Exco Technologies Limited

Good day, everyone, and thank you for standing by. Welcome to the EXCO Technologies Limited Third Quarter Results 2025. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. To participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please note, this event is being recorded. Now, it's my pleasure to turn the call to the President and CEO, Mr. Darren Kirk. The floor is yours.

Thank you, Carmen, and good morning, everyone. Welcome to Exco Technology's fiscal 2025 third quarter conference call. I will start with an overview of our operations for the quarter, and then our CFO, Matthew Posno, will review the financial details. After our prepared remarks, we'll open the call for questions. Before we begin, let me remind everyone of the cautionary notes regarding forward-looking statements in our press release and on page two of our quarterly presentation. Those notes apply to our discussion today. Overall, this was clearly a challenging quarter for Exco as we faced multiple headwinds in our end markets. Automotive production volumes declined in both North America and Europe during the quarter, driven in part by tariff-led trade disruptions and macroeconomic uncertainty. In North America, industry analysts are forecasting roughly a 5% drop in vehicle output for calendar 2025, with European production expected to be down about 3%. Against this backdrop, EXCO sales softened modestly in the quarter with a mid-single-digit percentage decline in revenue. Our profitability was further pressured by a fall-off in die-cast sales, unfavorable product and vehicle mix in our auto solutions segment, adverse foreign exchange impacts, and costs associated with restructuring activities. Despite these headwinds, we continued to execute on our strategy and maintained very favorable performance in several areas of our businesses. In our automotive solutions segment, sales were lower than a year ago, reflecting difficult market conditions. A key factor was reduced vehicle import volumes from Asia due to tariffs, which impacted programs where we supply accessory content. The imposition of steep US tariffs on certain foreign-built vehicles earlier this year led to a pullback in imports of some Japanese and Korean models that include our interior trim and storage accessories, dampening our sales in this segment. Aside from the tariff effects, we also experienced unfavorable vehicle and product mix and continued launch delays on certain new programs, as well as cautious production schedules from our OEM customers. On the positive side, US consumer demand has been relatively resilient, dealer inventories have improved, and OEM incentives have increased to support sales despite interest rates being where they are. Earlier in the year, we saw customers restock accessory inventories that had been drawn down, although tariff related uncertainties have again made some OEMs more conservative. We responded by tightening our cost controls within automotive solutions, and despite the volume headwinds, segment EBITDA margins held relatively firm. This was achieved through a combination of efficiency gains, pricing actions, and proactive cost management. Notably, we implemented headcount reductions and other restructuring measures in this segment to help offset rising labor costs and protect profitability. These were difficult decisions, but they were necessary to improve our cost structure. The severance and restructuring costs incurred this quarter are expected to be paid back within a year or so through lower ongoing expenses. Excluding these charges, our automotive solutions performance was relatively stable and positioned to rebound when volumes normalize. Turning to our casting and extrusion segment, results here were mixed with areas of weakness in die-cast tooling offset by resilience in extrusion tooling. Demand for new high-pressure die-cast mold and related consumable tooling was relatively soft this quarter. Automakers have been pumping the brakes on certain new vehicle programs, which we attribute to several factors. A noticeable slowdown in EV adoption and a pivot toward hybrid vehicles, changes in the regulatory landscape, particularly around emissions and fuel economy, continued tariff-induced uncertainty, and a tendency of OEMs to extend the life of existing powertrain platforms before committing to next-generation hybrids or EVs. Essentially, many of our customers are deferring new tooling orders as they reassess product plans in light of political and market risks. We've seen a decline in order flow for new die-cast molds as a result, with some programs on hold until there is more clarity. That said, our die-cast business remains fundamentally strong. Quoting activity for new programs continues, we're engaged on multiple fronts, and we're totally confident this is more of a timing issue than a structural change in the business. It's worth emphasizing that while the EV rollout has slowed, EXCO's business is largely agnostic to powertrain type. Whether the industry accelerates electrification or shifts toward hybrid, the common trend is a greater use of lightweight aluminum components, which sustains demand for our die-cast and extrusion tooling over the longer term. We have already seen gigapress capacity expansion plans delayed somewhat along the slower EV ramp, but we fully expect those large casting programs to proceed in time, and EXCO is well positioned for when they do. Meanwhile, our extrusion tooling operations delivered relatively stable results this quarter. Sales of extrusion dyes and associated tooling were roughly flat year over year, demonstrating the resilience imparted by the diverse end markets we serve. The extrusion group supports not only automotive, but also building and construction, green energy, aerospace, transportation, and other industrial sectors. So weakness in one area is often offset by strength in others. In Europe especially, we performed well. Our Halex operations outperformed local market conditions and improved profitability thanks to higher volumes, efficiency gains, and better integration with EXCO's global operations. we continue to realize benefits from our recent capital investments. For example, despite temporary installation-related disruptions during the quarter, our new heat treat equipment in Michigan is now fully operational and enhancing productivity and lowering costs. As well, our Castrol Mexico plant is ramping up nicely now, contributing positive EBITDA. Across the segment, we have focused on standardizing processes and increasing automation, which has reduced lead times and improved product quality. These operational improvements combined with our strategic footprint and unmatched capabilities give us confidence that our segment will deliver much stronger results when the die-cast industry demand recovers. Matthew will now provide details on the financial aspects of the quarter, and then I'll come back and provide some commentary on our outlook.

