Exco Technologies Ltd
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Good day, ladies and gentlemen, and welcome to Exco Technologies Limited Annual General Meeting and First Quarter of 2018 Results Conference Call. [Operator Instructions]. And as a reminder, this conference may be recorded.I would now like to introduce your host for today's conference, Mr. Laurie Bennett, Chairman. Please go ahead.
Thank you, ladies and gentlemen, good afternoon. My name is Laurie Bennett, and as Chairman of the Board, I welcome you to this annual meeting of the shareholders of Exco Technologies Limited.I also welcome those listening to our broadcast through the internet. I should also mention that we'll be taking questions from our webcast as well as from the floor and telephone. If those listening to this webcast have any questions, please submit them at anytime during the presentation using the question box on the webcast console.Those listening on the telephone will be muted until the end of the formal presentations and then questions will be taken. We reserve the right to limit questions either in the interest of time or content.I also want to draw your attention to the cautionary statement on this slide. During the course of our presentations and subsequent question-and-answer session, forward-looking statements will most likely be made. I won't read the entire cautionary statement, but for those listening by phone or internet, it is substantially identical to that appearing at Pages 4 and 5 in our 2017 Annual Report.I will now proceed with the agenda for today's meeting. In accordance with the company bylaws, I will serve as Chairman of the meeting and Drew Knight, Chief Financial Officer of the corporation, will act as Secretary of the meeting.With your approval, I will ask TSX Trust Company, represented by Mr. Steven Nguyen, to act as scrutineer.Pursuant to the notice and access regulations, Notice of Meeting was mailed to shareholders on December 21, 2017, and we have received an affidavit of the corporation's transfer agent as to its mailing. Unless someone wishes to have it read, I will ask for a motion to dispense with the meeting of the notice.
I move that the notice calling the meeting be taken as read and approved.
Thank you, Janet.
I second the motion.
Thank you, Jeff. We've heard the motion all in favor?[Voting]
Contrary, if any?[Voting]
Okay. I direct that a copy of the notice, together with the affidavit, and the mailing be kept for the purpose of this meeting. I've received a preliminary report of attendance from the scrutineer, which indicates that a quorum is present. Since we have a quorum, I declare that the meeting has been duly called and is properly constituted to transact any business appearing on the agenda.The Secretary has tabled the minutes of the annual meeting of shareholders held on February 1, 2017. Unless someone wishes to have them read, I will ask for a motion to approve the minutes and to dispense with the reading.
I move that the minutes of the annual meeting of shareholders held on February 1, 2017, be approved and that the reading of the minutes be dispensed with.
Thank you, Jeff.
I second the motion.
Thank you, Paul. You've heard the motion. All in favor?[Voting]
Contrary, if any? [Voting]
Carried.The next item of business is the presentation of the consolidated financial statements of the corporation and its subsidiaries as at and for the year ended September 30, 2017, and the auditor's report thereon.Mr. Blake [ initially ] a partner of the firm Ernst & Young, the corporation's auditor, is here today and has advised me that he knows of no points which should be raised with the shareholders at the meeting.The annual report containing financial statement and the auditor's report was made available to shareholders under the notice and access regulations at our SEDAR website and our transfer agent, TSX Trust Company website. Copies are also available here today. I would ask that you hold any questions until the end of the meeting, at which time we'll be pleased to respond. The secretary has tabled the financial statements and the auditor's report thereon, and I direct that a copy be kept with the records of the meeting.I propose to vote -- to proceed with the votes on each of the election of directors and the appointment of auditors by way of a show of hands, as the proxies received show overwhelming support for management's nominees.It is now in order to proceed with the election of directors. At today's meeting, 8 directors are to be elected. All 7 of the existing directors are being renominated, and the information regarding them is set out in the information circular, which, again, was made available at our SEDAR website and our transfer agent's website. Copies are also available here today. Our new nominee for the eighth position is Paul Riganelli.Paul, as most of you probably know, is no stranger to Exco. Indeed, he would normally sit at this table. Today, while he has been a senior executive here for the last 14 years. The first 10 were CFO and the last 4 he has been a COO.Before that, he was a senior executive at a company called TecSyn International Inc; Exco bought Tecsyn in the year 2000, and its operations formed the core of what is now Exco's Automotive Solutions group. Needless to say, he is uniquely qualified to be a director of Exco. Academically, he has a Bachelor of Arts degree and a Masters of Business Administration degree from the University of Toronto, and a law degree from Osgoode Hall Law School. Just recently, he retired from his position as Chief Operating Officer. I've already -- he remains Executive Vice President, focusing on legal, regulatory and compliance matters.We are sure he will be a valuable addition to our board and we welcome here today. I now declare the meeting open for nominations, and would ask each nominee to stand as your name is called.
I'm Paul [ Robin, ] Mr. Chairman, I have the pleasure of nominating Laurie T.F. Bennett.
I understand.
Nicole Kirk, Brian A. Robbins, Colleen McMorrow, Edward K. Kernaghan, Robert B. Magee, Philip B. Matthews, and Paul E. Riganelli, all of whom are Canadian citizens, as directors of the corporation, will hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed.
