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Good morning, ladies and gentlemen, and welcome to Exco Technologies Limited Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded.I would now like to turn the conference over to Darren Kirk, CEO. Please go ahead.
Thank you, Denise. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited Fiscal 2019 Fourth Quarter Conference Call. I am Darren Kirk, Chief Executive Officer of Exco. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial results.There are a number of analysts, shareholders and brokers on the line with us today. In addition, call-in details have been widely disseminated to the public through the news release process. This call is being simultaneously webcast at our website, where we have also posted a short presentation that we will loosely reference. We welcome all participants this morning.The format of this call will be the same as in the past. After the presentation, we will take questions. The call will end at about 10:40. [Operator Instructions]Before we begin, I would like to make some comments about forward-looking information. In yesterday's news release and on Page 2 of the presentation, 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 that we might disclose on the conference call today.Fiscal 2019 proved to be a more difficult year than we expected, and our fourth quarter was no exception. In particular, we continued to face increased costs in our Automotive Solutions segment this quarter, which brought down our year-over-year profitability. Our Casting and Extrusion segment, however, generated higher profits on the back of stronger performance from the Large Mould group. So in terms of our 2 segments, our results were clearly mixed this quarter.Nonetheless, despite the weaker overall levels of profitability, there are a number of bright spots that we expect will bode well for the quarters and year ahead. First, while the economic backdrop is clearly softer, our underlying revenues grew strongly. This revenue increase speaks directly to the demand of our products and a solid market position of our various businesses. Second, while our profits have been impacted by higher costs, we continue to expect relief against some of these cost increases beginning in our current quarter. Third, I must say it is very satisfying to see continuing signs of the turnaround in our Large Mould group that we've long been expecting. And last but certainly not least, our cash generation -- generating ability was on full display this quarter.Despite the challenges we've encountered this year, we generated significant free cash flow and returned substantial amount to shareholders while also improving our balance sheet to a net cash position.For more detail on the quarter, I'll start on Slide 4 with our Automotive Solutions segment. Here, of course, we are talking about the combined results of Polytech, AFX, Neocon and Polydesign. Of note, the segment no longer includes the results of ALC. That business was deconsolidated from our financial statements during our second quarter, as we previously disclosed.Overall, industry's light vehicle production in North America was off by about 2% while production in Europe was down by a little more than that. Nonetheless, segment sales were up by 10% year-over-year, excluding FX fluctuations and prior year contributions from ALC. Segment sales growth in the quarter was supported by a number of program launches, particularly at Polydesign and AFX. Meanwhile, sales at Polytech and Neocon were relatively stable, although there was considerable movement of programs, both incoming and outgoing, within those businesses.Profitability within the segment was adversely impacted by a number of factors versus the prior year period. In particular, as we discussed in our last 2 quarters, costs at our Polytech and AFX operations in Mexico were impacted by higher wages and bonus payments to production staff associated with the union negotiations and strike in January of this year. As well, our typical practice is to revalue retirement accruals for our Mexican staff at the end of the year, and we booked sizable catch-up accruals this year related to that.Loss contributions and uneven production associated with the GM strike added to the challenges this quarter. And while GM strike-related costs continued into October, they quickly normalized once the strike was settled in mid-October.During the quarter, we also continued to face sizable cost increases due to front-end program launch inefficiencies. This was particularly true at Polydesign but also AFX, where we are incurring substantial costs to staff up and train the related workforce. It has clearly been a challenge to ramp up some of these programs, both during the quarter and the year, in context of relatively tight labor markets. We are nonetheless making solid progress, and we continue to expect a near-term pickup in both our overall efficiency levels and profitability as these programs season.Looking at business conditions, new quoting activity has certainly slowed, particularly in Europe. This is tied to softer vehicle production volumes and incremental capacity of certain automotive suppliers.In North America, vehicle production volumes continue to soften, although quoting activity remains fairly decent. We see