locations in the United States for simulator training.
Having our own simulator will not only generate an accretive financial return. It will also increase operating flexibility because we were a lot after rely on third party providers for limited trading spots.
Increase our training.
It will increase our pilot training capacity in the industry faced a pilot shortage.
It will provide new revenue opportunities trading pilots from other airlines within Canada, as we will not fully utilize the simulators capacity.
It will eliminate fuel burn while gaining all of the experience to make our fleet one of the safest in the world Skies, and finally, we'll reduce our carbon footprint by significantly reducing fuel burn and corresponding greenhouse gas emissions for both training the training itself and the travel training in the United will stay.
<unk> fund.
Fundamental to our strategy is making our balance sheet to ensure we have capital on hand to take advantage of investment opportunities when they arise.
While the markets have bromine turbulent did 2023, we were successful in upsizing and extending our credit facility and fixing our interest rate exposure.
Which positions us well to execute on investment opportunities on a go forward basis, Richard will detail. This in his remarks.
We're excited about our future and intend to keep on doing what we are doing because it works the diversification of our manufacturing segment over the past 18 months, the new investments and acquisitions and organic growth from new contract wins and the discipline in which we've managed our balance sheet.
<unk>, we are in a position to revise our guidance from the previous range of $510 million to $540 million to our new guidance of $540 million to $570 million.
And while we're not yet prepared to provide formal guidance for 2024, we believe it is likely that we will hit the $600 million threshold as adjusted EBITDA.
Based on current performance levels and future growth.
The consistent execution of our strategy continues to deliver for all our shareholders as evidenced in our results. We're excited to integrate our new investments into our operations and report their performance in future quarters, I will now hand, the call off to Richard who will detail our first quarter results.
Thank you, Mike and good morning, everyone.
In the first quarter, our subsidiaries delivered results that were higher than our internal expectations, resulting in several first quarter records and 0.3 adjust.
Adjusted EBITDA was $97 million, an increase of 45% over the prior period, both the aerospace and aviation segment in the manufacturing segment drove this increase as adjusted EBITDA increased by 17% and 195% respectively in each segment.
Our services increase adjusted EBITDA by 30%, despite not receiving any government subsidies in 2023 as compared to $11 million in the prior period all revenue streams within essentially a services grew over the prior period the.
The most material increase with passenger revenue as passenger levels returned to pre COVID-19 levels.
Within aerospace adjusted EBITDA increased primarily due to the contribution from the deployment of the Corporation's ISR assets for the Netherlands Coast Guard contract. This is the first quarter of full deployment of these assets on this contract.
With an aircraft leasing adjusted EBITDA declined from the prior period.
<unk> experienced a much higher level of large asset sales than we have experienced historically with airlines around the world had to start making purchases that they had put off during the pandemic and other things for summer 2020 to travel.
Current period was strong relative to what would be considered normal but it was lower than the prior period part sales remained strong and these revenues increased slightly over the prior period.
In the manufacturing segment. The increase was primarily driven by the acquisition of Marlin, Matt in the second quarter of 2022, and Theres no comparative in Q1, 2022, but all business lines within the segment experiences experienced increases over the prior parent within multi storey window solutions adjusted EBITDA increased over the prior period as Patrick that work.
Beds in previous periods included adjustments for higher input costs.
We're starting to be manufactured for customers. We expect continued improvement over the remainder of 2023.
Precision manufacturing and engineering.
Adjusted EBITDA increased by 32% investments made in prior periods to expand capacity and the benefits of the integration of tuck in acquisitions completed in 2021 were the main contributors to the increase.
Net earnings and adjusted net earnings increased by 83% and 47% respectively an increase of.
And increased by 60% and 35% respectively on a per share basis.
Per share results were impacted by a 10% increase in the shares outstanding driven by our common share offering in the third quarter of 2022.
And shares issued as part of the purchase consideration on our 2022 acquisitions the.
