Exco Technologies Ltd
TSX:XTC
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Earnings Call Analysis
Summary
Q3-2024
Exco Technologies reported Q3 consolidated sales at $161.8 million, down 2%. Net income rose by 30% to $8.2 million. The Automotive Solutions segment saw a minor dip in sales to $82.9 million due to launch delays and unfavorable vehicle mix. However, the Casting and Extrusion segment grew, with pretax profit up by 77% to $7.1 million. The company expects margins to improve, targeting 15% for Automotive Solutions and 20% for Casting and Extrusion by 2026. Future EV and gas/hybrid vehicle markets remain strong, supporting growth targets.
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Good day, and thank you for standing by. Welcome to the Exco Technologies Limited Third Quarter Results 2024 Conference Call. [Operator Instructions] Please be advised 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, Kevin, and good morning, all participants. Welcome to Exco Technologies Fiscal 2024 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 I begin, I'd like to point out that the cautionary note 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. Overall, we had another solid quarter, chalking up our seventh consecutive quarter of year-over-year growth in EBITDA and EPS. As well, I'm very happy to point out that we saw a notable uptick in our Casting and Extrusion segment EBITDA margin, which rose to almost 18%.
This segment margin has much more upside from our current investment initiatives and as we focus our efforts on filling these capacities, improving our efficiencies and achieving our fiscal 2026 targets. Free cash flow was also much stronger this quarter as our earnings continue to improve and CapEx came in a little lighter.
We continue to tightly assess our capital spending and now expect annual spending will come in around $36 million this year. Beyond our financial results, we made great progress at pushing the pace of innovation across the company again this quarter. It is truly exciting to see all the innovation happening across Exco and the tremendous potential that will clearly be unleashed through the use of AI and machine learning.
We are already literally taking hundreds of hours out of jobs with these technologies across design, programming and machining functions. We also continue to make meaningful progress at scaling up our greenfield plants further integrated Halex into Exco extrusion die operations and maximizing the benefits of our enhanced heat treatment equipment.
Jumping into market conditions and first looking at our Automotive Solutions segment, vehicle production volumes in North America and Europe were roughly flat on a combined basis with North America a little higher in Europe, a little lower. Vehicle sales also remained decent, ending the quarter with a U.S. seasonally annual adjusted rate of about 15.5 million units.
Volumes would likely have been a bit better than this, if not for the large cyber incident that impacted thousands of dealerships in the month of June. While elevated interest rates and continuing high average transaction prices are certainly headwinds, there remains pent-up demand at the consumer level, while dealer inventories continue to be replenished.
OEM incentives are clearly picking up and interest rates are starting to head lower. Compared to the flattish OEM production this quarter, our segment revenues modestly underperformed overall market conditions dropping 4%. This was due to customer-driven program launch delays, unfavorable vehicle mix in our general program launch cadence with some programs ending before new programs launched later this year.
Looking forward, vehicle production volumes are widely expected to be flat to slightly down in the second half of calendar 2024, which includes expectations of more pronounced summer shutdowns this year. Looking now a little further, vehicle production volumes are expected to remain relatively stable in 2025 as pent-up consumer demand is satisfied. As we've long demonstrated, we would expect our revenues to comfortably exceed the industry rate of growth over time, representing content per vehicle growth of between 5% to 10%. In this regard, our launch pipeline quoting activity and new product development remains very robust.
On the cost side, margins were squeezed during the quarter by modestly weaker volumes, unfavorable vehicle mix and higher labor costs, particularly in Mexico. Labor costs in Mexico have increased significantly in the past several years, and we are working to offset the pressures through various measures. These measures include implementing automation and trimming headcount where possible, exiting less profitable programs, pushing off cost downs and, of course, targeting price increases.
As some of our older tighter price margin programs roll off and newer programs with more favorable economics ramp up, we expect our segment margins will begin to recover.
Turning to our Casting and Extrusion segment and starting with die cast, demand in that end market remained very firm for new molds, rebuilds, shot-in tooling and of course, our leading 3D metal printing business. While EV adoption has clearly slowed, it is important to note that our business is relatively agnostic to powertrain architecture. To the EV revolution slow further or shift toward hybrid vehicles as appears to be the case, we remain confident in the trend towards aluminum, and that demand for our products will continue to grow strongly in the years ahead.
Demand for consumable extrusion tooling remained strong across most regions and end markets during the quarter, while extruders continued to be somewhat sluggish overall due to weak demand in the building and construction end markets, this end market improved this quarter and certain other markets such as automotive and green energy applications, continued to show good growth.
Capital equipment sales within the extrusion end market also remained decent as extruders continued to focus on enhancing their productivity and efficiency through the cycle, a sweet spot for our Castool operations. Margins in our Castool Extrusion segment improved over the prior year and sequentially as we benefited from higher demand for extrusion dies a more favorable pricing environment in the die cast market, but also much improved productivity across the segment. We are clearly seeing the benefit of our various capital investment initiatives.
