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spk00: Good day and thank you for standing by. Welcome to the EXCO Technologies Limited Third Quarter Results 2022 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 1-1 on your telephone. 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 CEO of Exco Technologies Limited. Please go ahead.
spk03: Thanks, Gigi. Good morning, all participants. Welcome to Exco Technologies' fiscal 2022 third quarter conference call. 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 we 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, I want to emphasize they apply to this discussion today. I would like to start by thanking our employees for their hard work and dedication through another challenging quarter. I would also like to welcome all employees of Halex, which EXCO acquired on May 2nd. Accordingly, our consolidated results this quarter benefited from two months of contributions from Halex. But I'll have more to say on Halex later. We are joining the call today from our Neocon division in beautiful Nova Scotia, where we held our board meetings yesterday and toured the facilities. I must say how impressed I am with Neocon's operation and the team here. Continuous innovation has always been critical to EXCO's success. And Neocon's operations are a great example where innovation is evident across the entirety of business. With their growing portfolio of vehicle protection and organization products created by an in-house design studio using proprietary materials to the efficiency innovation teams that are dedicated to streamlining production processes, Neocon continuously gets a better product to its customers faster. Neocon has grown significantly over the years and is nearing completion of a large addition to its building to handle its next chapter of growth. I have great optimism in the team's future here and congratulate them on their achievements to date. So market conditions in the quarter were again tough and influenced by several of the same factors as our second quarter results. Vehicle production volumes remain constrained below market demand due to ongoing chip shortages and other supply chain limitations, which were exacerbated by the effects of China COVID lockdowns this quarter. These lower volumes hurt our park business, but also our tooling operations through reduced demand in the die-cast channel. And of course, widespread inflationary pressures, labor disruption to prevent greater spread of COVID, and logistical constraints were all additional factors weighing on our performance. Despite these challenges, our revenues held up fairly well in the quarter, showing modest organic growth year over year. We recorded consolidated revenues of $129 million, generated almost $15 million of EBITDA, and earned 14 cents per share. Given all the headwinds we faced, I think our results were actually pretty decent. This speaks directly to the strength of our businesses and, of course, our very talented and dedicated team members. By this point, I think the constrained supply of microchips impacting the OEM's ability to manufacture vehicles is well understood. There has been an improvement in this constraint in recent months, and most industry players expect supply will continue to improve as we go through 2022. While rising interest rates and generally slowing economic conditions will create new challenges, Demand for new vehicles is expected to hold up relatively well given pent-up demand following a prolonged period of constrained supply. IHS market, for example, is anticipating a 20% increase in combined North American and European production volumes in the second half of calendar 2022 and a further 10% growth in calendar 2023 as supply conditions improve. But while the quarter was again challenging, I would note our results improved for the second consecutive quarter sequentially. And as I indicated in our last call, nothing has changed fundamentally for EXCO or our medium-term outlook despite current macro conditions. We are making strategic investments to ensure we remain well positioned in our core markets and continue to expect much stronger results in the quarters ahead. I've mentioned several times before that the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for EXCO's tooling businesses. 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. In addition, there is a heightened focus on efficiency by all manufacturers for sustainability initiatives, including trend toward reshoring, all of which will be very positive for the entirety of our tooling business. In anticipation that these trends will continue to take hold, we are making sizable investments to better position our various businesses to capture the expected growth. To summarize, these investments include New tooling plans for Castool in Morocco and Mexico to better serve the European extrusion and die-cast markets and add incremental capacity within Mexico and the southern U.S. Significant investments in state-of-the-art heat treat equipment across our entire tooling group to enhance capacity, reduce emissions, and enable us to insource most of our needs. Investments to upgrade the capabilities of our large mold group to handle molds of extreme size which we expect will be increasingly demanded by all OEMs. Additional equipment for our 3D printed tooling business, which continues to see strong growth, and building expansions at Neocon and Polytech to