Previous Investments and Focus on Reduction
of Payout Ratio Delivers Results
WINNIPEG, May 7, 2019 /CNW/ - Exchange Income Corporation
(TSX:EIF) (the "Corporation" or "EIC"), a diversified,
acquisition-oriented company focused on opportunities in the
aviation, aerospace and manufacturing sectors, reported its
financial results for the three month period ended March 31, 2019. All amounts are in Canadian
currency.
CEO Commentary
"The first quarter of 2019 was very
gratifying," stated Mike Pyle, the
CEO of EIC. "From a financial standpoint, we continued to generate
strong results in all our primary metrics, including revenue,
EBITDA, Adjusted Net Earnings and Free Cash Flow less Maintenance
Capital Expenditures. Investments made in our Aerospace &
Aviation segment in prior periods yielded returns in the quarter as
revenue and EBITDA for the segment were up significantly over the
prior year. I am particularly proud that the trailing twelve month
Free Cash Flow less Maintenance Capital Expenditures payout ratio
was 56% at the end of the quarter, an improvement from 69% where it
stood last year at this time. Our first quarter results mark
significant progress towards our goal of a payout ratio of 50% on a
Free Cash Flow less Maintenance Capital Expenditures basis and 60%
on an Adjusted Net Earnings basis. The sustainability of our model
clearly resonates with these results."
"During the quarter, I was also pleased to see the confidence
that our customers have in EIC as a dependable and reliable
long-term business partner and that they see value in their
relationships with EIC. The Government of Canada continued to expand its more than
thirty year relationship with PAL Aerospace with the recent
awarding of the maritime surveillance contract after a very
competitive RFP process. EIC also successfully won the RFP process
to provide general transportation services to the Government of
Manitoba, primarily providing air
service for the legal system in the northern region of the
province. Finally, our relationship with SkyWest Inc. continued to
grow as we entered into a joint venture with them to lease CRJ
aircraft and/or engines to other regional airlines around the
world," added Mr. Pyle.
Darryl Bergman, the CFO of EIC,
stated, "One of the keys to EIC's track record of growth is
maintaining a strong, flexible balance sheet. During the quarter,
the Company raised $86 million
through a convertible debenture offering, which includes the
exercise of the full over-allotment by the underwriting syndicate.
We also announced that we would be redeeming the 2014 seven year
convertible debenture that was maturing in 2021. The new debenture
features a seven year term, a lower interest rate and much higher
strike price of $49.00. EIC's
convertible debentures are now spread across four maturities
between 2022 and 2026, providing us further flexibility. Subsequent
to the 2018 year end, approximately $25
million, or 90%, of the debentures were converted into
common shares, increasing our equity position and further
strengthening our balance sheet. It is apparent from the success of
this offering that investors continue to have confidence in EIC's
business model and proven track record of delivering results."
Q1 2019 Financial and Operating Highlights
- Consolidated revenue increased 12% to $297 million;
- Consolidated EBITDA grew by 18% to $64
million and was 9% higher excluding the impact of IFRS
16;
- Adjusted Net Earnings per basic share was $0.41, consistent with the prior year, and was
$0.43 excluding the impact of IFRS
16;
- Trailing Twelve Month Adjusted Net Earnings payout ratio
improved to 75% from 77% for the comparative period;
- Free Cash Flow improved by 9% to $44
million;
- Free Cash Flow less Maintenance Capital Expenditures was
$18 million, up 80%;
(Free Cash Flow and Free Cash Flow less Maintenance Capital
Expenditures are not impacted by the adoption of IFRS 16).
- Trailing Twelve Month Free Cash Flow less Maintenance Capital
Expenditures payout ratio strengthened to 56% from 69% for the
comparative period;
- Amended its credit facility to obtain more favourable pricing
and extend its term;
- Completed a joint venture with SkyWest to acquire, lease and
sell CF34 engines, expanding its relationship with SkyWest;
- Received the five year Aerial Surveillance contract from the
Government of Canada, with
increased scope and nature of services;
- Received the five year General Transportation contract from the
Manitoba Government, providing air service for the legal
system;
- Closed an $86 million bought deal
offering of convertible unsecured subordinated debentures,
including the exercise of the full $11
million over-allotment option that was granted to the
underwriters.
