Exchange Income Corporation (EIF) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Exchange Income Corporation's Second Quarter Conference Call to discuss the financial results for the three and six months ended June 30, 2026. The corporate's results, including the MD&A and financial statements, were issued on August 11, 2026, and are currently available via the company's website or SEDAR+. Before turning the call over to management, listeners are cautioned that today's presentation and the responses to the 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 undue 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 securities 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, and thank you for joining us in today's call. With me today are Richard Wowryk, who will highlight our financial results, along with Jake Trainor and Travis Muhr, who will expand on our outlook. Yesterday, we released our second quarter results for fiscal 2026. Our performance was incredibly strong and again demonstrated the resilience of our business model. We set second quarter records in all our key metrics, including revenue, adjusted EBITDA, net earnings, adjusted net earnings, free cash flow and free cash flow less maintenance CapEx. Those results, coupled with our outlook for the remainder of the year, have necessitated us to significantly update our guidance. We now expect adjusted EBITDA to be between $890 million and $920 million for the 2026 fiscal year. Our accelerating performance has also resulted in records in our net earnings per share of $1.01 or 29% higher than the prior period and adjusted net earnings of $1.13 or 23% higher than the prior period. Along with very strong metrics in our payout ratios, our free cash flow less maintenance CapEx payout ratio of 55% was near an all-time low, while our adjusted net earnings payout ratio was an all-time low of 65%. The strong results, coupled with our confidence in our outlook, which Jake and Travis will talk about shortly, has allowed our Board of Directors and management to increase our dividend from $2.76 to $2.88 on an annualized basis. We have consistently communicated with our shareholders that we only intend to increase the dividend when we can reduce the proportion of our cash flow and profitability being directed toward the dividend. We have been able to make strong progress in this initiative, and we expect even with the increase announced that the payout ratios will continue to fall. During the quarter, we announced several highly strategic contracts. Our Aerospace business line has finalized the scope of the services under the Future Aircrew Training program. While the definitive agreements will be papered and signed, we anticipate that the modifications of the aircraft will begin in 2027, with the bulk of the modification and missionization services occurring in the first five years. The duration of the contract will be focused on training and in-service support. This was an important milestone for both PAL Aerospace and the SkyAlyne team. During the quarter, we also announced a contract with Air Greenland and the government of Denmark for the modification, configuration and integration of two ISR aircraft owned by Air Greenland. The Aerospace business continues to be very busy in fielding inquiries and responding to requests around the globe. Our Essential Air Services and Aircraft Sales & Leasing business lines continued to see strong demand trends. In our Essential Air Services, we saw broad-based strength in our scheduled cargo, charter and medevac services. With the Air Canada contract expanded and extended starting in the third and fourth quarter, we expect to see continued strength in that business line. Our Aircraft Sales & Leasing business line is continuing to see robust demand for its leasing business, along with its parts, aircraft and engine businesses. We have put significant growth capital investments in that business, and it is yielding the returns anticipated when we made the investment. Lastly, the integration of Mach2 has gone very well, and management teams are working very closely. Mach2 has also been integral to working with Canadian North to secure spare parts and components to ensure Canadian North can meet the significant demand they are seeing for their northern routes. As I mentioned during our first quarter conference call, we saw accelerating momentum within three of our business lines in our Manufacturing segment as we exited the first quarter. That momentum continued through the quarter and was highlighted by strong results in both our Environmental Access Solutions and Precision Manufacturing and Engineering business lines. We are continuing to see significant demand for our composite mats and continuing to see pardon me, for our composite mats and our output from our existing plant has exceeded our own high expectations and were, in fact, records during the quarter. We are continuing to see market share transition to composite mats in the Southern U.S., hence, the excitement for our new plant in South, which is on time and on budget. And we hope we will be able to see the plant operational later in 2027. In our Canadian operations, we are seeing significant demand for our wooden mat solutions with the number of rentals continuing to significantly increase quarter-over-quarter. With large linear projects commencing in the latter part of 2026, we're expecting to see strong results by the business line. We continue to see encouraging booking trends at our Multi-Storey Windows. The second quarter bookings for our order book were the strongest quarter over the past several years. In the first quarter, I spoke about a positive book-to-burn ratio, and that continued. However, I would say we are early innings of the game as two positive quarter does not mean a longer-term trend as we still see market softness in Southern Ontario. Overall, this was a very solid quarter, coupled with our outlook has led us to a significant increase in our 2026 guidance, a dividend increase while anticipating further reductions in our payout ratios and maintaining our strong balance sheet. Jake and Travis will focus on the outlook for our segments for the third quarter and the remainder of 2026. I will now pass the call over to Rich, who will talk about some of the key highlights in the MD&A and the financial statements.