support previously awarded contracts. As a reminder, our total CapEx budget this year exceeds $55 million and covers these and several other growth initiatives. We again made great headway on advancing these projects during the quarter. Turning to the quarter and first looking at our automotive solutions segment, overall industry vehicle production volumes in North America were up about 12%, while volumes in Europe were down 5% year-over-year. Excluding foreign exchange rate movements, our segment revenues were up by 4%. Revenues were helped by certain pricing actions taken to protect margins, but did suffer from unfavorable vehicle mix, particularly in Europe. New program launches contributed to our results this quarter, including one key new program where supply of sizable content on a fleet of commercial EVs. This program is off to a slower than expected start, but will ramp up more significantly going forward and continue for several years. Moreover, we will continue to ramp up several other key programs through 2023, that will provide outside growth relative to our historical performance. Meanwhile, quoting activity and new program awards remain very decent. We are seeing a number of sizable new opportunities, particularly with electric vehicles from both new and established OEMs. On the cost side, our margins were impacted by higher input costs as well as unfavorable product mix during the quarter. Extra costs associated with carrying surplus labor in anticipation of higher demand levels also impacted our results. Compounding these issues were fluctuations in forecast versus actual order releases. This occurred as our customers juggled their own production schedules in response to the chip shortage and other constraints, particularly in Europe. These challenges were pushed down to the supply base and placed strain on our own production planning process. Moreover, raw material cost increases remained a factor, and we faced various supply chain and labor availability 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. Pricing remains tough in this business, and there is limited ability to use this lever. We continue, however, to take pricing action where possible to recover higher input costs and are embedding higher inflationary costs in our current quotes. In our casting and extrusion segment, it was again a mixed bag. Demand for extrusion-related tooling and equipment remains strong, while die-cast has been weak due to lower industry vehicle production volumes combined with inventory-to-stocking in the supply chain. 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 the sizable demand by using 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 down lead times drive down our operating costs, and insource more of our own heat treat requirements, all while reducing our environmental footprint. With respect to HALACS's extrusion dye business, volumes are holding up quite well. Integration of these plants into our existing operations is proceeding, and we are excited by the potential we see. As we discussed on our call when we announced the acquisition, HALACS's operations are high quality, and we do not plan to undertake meaningful changes near term. Yet longer term, we expect through the sharing of best practices and leveraging of greater global scale, we will certainly see significant synergies. The die-cast market, which is driven by automotive production, remains soft in the quarter, as lower vehicle production was magnified by inventory destocking. This negatively impacted demand for Castool's consumable die-cast tooling, while the large mold group suffered from greatly reduced rebuild work. Nonetheless, we saw sequential improvement in activity again, and we achieved a number of important wins that will benefit future quarters. In fact, our large mold group again ended the quarter with the highest backlog in our history, and both Castool and the large mold had several key wins in the quarter for very large and complex die casting molds and associated tooling for structural applications. We are very bullish on the long-term outlook for this business, given the growing demand for large and complex die casting 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 tooling business continues to perform very strongly, contributing record levels of sales and order intake during the quarter. Additive tooling is a critical differentiator, providing us with an unmatched competitive edge. We are extremely optimistic on where this business will go. Looking at the casting and extrusion segment margins, we experienced weakness again this quarter from levels that we would have otherwise come to expect. Segment margins were impacted by unfavorable product mix, including very limited rebuild work in our large mold segment. As well, rising input costs, higher freight charges, and labor disruption due to COVID were all a drag on our performance and outpaced ongoing efficiency gains. Front-end losses at Castool's new plant in Morocco and heat treat operations added to the margin pressure this quarter, although we have started to generate revenue and expect cash losses will quickly reduce. Lastly, I would point out that the segment margins improved sequentially for the second consecutive quarter, and we expect ongoing improvement in the quarters ahead. That concludes my operations overview. I will pass the call to Matthew to discuss the financial highlights of the quarter. Matthew?
