Exco Technologies Limited

Good day and thank you for standing by. Welcome to the EXCO Technologies Limited fourth quarter results 2024 conference call. At this time all participants are in listen only mode. After the speaker's presentation there will be the question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a 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 our speaker today, Darren Kirk, President and Chief Executive Officer. Please go ahead.

Thank you, Nadia, and good morning, all participants. Welcome to Exco Technology's fiscal 2024 fourth quarter and year-end conference call. I will begin with an operations overview, after which our CFO, Matthew Posno, will review the financial aspects of the quarter before we open up the call for questions. Before we proceed, I'd like to highlight the cautionary notes included in yesterday's news release and on page two of the presentation available on our website. These notes apply to today's discussion. Overall, I would describe the quarter as decent, though we faced anticipated headwinds from lower automotive production volumes. I was pleased to see the sustained improvement in EBITDA margins in our casting and extrusion segment, holding steady at around 18%. This segment margin continues to have more upside potential from our recent investment initiatives as we continue to focus on filling new capacities, enhancing efficiencies, and advancing towards our fiscal 2026 targets. Our free cash flow focus was also evident this quarter, which remained strong, bringing our total free cash flow for the year to $54 million, representing a robust 66% conversion of EBITDA. Innovation remains a key driver for us, and this quarter was no exception. Our 3D printing operations are performing exceptionally well. We recently added a sixth printer and placed an order for a seventh, underscoring our confidence in this expanding market. Additionally, we made meaningful strides in scaling up our greenfield plants, including integrating Halex into our extrusion dye operations and maximizing the benefits of our enhanced heat treatment equipment. but there is certainly more work to be done. Turning to market conditions, the automotive solution segment faced headwinds as we expected. Combined vehicle production volumes in North America and Europe were down approximately 5% as OEMs adjusted to rising inventory levels driven by softening macroeconomic conditions, high transaction prices, and lower vehicle affordability. our segment revenues declined by about 10%, additionally impacted by customer-driven program launch delays and reduced accessory sales due to inventory stocking. Unfavorable vehicle mix also impacted us as there were lower sales of certain premium trim vehicles where we have higher concentration of accessory products, further contributing to this decline. Looking ahead, vehicle production volumes are expected to again be slightly down in the last calendar quarter of 2024 with a more pronounced pullback in Europe. Moving into 2025, volumes are projected to stabilize through the year as lower interest rates and higher OEM incentives stimulate demand. Over time, we expect our revenues to exceed the industry rate of growth driven by ongoing content per vehicle. In this regard, our quoting activity, new product development, and launch pipeline remain robust, especially for new program launches in the second half of fiscal 2025. On the cost side, margins were pressured this quarter by weaker volumes, unfavorable product mix, somewhat erratic order releases, and higher labor costs. Labor costs in Mexico have increased significantly in recent years, and the severance expenses in Mexico and elsewhere associated with headcount optimization further compressed margins. To mitigate these pressures, we are implementing automation, exiting less profitable programs, deferring cost downs, and targeting price increases. As older, tighter margin programs roll off and newer, favorable ones ramp up, we expect the segment margins will recover. In our casting and extrusion segment, demand for new molds, rebuilds, and additively printed inserts remain firm, while demand for consumable die-cast tooling softens slightly alongside reduced OEM production volumes. While EV adoption has slowed, our business remains relatively agnostic to powertrain architectures, positioning us well for continued growth over time as aluminum adoption increases. Demand for consumable extrusion tooling was steady across most regions, though some softening was evident late in the quarter. Extrusion related capital equipment sales, however, remain solid as extruders are prioritizing productivity and efficiency enhancements, a key area of focus for our cast fuel operations. Margins in our casting and extrusion segment improved over the prior year and held relatively steady sequentially, supported by higher demand for new molds, extrusion dyes, and a relatively favorable pricing environment. Looking forward, we anticipate further margin improvement as greenfield investments mature, new capacity is utilized, and efficiency initiatives take hold. Finally, a brief comment on the evolving global trade landscape. EXCO remains well-positioned to navigate rising input tariffs into the U.S. from regions outside of NAVTA. In fact, it could even be a benefit for our operations. However, the prospect of increased tariffs on goods from Mexico or Canada into the U.S. would present significant challenges for the highly integrated North American auto supply chain. That said, we view this risk as low given the deep regional interdependence and remain skeptical that these tariffs will actually be implemented. That concludes my prepared remarks. I'd like to thank my ExCo teammates for their tremendous efforts, their drive for innovation, and their unwavering commitment to safety. I will now hand the call over to Matthew to discuss the financial highlights.