The increase in adjusted EBITDA, which drove the increase in net earnings and adjusted net earnings was partially offset primarily by two items increased interest costs and depreciation of capital assets.
Interest costs increased over the prior period in lockstep with increase benchmark rates over the last 12 months. In addition increased amounts outstanding due to investments made over the last 12 months increased interest cost depreciation.
Depreciation on capital assets increased for two reasons first the acquisition of the other Matt in the second quarter of 2022 contributed to the increase in plant three second investments made to increase the size of our fleet and increased buying of that please also resulted in higher depreciation.
Other costs associated with our acquisition activity, notably intangible asset amortization also increased over the prior period amortization of intangible assets is a noncash expense and these assets are not replace on an ongoing basis, when they're set up as part of the purchase price allocation for accounting purposes, and as such are.
Moving from our investment earnings.
Cash flow less maintenance capital expenditures was flat to last year as a more normal seasonal cadence to our capital expenditures offset an increase in free cash flow generally our central air services with the bulk of their maintenance where possible in the first part of the year when they are less busy in the prior year the onset of the AUM in cranberry.
Of course, some of these expenditures to later in the year, meaning that Q1 of 2022 was abnormally low compared to what we would've expected absent the impact of the Omnipod right.
Gross capital expenditures were focused in our essentially our services and our aircraft and engine lease portfolio.
Actually the services investments were made in additional aircrafts the construction of a new hangar to support growth in our essentially our services and deposits made on a king air simulator.
The leasing portfolio investments were made in assets as we increase our fleet to position our operations to respond to customer demand as the narrow body and regional jet marketplace continued its recovery from the impact of the worldwide pilot shortage.
During the first quarter as we messaged in the fourth quarter of 2022, we had a material outflow from working capital, which was driven by a receivable that was collected in the fourth quarter of 2022 with a corresponding payable was not due until January of 2023.
Our senior leverage ratio at the end of the quarter remains consistent with our historical targets at 259 times as our adjusted EBITDA over the remainder of the airlines, but the guidance we've provided to the market. We expect this will continue to decline towards the end of the year.
Our leverage ratio when including our convertible debentures continues to decline as debentures have not increased at the same rate as our adjusted EBITDA over the last 18 months.
Storage.
The ventures have represented one times and adjusted EBITDA within our capital structure, whereas now the debentures represented approximately three quarters of a turn of adjusted EBITDA off of the new 2023 guidance using the midpoint.
In addition, there are two series in Korea with ventures that are now in the money and we have started to see a limited amount of these converted into equity.
Subsequent to the end of the quarter, we extended our credit facility to May not 2027 and increase its size from approximately $1 75 billion to approximately $2 billion.
Just one of their past practice of always ensuring we have capital available for as required for investments. We took advantage of our optional renewal with our syndicate of lenders to increase the size of the facility.
To provide the liquidity required as we are seeing some very exciting growth opportunities both through acquisition and organic growth.
So they are consistent with our previous facility and we added one new American lender to the syndicate.
Quite an elevated rate environment, putting pressure on banks funding costs were able to complete the extension and upsize with no change in pricing.
First quarter, the corporation fixed $350 million of credit facility debt at a rate below floating rates for a period of approximately three years. The inversion in the yield curve in mid January and provided an opportunity to fix that that was invested through acquisitions and growth investments in the prior year.
Subsequent to the end of the quarter in early April we fixed $140 million of credit facility debt at a rate below floating rates for a period of three years.
When the Canadian dollar swap there is significant inversion in the yield curve at the time that made fixing the rates are attractive.
Both of these transactions provide us with certainty on our cost of capital and with previous swap transactions and our convertible debentures. Both also having fixed rates approximately two thirds of our debt now has a fixed rate that conclude my review of our financial results I will now turn the call over to promote thank you rich our strong financial performance in Q1, coupled with the acquisition.
Activities in the first part of 2023 and you organic contract awards has set the stage for another year of solid growth for EIC and further solidifying the foundation for 2024.
