Exco Technologies Limited

Good day and thank you for standing by. Welcome to the Exco Technologies Limited second quarter results 2024 conference call. At this time all participants are in a listen only mode. After the speakers 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. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1-1 again. 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. Please go ahead.

Thank you Daniel and good morning all participants. Welcome to Exco Technologies fiscal 2024 second 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. Before I begin I would 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. They are applicable to this discussion today. Overall we had a decent quarter again chalking up our seventh consecutive quarter of year over year growth in revenues and EBITDA while our EPS came in at 21 cents. As well we saw a notable uptick in our casting and extrusion segment margins. This segment margin has much more upside as our current investment initiatives ramp down and we focus our efforts on filling new capacities, improving our efficiencies and targeting our fiscal 2026 targets. Free cash flow is also much stronger this quarter as our earnings continue to improve and capex came in a little lighter. I would point out that we expect our overall capex to fall comfortably short of our $49 million budget this year. And while some of the shortfall will simply fall into next year, some of the difference reflects that we are being prudent targeting higher overall returns on capital. Jumping into market conditions and first looking at our automotive solution segment, vehicle production volumes in North America and Europe were roughly flat on a combined basis with North America a little higher and Europe a little lower. Vehicle sales also remained relatively robust ending the quarter with a USR of about 15 and a half million units. While elevated interest rates in continuing high average transaction prices are certainly headwinds, there remains pent up demand at the consumer level while dealer inventories continue to be replenished and OEM incentives are clearly picking up. Compared to the flattish OEM production this quarter, our segment revenues again outperformed overall market conditions, rising 3% and representing ongoing growth in content per vehicle. Looking forward, despite macro headwinds, vehicle production volumes are expected to remain relatively stable in 2024 as dealer inventories continue to be replenished and pent up consumer demand is satisfied. As we've long demonstrated, we would expect our revenues to comfortably exceed industry rate of growth over time. In this regard, our launch pipeline, quoting activity and new product development remains very robust. On the cost side, margins were squeezed during the quarter by weaker volumes in Europe, rising severance costs associated with headcount reductions and higher labor costs, particularly in Mexico. Labor costs in Mexico have increased significantly in the past several years and we are working to offset these pressures through various measures. These measures include implementing automation and trimming headcount where possible, exiting less profitable programs, pushing off cost downs and of course targeting price increases. Turning to our cast and extrusion segment and starting with diecast, demand in that end market remains very firm, particularly for new molds for both EVs and internal combustion engine vehicles. This is true for powertrain and structural programs, giga-sized dies and of course our additive manufacturing operations. While there is clearly a slowing of pace of EV adoption, it is important to note that our business is relatively agnostic to powertrain architecture. Should the EV revolution slow further or shift toward hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead. Of note, our large mold group continues to see record and growing backlog levels despite the sharp rise in revenues over the past several quarters. Demand for consumable extrusion tooling recovered from much slower conditions in our first fiscal quarter, which saw typical seasonal softness exacerbated by plant shutdowns over the holidays. While extruders continue to be somewhat sluggish overall due to weak demand in the building and construction end markets, certain end markets such as automotive and green energy applications are showing good growth. Capital equipment sales within the extrusion end market remain decent as extruders continue to focus on enhancing their productivity and efficiency through the cycle, a sweet spot for our cast fuel operations. Margins in our casting and extrusion segment improved over the prior year and sequentially as we benefited from higher demand for large molds, but also improved productivity across the segment. We remain confident in the path higher for segment margins through our outlook period of 2026 as our greenfield investment season, our recent capacity additions are utilized and various efficiency initiatives continue to take hold. That concludes my prepared remarks. I want to thank all of my Exco teammates for their tremendous efforts and focus on working safely through the quarter. I will now pass the call over to Matthew to discuss the financial highlights.