Thank you, Mike, and good morning, everyone. I'll provide some highlights from our quarterly key performance indicators and focus on our balance sheet, investments in capital expenditures and pipeline of acquisition opportunities. As Mike mentioned, we set second quarter records in all of our key performance indicators, including net earnings and adjusted net earnings per share amounts. Those per share records are even more impressive when you consider that shares outstanding were approximately 10% higher over the prior year due to the conversion of convertible debentures in the prior year as we completed our goal of simplifying our balance sheet. From a balance sheet and cash flow perspective, we had further investment in working capital during the quarter, highlighted by some significant investments in prepaid and inventory at our Aircraft Sales & Leasing business line. In addition to purchases of whole aircraft for resale and growth in parts inventory to support future growth in parts sales, deposits were made for future asset acquisitions that will occur over the back half of the year. Consistent with the seasonality of EIC, we expect that the third quarter will require a further investment in working capital as the third quarter is our seasonally strongest quarter. And then we anticipate a normalization of working capital in the fourth quarter, which is generally an average quarter for the fiscal year. Aggregate leverage remains near historic lows with total leverage at 2.82x. With over $2 billion of additional available liquidity, we are well positioned to pursue acquisitions and invest in our existing businesses while maintaining our established disciplined capital allocation. The investments we have made over the past number of years have started realizing the returns envisioned when those investments were made. There is always a lag in growth capital expenditures between the outlay of capital and the ramp-up in operations and the generation of the free cash flow, and we are seeing the impact of those investments in our current year results per share metrics and payout ratios. In the current year, growth capital expenditures were $120 million on a year-to-date basis. The Manufacturing segment growth capital expenditures are primarily related to the Spartan state-of-the-art facility in Saltillo, Mississippi, which will be an important growth engine and provide significant operating leverage to that business line to meet market demand. The growth capital expenditures within the Aerospace & Aviation segment were primarily focused on the Aircraft Sales & Leasing business, which accounted for about 15% of the investments with the vast majority of the growth capital expenditures focused on our essential Air Services with investments in our BCEHS contract, finalization of our full motion King Air simulator, which is now fully certified and operational, investments in aircraft for the Air Canada expanded and extended commercial arrangement, investments in the Canadian state-of-the-art cargo facility, which is now operational in Ottawa and various growth investments in our air operators for additional capacity to meet scheduled service and charter growth. These investments will drive cash flow in future periods. Maintenance capital expenditures were below our internal expectations in the first and second quarters. In the second quarter, investment and maintenance capital expenditures were $76 million for Aerospace & Aviation and $10 million for Manufacturing. The increase over the prior year comparatives were due to the acquisition of Canadian North and increases in the utilization of the Aircraft Sales & Leasing fleet. Jake will provide further guidance for Q3 and Q4. The cost of significant increases in growth and maintenance capital expenditures will result in increases in depreciation over the back half of 2026 when compared to the first six months as the net book value has increased over the period. Our M&A pipeline remains strong. Adam and his team continue to work on a number of opportunities across both segments. Generally, the more advanced opportunities are those that are tangential to our existing businesses and are in high-growth areas. We have a great foundation of businesses. And to the extent that we can find ancillary opportunities to support our competitive moats, we are always interested in those accretive opportunities. I will now turn the call over to Jake, who will provide an update for the third quarter and the remainder of 2026 for the Aerospace & Aviation segment.

