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spk00: Good day and thank you for standing by. Welcome to the Xcode Technologies Limited fourth quarter results 2021 conference call. At this time all participants 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 one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Darren Kirk, CEO of Exco. Please go ahead.
spk04: Thank you, Gigi. Good morning, ladies and gentlemen. Welcome to Exco Technologies' fiscal 2021 fourth 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 before we open 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 2 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, I want to emphasize that the cautionary notes apply to this discussion today. So, it was a challenging quarter, but we performed well, producing $0.18 of earnings per share. I must say our performance stands out against much weaker results shown by many other automotive suppliers in the current environment. It is a testament to what differentiates Exco, which I think is vastly underappreciated by the market. Our quarter capped off a year in which our results were also very decent, despite severe macroeconomic headwinds that saw microchip shortages and broader supply chain challenges forcefully restrain global automotive vehicle production. As well, we managed through rising input costs and a stronger Canadian dollar, which further crimped our results. Despite this, our full-year sales were up 12% compared to fiscal 2020, and we delivered $0.98 of earnings per share, a 42% improvement compared to $0.69 last fiscal year. I want to thank all of my EXCO teammates for their fantastic efforts and, of course, commitment to working safely through such extreme circumstances. Beyond our financial results, in fiscal 2021, we bolstered the foundation that will drive our future growth once current constraints inevitably ease and as the electric vehicle revolution continues to take hold. We promoted our core EXCO values, we enhanced our employee code of conduct, and published our first sustainability report. But we also secured sizable program wins, realized significant productivity gains, and mapped out investment plans and a growth agenda that we expect will enable our revenue, EBITDA, and EPS to more than double in the next five-year period. Our businesses directly support the electric vehicle revolution and worldwide movement toward reducing emissions. Consequently, as the world continues to push toward social and environmental sustainability, The future for our products has never been brighter. An increase in the use of aluminum across many industries is the primary driver of this tailwind, particularly in the automotive industry, our primary end market. One key trend that will continue to benefit EXCO is the increasing size and complexity of die-cast aluminum components. Tesla has really pushed the envelope on this front using massive gigapresses, which are much larger die-cast machines than those used previously. This enabled Tesla to cast entire subframes of the vehicle in one shot with gigacastings, rather than assemble numerous stamped metal components in the body shop, creating significant space and manufacturing efficiency gains. The tooling required to facilitate this process is very large and extremely complex, limiting the number of players able to compete effectively. Our cast tool division is already the primary supplier of all shot end tooling for Tesla's gigapresses globally. This provides a clear indication of the depth we have in the design and know-how required to meet the challenges of the industry. We expect traditional OEMs will follow Tesla's lead in using these larger die-cast machines as they transition to an EV future. Consequently, we are making significant additional investments in our people, equipment and processes to remain a leading supplier. Our aggressive capital agenda within our casting and extrusion segment is aimed at capturing growth from this development, but from higher expected demand for extrusion tooling across many industries. These investments are especially evident in our Cast Tool division. In November 2021, Cast Tool celebrated the opening of its latest production facility in Kenitra, Morocco. This new facility will enable Castool to better serve its customers in Europe, the Middle East, and Africa while providing increased capacity to meet market demands. Other projects within Castool include a new energy-efficient heat treatment plant located in our existing new market facility, which is expected to begin operations in the spring of 2022. This new equipment will be the largest in North America, providing us with unique capabilities for our internal needs. As well, Castool is moving forward with the construction of a new greenfield facility in Mexico, which will further increase manufacturing capacity and allow us to better serve the local market in Latin America, Mexico, and southern U.S., During the year, our large mold group made several investments in new equipment to harmonize its manufacturing processes within the group, further improve its efficiency, and better position us to capture growth in the very large die-cast segment. Installation of this equipment has commenced and will continue throughout fiscal 2022. In addition, our board approved three new projects in fiscal 2021 to enhance the extrusion group's heat treatment capabilities. All of these investments will further minimize our environmental footprint, enhance quality, and enable a reduction in lead times once completed in fiscal 2022. In our automotive solution segment, we are adding 40,000 square feet of manufacturing space to accommodate the launch of several new key programs. These programs will together contribute annual