Are there any further nominations?As there are no further nominations, I declare the nomination to be closed. We have 8 persons nominated for the 8 positions of director. May I have a motion to elect the 8 nominees?
I move that the 8 persons nominated be elected as directors of the corporation to hold office until the next annual meeting of shareholders or until their successors are elected or appointed, subject to the provisions of the corporation's bylaws.
Thank you, Jeff.
I second the motion.
Thank you, Janet.All in favor, please raise your hand. Contrary, if any?[Voting]
Contrary?[Voting]
The motion is carried. I now declare that Laurie Bennett, Nicole Kirk, Brian Robbins, Colleen McMorrow, Edward Kernaghan, Robert Magee, Philip Matthews and Paul Riganelli have been duly elected Directors of the Corporation, to hold office until the next annual meeting of shareholders or until their successors are duly elected or appointed. We'll now proceed with the appointment of auditors and the authorization of the directors to fix their remuneration.
I move that Ernst & Young be appointed the auditor of the corporation, to hold office until the next annual meeting of shareholders and that the directors of the corporation be authorized to fix its remuneration.
Thank you, Paul.
I second the motion.
Thank you, Janet. You have heard the motion. All in favor?[Voting]
On the contrary?.[Voting]
The motion is carried. I now call upon Mr. Darren Kirk, the Chief Operating Officer, to comment on the corporation's performance. Darren?
Thank you, Laurie. Good afternoon, ladies and gentlemen.For the folks on the phone and webcast, my name is Darren Kirk, Chief Operating Officer of Exco. I'll use my first few slides to provide a summary overview of our results in fiscal 2017 and touch on our various strategic initiatives.I'll then dig into the operational aspects of our first quarter of fiscal 2018 before I hand things over to Drew to discuss our Q1 financial highlights.Starting on Slide 5, you can see that Exco's revenue of $584 million and EBITDA of $83 million and adjusted earnings per share of $1.03 remained essentially unchanged in fiscal 2017 compared to the record results we achieved the prior year. This was particularly true before the effects of foreign exchange rate movements, which was a modest drag on our performance.Turning to Slide 6, while our key income statement metrics were largely static year-over-year, we grew our free cash flow by 19% to a record $49 million. I would point out that Exco converted almost 60% of its EBITDA into free cash flow in fiscal 2017, which is among the highest rate in our industry and many others. Our cash flow supported a 14% increase in our common dividend and enabled us to modestly reduce our share count and bolster our balance sheet, nearly eliminating our net debt position.Moving down to the operational level. We see the Automotive Solutions segment recorded modest top line growth, with decent margin expansion. This combination produced a 9% increase in segment EBITDA, which totaled $58.5 million for the year.The full year benefit of our AFX acquisition in April 2016, certainly provided a boost to our performance. But our mature businesses also performed very well collectively. And, in fact, explain most of the favorable variance to earnings.While revenues fell sharply at ALC due to our voluntary exit from its operations in South Africa and Lesotho, those operations were in a loss position so the impact on EBITDA was actually positive, contributing to the margin boost.Now looking at our Casting and Extrusion segment, fiscal 2017 was softer on both the top and bottom lines, with EBITDA falling 15% to $31.2 million.Most of this deterioration was driven by weakness in the large mould group for reasons that have been well articulated over the past couple of years, mainly increased price competition and unfavorable mix shift away from mature programs and towards lower-margin first-off programs, together with increased costs associated with our transition to a new manufacturing method.As well Castool's result suffered from a slowdown in demand for some of the capital equipment it sells. This adversely impacted overhead absorption, while pricing pressures ratcheted up with intensifying competition.The extrusion group, however, benefited from widespread strength, and with higher revenues and improved profitability at each of the division's 5 operating locations.I'd now like to touch on our various strategic initiatives. Within our Automotive Solutions segment, we are generally focused on: one, improving various measures of diversity; two, growing our content by vehicle; and three, actively seeking acquisitions that can enhance these measures.I'll begin with AFX, which, as mentioned, concluded its first year of operation under Exco's ownership during fiscal 2017. While lower passenger car volumes dampened AFX's results beginning in the second half of the year, we remain very satisfied with our latest acquisition. We have no doubt that AFX will succeed in its effort to expand its business around an endless array of leather-based products that it can provide within its core capabilities, increasing its content per vehicle.More broadly, we are now exploring ways to beneficially expand AFX's premium leather-cutting capabilities and supplier connections into our broader operations.Over at ALC, we put some of the persisting financial pain behind us with the closure of South Africa in late fiscal 2016 and Lesotho in early fiscal 2017. Even so, ALC's results continue to lag our expectations. This situation has continued, as the new Audi A5 seat cover program ramped up the volumes much lower than we initially expected. Nonetheless, ALC's Bulgarian operations remain strategically important to us, given its low-cost location is well situated to service the growing automotive industry in Eastern Europe.As we've indicated in the past, we see a path towards restoring profitability through closer integration of ALC and Polydesign low-established operations in Morocco. This initiative is underway and we expect it will begin to lead to improved -- an improvement in ALC's results through fiscal '18 and beyond. Meanwhile, our long-standing interior trim businesses continue to grow strongly, as they focus on products that enhance the vehicle with much success. Innovation continues at a strong pace, with new flexible netting storage and restraint systems, bumper covers, cargo