Thanks, Darren. In terms of consolidated results, consolidated sales for the third quarter ended June 30, 2025, were $154.9 million compared to $161.8 million in the same quarter last year, a decrease of $6.9 million or 4%. Foreign exchange rate changes increased sales by $3.1 million during the quarter. Consolidated net income for the third quarter was $5.4 million or 14 cents per share, compared to $8.2 million, or $0.21 per share, last year, a decrease of $2.8 million, or 34%. Net income included $600,000, or $0.02 earnings per share, and after-tax restructuring charges. The effective tax rate was negative 13%. It was a tax credit compared to a 27.5% debit last year, benefiting from $1.6 million in prior research and development tax credits recognized this year. In terms of segment results, the automotive solutions segment, sales for the quarter were 80.8 million, down 2.1 million from last year. Foreign exchange fluctuations added 1.5 million to sales. The decline reflects customer-driven delays in program launches, an unfavorable vehicle mix, and slightly lower production volumes in North America and Europe. Broader industry challenges such as tariff uncertainty, recessionary risk, evolving environmental regulations, and consumer confidence continue to weigh on the automotive solutions segment, We expect recent and upcoming program launches to drive growth in content per vehicle. Quoting activity remains solid. In terms of pre-tax profit, it was down $7.4 million or $800,000 compared to the prior year third quarter, mainly due to lower volumes, product mix changes, and rising labor costs, particularly in Mexico, where the wage inflation has been significant in 2025. We incurred approximately half a million dollars in restructuring costs, as part of the lean manufacturing automation initiatives to better align with current production levels. Pricing discipline remains a priority, with new programs being priced to reflect anticipated future cost increases. The catch and extrusion segment sales were $74 million, down $4.9 million or 6% compared to last year. Foreign exchange added $1.6 million to sales. Extrusion tooling sales increased driven by diversified end markets such as construction, automotive, sustainable energy, transportation, recreational vehicles, electronic components. However, die-cast tooling demand weakened as OEMs delayed EV launches, shifted production to hybrids and smaller internal combustion engines, and extended the life of existing platforms amid tariff and EV market uncertainties. Over time, we expect to benefit as foreign non-USMCA die-cast tooling suppliers face growing disadvantages from potential tariff increases. Potting activity remains healthy and demand for our 3D printed tooling continues to grow within GigaPresses and other applications. Pre-tax profit was $2.6 million, down 4.5 million or 63% due to lower die-cast tooling demand and several additional costs. $1 million in incremental outsourcing costs for heat treatment, half a million dollars in restructuring costs, and $1.6 million in foreign exchange losses. CASTO's heat treatment operation continues to expand, improving cost savings and production quality, while HALIC's efficiency initiatives are delivering positive results. Startup loss at Castile's new facilities are narrowing, especially in Mexico. Management remains focused on process standardization, engineering capabilities, and centralized support functions to improve lead times, quality, and production capacity. In terms of cash flow and financial position, operating cash flow was $25.2 million and free cash flow was $20.1 million after $3.9 million in maintenance fixed asset expenditures. Free cash flow combined with existing cash balances funded $4.5 million in growth capital, $4 million in dividends, and $1.1 million in share repurchases under a normal course issuer bid. We ended the quarter with $23.5 million in cash, $95 million in debt, and $57 million available under our credit facility. Our financial position remains strong, supporting strategic initiatives and enabling us to pursue high-value growth opportunities, dividends, and other potential investments. That concludes my comments. We can now transition back to Darren to discuss the company's outlook.