prospects for top line growth in both Europe and North America in fiscal 2020, supported by previous program wins and a reduction in the number of programs reaching completion relative to fiscal 2019.Perhaps more importantly, we anticipate a reduction in costs driven by lower bonus payments for Mexican production staff as well as reduced program launch inefficiencies.Moving on to the Casting and Extrusion segment on Slide 5 and starting with our Large Mould group. Sales there were modestly higher due to customer timing requirements, commencement of work on new programs and an improvement in the demand of spare parts.Profitability within the group improved sharply year-over-year driven by completion of prior loss-making programs, improved program mix and continued efficiency gains. On this front, our 5-axis manufacturing cell performed very well again this quarter with fresh record levels of spindle uptime. As well, we continued to receive heightened interest in our additive manufacturing capabilities following receipt of the prestigious PACE Award for 3D printed die components earlier this year. We see a number of opportunities with both new and existing customers, where we can leverage our various strengths.At Castool, the group's innovative portfolio of products remains very well positioned and is clearly an industry leader that is gaining share in both die-cast and extrusion tooling. As in recent quarters, Castool continues to experience higher demand for its capital equipment globally. Demand for its consumable products, however, which -- was again more varied during the quarter with softer market conditions evident, particularly in Asia. We believe demand has slowed in this region due in part to a redirection of Chinese exports following implementation of U.S. tariffs.Looking forward, Castool's plant expansion in Uxbridge is now complete, and they are moving equipment in as I speak. As well, Castool's third plant in Morocco continues to move ahead although will not be operational until around mid-fiscal 2021. As discussed in recent quarters, we expect this new plant will enable the group to better penetrate European customers where Castool is currently at a disadvantage given that it lacks proximity to that market.In our Extrusion Tooling operations, we saw North American market conditions continuing to remain weak in the quarter driven by an apparent slowdown in the building and construction markets. This caused the group's overall sales to be flat despite solid initial top line contributions from our new tooling facility in Mexico, which began commercial production on April 1.Group profitability was negatively impacted by reduced overhead absorption at our mature facilities as well as start-up losses in Mexico. While it is difficult to say how long the market slowdown will persist, we remain focused on further improving our efficiency and expect start-up losses in Mexico will quickly decline as we ramp that plant up. I must say I'm very encouraged by the early results of our newest facility, which has surpassed our initial expectations.Looking forward, as it relates to all 3 of our tooling businesses, demand for the aluminum products they help create continues to grow across many applications. This is particularly true within the automotive industry, where a focus on vehicle light-weighting is driving the higher use of aluminum in all vehicles. We have been adapting our manufacturing processes and capability to capitalize on these trends for many years now. While there are certainly pockets of market weakness, we fully expect our position as the leading independent tooling player will assist our efforts to realize above-market growth for the foreseeable future.In summary, it was a difficult quarter and a difficult year. Overall market conditions are a challenge, but we are winning more than our share of new business and continue to expect some relief on the costs in the year ahead. Meanwhile, we are making significant investments to both better position and grow our businesses for future success even while returning meaningful cash to shareholders and maintaining our exceptional financial strength.With that, it concludes my operational 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. I'll start with consolidated results for the fourth quarter ended September 30 were $121.8 million, a decrease of $17 million or 13% from the prior year. Excluding $26 million in revenue from ALC in the fourth quarter of fiscal 2018, consolidated revenues increased $8.5 million or 8% year-over-year.Fourth quarter sales at our Automotive Solutions segment increased $6.6 million or 11%, and the Casting and Extrusion group were up $1.9 million. Over the quarter, exchange rate movements increased sales by $800,000.Annual sales totaled $507 million compared to $575 million last year, a decrease of $68 million or 12%. The decline reflects the deconsolidation of ALC in January 2019, offset by modest growth in the rest of our operations. Excluding results from ALC and foreign exchange rate movements, the Automotive Solutions segment sales were higher by $8 million or 3% compared to fiscal 2018, and the Casting and Extrusion segment sales were consistent with fiscal 2018. FX rate movements added about $9 million in sales during the year.Consolidated net income in the fourth