CA - Exco Technologies Limited (EXCOF) Q2 2023 Earnings Call Transcript

2023-04-28 13:24:10 ET

Exco Technologies Limited (EXCOF)

Q2 2023 Earnings Conference Call

April 28, 2023, 10:00 AM ET

Company Participants

Darren Kirk - President and CEO

Matthew Posno - CFO

Conference Call Participants

David Ocampo - Cormark Securities

Presentation

Operator

Good day and thank you for standing by. Welcome to the Exco Technologies Limited Second Quarter Results 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Darren Kirk, President and Chief Executive Officer. Please go ahead.

Darren Kirk

Thank you, Michelle. Good morning, all participants. Welcome to Exco Technologies fiscal 2023 second quarter conference call. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial aspects of the quarter before we open the call for questions.

Before we begin, please ensure you review the cautionary notes in yesterday’s new release and on Page 2 of the presentation that we have posted to our website. Please note they are applicable to these discussions today.

I would like to start off with a big thank you to the entire Exco team, who works together with purpose through the quarter to drive our business forward while producing much stronger financial results. This quarter, we demonstrated clear evidence that our strategic growth initiatives are on the right track. We saw solid demand across our various businesses, particularly for our large and complex tooling, but also are in sort of interior trim and accessory products.

We are more confident than ever that Exco is exceptionally well positioned to enjoy a multiyear period of heightened demand growth.

Looking first at the advancement of our strategic growth initiatives, we gain made great progress this quarter. Importantly, I will remind you that our initiatives are primarily driven by the increasing demand for electric vehicles, the lightweighting and economizing of all vehicles, the broader environmental sustainability movement, and adoption of increasingly sophisticated extrusion in die cast tooling.

With regards to our specific investments, I am pleased to report that Castool has essentially completed construction of its new facility in Mexico, and delivery of machinery and equipment has continued this quarter. We expect this plant to be operational in our third fiscal quarter, providing much needed capacity to better -- and better positioning us competitively within the geographies of Latin America in the southern U.S.

Installation of new equipment that has upgraded and enhanced our heat treatment capabilities across the segments has continued with the last of these pieces now fully operational. This equipment provides us with unmatched capabilities and competitive advantages, lowers our costs and also significantly reduces our carbon footprint. Beginning this current quarter, we are now able to handle essentially all of our North American heat treatment requirements in-house across the casting extrusion segment.

Elsewhere, Castool plants in Morocco remains in a ramp up phase and is making slow but steady progress while the large whole group has completed the installation of all equipment and crane capacity to handle moulds of extreme size and is continuing to optimize the use of this new equipment.

The integration of Halex into the extrusion group and realization of synergies from the sharing of best practices remains ongoing. But here again, we made great progress this quarter. Despite unexpected challenges during the first year of owning Halex into the elevated energy costs and heightened inflationary pressures in Europe, we remain very happy with this acquisition. I know Halex has great potential.

Lastly, our plant expansions within our automotive solution segment are complete and all equipment to support new programs are operational contributing to our very strong growth this quarter. It is important to note that these investments not only require a significant amount of capital, but there are a sizeable front end cash costs that we are absorbing within our results, not to mention the allocation of our most precious resources, the time and attention of our people.

Nonetheless, we believe we are at an inflection point as we are starting to see the aggregate of these investments now contributing to not just sales but also margin growth. We expect this trend will continue in the quarters ahead.

Turning to market conditions, there was overall improvement during the quarter with automotive industry volumes increasing sharply and production flow stabilizing in both North America and Europe. This positively impacted our own efficiency, particularly in our automotive solutions segment, which demonstrated continued good growth in both sales and margins.

Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates. We have seen early signs that OEMs are responding to the changing environment by increasing incentives and in some cases reducing vehicle prices. This bodes well for automotive suppliers, as these actions will help support sales volumes should economic conditions deteriorate further.

Microchip supply is improving, though the industry is likely still months away from being fully recovered. Independent industry experts forecast a 5% increase in overall automotive production volumes for both North America and Europe through calendar 2023.

We would expect our Automotive Solution segments to generate higher sales growth in this, as we continue to continue to benefit from the launch of previously awarded programs. Looking at further, Quoting activity is very robust across the segment, which will support our growth over the longer term.

With respect to our own input costs, we continue to see a levelling off of inflationary pressures. Labour rates, however, remain a challenge particularly in Mexico, which puts through a 20% increase in minimum wage in December. With this in mind, we continue to take specific pricing actions where possible in order to restore and protect our margins.

