Exco Technologies Q3 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Exco Technologies Limited Third 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, Gigi. Good morning, all participants. Welcome to Exco Technologies fiscal 2023 Q3 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, 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 are applicable to this discussion today.

Speaker 1

I would like to start off with a big thank you to the entire Exco team who worked together through the quarter to drive our business forward while producing much stronger financial results. I must say it is truly inspiring to see the tremendous pace of innovation happening across Exco in terms of both new product development and process improvement. In Q3, our collective efforts helped grow revenues 27% to a record $165,000,000 while EBITDA kept pace growing to almost $19,000,000 and earnings came in at $0.16 per share. This quarter, we again demonstrated clear evidence that our strategic growth initiatives will yield significant earnings growth for Exco In the years to come, we saw solid demand across our various businesses, particularly for our large and complex tooling, but also for our assorted interior trim and accessory products. Looking first at the advancement of our strategic growth initiatives, We again made great progress this quarter.

Speaker 1

Importantly, I would remind you that our initiatives are primarily driven By the increasing demand for electric vehicles, the lightweighting and economizing of all motor vehicles, the broader global environmental sustainability movement and the adoption of increasingly sophisticated extrusion and die cast tooling of extreme size. With respect to that last point, the adoption of so called giga presses by both OEMs and tier suppliers for die casting is a key driver here. During the quarter, we saw a number of industry players announce plans to use Giga Presses to simplify their electric vehicle manufacturing process and reduce overall costs. We are starting to see the associated tooling demand come through, taking advantage of the significant capabilities that we've been Again over the last couple of years. We expect this demand will ramp up steadily over the next couple of years and really come on strong by 2025.

Speaker 1

In addition to Giga Castings, larger extrusion presses are also a big factor driving us forward. We are seeing a number of very high tonnage extrusion presses being installed globally, mostly for automotive applications. Our cash tool and extrusion groups are making significant investments to design, manufacture and support the associated tooling and capital equipment that enables these large presses to produce complex extrusions efficiently. With regards to our specific investment plans, I'm pleased to report that Castool's new facility in Mexico is almost operational. This plant will provide much needed capacity for Castool and better position us competitively within the geographies of Latin America and the Southern U.

Speaker 1

S. We expect to begin commercial production at the start of And we will hold our ceremonial opening event this October in Queretaro, Mexico. Installation of new equipment that has upgraded and enhanced our heat treatment capabilities across the segment is all fully operational. This equipment includes the largest vertical heat treatment oven in North America. It provides us with unmatched capabilities and competitive advantages For large and complex tooling, lowers our costs and also significantly reduces our carbon footprint.

Speaker 1

Consequently, we are now able to handle Essentially all of our heat treatment requirements within North America in house. Elsewhere, Castool's plant in Morocco remains in a ramp up phase, but is making terrific progress and I'm pleased to report it contributed positive EBITDA this quarter. Next, our large mold group is increasingly utilizing all equipment in expanded crane capacity to handle molds of extreme size, while our additive operations are seeing record demand levels. The integration of Halex into the Extrusion Group and realization of synergies Challenges during our 1st year of owning Halex due to rising energy costs, heightened inflationary pressures From the Russian invasion of the Ukraine, we remain very happy with this acquisition. Lastly, our plant expansions within our Automotive Solutions Group are complete and all equipment to support a number of new programs are operational.

Speaker 1

In fact, we are now adding more equipment to support ongoing growth ahead of our previous expectations. I can't emphasize enough that all of 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. While margins are suffering near term, we fully expect our margins will grow strongly in the quarters ahead Once the pace of this disruption subsides, new processes mature and its further scale benefits are achieved. Turning to market conditions, there was continued 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 significant improvement in both sales and margins.

Speaker 1

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 isolated 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 still likely months away from being fully recovered. Dealer inventory levels have started to improve, however, remain well below normal levels.

Speaker 1

Independent industry experts forecast a 5% increase in overall automotive production volumes for both North America and Europe through the second half of calendar twenty twenty three. As was the case this quarter, We would expect our Automotive Solutions segment to generate higher sales growth in this as we 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 signs of slowing inflation. Labor rates, however, remain a challenge, particularly in Mexico, while foreign exchange rate movements have been an added headwind.

Speaker 1

With these factors in mind, We continue to take specific pricing actions where possible in order to restore and protect our margins. We also, of course, remain We are extremely focused on further improving our own efficiency, which is ultimately the clearest path to margin enhancement. Within our cast 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 very large molds as well as traditional powertrain and structural programs, while our 3 d printing operations achieved record sales in order intake during the quarter. Demand for consumable extrusion tooling did soften during the quarter as extruders respond to softening global macro conditions.

Speaker 1

However, extrusion demand in a number of end markets such as automotive remained very strong. Castool's capital equipment sales within the extrusion End market remained very robust as the demand for its consumable die cast tooling and systems. Castool's products Greatly enhanced the productivity and efficiency of their customers and we are clearly gaining significant market share globally. Margins in our Casting and Extrusion segment were again below potential this quarter 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. We expect these pressures will subside in the quarters ahead enabling segment margin to And back towards historical norms in the quarters ahead.