Highlights Subsequent to Quarter End
- Redeemed its 7 year 6.00% convertible unsecured debentures
which were to mature on March 31,
2021. At December 31, 2018, the
Company had $28 million of these
debentures on the balance sheet. Approximately $25 million of the debentures were converted into
707,760 common shares prior to redemption.
Selected Financial Highlights
The Corporation's 2019 financial results include the impact of
IFRS 16, a substantial change in lease accounting standards,
effective January 1, 2019. The
Corporation was required to adopt IFRS 16 and used the modified
retrospective approach. Financial results prior to 2019 were not
prepared on this basis. As a result, the comparability of the
Corporation's 2019 EBITDA, Net Earnings and Adjusted Net Earnings
prior to 2019 is impacted. The Corporation provided guidance on the
impact of IFRS 16 adoption in Section 10 – Accounting Policies of
its annual 2018 MD&A that 2019 annual EBITDA would increase
approximately $20 million and Net
Earnings and Adjusted Net Earnings would decrease by approximately
$0.05 per share. In addition, the
opening balance sheet as of January 1,
2019 includes right of use assets of $120 million and a right of use lease liability
of $123 million as a result of the
adoption.
(All amounts in thousands except % and share data)
|
Q1
2019
|
Q1
2018
|
%
Change
|
Revenue
|
$297,016
|
$266,027
|
+12%
|
EBITDA1
|
$63,826
|
$54,013
|
+18%
|
Net
Earnings
|
$7,488
|
$8,614
|
-13%
|
per share
(basic)
|
$0.24
|
$0.27
|
-11%
|
Adjusted Net
Earnings2
|
$12,724
|
$12,932
|
-2%
|
per share
(basic)
|
$0.41
|
$0.41
|
-
|
Trailing Twelve Month
Adjusted Net Earnings Payout Ratio (basic)
|
75%
|
77%
|
|
Free Cash
Flow3
|
$44,246
|
$40,596
|
+9%
|
per share
(basic)
|
$1.41
|
$1.29
|
+9%
|
Maintenance Capital
Expenditures4
|
$26,524
|
$30,754
|
-14%
|
Free Cash Flow less
Maintenance Capital Expenditures
|
$17,722
|
$9,842
|
+80%
|
per share
(basic)
|
$0.57
|
$0.31
|
+84%
|
Trailing Twelve Month
Free Cash Flow less Maintenance Capital Expenditures Payout Ratio
(basic)
|
56%
|
69%
|
|
Dividends
declared
|
$17,187
|
$16,733
|
+3%
|
Review of Q1 Financial Results
Consolidated revenue for Q1 2019 was $297
million, an increase of $31
million or 12% over Q1 2018. Consolidated EBITDA for the
same period was $64 million, up
$10 million or 18%. Excluding the
impact of IFRS 16, EBITDA increased 9% over the prior year. Most of
the increase was generated by the Aerospace & Aviation segment
and was driven by a combination of significant organic growth and
the impact of acquisitions.
Within the Aerospace & Aviation segment, revenue increased
by $27 million or 14% to $217 million. EBITDA also increased by
$11 million or 23% to $58 million. Excluding the impact of IFRS 16,
EBITDA in Q1 2019 increased by $7
million or 15% over the prior period. Within the Legacy
Airlines and Provincial, increased EBITDA was driven by higher
revenue, cost savings associated with operational efficiencies,
stabilization in fuel prices and reduced third party charter costs
achieved by sharing capacity across airline subsidiaries and
investment in additional aircraft in prior periods. Regional One
experienced a significant increase in sales and service revenue and
realized a smaller increase in lease revenues.
The Manufacturing segment generated revenue of $80 million in Q1 2019, up $4 million or 5% from Q1 2018. EBITDA also
increased during the first quarter of 2019, up $1 million or 4% to $13
million. The adoption of IFRS 16 increased EBITDA by
$1 million in 2019 compared to the
prior period. Quest's results were negatively impacted in the
quarter by production inefficiencies resulting from a flood at the
plant caused by a broken water main during the fourth quarter of
2018. While the facility was operational during the quarter, the
plant was not fully remediated until the middle of March. The
balance of the segment collectively experienced growth in revenue
and EBITDA.