Thanks, Matthew. Looking ahead, we remain conscious but optimistic about EXCO's prospects. The external environment continues to be unpredictable, chiefly due to trade policy developments. The ongoing automotive tariffs have created uncertainty for our industry. They've introduced inefficiencies and made forecasting more difficult for both our customers and ourselves. However, I'm encouraged that some of this uncertainty is finally starting to resolve. In the past few days, the United States reached new trade agreements with the European Union, Japan, and last night, South Korea, establishing a framework for lower, more predictable tariffs on automotive goods. These deals, which set a 15% baseline tariff in place of much higher rates that were initially threatened, avert a broader trade war and bring a measure of stability to global automotive trade. While a 15% tariff is still a headwind for the industry, it is considerably better than the 25% plus scenarios that were on the table earlier. More importantly, we now have clearer rules of the game with our major trading partners, which should help OEMs make decisions with more confidence going forward. There are still other trade deals which must be finalized, including Canada, but the overall direction is positive and the risk of an escalating tariff situation is subsiding. Crucially for EXCO, North American trade remains favorable under USMCA. We expect that any international trade deals will continue to honor the USMCA agreement, meaning automotive product that meets USMCA origin rules will remain exempt from these tariffs. Virtually all of Expo's products qualify as USMCA compliant, given our North American manufacturing footprint. and sourcing strategies. In fact, this compliance is a strategic advantage for us as tariffs put pressure on non-USMCA competitors, such as tooling imports from Europe and China. EXCO stands to benefit by capturing additional share with our locally produced offerings. We've already seen some customers express increased interest in sourcing tools from within North America to avoid potential duties. Furthermore, we have a substantial manufacturing presence in the United States itself, particularly for extrusion dies and large casting molds, which positions us well if trade frictions were to ever broaden beyond current expectations. In short, we are confident that EXCO can weather the tariff storm and perhaps even emerge stronger in relative terms over time. Beyond trade matters, the core fundamentals of our business and industry remain intact. Long-term automotive demand drivers are still positive. Vehicle fleets are aging, consumers will eventually replace older cars, and any easing of interest rates, which we're hopeful for over the next year, should unleash some pent-up demand. We're already seeing automakers ramp up incentive programs to bolster affordability, and if inflation and borrowing costs moderate, that will provide further support to vehicle sales. Even with production volumes under pressure in the near term, automakers are continuing to invest in new models and technologies, albeit with some delays, and that bodes well for future tooling demand. EXCO has historically outperformed overall auto production growth by increasing our content per vehicle typically achieving five to ten percent annual growth in content per vehicle over time and we believe this trend will continue as we introduce new products and new programs. Our launch pipeline and quoting activity remain robust indicating that customers value our solutions and are planning for the future. In the die-cast arena, the shift towards lighter metals and larger cast components such as EV battery housings and structural parts is a powerful secular trend that plays to our strengths. And in the extrusion space, the push for greater energy efficiency in buildings, renewable energy projects, and the general infrastructure is driving steady demand for extrusion tooling. Additionally, the broader movement towards reshoring and regionalizing supply chains in North America is a tailwind for us. As manufacturing capacity is built or expanded on this continent, there will be greater need for local tooling and molds that EXCO provides. We're already seeing increased inquiry activity from customers who are localizing their production. EXCO's recent investments from new plants to advanced equipment and automation to our adoption and of additive manufacturing have positioned us at the forefront to capitalize on these opportunities. We firmly believe that as macro conditions stabilize, EXCO is poised to resume profitable growth. In summary, despite the softening we experienced this quarter, we remain confident in our strategy and the resilience of our business. We have taken proactive steps to control what we can, cutting costs, streamlining operations, and staying close to our customers, while also continuing to invest in innovation and capacity for the long term. Our balance sheet gives us the ability to navigate near-term challenges, and our workforce gives us the ability to innovate and execute. I want to thank all of our Expo employees for their hard work and dedication in these uncertain times. Their commitment to excellence and safety is what enables us to deliver value to our customers and shareholders quarter after quarter. That concludes our prepared remarks for today. We will now open the call for questions.

