Profit up, shares down at Exchange Income

PUBLIC CAMPAIGN

• Exchange Income Corp. reported a 50 per cent rise in second quarter profit Thursday in an earnings release that was moved up three weeks after the company became the target of a short- seller’s public campaign.

The increase, however, was not enough to soothe market fears, as shares in the Winnipeg- based operator of airlines that serve remote northern communities reversed gains made earlier in the week and fell 8.15 per cent, or $ 2.69 each, to close at $30.33.

Exchange Income r eported $ 26 million in net earnings in the second quarter, up roughly 50 per cent from $17 million in the same quarter a year earlier. It said its dividend payout ratio, which has come sharply into focus following the short seller attacks, was 75 per cent in the second quarter, up from 54 per cent a year earlier.

“Our payout ratio in Q2 is well within the range we use to determine the sustainability of our dividend and to make decisions on the changes to our dividend rate,” Exchange Income’s chief financial officer Tamara Schock said during the earnings call.

The dividend payout ratio, which was 250 per cent in the first quarter, has helped make the company a target of short sellers. Those include Marc Cohodes, who has launched vocal campaigns against several Canadian companies, including mortgage lender Home Capital Group Inc.

Cohodes r evealed his short position in Exchange earlier this month and has argued that the company’s dividend is not sustainable based on how much money the company has left after paying its bills.

He said the company’s free cash flow — measured by operating cash f l ow minus capital spending and a few smaller expenditures — is and has been negative and therefore the company cannot maintain a dividend.

For its part, Exchange Income’s financial statements calculate free cash flow using cash from operating activities and adjusting it for things like changes in non- cash working capital and long- term deferred revenues. By that metric, the company reported its free cash flow at $ 52 million in the second quarter, up from $43 million a year earlier.

Much of the company’s earnings call was focused on the questions raised by short sellers, including the dividend.

Laurentian Bank Securities analyst Mona Nazir asked the company to explain whether or not the company could afford to pay a dividend if the company stopped investing in growth capital spending.

“The maintenance capital expenditures that we have (at our subsidiaries) are fully sufficient to maintain the assets in those businesses and by doing that, they’re fully sufficient to maintain the dividends at current levels,” Exchange Income’s chief executive officer Michael Pyle said.