Exchange Income : Q2 2023 Quarterly Report

Second Quarter Report

For the six months ended

June 30, 2023

CEO's Message

The second quarter continued on the path we have seen in the post pandemic period with strong operating performance coupled with the execution of multiple initiatives to facilitate further expansion in 2024 and beyond. EIC has always prided itself on our focus on the future, while managing for today, but the second quarter has seen this future focus taken to a level not experienced in the past. The Company delivered a number of record financial metrics in the second quarter, and I will return to those shortly, but I would like to first focus on the long-term initiatives completed during and immediately subsequent to the quarter. This was the busiest period in our history by a wide margin. We closed two acquisitions, BVGlazing and Hansen Industries in our Manufacturing segment, we signed long term 10 year plus medevac contracts with the governments of British Columbia and Manitoba, and we signed a new maritime surveillance contract with the United Kingdom for the Force Multiplier Aircraft in our Aerospace & Aviation segment. We also entered into a contract with Air Canada to provide regional connectivity for up to a five year term. Finally, we increased the size of our syndicated bank facility by approximately 15% to $2 billion and completed the largest equity offering in our history with a bought deal common share offering of $173 million. Our 20-year track record of investing today will bear fruit for years to come.

Highlights from EIC's 2023 Second Quarter Financial Performance

• Revenue increased 19% to a record high of $627 million, up from $529 million last year.
• Adjusted EBITDA grew to a second quarter high of $147 million from $115 million last year, an increase of 28%.
• Free Cash Flow increased 10% to $98 million, while remaining essentially unchanged on a per share basis at $2.25.
• Free Cash Flow less Maintenance Capital Expenditures increased by 24% to $59 million versus $47 million last year while on a per share basis it improved 12% to $1.34 from $1.20.
• Net Earnings was $37 million or $0.85 per share up from $30 million or $0.76 per share, an increase of 23% and 12%, respectively.
• Adjusted Net Earnings was $43 million or $1.00 per share, an increase of 13% and 2% respectively.
• The second quarter and trailing twelve-month Free Cash Flow less Maintenance Capital Expenditures payout ratio were essentially unchanged at 47% and 57% respectively.

The second quarter of the year showed the power of our diversified model as despite our strong aggregate results, they were achieved with some subsidiaries delivering strong performance to help other subsidiaries experiencing a more challenging period. Essential Air Services had a very strong quarter as strengthening demand and increased capacity from previous Growth Capital Expenditures drove higher revenue and combined with strong cost management, higher margins in both absolute and percentage terms. Aerospace was also very strong driven by the new maritime surveillance contracts in the Netherlands and the United Kingdom. Demand for training services in Canada and the United States remained strong resulting in both higher revenue and Adjusted EBITDA. Offsetting this performance somewhat was Aircraft Sales & Leasing, where there were fewer large transactions in the period compared to the prior year, although the leasing portfolio continued to strengthen as expected.

In the Manufacturing segment, Multi-Storey Window Solutions continued to improve. The order book remained steady at approximately $1 billion while the active inquiries continued to grow. We expect continued short, medium and long-term growth in this business. Precision Manufacturing & Engineering continued its consistent performance. Environmental Access Solutions experienced headwinds as compared to the second quarter of 2022 where there was a perfect alignment of price, supply, demand and weather. The second quarter of this year experienced unfavourable dry and hot spring weather conditions, historic wildfire activity across the country and increased competitive mat supply leading to reduced matting scopes and projects delays. However, given that our ownership of Environmental Access Solutions began part way through the second quarter of 2022, current period results are still higher than the comparative period and continue to exceed the financial metrics on which we acquired Northern Mat.

Our future success is driven by more than operating excellence, but rather is driven by a focus on the future and investments to drive future growth. During the quarter we closed two acquisitions in our Manufacturing segment, which will be accretive to our results on a standalone basis and have considerable synergy opportunities in the medium term. In March we announced an agreement to acquire BVGlazing, and after approval under the Competition Act (Canada), closed the transaction on May 1, 2023. Like Quest, BVGlazing has a long track record of success in the high-rise window wall business with a proven management team who will stay on to lead this performance into the future.

Quest and BVGlazing have slightly different product offerings in addition to the core window wall product line which will provide opportunities to cross sell between companies. For example, Quest has the capability to install product in the US market, while BVGlazing does not. BVGlazing, however, has internal curtain wall and balcony railing system manufacturing capability, while Quest outsources these products. Both companies will be better placed to compete in the North American market with the complementary product offerings available from one another.

There are also considerable opportunities to enhance efficiency in the manufacturing process. The companies currently have a combined six manufacturing facilities in Southern Ontario and a new state of the art facility in Texas. The CEO's of the two companies will work with EIC's Chief Operating Officer, Darwin Sparrow, to build a plan to streamline production into fewer and more efficient production plants.

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We also acquired Hansen Industries at the beginning of the second quarter on April 1, 2023. Hansen will augment Precision Manufacturing

• Engineering. Led by an exceptional management team, it will strengthen our footprint in the lower mainland of British Columbia. Together with our Overlanders operation, the companies will provide additional surge capacity to each other to manage excess demand in given periods. We have long looked to grow our metal business in the West as we have seen tremendous performance from Overlanders for over 15 years. Hansen is the first company we have uncovered that has the track record and proven management team that we require at EIC.

The beginning of 2023 marked the first time that both maritime surveillance aircraft built for the contract in the Netherlands were in full operation. The impact of these aircraft is clear in our financial results. During the second quarter we signed an 18-month contract and began operation of our Force Multiplier Aircraft for the Government of the United Kingdom. The Force Multiplier was built to provide Governments around the world access to a fully staffed solution for short term needs. This contract is exactly what Force Multiplier was made for and showcases the credibility PAL Aerospace has earned around the world.

