Abc Technologies Holdings Inc

TSX:ABCT

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to ABC Technologies Q3 Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Thurukka Sivanantharajah, Director of Investor Relations. Thank you. You may begin.

[Thurukka Sivanantharajah, executive]

Thank you, operator, and thanks, everyone, for joining us today. With me on the call are ABC's President and Chief Executive Officer, Terry Campbell; and Scott Roggenbauer, Chief Financial Officer of ABC Technologies. This call is being webcast live on ABC Technologies' Investor Relations website. The webcast will be available for replay for 12 months following this call. The content of today's call is the property of ABC Technologies. It cannot be reproduced or transcribed without prior written consent from the company.

Before we begin, I would like to remind you that today's call will include forward-looking statements within the meaning of applicable securities laws, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such statements should be considered in conjunction with and subject to cautionary statements in our earnings release for the last completed fiscal quarter and risk factor discussion in our filings with the Canadian Securities regulatory authorities that can be accessed on the company's profile on SEDAR.

I would also invite everyone to review the non-IFRS measures and key indicators as well as the forward-looking statements of the company's filings for the last completed fiscal quarter and the Risk Factors section in the company's annual information form for the fiscal year of the company ended June 30, 2022. We assume no obligation to update any of these forward-looking statements or information, unless required by law.

I also want to note that any third-party data concerning the market and economic data referenced in today's call is the intellectual property of such third parties, and that the company makes no representation as to the accuracy and completeness of such market and economic data.

I want to remind our investors that we are on a fiscal year that began July 1, 2022. All references to Q3 fiscal 2023 are to the 3 months ended March 31, 2023, and Q3 fiscal '22 are to our fiscal quarter ended March 31, 2022. I also want to note that while ABC shares trade in Canadian dollars, the company reports its financials in U.S. dollars.

With that, I'd like to turn the call over to Terry Campbell.

[Terry Campbell, executive]

Thank you, Thurukka. Good morning, everyone, and thank you all for joining us today for our third quarter earnings call. This quarter marks 2 very eventful years since our first earnings report as a public company after our initial public offering in February 2021. As an industry, we cycled through some incredible headwinds, including the worst of the global pandemic, followed by a semiconductor chip prices and ongoing geopolitical issues affecting the global auto market. As a company, though, we've seen pivotal progress in our ownership and leadership structure, rolled out a global operating model, closed on 3 acquisitions and completed 2 real estate sale and leaseback transactions.

In fact, exactly a year after the closing of our dlhBOWLES acquisition and almost a year after acquisition of Karl Etzel on March 1 of this year, ABC completed our previously announced acquisition of Windsor Mold Group Technologies for an upfront consideration of $165 million with additional potential earnouts related to profitability targets.

The Windsor Mold Group Technologies team brings a wealth of experience, expertise and valuable relationships to our business. We're excited to continue working through the integration with our new teammates to leverage the strengths of both organizations in order to drive new business opportunities and create value for our employees, customers and investors as one ABC.

Since closing, our team has been focused on integrating the respective Windsor Mold Group functional groups into ABC's global operating model, focused on commercial, engineering, operations and G&A functions. We have aligned the top-level Windsor Mold Group reporting structures to this model and define the integrated organizations at an individual headcount level. As part of this integration, we're executing several IT projects in the areas of cybersecurity, network interconnections and enterprise-wide HR tracking.

Speaking more broadly to the collection of acquisitions I've just mentioned, including dlhBOWLES and Karl Etzel, we continue to be pleased with how these assets complement our product offering, expand our technical expertise and diversify our customer base. Our transformation team remains focused on driving value by curating and refining a portfolio of assets, products and processes that will enable growth, bolster competitive advantage and enhance financial performance.

We also continue to rationalize our portfolio of assets with the exit of one of our North American JVs at the beginning of the quarter. We've also signed a definitive agreement to exit our China JV by selling our 50% stake to our JV partners. We also signed a definitive agreement to sell a large parcel of empty land in Mexico that was no longer strategically important, and we have more to come in the future.

Next to our financial results for the quarter, which are beginning to show that our operational improvement initiatives and reorganization are beginning to bear fruit. Our revenue and adjusted EBITDA for the third quarter landed at $373 million and $44 million, respectively, an 11.4% margin. This marks 2 quarters in a row registering double-digit adjusted EBITDA margins, which has not occurred since Q4 of fiscal 2021. Revenue, adjusted EBITDA and margin were up significantly year-over-year, while revenue and EBITDA were up quarter-over-quarter as well, benefiting from a normalizing production environment and contributions from recent acquisitions, offset slightly by material cost increases and foreign currency impact of a strong peso.

Supporting this quarter of stronger financial performance was the [ cause of ] improvement in our operations at the plant level. Volumes continue to remain strong in Canada, and our team here has done a fantastic job of converting sales to the bottom line, with their efforts augmented by some successful restructuring actions in the region.