revenue in excess of $65 million once fully ramped up by the end of fiscal 2022. Over and above this growth, we expect to maintain our longer-term track record of content per vehicle growth in the 5% to 10% range. Of particular note, much of the segment's growth is being driven by content on electric vehicles, which are exceptionally well suited for our products. In total, we expect our capital spending will approximate $55 million in fiscal 2022, of which $43 million is for growth initiatives. With the benefit of these investments, we expect to achieve substantial growth in the years ahead. As detailed in our last quarter, over the next five years, EXCO is targeting a compounded average annual growth rate of approximately 10% for revenues and slightly higher levels for EBITDA and net income. If achieved, as we expect, EXCO's annual revenue would grow to $750 million and generate EPS of roughly $1.90 in fiscal 2026. Turning to the quarter and looking first at our automotive solution segment, overall vehicle production volumes in North America and Europe were materially lower year over year. Nonetheless, our foreign exchange adjusted segment revenues were only down a tick and again exceeded industry growth by a significant margin. This reflects continuing gains in our content per vehicle at levels well above our historical track record. On both a year-over-year and sequential basis, our segment revenues were down slightly, but well below levels we would have otherwise expected this quarter. This shortfall is mainly due to reduced vehicle production volumes as OEMs continued to be crimped by the shortage of microchips. As a result, North American and European vehicle production in the quarter was 25% to 30% lower than a year ago. Consumer sales were similarly constrained by the lack of supply, while sales incentives are declining and dealer inventory levels are now at record lows. This bodes well for a sustained period of higher vehicle production volumes once microchip supply issues ease, which we expect will begin to occur in the next couple of quarters. New program launches contributed to our results this quarter. and we also have high amounts of content on several vehicle models that are outperforming market trends. We did launch one additional key program this quarter, which will continue to contribute strongly to our results in the quarters and years ahead. Quoting activity has slowed somewhat, but remains decent. We are seeing a number of important wins and sizable new opportunities, particularly with electric vehicles for both new and established OEMs. On the cost side, our margins were relatively stable compared to Q3, but did slip from Q4 last year due mainly to reduced overhead absorption arising from lower vehicle production volumes. As well, we faced foreign exchange headwinds and heightened fluctuations in forecasts 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 further, and we faced various supply chain challenges of our own. These elements required us to be nimble and absorb a lot of extra costs related to overtime, material substitution, and expedited freight. In our casting and extrusion segment, we again had terrific results. Demand was strong in all three of our segment's business groups. As I've mentioned several times before, the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for EXCO's tooling business. We certainly saw the 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. Again, as mentioned, Tesla with its Gigapress is a good example of this as they are now producing die-cast components that are much larger than anything produced previously. Castool is the primary supplier for much of Tesla's shot-in tooling for its gigapresses and expects to expand this relationship as Tesla ramps up its new facilities in Texas and Berlin any week now. More broadly, we also expect to benefit from the trend toward larger and more complex castings across the industry as traditional OEMs inevitably pursue a similar process. 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 remains 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 and drive down our operating costs by insourcing more of our own heat treat requirements, all while reducing our environmental footprint. Our large mold group performed well on the top line this quarter, although still suffered from reduced rebuild work due to lower automotive production. We did, however, have a number of program wins that will benefit future quarters. We are very bullish on the 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 become more localized over time. As well, our additive business continues to perform strongly and is a critical differentiator, providing us with an unmatched competitive edge. This business is now contributing strongly to our results, and we are very optimistic on where this business will go. Despite rising input costs, segment margins benefited in the quarter from absorption gains driven by 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 again, it is really driven by our people who continuously rethink the way of doing things and who push the envelope on innovation and product performance. So in summary, we had a decent fourth quarter in year. Despite the significant challenges we all face today, we are very well positioned to build on our results in the years ahead. With all of that, we know these goals can't be obtained without the dedication of our people. I'd again like to thank the entire team at EXCO for their focus, hard work, and immense flexibility during the past quarter and year. That concludes my operations overview. I will now pass the call over to Matthew to discuss the financial highlights of the quarter and year.
spk03: Matthew?
spk04: Thank you, Darren.
