Exco Technologies Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to the Exco Technologies Limited First Quarter Results 2021. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Mr. Darren Kirk, President and Chief Executive Officer. Please go ahead, sir.
Thank you, Olivia. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited's Fiscal 2021 First Quarter Conference Call. I am Darren Kirk, CEO of Exco. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial results.The format of this call will be the same as in the past. After a brief presentation, we will take questions. The call will end no later than 10:40. First, I would like to make some comments about forward-looking information. In yesterday's news release and on Page 2 of the presentation that we have posted to our website, you'll find cautionary notes in that regard. While I won't repeat the content of the cautionary notes, we do claim their protection for any forward-looking information we might disclose today.In summary, we had a very good quarter. Our earnings per share of $0.28 is the highest such figure in any of our first quarters in our history. I am particularly pleased with these results given the ongoing challenges we are all facing with respect to COVID-19. I want to thank all of my Exco teammates for their fantastic efforts and, of course, commitment to working safely through such extreme circumstances.Before I start my quarterly operations overview, I would like to address the accelerating movement towards electric vehicles and the rise of several new nontraditional entrants into the EV market as it relates to Exco. I want to be clear that these changes are creating substantial opportunities for us. In fact, we are already seeing decent sales and strong order growth in each of our business segments from these trends.As it relates to our Automotive Solutions group, electric vehicles have much more cabin space, which is essentially additional real estate for us to sell our innovative and cost-effective product into. We have won programs for key content on several electric vehicle platforms, including with newer industry entrants. More encouragingly, customer discussions, quoting activity and new program awards are all gaining steam.In our Tooling group, both die-cast and extruded aluminum components are increasingly being used in a number of structural automotive applications. This is especially true for electric vehicles, but for internal combustion engine vehicles as well. Sure, the tooling we provide for engines and transmissions will inevitably decline, but this will occur only very slowly over a number of years. Growth in non-powertrain die-cast and extrusion applications, however, will greatly exceed this decline.In any event, our direct internal combustion engine powertrain tooling exposure currently makes up a very small proportion of our total operations, perhaps about 10% to 15% of consolidated sales. In addition, our products are getting larger and far more complex as the scale of application and engineering limits are pushed increasingly higher. This plays to our competitive advantage given our leading industry position in the engineering, design and production of the various products we produce. Simply put, our customers are looking to us to help solve problems, and we are responding.As it relates to the operations in our Automotive Solutions segment for the first quarter, market fundamentals were decent. On a combined basis, industry production volumes in North America and Europe were essentially flat compared with the prior year period. Segment revenues in the quarter were, nonetheless, higher by 11% year-over-year, which represents significant content per vehicle growth. New program launches helped achieve these results, and we have high content on several refreshed vehicle models. As well, contrary to our experience last quarter, we saw some inventory channels being restocked and perhaps to some degree, overstocked as to mitigate against possible future supply chain disruptions.On the cost side, our margins benefited this quarter from higher margin -- sorry, higher volume levels and increased overhead absorption, favorable product mix shifts and general efficiency improvements. As well, in our first quarter last year, we faced significant program launch inefficiencies and GM-related strike costs. We continued to experience major fluctuations in forecasts versus actual order releases again this quarter. This occurred as our customers struggled to anticipate demand and understand their own plant production limitations. These challenges were -- pushed down the supply base and placed strain on our production planning process. The intensity of this dynamic, however, did reduce through the quarter.Nonetheless, despite the disruption and increased costs to keep our labor safe, we rose to the challenge to satisfy our customer needs. Of note, our segment EBITDA margin improved to 17.5%, which is amongst the highest such figure we've ever achieved. Looking forward, combined North America and European vehicle production levels are expected to be up sizably for the year as industry production normalizes. I expect our growth will comfortably exceed this trend for the year, helped by the launch of new programs in the following quarters that are above the size we would normally see. Further out, we remain deeply engaged in quoting new programs that we increasingly expect will contribute as sized growth.In the Casting and Extrusion segment, overall market conditions continued to improve. This was true in both the extrusion and die-cast production markets where order intake exceeded sales by a decent amount across the segment. Sales of larger capital equipment within the Extrusion channel remained relatively weak through much of the quarter, however. Nonetheless, order flow for these products picked up in December, which will bolster our sales in the quarters ahead.Our Large Mould group continues to see a delayed impact from the OEM production shutdowns in our third quarter of fiscal 2020. This impact is exacerbated by accounting rules, whereby we don't recognize revenue until the product is complete. I believe we've largely worked through this temporary suppression now and expect our Large Mould group sales will move higher in the quarters ahead