trays and many other products finding their way into more and more vehicles.On a combined basis, Polydesign, Neocon and Polytech collectively recorded revenue growth of 12% during fiscal 2017, despite relatively flattish auto production, indicating a similar growth of content per vehicle.As well, Polydesign absorbed significant front-end inefficiencies, associated with its growth, which required completion of a building expansion and headcount growth of 45% through fiscal 2017.I would note that since fiscal 2012, our content per vehicle growth has grown by a compounded average growth rate of 26% in North America, and an even more impressive 40% in Europe. Yet, with just $14 of content per vehicle in North America and $7 in Europe, we have seemingly endless potential for additional content growth.Moving on to our Casting and Extrusion segment. Our strategic initiatives are broadly aimed at; one, solidifying our leading position in -- through investments in technology and productivity; and two, growing through greenfield investments in new markets.2 years ago, in the face of increased price competition, we undertook a large capital program to radically transform the way we manufacture our large moulds. Our goals were clear. We would dramatically improve our efficiency, raise our throughput and enhance our quality to strengthen our competitive position.While our progress has been slower than we initially expected, I'm pleased to say that the implementation of our new manufacturing process is essentially complete, and the attainment of our goal is essentially within grasp.We are now able to produce moulds in less than half the time it took us just a couple of years ago, and we expect further improvement over time, as we continue to refine our processes. As well, by incorporating 3D printing components into the mould design, our customers can achieve a level of quality and reliability previously impossible.Our large mould results were generally soft again in fiscal 2017, as we continued to absorb persistent pricing pressures, suffered through an unfavorable mix shift towards newer programs and completed the implementation of our new manufacturing process. However, we expect steady improvement going forward, as activity levels pick up, our mix improves and we increasingly harness the benefits of the changes we've made.It goes without saying, we would be materially worse off today, had we not pursued this path of innovation and differentiation. Indeed, we believe we have leapfrogged our competition with unrivaled speed, quality and capabilities to the betterment of our future results.We also continue to invest heavily in our Extrusion group to harmonize our manufacturing process across our 5 plants and cement our position as the leading extrusion die manufacturer in the Western Hemisphere. These efforts have resulted in an improved flow of product through our facilities with better on-time delivery performance, despite higher volumes. In turn, we have been able to leverage these improvements, with a modest degree of pricing power.Our cost structure is improving too. As we can increasingly access labor savings from -- using our operations located in lower-cost jurisdictions and obtain the benefits of fluidity from our multiplant footprint.With the great strides that we've made, with our harmonization initiative, we expect to realize further gains in the quarters ahead.Elsewhere in the tooling group, we continue to benefit from a seasoning of our greenfield operations in Colombia, Texas, Brazil as well as Castool's operations in Thailand.In fiscal 2017, each of these operations recorded improved top and bottom line results, and they grew their combined revenue and EBITDA by approximately 20% and 100%, respectively, from the prior year, with only Brazil remaining at a net loss position.We expect our existing greenfields will contribute additional growth in fiscal 2018 with minimal capital requirements, and a low-blended tax rate supporting the generation of incremental free cash flow.For our next chapter, we are weeks away from breaking ground for a new greenfield investment in our extrusion business to better service the local market in Mexico.I'd now like to lead 2017 in terms of the first quarter of 2018. During these -- digging into these results, our Automotive Solutions segment recorded lower top line and bottom line results in the quarter, compared to the prior year quarter. Our results, however, were stronger sequentially and we expect this trend to continue.Looking at our Automotive Solutions segment in more detail, I would first note that industry conditions remained firm, but there is no denying that the cream has come off the top. With vehicle sales volumes in North America have been relatively weak the last couple of quarters, as OEMs have reimplemented seasonal production patterns in response to modestly lower sales, the impact of this front-end adjustment has been compounded by inventory destocking, which can occur with the onset of production declines. As well, the segment faced isolated pricing and raw material cost pressures, unfavorable foreign exchange rate movements as well as lower sales and incremental expenses associated with the repositioning of ALC's business around greater diversity.Onto Slide 13. Looking closer at our North American operations, which include Polytech, Neocon and AFX, we see that overall vehicle production was down 7% in the quarter versus the prior year. This week, this was entirely driven by a 20% reduction in passenger cars. Whereas truck sales, which include SUVs and CUVs, were flat.As we've indicated in the past, our segment exposure is about 50-50 between these 2 broad categories, with AFX's products mostly concentrated on cars and those of Polytech and Neocon mostly on trucks.Lower overall vehicle production volumes explain most of the revenue shortfall year-over-year within our North American businesses. However, a weaker U.S. dollar and isolated price pressures also negatively impacted our results during the quarter.Looking forward, we do not expect further year-over-year production declines will continue through 2018. In fact, we are aligned with industry consensus that North American production volumes are likely to increase modestly in calendar 2018 verses calendar 2017.While FX headwinds and isolated cost pressures will need to be managed, we expect improved industry volume trends and a decent pipeline of activity should