spk01: Thank you, Darren. Consolidated sales for the third quarter ended June 30, 2022 were $129.3 million compared to $115.0 million in the same quarter last year, an increase of $14.3 million or 12%. Third quarter sales at our automotive solutions segment were up $3.6 million or 6% and the casting and extrusion group sales increased $10.7 million or 20%. Casting and extrusion segment sales included $9 million from Halex, Over the quarter, exchange rate movements increased sales $1.5 million, excluding the impact of foreign exchange consolidated sales for the quarter were up 10%, automotive sales increased 4%, and casting and extrusion sales were up 17%. Consolidated net income for the third quarter was $5.6 million, or basic and diluted earnings of 14 cents per share, compared to $8.7 million, or 22 cents per share, in the same quarter last year, a decrease in net income of $3.1 million. The consolidated effective income tax rate of 24% in the current quarter increased from 12% last year. The increased income tax rate in the quarter was due to fiscal 2021 SRED tax credits booked in the third quarter last year, non-deductible losses from our CAST tool Morocco facility in fiscal 2022, geographic distribution, and foreign tax rate differentials. Third quarter EBITDA of 14.6 million was fairly stable compared to prior year of 15.2 million. The difference in the lower net income being driven by 26% increase in depreciation, an effective tax rate difference explained earlier, and higher interest costs associated with the increase in our credit facility related to the HLICS acquisition. The automotive solutions segment reported sales of $64.6 million in the third quarter, an increase of $3.6 million, or 6% from the prior year quarter. Segment sales in the quarter were primarily influenced by vehicle production volumes in North America and Europe. IHS market estimates volumes increased 12% in North America and declined 5% in Europe compared to the prior year quarter. Segment sales were also negatively influenced by unfavorable vehicle mix, partially offset by ongoing key program launches for new and existing products, as well as certain pricing actions taken to protect margins. Third quarter pre-tax earnings in the automotive solution segment total $4.8 million, which represents a $300,000 reduction from the prior year quarter. The segment's lower pre-tax profit was due to unfavorable market-driven product mix changes, higher raw material, logistics, and labor costs. The reversal of certain bad debt accruals last year partially offset by pricing actions. Improving the efficiency of operations and reducing the overall cost structure is a key management focus on current programs where possible, though there is typically a lag of a few quarters before the impact is realized. The casting and extrusion segment reported sales of $64.7 million for the third quarter, an increase of $10.7 million or 20% from the same period last year. Foreign exchange rate changes increased sales $1.5 million in the quarter. HALUS contributed $9 million of sales in the quarter, reflecting two months of activities. Demand for extrusion tools Dies, dummy blocks, stems, etc., and associated capital equipment, die ovens, containers, remain strong due to both industry growth and ongoing market share gains. The die-cast market, which primarily serves the automotive industry, demand has remained suppressed due to lower vehicle production volumes, which in turn is due mainly to broader supply chain constraints. These constraints have been amplified by customer inventory destocking activity in recent quarters, particularly in the large mold segment, which has faced significantly lower rebuild work than typical. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. With respect to quoting activity, longer lead time items continue to see elevated demand for future activity, particularly large mold, and inventories and backlog grow, which will lead benefit sales through the remainder of fiscal 2022 and into fiscal 2023. The casting and extrusion segment reported $4.8 million of pre-tax profit in the third quarter, a decrease of $3 million from the same quarter last year. The lower pre-tax profit was primarily driven by reduced activity for rebuild work in the large mold group, coupled with shipments of new molds. Profitability was negatively impacted by raw material and labor cost inflation, unfavorable market-driven product mix shifts, reduced labor availability, and higher overtime costs across the three business units. Startup losses at cast tools plants in Morocco and new heat treat operations in Newmarket also negatively impacted profitability, mainly due to non-cash depreciation of plants and equipment. Segment pre-tax profitability, however, benefited from contributions from the acquisition of Halex and was higher sequentially for the second consecutive quarter. Exco generated cash from operating activities of $14.1 million during the quarter and $9.9 million of free cash flow after $3.5 million in maintenance fixed asset additions. The company utilized $60 million of its credit facility to fund its investment in Halex. Operating cash flow combined with cash on hand and existing credit facilities funded $4.1 million of dividends, $9.1 million in growth capital expenditures, and repurchased $1.6 million of shares under the normal course issuer bid. As reported in previous quarters, management expects total capital expenditures to be in excess of $55 million as we complete our new market heat treatment facility, the extrusion plant heat treatment projects, launch Cast Tool Mexico, complete the expansion of our Nova Scotia facility, and upgrade certain large mold assets to allow us to win additional projects for larger EV and structural components. The company's balance sheet availability and our expanded credit facility allow flexibility to support strategic initiatives like our Halex extrusion acquisition. Our strong financial position 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. That concludes my comments, and 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 1-1 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Ocampo. from Coremark Securities.