Before we talk about the impact that those items will have on our outlook for the year. Let me first discuss our operations for Q T, which I will do in relation to how we are now discussing our operations being two of the six business lines in which our operations are included.
Starting with the aerospace and aviation segment, our essential Air service business will see increased profitability over Q2, 2022, driven primarily by increased passenger traffic in all regions cargo will remain relatively flat compared to last year charters will continue to be hampered by tight.
But demand remains strong in particular with increased mining exploration activity, we have three aircrafts coming on online in Q3, which will allow us to capture some of these additional opportunities.
Well she also year over year growth, albeit more modest from trauma flight, which was not fully operational until later in 2022 and an expansion in scope of work for the government Nunavut with increase increased crewing out of Ottawa and Winnipeg.
All of our air operators are experiencing increased costs from rising labor costs, driven by an industry wide shortly James for pilots aircraft mechanics, and medical personnel. We have completed or are in the process of negotiating many of our collective bargaining agreements that will provide security for our employees and stability.
All of our operations the increase in labor costs will impact margins until such time as we were able to pass through these costs onto our customers.
The aerospace line.
Well see also an increase year over year with the benefit of its Netherlands operations, which did not go into service until Q4 of 2000 2010 full deployment a force multiplier for the back half of Q2 pursuant to its 18th month ISR contract with an Allied European government higher tempo flying in the UAE and tourist.
Ross and some additional training contracts for the U S Department of defense.
The aircraft sales and leasing business will see marginal growth year over year as Q2, 2022 had the highest ever aircraft and engine sales, which will be materially lower than Q2, 2023 parts sales, although still strong or being impeded by the lack of available MRO slots for tear downs.
This will be offset by any increase in leasing revenue over last year. We are encouraged by the trend of early king revenues, but the pace is slower than expected as pilot charges continue to persist and constrained the speed of the regional narrow body aircrafts recovery.
The environmental access solutions business will benefit from a full quarter of earnings from northern Mac compared to two months in Q2, 2022, However, northern mass performance in Q2 2022 needs to be put in perspective as it benefited from ideal winter spring transition conditions, because the market pricing and lack of match.
Apply some competitors Q2 2023 market conditions are good but not as ideal.
Going into Q2 large portions of northern mass operating regions went from frozen it's rain conditions straight to road bans as temperatures rose limiting northern mat rental and operational buildup in Q2.
Also declining mining lumber prices and an increase in competitive match supply will also limit environmental access solutions year over year growth, however to be clear northern match performance in Q T was still expect it to be.
Still expect it to materially exceed the performance metrics on which it was acquired.
The ongoing wildfires in northern Alberta have not yet, but depending on their path of destruction could impact our customers or access to your customers in that region and therefore impede in the short term our operations in northern Alberta, if it does occur there could be upside in later quarters as those customers look to replace Matt.
And rebuild any damage infrastructures.
The multi storey window solutions business will benefit from the acquisition of BV glazing on me first as well as increasing margins later in Q2 from higher pricing quest to market over a year ago to address the substantially higher input cost overall demand for product remained strong but in the U S market.
At that time from quote to project contract has elongated the Canadian market, However is particularly experiencing high levels of activity.
The precision manufacturing engineering business will experience organic growth year over year as well as benefits from the acquisition of Hanson, which was completed at the beginning of April .
Organic growth is from increased demand in our wireline and wireless construction services business as well as in precision manufacturing in particular for the defense sector.
With respect to maintenance cap capital expenditures in Q2, we anticipate materially higher levels than in Q2 of 2022 first several regions regions.
First.
The first part of Q2, 2022 was impacted by Omnicom variant, which slowed activity enforce maintenance capital expenditures into subsequent quarters. Secondly, our air operators are expecting increased flying hours relative to Q2 2022, leading to increased maintenance capex.
Thirdly, labor shortages and supply chain issues have driven maintenance capital expenditure higher and lastly, we have increased maintenance capex due to recent acquisitions for Hanson D D as well as a full quarter for northern map.