1 EBITDA is defined as earnings before interest,
income taxes, depreciation, amortization, other non-cash items such
as gains or losses recognized on the fair value of contingent
consideration items, asset impairment and restructuring costs, and
any unusual non-operating one-time items such as acquisition costs.
EBITDA is not a defined performance measure under International
Financial Reporting Standards ("IFRS") but it is used by Management
to assess the performance of the Corporation and its segments.
2 Adjusted Net Earnings is defined as Net Earnings
adjusted for acquisition costs, amortization of intangible assets
that are purchased at the time of acquisition, interest accretion
on acquisition contingent consideration and non-recurring
items. Adjusted Net Earnings is a performance measure, along
with Free Cash Flow less Maintenance Capital Expenditures, which
the Corporation uses to assess cash flow available for distribution
to shareholders.
3 Free Cash Flow is a performance measure used by
Management and investors to analyze the cash generated from
operations before the seasonal impact of changes in working capital
items or other unusual items. Free Cash Flow for the period
is equal to cash flow from operating activities as defined by IFRS,
adjusted for changes in non-cash working capital, acquisition
costs, principal payments on right of use assets and any unusual
non-operating one-time items.
4 Maintenance Capital Expenditures is not an IFRS
measure. Capital expenditures are characterized as either
maintenance or growth capital expenditures. Maintenance capital
expenditures are those required to maintain the operations of the
Corporation at its current level and includes principal payments
made on finance leases.
On a consolidated basis, EIC generated Net Earnings of
$7 million, or $0.24 per share (basic) for the three month
period ended March 31, 2019. These
compare to $9 million, or
$0.27 per share (basic), for the
comparative period in 2018. Excluding the impact of IFRS 16, Net
Earnings were relatively flat compared to the prior year.
Adjusted Net Earnings for the period was $13 million, or $0.41 per share (basic), which is consistent with
the $13 million and $0.41 per share (basic) generated in the
comparative period. Excluding the impact of IFRS 16, Adjusted Net
Earnings per share increased 5% to $0.43 per share. Many of the costs affecting Net
Earnings that are associated with acquisitions, such as
amortization of the Corporation's intangible assets, net of tax,
and acquisition costs, are added back in the calculation of
Adjusted Net Earnings.
Free Cash Flow for Q1 2019 totaled $44
million, up 9% from $41
million in Q1 2018. Free Cash Flow on a per share basis was
$1.41 (basic), up 9% from
$1.29.
Maintenance Capital Expenditures were $27
million during the three months ended March 31, 2019, a decrease of 14% from
$31 million during the comparative
period. The Maintenance Capital Expenditures are lower than
our expectations. We continue to perform as much scheduled
large aircraft maintenance work in the seasonally slower first half
of the year as possible. However, the required timing of
maintenance events for several engines has moved to later in the
year. The Corporation still expects that Maintenance Capital
Expenditures will increase in line with the overall growth of the
business in 2019.
Free Cash Flow less Maintenance Capital Expenditures in the
first quarter of 2019 was $18
million, which is up from $10
million in the first quarter of 2018. On a per share
(basic) basis, Free Cash Flow less Maintenance Capital Expenditures
was $0.57 per share, up 84% from
$0.31 per share.
The trailing twelve month Free Cash Flow less Maintenance
Capital Expenditures payout ratio improved to 56% at March 31, 2019 compared to 69% at March 31, 2018. The improvement is a direct
result of the percentage increase in Free Cash Flow exceeding the
percentage increase in Maintenance Capital Expenditures and
dividends during the period. The basic per share payout ratio based
on trailing twelve month Adjusted Net Earnings also improved
slightly during the quarter, from 77% at March 31, 2018 to 75% at March 31, 2019.