We also of course remain extremely focused on further improving our own efficiency, which is ultimately the clearest path to market enhancement.

With our casting and extrusion segments, we saw very strong demand for new die cast moulds, while rebuild work is continuing to pick up. This is true for both powertrain and structural programs. And of course, our additive operations continued to grow strongly.

In Q2, our Large Mould group recorded its highest ever level of quarterly order intake in our backlog the sales ratio remains at record levels. Within this backlog, I would point out that orders are well balanced between moulds for powertrain instructional applications. Demand for consumable extrusion tooling did softened during the quarter as extruders responded to slower global macro conditions. However, extrusion demand in a number of end markets such as automotive in green categories remained solid.

Castool capital equipment sales within the extrusion end markets remained very strong as the demand for its consumable die cast tooling and systems. Castools products are leading the market forward as they greatly enhance the productivity and efficiency of their customers. As a result, Castool is clearly gaining significant market share globally.

Margins in our casting and extrusion segments improved this quarter, but remain below potential as we absorb startup losses at new operations incur elevated levels of depreciation from recent CapEx activity, navigate through operational disruptions as we install new equipment and continue to catch up from inflationary pressures with pricing actions. Nonetheless, as I mentioned, I believe we are at an inflection point with our investments and expect to see continued gains in the segment margins in the quarters ahead.

With that, I again want to thank all my Exco teammates for a great quarter and I will now pass the call over to Matthew to discuss the financial highlights.

Matthew Posno

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the second quarter ended March 31 2023 were $155 million compared to $190 million in the same quarter last year, an increase of $36 million or 30%. Second quarter sales at our Automotive Solutions segment were up $14.9 million or 22%. The Casting and Extrusion group sales increased $21.3 million or 42%.

Excluding the impact of foreign exchange, consolidated sales for the quarter were up 24%, automotive sales were up 15% and casting extrusion sales were up 35%.

Consolidated net income for the second quarter was $6.3 million or $0.16 per share compared to $5.1 million or $0.13 per share and the same quarter last year. The increase in net income of $1.2 million or 24%.

Earnings per share were reduced $0.03 in the quarter due to the one-time impact of the January 2023 cyber incident. Consolidated effective income tax rate of 21% in the current quarter, decreased from 23% from the prior quarter due to non-deductible losses from our recently launched Castool Morocco facility offset by geographic distribution and foreign rate differentials.

The Automotive Solution segment reported sales of $83.1 million in the second quarter, an increase of $14.9 million or 22% from the prior year quarter. The sales increase was driven by the ramp up of newer programs, higher vehicle production volumes, select pricing actions to compensate for inflationary pressures as well as a favourable vehicle mix.

North American European production volumes were up about 13% in the quarter, indicating continued gains in content per vehicle.

Looking forward OEM vehicle production volumes are expected to increase as the semiconductor chip shortages and other supply chain constraints continue to improve. While industry growth may be tempered by rising interest rates and emerging indicators of a global recession, there remain significant pent up customer demand for new vehicle and dealer inventory levels are expected to be replenished.

As well Exco will benefit from recent and future program launches that are expected to provide ongoing growth in our content per vehicle. [Technical difficulty] earnings in the Automotive Solutions segment totalled $8.7 million, which represents an increase of $2.5 million from the prior year quarter. A higher pre-tax profit is largely attributed to increased sales, improved overhead absorption and benefits from select pricing actions. These improvements were partially offset by inefficiencies caused by launch costs in the period.

Industry vehicle volumes remain below pre pandemic levels and production flows remain somewhat erratic due to ongoing supply chain challenges. But these challenges less than in the quarter will cost increases related raw materials wages and transportations also subsided. Pricing discipline remains a focus and action is being taken where possible, so there's typically a lag of a few quarters before the impact is realized. As well new vehicle awards are priced to reflect management's expectations for higher future costs.

The casting and extrusion segment reported sales of $72.4 million for the second quarter, an increase of $21.3 million or 42% from the same period last year. Adjusted for the impact of foreign exchange movements, segment revenues increased 35% during the quarter. Casting and extrusion segment sales were significantly influenced by the acquisition of Halex in our third quarter of fiscal 2022. Excluding Halex sales, segment sales increased by 12% in the quarter. Demand for extrusion tooling, dies, dummy blocks, stems et cetera. And associated capital equipment die ovens and containers remain relatively strong due to industry growth and ongoing market share gains.