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales totaled $637.8 million compared to $619 million last year, an increase of $19 million or 3%. Full-year sales in the automotive solutions segment were $331 million, an increase of $4 million or 1%, and sales in the casting and extrusion segment were $307 million, an increase of $15 million or 5%. The company experienced higher demand within our casting and extrusion segment and sales in the automotive solutions segment increased slightly as the impact of the UAW strike action and program launch delays partially offset the company's higher content per vehicle, while overall automotive production volumes in North America and Europe were mostly stable. Consolidated sales for the fourth quarter ended September 30th were $155 million, a decrease of $4.7 million, or 3%. Fourth quarter sales at our casting and extrusion segment increased $4 million, or 5%, and the automotive solutions segment were down $8 million or 10%. Consolidated fourth quarter net income was $7.7 million or earnings of 20 cents per share compared to $9 million or earnings of 24 cents per share in the same quarter last year. The effective income tax rate was 26% in the quarter compared to 25% the same quarter last year. The automotive solutions segment fourth quarter sales of $79 million were down 10% from the prior year quarter. The sales decrease was driven by lower automotive production volumes in North America and Europe, customer-driven program launch delays, and unfavorable vehicle mix. Looking forward, industry growth may be tempered near term by increasing OEM inventory levels, elevated interest rates, relatively high vehicle average transaction prices, and softening global economic conditions. Countering these headwinds, central banks have begun lowering rates Vehicle sales have remained resilient, deal inventory levels remain below pre-COVID-19 levels, vehicle fleets continue to age, and OEM incentives are rising. As well, EXCO sales volumes are expected to benefit from awarded program launches that should provide ongoing growth in our content for vehicle. Coding activity remains encouraging, and we believe there is ample opportunity to achieve our targeted growth objectives. Fourth quarter pre-tax earnings in the automotive solution segment totaled $8 million, a decrease of $2 million, or 22%, over the same quarter last year. Variances in period profitability were due to lower sales, products mixed shifts, rising labor and severance costs, and foreign exchange movements. Although production volumes have largely stabilized from a macroeconomic and global perspective from recent years, volumes in the segment's first quarter First quarter are expected to follow typical seasonality trends due to OEM December holidays. Apart from these specific impacts, management is cautiously optimistic that its overall cost structure should improve margins in coming quarters. Pricing discipline remains a focus and actions are being taken on current programs where possible, though there's typically a lag of a few quarters before the impact is realized. As well, new program awards are priced to reflect management's expectations for higher future costs. The casting and extrusion segment recorded sales of $76 million in the fourth quarter compared to $73 million last year, an increase of $3.7 million or 5%. Demand of our extrusion tooling remained relatively resilient in both North America and Europe, though activity slowed through the quarter with key end markets such as building and construction as well as automotive extrusions showing signs of softer conditions. Other end markets such as sustainable energy remained firm. We remain focused on initiatives to reduce lead times, enhance product quality, expand product breadth, and increase capacity, contributing to share gains in our core markets. Management continues to develop its capital Morocco and Mexico locations, which provide the opportunity to gain market share in Europe and Latin America through better proximity to local customers. In the die-cast tooling market, demand and order flow for new molds and rebuild work remained firm during the quarter, though demand for consumable tooling slowed. Demand for gigasized tooling had similarly slowed back with the slower adoption of EVs, although management continues to expect this market segment will see significant growth in coming years. Our leading market 3D printing group continued strong sales activity supported by the six additive printers Darren referenced earlier. as customers focus on greater efficiency in all large mold-sized segments, i.e. for both giga and non-giga sized die-cast machines. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. Fourth quarter pre-tax earnings in the casting extrusion segment totaled $6.3 million, an increase of $1 million, or 18% over the same quarter last year. The pre-tax profit improvement is due to higher sales volume within the die-cast and extrusion end markets, program pricing improvements, favorable product mix, and efficiency initiatives across the segment, including the ongoing use of lean manufacturing and automation to improve productivity through standardization and waste elimination. In addition, volumes at Castool's heat treatment operation continue to increase, providing savings and improved production quality, while efficiency initiatives at Halex are progressing. Offsetting these cost improvements were ongoing challenges at Castiel's Greenfield operations and an increase in segment depreciation of about half a million dollars 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. Operating cash flow before net changes in working capital was $16.7 million in the quarter compared to $23.5 million in the prior year quarter. The primary drivers on operating cash flow include a $5 million quarterly change in deferred income taxes, lower net income and interest expense. Fourth quarter net change in non-cash working capital contributed $12.2 million of cash compared to a $5.9 million use of cash in fiscal 2023. Improvements to working capital were driven primarily by lower accounts receivable due to management's focus on collections throughout the year, slightly lower fourth quarter sales, and due to customer payment delays in the end of 2023 due to the UAW strike. Investment in fixed assets of $8.7 million compared to $9.6 million in the prior year quarter. Included in the current quarter was $3.3 million in growth capital. The reduction in capital spending relates to timing of equipment purchases and completion of major projects from the prior year. EXCO ended the quarter with $73.4 million in net debt compared to $94.2 million in the prior year. The company has $46 million in available liquidity under its banking facilities at year-end. With respect to fiscal 2025, we plan to invest approximately $40 million in capital expenditures, of which roughly $21 million is for growth expenditures. EXO's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility allows flexibility to support strategic growth initiatives. This, combined with cash from operations, creates a foundation for men 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, Nadia.