Gross investments for the aerospace and aviation segment in Q2, we're focused on the upgrade of the surveillance aircraft for the renewed curacao contract additional aircraft capacity to capture increased charter demand and have started the construction of the Gary film and indigenous terminal, which will align our terminal capacity to the growth of the communities. We serve also.
So in Q2 investments will be made to modify one of her beach 1900 aircrafts can provide for scheduled medevac flight for Nova Scotia Health. We currently have a seven year contract with Nova Scotia Health, which is serviced by one king air condition.
Addition of the 1900 aircrafts is an increase in the scope of the service under that contract and will commence in Q3.
But the current size of our King Air Fleet and the anticipated continued growth in this platform he or she will be one of the largest king air operators in the world.
The scope of operations led to Eic's economic and strategic decision to enter into a contract to purchase a full motion simulators to support all of our King air operators and eliminate the costs extending our pilots to the U S. For training simulator is expected to take several quarters to complete an install it seemed later not only provides more training time for pilot.
But also significantly reduces fuel burn and corresponding G. H T emissions for both training and travel to training, thus, reducing our carbon footprint.
Gross investments for manufacturing segment will be minimal with the investment concentrated on the expansion of our environmental access solutions Mat rental fleet and rolling stock and the procurement of some new equipment and the precision manufacturing and engineering solutions business to meet increased customer demand.
As I look to the balance of 2023, there are obviously economic challenges to manage routes, including persistent higher interest rates inflation rates labor shortages and increased cost, but the investments we have made in the past that paved the way for continued success for the balance of 2023 with.
With the tailwind of a strong performance in Q1, two acquisitions in Q2 and organic growth opportunities. We are increasing our 2023 and adjusted EBITDA guidance from $510 million to $540 million to between 540 to 570 million. Thank you for your time. This morning, we would now like.
The open the call for questions operator.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two.
And if you are using a speaker phone please lift your handset before pressing any keys.
One moment. Please for your first question.
Your first question comes from Steve Hansen at Raymond James. Please go ahead.
Yeah.
<unk>.
Good morning.
The New force multiplier contract appears to be another important win in Europe .
That segment. It also is one of the longest duration contracts I think you've discussed thus far could you maybe give us a sense for what that means for the program longer term and whether this opens up additional opportunities in that region.
Yeah. We are we're really excited about the ability to put out that Max out on a prolonged basis.
Many of you will recall, we built that found that as an opportunity to respond to hotspots in the world, where there was a need for an immediate surveillance.
Aircrafts, but nobody has the staff that are available and ready to go with something that always needs to be built and so we built this in turn COVID-19 quite frankly, it's been less busy than it had been before simply because governments are focused around the world other other areas.
With ongoing immigration issues.
Governments around the world, but in Europe in particular are very interested in patrolling their waters and one of the government's approached us and said we need an immediate solution and by immediate we're going to stand up that operation in a matter of a few weeks and I'm not just getting the plane there we're gonna basis staff.
If everything to fly that aircraft more hours than we've ever flown at a on.
Monthly basis in fact, the government would like us to fly.
Beyond the capacity, we think it can fly so we're gonna be pushing the limits of our team to keep it maintained it in the air but what's unique about that is that.
We only just signed our first are delivered our first contract and then the other ones. This is a socket the opportunity and we see opportunities like this continuing to pop up it's highly likely that the government that we're doing this for will fall a lot. This 18 month contract with a long term RFP and.
While we would have to win such an RFP I think we're in a good position when at least kind of a head start because we're working for them already.
And so.
I think it just speaks well to power.
<unk> reputation in the world.
<unk> credibility in solving ISR maritime surveillance issues.
Yeah, and Steve what I would add is it really showcases the capability a force multiplier here I think what I'm trying to think of it as a as an object if an aircraft, but it's really a full service and for our folks to stand up and it just a matter of weeks.
The aircraft to get it ready for that type of deployment, but it's going on to do the necessary modifications and to quickly adapt our technology on the aircraft to suit the government the customer that we're servicing is quite remarkable and you know we're also excited about the carton out system, which you've heard us talk about before.
