Mr. Mike Pyle reports

EXCHANGE INCOME CORPORATION POSTS RECORD THIRD QUARTER RESULTS, DEMONSTRATES THE STRENGTH OF ITS BUSINESS MODEL AND ANNOUNCES A DIVIDEND INCREASE

Exchange Income Corp. has released its financial results for the three and nine months ending Sept. 30, 2023. All amounts are in Canadian currency.

Q3 Financial Highlights

• Record quarterly revenue of $688-million, an increase of $101-million or 17 per cent.
• Earned adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $168-million, representing growth of $17-million over the prior period or 12 per cent and setting a new benchmark for the corporation.
• Free cash flow third quarter record of $117-million compared with the prior period of $113-million.
• Record free cash flow less maintenance capital expenditures of $74-million, an increase of $5-million or 8 per cent.
• Record third quarter record net earnings and adjusted net earnings of $50-million and $55-million. Each increased by approximately $1-million despite an increase in interest expense of $8-million. On a per-share basis (basic), net earnings decreased from $1.20 to $1.06 and adjusted net earnings decreased from $1.34 to $1.19 primarily due the bought deal capital raised in the second quarter which will be deployed on future long-term contracts.
• Trailing-12-month free cash flow less maintenance capital expenditures payout ratio of 58 per cent and adjusted net earnings payout ratio of 78 per cent compared with prior period amounts of 52 per cent and 72 per cent, respectively.
• Announced the acquisition of DryAir Manufacturing on Oct. 5, 2023.
• Announced an increase in the dividend of 12 cents per annum to $2.64 per share, or an increase of 5 per cent.

CEO commentary

"Our third quarter was characterized by strong underlying fundamentals. We set several records for the quarter including revenue, adjusted EBITDA, free cash flow, free cash flow less maintenance capital expenditures, net earnings and adjusted net earnings on an absolute basis," commented Mike Pyle, chief executive officer. "Certain per-share metrics temporarily declined when compared with the prior year primarily because of the bought deal offering in the second quarter and capital on hand that is yet to be deployed. The acquisitions of BVGlazing and Hansen have met or exceeded our initial expectations and have been accretive to our shareholders. Our bought deal offering will be used to finance future growth capital expenditures, primarily the new medevac contracts in British Columbia and Manitoba, and the aircraft required to support the Air Canada routes on the East Coast, which will reap the rewards in the future. We have always had a long-term disciplined approach to capital allocation and our investment decisions made earlier this year are no exception. Those seeds sown and investments made will yield meaningful long-term growth for the company in the future. This confidence in the future and our collective sustained performance on an absolute basis has allowed us to increase our dividend by 12 cents per annum to a new level of $2.64 per share.

"This quarter also demonstrates the importance of our diversification. We previously communicated to the market that the prior year was a unique alignment of price, supply, demand and weather in our environmental access solutions business. When we purchased the business, our investment decision was based on the long-term fundamentals of the business. Fiscal 2022 significantly exceeded those metrics based on the unique combination of factors described above and, as we have noted previously, the results were not sustainable under normal economic and industry conditions. The business has moderated, as expected, and is still exceeding our internal expectations of the deal metrics. When you look at the combined performance of our segments you will note that our overall performance of the entire business continues to set record results even with an increase in interest expense of $8-million. This illustrates the effectiveness of our diversified business model and disciplined acquisition and organic growth strategy. Further, this record performance was achieved whilst the broader economy was experiencing difficulties associated with persistent inflation, tightening monetary policy and corresponding highs in benchmark interest rates. Our strong balance sheet management has been a cornerstone of our success and, with a slowing economy, ensures that we will be able to take advantage of any opportunities. The growth capital expenditures that we executed throughout 2023 will further lead to improved metrics in the latter part of 2024 and 2025 as the assets come on line and contribute to our financial performance in a meaningful way.

"Subsequent to quarter-end, we announced the acquisition of DryAir Manufacturing Corp. DryAir exhibited all of the hallmarks of an acquisition target. They are an innovative and recognized leader in the hydronic heating industry in North America primarily serving the rental market. The former owners will continue in their existing roles and it was clear at the outset of our initial meetings that EIC's business model and management's values were a match. The acquisition is accretive to our shareholders on a per-share basis and exceeded our investment thresholds on a historical basis and on forward-looking metrics," stated Adam Terwin, EIC's chief corporate development officer. "We continue to be active in reviewing potential acquisition opportunities. Our acquisition strategy and requirements are very disciplined, and we continue to apply those criteria for any potential acquisitions. As evidenced by the DryAir acquisition, the EIC story resonates with prospective vendors. We continue to champion the value that EIC can unlock by continuing to support their management's success and entrepreneurial spirit while providing capital for organic growth."

Review of Q3 financial results

Consolidated revenue for the quarter was $688-million, which was an increase of $101-million or 17 per cent over the prior period. Revenue in the aerospace and aviation and manufacturing segments grew over the prior year, by $51-million and $50-million, respectively. Adjusted EBITDA for the quarter was $168-million, which was an increase of $17-million or 12 per cent compared with the third quarter of last year.

Revenue generated by the aerospace and aviation segment increased by $51-million or 14 per cent to $415-million and adjusted EBITDA increased by $24-million or 24 per cent to $124-million over the prior period. The most material increases in revenue and profitability were related to increased passenger traffic marking a return to normal passenger movements in the north and expanded routes along the East Coast, including those being operated on behalf of Air Canada. Revenues and profitability were also positively impacted by the Netherlands Coast Guard contract that was previously awarded and began late in 2022 along with the contract with the United Kingdom Home Office that was awarded in May, 2023. The aircraft sales and leasing business line also experienced continued improvements in the leasing business.

