Exco Technologies Ltd
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Ladies and gentlemen, thank you for standing by, and welcome to the Exco Technologies Limited Fourth Quarter 2020 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the conference to your speaker today, Darren Kirk, Chief Executive Officer of Exco. Please go ahead, sir.
Thank you, Joelle. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited's Fiscal 2020 Fourth 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.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 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.First, I'd like to address the formidable challenges that we are all facing with respect to COVID-19. At Exco, we continue to take the necessary actions to protect the health and safety of our employees, meet the ongoing needs of our customers and minimize the adverse impact on our finances and operations. Of course, we are also continuing with the necessary investments to both solidify and enhance our competitive positioning for the immediate and longer term.In summary, I'm exceptionally pleased with the progress in the results for both the quarter and the year, especially in context of the extremely difficult market conditions we faced in the last 2 quarters. I know all of our stakeholders appreciate these results were only possible with a lot of extra effort by and disruption to each of our employees. I am very thankful for the extra effort by the entire Exco team, especially for working together to keep each other safe through these difficult times.For the year, we delivered $0.69 of earnings per share and generated free cash flow of $42 million or $1.04 per share. We paid out about 1/3 of this cash in dividends and directed the rest to share buybacks and to further strengthen our balance sheet. Beyond our financial results, we achieved significant operational success, which will be evident in the quarters and years to come.In our Casting and Extrusion segment, our new extrusion die plant in Mexico performed extremely well, with first full year results exceeding our expectations. We also advanced our industry-leading position in the 3D printing of powdered metal for tooling purposes, upgraded and added equipment across our businesses, gained several new customers and saw significant productivity gains. As well, we progressed key strategic investments, including Castool's new greenfield plant in Morocco, and we are moving ahead with heat treatment facilities for several of our locations.In our Automotive Solutions segment, we continued to develop new innovative products, won sizable new programs, advanced several others and are readying for the launch of some key new programs this quarter.In both of our business segments, the rise of the electric vehicle and the entrance of several new nontraditional automakers are creating incremental opportunities, which we are actively seizing. As well, in our tooling group, our products are getting larger and far more complex, which plays to our competitive advantage. So despite obvious uncertainty, we see great potential for margin-enhancing growth in the year and indeed years ahead.I'll begin my operations overview for the fourth quarter with our Automotive Solutions segment, where market fundamentals improved materially relative to Q3. As you know, automotive vehicle production levels in Europe and to a greater extent in North America rebounded swiftly during the quarter. On a combined basis, our targeted industry production volumes were down only modestly versus the prior year.Segment revenues in the quarter saw a drag from this lower vehicle production volume. But our revenues were also negatively impacted by launch delays for certain new programs at our customers' end as well as the destocking of inventory channels for our accessory products.On the cost side, we experienced major fluctuations in forecast versus actual orders in the quarter. This occurred as our customers struggled to anticipate demand and understand their own plant production limitations, particularly at the front end of the quarter. These challenges were pushed down to the supply base and placed strain on our production planning process. Nonetheless, despite the disruption and increased costs to keep our labor safe, we rose to the challenge to satisfy our customer needs.Offsetting these challenges, we implemented several operational measures that will result in lasting productivity gains once things inevitably normalize and our volumes go higher as we expect. Of note, despite the difficult environment during the quarter, our segment EBITDA margin improved to almost 15%, which is among the highest such figure we've achieved in the past few years.Looking forward, combined North America and European vehicle production levels are expected to be down modestly in the quarter ahead, but up sizably for the year. We expect our growth to exceed these trends beginning in our first fiscal quarter. This growth will be helped by increased sales of our accessory products as inventories are replenished with buffer stock added. As well, we do have a few programs that will launch in the first half of the year, above the levels that we would normally see. Further out, we are deeply engaged in quoting new programs that could contribute outsized growth.In the Casting and Extrusion segment, market conditions varied somewhat widely between the extrusion and die-cast markets. Extrusion market conditions improved during the quarter, but remained relatively soft. This market, as you know, is highly diversified by industry vertical and contracted by perhaps 12% compared to the prior year. Conditions, however, improved from the prior sequential quarter and further improvement is expected in the quarters ahead with higher demand from the automotive end market playing a key part.Demand for our extrusion die tooling was down by less than the market as we outperformed the industry by leveraging our multiplant footprint and harmonized manufacturing processes. This flexibility enabled us to meet customer demands, while containing costs.On the die-cast side, there were also varying trends, but overall market demand is pretty good. Castool saw significant demand for its consumable tooling products as automotive production volumes ramped