It is on other surveillance.
Acknowledging that this government has so well be very integrated with them and I think it just showcases our international capabilities and I think that'll lead to a lot of additional opportunities in the future. One last thing before we leave this topic, we're not being cute or vague about who it is for the.
The government extended the contract with allowed us to announce it because it.
Our AGM later today, but they will be making their own announcements very shortly and it will become public.
Public who this is for but we are at the request of our customer letting down without stop.
Okay. That's great. That's good color. Thank you.
Just maybe one follow up and I'll get back in the queue is around the window solutions business.
Getting you saw these names.
Just wanted to make sure I'm understanding it properly the backlog there had been deep for some time I think we all know that.
But there has been challenges you referenced the ability to ramp up here through the balance of the year I'm trying to get a sense for the cadence at which you see that production schedule improving them and how we should think about the economics for that business as it goes forward I think you've also described it in the past as one of your most under underutilized businesses.
Upside so just some sort of sense for how we expect the balance of the year to play out would be helpful. Thanks.
Well I think I think you see two things.
We've already seen the revenue start to increase as our production is normalizing.
And so you'll see that continue to go through the year and quite frankly into next year, we've got more and more projects. The farther we go deeper in the order book is but in addition to that it really are the returns go not only with the volume, but there are gross margins are better because they were priced at higher.
Input prices. So we have better gross margins and then quite frankly, the factories more efficient because it's running more than it has been in the past.
And one of the best indicators of that as we're in the midst of setting up a second shift at Dallas for the first time since we've built that factory and for those of you who have had the opportunity to see it. It really is a stages yard manufacturing facility and soon more product we could run through there the better.
It really was a part of your question, but I'm going to Trump analysis cause.
Related to this as it relates to BV.
We have a strong order book and you'll see that instantaneously.
With this well as they come into Q2 with the May one closing, but you're going to see significant synergy.
Synergy opportunities as those companies are put together.
Revenue cross selling our railings and person wall installation, where they can help each other out and then.
Consolidating our manufacturing we have five or six facilities in southern Ontario will shrink that down materially and have more Dallas like a production now that's obviously going to happen overnight, we will see that over ensuing quarters, but I think we are.
Well you used the word cadence we're gonna be talking about this quarterly for the next three or four or five quarters as we start to see the benefits of the higher contract. The increased demand and then following that the synergies of the two operations.
Thanks.
Your next question comes from Matthew Lee at Canaccord. Please go ahead.
Good morning.
Morning, Hey, good morning, Thanks for taking my question and congrats on the result I just.
Maybe want to start.
Okay.
The manufacturing side, you know based on my calculation for you did high single digit organic revenue in the business.
Can you maybe break down what's driving that and if we should expect that rate of growth to kind of get to your end of the year throughout the year, even though northern Matt brings them right.
Yeah, I mean, if we need to talk about northern Matt separately from the precision.
The manufacturing stuff, we do Ah you're calc on the high single digits.
Is pretty close to Bang on it's driven by really by Tuesday, the strong demand.
And passing on some of the cost of increased the products like the raw materials in there.
But virtually every one of our businesses.
As a.
Record or near record order books, so in that part of our business it's very.
It's easier to forecast that.
Quite frankly pretty positive because the demand across the board, we don't have a lot of direct to retail.
What kind of products, we're producing so those discussions.
Discussions and rumors of recession, we really don't see having a big impact there. So I think continued growth out of the type you're talking about is a reasonable estimate.
As it relates to northern not.
They performed at a rate very close to last year. When we didn't know the business, but last year was clearly the best in our northern Abbotts business Hormel mentioned during the call that.
We don't anticipate and we've said all along last year was kind of.
A perfect storm of good things, having said that this year remains strong demand is good we have a lot of that song rent price may come down somewhat as orange.
Letters have more supply, but demand remains strong the results coming out of the northern matter going to be far higher than.