Exco Technologies Limited

Ladies and gentlemen, thank you for standing by and welcome to the EXCO Technologies Limited Third Quarter Results 2021 conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Darren Kirk, President and CEO. Thank you. Please go ahead.

Thank you, Tina. Good morning, ladies and gentlemen. Welcome to Exco Technologies Fiscal 2021 Third Quarter Conference Call. I am Darren Kirk, CEO of Exco. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial results. Afterwards, I will discuss our outlook, including targeted levels of revenue, EBITDA, and net income by fiscal 2026. Let me warn you, our prepared remarks will go on a little longer than normal this quarter before we open up the call for questions. Before I begin, I would like to make some comments about forward-looking information. In yesterday's news release and on page two of the presentation that we have posted to our website, you'll find cautionary notes in that regard. While I won't repeat the contents, we are going into more detail about future events than usual, so I want to emphasize that the cautionary notes apply to this discussion today. In summary, we had a very decent third quarter, producing 22 cents of earnings per share and $15 million, or 40 cents per share, of free cash flow. I am particularly pleased with our results, given the ongoing challenges related to COVID-19, lower OEM production due to microchip shortages, supply chain disruptions, rising input costs, and a stronger Canadian dollar. I want to thank all of my EXCO team-mates for their fantastic efforts and of course commitment to working safely through such extreme circumstances. Looking first at our automotive solutions segment, overall vehicle production volumes in North America and Europe were materially higher year over year. We acknowledge we are lapping an unusually weak period when much of our operations came to a halt due to government-imposed COVID restrictions. Nonetheless, our foreign exchange adjusted segment revenues again exceeded industry growth by several percentage points. This reflects continuing gains in our content per vehicle at levels above our historical track record. On a sequential basis, our segment results were down from both Q2 and from levels that we would have otherwise expected this quarter. This shortfall is mainly due to reduced vehicle production volumes as OEMs continue to be crimped by the shortage of microchips. As a result, North American vehicle production in the quarter was 15% lower than what we would have expected in mid-April and 12% lower than in our second quarter. Consumer demand for vehicles, however, remains strong with sales incentives declining in dealer inventory levels, now at near record lows. This bodes well for a sustained period of higher vehicle production volumes once microchip supply issues ease, which we expect will begin in our current quarter. New program launches contributed to our results this quarter, and we also have high amounts of content on several refreshed vehicle models that are performing well. We did launch one new key program towards the end of the quarter which will continue to contribute strongly to our results in the quarters and years ahead. Quoting activity remains decent. We are seeing a number of important wins and sizable new opportunities, particularly with electric vehicles from both new and established OEMs. On the cost side, our margins were greatly improved from last year, but did slip from Q2 due mainly to reduced overhead absorption arising from lower vehicle production volumes. As well, we faced foreign exchange headwinds and heightened fluctuations in forecast versus actual order releases again this quarter. This occurred as our customers juggled their own production schedules in response to the chip shortage issue. These challenges were pushed down to the supply base and placed strain on our production planning process. Moreover, raw material cost increases picked up and we faced various supply chain challenges of our own. These elements required us to be nimble and also absorb a lot of extra costs related to overtime, material substitution, and expedited freight. Finally, we carried launch costs for one new large program through much of the quarter before beginning to realize revenues near quarter end. In our casting and extrusion segment, we again had terrific results. Demand was strong in all three of our segment business units. As I've mentioned several times before, the automotive industry's transformation toward electric vehicles and focus on emission reduction is extremely positive for EXCO's tooling businesses. We certainly saw that benefit in our results again this quarter. As OEMs make the change to greener vehicles and strive for greater manufacturing efficiency, there is an increased use of light metals and the demand for our associated tooling. There is also increasing demand for technical expertise at the supplier level as products become larger and more complex. This plays right into our strength. Tesla, with its gigapress, is a good example of this, as they are now producing entire subframe assemblies with aluminum die-cast components that are much larger than anything previously produced. Castool is the primary supplier for much of Tesla's shot-end tooling for its gigapresses, and expects to expand the relationship as Tesla ramps up its new facilities in Texas and Berlin later this year. More broadly, we also expect to benefit from the trends toward larger and more complex castings across the industry as OEMs seem likely to pursue similar processes. In addition, there is a heightened focus on efficiency by all manufacturers for sustainability initiatives that will be very positive for the entirety of our tooling business. The extrusion market remained strong this quarter, with high demand across the vast majority of end markets. Our extrusion tooling ultimately supports a diverse range of applications, including residential and industrial building and construction, solar panels, consumer durable products, and various modes of transportation. This quarter, we again demonstrated we could keep up with sizable demand growth by utilizing equipment and labor more efficiently while leveraging the harmonized manufacturing process of our numerous group facilities. With regards to the latter, this initiative has allowed us to centralize certain processes, such as programming and design, and utilize our capacity on a network basis. All of this keeps our cost low, capacity high, and provides us with the ability to manufacture a quality product in a standardized manner. We are making significant strategic investments to further shrink lead times drive down our operating costs, and in-source more of our own heat treatment requirements, all while reducing our environmental footprint. Our large mold group performed well this quarter, with COVID-related program delays easing and newer programs ramping up. We are very bullish on the long-term outlook of this business, given the growing demand for large and complex die-cast components, coupled with our leading market position. Full-service capabilities and view that supply chains will likely become more localized over time. As well, our additive business continues to perform strongly and is a critical differentiator, providing us with unmatched competitive advantages. Despite rising input costs, segment margins benefited in the quarter from absorption gains from higher sales, but more so by efficiency gains in the usage of both material and labor. This progress in part reflects our past and ongoing sizable investments in new equipment, but it is really driven by our people who continuously rethink the ways of doing things and who push the envelope on innovation and product performance. So in summary, we had an excellent third quarter. Despite the significant challenges we all face today, we are very well positioned to continue this momentum in the quarters and years ahead. That concludes my operations overview. I will now pass the call over to Matthew to discuss the financial highlights of the quarter before I come back to discuss our outlook. Matthew?