quarter decreased $6.7 million -- decreased to $6.7 million or earnings of $0.17 per share compared to $11.6 million or earnings of $0.27 per share in the same quarter last year, an EPS decrease of 37%.The effective income tax rate was 16% in the quarter compared to 19% in the same quarter last year. The effective tax rate in the current period was improved by foreign exchange gains that are not subject to tax as well as a reduction in the corporate income tax rate in the U.S. and a greater proportion of earnings generated at lower tax rate jurisdictions.The Automotive Solutions segment experienced a 22% decrease in sales in the fourth quarter or a reduction of $19 million to $69.4 million from $89 million in the fourth quarter of 2018. The decrease was driven by the deconsolidation of ALC from Mexico's consolidated results in January 2019. Excluding $26.2 million of contribution from ALC in the fourth quarter of fiscal 2018 as well as FX movements, segment sales increased by 10%.Fourth quarter pretax earnings in the Automotive Solutions segment totaled $5 million, a decrease of $7.8 million or 35% over the same quarter last year. Prior year results benefited from $2.5 million of operating earnings generated by ALC, 0 in the fourth quarter of 2019 as well as $1.8 million gain from the sale of a building. Current period results benefited from foreign exchange gains, but were also adversely impacted by various operational issues discussed by Darren.The Casting and Extrusion segment reported sales of $52.4 million compared to $50 million -- $50.5 million last year, an increase of $1.9 million or 4%. Pretax earnings in the Casting and Extrusion segment improved by $600,000 or 18% over the same quarter last year to $4 million. The earnings improvement was mainly driven by increased contributions from the Large Mould group, partially offset by lower contributions from the Extrusion group.Exco generated cash flow -- cash from operation activities of $29.4 million during the quarter and $21.2 million of free cash flow after $8.3 million in net capital expenditures. This cash flow was more than sufficient to fund $3.7 million of dividends and $4.5 million in share repurchases. For the year, Exco generated free cash flow of $36.5 million and returned $26.9 million to shareholders through combined dividend payments and share repurchases. Exco ended the year with $8.7 million in net cash and $59.5 million in available liquidity, including $26.5 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 on the existing credit facility allows considerable flexibility to support strategic capital spending, dividends and share buybacks and other opportunities that may arise.That concludes my comments. We can now transition to the Q&A portion of the call. Thank you, Denise.
[Operator Instructions] Your first question comes from David Ocampo with Cormark Securities.
Darren, you provided some good color on some of the impacts in the Automotive Solutions group. But I was wondering if you can quantify that so we can get a better handle on the margin trend going forward.
Well, I guess that there were kind of a number of items going both ways during the quarter in the segment. Of course, last year, the profits were, I guess, somewhat inflated by some positive income at ALC, which amounted to about $2.4 million, and we also had a building sale that added about $1.8 million to the profit last year. And so of course, neither one of those elements were here this year.I talked about the impact of the GM strike and some of these catch-up accruals for the Mexican severance payments. And I would say that those 2 together are probably $1.2 million, $1.3 million. I think the bonus payments that we've been talking about have been about $1.5 million for the quarter year-over-year.We did have kind of a positive FX gain of somewhere just north of $1 million for the quarter. And then the difference is probably somewhere around $1.5 million or so, which I would largely chalk up to continued inefficiency of programs that we're launching.
Okay. That's great. So it seems like the margin profile going forward should be kind of similar to what we've experienced in the past. I guess just moving over to Casting and Extrusion. We've been waiting for that kind of sequential improvement for some time now. Is that still the thesis here going forward? Or is this something that's more back-end weighted in 2020?
I think we've seen the Large Mould group have a couple of quarters of good, positive progress there just as the prior loss-making programs have wound down, but I guess equally as important as they have continued to improve the efficiency of their new manufacturing process. And I think you'll just continue to see incremental improvement along those lines. And of course, additive manufacturing is becoming a bigger part of that business and a good driver of their improved performance going forward. So I would just expect kind of steady improvement, but nothing of a huge leap in a short time period.
Your next question comes from Jonathan Goldman with Scotiabank.
This is Jonathan on for Michael. I just want to ask about Polytech and Polydesign. I understand like launch costs are launch costs. But could you maybe elaborate on the significant inefficiencies related to the -- like the recent launch programs?
