Exco Technologies Q4 2023 Earnings Call Transcript

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Provided by Quartr
November 30, 2023

There are 3 speakers on the call.

Operator

And welcome to the Exco Technologies Limited 4th Quarter 2023 Results 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. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, Abigail. Good morning, all participants. Welcome to Coe Technologies' Fiscal 2023 4th Quarter and Year End 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.

Speaker 1

Before I begin, I'd like to point out the cautionary notes in yesterday's news release and on Page 2 of the presentation that we have posted to our website. They are applicable to this discussion today. In fiscal 2023, Exco clearly demonstrated our aggressive growth strategy is on the right track. Despite difficult market conditions, we recorded a 26% increase in sales to a record 619,000,000 Grew our EBITDA by 41 percent to almost $75,000,000 and delivered $0.68 of earnings per share, A 39% improvement over last year. As well, our momentum remains strong.

Speaker 1

We established Positive trends throughout the year with our quarterly revenues and EBITDA showing sequential improvement ending the year on a high note. We not only achieved substantial financial growth, but also pushed operational excellence throughout our business. From our fast growing 3 d printing operations to Castool's energy efficient systems that help die cast and extrusion customers reduce emissions globally to NeoCon's leadership in the industrial reuse of plastics and post process recycling, It is truly inspiring to see the numerous examples of innovation in both products and processes happening across Exco. Similarly, the opportunities we see to further our reach through both recent acquisition and Greenfield Investments is thoroughly exciting. Looking forward, despite macro headwinds, vehicle production volumes are expected to grow in 2024 As dealer inventories continue to be replenished and pent up consumer demand is satisfied.

Speaker 1

Also, we are clearly gaining market share And we enter the new fiscal year with a record backlog levels in our long lead time products such as large molds. Moreover, start up losses and operational disruption associated with our current capital investment activity should reduce, While the benefits of our ongoing efficiency initiatives will continue to take hold, while there will no doubt be new challenges, We remain very optimistic that our earnings will again be substantially stronger in the year ahead. As I've noted many times in the past, the key focus for Exco is to directly support the electric vehicle revolution and the worldwide movement toward reducing emissions. Consequently, as the world continues to push forward with sustainability initiatives, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the principal driver of this tailwind, particularly in the automotive industry, our primary end market.

Speaker 1

As the automotive industry adapts to ever tightening fuel efficiency standards, lightweight metals are increasingly displacing Structural steel vehicle components to make internal combustion engine vehicles more environmentally friendly. Moreover, Electric vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range. Our Casting and Extrusion segment is especially well positioned to benefit from this transition as we are the leading provider of tools that shape lightweight metals And we do not manufacture tooling for stamped steel components. Over the next several years, significant growth is expected in the application of both extruded and die cast aluminum components. More recently die cast aluminum Components and associated tooling have been increasing in both size and complexity.

Speaker 1

OEMs and their tier suppliers Are increasingly using so called Giga Press die casting machines that are much larger than those used previously. This enables the casting of entire vehicle subframes from aluminum rather than assembling numerous stamped melt components, Creating significant manufacturing efficiencies. The tooling required to facilitate this process is also much larger and more complex, which plays directly into our strengths. We anticipated this trend several years ago and have made considerable investments in our people, equipment and processes to be the leading supplier in this market segment. Our Automotive Solutions Group, which manufactures products for both the interior and storage areas of passenger vehicles, Also stands to benefit from sustainability trends.

Speaker 1

Exco's Automotive Solutions segment typically makes products that are lighter in weight than competing products And electric vehicles generally have more cabin and storage space for which our products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher margin accessory products as a means to enhance their own profitability And Exco is an industry leader for many of these products. To these points, we grew our content per vehicle by 14% in fiscal 2023, which was well above our historical range of 5% to 10% per annum. It is important to note That while both our business segments are very well positioned for the automotive industry's eventual transition to electric vehicles, HEXCO is relatively agnostic to powertrain architecture. Should the EV revolution proceed more slowly or even shift toward hybrid vehicles, We remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead.