drive the performance of our North American parts businesses higher, sequentially.Moving over to Europe on Slide 14. Auto production volumes remained relatively healthy with modest year-over-year increases continuing.Nonetheless, it's a tale of two cities with respect to our operations there. Polydesign continues to perform very well with higher revenues and modest margin expansion. ALC's performance, however, suffered again this quarter. ALC's revenue was lower, mostly due to the remaining impact of the previous plant closures and the wind down of the BMW 5 Series program. ALC's profitability fared even worse with reduced overhead absorption and incremental cost associated with repositioning its business to accommodate the launch of EUR 6.5 million of new programs through the remainder of 2018.Now looking at the Casting and Extrusion segment and starting with the large mould group, on Slide 15, results there were soft again this quarter for many of the same reasons we've talked about. There's lots of good news to report, however. Starting with the status of our new manufacturing method, which is now handling about 2/3 of our load.Our lower volumes precluded the associated efficiencies from being realized this quarter, we are very well positioned to handle an increase, which is now materializing.Putting this increased business into context, Slide 16 highlights the significant number of new awards signed by our large mould group during the quarter. These awards totaled a very robust $18.5 million, which boosted the group's backlog to over $31 million. And activity has remained equally robust, following the quarter end, with an additional $8.5 million of new orders signed in January.Perhaps, more important, however, is that we won much of this new business based on our ability to meet shortened delivery time requirements demanded by our customers, which we simply couldn't provide with our older traditional manufacturing methods. This advantage has enabled us to win -- take over business from some of our competitors at pricing generally more favorable than what we've been accustomed to recently.Moreover, the mix of this business is skewed towards more repeat moulds and away from first-off moulds, which have an inherently lower margin profile.With our strategy playing out consistent with our expectations, Jeff and his team are now turning their focus to executing on a significant new book of business.Onto Slide 17. Our Extrusion die group continue to demonstrate very solid results during the quarter, with group sales and profitability growing strongly. Contribution within the group was widespread with significant year-over-year revenue gains and EBITDA improvement achieved in 4 of the 5 plants. Columbia was the exception, but results there were only off very modestly compared to the prior year.We continue to invest significant financial and management resources in the harmonization of our design and manufacturing processes across our various extrusion facilities. As I've mentioned during our previous calls, there may still be some choppiness in our progress going forward. However, we believe these operations still make potential for continued improvement into the medium-term.Turning to Castool, sales were notably higher in the quarter, as demand for the group's capital equipment rebounded from a soft 2017. Profitability was nonetheless down modestly due to adverse foreign exchange rate movements, competitive pricing pressures, raw material price increases and a mix shift towards lower margin products.Castool's operations in Thailand, however, continue to grow strongly and remain solidly profitable for the fourth consecutive quarter.Finally, my last slide reemphasizes a number of the factors I've just discussed. In summary, we expect the automotive industries in both North America and Europe will remain healthy through fiscal 2018, and we expect to achieve continued progress against our various strategic initiatives. While external pressures including foreign exchange rates, potential renegotiate of NAFTA, and a raw material cost inflation present a challenge. We continue to feel good about our prospects for returning to earnings growth this year. That completes my presentation. I'd now like to turn the podium over to Drew.
Thanks, Darren. Good afternoon, ladies and gentlemen. My comments will cover Slides 20 to 28 of the presentation.Consolidated sales for the first quarter ended December 31, were $134.9 million, a decrease of 12% or $18.2 million compared to last year due to known factors at ALC and lower North American vehicle production volumes, particularly during the December holiday shutdown season.EBITDA for Q1 was $17.3 million, down $6 million or 26% due to lower sales and margin erosion in the Automotive Solutions segment. EPS for Q1 was $0.21 compared to $0.27 last year. However, last year was $0.30 on an adjusted basis.On Slide 21, the significant fluctuations in currencies has impacted Exco's results during Q1. It has decreased the Canadian dollar value of U.S. dollar-denominated sales in the quarter, and overall FX reduced sales approximately $2.2 million. Otherwise, the balance of the decline is attributable to the Automotive Solutions group.As Darren noted, this is primarily due to the wind up of ALC South Africa, lower sales in ALC Bulgaria due to the EOP of the 5 series, replaced with disappointing volumes from the A5 and lower sales in North America due to exposure to sedans compounded by the resumption of the December seasonality.On Slide 22, consolidated net income for the fourth quarter was $8.9 million, or basic earnings of $0.21 per share compared to consolidated net income of $11.5 million or basic earnings of $0.27 per share last year and EPS decrease of 22%.EBITDA was down 26% to $17.3 million from $23.3 million in 2016. The automotive segment EBITDA declined $4.5 million while the tooling group was essentially flat and the corporate segment declined only $0.3 million.FX movements reduced EBITDA $1.3 million primarily due to the U.S. dollar devaluation.On Slide 23, turning to the Automotive Solutions segment. Sales in the first quarter were $88.3 million, a decrease of $19.9 million or 18% over the last year due to the points noted earlier.Specifically the ALC decline was expected through the South Africa wind up and 5 Series EOP, while North American volumes disappointed with soft sedan sales, particularly at AFX. Also, FX reduced revenue by $0.7 