Thanks, Darren. Good morning, ladies and gentlemen. Consolidated sales for the third quarter and of June 30, 2021, were $115 million compared to $71 million in the same quarter last year, an increase of $44 million, or 63%. Third quarter sales at our automotive solution segment were up $32.9 million, or 117%. The catching and extrusion group sales increased $11.1 million, or 26%. Over the quarter, exchange rate movements decreased sales $11.2 million compared to last year's quarter. Excluding the impact of foreign exchange, consolidated sales for the quarter were up 78%. Automotive sales were up 139%, and catching and extrusion sales were up 37%. Consolidated net income for the third quarter was $8.7 million, or basic and diluted earnings of 22 cents per share, compared to a loss of $800,000, or 2 cents per share, in the same quarter last year. An increase in net income of $9.5 million. The consolidated effective income tax rate was 12% in the current quarter, compared to 10% in the prior year period. The income tax rate in the current quarter was favorably impacted by the recognition of scientific research and experimental development income tax credits during the quarter. The automotive solutions segment reported sales at $61 million in the third quarter, or an increase of $32.9 million, or 117%. This strong sales growth reflects a normalization of activities compared to the prior year when three of our four manufacturing plants in this segment were shut down for April and much of May due to COVID-19 government restrictions. Notwithstanding this improvement, growth in the current year period was hampered by the global microchip supply issues, which management estimates reduced segment sales between 15% to 20% in the quarter. Segment sales were supported by a number of key program launches for both new and existing products and favorable vehicle mix. Third quarter pre-tax earnings in the automotive solution segment totaled $5.1 million compared to a loss of $3.8 million in the same quarter last year, an increase of $8.9 million. The segment's profitability growth reflects three-month sales compared to less than a full quarter due to the plant shutdown in the prior year from COVID-19 restrictions. Overall profit margins were lower than expected due to decreased fixed cost absorption from sales reductions arising from the microchip shortage, raw material price increases due to inflationary pressures, high freight and transportation costs, and ramp-up costs for future programs. Management remains focused on improving the efficiency of its operations and reducing its overall cost structure. The casting and extrusion segment reported sales of $53.9 million for the third quarter, an increase of $11.1 million, or 26% from the same period last year. Although the impact of the microchip shortage was not as significant in the casting and extrusion segment as it was in the automotive segment, sales in Castool and the large mold groups were still negatively impacted. Third quarter segment sales reflect the third consecutive quarterly increase, 10% over the second quarter of fiscal 2021, even with the negative impact of foreign exchange and the microchip issues. The extrusion group experienced higher sales at all locations, reflecting demand for extrusion tools across industry segments, coupled with operational improvements that have continued to reduce lead times, contributing to market share gains. Demand for CAAS tools, die-cast consumable tooling, and extrusion products was solid, with a slightly stronger demand for the die-cast consumable tooling solutions leading for the quarter. The large mold group sales were up 31% from Q2 fiscal 2021, with diversity of its customer base and solid additive sales representing key drivers of the results. New business from current and new customers was awarded in the quarter. As a result, inventories and backlog continue to grow. The casting and extrusion segment reported $7.8 million of pre-tax profit in the third quarter, an increase of $2.8 million or 57% from the same quarter last year. Similar to the automotive segment, the catching extrusion segment profitability growth over the prior year is a result of higher sales due to the impact of COVID-19 last year. The COVID impact was somewhat muted last year by the nature of much of this segment's tooling products as they feed into many essential industries. Consistent with the higher third quarter sales, segment profitability continued to improve through fixed cost absorption. We benefit from greater labor efficiencies reflecting our continuing investments in new equipment and processes. These improvements were partially offset by higher freight and raw material input costs. EXCO generated cash from operating activities of $19 million during the quarter and $15.3 million of free cash flow after $3.6 million in maintenance capital expenditures. This cash flow funded $13.1 million of growth capital expenditures and $3.9 million of dividends. Consistent with recent quarters, there was no activity in the company's normal course issuer bid. Capital expenditures were above our historical levels and will continue higher this year and heading into fiscal 2022 to support our growth initiatives. EXCO ended the quarter with $26.3 million in net cash, continuing its practice of maintaining a strong balance sheet and liquidity position. EXCO's financial position remains strong. As such, the company's balance sheet and availability under the existing credit facility allows considerable flexibility to support strategic initiatives. This, combined with our free cash flow, creates a foundation for management to pursue high-value growth capital expenditures, dividends, and other opportunities that may arise. This concludes my third quarter financial review. Before we open up the call to questions, Darren has some additional comments regarding EXCO's outlook. Darren?