Exco Technologies Q2 2023 Earnings Call Transcript

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April 28, 2023

Key Takeaways

  • Exco’s strategic growth initiatives progressed with Castool’s new Mexico facility near completion, upgraded in-house heat treatment capabilities, and the Large Mould Group’s new equipment fully installed, positioning the company for multi-year demand growth.
  • Automotive industry volumes rose sharply in Q2, OEM incentives increased and microchip supply improved, boosting Exco’s Automotive Solutions segment efficiency and underpinning robust quoting activity for future programs.
  • Second quarter revenue jumped 30% year-over-year to $155 million and net income rose 24% to $5.2 million (EPS $0.16), reflecting strong sales in both Automotive Solutions and Casting & Extrusion segments.
  • The Casting & Extrusion segment delivered a record order intake with backlog at all-time highs, driving a 42% sales increase (35% constant currency) and marking the segment’s strongest performance yet.
  • Margins remain pressured by elevated depreciation from recent capital expenditures, start-up losses at new operations and higher labor costs—particularly following a 20% minimum wage increase in Mexico.
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Earnings Conference Call
Exco Technologies Q2 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Aesco 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 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.

Operator

Please go ahead.

Speaker 1

Thank you, Michelle. Good morning, all participants. Welcome to Exco Technologies' fiscal 2023 2nd 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.

Speaker 1

Before we begin, please ensure you review the cautionary notes in yesterday's news release and on Page 2 of the presentation that we have posted to our website. These notes are applicable to this discussion today. I would like to start off with a big thank you to the entire Exco team who worked together with purpose Drew 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 our assorted interior trim and accessory products.

Speaker 1

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 again 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 3rd fiscal quarter, providing much needed capacity to better and better positioning us competitively within the geographies of Latin America and the Southern U.

Speaker 1

S. Installation of new equipment that has upgraded and enhanced our heat treatment capabilities across the segment 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's plant in Morocco remains in a ramp up phase and is making slow but steady progress, While the Large Mould Group has completed the installation of all equipment in crane capacity to handle molds 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.

Speaker 1

But here again, we made great progress this quarter. Despite unexpected challenges during the 1st year of owning ALX Due to the elevated energy costs and heightened inflationary pressures in Europe, we remain very happy with this acquisition and know Halex has great potential. Lastly, our plant expansions within our Automotive Solutions 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 sizable 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.

Speaker 1

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 flows 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.

Speaker 1

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 Solutions segment to generate higher sales growth in this as we Continued 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 a leveling off of inflationary pressures.

Speaker 1

Labor rates, however, remain a challenge, particularly in Mexico, which pushed 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 margin enhancement. Within our Casting and Extrusion segment, we saw very strong demand for new die cast molds, while rebuild work is continuing to pick up. This is true for both powertrain and structural programs and of course our additive operations continue to grow strongly.

Speaker 1

In Q2, our Large Mould Group recorded its highest ever level of quarterly order intake and our backlog to sales ratio remains at record levels. Within this backlog, I would point out that orders are well balanced between molds for powertrain and structural applications. Demand for consumable extrusion tooling did soften during the quarter as the extruders responded to slower global macro conditions. However, extrusion demand in a number of end markets such as automotive and green categories remained solid. Castool's capital equipment sales within the extrusion end markets remain very strong as does demand for its consumable die cast tooling and systems.

Speaker 1

Castool's 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 segment improved this quarter, but remain below potential as we absorb start up 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 EXFO teammates for a great quarter.

Speaker 1

And 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 Q2 ended March 31, 2023 were $155,000,000 compared to $119,000,000 in the same quarter last year, an increase of $36,000,000 or 30%. 2nd quarter sales at our Automotive Solutions segment were up $14,900,000 or 22 percent and the Casting and Extrusion Group sales increased $21,300,000 or 42%. Excluding the impact of foreign exchange, consolidated sales for the quarter were up 24%, automotive sales were up 15% and casting were $0.16 per share compared to $5,100,000 or $0.13 per share in the same quarter last year, an increase in net income of $1,200,000 or 24%.

Speaker 2

Earnings per share were reduced $0.03 in the quarter due to the one time impact of the January 2023 cyber incident. The consolidated effective income tax rate of 21% in the current quarter decreased from 23% from the prior year quarter due to non deductible losses from our recently launched Castool Morocco facility offset by geographic distribution and foreign rate differentials. The Ironman Solutions segment reported sales of $83,100,000 in the 2nd quarter, an increase of $14,900,000 or 22% 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 favorable vehicle mix. North America and 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.