Thank you, Rich. As we expect another strong year of growth in Aerospace & Aviation as the trends both Mike and Rich discussed continue through 2026. Growth investments already made, including ISR assets, the acquisition of Mach2, the start-up of the Newfoundland and Labrador medevac contract and the expansion of the Air Canada commercial agreement should support higher revenue and profitability. In Essential Air Services, the largest driver will be continued strong load factors and strength in cargo, charter and medevac services, coupled with the expanded Air Canada commercial agreement as aircraft come online in Q3 until full operational tempo is achieved. We continue to see expansion in contracts, including growth in our BCEHS contract, which will necessitate the purchase of two additional new King Air aircraft, which we anticipate receiving in 2028 and 2029, respectively. Offsetting some of these gains is the continued inflationary pressures on labor, aircraft parts, consumables and overhaul costs. In Aerospace, we expect continued strong flying tempo of all aircraft in our fleet, along with the commencement of modification services on the two Air Greenland aircraft, which will start in the third quarter and will continue through 2027. Therefore, we expect that the third quarter profitability will be slightly higher than the comparative and the fourth quarter is expected to be in line with the prior year comparative as our Training business is transitioning between some legacy contracts and new contracts in '26. Looking forward, the finalization of the scope of services for SkyAlyne FAcT contract is expected to impact the operating results starting in fiscal '27 with minimal capital investment required. We remain engaged on several additional opportunities in Canada, Europe and the U.S. in the Aerospace Business line. Aircraft Sales & Leasing is also expected to grow as aircraft and engines acquired during 2025 and the current year are placed with customers along with increasing rental rates. Regional One and Mach2's demand remains robust through their various lines of business, including parts, aircraft and engines. As Mike had commented on the integration of Mach2, it's exceeded our expectations, and they're actively working with Canadian North on supply and for their operations. Maintenance capital expenditures are expected to be higher year-over-year due to growth in our fleet along with the planned maintenance events that were pushed to the right earlier in the year. Additionally, we'll continue to see continued investment in Canadian North spares and engines and year-over-year increases in our Aircraft Sales & Leasing business due to increased utilization of leased aircraft and engines. Growth capital expenditures are expected in Q3 and through the balance of 2026 including in the last of the initial order of King Air aircraft for BCEHS, which is expected in September '26. Aircraft modifications for the Newfoundland and Labrador Medevac contract, aircraft for the expanded Air Canada agreement and opportunistic purchases in Aircraft Sales & Leasing to meet robust demand. I'll now pass it off to Travis to provide commentary on the Manufacturing segment.

Thanks, Jake. From a manufacturing perspective, we expect Q3 revenue and profitability to continue with the momentum built during the second quarter with that trend continuing through the balance of the year. Environmental Access Solutions is expected to generate stronger returns in Q3 and throughout the remainder of the year. The number of mats on rent continued to strengthen as we exited the quarter, along with expansion in rental rates. Composite demand remains robust, and the plant continues to run at full capacity with all of our 2026 output already sold. We continue to see encouraging medium- and longer-term demand drivers for our transmission distribution pipeline and oil and gas activity and are very bullish on the business line and its operating prospects throughout North America. Multi-Storey Window solutions continues to see strong inquiry levels and booking levels. As Mike had mentioned, in the second quarter, bookings were the highest quarterly bookings over the past several years. We're encouraged by the results. However, the strong book-to-burn ratio experienced in the first and second quarters are not necessarily indicative of an industry-wide recovery as we still see softness in the Southern Ontario condo market, which was our largest market in the past. The team has done a great job in diversifying geographies and end markets, whether it be hospitals, long-term care homes, student housing or government institutions. The revenue and profitability were in line with our internal expectations, and we expect that trend to continue throughout the remainder of the year. We anticipate in the third and fourth quarters that the profitability will be consistent with the prior period, including the impact of tariffs. Precision Manufacturing and Engineering is also expected to continue to improve in Q3. However, we'll have a slightly lower profitability compared to Q4 last year, where our Hydronic Heating Solutions subsidiary had a very strong quarter due to the shipping of the vast majority of the production in the fourth quarter, whereas the business was much more even from a sales and delivery perspective in fiscal 2026. We'll continue to see strong inquiry and booking trends with the exposure to attractive end markets such as aerospace, defense, telecommunications and data farms. On the tariff front, we noted in our report that Multi-Storey Window solutions continue to be negatively impacted by the aluminum tariffs and our Dry Air subsidiary could be negatively impacted by the recently announced 338 tariffs. However, we're undertaking active mitigation strategies in both businesses. Maintenance capital expenditures are expected to be above the prior year, primarily because of timing and the anticipated demand across the business lines in the back half of the year. We also expect growth capital expenditures across the manufacturing businesses to be broadly consistent with 2025, except Environmental Access Solutions, where spending will support the new composite mat and additional Canadian rental fleet investments due to our strong outlook on that business line. I'll now pass the call back to Mike.