million.On Slide 24, our Automotive Solutions segment reported lower EBITDA of $11.3 million in the first quarter, a decrease of $5.2 million or 31.5% from the last year. The decrease in the quarter was driven by the overall lower sales volumes at all Automotive Solution divisions, as all Automotive Solution divisions experienced a decline with a notable exception of Polydesign, Morocco.Overall, EBITDA margin declined 250 basis points to 12.8%, including 65 bps due to FX and 93 bps due to increased losses at ALC.On Slide 25, turning to the Casting and Extrusion segment. Revenue was $46.6 million in Q1, an increase of $1.6 million or 3.6% versus Q1 2017.FX rates reduced revenue by $1.5 million. And the large mould business experienced a revenue decline in the quarter, but this was more than offset by strength in the Extrusion group in Castool.On Slide 26, the Casting and Extrusion segment reported lower EBITDA for the fourth quarter, $7.8 million, which is a decrease of $0.5 million or 5.6% from last year. This reduction occurred in the large mould business, which continued to experience pricing pressure, had lower absorption rates and nuance and efficiencies in the quarter. This was partially offset by the Extrusion business's increased sales and profitability.On Slide 27, cash flow from operating activities was strong in the quarter and amounted to $15.1 million before changes in working capital compared to $17.9 million last year. Much of this cash was used to fund investing activities as Automotive Solutions purchased the AFX real estate in Mexico, and the tooling group invested $4.6 million toward equipment that will harmonize manufacturing methods across multiple plants and drive significant improvements in production cost, speed and quality.Capital expenditures have been front-end loaded in the 2018 year, as about 1/3 of the annual CapEx budget was spent during Q1.Exco's balance sheet and liquidity remain very strong. Given the last 12 months' EBITDA of $77 million, Exco's net debt-to-EBITDA was 0.2x. We expect our net debt position will steadily improve through 2018 through free cash flow generation. And as such, the company balance sheet and availability under the existing credit facility allow considerable flexibility to support any strategic capital spending and acquisition activity as well as dividends and the share buybacks as opportunities arise.That concludes my comments. I'll now call upon Brian to take the podium.
Thank you, Drew. I thought I was going to have to read your part of the presentation there for a while but you made it.You know, I was watching CNBC the other day, and they were interviewing Jamie Dimon from JPMorgan. He made a very interesting statement, that is, "that in all business -- businesses, margins tend to trend down, that is capitalism. The only solution to this is innovation and applying innovation through the implementation of new technology." This is exactly what we are doing in our tooling divisions, particularly. Not to say that we are not innovating in our parts production.As you heard, for 2 years now, we have installed well over $10 million of new, state-of-the-art equipment including 3D printing and 5-axis machining, both are very exciting and have been challenging to incorporate. The 3D printing has been very successful, allowing us to build mould components that could not otherwise be built conventionally. Thus, giving us a technical and competitive advantage. The 5-axis machining was a challenge in itself. However, we have compounded it by machining all the components in the hardened state.I'm sure some skeptics thought we would never master this technology, and sometimes we questioned it ourself. Well, I am pleased to say, we are finally there. Certainly, we will continue to improve this technology over time but it is now a regular production tool and winning us many new programs as mentioned by Darren several minutes ago.We have managed to cut delivery time in half, and I have a short video here, I want to show you of this equipment performing. It's very short.[Presentation]
This is simulation of what we're trying to do. And for those of you who are machinists, you'd appreciate the difficulty of such a small drill going so far in the hardened steel at such a rate. Simulation again.[Presentation]
We actually flew a drone over the machines to do the video. He doesn't really walk that fast but they speeded it up. But the robot does walk that fast.There's a wall there that contains I think 4,000 or 5,000 tools. Here is loading tools into the machines.It doesn't look like a big deal but let me tell you that was one major challenge, the integration of that machinery, and it takes time and it takes people. Which brings me to the point today for the recipients of the President's Award for 2017. The recipient is Richard Dunn from Exco Engineering. Richard, who has been with Exco for 5 years, envisioned this departure from conventional manufacturing. It was his brainchild. He conceived it, specced it and oversaw the integration of this equipment. It is not purchased from a catalog. It is radical to say the least and compounded by the fact that the steel is, as I said, pretty hardened.Certainly, competitors could attempt the same but there are significant barriers to entry as demonstrated by our own delay in actualizing it. Cost is the least barrier. Integration, development and programming presented real challenges.However, we are now productive and winning business. You will see progressively improving results from our tooling group throughout the year and going forward. I have said in the recent past that we will restore our past EBITDA numbers for this group, and I still firmly believe that we will achieve this. In this – certainly, in this current fiscal year, we should see real progress towards this. The technology is only one example of the innovation we are undertaking throughout our tooling groups and throughout the entire Exco organization.Richard, could you please come forward? You did a hell of a job.Thank you [indiscernible].We will stay the course, as it may be painful in the short term but, is the right one to preserve and grow margins over the long term. I'm pleased to announce that your Board of Directors has today approved 6% increase in the quarterly dividend to $0.085. Thank you to our shareholders for their patience, our employees for their diligence and our board members for their guidance. Thank you. Darren?