Speaker 2

While industry growth may be tempered by rising interest rates and emerging indicators of a global recession, There remains 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 contract vehicle. Earnings in the Automotive Solutions segment totaled $8,700,000 which represents an increase of $2,500,000 from the prior year quarter. The 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.

Speaker 2

Industry vehicle volumes remain below pre pandemic levels And production flows remain somewhat erratic due to ongoing supply chain challenges, but these challenges lessened in the quarter while cost increases related raw materials, wages Transportation has also subsided. Pricing discipline remains a focus and action is being taken where possible, though 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 $72,400,000 for the 2nd quarter, an increase of $21,300,000 or 42% from the same period last year. Adjusted for the impact of foreign exchange movement, segment revenues increased 35% during the quarter.

Speaker 2

Casting and Extrusion Sales were significantly influenced by the acquisition of Halex in our Q3 of fiscal 2022. Excluding Halex's sales, segment sales Increased by 12% in the quarter. Demand for our extrusion tooling, dies, dummy blocks, stems, etcetera, and associated capital equipment, die ovens and containers remained 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 serves the automotive industry, demand for new molds, Consumable tooling like shop sleeves, rods, rings and tips, rebuild tools and additively printed tooling has continued to improve As industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine transmission platforms are launched.

Speaker 2

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 were implemented to recover margins eroded by higher input costs. Corning activity within the die cast end 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 $3,900,000 of pre tax profit in the 2nd quarter, an increase of $1,200,000 from the same quarter last year and $2,000,000 from the Q1 of fiscal 2023. The Q2 pre tax improvement was driven by contributions from Halex, increased overhead absorption and production efficiencies due to stronger sales in the diecast market, including new molds, rebuilds and consumable tooling.

Speaker 2

These positive contributions were partially offset by higher depreciation in the quarter, Startup costs at Castool's New Moroccan and Mexican operations and at Tea Treat operations in Newmarket, higher energy Raw material, energy, freight and labor costs as well costs were impacted by roughly $600,000 of expenses recorded in this segment due to lost production time in the Large Mould Group arising 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 $6,000,000 during the quarter and $1,100,000 of free cash flow after $10,000,000 of increased non cash working capital, dollars 2,900,000 of maintenance fixed asset additions Cash flows combined with cash on hand and existing credit facilities funded $4,100,000 of dividends, $7,700,000 in growth capital expenditures. Management expects fiscal 2023 capital expenditures to $46,000,000 as we complete our strategic capital asset projects.

Speaker 2

Exco ended the quarter with $13,100,000 of cash, $116,000,000 in bank and long term debt and $36,300,000 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 our free cash That concludes my comments. So we can now transition to the Q and A portion of the call, Michelle.

Speaker 2

Okay.

Operator

Please standby while we compile the Q and A roster. The first question comes from David Ocampo with Cormark Securities. Your line is now open.

Speaker 3

Thanks. Good morning, Darren and Matt. Good morning, David. Good morning. So the EPA put out a proposal for a change in The CAFE requirements up to 2,032, are you guys viewing that as a risk or opportunity?

Speaker 3

And does that change how you guys are investing your capital or more or less confirm what you guys

Speaker 1

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 reduce emissions and battery electric vehicles will be increasingly adopted. And those two trends within the die cast segment of our Casting Extrusion segment. We'll continue to see increased demand. I mean, I guess, the only question remains what pace And how high the demand goes, but we're certainly seeing it already that there is significant demand.

Speaker 1

And again, we expect that will persist For many, many years.

Speaker 3

Got it. And then since we're talking about mold, maybe just on the extra large mold 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?

Speaker 1

Yes. Well, as we mentioned, this was a record quarter for order intake and the backlog continues To grow, there 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 molds of extreme size and we're using all of the equipment as we expected.

Speaker 3

And I guess, is there any kind of hurdles that you guys see how the equipment in place? Is there a technical know how that you guys need to develop in house Before we could see this materially uptick in future quarters?

Speaker 1

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.

Speaker 3

And do you guys have to qualify any of the molds that you guys produce for your customers before that starts going down into revenue?

Speaker 1

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

Speaker 3

Got it. Okay, that's it for me. Thanks a lot guys. Yes. Thank

Operator

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

Speaker 1

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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