The first and second quarters for 2026 were a very strong start for the year, and we're excited to communicate to the market our significant increase in our guidance for the year. I'm extremely confident in the future of our company. EIC is at the intersection of a number of critical themes and trends. We have remained true to our principles and our business strategies, and those will continue to drive our long-term success. Thank you for your time this morning. We'd now like to open the call for questions. Operator?

[Operator Instructions] Your first question comes from Steve Hansen from Raymond James.

Mike, I know you've described the matting business is starting to improve and some of the project activity picking up. I was hoping you could maybe just give us a broader lens as to how you see the industry shaping up because that supply-demand backdrop for mats does matter. Effectively, it sounds like it is tightening up. But can you just give us some context around how you see matting supply out there today after a couple of years of slack supply and how you think that's going to play in your favor or not?

Sure. In the Canadian marketplace, when a couple of larger jobs were completed in late '22 and '23, there was a lot of used mats that came back into the marketplace, things that came from the Trans Mountain and other things. And so some of our competitors were heavily discounting to get these older mats into service. The natural life cycle of these mats has brought that trend sort of to a close at the same time as we're seeing a rebound in the number of long linear projects. Just in the last 60 days, we've seen two major new pipelines announced they're going ahead. We're bidding for RFPs and the number of our mats that are on the ground is growing significantly and regularly. And the advantage to us is twofold. As the market tightens up, these discounted market mats leave the market and prices increase at the same time as our utilization rate increases. And we've increased the production in both of our matting plants, and we continue to expect to make as many mats as we can to meet what we see as a new long-term cycle in the matting business. These long linear projects aren't something that are done in weeks or months. They're in years. And so we're really bullish on the Canadian market. The U.S. market is, I would say, more of the same. It's been very busy since we bought Spartan, and that's continued largely because of a migration from wood mats to composite mats in the United States. and strong demand in the utility sector. So we are so excited about getting our new plant up and running to take advantage of opportunities in North America, but not only North America. During the quarter, we had a significant sale of mats into Europe and opportunities in Australia. And right now, capacity constraints really preclude us from attacking those the way we'd like to. So I think once that plant is up and running, you'll see an increase in the geographic diversity of our sales out of our Spartan subsidiary in the U.S.

Super helpful. Just one follow-up just around the ISR business. There's obviously been a lot of volatility out there geopolitically in the Middle East, Europe and otherwise. But I just was curious around your thoughts about long-term contract opportunities. And then as a sort of adjacency to that is the idea of having another force multiplier sort of for spot availability. I don't know if that's something you want to build again upfront, but just how do you think about the balance of chasing those long-term contracts with easy firm commitments relative to some spot capabilities?

It's a really good question, Steve. We don't view that as an either/or. Building another rental aircraft will occur. It's really just a matter of when we have gaps in production. Right now, we're really focused on our new Greenland project and getting those aircraft ready and in service for the customer. So that's where we're focused today. We've talked a lot in the past about opportunities in Europe. I'm pleased to say that we're very close to another one there that we're in final discussion talks and hopefully, we'll have something to announce later this year. And opportunities, whether it be in Canada, the Middle East, our marketing teams are very busy in that business. So it's hard to predict which is going to come first and where. But I think it's important to know that long-term contracts won't stop us from refilling the short-term rental fleet.