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the second quarter ended March 31st for $163.8 million, an increase of $8.3 million or 5%. Foreign exchange rate movements had minimal impact on sales in the quarter. Consolidated net income for the second quarter was $8.1 million or earnings of 21 cents per share compared to $6.3 million or 16 cents per share for the same quarter last year. The 29% increase in net income. The effective income tax rate for the current quarter was 23% compared to 21% the prior year period. The change in income tax rate in the current quarter was impacted by geographic distribution and foreign rate differentials. The automotive solution segment experienced a 3% increase in sales in the second quarter or an increase of $2.7 million to $85.8 million from $83.1 million in the second quarter last year. The sales increase was driven by a ramp up of new programs, stable vehicle production volumes, select pricing actions to compensate for inflationary pressures, as well as favorable vehicle mix. As Darren referenced, blended vehicle production volumes in North America and Europe were essentially unchanged from the prior year period, indicating continued gains in content per vehicle. Second quarter pre-tax earnings in the automotive solution segment totaled $8.4 million, which is a decrease of $300,000 over the same quarter last year. A slight decrease is primarily due to rising labor costs and foreign exchange headwinds. Labor costs in Mexico have been particularly challenging in recent years and are seeing added pressure on fiscal 24 given significant rise in minimum wage levels. Offsetting these costs increases were improved stability in vehicle production volumes, which have led to improvements in labor scheduling and reduced expedited shipping costs. As well, pricing action and efficiency initiatives helped temper inflationary pressure while higher volumes from new program launches improved absorption of fixed costs. Production volumes have largely stabilized from a macroeconomic and global perspective. The casting and extrusion segment reported sales of $78 million in the second quarter, an increase of $5.6 million, or 8% from the same period last year. Demand for extrusion tooling recovered from weaker conditions in the prior sequential quarter in both North America and Europe due primarily to December holiday shutdowns that are customers. Higher interest rates have negatively influenced the building, construction, recreational vehicle extrusion and markets, but automotive and sustainable energy extrusion and markets remain strong, and we are further positioning our business to benefit from continued strength in these markets. Management is developing the benefits of its cast tool greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America through better proximity to local customers. In the diecast market, demand and order flow for new molds, associated consumable tooling and rebuild work has increased as industry vehicle production volumes remain healthy and new electric vehicles, hybrids and more efficient internal combustion engine platforms are launched. In addition, demand for Exco's additive 3D printed tooling continues its strong contribution as customers focus on increased performance with the size and complexity of diecast tooling continuing to increase with the rising adoption of gigapresses. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. Coating activity remains robust and our backlog for diecast molds remains at record levels. The casting and extrusion segment recorded $5.5 million in pre-tax profit in the second quarter, an increase of $1.6 million from the same quarter last year. The pre-tax profit improvement is due to higher sales volumes within extrusion and large mold groups, program pricing improvements, favorable product mix within large mold group, improved efficiency in the extrusion die business, as well as prior year one-time January 2023 cyber incident costs of $600,000. Volumes at Cast Tools heat treat operation, improve performance and stability through vertical integration for large mold in Cast Tools. I'll say in these cost improvements were startup costs at Cast Tools Greenfield operations and a $700,000 increase in segment depreciation associated with capital expenditures. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with its sales efforts should lead to improved segment profitability over time. Exco generated cash from operating activities of $17.3 million during the quarter and $13.2 million of free cash flow after $1.8 million of maintenance fixed asset additions. This free cash flow together with the company's cash balances was used to fund fixed assets for growth initiatives of $3.4 million, $4.1 million of dividends and $700,000 to repurchase shares under a normal course issuer bid. Exco ended the quarter with $17 million in cash, $111 million in bank and long-term debt and $40 million availability on its credit facility. Exco's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility provides continued support for strategic initiatives. 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. We can now transition to the Q&A portion of the call. Thanks, Daniel.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from David Ocampo with Cormark Securities. Your line is open.

Thanks. Good morning, everyone. Good morning, David. Thanks. So I guess if I take a look at automotive solutions, obviously being impacted by rising minimum wages in Mexico, and you guys pointed out to some automation to sort of offset some of your legacy contracts. But if I, I'm curious, if I look at your New York contract and stuff that you're pricing today, are you able to get, you know, price increases to be able to offset those minimum wages where if you take a look at the margin profiles on the New York contract, you guys are getting closer to 15%, is that right?