Although we did see signs of market activity for consumable extrusion tooling slowing through the quarter in North America. In the die cast market, which primarily served the automotive industry demand for new moulds, consumable tooling like short sleeve rods, rings and tips, rebuild tools and additively printed tooling has continued for to improve as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine transmission platforms are launched.

We believe this segment is gaining market share, particularly for tooling that is larger and more complex, which is the fastest growing portion of the market. Sales in the quarter were also aided by price increases which are implemented to recover margins eroded by higher input costs. Quoting activity within the die cast and market remains extremely robust, while our backlog levels are at record highs, which is expected to bode well for sales into fiscal 2024.

The casting and extrusion segment reported $3.9 million of pre-tax profit in the second quarter, an increase of $1.2 million from the same quarter last year, and $2 million from the first quarter of fiscal 2023.

The second quarter pre-tax improvement was driven by contributions from Halex, increased overhead absorption and production efficiencies due to stronger sales in the die cast market, including new moulds, rebuilt and consumable tooling. These positive contributions were partially offset by higher depreciation and the quarter, Start-up costs at Castool’s new Moroccan and Mexican operations, and a Heat Treat operations in new market. Higher energy, raw material energy, freight and labor costs. As well costs were impacted by roughly $600,000 of expenses recorded in the segment, due to lost production time in the Large Mould group rising from the cyber incident.

Management remains focused on ramping up newer operations, reducing its overall cost structure and improving manufacturing efficiencies. We expect such activities together with our sales efforts should lead to further improvement in segment profitability over time.

Exco generated cash from operation operating activities of $6 million during the quarter and $1.1 million of free cash flow, after $10 million of increased non-cash working capital, $2.9 million in maintenance fixed asset additions and interest of $2 million. Cash flows combined with cash on hand and existing credit facilities funded $4.1 million of dividends $7.7 million in growth capital expenditures.

Management expects fiscal 2023 capital expenditures to be approximately $46 million as we complete our strategic capital asset projects. Exco ended the quarter with $13.1 million of cash, $116 million in bank and long-term debt and $36.3 million available in its credit facility. Exco’s financial position remains strong. As such the company's balance sheet and availability under existing credit facilities provide continued support for our strategic initiatives.

Our strong financial position combined with their free cash flow creates a foundation for management to pursue high value growth, capital expenditures, dividends, and other opportunities that may arise. That concludes my comments, so we can now transition to the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from David Ocampo with Cormark Securities. Your line is now open.

David Ocampo

Thanks. Good morning, Darren and Matt. So the EPA put out a proposal for a change in the cafe requirements up to 2032. Are you guys doing that as a risk or opportunity? And does that change how you guys are investing your capital? Or are more or less confirmed what you guys are putting out there today?

Darren Kirk

With regards to that specific proposal, it doesn't have a meaningful influence in the way we run the business. I think that we continue to expect that all vehicles will need to produce emissions and battery electric vehicles will be increasingly adopted. And, those two trends within the die cast segment of our -- casting extrusion segment, well we continue to see increased demand. I mean that I guess that the only question remains what pace and how high the demand goes. But we're certainly seeing already that there is significant demand. And again, we expect that will persist for many, many years.

David Ocampo

Got it. And then since we're talking about mould, maybe just on the extra-large mould side of the equation. Did you guys see any notable business wins in the quarter? And now that you have all the equipment in place, just curious how that business scales over time?

Darren Kirk

Yes, well, as we mentioned, this was a record quarter for order intake, and the backlog continues to grow. I guess with regards to specific programs, the only thing I would say is that we've installed a tremendous amount of new equipment. And that gives us the capabilities to work on moulds of extreme size and we're using all the equipment as we expected.

David Ocampo

And I guess is there any kind of hurdles that you guys see how the equipment in places or technical know how that you guys need to develop in house before we could see this materially architecting in future quarters?

Darren Kirk

No. At this point, I'd say that the biggest risks are certainly behind us. And it's a matter of just optimizing the equipment that we have. It's all running. And we just want to make it run better as we always do.

David Ocampo

And do you guys have to qualify any of the moulds that you guys produce for your customers before, moving on into revenue.

Darren Kirk

Castool heat treatment operations had to go through a qualification procedure with some OEMs and they passed it with flying colors.

David Ocampo

Got it. That's it for me. Thanks. Thanks a lot, guys.

Darren Kirk

Yes. All right. Thanks.

Operator

[Operator Instructions] I show no further questions at this time. I would now like to turn the conference back to Darren for closing remarks.

Darren Kirk

Well, thanks everyone for participating today. We look forward to speaking with you again in another 90 days or so. Take care.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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