Your next question comes from Matthew Lee from Canaccord.

So by all accounts, the Canadian North business is performing well ahead of expectations. Given that progress, can you help us understand why the province and Nunavut maybe opt the equity option?

Sure. It's always dangerous when you answer a question on behalf of someone else. So what I'm going to give you is my impression. This isn't something that we know in some writing they gave to us. They had an option really to ensure that when they put it all in our hands, the government took risk that we were going to deliver on what we said we were going to do in terms of service and looking after the people in Nunavut. I'm very pleased to say that we've done a really strong job of that, and the government has come to a realization that they don't need to own the business for us to do a good job of that. So I think part of the reason to invest went away. And I think secondarily, while they were comfortable with the level of investment they had to make for their participation in the company, we were pretty clear that we intend to put more money into the North, whether we'd be adding extra aircraft or building additional crew quarters or hangar as the market expands. The focus on Canadian North means there's going to be more passengers and more passengers requires more fixed assets. And I don't think the government really wanted to sign up for an investment now and other investments in the future, given that they were comfortable with the level of service that we were providing. It clearly wasn't a financial decision because the results we were generating were above what we had anticipated when we bought the company.

In fact, it might be because they think you are doing a good job, they don't have to actually step in and kind of guide you anyway.

Again, that was similar to what they put in their press release, Matt.

Yes. Understood. So organic EBITDA growth this year, when you take out from the acquisitions has been in the mid-teens momentum in the business right now, just given the tailwinds you're seeing in the new contracts coming online, is there any reason to believe that cadence will slow as you kind of look in the back half of the year and '27? I know you haven't given guidance yet, but just trying to get my head around it.

Well, as long as you're not trying to trick me and to give you my 2027 number yet because I'm not ready to do that, there's no reason to believe there's a slowing in the organic opportunity. sometimes those are a little chunky as an example, like the Spartan plant. We're putting up money and you won't see that until the back half of next year, but that's going to generate significant growth in revenue and profitability. We see the increase in the Air Canada contract as we put those aircraft online later this year, and so we'll have the benefit of that next year. The Newfoundland contract as those go into service and even the BC Medical contract where the government has asked us to put additional aircraft into place to grow that contract. So very excited about what we're facing. And the sprinkles on the sundae as we're starting to see life in the window business. And again, with the cycle of that business, when we get orders now, it's 18 months before they show up in the financial statements. And it's only been a quarter or two of positive book-to-burn. But in particular, the U.S. market is showing real signs of life and growth. So, I don't see any reason for our organic growth rate to decline.

Your next question comes from Cameron Doerksen from National Bank.

I guess I wanted to maybe follow up on some defense opportunities. I mean you talked a little bit about some of the ISR opportunities, your opportunity perhaps close. Is there any update, I guess, on the potential for the Canadian in the North surveillance opportunity? Is there any actual, I guess, RFP out there? I know you have been in some discussions with the government. So just any update there would be useful.

Sure. There's no real RFP. It's discussions about what exactly they want, when they want. And the biggest challenge with the government right now with all the things they're doing is having people to manage these various programs. And so we're in discussions with the government about where this would live, who would run it. Jake, maybe you want to jump in here, you're closer to this than I am.

Sure. Thanks for the question, Cam. And yes, there's continued engagement. But as Mike pointed out, you've got to keep in mind, these are the same people that are wrestling with the future fighter decision with the naval shipbuilding, the submarine decision, a lot of the large capital asset decisions are being run through the same office. So again, we're just trying to make sure that we keep top of mind, and we're continuing to engage because the need has not gone away.

Okay. That's helpful. And if I could sort of follow up on the same theme. Obviously, as you mentioned, Jake, there's an awful lot of investment going on into the military and assets. I'm just wondering if sort of we look beyond surveillance opportunities, what other defense opportunities are you seeing that might emerge for your companies I'm thinking about in-service support type contracts. We obviously got a few of those already. Is there anything that's kind of on the horizon that has emerged in the last few months that is a potential opportunity for you down the road?