Manufacturing segment revenue increased 22 per cent to $273-million for the quarter, however adjusted EBITDA decreased by $6-million or 11 per cent to $54-million. The acquisitions of BVGlazing and Hansen during fiscal 2023 were significant drivers of the revenue increase and they contributed to adjusted EBITDA as they met or exceeded expectations. Adjusted EBITDA declined, as expected, as the prior year comparative for the company's environmental access solutions represented record results from the unique alignment of price, supply, demand and weather along with near practical capacity for the utilization of rental mats in the prior-year comparative period. Demand and pricing have moderated toward more historical norms, however the business still performed in excess of the accretion metrics upon which the deal was priced. The majority of the manufacturing segment's remaining operations continued to improve, resulting in increases in both revenue and adjusted EBITDA over the prior period.

EIC recorded net earnings of $50-million compared with $49-million in the third quarter of last year. The increase was muted by an interest expense increase of approximately $8-million compared with the prior year.

Carmele Peter, president of EIC, said: "While the broader economies are experiencing significant economic uncertainty, our subsidiary management teams are continuing to drive their operating results. Operationally, the third quarter is our largest and busiest quarter of the year and a focus on operational excellence is critical to generating the types of results we have. Our aerospace and aviation segment demonstrated real resiliency throughout this uncertainty and were a major contributor to our third quarter results. Our manufacturing businesses experienced greater sensitivity to economic uncertainty, however we are very proud of how those subsidiaries have managed throughout these periods. The aerospace business is characterized by its stability due to its long-term contracts with governments throughout the world. We are continuing to see momentum within the aerospace business line due to our capabilities and brand recognition with governments around the world resulting from our previous contract announcements. Furthermore, geopolitical tensions also have created favourable business conditions as countries look to protect their borders and citizens. Our northern air operations have continued to experience higher demand driven by an increasing population in the north, continuous need for medical travel and the ongoing need to provide essential passenger and freight movements. As previously communicated, demand has outstripped our available capacity and as a result, we have recently expanded our fleets throughout our aerospace and aviation segment.

"We are also very proud of our collective actions in giving back to our communities which we serve. We continue to see increasing success with the Atik Mason Indigenous Pilot Pathway program with enrolment continuing to expand. During the quarter we also welcomed over 1,000 indigenous guests, in honor of National Day for Truth and Reconciliation, to a Winnipeg Blue Bomber football game. Our employees are making a difference in the communities we serve."

Richard Wowryk, EIC's chief financial officer, noted: "During the quarter, we have made payments and acquired capital assets related to our previously announced organic growth initiatives. The positive financial performance and resultant cash flows from such investments will be generated as the operations related to the recent contract awards commence, starting in the fourth quarter for the Air Canada contract and more fully in the latter part of fiscal 2024 and throughout fiscal 2025 for the new medevac contracts. Our financing decisions made in 2023, including the increase and extension of the credit facility and bought deal offering, set us up for strong financial performance for the foreseeable future. Our balance sheet and conservative leverage ratio will allow for continued growth whether it be through future acquisition or organic growth. However, consistent with our strategy, such growth will only be executed if the acquisitions or growth capital expenditures meet our internal rates of return to ensure that such investments are accretive to the company and its shareholders on a per share basis."

Outlook

Mr. Pyle concluded by saying: "Our results once again demonstrate the resilience of our business model. We continue to deliver record results in a difficult economic environment. Our industry diversification has delivered consistent meaningful financial performance irrespective of economic and geopolitical conditions. We are continuing to deploy growth capital expenditures in our existing operations which will result in even stronger financial results and cash flows both on an absolute basis and on a per-share basis in the future. The consistent execution of our strategy, including making investment decisions for the long term while maintaining a strong focus on operational excellence, continues to show in our results. With the recent contract wins we have announced and the returns we will generate on the capital deployed for those contracts, in addition to expected growth across EIC, we are pleased to provide guidance of adjusted EBITDA between $600-million and $635-million in 2024 and further growth in 2025 as the contracts mature. We have not deviated from our strategy since inception of the company and we will continue to deliver dependable and consistent financial results. Since inception of EIC, we have achieved a 5-per-cent cumulative annual growth rate in our dividend and we are proud to announce that based on our underlying operating fundamentals and strong outlook we are increasing our annual dividend by 5 per cent. This will increase our annual dividend from $2.52 per share to $2.64 per share effective with the November, 2023, dividend."

EIC's complete interim financial statements and management's discussion and analysis for the three and nine months ending Sept. 30, 2023, can be found on the company website or on SEDAR+.

Conference call notice

Management will hold a conference call to discuss its 2023 third quarter financial results on Friday, Nov. 10, 2023, at 8:30 a.m. ET. All interested parties can join the conference call by dialling 1-888-396-8049 or 1-416-764-8646 (international). Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Nov. 17, 2023, at midnight. To access the archived conference call, please dial 1-877-674-7070 or 1-416-764-8692 (international) and enter the encore code 528965 followed by the pound key.

A live audio webcast of the conference call will be available at the company website. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. An archived replay of the webcast will be available for 90 days.

About Exchange Income Corp.

Exchange Income is a diversified acquisition-oriented company, focused in two sectors: aerospace and aviation, and manufacturing. The corporation uses a disciplined acquisition strategy to identify already profitable, well-established companies that have strong management teams, generate steady cash flow, operate in niche markets and have opportunities for organic growth.

We seek Safe Harbor.