Exco Technologies Limited

Good day and thank you for standing by. Welcome to the ExoTechnologies Limited first quarter 2023 earnings 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you, your hand is raised. To withdraw your question, please press star 1-1 again. Please give the advice 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. Please go ahead.

Thank you, Michelle. Good morning, ladies and gentlemen. Welcome to Exco Technology's fiscal 2023 first 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. First, I'd like to make some comments about forward-looking information. In yesterday's news release and on page two of the presentations that we have posted to our website, you'll find cautionary notes in that regard. While I won't repeat the content, I want to emphasize that the cautionary notes apply to this discussion today. So, we again made great progress advancing our various growth initiatives during the quarter, which is evident in our very strong top-line results. We continue to see solid demand for our large and complex tooling and related solutions, as well as our assorted interior trim and accessory products. Importantly, key drivers here are the accelerating adoption of electric vehicles and the broader environmental sustainability movement, both of which are in early innings. We are more confident than ever that EXCO is entering into a multi-year period of heightened demand growth for which we are exceptionally well positioned. With regards to our specific investment plans, I'm pleased to report that Castool has essentially completed construction of its new facility in Mexico and delivery of machinery and equipment has commenced. We expect this plant to be operational in our third fiscal quarter providing much needed capacity and better positioning us competitively within Latin America and the Southern US. Installation of new equipment that will upgrade and enhance our heat treatment capabilities across the segment continues, and we expect these pieces will be fully operational by the end of our second quarter. This equipment will give us unmatched competitive advantages while significantly reducing our own carbon footprint. Elsewhere, Castool's plant in Morocco remains in a ramp-up phase and is making terrific progress, while the large mold group has completed the installation of all equipment in crane capacity to handle molds of extreme size. Lastly, our plant expansions within our automotive solutions group are complete and all equipment to support new programs are operational. At this time, we have no change to our prior CapEx guidance for the year of $47 million. Overall market conditions continued to improve during the quarter, with automotive industry volumes increasing modestly 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 recovery 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. 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 volumes for both North America and Europe through calendar 2023. We would expect our auto solution segment to generate higher sales growth than this as we continue to launch previously awarded programs. Looking out further, quoting activity is 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 or disinflation. In fact, in some aspects of our business, we have begun to see pockets of outright deflation, which is the case for certain transportation costs, steel, and some other commodities. Labor rates, however, remain a challenge, particularly in Mexico, which pushed through a 20% increase in minimum wage in December. With these factors in mind, we continue to take specific pricing action where possible in order to restore and protect our margins. We, 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 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 gain meaningful traction. In fact, in January 2023, our large mold group recorded its highest ever level of monthly order intake, and our backlog to sales ratio is currently sitting at record levels. Demand for consumable extrusion tooling did begin to weaken during the quarter as extruders responded to softening global macro conditions. However, extrusion demand in a number of end markets, such as automotive, remains firm. As well, Castool's capital equipment sales within the extrusion end markets remain very strong, as does demand for its consumable die-cast tooling and systems, where we are clearly gaining significant market share. Margins in our casting and extrusion segment remain well below potential as we absorb startup 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. Difficult conditions in Europe also weighed on segment margins. However, more recent data points are encouraging, including a significant reduction in energy costs and realization of initial synergies within the extrusion tooling group. We are very optimistic our segment margins will see recovery from here through the remainder of the year. With regards to the cyber incident that affected our large mold groups three plants during the quarter, I will provide a few comments. First, I will say this was a very sophisticated attack on our network. I want to emphasize that EXCO is committed to data security and has taken this matter very seriously. Upon learning of the incident, we took immediate action to secure our systems and mitigate the impact to our data and operations. I'm pleased to report that our operations have now been fully restored and shipments to our customers have not and will not be materially interrupted. We are still fully assessing the financial impact of the situation, but at this time expect production downtime and other costs associated with the incident will reduce our earnings per share in Q2 of this fiscal year by between one to three cents net of expected insurance proceeds. We do not expect material additional implications for future quarters beyond Q2. I would like to thank our customers and partners for their patience as we remediated the situation, and of course our employees who worked tirelessly to restore our network and operations expeditiously. Lastly, I'm sure you noticed with last night's earnings release, our board of directors elected to maintain our quarterly dividend at 10.5 cents per share. The Board supported continuing our dividend at this level rather than increasing further, which EXCO has done 14 times in the past 13 consecutive years. I want to point out that continuance of the current dividend level in no way reflects a lack of confidence in EXCO's expectations of future profit growth. Rather, I would emphasize that we see significant growth opportunities in our core business and are motivated to preserve our capital to fund such growth. In that regard, we will prioritize the use of surplus near-term cash flow to reduce our current indebtedness. I will now pass the call over to Matthew to discuss the financial highlights of the quarter. Matthew?