EIC has been involved in the medevac business since our first acquisition of Perimeter in 2004. It has proven to be resilient and reliable during both good and bad financial times, and largely unaffected even during the pandemic. We have invested in it regularly whenever we had the opportunity and have grown to be Canada's largest provider. When British Columbia and Manitoba put out RFPs to look after exclusive portions of the Province's requirements, we were of course very interested in putting forth solutions that would meet the needs of these Governments. In both situations we were selected as the preferred supplier and signed contracts that have an initial term of 10 years together with renewal options. These are large contracts which will require aggregate capital of approximately $275 million. These contracts will not begin immediately, as it will take the balance of 2023, all of 2024 and into 2025 to acquire the aircraft, install medical interiors and acquire ground facilities. The capital will be invested over the next six quarters and will make a small contribution to our results towards the end of 2024, but will be fully evident in the decade beginning in 2025.

On July 1, 2023, PAL Airlines finalized its agreement with Air Canada to provide regional air services in Eastern Canada. The agreement will see PAL Airlines acquire up to six additional Dash 8-400 aircraft to be operated as Air Canada Express flights for a term of up to five years. PAL Airlines has commenced flying on a limited basis using existing capacity and is expected to acquire the first four aircraft and have them online in the middle of the fourth quarter. This agreement preserves the existing PAL Airlines commercial network, substantially expands our Maritime airline operation, and supports our long-held strategy of building our business by staying attuned to the markets we serve.

I would like to take a moment to deal with what I believe is a misunderstanding held by many about EIC's investment model. When I meet with our shareholders and other stakeholders, I am regularly asked questions about how we will continue to grow if we are unable to find a sufficient number or size of acquisitions that meet our criteria. EIC is not now, nor has it ever been reliant on acquisitions as the sole source of our growth. We have always been very opportunistic when it comes to acquisitions, but at the same time we have invested capital in the companies we already owned to help them take advantage of their competitive opportunities. The recent four aviation contracts (Netherlands, United Kingdom, British Columbia and Manitoba) are great examples of our ability to grow through investment in ourselves. This philosophy is evident in the chart below which shows that over the last eight and a half years we have invested more capital in growing our existing subsidiaries than in new cornerstone acquisitions. We are not reliant on any one way to grow, and this has served us well for 20 years.

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In order to move quickly on acquisitions and growth opportunities, we require a strong liquid balance sheet. To that end, during the second quarter, we extended our syndicated bank facility and increased it by approximately $250 million to $2 billion. In spite of the turmoil in credit markets, we were able to complete this transaction at the same pricing and on the same terms and conditions as the previous arrangement. Debt, however, is only half of the capital equation. Knowing that we had a deep pool of acquisition opportunities, and large long-term contract proposals, we realized that we also needed to strengthen our equity box. As such, we went to the market with a $100 million common share bought deal. Demand was so strong that we increased the offering to $150 million plus a 15% overallotment option bringing the total capital raised to $173 million. Not only did the transaction have demand that allowed us to upsize it to $173 million, but it also had the largest proportion of institutional participation in our history.

Interest rates remain very high, and this has had a clear and obvious impact on our income statement. Our interest expense has grown by approximately 79% to $54 million and while a portion of this increase is explained by the increase in debt levels incurred to fund the acquisition of Northern Mat and Bridge, the majority relates to the increase in rates. Not only were we able to fund this increase in costs, but we also generated sufficient profits to grow our bottom line in the same period by 30% to $44 million. Our model is resilient enough to withstand such general market challenges while still increasing the return to our shareholders.

Interest rates have also been a positive development for EIC in some respects. The higher rates have brought a level of sanity to the acquisition markets where financial buyers, who base their acquisition model on far higher levels of debt than EIC is comfortable with, have had trouble funding their purchases. This has in turn served to bring a moderation in acquisition prices. While there is still plenty of competition for good companies with proven management teams, a new sense of rationality has entered the marketplace. This has in turn made EIC competitive on a larger number of transactions, particularly larger transactions. Our pipeline is currently the strongest it has been in our history, and while this does not mean that we will complete any acquisitions, we are excited about the opportunities in front of us.

None of this would be possible without the team of exceptional people we have at each and every one of our operations. I want to thank them for the dedication, effort and loyalty that they demonstrate each day. We look forward to the future and are excited about continuing to deliver income and growth to our shareholders.

Mike Pyle

Chief Executive Officer

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August 10, 2023

TABLE OF CONTENTS

1. FINANCIAL HIGHLIGHTS AND SIGNIFICANT EVENTS __________________________________________________ 10
2. RESULTS OF OPERATIONS _______________________________________________________________________ 12
3. INVESTING ACTIVITIES ___________________________________________________________________________ 20
4. DIVIDENDS AND PAYOUT RATIOS __________________________________________________________________ 23
5. OUTLOOK ______________________________________________________________________________________ 24
6. LIQUIDITY AND CAPITAL RESOURCES ______________________________________________________________ 26
7. RELATED PARTY TRANSACTIONS _________________________________________________________________ 29
8. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS _______________________________________________ 29
9. ACCOUNTING POLICIES __________________________________________________________________________ 29
10. CONTROLS AND PROCEDURES __________________________________________________________________ 29
11. RISK FACTORS_________________________________________________________________________________ 30
12. NON-IFRSFINANCIAL MEASURES AND GLOSSARY__________________________________________________ 30
13. QUARTERLY INFORMATION ______________________________________________________________________ 32
14. FINANCIAL STATEMENTS AND NOTES _____________________________________________________________ 33

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