Exco Technologies Ltd
TSX:XTC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
7
8.78
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Good day, and thank you for standing by. Welcome to Exco Technologies Limited Third Quarter Results 2023 Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Darren Kirk, President and Chief Executive Officer. Please go ahead.
Thank you, Gigi. Good morning, all participants. Welcome to Exco Technologies Fiscal 2023 Third Quarter Conference Call. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial aspects of the quarter before we open the call for questions. Before we begin, I’d like to point out the cautionary notes in yesterday’s news release and on Page 2 of the presentation that we have posted to our website are applicable to this discussion today.
I would like to start off with a big thank you to the entire Exco team who worked together through the quarter to drive our business forward while producing much stronger financial results. I must say it is truly inspiring to see the tremendous pace of innovation happening across Exco in terms of both new product development and process improvement. In Q3, our collective efforts helped grow revenues 27% to a record $165 million, while EBITDA kept pace growing to almost $19 million and earnings came in at $0.16 per share.
This quarter, we again demonstrated clear evidence that our strategic growth initiatives will yield significant earnings growth for Exco in the years to come. We saw solid demand across our various businesses, particularly for our large and complex tooling, but also for our assorted interior trim and accessory products. Looking first at the advancement of our strategic growth initiatives we again made great progress this quarter.
Importantly, I would remind you that our initiatives are primarily driven by the increasing demand for electric vehicles, the lightweighting and economizing of all motor vehicles the broader global environmental sustainability movement and the adoption of increasingly sophisticated extrusion and die-cast tooling of extreme size.
With respect to that last point, the adoption of so-called giga presses by both OEMs and tier suppliers for die casting is a key driver here.
During the quarter, we saw a number of industry players announced plans to use giga presses to simplify their electric vehicle manufacturing process and reduce overall costs. We are starting to see the associated tooling demand come through, taking advantage of the significant capabilities that we’ve been investing in over the last couple of years. We expect this demand will ramp up steadily over the next couple of years and really come on strong by 2025.
In addition to giga castings, larger extrusion presses are also a big factor driving this forward. We are seeing a number of very high tonnage extrusion presses being installed globally, mostly for automotive applications.
Our Castool and Extrusion groups are making significant investments to design, manufacture and support the associated tooling and capital equipment that enables these large presses to produce complex extrusions efficiently.
With regards to our specific investment plans, I’m pleased to report that Castool’s new facility in Mexico is almost operational. This plant will provide much needed capacity for Castool and better position us competitively within the geographies of Latin America and the Southern U.S. We expect to begin commercial production at the start of fiscal 2024 and we will hold our ceremonial opening event this October in Carretero, Mexico.
Installation of new equipment that has upgraded and enhanced our heat treatment capabilities across the segment is all fully operational. This equipment includes the largest vertical heat treatment oven in North America. It provides us with unmatched capabilities and competitive advantages for large and complex tooling, lowers our costs and also significantly reduces our carbon footprint.
Consequently, we are now able to handle essentially all of our heat treatment requirements within North America in-house. Elsewhere, Castool’s plant in Morocco remains in a ramp-up phase, but is making terrific progress, and I’m pleased to report it contributed positive EBITDA this quarter.
Next, our Large Mould group is increasingly utilizing all equipment in expanded crane capacity to handle molds of extreme size while our additive operations are seeing record demand levels. The integration of Halex into the Extrusion group and realization of synergies from the sharing of best practices remains ongoing. But here again, we made great progress this quarter.
Despite unexpected challenges during our first year of owning Halex due to rising energy costs, heightened inflationary pressures from the Russian evasion of the Ukraine, we remain very happy with this acquisition.
Lastly, our plant expansions within our Automotive Solutions group are complete and all equipment to support a number of new programs are operational. In fact, we are now adding more equipment to support ongoing growth ahead of our previous expectations. I can’t emphasize enough that all of these investments not only require a significant amount of capital, but there are sizable front-end cash costs that we are absorbing within our results, not to mention the allocation of our most precious resources, the time and attention of our people.
While margins are suffering near term, we fully expect our margins will grow strongly in the quarters ahead once the pace of this disruption subsides, new processes mature and its further scale benefits are achieved.
Turning to market conditions. There was continued overall improvement during the quarter with automotive industry volumes increasing sharply in production flow stabilizing in both North America and Europe. This positively impacted our own efficiency, particularly in our Automotive Solutions segment, which demonstrated significant improvement in both sales and margins.
Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates. We have seen early signs that OEMs are responding to the changing environment by increasing incentives and in some isolated cases, reducing vehicle prices.
This bodes well for automotive suppliers as these actions will help support sales volumes should economic conditions deteriorate further. Microchip supply is improving, though the industry is still likely months away from being fully recovered.
Dealer inventory levels have started to improve, however, remain well below normal levels. Independent industry experts forecast a 5% increase in overall automotive production volumes for both North America and Europe through the second half of calendar 2023.
As was the case this quarter, we would expect our Automotive Solutions segment to generate higher sales growth than this as we continue to benefit from the launch of previously awarded programs. Looking at further, quoting activity is very robust across the segment, which will support our growth over the longer term.