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the first quarter ended December 31st were $139.1 million. an increase of $38 million, or 38%. Over the quarter, the consolidated impact of exchange rate movements increased sales by $6 million. Adjusting for the impact of foreign exchange, first quarter sales at our automotive solution segment increased $11.6 million, or 21%, and the casting and extrusion group sales were up $20.4 million, or 45%. Consolidated net income for the first quarter was $4.5 million, or earnings of 12 cents per share, compared to $2.7 million or $0.07 per share in the same quarter last year, a 67% increase in net income. The effective income tax rate for the quarter was 21% compared to 26% the prior year period. The change in income tax rate in the current year quarter was impacted by geographic distribution and form rate differentials. The automotive solutions segment experienced a 27% increase in sales in the first quarter or an increase of $15 million to $70.3 million from $55 million. The sales increase was driven by higher vehicle production volumes and fewer program launch delays as supply chain disruptions eased in the quarter. North American industry vehicle production was up 8% compared to a year ago, and European industry vehicle production was up 4%. Sales increased at all four of the segment's operations, and we continued ramp up in our new programs. First quarter pre-tax earnings in the automotive solutions segment totaled $7.2 million, which is an increase of $3.8 million, or 112%, over the same quarter last year. The segment's higher pre-tax profit is due to the 27% increase in sales and improved overhead absorption, partially offset by continued pressure on wages, materials, and transportation costs compared to the prior year period. The cashing and extrusion segment recorded sales of $68.8 million in the first quarter compared to $45.8 million last year, an increase of $23 million. Paylock sales were $11.6 million. These results were impacted by December holidays, the Russian conflict in Ukraine, and weakening economic conditions in Europe. Demand for extrusion tooling and associated capital equipment outside of Europe remained relatively strong due to both industry growth and ongoing market share gains. However, signs of slowing market activity exist through the quarter. In the die-cast market, demand continues to improve as industry vehicle production recovers, new electric vehicles and more efficient internal combustion engine slash transmission platforms are launched, and customer inventory levels increased. EXCO's additive 3D printed tooling continues its strong contribution as customers focus on greater efficiency with the size and complexity of the die-cast tooling continuing to increase. Sales in the quarter were also aided by price increases, which were implemented in order to protect margins from higher input costs. Pre-tax earnings in the casting and extrusion segment of $1.9 million declined modestly compared to the prior year quarter. The decline was driven by $1.9 million higher depreciation, startup costs at Castiel's heat treat operations and new market, continued outsourcing heat treat costs in our extrusion tooling group, while new equipment was being installed and higher raw material, energy, freight, and labor costs due to inflation, particularly in Europe. EXCO generated cash from operating activities of $10.8 million during the quarter and $5.6 million of free cash flow after $3.4 million of maintenance fixed asset expenditures. This free cash flow together with the company's cash balances was used to fund fixed assets for growth initiatives of $4 million and $4.1 million of dividends. EXCO ended the quarter with $18 million in cash, $110.7 million in bank and long-term debt, and $41.9 million available in its credit facility. EXCO's financial position remains strong. As such, the company's balance sheet and availability under the existing credit facility provides continued support for our strategic initiatives. Our strong financial position, combined with our free cash flow, provides a foundation for management to pursue high-value growth capital expenditures, dividends, and other opportunities that may arise. That concludes my comments. Michelle, we can now transition to the Q&A portion of the call.