spk03: Good morning, ladies and gentlemen. Consolidated sales for the fourth quarter ended September 30 were $106.4 million, an increase of $5.7 million or 6% from the prior year. Fourth quarter sales at our automotive solution segment decreased $4.4 million or 7%. The casting extrusion group sales were up $10.1 million or 26%. Over the quarter, exchange rate movements decreased sales by $5 million. Annual sales totaled $461.2 million compared to $412 million last year. an increase of $49 million, or 12% over last year. Excluding the negative impact of exchange rate movements, full-year sales increased 17%. Sales in the automotive solution segment were $263 million, an increase of $32 million, or 14%, and the sales in the caffeine and extrusion group were $198 million, an increase of $17 million, or 9%. The quarterly and full-year sales improvements reflect the general economic recovery from the global impact of COVID-19, strong demand for extrusion and die-cast consumable tooling, and increasing customer base and significant product launches. These were partially offset by constraints to automotive production volumes due to supply chain disruptions, particularly in the third and fourth quarters of the fiscal year. Consolidated net income in the fourth quarter was $7.7 million, or earnings per share of $0.18, compared to $10.7 million, or earnings of $0.27 per share, the same quarter last year, an EPS decrease of 33%. The effective income tax rate was 27% in the current quarter compared to negative 3% in the same quarter last year. The effective tax rate in the current period reflects the impact of non-taxable expenses in foreign jurisdictions and the payment of franchise and state taxes. The tax rate in the prior year quarter reflects a reversal of $2.6 million of deferred tax liabilities from resolved tax exposures and R&D tax credits. These two items increased earnings 7 cents last year. The animal solutions segment experienced a 7% decrease in sales, or a reduction of 4.4 million to 56.8 million. Excluding the impact of foreign exchange, the segment sales decreased 1.4 million, or only 2%. The sales decline was driven by materially lower vehicle production volumes in both North America and Europe due to the supply chain disruptions, including semiconductor chip shortages and logistical constraints. As Darren noticed earlier, North American and European vehicle production decreased 25% and 30% respectively during the quarter compared to a year ago. The segment's 7% sales decline in context of global vehicle production reduction reflects the benefits of sizable new program launches and favorable product mix, particularly at our Polytech and Neocon operations. Fourth quarter pre-tax earnings in the automotive solution segment totaled $4.5 million, which is a decrease of $2.8 million or 38% over the same quarter last year. Included in the prior year quarter was COVID-19 wage subsidies of $1.3 million. Current period profitability was negatively impacted by lower sales volumes and higher costs associated with the semiconductor shortage. The casting and extrusion segment recorded sales of $49.6 million in the fourth quarter compared to $39.5 million last year, an increase of $10.1 million or 26%. Excluding the negative impact of foreign exchange movements, the segment sales were up 31% for the quarter. The sales increase is mainly driven by the recovery of general economic conditions due to the impact of COVID-19. The extrusion, large mold, and capsule groups experienced higher sales from new and existing customers in the quarter. Pre-tax earnings in the casting and extrusion segment improved by $1.7 million, or 40%, over the same quarter last year to $5.9 million. Excluding $2.7 million in COVID-19 subsidies received last year, segment profitability improved by $4.4 million. The earnings improvement was mainly driven by increased contributions from the extrusion group. This group benefited from higher volumes and prices, improved labor efficiencies, and fixed overhead absorption, which offset higher costs. While higher sales at a capsule and large mold groups also positively impacted segment profitability, this benefit was countered by rising raw material prices, cost overruns with certain programs nearing completion, and initial expenses for Castool's new plant in Morocco. EXCO generated cash from operating activities of $7.3 million during the quarter and $3.2 million of free cash flow after $4 million in maintenance fixed asset additions and $8 million in working capital investment. This cash flow, together with cash on hand, was more than sufficient to fund fixed assets for growth initiatives of $7.7 million and $3.8 million in dividends. For the year, EXCO generated free cash flow of $37.3 million and returned $15.5 million to shareholders shareholders through dividend payments. EXCO ended the year with $18.6 million in net cash and $68.6 million in available liquidity, including $24.1 million of balance sheet cash. EXCO's financial position remains very 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 pursue high-value growth capital expenditures, dividends, and other opportunities that may arise. That concludes my comments. We can now transition to the Q&A portion of the call. Gigi?
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Ocampo from Cormark. Your line is now open.
spk05: Good morning, everyone.
spk02: Good morning.
spk05: For your 2026 guidance, you also laid out the path for it to get to a billion dollars through M&A. And given all the supply chain disruptions that we're seeing today, are you starting to see more distressed assets become available for sale?
spk04: Yeah, you know, we are... seeing some distressed assets come for sale, David, but we tend to pass on those opportunities pretty quickly. We don't intend to acquire companies that require kind of turnaround efforts. So while the deal flow availability is picking up, our appetite in that regard is very low.
spk05: So would you say that your near-term priorities are kind of your organic initiatives as opposed to going out in the marketplace and acquiring other assets?
spk04: Yeah, that's certainly our focus. You know, never say never on the acquisition front, but certainly front and center on our focus is our organic growth initiatives, of which we have several underway. Yeah.
spk05: I guess the big concern for most people, including the auto parts guys and your peers, is the labor issues. Are you starting to see labor increases that are approaching 10%? And are you able to pass off those costs to your customers, or is that something that you have to eat while you're under those longer-term contracts?
spk04: I can't really give you a clear magnitude of the impact, but certainly... All input costs are going up, labor, materials, and other inputs. In this business, it's extremely difficult to get a price increase out of your customer. We have had some success in our extrusion group at recapturing some of the raw material price increases, as well as in other pockets of the business. By and large, we need to continue to push ahead with efficiency efforts in order to offset those pressures.
spk05: And I guess ask more directly, is it possible for you guys to get into the 15% EBITDA margin range again, given all the inflationary pressures that you're seeing?