Moving on to the U.S., where we arrived at an inflection point under the guidance of our new plant management teams focusing on reduced labor, overhead and premium freight costs. We are confident not only by the quarter-over-quarter improvements from fiscal Q2 to fiscal Q3, but also the progressive month-over-month improvements intra-quarter that have continued into fiscal Q4.

Speaking specifically to operational issues and labor cost reductions, as recently as October 2022, all of our American plants were running 7-day shifts. Fast forward to today, and you'll find both our Kentucky and Michigan plants running a normal 5-day week and only running weekends when required by the customer. And in our Tennessee campus, we are similarly running 5 days at all but 1 plant, the [ last of ] which we expect to be operating at this level very soon. This will be the first time in several years that all of our U.S. plants will not be running over time on a regular basis.

These improvements not only allow us to eliminate elevated costs, which obviously benefits our business, but also indicates that we are better serving our customers while addressing crucial employee issues related to operator fatigue and turnover.

And finally, to Mexico, where the volume and conversion story remains compelling with meaningful sales pull-through. With the acquisition of the Windsor Mold Group this quarter, we've inherited one well-run plant that's already at full production and another that's completing construction and will be ramped up by Q1 of fiscal 2024. We're also completing Phase 2 of our own ABC plant in Ramos, which will mark a major milestone in Q4 as it launch its first major EV platform. Both new builds in Mexico will have a heavy EV presence with the ABC plant focusing exclusively on GM electric vehicles and Windsor Mold Group's lineup skewing heavily towards Ford's popular Mustang Mach-E.

In terms of production in the current quarter, we launched 29 programs in fiscal Q3 2023, which included running boards on the Silverado EV and Washer Systems on the [ VT-1XX ] EV.

On the quoting front, we saw our awards for the quarter, parallel slim-quoting quarter for some of our key OEM customers ending with $16 million in annual sales volume of net awards, including wins on several electric vehicles with GM, an HVAC IP system for the high-volume Toyota RAV4 and HVAC systems and ducts for the popular new Ford Bronco.

Our acquisition of the Windsor Mold Group has brought with it opportunity to diversify and expand our customer platform base, especially at Toyota as well as Ford. With a number of quotes out in the marketplace, we are hopeful of successful resolution in the near term, which will help boost activity next quarter.

With that, I would like to introduce to you our new CFO, Scott Roggenbauer. Scott joins us most recently from his role as CFO of AmesburyTruth, a North American hardware and ceiling provider. But Scott also brings with him a wealth of automotive and mobility experience from prior roles with Johnson Controls, ZF Group, Harley-Davidson and Haas F1 Racing. Welcome, Scott.

[Scott Roggenbauer, executive]

Thank you, Terry, for that warm welcome, and good morning all. It is a pleasure speaking with all of you today as I think we have a very compelling story to tell. As Terry noted, the business is gaining momentum, and our sell-or-fix strategy is really starting to bear fruit as demonstrated with the strong fiscal Q3 results.

I'll begin with an overview of our revenue performance in our fiscal third quarter ended March 31, 2023. Starting off with our top line. ABC's revenue for Q3 fiscal 2023 was $373.5 million. This is up $87.7 million or 30.7% from $285.8 million in Q3 fiscal 2022. $64.3 million or 73.3% of this increase is attributable to the acquisitions of dlhBOWLES and Karl Etzel last year, both of which only contributed 1 month of earnings in Q3 of fiscal 2022. Additionally, we have 1 month of contribution this year from the Windsor Mold Group, which was acquired on March 1.

Excluding the impact of the acquisitions, legacy ABC benefited from increased sales volumes on key ABC platforms as our customers continue to rebuild inventory levels that had been below historic norms due to industry-wide supply chain challenges. As we move into the fourth quarter, we remain cautiously optimistic regarding customer production volumes as the industry continues to rebuild inventory towards historical levels.

Cost of sales for the quarter was $312.4 million, an increase of $64.1 million or 25.8% compared to the same quarter last year. Of this increase, $60.3 million is attributable to ABC's 3 acquisitions. Q3 fiscal 2023 saw our gross margin improve 24.8% from 13.1% in Q3 fiscal 2022 to 16.4% in Q3 fiscal 2023, driven by the significant progress we have made on our operational excellence initiatives, including aggressive steps to recover capacity utilization and improved launch performance aided by sharing agreements with our customers.

Commodity costs, while off their peaks, are still elevated due to the ongoing inflationary pressures. While we are seeing some moderation in select steel and chemical commodity prices as well as freight and logistics costs, these benefits are being offset by increased component costs as our supply base continues to contend with higher labor costs.

For ABC, labor costs remain high as our operating markets remain competitive. We expect the labor markets to remain challenging into the foreseeable future, which only sharpens our focus on operational excellence that will drive out waste in our operations and improving efficiency. On the positive side, we expect to largely offset the headwinds we're facing by continuing to focus on improved operational performance and negotiating sharing agreements with our customers. In addition, we're benefiting from resilient demand on our key platforms.