With respect to our own input costs, we continue to see signs of slowing inflation. Labor rates, however, remain a challenge, particularly in Mexico, while foreign exchange rate movements have been an added headwind. With these factors in mind, we continue to take specific pricing actions where possible in order to restore and protect our margins. We also, of course, remain extremely focused on further improving our own efficiency which is ultimately the clearest path to margin enhancement.
Within our Casting and Extrusion segment, we saw very strong demand for new die cast Moulds, while rebuild work is continuing to pick up. This is true for very Large Moulds as well as traditional powertrain and structural programs while our 3D printing operations achieved record sales and order intake during the quarter. Demand for consumable extrusion tooling did soften during the quarter as extruders respond to softening global macro conditions. However, extrusion demand in a number of end markets, such as automotive remained very strong.
Castool’s capital equipment sales within the Extrusion end market remain very robust as the demand for its consumable die-cast tooling and systems. Castool’s products greatly enhance the productivity and efficiency of their customers, and we are clearly gaining significant market share globally.
Margins in our Casting and Extrusion segment were again below potential this quarter as we absorbed start-up losses at new operations incur elevated levels of depreciation from recent CapEx activity navigate through operational disruptions as we install new equipment and continue to catch up from inflationary pressures with pricing actions.
We expect these pressures will subside in the quarters ahead, enabling segment margins to expand back towards historical norms in the quarters ahead. With that, I again want to thank my Exco teammates for a great quarter and I will now pass the call to Matthew to discuss the financial highlights.
Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the third quarter ended June 30, 2023 were $165 million compared to $129 million in the same quarter last year, an increase of $35 million or 27%. Third quarter sales at our Automotive Solutions segment were up $22 million or 33% and Casting and Extrusion group sales increased $14 million or 21%. Excluding the impact of foreign exchange, consolidated sales for the quarter were up 20%, Automotive sales were up 26%, and Casting and Extrusion sales were up 14%.
Consolidated net income for the third quarter was $6 million or basic and diluted earnings of $0.16 per share compared to $5.6 million or $0.14 per share in the same quarter last year, an increase of net income of $700,000. The consolidated effective income tax rate of 26% in the current quarter increased from 24% from the prior year, the change in income tax rate in the quarter was impacted by nondeductible losses, geographic distribution and foreign tax rate differentials.
Moving on to segment disclosures. The Automotive Solutions segment reported sales of $86 million in the third quarter, an increase of $22 million or 33% from the prior year quarter. The sales increase was driven by the continued ramp-up of newer programs, higher vehicle production volumes in North America and Europe, select pricing actions to compensate for inflationary pressures as well as favorable vehicle mix.
During the quarter, IHS Markit estimates vehicle production volumes increased 15% in North America and 14% in Europe compared to the prior year quarter. The segment’s organic sales growth was well above our estimated market levels, indicating strong gains in content per vehicle.
Looking forward, OEM vehicle production volumes are expected to increase at a more modest pace for the remainder of calendar 2023. There remains consistent customer demand for new vehicles and dealer inventory levels continue to be replenished.
While the semiconductor chip shortages and other supply chain constraints continue to improve, industry growth may be tempered by rising interest rates and emerging indicators of a global recession. Nonetheless, Exco will benefit from recent and future program launches that are expected to provide ongoing growth on our content per vehicle.
Quoting activity remains encouraging, and we believe there is an opportunity to achieve our targeted growth objectives, which include realizing segment revenues of $400 million by 2026. Third quarter pretax earnings in Automotive Solutions segment totaled $9 million, which represents an increase of $4 million from the prior year quarter.
The increase is largely attributed to higher sales, better absorption of overheads and select pricing actions. This improvement was partially offset by inefficiencies caused by launch costs from new programs in the period.
Industry vehicle production volumes remain below pre-pandemic levels and ongoing supply chain challenges continue to influence production volumes, but these challenges lessened in the quarter while cost increases relating to raw materials, wages and transportation also subsided.
Management is optimistic that its overall cost structure will return to relative normal levels in future quarters as scheduling and predictability improves and strength -- with strengthening volumes. Pricing discipline remains a focus and action is being taken on current programs where possible, though there’s typically a lag of a few quarters before the impact is realized.
As well, new programs are being -- are priced to reflect management expectations for higher future costs. The Casting and Extrusion segment reported sales of $78 million in the third quarter, an increase of $14 million or 21% from the same period last year.
Adjusting for the impact of foreign exchange movements, segment revenues increased 14% during the quarter. Cash [indiscernible] segment sales were influenced by the acquisition of Halex in May 2022. Excluding Halex’ contribution, sales increased by 15% in the quarter.
Demand for our consumable extrusion tooling, dies, dummy blocks, stems, et cetera, and associated capital equipment, Die Ovens and Containers remain relatively firm overall due to the both industry growth and ongoing market share gains. Although there were signs of market activity for certain extrusion tooling slowing through the quarter. In the die cast market, demand for new moulds, consumable tooling, shot sleeves, blocks, rings and tips, rebuild work and additive printed tooling has continued to improve as vehicle production recovers and new electrical vehicles and more efficient internal combustion engines and transmissions platforms are launched.