Thank you, Brian. That concludes our prepared remarks, and we'd now like to open up for some questions. David?
David from Cormark. Just two questions: one very broad one and then one with specifics on the large mould. On the broad side, I was wondering if you could give us a sense of how you see the progression of the improvement through the course of the year. Are there going to be any large steps up along the way? Or should we continue to see kind of gradual improvement through the year? And then specifically on the large mould side, obviously, a very good quarter and it started -- good start to this quarter from your awards. How sustainable is this? Do you see a lot more? And then on the margin side, does this help a lot on the margin side? Should we see a big improvement in the margins from this stuff and also from the continuing improvements in the business?
Okay. I guess, as it relates to, first, improvement throughout the year, I think that Q3 and Q4 will probably be stronger than Q2. These awards were mostly achieved in -- towards the end of our Q4 and -- sorry, our Q1. But they'll ramp up through Q2, but they'll really start to hit their peak in Q3 and Q4 on the tooling side. So you should expect a progression in that manner. With regards to the sustainability of awards, I think that it's difficult to expect that awards will continue at this level. This was a pretty robust quarter. It has continued in January with an additional $8.5 million of awards that we received in January. But -- and I think the market seems pretty healthy, but I wouldn't expect the awards to continue at that rate going forward at least in the near term.
If I'd add, Darren, it gives us the backlog and it gives us the ability to cherry pick the business going forward. And so that's just the significant margin impact aside from just that business.
With respect to margins, as Brian has indicated that we would get our EBITDA margins back up in the tooling group to historical levels, we were 19% EBITDA margin in 2016. We were about 17% in 2017. I think that with the book of business that we have that we would expect to get kind of back to 2016 levels this year in terms of margin percentage. Next question? Yes?
Neil Linsdell, Industrial Alliance Securities. Congratulations on everything you're doing on the large mould business. You're talking about -- I think you mentioned Q2, you're going to be running at full capacity. Is that on the number of multi-access machines you've got running now? And where are the plans or are there plans to continue to expand that capability?
So we'll be running, I guess, near capacity in Q2. We'll take it one step at a time. We're not going to be rushing out to buy another machine tomorrow to -- we have enough capacity to service the work that we have. We'll see how it progresses, but we'll go from there.
And Darren, we are adding one of those machines this month in Toledo.
So that -- those comments with respect to our operations in Newmarket. With respect to our large mould operations at Edco in Toledo and in Mexico, we continue to add equipment. And there's a lot of fluidity of product movement between the 3 plants now. So there is effective capacity within the group being added.
Okay. And just a follow-up with the 3D printing capacity that you've been using already to enhance your large mould business, did that play a factor as you were looking at getting enhanced margins on the new orders that you were talking about?
So I can't say it played a role with all the awards, but certainly, for some of the awards, our ability to differentiate the mould design with contributing 3D printing components to enhance the quality of the mould certainly played a role as did the -- our ability to execute on speed of delivery and deliver these mould in a shortened time horizon that's demanded by our customers. Without that capability, we wouldn't have won the awards that we have.
Brian here. I can't stop myself, I can't help myself. The one 3D printer, which we've put in, I guess, it was about a year ago? Two years now? Maybe 2 years, is fully sold out, fully booked. We added a second one. It arrived in December. It's operating now as we ended January. And of course, the first one we put in 2 years ago is now an antique. The new one is 3x as fast and just does some marvelous things. We'll probably be adding these on an annual basis easily. I mean, it has become a very important part of our business. We can do things that other people can't do. We can print the largest parts in North America. Nobody can print these parts. So not that we can gouge, but it can play a major role in winning a program because of our ability to make the components that other persons can't.
I would further add that many of these awards were takeover programs from competitors. So they're established programs, and it's quite difficult to steal a program away from a competitor. So the fact that we are able to do that really speaks to the unique capabilities that we've put in place.
And partly what beat us up last year -- and you can see the assortment of parts in front of us here. First off, tools or one-off tools, we never make any money on them. And so when you want to diversify your product mix into structural components or into other transmissions, you have to take a first-off tool because that's how you get into the program. Last year, we had -- majority of our business was first off and one-off. I mean, this transmission case here is for Detroit and Allison. It's for a transport truck. I think the mould weighed 85 or 90 tons, and we're the only people in North America who can build it. But the other 2 are structural components, and they go on the -- in the 2020 -- I am not supposed to say. They go on an American sports car. And their -- the rear left and right suspension, we built one of each. Do we make any money? I rather doubt it. But we're now -- have an order for a second set, and there'll be a third set. And we will make money on those. And so we have that on order now and the large -- another large transmission here. Jeff, I can say that, can I, General Motors? Yes. Is it 8 or 9 speed?