Well, Polydesign in particular has had very high revenue growth, and that has happened as they have kind of taken over immediate business. And we spoke about that in the past where the inflationary conditions in Eastern Europe had really elevated to the point where European OEMs were increasingly looking to Morocco, which has got a good track record now as certainly Polydesign does at supplying with a quality labor force and contained inflation. And so Polydesign has been taking over some pretty large programs, a lot of wrapping programs, which are quite labor intensive.And when you're launching these programs, I mean, there's upwards of 20,000 steering wheels a week that they're kind of wrapping and it does take several months, if not quarters, to get the labor operating at a level of efficiency. And so until they get there, we're suffering from the profitability reduction. But we have seen improvement. It's not really evident in the numbers this quarter, but I assure you we're seeing improvement, and we expect that improvement will continue.
Perfect. No, that's helpful. And then maybe just switching over to C&E. Maybe you could elaborate on the pockets of weakness you're seeing. I mean in LM, we've seen some pricing pressure in that segment before. I was wondering if this reintroduces an element of risk as it relates to pricing.
So I don't see pricing as being kind of the problem this time around that. Pricing was really pressuring the results of the Large Mould group in the past. The weakness in this instance really relates to the North American extrusion market. So extrusion profiles have seen a reduction in demand mainly as the building and construction market has become weaker. But typically -- and we certainly don't expect to respond to weakness in this cyclical demand through any pricing reductions, and we haven't seen that from our competitors. So that's one element.And then the other is with respect to the markets in Asia where Castool serves primarily on the consumables side. In die-cast in particular, there's a lot of automotive production there, and that market has softened quite significantly. But again, there's been no indication that pricing has also weakened.
Your next question comes from Peter Sklar with BMO.
Darren, on the -- in the auto solutions group and on your 2 plants in Mexico and with the higher labor rates, can you just bring us up to speed on where you're at in terms of trying to get some relief from your customer on labor costs?
Well, I guess as it relates to customer relief, I mean, there's not a lot that we can do with the programs that we have. I mean the costs were elevated in fiscal 2019 particularly due to the bonus payments that we made to production staff in Mexico. And again, that was tied to the percentage increase in the minimum wage that Mexico pushed through much earlier in the year. And so we've just kind of been sucking it up and dealing with reduced profitability. But those bonus payments -- presuming the increase in minimum wage goes back to a normal level next year, we should have a material reduction, right, year-over-year in those bonus payments.Now we are incorporating in our pricing for new programs going forward the increased cost of labor generally in Mexico and elsewhere, to be frank, but those programs typically launch kind of a year or so after you get them. And so there's some period of time when our costs are kind of going up a little bit here and until we get the benefit of the new programs with the higher pricing that launch.
Okay. And then I just had a question on the Large Mould business. I mean in the past, like, one of the issues you faced there is because of foreign exchange movements, you had faced increased competition from European tool and diemakers who are exporting large molds into the North American market. Is that still the case? Are you competing against European tool and diemakers here domestically?
We certainly are. And I guess just to recap, there was a change in the competitive environment several years ago when the euro weakened against the U.S. dollar and Europe itself weakened, providing incremental capacity for some of those toolmakers. And we're kind of seeing at a macro level similar-type situations where the euro has weakened and Europe has also weakened, but I'm -- and we certainly see competition from European players today. I wouldn't say that it has become more intense by any means recently, but I would also say that the difference this time around if circumstances should go there is that we believe that we are much more efficient and we have a much stronger value proposition to bring to the table, helped by our shorter lead times and our additive manufacturing capabilities.
And how does that work? So if a customer brings over a European mold and if there's issues with the mold or even if there's not issues with the mold, like, as you know, there's kind of like mid-life refurbishments of the mold, like, how does that work? Do they ship the mold back to Europe for any major work that...
Yes. Those molds -- I mean, I guess there would probably be more activity for new molds being shipped out of Europe than regular refurbishment of mold activity, but they do ship those molds all over the place, and that would be an incremental cost for European toolmakers.
[Operator Instructions] Your next question comes from Ben Jekic with GMP Securities.