In the quarter, SG&A increased to $60.8 million from $28.3 million in Q3 fiscal 2022, an increase of $32.5 million. Almost 80% of this increase was related to onetime business transformation costs because of higher restructuring charges as well as costs related to the recent acquisition of the Windsor Mold Group and the cost of terminating the previously contemplated acquisition of the Washer Systems product line of Continental Automotive.

The company reported a net loss of $2 million in Q3 fiscal 2023 compared to a net loss of $6.3 million in fiscal Q3 of the prior year, an improvement of $4.4 million or 69%. The primary contributor to the improvement between the periods is a $2.4 million tax recovery in Q3 fiscal 2023 compared to tax expense of $8.1 million in Q3 fiscal 2022. This is partially offset by a $5.4 million increase in interest expense for Q3 fiscal 2023 attributable to higher debt load related to acquisition financing as well as an increase to the interest rate due to a larger floating debt component and a $0.8 million decrease in operating income for Q3 fiscal 2023. The net loss per share in Q3 fiscal 2023 was $0.02 per share versus a net loss per share of $0.07 in the same quarter last year, both figures on a basic and fully diluted basis.

Moving to adjusted EBITDA, which was $44.3 million in Q3 fiscal 2023 compared with $30.3 million in Q3 fiscal 2022. This was an increase of $14 million or 46.3%, primarily due to higher sales and growth from profit both from existing operations as well as recent acquisitions. The adjusted EBITDA margin for the quarter improved to 11.4% from 9.5% in Q3 fiscal 2022. This is a continuation of a promising trend we witnessed over the last several quarters with the EBITDA margin approaching our target mid-teens levels.

Our business was able to successfully operate at these margins prior to COVID-19, which introduced heightened inflation as the economy reopened for business, along with the semiconductor and supply chain challenges, which drove significant inefficiencies into our production processes. As we continue to move to a more normalized production environment, we expect the business to operate in this range.

Net cash from operations for the quarter was $41.2 million, an increase of $18.7 million or 83.3% from $22.5 million in Q3 fiscal 2022. This increase is primarily due to higher adjusted EBITDA in the current fiscal quarter compared with the same quarter in the prior year. Adjusted free cash flow was $20.8 million in Q3 fiscal 2023 compared to $7.7 million in the prior year. This $13.1 million increase was primarily due to higher net cash flows from operating activities.

Before I pass the mic back to Terry, I'll end with some details on our liquidity and capital structure. As of March 31, 2023, the company had $530 million outstanding under our credit facilities. We have had no direct impact from the current banking crisis and continue to have the strong backing of our lending syndicate. Our total liquidity at the end of the quarter was $73.8 million, made up of $55.5 million in cash and $18.4 million available under our credit facilities, which are subject to covenant limitations. Subsequent to the close of the quarter, on April 25, 2023, the company amended its credit agreement to add a $10 million swing line facility under the revolving credit facility, with no change to the overall size in the credit facility.

ABC's liquidity position has continued to remain strong throughout this fiscal year, despite the volatility noted within the industry and the general economy. We expect to remain in a strong position as we move forward and continue on our growth trajectory.

Turning now to leverage. As anticipated, ABC is currently operating at temporarily elevated leverage levels that are higher than our long-term internal targets. I'd like to emphasize that our leverage multiple is expected to decline over the coming quarters, as industry volumes continue to normalize and we monetize acquisition-related assets. We ultimately expect to return leverage levels well below our target of 3.0 by the end of the fiscal Q4.

As you can see, we have had a very active quarter and continued to take aggressive steps to improve our competitive position and financial performance. We also continue to make significant progress through our One ABC initiatives, including aggressive steps to improve capacity utilization and working capital, which are driving meaningful impacts. These performance improvement actions, coupled with strategic investments, will continue to position the business for sustained revenue and margin expansion.

With that, I'll turn it back over to Terry for a few closing remarks. Terry?

[Terry Campbell, executive]

Thanks, Scott. Overall performance in the third quarter of fiscal 2023 was largely in line with our expectations as our teams continue to optimize limited resources while navigating a still complex production and economic environment. I am fully aware of the challenging mandate that our management team has set forth and remain grateful as our global teammates have embodied our one team, one company mindset, while continuing to chart our path forward.

Looking to our financials, it's clear that there's still a lot of work to be done to achieve our targets. But you only have to look back a few quarters to see how far we've come. The progress we've made is a lagged indicator of the team's efforts and initiatives, and I'm confident we'll continue this trajectory in the coming quarters as we build a more effective and efficient organization.

That concludes our remarks for today. If you have any questions or comments, please feel free to reach out to we Thurukka Sivanantharajah, Director of Investor Relations after this call. Thank you, everyone. You may now disconnect.