Speaker 1

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

Speaker 2

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales The Q4 end 30, 2023 were $165,000,000 compared to $129,000,000 in the same quarter last year, an increase of $35,000,000 or 27%. 3rd quarter sales at our Automotive Solutions segment were up $22,000,000 were 33% and Casting Extrusion Group sales increased $14,000,000 or 21%. Excluding the impact of foreign exchange, Consolidated sales for the quarter were up 20%, automotive sales were up 26% and casting extrusion sales were up 14%.

Speaker 2

Consolidated net income for the 3rd quarter was $6,000,000 or basic and diluted earnings of $0.16 per share compared to $5,600,000 or $0.14 per share in the same quarter last year, an increase of net income of $700,000 The consolidated effective income tax rate of 26% in the current quarter increased from 24% from the prior year. The change in income tax rate in the quarter was impacted by non deductible losses, geographic distribution and foreign tax rate differentials. Moving on to segment disclosures. The Automotive Solutions segment reported sales of $86,000,000 in the 3rd quarter, an increase of $22,000,000 or 30 percent from the prior year quarter. The sales increase was driven by the continued ramp up of newer programs, higher vehicle production volumes in North America and Europe, Select pricing actions to compensate for inflationary pressures as well as favorable vehicle mix.

Speaker 2

During the quarter, IHS Markit estimates vehicle production volumes increased 15% in North America and 14% in Europe compared to the prior year quarter. The segment's organic sales growth was well above our estimated Market levels indicating strong gains in content per vehicle. Looking forward, OEM vehicle production volumes are expected to increase at a more modest pace remainder of calendar 2023. There remains consistent customer demand for new vehicles and dealer inventory levels continue to be replenished. While the semiconductor chip shortages and other supply chain constraints continue to improve, industry growth may be tempered by rising interest rates and emerging indicators of a global recession.

Speaker 2

Nonetheless, Exco will benefit from recent and future program launches that are expected to provide ongoing growth on our content per vehicle. Quoting activity remains encouraging and we believe there is an opportunity to achieve our targeted growth objectives, which include realizing segment revenues of $400,000,000 by 2026. 3rd quarter pre tax earnings in Automotive Solutions segment totaled $9,000,000 which represents an increase of $4,000,000 from the prior year quarter. The increase is largely attributed to higher sales, better absorption of overheads and select pricing actions. This improvement was partially offset by inefficiencies cost by launch costs from new programs in the period.

Speaker 2

Industry vehicle production volumes remain below pre pandemic levels Ongoing supply chain challenges continue to influence production volumes, but these challenges lessened in the quarter while cost increases relating to raw materials, wages and transportation also subsided. Management is optimistic that its overall cost structure will return to relative normal levels in future quarters as scheduling and predictability improves with strengthening volumes. Pricing discipline remains a focus And action is being taken on current programs where possible, though there's typically a lag of a few quarters before the impact is realized. As well new programs are priced to reflect management's expectations for higher future costs. The Casting and Extrusion segment reported sales of $78,000,000 in the 3rd quarter, an increase of $14,000,000 or 21% from the same period last year.

Speaker 2

Adjusting for the impact of foreign exchange movements, segment revenues increased 14% during the quarter. Cash Revenues segment sales were influenced by the acquisition of Halex in May 2022. Excluding Helix's contribution, sales increased by 15% in the quarter. Demand for our consumable Dies, Dummy Blocks, STEM, etcetera and associated capital equipment, die ovens and containers remain relatively firm overall due to the both industry growth and ongoing market share gains. Although there were signs of market activity for certain extrusion tooling slowing through the quarter.

Speaker 2

In the die cast market demand for new molds, consumable tooling, shop sleeves, rods, rings and tips, rebuild work and additive printed tooling has continued to improve as vehicle production recovers and new electrical vehicles and more efficient internal combustion engines and transmissions platforms are launched. Customer inventory levels increased as expectations for higher vehicle production volumes improved. We believe die cast manufacturing is gaining market share, particularly for tooling that is larger and more complex. Sales in the quarter were also aided by price increases, which were implemented to recover margins eroded by higher input costs. Quoting activity within the diecast end market remains extremely robust While our backlog levels are near record highs, which is expected to bode well for sales into fiscal 2024.

Speaker 2

The Casting and Extrusion segment reported $4,000,000 pre tax profit in the 3rd quarter, a decrease of $800,000 from the same quarter last year. Increased overhead absorption and production efficiencies due to stronger sales in the die cast market, including new mold rebuilds, consumable tooling and additive printed tooling Set by a general slowdown in the extrusion dye market, driven primarily by higher interest rates negatively affecting the building and construction markets, Higher depreciation of an increase of $1,400,000 in the quarter, start up costs at Castool's Mexico and heat treat facility in Newmarket as well as higher energy, raw material, freight and labor costs. Management expects to temper many of these costs over the coming quarters scale and as the utilization of new equipment that facilitates the manufacturing of large scale die cast tooling improves. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with Sales efforts to improve segment profitability time. Exco generated cash from operating activities of $24,000,000 during the quarter and $17,000,000 of free cash flow after $5,000,000 of maintenance fixed asset additions and $2,000,000 interest expense.