Darren, a question for you, and it's related to Peter's question. Can you just kind of refresh my memory on the increased costs in Mexico? There was a onetime bonus payment and then there was an increase. And can you quantify it? I know somebody asked that before.
Yes. I believe that the bonus payments were about $4.5 million incremental in '19 versus '18. And I believe the wages went up by about $2 million.
Okay. So bonus payment is the element that should not repeat or not to that extent?
Not to that extent.
Right. Okay. And my second question is I think I read within Automotive Solutions that the product mix was adversely affected. Which products would those be? Like, which products were favored in the quarter?
Well, it's kind of all over the place, to be honest, because there's a number of different products. But particularly at Polydesign, there's higher-margin products and lower-margin products. I don't typically really want to get into which of those are each. But just on balance, when we look at the product mix, there was more lower-margin products going through this quarter.
So when we look at Automotive Solutions, is sort of the path for this business to appear on sort of Exco's movie poster? Is it just a matter of time and sort of getting into more profitable programs, better price programs? Like, what is the factor that can make this business what once it was meant to be?
Well, I would say that in terms of our market position and the products that we have, we are stronger than ever. We have a very high win rate. We are kind of the go-to company for nets and trunk trays and leather wrapping in North America and a diverse product portfolio in Europe through Polydesign. And so what we've really had here is an increase in costs. Some of that increase is permanent, but a lot of that increase, we believe, is hopefully temporary. And so as those costs recede, the profitability will improve.But then, again, as I indicated on a prior answer, we're incorporating the higher costs into our new program quotes, and that takes some time in order for those programs to start up. But I think that you'll see improvement in profitability for the group. It'll take some time to get there. But I think that's the way I would characterize it.
Your next question comes from Nav Malik with Industrial Alliance.
I just want to try and get a sense of your revenue for fiscal 2020 on the automotive side. Is there a way that you can give us a sense -- I know you've been adding new programs, but in terms of -- and I think you alluded to it there, but can you give us a sense of the programs that are dropping off in 2020? Like, what sort of magnitude of revenue would those programs represent?
I don't have a quantum on that, Nav, but I would say that it is going to be less than it was in 2019 for sure. We do expect growth in 2020 on a revenue basis for the segment. I think that 2019 had 1 quarter of ALC revenue in it, which was about $20 million or so. If you back that out, the segment had kind of pro forma revenue of, call it, $280 million or so, and we had 10% growth in our latest quarter on that basis. So I don't think that the revenue growth is going to be that high as we go through 2020, but it certainly shows you what it's capable of.
Okay. And then -- I guess -- I mean, I guess it's -- you somewhat answered it in a way. But the margins on the new programs overall, they would be higher than the programs that have been dropping off? I know you've said that you've -- when you've gone out to quote, you've incorporated some of the higher costs that you're facing. So would that be fair to say then that the new programs that you add are higher margin? Or is there -- maybe just to clarify or to confirm that.
Certainly higher than what we've experienced in 2019.
Okay. Fair enough. And then I just also want to ask on CapEx. Could you just remind us -- I know it's -- what was spent in the quarter? I know the dollar value that was spent, but just kind of what were -- what was the CapEx spent on. And then just give us maybe kind of a sense of what you anticipate -- where you anticipate spending money next year on capital.
This is Matthew. The biggest CapEx in the quarter would have been our Castool Uxbridge plant expansion. That really kind of -- so it's basically done now, but it was really boiling to a point in the fourth quarter. And then we added some machine or equipment in various locations. Some of them were replacements and maintenance CapEx. We added some new machines up in our new market facility as well. Some of that will kick in, in 2020. We see our capital in 2020 is going to probably be up marginally from this current year. As we mentioned, we've got the Castool Morocco facility coming in, and we're continuing with our 5-axis technology in the Large Mould group and some additives, so.
Yes. I'd model it about $30 million for 2020 for CapEx.
There are no further questions queued up at this time. I'll turn the call back over to Darren Kirk.
Okay. Well, I guess that concludes the call. I appreciate everyone's time this morning. We look forward to speaking with you again next quarter.
This concludes today's conference call, you may now disconnect.