spk04: With time, I certainly expect so. In the automotive solutions segment, that's kind of our... and overall on a consolidated basis, a little bit higher than that. But where the margin goes in the near term is very difficult to say, but we're confident that we're making the right investments and decisions to recapture and maintain that margin at those levels on a longer-term basis.
spk05: Okay, that's it for me. I'll hand the line over.
spk04: Thanks, David.
spk00: Thank you. Our next question comes from the line of Pete Schuyler from BMO Capital. Your line is now open.
spk02: Okay. Darren, I'm just trying to understand, make sure I understand how you see the opportunity for vehicle electrification. So if I was to summarize at a very high level, you know, the auto solutions business will carry on because all the things they do are required on battery electric vehicles. And then on the tooling side, like as you say, the structural parts are going to become big and complex. So like new market and your large die cast mold capabilities will play a role in that. And at the same time, there'll be all the associated consumables, which will be satisfied by cast tool. Is that kind of how you're thinking about it?
spk04: Yeah, no, that's exactly right, Peter. As I've mentioned here, Tesla's really taken the lead and really change the way that vehicles are manufactured, and they've had tremendous success with that. We can see it in our order flow, and as they ramp up these new plants, that order flow will be expected to increase further. But we do see clear evidence that many of the traditional OEMs are looking in a deep dialogue with these large OEM die-cast machine builders to implement their own gigapresses. And I expect that as they transition to an electric vehicle future, that they will pursue similar means of producing the vehicle structure with these large gigacast machines.
spk02: Okay, so on Tesla specifically, like you talked about, you know, how this is an opportunity that you're satisfying customers know with cast tool but like who like who who who is doing their large molds and you know for these big presses and did you get a piece of that and did you bid on it and kind of what's the backdrop there like why is new market not the supplier for tesla of these large molds well i mean i i'm not going to speak to who's providing those molds today but uh i will say that uh
spk04: You know, all of our divisions are involved with Tesla at some level. And, you know, they are an important and growing customer across the board, and we see significant opportunity to expand on that.
spk02: Okay. And then, like, just on this transition to vehicle electrification, so I think the way it's going to play out is that your traditional large mold business, which is, you know, making molds for transmission case covers and engine molds blocks is going to wind down and then you know making molds for these big complex structural parts is going to wind up so how do you know that you know five years from now that it's all going to balance out do you know what i mean like like how do you know you're not going to have a big dip until all these mold you know electrification molds fill in the gap as traditional ice engines wind down yeah well you know we we can see it based on kind of the order flow of uh
spk04: high-pressure die-cast machines and what's going on at that supplier level, either from the OEMs direct or through the tiers, we can see that there is significant demand for additions to die-cast machines. I think at a high level that you're probably going to have... The internal combustion engine is not going away overnight. It's going to be around for a long period of time, and it's The OEMs are continuing to reconfigure transmissions and engines into more efficient formats. And so molds are going to be required both for initial molds and rebuild work on the powertrain side of internal combustion engine for at least five years and likely for a decade. But even as that happens, the structural mold demand is going higher. And that's not just for electric vehicles, but also for internal combustion engines as well. We are working on a number of molds and mold components for structural components for internal combustion engines. So there is a big tailwind here for the next several years that I think is going to support overall growth in that business, at least through the next five years and likely beyond.
spk02: Okay. Another area too, why is Castool so strong? Because Castool is selling consumables, and as you point out, global vehicle production volumes are down 20%, 25%. So I would have thought Castool would have taken a dip, but by your comments, Castool seems to be doing really well.
spk04: Yeah, I agree. They're doing fantastic. I think that if vehicle production was normalized, that they would be doing even stronger. They are taking market share. They have an incredible team. They have incredible products, and they're really capturing a lot of market growth, not just on the die-cast side, but also on the extrusion side as well. Extrusion presses are also becoming much bigger, much more complex, and there's a focus on efficiency like never before across all of these industries, and Castool's products and services facilitate that improvement right down the chain.
spk02: And then just lastly, you've mentioned also that the extrusion tooling business has been very strong. I'm just curious, what sectors of the economy are you seeing that strength coming from?
spk04: It's coming across the board. Automotive is a real big driver. So more and more extrusions are going into automotive as vehicles need to be made lighter. And as that happens, automotive has the need for the tightest tolerance of any industry. And so having a quality product that facilitates a good quality and efficient extrusion is paramount. And so we're picking up market share over and above market growth due to that. But again, it's really coming across the board that The extrusion demand is highly diversified. I mean, they're going into solar panels and high-speed rail and, you know, everything.
spk02: Okay. Thanks for your comments. Thanks, Peter.
spk00: Thank you. As a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. At this time, I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.
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