Speaker 1

With regard to our various capital asset investment and growth strategies, we again made great progress in fiscal 2023. I want to emphasize the sizable negative impact these investments have had on our recent financial results. We have incurred significant front end cash costs from the start up of new plants, navigated through operational disruption As we installed new equipment and are incurring much higher levels of depreciation associated with our conservative accounting methods. Nonetheless, in fiscal 2023, we saw clear signs that the aggregate of these investments has not only begun to add to our EBITDA, but is accretive to our margins as well. I will direct you to the slides we've posted to our website or to our Quarterly material for more information about the specifics of these investments.

Speaker 1

I would point out, however, that Castool's new facility in Mexico Is now operational with commercial operations beginning on October 1. This plant will provide much needed capacity for Castool and better position us competitively within the geographies of Latin America and the Southern U. S. In fiscal 2024, We will continue to generate efficiencies from the substantial capital that we have recently deployed. As well, We plan to spend approximately $49,000,000 in capital in the year ahead to further improve our efficiency, provide additional capacity and reduce our environmental footprint.

Speaker 1

With the benefit of these investments, the launch of new programs, General market growth and also market share gains consistent with our history, we expect to achieve substantial growth. This quarter, we confirmed our fiscal 2026 targets of $750,000,000 in revenue and $120,000,000 We did, however, revise our fiscal 2026 EPS target to roughly 1.50 As a result of higher than expected capital spending for future growth initiatives as well as the potential that interest rates remain higher for longer. Turning to market conditions, there was an overall improvement again this quarter with automotive industry volumes increasing and production flows stabilize. This positively impacted our own efficiency, particularly in our Automotive Solutions segment, which demonstrated Impressive sales growth and margin improvement. UAW strike action, which commenced in mid September had only a very modest impact On our results in Q4, while this impact continued through October before the strikes were resolved, I would describe the impact on our Q1 results Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates.

Speaker 1

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. Independent industry experts forecast a low single digit increase in overall automotive production volumes For North America and Europe through 2024, as was the case again this quarter year, We would expect our Automotive Solutions segment to generate higher sales growth than this as we continue to benefit from the launch of previously awarded programs. Looking out 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 signs of slowing inflation.

Speaker 1

Labor rates, however, remain a challenge, particularly in Mexico, while foreign exchange rate movements have been an added headwind. Within our Casting Extrusion segment, we saw very strong demand for new die cast molds, while rebuild work is also continuing to pick up. This is true for powertrain and structural programs, Gigasized dies and of course our additive manufacturing operations. Demand for consumable extrusion tooling It remained soft during the quarter as extruders have responded to weaker global macro conditions. However, extrusion demand In a number of end markets such as automotive remains strong.

Speaker 1

Castool's capital equipment sales within the extrusion end markets remain robust As does demand for its consumable die cast tooling and systems. Castool's products greatly enhance the productivity and efficiency of their customers and they are clearly gaining significant market share globally. Margins in our Cats and Extrusion segment improved this quarter as we have been expecting Margin improvement came from numerous areas, but primarily reflect our cost optimization efforts, strategic price increases and the net benefit Of the substantial investments we have been making over the past couple of years, we remain confident that there is much more upside to our margins as our recent greenfield investment season and our recent capacity additions are utilized. With that, I want to thank All of my Exco teammates for a great quarter year. I will now pass the call over to Matthew to discuss the financial highlights.

Speaker 2

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the Q4 ended September 30 was $160,200,000 an increase of Almost $20,000,000 or 14% from the prior year. 4th quarter sales at our Automotive Solutions segment increased $22,000,000 or 33 percent and the Casting Fusion Group decreased $1,800,000 or 2%. Foreign exchange rate movements increased sales by $4,800,000 in the quarter.