Outlook
"This quarter was evidence that our strategy of making
investments with a long-term focus works. In 2019, we will continue
to make prudent decisions that will generate future, sustainable
returns," Mr. Pyle said. "The second facility for Quest has been
completed, on time and on budget. We are increasing staffing
and will be in production by the end of the second quarter.
Production will ramp up throughout the second half of the year and
into 2020. Once full production levels are achieved in 2020, the
facility will more than double Quest's production capacity."
"We will also continue to grow our Aerospace & Aviation
segment. We will make investments to support the recently awarded
RFP's from the Government of Canada, the Province of Manitoba and the Territory of Nunavut. EIC will also continue to build its
relationship with SkyWest. These investments will not have a
material impact on the current year but will yield positive results
in the future."
"As we look ahead to the balance of 2019, our strong EBITDA
performance in the first quarter has us tracking well against the
guidance we provided to the market for the year," stated Mr. Pyle.
"As we said last quarter, we expect fiscal 2019 EBITDA and Adjusted
Net Earnings per share to grow between 10 to 15% and 8 to 12%,
respectively. It is important to reiterate that these increases are
not driven by new acquisitions, the RFP awards previously discussed
or major capital investments in 2019."
"The Canadian aviation industry faces a significant challenge
with regard to the current and projected pilot shortage, as the
need for experienced talent quickly outpaces the national supply.
EIC has developed our Life in Flight program to meet this industry
challenge head on. The program will provide unique and mutually
beneficial pathways for future aviation talent and EIC air
operators. Key to the strategy was the acquisition of
Moncton Flight College with its
strong and successful history in training the next generation of
pilots. We are excited to offer this program and will provide
additional information at our Annual General Meeting on
May 8th where the program
will be officially unveiled."
Conference Call Notice
Management will hold a conference call to discuss the
Corporation's 2019 first quarter financial results on May 8, 2019 at 8:30 a.m.
ET. To join the conference call, dial 1-888-231-8191 or
647-427-7450. Please dial in 15 minutes prior to the call to secure
a line. The conference call will be archived for replay until
May 15, 2019 at midnight. To access
the archived conference call, please dial 1-855-859-2056 and enter
the encore code 1487494.
A live audio webcast of the conference call will be available at
www.ExchangeIncomeCorp.ca and www.newswire.ca. 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 Corporation
Exchange Income Corporation is a diversified
acquisition-oriented company, focused in two sectors: aerospace
& aviation services and equipment, 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.
The Corporation currently operates two segments: Aerospace &
Aviation and Manufacturing. The Aerospace & Aviation segment
consists of the operations of Perimeter Aviation, Keewatin Air,
Calm Air International, Bearskin Lake Air Service (operating as a
division of Perimeter Aviation), Custom Helicopters, Regional One,
Provincial Aerospace and Moncton Flight
College, and an investment in Wasaya Group. The
Manufacturing segment consists of the operations of Overlanders
Manufacturing, Water Blast, Stainless Fabrication, WesTower
Communications, Ben Machine and Quest Window Systems. For more
information on the Corporation, please visit
www.ExchangeIncomeCorp.ca. Additional information relating to the
Corporation, including all public filings, is available on SEDAR
(www.sedar.com).
Caution concerning forward-looking
statements
The statements contained in this news
release that are forward-looking are based on current expectations
and are subject to several uncertainties and risks, and actual
results may differ materially. These uncertainties and risks
include, but are not limited to, the dependence of Exchange Income
Corporation on the operations and assets currently owned by it, the
degree to which its subsidiaries are leveraged, the fact that cash
distributions are not guaranteed and will fluctuate with the
Corporation's financial performance, dilution, restrictions on
potential future growth, the risk of shareholder liability,
competitive pressures (including price competition), changes in
market activity, the cyclicality of the industries, seasonality of
the businesses, poor weather conditions, foreign currency
fluctuations, legal proceedings, commodity prices and raw material
exposure, dependence on key personnel, and environmental, health
and safety and other regulatory requirements. Further information
about these and other risks and uncertainties can be found in the
disclosure documents filed by the Corporation with the securities
regulatory authorities, available at www.sedar.com.
SOURCE Exchange Income Corporation