Customer inventory levels increased as expectations for higher vehicle production volumes improve. We believe die cast manufacturing is gaining market share, particularly for tooling that is larger and more complex.
Sales in the quarter were also aided by price increases, which were implemented to recover margins eroded by higher input costs. Quoting activity was in the die cast end market remains extremely robust, while our backlog levels are near record highs, which is expected to bode well for sales into fiscal 2024.
The Casting and Extrusion segment reported a $4 million pretax profit in the third quarter, a decrease of $800,000 from the same quarter last year. Increased overhead absorption and production efficiencies due to stronger sales in the die cast market, including new mould, rebuilds, consumable tooling and additive printed tooling and improvements in Castool’s new operation in Morocco contributed positively for the results of the quarter. These positive contributions were offset by a general slowdown in the extrusion die market, driven primarily by higher interest rates, negatively affecting the building and infrastructure markets.
Higher depreciation of an increase of $1.4 million in the quarter, start-up costs at Castool’s Mexico and heat treat facility in new market as well as higher energy, raw material, freight and labor costs. Management expects to temper many of these costs over the coming quarters through efficiency improvements and pricing action where possible.
Margins will also benefit as newer operations mature and achieve greater scale and as the utilization of new equipment that facilities -- facilitates the manufacturing of large-scale die cast tooling approves. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with its sales efforts to improve segment profit [indiscernible] time.
Exco generated cash from operating activities of $24 million during the quarter and $17 million of free cash flow after $5 million of maintenance fixed asset additions and $2 million in interest expense. During the quarter, the company invested $6 million in growth capital expenditures and paid $4 million in dividend. Management expects fiscal 2023 capital expenditures to be approximately $46 million as we complete our strategic capital asset projects.
Exco ended the quarter with $21 million in cash, $118 million in bank and long-term debt and $35 million available in its credit facility. Exco’s financial position remains strong with net leverage of $1.4 million. As such, the company’s balance sheet and availability on the existing credit facility provides continued support for our strategic initiatives.
Our healthy financial position, combined with our free cash flow, creates a foundation for [indiscernible] dividends and other opportunities that may arise. This concludes my comments.
We can now transition to the Q&A portion of the call, Gigi. Thank you.
[Operator Instructions] Our first question comes from the line of David Ocampo from Cormark.
You guys called out a pretty good line of sight of hitting that $400 million target that you laid out before in the Automotive Solutions group just based on your backlog.
David, can you start over. Your phone sounded a bit odd there.
So you guys called out a pretty good line of sight of hitting your $400 million target in the Automotive Solutions group. So that’s pretty encouraging there. But how should we be thinking about your path to hitting $350 million in Casting and Extrusion, just given your positive commentary on the demand for actual Large Moulds and all the investments that you guys have been making?
Yes David, this is Darren. I couldn’t quite make everything that you said, but I believe you were talking about our half to $350 million of top line growth in the Casting and Extrusion segment. And I think we feel pretty good overall about our prospects of achieving our 2026 targets in both segments. In fact, the revenue run rate annualized this quarter is about $660 million. And so if anything, we’re on pace to surpass that $750 million mark. And I think you also kind of called out the Automotive Solutions segment is tracking pretty well, which is true on the margin line. And really, the big opportunity we have is strengthening [indiscernible] Casting and Extrusion segment margin back towards [indiscernible] and there’s so much disruption and new processes and new products and all of these things that -- new plants that we’re working on right now that we’re having a suppressing impact on that margin is, as the new products and processes get more developed, you’ll see the hours of these jobs come down, and we should see that margin start to head back up. And I’m not going to give you a time frame, but we still feel very good about our fiscal 2023 [indiscernible] overall.
No, that’s very helpful commentary. And I know it’s always hard to isolate onetime integration cost with your new equipment and new operations. But do you guys have a sense on how much that’s negatively impacting the margins in both groups? Is it 100 to 200 basis points? Or any range would be helpful for us.
I apologize, David. I really just could not make out the message there. The phone line here is a bit garbled, unfortunately.
Yes, never had this before, David.
We could take it off-line. I mean, when you guys are speaking back to us, it’s muffled a bit here too as well.
Well, look, I’m corresponding with Gigi, and she’s seeing there’s some oddness in the signal, but that’s never happened before.
Yes. We’re happy to take it off-line, David at some -- at any time.
I’ll hop off the call and we’ll try to connect after this.
Our apologies to the other participants, I can see many of you who are on and please feel free to reach out to us. That’s all I can say. So Gigi, maybe see if someone else has a question. If not, maybe we’ll just end the call early.
[Operator Instructions] At this time, I would now like to turn the conference back over to Darren Kirk for closing remarks.
Okay. Well, thanks, Gigi. Appreciate everyone’s time and interest today. We look forward to updating you again once we released our Q4 results. So take care.
This concludes today’s conference call. Thank you for participating. You may now disconnect.