Speaker 2

Annual sales totaled $619,000,000 compared to $490,000,000 last year, an increase of $129,000,000 or 26%. The net effect of foreign exchange rate changes increased sales of $28,000,000 for the year. Full year sales in Automotive Solutions segment were $327,000,000 an increase of $73,000,000 or 29 percent and sales in the Casting and Extrusion Group were $292,000,000 An increase of $56,000,000 or 24%. The increase reflects 12 month sales from Halex, strong demand from our die cast products, Large mold and cast tool and higher sales in the Automotive Solutions segment as automotive production volumes continue to increase and program launches generated higher content per vehicle Consolidated net income in the 4th quarter was $9,200,000 or earnings per share of $0.24 compared to $5,600,000 or earnings per share of $0.14 in the same quarter last year, an EPS increase of 71%. The effective income tax rate was 25% in the current quarter compared to 26% in the same quarter last year.

Speaker 2

The Automotive Solutions segment experienced a 33% increase in sales or an increase of $21,600,000 to $87,600,000 from $66,000,000 in the Q4 of 2022. Excluding the impact of foreign exchange rates, segment sales increased $19,200,000 or 30%. Sales increased at all 4 of the segment's operations. The sales increase was primarily driven by new program launches and to a lesser extent higher vehicle production volumes. North American vehicle production was up 9% compared to a year ago and European vehicle production was up 6%.

Speaker 2

There's virtually no impact of the UAW strike, which started mid September and was resolved in late October. 4th quarter pre tax earnings The Automotive Solutions segment totaled $10,000,000 which is an increase of $3,500,000 or 54% over the same quarter last year. Although production volumes continue to experience some challenges with semiconductor and supply chain constraints, the impact of those factors has reduced considerably. This has allowed all 4 businesses to benefit from improved efficiencies and absorption of fixed costs to offset the higher raw material and labor costs experienced in recent years. In addition, the stabilized production volumes means improvements to scheduling and managing labor downtime, fewer expedited shipping and overtime costs The Casting and Extrusion segment recorded sales of $72,600,000 in the 4th quarter compared to 74 point $4,000,000 last year, a decrease of $1,800,000 or 2%.

Speaker 2

Demand for extrusion tooling was lower in the 4th quarter as the impact Higher interest rates and potential for global recession reduced orders mainly in the building and construction markets. Demand for Extrusion Tooling and Automotive and Sustainable Energy Markets remain strong and growing, but the building and construction market is the largest driver of extrusion tooling. In the die cast market, which primarily serves the automotive industry, Demand and order for new molds, associate consumable tooling like shot sleeves, rods, rings and tips and rebuild work Continue to pick up as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine transmission platforms are launched. In addition, demand for Exco's industry leading additive 3 d printed tooling has continued to gain significant traction As customers focus on greater efficiency with the size and complexity of die cast tooling continuing to increase. Sales in the quarter were also aided by price increases, which were implemented to protect margins from the higher input costs.

Speaker 2

Also impacting revenue during the quarter was considerable period over period variance The recognition of revenue from some of the large new build molds, which have high price points relative to other products in the segment. 4th quarter pre tax earnings in the Casting and Extrusion segment totaled $5,300,000 an increase of $2,800,000 or 108% over the same quarter last year. The pre tax profit improvement is due to improved efficiency in the Extrusion Dye business, including improvements in Halex and the elimination A fiscal 2022 one time cost associated with the outsourcing due to the extrusion heat treatment implementation. As well, there was improved absorption efficiencies at Castool's heat treatment as the heat treat operation ramps up, Stabilizing raw material and labor costs and lower Castool Morocco start up costs. Program pricing and mix Has also improved in the Large Mould Group as demand has picked up in recent quarters while efficiency initiatives continue to take hold.

Speaker 2

Offsetting these reduced costs was $500,000 increase in depreciation costs associated with increased capital expenditures and start up loss of the Castool's new operation in Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with its sales efforts should lead to improved segment profitability over time. Operating cash flow before changes in working capital was $23,500,000 in the quarter compared to $17,500,000 in the prior year quarter. Higher 4th quarter net income, depreciation, deferred taxes and interest Expense contributed to the increased operating cash flow in the quarter. Cash used for working capital was $5,900,000 in fiscal 2023 compared to $21,500,000 cash used last year. Current quarter cash used for working capital was driven by higher accounts Receivable associated with higher 4th quarter sales and increased inventory reflecting the strength of our backlog and ramping up of new facilities.

