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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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 Technology's fiscal 2024 second quarter conference call. I will lead off with an operations overview. Matthew Posnow, our CFO, will then review the financial aspects of the quarter before we open the call for questions. Before I begin, I'd like to point out the cautionary notes in yesterday's news release and on page two 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 solutions 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 15.5 million units. While elevated interest rates and 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 die cast, 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 a 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 were $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 $0.21 per share, compared to $6.3 million, or $0.16 per share, for the same quarter last year. A 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 solutions 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 favourable 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 solutions 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 in fiscal 24, given the significant rise in minimum wage levels. Offsetting these cost increases will improve 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 help 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 at our customers. Higher interest rates have negatively influenced the building, construction, recreational vehicle extrusion end markets, but automotive and sustainable energy extrusion end 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 die-cast 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 die-cast 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. Coding activity remains robust, and our backlog for die-cast molds remains at record levels. The casting and extrusion segment reported $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, variable product mix within large mold group, improved efficiency in the extrusion dive business, as well as prior year one-time January 2023 cyber incident costs of $600,000. Volumes at Castool's heat treat operation improved performance and stability through vertical integration for large mold in Castool. Offsetting these cost improvements were startup costs at Caskfields 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 expects 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 in the existing credit facility provides continued support for our 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.