That's 10 speed.
10 speed. It's our program now. So we built the first one, blew our brains out and -- but diversified our business. So we made the investment, painful just like a lot of things we've done, but it will pay back.
Michael Doumet, Scotiabank. My question is can you give us sense of the magnitude of how, again, referring to large mould business, how the new process has changed your cost structure. Maybe give us a sense, on the marginal tool, how that's changed. And assuming we have a sense that margins are going to improve, what are your assumptions for pricing and how that plays out during the year?
Jeff, do you want to take the large mould margin question?
Sure. [indiscernible] It's hard to say.
Jeff runs that group.
[Indiscernible]. It's hard to say because the so-called Mazak process is just sort of one of many in we've been building. I would say that in terms of the total number of hours it takes to build these things, the new process, it takes half the time. It takes half the time, and frankly, we're still getting better. So it should be even less than that. How that then cascades down to the margin on the program as a whole would be hard to say.
Sorry, Michael. Your second part again?
Yes. The second part is your assumption on pricing for margins to get back to historical levels. Have you seen any improvement in pricing? And what are your assumptions going forward?
So our comments about the margin going back to historical levels, just to reemphasize, is on a segment basis and not just within the large mould group but including the extrusion business and Castool business. And we expect that the margin improvement will come effectively from all 3 of those sub businesses. With respect to our expectation for pricing, many of these new awards, they had increased pricing relative to what we've been used to do in the recent past. I can't say that the pricing level is near where it was historically, but it's certainly firmer. And I think I'd leave it at that.
You could add -- our industry was disrupted by the European toolmakers. They were quite capable. In fact, they were more capable than we were. And they had a 25% devaluation of the euro, and they weren't busy. So I mean, they just literally dumped and undercut pricing into North America, whereas you know, the euro's back up 20%. So that factor is gone, and that alone will improve the pricing.
And just maybe one more question related to raw material prices. So prices of steel and the resins have moved up in the last quarter. I'm assuming it impacts a number of your businesses. But could you talk about the mechanisms you have for pass-throughs and how we should think about that for the rest of the year?
Sure. So with respect to our tooling group, which is exposed to pricing on specialty tools deal, there's -- first, the large mould group really can contain the pricing exposure by virtue of when it orders its steel relative to the delivery date. It limits the exposure there. Even more true is that pretty extrusion die business, which is a short-cycle business but also has a surcharge mechanism to adjust for the price of steel movement. Castool is perhaps the most exposed given the number of SKUs that it has and the inventory level that it carries. The price of specialty steel has gone up 20% plus in the last 8 months, and we need to react to that. And so you can either react to that with price or cost, and we're effectively trying to pursue both.
[Indiscernible] your Neocon business?
So Neocon certainly is exposed to the resin price increase. I think that part of the margin deterioration in our first quarter was due to the impact of our Hurricane Harvey, which increased crack spreads for the polymer that Neocon buys. So they will -- we think that the first quarter, there was a bit of a spike in the price due to the Hurricane Harvey impact, but those prices have been generally going up. And we're working as hard as we can to offset that with other cost control mechanisms. But it's very difficult to effect price increases, so you just need to continue to innovate in order to absorb these things. But raw material cost inflation is here, and it's a real issue.
So just following on that question. So Polytech, Neocon and AFX margins were down 420 basis points. There were quite a few factors cited: absorption, mix, competition, sounds like raw materials, presumably the AFX car exposure. I'm wondering, when we think about all this and think about going forward, how much of this falls out relatively quickly as volumes come back and how much of it stays around and you have to deal with it on things like how you deal with the commodity impact.
Yes. Foreign exchange is another headwind that we've had to deal with there. There was a slide in the deck that showed, I think, the extent of the margin deterioration was about $2 million for those entities in the group. And I think it's pretty split between raw material pricing increase and lower overhead absorption and some isolated pricing pressure. I think that will probably have mechanisms to get kind of half that back, but we'll have to work hard on the other half.
Darren, could I add? Most of our margin deterioration in that first quarter was in the month of December, and last several years, we've run our plants right through December because the assembly plants ran late through. They shut down for a week or 10 days in December, and December blew us away. Now that's not -- shouldn't happen in the second or third quarter as there is no Christmas. But Christmas shutdown this year had a huge impact on our first quarter. It hadn't in the last several years.
And I think just to follow on to that point, now that we've gone through 2017 and we've normalized to the -- back to the old seasonal patterns, as we lap those quarters year-over-year, we won't have this big drop that we've had to deal with in our Q4 of '17 and our first quarter of '18. And in fact, as I mentioned in my presentation, wider consensus is that North American vehicle production volume grows by perhaps 2% or so this year. Peter?
Yes. So now that you've proven out this new manufacturing, processing approach in Newmarket, does that mean you will deploy that in the other die cast mould facility?
Well, as Brian mentioned, we are buying a new piece of equipment for our Toledo location. And that piece of equipment is identical to what we have in Newmarket, and that gives us all kinds of advantages from standardization, particularly with respect to the coding of the programs. And so we are adding the same machines, and that's going to give us the benefit.
