Exco Technologies Limited

Good day and thank you for standing by. Welcome to the Exco Technologies Limited Third 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'll 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, 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, Kevin, and good morning, all participants. Welcome to Exco Technology's fiscal 2024 third 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'd like to point out that the cautionary notes in yesterday's news release and on page two of the presentation that we have posted to our website are applicable to this discussion today. Overall, we had another solid quarter, chalking up our seventh consecutive quarter of year-over-year growth in ETADA and EPS. As well, I'm very happy to point out that we saw a notable uptick in our casting and extrusion segment ETADA margin, which rose to almost 18%. This segment margin has much more upside from our current investment initiatives and as we focus our efforts on filling new capacities, improving our efficiencies and achieving our fiscal 2026 targets. Free cash flow was also much stronger this quarter as our earnings continue to improve and CapEx came in a little lighter. We continue to tightly assess our capital spending and now expect annual spending will come in around $36 million this year. Beyond our financial results, we made great progress at pushing the pace of innovation across the company again this quarter. It is truly exciting to see all the innovation happening across Exco and the tremendous potential that will clearly be unleashed through the use of AI and machine learning. We are already literally taking hundreds of hours out of jobs with these technologies across design, programming, and machining functions. We also continue to make meaningful progress at scaling up our greenfield plants, further integrating HALEX into EXCO's extrusion dye operations, and maximizing the benefits of our enhanced heat treatment equipment. 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 decent, ending the quarter with a U.S. seasonally annual adjusted rate of about 15.5 million units. Volumes would likely have been a bit better than this if not for the large cyber incident that impacted thousands of dealerships in the month of June. 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. OEM incentives are clearly picking up, and interest rates are starting to head lower. Compared to the flattish OEM production this quarter, our segment revenues modestly underperform overall market conditions, dropping 4%. This was due to customer-driven program launch delays, unfavorable vehicle mix in our general program launch cadence, with some programs ending before new programs launch later this year. Looking forward, vehicle production volumes are widely expected to be flat to slightly down in the second half of calendar 2024, which includes expectations of more pronounced summer shutdowns this year. Looking out a little further, vehicle production volumes are expected to remain relatively stable in 2025 as pent-up consumer demand is satisfied. As we've long demonstrated, we would expect our revenues to comfortably exceed the industry rate of growth over time, representing content for vehicle growth of between 5% to 10%. In this regard, our launch pipeline, porting activity, and new product development remains very robust. On the cost side, margins were squeezed during the quarter by modestly weaker volumes, unfavorable vehicle mix, 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. As some of our older tighter price margin programs roll off and newer programs with more favorable economics ramp up, we expect our segment margins will begin to recover. Turning to our casting and extrusion segment and starting with die-cast, demand in that end market remained very firm for new molds, rebuilds, shot end tooling, and of course our leading 3D metal printing business. While EV adoption has clearly slowed, 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, as appears to be the case, we remain confident in the trend toward aluminum and that demand for our products will continue to grow strongly in the years ahead. Demand for consumable extrusion tooling remains strong across most regions and markets. During the quarter, while extruders continued to be somewhat sluggish overall due to weak demand in building and construction end markets, this end market improved this quarter and certain other markets such as automotive and green energy applications continued to show good growth. Capital equipment sales within the extrusion end market also remained decent as extruders continued to focus on enhancing their productivity and efficiency through the cycle, a sweet spot for our cast fuel operations. Margins in our casting extrusion segment improved over the prior year and sequentially as we benefited from higher demand for extrusion dyes, a more favorable pricing environment in the die cast market, but also much improved productivity across the segment. We are clearly seeing the benefit of our various capital investment initiatives. We remain confident in our expectations for higher segment margins through our outlook period of 2026 as our greenfield investments continue to 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 actual teammates for their tremendous efforts, their drive to push innovation through our organization, and their focus on working safely always. I will now pass the call to Matthew to discuss the financial highlights.

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the third quarter ended June 30th were $161.8 million, a decrease of 2.8 million or 2%. Foreign exchange rate changes increased sales approximately 1.9 million in the quarter. Consolidated net income for the third quarter was 8.2 million or earnings of 21 cents per share compared to 6.3 million or 16 cents per share in the same quarter last year. This is an increase of $1.9 million or 30%. Effective income tax rate was 27% in the current quarter compared to 26% in the prior year quarter. The income tax rate in the quarter was impacted by non-deductible losses, geographical distribution, and foreign rate differentials. The automotive solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter. Foreign exchange rate changes increased segment sales $1.1 million in the quarter. The sales decrease was driven by customer delays in certain program launches, unfavorable vehicle mix, and slightly lower blended vehicle production volumes in North America and Europe compared to the prior year quarter. Third quarter pre-tax income in the automotive solution segment was $8.1 million, which is a decrease of $800,000 from the prior year quarter. Variances in period profitability were due to lower sales, product mix shifts, higher raw material pricing, rising labor costs, and foreign exchange movements. Labor costs in Mexico have been particularly challenging in recent years, and we're seeing added pressure in fiscal 2024 given the rise in wages. Vehicle production volumes, however, remain relatively stable, which has led to improvements in labor scheduling and reduced expedited shipping costs to partially offset these other costs. As well, pricing action and efficiency initiatives continue to temper inflationary pressures. The casting and extrusion segment reported sales of $78.9 million for the third quarter, an increase of half a million dollars from the same period last year. Demand for extrusion tooling remains strong in both North America, and Europe. High interest rates negatively influenced the building, construction, and recreational vehicle extrusion end markets in prior quarters, but the construction and end market improved more recently while demand within the automotive market gained momentum and sustainable energy end markets were strong. Management continued to develop its Castle Greenfield locations in Morocco and Mexico, which provided the opportunity to gain market share in Europe and Latin America. In the die-cast tooling market, demand and order flow for new molds associated to mold tooling and rebuild work remained firm during the quarter, and demand for EXCO's additive 3D printed tooling grew strongly as customers focused on greater efficiency in all large mold-sized segments. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. The casting extrusion segment reported $7.1 million of pre-tax profit in the third quarter, an increase of $3.1 million, or 77% from the same quarter last year. The pre-tax profit margin – pre-tax improvement is due to higher sales volumes within the extrusion end markets, program pricing improvements, favorable product mix, and efficiency initiatives across the segment. As well, volumes at Castiel's heat treatment operation continue to increase, providing savings and improved production quality, while efficiency initiatives at Halex are being realized. Offsetting these cost improvements were ongoing startup costs at Castle's Greenfield operations and a $700,000 increase in segment depreciation for the quarter associated with recent 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 $22.7 million during the quarter and $15.9 million of free cash flow after $4.7 million in 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 $3.2 million, paid $4.1 million in dividends, and $1 million to repurchase shares under a normal course issuer bid. EXCO ended the quarter with $20 million in cash, $107 million in bank and long-term debt, and $44 million available in its credit facility. EXCO's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility provide 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. Kevin?