spk02: Good morning, gentlemen.
spk01: Good morning, David. Good morning, David.
spk02: My first question is just on the pricing environment. I understand it takes a few quarters for things to flow through here, but when you take a look at kind of your order book, is there still a lot more to do to get the margin profile back to normal? I'm just trying to get a sense of if this takes a year or even longer for things to sort of normalize here.
spk03: Sure. I guess it really does depend on the business unit, but just broadly speaking, in casting and extrusion, there is a greater ability to use price to recapture margins, and we're certainly doing that. It doesn't happen instantly. There are several programs, particularly in the large mold group, that will work out over time, but certainly we're seeing that trend of pricing to recapture higher input costs occurring closer to real time and casting extrusion. Automotive solutions, there's pockets of products that we have in there that we do have the ability to go back to the OEMs or the tiers to get price increases, but it's much less limited. And so we're unable to really ramp up the pricing there. But certainly with respect to new quotes, we're embedding current levels of pricing and our expectations for inflation going forward. So that one plays out slowly over a few years.
spk02: And, Darren, can you remind me how much of your order book, at least in automotive solutions, rolls over in a year? Is it 20%, 30%?
spk03: Yeah, it would be in the neighborhood of 20% or so. But really, pricing in automotive solutions is part of the equation, but really what drives the margin there is levels of vehicle production volumes. And while they remained at lower levels and that we expect where they will go, I mean, that has the biggest impact on dampening the margins.
spk02: Okay.
spk01: Sorry, David, in every quarter, sometimes one program gets delayed over another one, and that can impact a lot depending on our mix of the time, too.
spk02: Okay, that's fair. And then just sticking with automotive solutions here, when I'm thinking about the overall market, say, for nets and mats, How much of that market now is third-party? Not what you guys are selling, but the overall market. And has that market share shifted over the last few years as OEMs look to steal back their mineral rights?
spk03: You mean third-party, meaning what, aftermarket business or suppliers?
spk02: Yeah, aftermarket business, yeah.
spk03: Oh, I think that, broadly speaking... I don't know the number, but there is tremendous opportunity to increase penetration of both of those products as the OEMs try to recapture the accessory products themselves. But I can't give you a figure other than it's a very high number.
spk02: That's a fair comment. And then on the capabilities for moving to larger larger molds in your large mold division. Is there much competition there, and how long does the CAPEX program take for you guys to be able to supply these bigger presses?
spk03: We have the capabilities now, by and large. There's a couple other additions that are – capital additions that are being completed, but we can start work on very large molds now. And we'll be done our current CapEx plans probably in the next couple of months or so related to that. With respect to competition, there is very limited competition in North America that has these capabilities. The industry has by and large looked to outsource a lot of these requirements to China. And we see with increasing demand and kind of a focus on reshoring that it should be very beneficial to us.
spk02: And would the margin profile on those bigger molds be very similar to what you guys are doing now in the division, or is it a stop function app?
spk03: I guess all I would say on that is we We got a target out there of 20% EBITDA margin for the segments, and we certainly expect that to be very attainable.
spk02: Okay, that's it for me. Thanks so much, guys. Thank you.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. I would now like to turn the conference back to Darren Kirk for closing remarks.
spk03: Okay. Well, thanks, everyone, for your time today. Hope you have a great long weekend, and we look forward to speaking with you again for our fourth quarter results. Take care.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
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