Well, there's some of the things that we've talked about where it may be perhaps assisting in the installation of Canada's over the horizon radar system, where we'll look to participate in that when they're ready for bids. We'll be looking at providing services to the government as they expand military bases and build a deepwater port in the north. One of the things important to understand, if it's not going on a barge in the summer, it's going on one of our airplanes. Those are really the only way things get there. And so you'll see growth out of defense that will show up in our scheduled and charter businesses. Those would be the main exposures. Jake, have you got anything else you want to add there?

No, I was going to make the point. It's very valid that regardless of what's happening in the north, there's going to be increased activity, whether it's construction or actual capability being delivered. And that's going to be reflected in enhanced charters, enhanced demand for cargo, enhanced demand for passengers, and we're seeing some of that now. So again, we're going to be the beneficiaries of both direct and indirect activity.

The next question comes from James McGarragle from RBC Capital Markets.

I wanted to ask a question on the 2027 framework for EBITDA guidance. You committed to providing the '27 guidance with Q3 results in November. But just given the momentum that we're seeing across your segments, obviously, Aerospace remains strong. It seems like Manufacturing is starting to turn a corner. Can you just give us any preliminary or directional commentary on how you're thinking about that growth trajectory into next year?

Yes. I mean we saw a big growth this year even with our original guidance of the $825 million to $850 million, $875 million, I'm sorry, midpoint, $850 million. Now our midpoint is a little over $900 million. To get to that $1 billion framework we've talked about is 10% growth. I don't think that's an unreasonable thought, although we're not prepared to commit to that quite yet. The one thing I would say is within our range we've given you, to get to the very top of the range, we're going to have to execute on some things that may be are planned for next year, but we get them done earlier, so improvements in performance and those kinds of things. So for us, if we perform above our midpoint of our range, it will be things that otherwise might have been done next year. So I want to be careful that if we if we get to the top of our range, people don't take exactly the same growth rate because we'll be pulling forward some of the things we think we can do in 2027 to get to the top of that range. But the other thing is that we've really increased our guidance 3x already this year. And that even for us is pretty rare going from $825 million to $875 million to mid- to upper to the top end to the new guidance. And so I'm reticent to look too far into the future. But if I were to prognosticate if that's a word, I would say that our continued growth rates are reasonable and achievable, particularly if Adam is successful on some of the things he's looking at on the acquisition front.

Yes. And just to follow up on that and some of the things that Adam is looking at. You have over $2 billion of liquidity. You kind of alluded to there being a good pipeline in the press release. So can you just kind of talk about that pipeline? Is there a size of geography bias and what you're seeing? Just any color on how we should be thinking about that into next year? And I can turn the line over after that.

Yes. I don't really think there's a bias geographically. There is a bias to finding expansion opportunities in some of the businesses we're already in. Things that are tangential to our matting business. We're very active looking in things that are tangential to our Precision Metal Manufacturing. Most of the things we're looking at now wouldn't be described as new segments or even new sectors. They'd be things that would add on to our capabilities we already have.

Your next question comes from Jeff Fenwick from ATB Cormark.

I want to ask one here on Canadian North. You're coming through the one-year anniversary of that deal. One of the things I know that was on your list was renegotiating some of the charter contracts that were there. So I think we're seeing maybe a little bit of inflated revenue there without a lot of earnings contribution. So just maybe an update on the progress on that front.

We're making progress on a couple of the contracts. I'd maybe hand this over to Jake to talk about what we're prepared to disclose that's been done to date.

Sure. We're working our way through some of the contracts and some of the renegotiations. You got to keep in mind as well, the next phase of the LNG contract, which not commenced, will be another driver, we hope. And again, we're looking at just continued activity and strong activity even on an ad hoc basis. For example, Canadian North did all the FIFA security charters. So we're in a position where we can be very opportunistic and seek out higher-margin opportunities there and look to continue that trend moving forward. So it's something that we're certainly putting some attention to.