So, you know, price increases in the parts business are very tough. We have been successful in achieving kind of targeted price increases, but by and large, it's up to us to manage the costs through the duration of the program, which can be four to five years. And, you know, as those programs come up for renewal, we are certainly embedding a higher price to reflect the higher wage structure in the program renewals. And so, you know, every year we're kind of more or less working through 20 to 25% of programs that are going out, programs that are coming in. And so as those new programs come in with the higher price structure, that's naturally helping the segment margin go up. Now, I guess the other aspect is really the product mix. And, you know, if you can think of that automotive solutions segment as pretty much an equal mix of interior trim components and accessory type products. And accessory type products do tend to have a bit higher margin. And so that part of the business is growing faster for us, which also has a natural upward pressure on margin and is another factor that contributes to our confidence in getting that margin back to 15% in the 2026 timeframe.

Darren, I was wondering if you could speak a little bit on the automation. I know this is a labor intensive type business unit, but are you thinking full-blown robotics or what does that look like on your end?

Yeah, I mean, we use co-bots that basically are moving robots that work right alongside humans now. And, you know, we employ fixtures through the production line. So think of it as semi-automation to remove headcount where possible. You know, those are kind of two examples, but we're focused on seeing what we can do on the automation front across all of our businesses to improve productivity, because I think it's a reality that wage pressures are here to stay. And we do need to focus on achieving automation to help that pressure. You know, again, the other element here in the quarter is we've incurred some severance costs to get the headcount down as we pursue automation. So, you know, that's just another factor that's suppressing the margin in the quarter.

And Matt, just as a follow-up, I'm guessing that automation capex is already built into the guidance that you guys provide for the current business.

Yeah, we've purchased new machines and equipment that are more efficient and faster. You know, we reprogram and do what we can, but sometimes it's better to get new equipment that can meet the needs of today and next year and so on. Okay.

And then shifting gears to the large mold group, just zeroing in more on the gigapresses. I'm curious what you guys are seeing out there in terms of competition. Is it local operators or more people overseas? And as you look domestically, is anyone making the best ones that you guys have and continue to make?

Yeah, it's a good question, David. And I would say that the domestic competition is pretty weak. There's not been a lot of investment domestically by this industry apart from us to capture the growth in Giga. And so competition, where it comes from primarily, is overseas. And, you know, it really does appear that our customers are committed to localizing their supply chains. We all saw the hiccups that happened with long supply chains through the COVID period, but also from an environmental standpoint, you know, shipping these, you know, 100 plus ton molds across the world doesn't really make a lot of sense with a sustainability lens. And so, you know, that's where the bulk of our competition comes from today, particularly for the Giga type stuff.

All right. And the last one for me, just on capital allegations, but look back historically, Exco's typically operated with no net debt except when you guys do an acquisition. Just curious how you guys are balancing that debt reduction priority versus, say, your NCIP, just given that you guys are trading at, you know, three times EBITDA against your 26 guidance.

I mean, in terms of capex, I think Darren mentioned in his comments is, you know, we are looking at our capex closely to make sure that we're getting the best return on the assets that we're looking at. We did do a lot of expansion, three new plants in the last three years, four years, plus the Halix acquisition. You know, we've been promoting that and now we're at the performance stage and, you know, letting these acquisition season. So we're going to see our capex dropping this year. We put some guidance out there, but we think it'll be, you know, high 30s, you know, around there with some carryover, but some cancel programs. You know, managing working capital, we are focused on getting our debt under, you know, lower. It's still very, very comfortable compared to other companies out there, but we do want to get it down. With the NCIP, I'd say it's not a huge focus. We're using it, you know, but we're an operating company and we're focusing on operations for sure.

Yeah, absent any other, like, new investment that may come up or, you know, any M&A activity, none of which are currently envisioned to any scale, I would expect that the bulk of the free cash flow in the near term would go to reducing debt with a little bit for NCIP.

Okay, that's perfect. I'll hand the line over. Thanks, guys.

Thanks, David.

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would now like to hand it back over to Darren Kirk, President and Chief Executive Officer, for closing remarks.

I want to thank everyone for joining us on the call today. We look forward to talking to you again in roughly 90 days when we release our Q3 results. So, take care, everyone.

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