Speaker 2

Investment in fixed assets of $9,600,000 compared to $16,400,000 in the prior year quarter. Included in the current year quarter was $5,200,000 in growth capital. The difference relates to timing the difference from prior year relates to timing of equipment purchases and the completion of major projects. Exco ended the quarter with $94,200,000 in net debt. The company has $43,000,000 in available liquidity under its banking facilities at year end.

Speaker 2

With respect to fiscal 2024 investments in fixed assets, we are planning for approximately $49,000,000 in capital expenditures with $25,000,000 in growth CapEx and $24,000,000 in maintenance CapEx. Included in the total spending are approximately $7,000,000 in carryforward projects from longer term projects that were approved in prior years. Exco's financial position remains strong. As such, the company's balance sheet availability under the existing credit So, we allow flexibility to support strategic growth initiatives. This combined with cash from operations creates a foundation for management to pursue I value growth capital expenditures, dividends and other opportunities that may arise.

Speaker 2

That concludes my comments. We can now transition Abigail to the Q and A portion of the call.

Operator

Thank you. At this time, we'll conduct the question and answer session. One moment while we compile the Q and A roster. I'm showing no questions at this time. I would like to turn the call back to Darren Kirk for closing remarks.

Speaker 1

Thanks, Abigail. Actually, we did receive a few questions that were just submitted online. So I'll read them off and address them. Question 1, with respect to the revision of EPS in 2026, you were indicating that depreciation will be higher than previously expected. What do you foresee for CapEx over the next few years?

Speaker 2

Okay. Well, I'll take care of that one. So as we I just mentioned in my notes, We are expecting CapEx in fiscal 2024 to be approximately $49,000,000 and that includes $7,000,000 of carryover from last year Or prior years. The lead time on some of this capital is quite long and it's actually getting a little longer. So the timing of that $49,000,000 Some of it may carry over into next year.

Speaker 2

However, we are looking at a lot of new opportunities and We do not shy away from building and adding capital that's going to support us. So, I expect our CapEx to remain elevated Over the next couple of years, again, 49,000,000 this year. I don't have an estimate exactly for next year, but I'd say in excess of $40,000,000 and probably pretty Debbie at that level for the next year or 2.

Speaker 1

Okay. Next question I have is EBITDA margin in the Casting and Extrusion segment saw a nice improvement this quarter. What were the key drivers of this improvement and how do you reach your 20 I guess, The biggest driver of the margin improvement was a lot of these investments that we've been making over the last couple of years. As we've indicated throughout the investment period, there's a lot of operational disruption to install the new equipment. We've got startup losses for new plants.

Speaker 1

We had to outsource some of our heat treat operations while we installed New energy efficient heat treat operations within our own facilities. And I guess we've turned the corner With respect to the aggregate impact of these investments such that we're now starting to see the margin lift from them. And on top of that, we've had continued drive for efficiency throughout the segment and all three Castool, Large Mould and Extrusion did see improvement in their margins this quarter. So I'd say the last thing with respect to the recent improvement we've seen is We've worked through a lot of the older, much lower priced programs in our large mold Segment and the market conditions in that business are Improving rapidly, such that demand is increasing, particularly for the capabilities that we now have with these giga type dies. And So that is starting to have an impact as well.

Speaker 1

And continuation of all of these things plus the seasoning of our greenfield plants That are still incurring cash drag on our results will enable us to reach our 20% Margin by 2026. And so the last question I have is, I was a little surprised that you were guiding The UAW strike won't have a material impact on your results. What explains this? I would say that the biggest impact you would expect is in the auto Solutions Group and it's not to say that the impact is 0, but our operations are very diverse with significant Non domestic OEM exposure and it's really that diversity that Plus the impact of the programs that we were on that has given us kind of a muted impact. Again, not to say it's 0, but it shouldn't be material within context of the overall results.

Speaker 1

So that's All the questions I have and I want to thank everyone for participating and we'll look forward to talking to you again next quarter.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Exco Technologies Q4 2023
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