Speaker 2

During the quarter, the company invested $6,000,000 in growth capital expenditures and paid $4,000,000 in dividends. Management expects fiscal 2023 capital expenditures to be approximately $46,000,000 as we complete our strategic capital asset projects. Exco ended the quarter with $21,000,000 in cash, dollars 118,000,000 in bank and long term debt and $35,000,000 available in its credit facility. Exco's financial position remains strong with net leverage of 1.4. As such, the company's balance sheet availability and the existing credit provides continued support for our strategic initiatives.

Speaker 2

Our healthy financial position combined with our free cash flow creates a foundation We can now translate Transition to the Q and A portion of the call, Gigi. Thank you.

Operator

Thank you. Please standby while we compile the Q and A roster. Our first question comes from the line of David Ocampo from Cormark.

Speaker 3

Thanks. Good morning, everyone.

Speaker 1

Good morning, David. Hey, David.

Speaker 3

You guys Called out a pretty good line of sight of hitting that $400,000,000 target that you laid out before in the Automotive Solutions Group, just based on your backlog.

Speaker 2

David, can you start over? Your phone sounded a bit odd there. Is this better? Yes. Try again.

Speaker 2

Sorry.

Speaker 3

Yes. No worries. So you guys called out a pretty good line of sight of hitting your $400,000,000 Target in the Automotive Solutions period, so that's pretty encouraging there. But how should we be thinking about your path to hitting $350,000,000 in casting and extrusion, just given your positive commentary on the demand for extra large molds and all the investments that you guys have been making.

Speaker 1

Yes, David, this is Darren. I couldn't quite make Everything that you said, but I believe you were talking about our path to 350,000,000 Of top line growth in the Casting and Extrusion segment. And I think we feel pretty good overall about our prospects So achieving our 2026 targets in both segments. In fact, the revenue run rate Annualized this quarter is about $660,000,000 And so if anything, we're on pace to It surpassed that $750,000,000 mark. And I think you also Kind of called out the Automotive Solutions segment is tracking pretty well, which is true on the margin line.

Speaker 1

And really the big opportunity we have is Great. That cash infusion segment margin back towards this point of target. And There's so much disruption and new processes and new products and all of these things that new plants That we're working on right now that are having a suppressing impact on that margin is as these New products and processes get more developed. You'll see the hours of these jobs come down And we should see that margin start to head back up. And I'm not going to give you a time frame, but we still feel very good about our fiscal 2023 is turned overall.

Speaker 3

Yes, that's very helpful commentary. And I know it's always Hard to isolate one time integration costs with your new equipment and new operations. Do you guys have a sense on how much that's negatively impacting The margins in both groups is it 100 to 200 basis points or any range would be helpful for us?

Speaker 1

I apologize, David. I really just could not make out the message there. The phone line here is a bit garbled, unfortunately.

Speaker 2

I've never had this before, David.

Speaker 1

We could take

Speaker 3

it offline. I mean, When you guys are speaking back to us, it's muffled a bit here too as well.

Speaker 2

Is it? Okay. Well, I'm corresponding with Gigi, and she's seeing there's some oddness in the signal, but that's never happened before.

Speaker 1

Yes. Well, we're happy to take it offline, David, isn't it, Anytime. Yes.

Speaker 2

And for any

Speaker 3

I'll hop off the call and

Speaker 2

we'll try to connect after

Speaker 1

Okay. Thanks, David.

Speaker 2

Our apologies to the other participants. I could see many of you who are on and Please feel free to reach out to us. That's all I can say. So, Gigi, maybe, see if someone else has a question. If not, maybe we'll just end the call early.

Operator

At this time, I would now like to turn the conference back over to Darren Kirk for closing remarks.

Speaker 1

Okay. Well, thanks, Gigi. Appreciate everyone's time and interest today. We look forward to updating you again once we release our Q4 results. Take care.

Operator

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

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Key Takeaways

  • Exco reported record Q3 revenues of $165 million (up 27% year-over-year), EBITDA of nearly $19 million and earnings of $0.16 per share, driven by strong demand across its tooling and automotive businesses.
  • The company is advancing its strategic growth initiatives—including EV lightweighting, giga-press die casting and high-tonnage extrusion tooling—and expects demand to ramp up significantly by 2025.
  • Key capital investments near completion include the new Castool Mexico facility, North America’s largest vertical heat‐treatment oven and expanded crane capacity for large molds, all enhancing capacity and cost efficiency.
  • The Automotive Solutions segment delivered Q3 sales of $86 million (up 33%), benefiting from program ramp-ups, higher vehicle volumes and pricing actions, and is on track for $400 million in revenues by 2026.
  • The Casting & Extrusion segment posted Q3 sales of $78 million (up 21%), supported by strong die-cast tooling and record additive manufacturing orders, while margins were temporarily pressured by start-up costs and inflationary impacts.
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Exco Technologies Q3 2023
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