We remain confident in our expectations for higher segment margins through our outlook period of 2026 as our greenfield investments continue to season, our recent capacity additions are utilized and various efficiency initiatives continue to take hold.
That concludes my prepared remarks. I want to thank all of my Exco teammates for their tremendous efforts, their drive to push innovation through our organization and their focus on working safely always. 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 were $161.8 million, a decrease of $2.8 million or 2%. Foreign exchange rate changes increased sales approximately $1.9 million in the quarter. Consolidated net income for the third quarter was $8.2 million or earnings of $0.21 per share compared to $6.3 million or $0.16 per share in the same quarter last year. This is an increase of $1.9 million or 30%. Effective income tax rate was 27% in the current quarter compared to 26% in the prior year quarter. The income tax rate in the current -- in the quarter was impacted by nondeductible losses, geographical distribution and foreign rate differentials.
The Automotive Solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter. Foreign exchange rate changes increased segment sales $1.1 million in the quarter. The sales decrease was driven by customer delays in certain program launches, unfavorable vehicle mix and slightly lower blended vehicle production volumes in North America and Europe compared to the prior year quarter.
Third quarter pretax income in the Automotive Solutions segment was $8.1 million, which is a decrease of $800,000 from the prior year quarter. Variances and period profitability were due to lower sales, product mix shifts, higher raw material pricing, rising labor costs and foreign exchange movements. Labor costs in Mexico have been materially challenged -- challenging in recent years, and we're seeing added pressure in fiscal 2024, given the rise in wages.
Vehicle production volumes, however, remained relatively stable, which has led to improvements in labor scheduling and reduced expedited shipping costs to partially offset these other costs. As well, pricing action and efficiency initiatives continue to temper inflationary pressures. The Casting and Extrusion segment reported sales of $78.9 million for the third quarter, an increase of $0.5 million from the same period last year. Demand for extrusion tooling remains strong in both North America and Europe.
High interest rate, negative -- high interest rates negatively influenced the building construction and recreational vehicle extrusion end markets in prior quarters, but the construction end market improved more recently, while demand was in the automotive market gained momentum and sustainable energy end markets were strong. Management continued to develop its Castool greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America.
In the die-cast tooling market, demand and order flow for new molds associated with consumable tooling and rebuild work remained firm during the quarter and demand for Exco's additive 3D printed tooling grew strongly as customers focus on greater efficiency in all large mold size segments. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. The Casting and Extrusion segment reported a $7.1 million of pretax profit in the third quarter, an increase of $3.1 million or 77% from the same quarter last year. The pretax profit margin, pretax improvement is due to higher sales volumes within the extrusion end markets, program pricing improvements, favorable product mix and efficiency initiatives across the segment, as well, volumes at Castool heat treatment operation continue to increase, providing savings and improved production quality while efficiency initiatives at Halex are being realized.
Offsetting these cost improvements were ongoing start-up costs at Castool's greenfield operations and a $700,000 increase in segment depreciation for the quarter associated with recent capital expenditures.
Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activity together with the sales efforts should lead to improved segment profitability over time. Exco generated cash from operating activities of $22.7 million during the quarter and $15.9 million of free cash flow after $4.7 million in maintenance fixed asset additions.
This free cash flow, together with the company's cash balances was used to fund fixed assets for growth initiatives of $3.2 million, paid $4.1 million in dividends and $1 million to repurchase shares under a normal course issuer bid.
Exco ended the quarter with $20 million in cash, $107 million in bank and long-term debt and $44 million available in its credit facility. Exco's financial position remains strong, as such, the company's balance sheet and availability on the existing credit facility provide continued support for our strategic initiatives. Our strong financial position, combined with the free cash flow creates a foundation for management to pursue high-value growth capital expenditures, dividends and other opportunities that may arise.
That concludes my comments. We can now transition to the Q&A portion of the call. Kevin?
[Operator Instructions] Our first question comes from David Ocampo with Cormark Securities.
My first question is probably for Darren. I mean if we think about the Castool Moroccan facility, it's been open since, I think, November 2021. So obviously, a few years there. But it does sound like performance is still not at levels that you would like. So I was just curious if that time line is consistent with your expectations and probably most importantly, what else needs to happen at the facility for you guys to get your desired returns on capital.
Sure. Yes, I think it's a fair comment that, that facility is behind our expectations in terms of ramp-up. We continue to make progress there. It's generally kind of hanging around in EBITDA breakeven on a quarterly basis now. But the sales are -- and the orders are starting to come up. And so while it's -- there's all kinds of hurdles when you're starting a new plant in Morocco and shipping into Europe, we've overcome a lot of those in the past quarter. And we do expect that the performance is going to continue to improve very soon. But you're absolutely correct that it is behind schedule, but there's no -- we certainly see a path to achieving our objectives for that plant. It's just been a little more protracted.