as we complete work on our substantial order backlog.I would point out that while our segment sales were down year-over-year, they were up 15% sequentially. Despite the lower sales in the segment, profitability edged higher, driven by favorable product mix, various efficiency improvements, more balanced production loads across our plants and lower steel tariffs and surcharges, which are -- of which a significant component is passed through to the customer.Our segment EBITDA margin was again fairly strong in the quarter, coming in at 18%. While it is difficult to forecast this margin on a quarterly basis, we continue to expect the segment will realize overall revenue and EBITDA growth this year.On the capital deployment side, we continue to advance our various strategic priorities, including Castool's new greenfield plant in Morocco, heat treatment facilities for several of our tooling group locations and opportunistic purchases of capital equipment where we found deals.We didn't buy back any shares during the quarter, although we may in the quarters ahead. We remain interested in acquisitions, but have a lot on our plate with the organic growth initiatives we are currently pursuing. We intend to direct our growing cash flows toward these initiatives. But to the likely extent, our cash flows still exceed this usage, we will gladly pad our balance sheet further, waiting for the right opportunities to develop.Lastly, I am extremely pleased to announce that yesterday, our Board of Directors approved a $0.02 per share increase in our annual dividend to an annualized rate of $0.40 per share. This amount represents just 36% of Exco's trailing 12-month free cash flow and marks the 13th time Exco has increased its dividend in 12 consecutive years. As you're likely aware, that's an exclusive club.So in summary, again, we had a very first -- good first quarter with our year getting off to a record start. Despite the significant challenges we all face today and meaningful near-term risk in the broader market, we are very well positioned to continue this momentum in the quarters ahead.That concludes my operations overview. I will now pass the call over to Matthew to discuss the financial highlights of the quarter.
Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the quarter ended December 31 were $121 million, an increase of $1 million. First quarter sales of Automotive Solutions segment increased $7.8 million or 11%, and the Casting and Extrusion segment sales were down $6.8 million or 13%. Over the quarter, exchange rate movements had a negligible impact on sales.Consolidated net income for the first quarter was $10.9 million or earnings of $0.28 per share compared to $8.1 million or $0.20 per share in the same quarter last year, an increase in net income of 35%. The effective income tax rate for the quarter was 22% compared to 18% in the prior year period. The income tax rate in the prior year quarter was favorably impacted by the recognition of deferred tax assets and increase in earnings and jurisdictions with lower tax rates. Excluding the recognition of the deferred tax assets, the effective income tax rate for the prior year quarter was 20%.The Automotive Solutions segment experienced an 11% increase in sales in the first quarter or an increase of $7.8 million to $76.1 million from $68.3 million in the first quarter last year. The increase compares favorably to an overall industry vehicle production volumes in North America and Europe, which are relatively flat in the quarter. Segment sales were supported by program launches, higher order volumes, favorable product mix and higher tooling sales.First quarter pretax earnings in the Automotive Solutions segment totaled $11.6 million, which is an increase of $3.6 million or 45% over the same quarter last year. Key factors in this segment's improved margins include improved cost absorption with higher sales, cost reductions, improved operational efficiencies and favorable product mix.In addition, the prior year quarter segment pretax profits were negatively impacted by adverse exchange rate movements, the impact of the General Motors' strike and certain program launch costs inefficiencies.The Casting and Extrusion segment recorded sales of $45.3 million in the first quarter compared to $52 million last year, a decrease of $6.8 million or 13%. The sales decline is mainly driven by the deterioration of general economic conditions due to the impact of COVID-19, changes in product mix and delivery timing as well as lower steel costs generally. Although sales were down compared to the first quarter 2020, sequentially, sales are up $5.8 million or 15% compared to the fourth quarter of 2020. This 15% quarter-over-quarter increase reflects demand across Large Mould, Extrusion and the Castool groups.Pretax earnings in the Casting and Extrusion segment improved by $300,000 or 7% over the same quarter last year. This represents a 25% increase in pretax profit margin in the segment. The earnings improvement was driven by improved fixed cost absorption with more balanced sales across Extrusion division and favorable product mix shift at Castool.Exco generated cash from operating activities of $9.6 million during the quarter and $4.6 million of free cash flow after $5 million in net capital expenditures. This cash flow was more than sufficient to fund the $3.7 million of dividends. Exco ended the quarter with $26.5 million in net cash and $75 million in available liquidity, including $35.2 million of balance sheet cash, continuing its practice of maintaining a very strong balance sheet and liquidity position.Exco's financial position remains very strong. As such, the company's balance sheet and availability under the existing credit facility allows considerable flexibility to support strategic capital spending, dividends, share buybacks and other opportunities that may arise.That concludes my comments. We can now transition to the question-and-answer portion of the call.
[Operator Instructions] We have a question coming from the line of David Ocampo from Cormark Securities.
Darren, I think your guidance last quarter was to outpace the automotive industry by around 5% to 10%. So if I had to break that up between market share gains and just vehicles getting larger, how should we square that up?