Thank you so much. And as a reminder, to ask a question, press star one one on your telephone and wait for your name to be announced. To remove yourself, press star 11 again. Please stand by for our first question, please. And it comes from the line of Nick Corcoran with Acumen Capital Partners. Please proceed.

Good morning, guys. Thanks for taking my questions. Good morning, Nick. Just my first question maybe on the extrusion dyes and large bulbs. Have you seen a benefit from tariffs on Chinese products or is that something you expect later in the year? So Nick, it's Darren.

Let me just take it second by second here. So extrusion dyes really don't face a material competition from outside their local area. Extrusion dyes need to be designed you know, made, quality checked and delivered to customers in a seven day to 10 day period. And shipping those products from further field really doesn't work. So there's no impact or expected impact from tariffs on like China or European competitors. With respect to diecast, there's certainly more interplay there with respect to global competition. It's too early to say definitively what the impact is, but just by the conversations that we're having with customers that clearly want to localize more of their tooling and reduce costs to avoid tariffs, it's positive but difficult to quantify at this time.

And then Illumina is being subject to tariffs and counter-tariffs. Has that impacted the extrusion business or the demand for these materials and platforms going forward?

So, again, I would say not particularly at this point. You know, most of our tooling or effectively all of our tooling in North America qualifies for USMCA equipment. and therefore it shifts tariff exempt. And so we do expect that with these clarity of 15% tariffs, for example, in the EU and towards a 60% tariff that's in place for China that's we will see a tailwind develop because we do face a lot of competition from those regions across our cast and extrusion segment, particularly die cast. And then with respect to counter tariffs, I'd say that there's been no impact on the products that we source as imports. The steel tariffs that Canada announced for China are not applicable to the derivative of products that we acquire. And the quotas that Canada has put in place for steel effectively allow the country to buy the steel at 2024 levels. So there could be some pressure on costs, but it would be at the margin, assuming that, you know, growth over 2024 numbers is not super huge.

It's helpful. And there are some restructuring costs in the quarter. Can you remind us what the payback period on those costs are?

So, the research and development?

Sorry, you said restructuring. Restructuring costs, yeah.

Yeah, so it was still some continued headcount reductions based on improving automation, improving processes, trying to find ways to become more lean and improve our efficiencies. The majority, I guess, was in the automotive section. There was some in the diecast and large, or the extrusion and diecast group as well.

And the payback on those, what is the...

Probably around a year.

And then maybe higher level, you mentioned the trade deals with Japan and Europe. Any takeaways on what we should expect for potential deals for Canada and how that might impact the overall industry?

Yeah, it's difficult to say. It doesn't appear a trade deal with Canada is imminent despite the deadline tomorrow. But I think as it relates to EXCO, the one aspect of that Canada-U.S. trade deal is the continued exemption of USMCA-compliant products shipping tariff-free. And, you know, whether the tariff for Canada outside of that factor is 25% or 35%, it really doesn't have a material impact on our operations.

That's great. Thanks a lot. Okay.

Thanks, Nick. Thank you. Our next question comes from Martin Kim with Cormac Securities.

Good morning. Thank you for taking my question. I just have a question about your, if there is any change in the capital plans. So going forward, I understand that you don't publish guidance, but is there any change in CAPEX or are we?

Yeah, so CAPEX, I mean, we've been kind of predicting Nothing more in the last couple of quarters, nothing more than $40 million in CapEx for the fiscal year 2025. I think that could be lower, 10% to 15% lower by the end of this year. And heading into next year, we've been pretty vocal, not getting guidance, but saying that we expect our CapEx to be closer to a maintenance CapEx with a couple extra projects, definitely below our run rate depreciation for sure. I mean, we're just doing our budgets and starting to see all that stuff come together. But we do see, you know, the last couple of years, it's been launching greenfield operations and adding some major areas. And right now, I think we're going to be closer to a maintenance plus type CapEx for a while.

Okay, thanks for the call. No problem.

Thank you, and this concludes our Q&A session. I will turn the call back to Mr. Kirk for any final comments.

Well, thanks everyone for joining us today. We look forward to discussing our year-end results later in the year.

And thank you so much. This concludes our conference for today. Thank you all for participating, and you may all disconnect.