Okay. That makes sense. And then I was just hoping you could speak a little bit about your ongoing discussions with customers as it relates to giga-presses, especially in the context of slowing EV demand. And just out of curiosity, is this something that could also be used by traditionalized customers? Or all discussions right now related to EV?
Yes, it's a good question. So far, I have not seen application of giga-presses for anything but EVs and so to the extent that EVs have been pushed out, the demand for giga tooling is pushed out. I still believe that it's pushed out and not canceled. I mean -- we're probably looking at a 12- to 18-month delay here, maybe 24 months. But we still have very active discussions with customers about interest in moving forward with EVs and giga tooling. And so while I have not seen any application for giga tooling outside of the EV market, there's nothing that would prohibit OEs from using that technology for hybrid or even gas powertrain architecture.
It's the cheapest path for an OE when they're kind of tweaking an existing platform is to stick with their existing process. But to the extent that new platforms are developed, that you may see giga castings and tooling being used for those applications.
Okay. That makes sense. And is there any risk to your '26 targets just given that this has been pushed out to the right by, call it, 12 to 18 months?
At this point, we don't think so. Casting is kind of like 15% to 17% of our overall revenues. It is a higher growth part of the market. And while we are seeing a delay in EVs and giga, there's a lot more activity going on for casting demands for both gas and hybrids because to the extent that they're not selling EVs, they're going to be selling other powertrain platforms. And so there is a pretty good offset there and so I think given all of that, we don't see a risk at this point in our 2026 targets.
Okay. And then just last one here for Matt. If I look at CapEx for the first 3 quarters, it's around $22 million to $23 million. It does imply that there's going to be some big CapEx spending in Q4 against I think your previous guidance of $40 million. Curious if that still holds or if some of these capital projects have also been pushed to the right.
So we've been doing a couple of things. We started talking about at the end of last quarter where we took our guidance from almost $48 million to $40 million. We think our CapEx will land somewhere close to $36 million for this fiscal year. That's a combination of a couple of things. One is, we are trying to evaluate our programs and making sure that we're getting the best return on investment on the equipment we're purchasing. And also, some of these products, they take 12 to 18 months to actually get delivered to us depending on the size and the complexity of it. So there have been a couple of delays in timing.
So the way we see it is we were kind of saying around $40 million this year and maybe a little less next year. Over the next 2 years, it will probably be pretty consistent in the total, the absolute amount, but we think this year, it will be closer to about $36 million.
Our next question comes from Nick Corcoran with Acumen Capital.
Just a couple of questions from me. The first is in terms of margins, how much more room do you think they have to move up?
And sorry, I just kind of missed part of that.
Margins, in terms of margins moving up, how much room we may have?
Yes. I think you got to take it segment by segment. We are kind of running north of 12% or so in our Automotive Solutions segment with a target of 15%. And we certainly expect to get that 15% by 2026. It's been soft as we kind of been suffering through the inflationary effects of labor and raw materials relative to older price programs.
And as those programs roll off and new programs with more favorable economics roll on, that will help the margin. I would certainly expect that to be the case beginning in 2025 and that should be boosted further by the fact that most of -- a good piece of the growth that we have is from our accessory products, and they tend to have a bit of a higher margin associated with them.
So that's the path, and I would expect to see that, start to gain traction in 2025. In terms of the Casting and Extrusion segment, this quarter, I mentioned, has had a pretty good uptick in that segment margin closing in on 18% versus a 20% target. And I think as we continue to season our greenfields and we continue to get the benefits of some of this CapEx that we've been spending that we feel very comfortable that, that 2026 target of 20% is going to hold as well.
Great. That's helpful. And then maybe just a bigger picture from -- a bigger picture question for me. There's been a lot of negative segment from OEMs. I'm just wondering if you've seen any indication of supply chains that any of the OEMs, whether in North America or in Europe are starting to slow down production?
We listened to the OE calls last week, like most people in this sector, and it was, I'd say a little more difficult moment than it has been for some period of time. There is -- if I just start with the IHS numbers, they don't look too bad kind of slightly down for the second half of 2024. I do expect that summer shutdowns this year will be a little more pronounced than they have been in recent years. I don't have greater visibility at this point than kind of the industry-level comments that I've just relayed, but there is likely to be some pullback in OE volumes. But our offset is always that we aim to grow our content per vehicle and have a long track record of growing our content per vehicle in kind of the range of 5% to 10%.
And we certainly expect that to be the case going forward. It won't necessarily be true every quarter as was the case this quarter. But by and large, through the cycle, that's what we expect to achieve.
[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Darren for any closing remarks.
Okay. Well, thanks, everyone, for joining us on the call. We look forward to speaking to you all once we publish our fiscal 2024 year-end results. So take care.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.