Yes. Thanks for the question, David. It is difficult to give you a complete breakdown on that. I mean there's a number of moving factors that are going on there. As I mentioned last quarter, we did kind of expect to get to the upper level of that range. And there's -- the vehicle production was flat and then we did have a number of new program launches. And those program launches were on a number of vehicles that were refreshed and then had a bit of a sales boost from that effort.There was also some inventory restocking going on, which had gone in the other direction in our fourth quarter of 2020. And to some degree, we believe that the supply chain is bolstering up their inventory levels to, I guess, prepare for any disruption from COVID given the emergence of other variants and things like that. I'd struggle to quantify each of those for you, but some of each.
Yes. That's fair. And probably let's zero in on the margins in Automotive Solutions. And so it was quite strong. Is this sort of that new norm that you guys can expect going forward? Or can it actually go much higher as those lower margin contracts begin to roll off? Like what's the delta between the new margin contract and the old ones?
I'd like to think it's a new norm. I don't want to get that aggressive with any guidance. I mean we do have some other programs that are launching this year that may have some front-end compression associated with them. But to the extent that, overhead absorption has improved significantly in this quarter, to the extent that the mix and the volume levels remain where they are, there's certainly no reason why we can't continue to enjoy such good margins like this.
Okay. And Matt, what was the split on the government assistance that you guys have in the quarter? I know it was pretty small, but by segment, it would be great.
Just over $450,000 in the quarter. It was in our last note in the financial statements.
Yes. What's the split between Casting and Extrusion and Automotive Solutions?
I'd say, yes, about 2/3 -- 1/3, 2/3 Casting and Extrusion.
[Operator Instructions] Our next question is coming from the line of Peter Sklar with BMO Capital Markets.
Darren, in your commentary, where you were discussing electric vehicles and kind of the dynamics that underlie that, you threw out a statistic of 10% to 15%. Could you -- I didn't quite catch that. Could you explain that, what that represents? Is that your powertrain exposure?
Yes, that's roughly the powertrain exposure. And you can assume that's a good piece of the Large Mould group and some of Castool.
Okay. So that's largely making dies for engine blocks and transmission covers and -- plus some consumables out of Castool. Is that how we should think about it?
Yes. Yes, that's how you should think about it. I mean it's a relatively small portion of the business now. But as I also mentioned, the powertrain work that we have is ongoing. In fact, in the quarter, while the Large Mould group has continued to have some revenue suppression as a delayed impact of COVID, the order flow is substantial.I mean we've been running with book-to-bill or order flow compared to sales of about 50% higher. And we expect to start shipping on that in the quarter ahead. So you'll see some revenue pickup and that order flow is across the board. And certainly, some powertrain stuff, but non-powertrain components as well and several new customers I will add.
Okay. On this, like this new kind of Castool expansion plant in Morocco, like given that you've had the experience in Thailand, I assume building an equivalent kind of operation, can you talk about -- like so you know like in Thailand, just how did the ramp go? Like how long does it take to build up? How long before breakeven? Can you put it in the context, does Thailand help you put that in a context as to what the maturity curve looks like?
Well, it's going to be tough to give you guidance on that, Peter. The Castool Moroccan plant expansion is all about taking additional market share in the European market. And I guess, to the extent that we're successful as we expect to be, that ramp will be fast. And if not, it will be a little slower. But generally, these plants, if I look at our Mexican Extrusion plant, we were EBITDA positive in the first year, and it's pretty much positive profitability at this point. So there is -- I think we're pretty optimistic that, that ramp is going to go pretty well, but we'll have to wait and see.
But do you supply -- like do you supply European die-casters from Castool here in Uxbridge?
Yes. We do sell in the Europe for both die-cast and extrusion from Uxbridge. And for the larger extrusion capital components, we really can't be competitive. And when you don't get that relationship on the capital side, it's hard to follow through on the consumable side. And even on the die-cast side, we're at a competitive disadvantage due to distance. And so we do sell into Europe. It's not a huge part of our revenue for Castool, and this will open up the avenue to improve that.
Okay. And then lastly, Darren, like in your commentary, you said that you're happy to build up cash for the right opportunities. And when you referenced opportunities, are you talking about acquisitions? Or are you talking about building new plants similar to this new Moroccan facility or all of the above? When you're thinking of opportunity...
All of the above. We've had a long track record of greenfield growth, and the Moroccan land is the latest one. But it's too early for me to announce what we're thinking of here. But we're certainly thinking of new greenfield investment opportunities from the demand that we see. And we continue to look out for acquisitions.
Okay. And just -- sorry, one other question on this new plant in Morocco. Like who at Exco is taking the leadership and launching this? Is it Paul Robbins, similar to what he did in Thailand?
Paul and his teammates at Castool.
[Operator Instructions] I'm showing no further questions at this time.
Okay. With that, I guess we can move to conclude the call. I appreciate everyone's time this morning. Look forward to talking to you again next quarter. Take care.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.