So does that mean it'll be the same approach, where you're heat treating and then machining like you are now in Newmarket?
Yes, we'll use the same approach, and that will be operating by the end of February. So it's currently being installed.
So do you expect then that the big advantage at Newmarket now is that your machine mould has [declined ], and that you see roughly half the labor hours? So will you achieve that level of productivity at your other facilities?
We would expect to achieve the same degrees of productivity improvement. I mean, it's hard -- you certainly -- you're right with the half number of hours that are required and the efficiency that, that accrues. And there's no reason why we would expect to get anything different in Toledo.
And lastly, Brian, I know it's been mentioned in the information circular, but your compensation seems to have been restructured in 2017. Does that imply that you're stepping back? Or what does it mean?
That reflect a s***** fourth quarter. Obviously, I think it's well known that I intend to move other to be Executive Chairman next year this time and all going well, that Darren will become CEO. So there'll probably be some modifications to remuneration and whatever, but I intend to stay very much involved. I enjoy it, and it's my life.
Just a quick question on NAFTA. I -- just wondering if you could clarify how you would be impacted in an afterworld? In particular, I'm thinking of the Mexican plants, I guess, also Halifax. Are they classed as non-American? And if so, what would you do in a world where you have to have 50% U.S. content in the U.S.?
So good question. I think there's a lot more questions than answers with regard to NAFTA right now. Our Mexican operations are structured as maquiladoras, so a lot of the content that goes into the products that we make are actually sourced in the U.S. and taken across the Mexican border in bond. And then the labor and the value add is completed, and it's brought back into the U.S. marketplace. So there is a lot of U.S. content in the products that we produce with our Mexican operations. And so to the extent that there were a U.S. sublimit of regional content requirement, we would be able to fulfill a certain level based on that.
And all our profits in those plants are realized in the U.S. because we -- the material remains American goods, and the labor comes back at cost with minimal profit left in Mexico, very minimal. So we were paying 35% tax, respectively, on all that income, and it was a lot of income. And as you know, the U.S. rate has now gone to 21%. So if there were a small duty or some sort of transfer issue, I think it could be easily absorbed.
Just one last on that topic on tax. Any guidance for 2018 for our numbers?
Yes, sure. I can take that one. Well, I think we looked at the analysis, and the preliminary numbers look like they're turning towards 25% on a consolidated basis. And it's roughly worth almost $3 million or $0.07 EPS.
[indiscernible]
Yes, yes.
Any other questions? Questions on the -- oh, we have another question in the room here.
I'm a shareholder, and I have a question for the Board of Directors. Just a point of clarification for me from the notice of meeting on Page 15. The value of the options that are listed there is $2.29 if I read it correctly, and the share value last year was, let's say, around $9. And is that true that they're actually the share value -- or the value of the option was to $2.29?
I believe those options are older options that were outstanding issued at that price.
Outstanding ones, so the new...
Those were not issued at that price recently. They were issued at that price years ago.
I see. And the options that were granted on the basis of 2017, what were they valued at? Market value.
$10.40.
I think the average of 5 trading days.
Five trading days before the board meeting that authorizes the option grants.
And you'll see the range in our statements that we disclosed now. Those $2 ones have fallen off the table, and the lowest ones are $5.75 or thereabouts now.
[indiscernible]
Yes. Well, obviously, that price will exercise.
Would be nice if we could issue them with that.
[ Scott ], is there any questions on the phone?
I have a -- sorry, I have one online question from Kathryn Alexander, CCL. What is the duration of the backlog in large mould business?
Most of that backlog would be realized through the next 9 months or 12 months or so.
Well, also, Darren, don't forget we now deliver these tools in 6 months. So we take on an order, certainly the first one is going to be shipped in 6 months. So our backlog and our inventory in this large mould business, certainly our backlog should decline because, historically, we carry a 12-month backlog, and now we're looking at a 6-month backlog. So with a more rapid turnover, it will decline.
And the way it -- components of the backlog will be geared to 6 months. But in terms of backlog, there's some tail to it. Any other questions?
I should know better because whenever Donald Trump ad-libs, it isn't good. But I ad-libbed it. In spite of some significant headwinds in the last 2 quarters, I frankly feel very strong and very confident in where we're going with this business. We've made some investments that had been challenging and which have -- didn't succeed in short order. But nothing ventured, nothing gained. And we've made huge strides in how we build our products throughout the tooling business and not to ignore the parts business. But our backlogs are real. The business that we're winning is real, and we're not trying to approach perfume the pig, you know? It seems things look very encouraging, and a lot of people have worked very hard to make it happen. Thank you.
Is there any further business that anyone would like to bring up? And as there is no further business to be brought in front of the meeting, I ask for a motion to terminate the meeting.
I move that the meeting is terminated.
Thank you, Janet.
I second the motion.
Thank you, Jeff.You've heard the motion. All those in favor? [Voting]
On the contrary?[Voting]
Carried. I now declare the meeting terminated. Thank you very much.