up sharply. Castool is also seeing decent share gains as they benefit from their leading market position and increasing demand for larger and more complex die-cast components.The Large Mould group saw lower activity during the quarter from the delayed impact of OEM production stoppages in our third quarter. New die development continued through this period, but die rebuild work typically lagged by a quarter or so. The group, however, has been very active quoting and winning both new programs and new customers, so activity looks pretty good in the quarters ahead.With respect to segment cost, it's hard to overstate how competitive our markets are. Nonetheless, we continue to harness efficiency gains across the group, while lower steel prices were also a net benefit. Our segment EBITDA margin was fairly strong in the quarter, coming in at around 20% again. While this may tick down during the coming year, we certainly expect the segment will realize overall EBITDA growth.To summarize again, we are very pleased with our results for the quarter and the year. Despite the significant challenges we all face today and meaningful near-term risk in the broader market, we are very well positioned for fiscal 2021 and the years ahead.With that, it 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 fourth quarter ended September 30 were $100.7 million, a decrease of $21 million or 17% from the prior year. The decline in sales reflects the global impact of COVID-19 on the company's 2 segments. Fourth quarter sales at our Automotive Solutions segment decreased $8.2 million or 12%, and the Casting and Extrusion group sales were down $13 million or 25%. Over the quarter, exchange rate movements increased sales by $1.3 million.Annual sales totaled $412 million compared to $507 million last year, a decrease of $95 million or 19% over last year. The decline reflects the global impact of COVID-19, together with the deconsolidation of ALC in January 2019. The company's sales were impacted by COVID-19 differently depending on the business segment. For the Automotive Solutions segment, 3 out of our 4 plants were idled for 2.5 months in the third quarter. The Casting and Extrusion segment experienced sales declines ranging from 10% to 50% as volumes fluctuated with disrupted timing for customer orders. Customer demand for this segment vary depending on the product.Demand rebounded by the end of the fourth quarter across all business segments. For the year, Automotive Solutions segment sales were lower by $72 million or 24% compared to fiscal 2019, and Casting and Extrusion segment sales were down $23 million or 11% compared to fiscal 2019.The FX rate movements added about $3.5 million to sales during the year. Consolidated net income in the fourth quarter increased to $10.7 million or earnings per share of $0.27 compared to $6.7 million or earnings of $0.17 per share in the same quarter last year, an EPS increase of 59%. The effective income tax rate was negative 0.3% -- negative 3% in the quarter compared to 16% in the same quarter last year. The effective tax rate in the current period was improved by the reversal of $2.3 million deferred tax liabilities from resolved tax exposures and $300,000 of R&D tax credits net of certain foreign tax adjustments. Excluding these items, the effective tax rate was 22% in the quarter.The Automotive Solutions segment experienced a 12% decrease in sales in the fourth quarter or a reduction of $8.2 million to $61.2 million from $69.4 million in the fourth quarter. The decrease was driven by lower vehicle production volumes, the delay in certain new customer programs ramping up due to COVID-19 and timing of accessory sales, which do not always correlate well with OEM production volumes.Fourth quarter pretax earnings in the Automotive Solutions segment totaled $7.3 million, which is an increase of $2.3 million or 46% over the same quarter last year. Despite lower sales, pretax profits increased benefiting from management's efforts to control costs, improved efficiencies and a shift in demand to higher-margin programs. In addition, current period results benefited from the Canadian wage subsidy program, while the prior year results were adversely impacted by higher labor costs at Polytech and AFX, significant inefficiencies associated with program launches, higher severance costs and the inefficiencies related to the General Motors strike.The Casting and Extrusion segment recorded sales of $39.5 million in the fourth quarter compared to $52.4 million, a decrease of $13 million or 25%. The sales decline was 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.Pretax earnings in the Casting and Extrusion segment improved by $200,000 or 5% over the same quarter last year to $4.2 million. The earnings improvement was driven by increased contributions from the Extrusion and Castool groups and benefits from the Canadian wage subsidy program.Exco generated cash flow from operating activities of $15.5 million during the quarter and $10 million of free cash flow after $5.4 million of net capital expenditures. This cash flow was more than sufficient to fund $3.8 million in dividends and $3.2 million in share repurchases. For the year, Exco generated free cash flow of $41.7 million and returned $24.1 million to shareholders through combined dividend payments and share repurchases. Exco ended the year with $26.6 million in net cash and $76.6 million of available liquidity, including $33.1 million of balance sheet cash, continuing the company's 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 in our existing credit facilities allows considerable flexibility to support strategic capital spending, dividends and share buybacks and other opportunities that may arise.That concludes my financial review. We can now transition to the Q&A portion of the call. Joelle?
[Operator Instructions] Our first question comes from Michael Doumet with Scotiabank.
Nice quarter. I was just wondering if you can call out the wage subsidy you received in the quarter. And then for the Automotive Solutions, if you ex out the wage subsidy, I'm just wondering if you can sustain that level of margin going forward.
So in terms of wage subsidy, the quarter discloses around $4 million, approximately 25% was the Automotive Solutions group and the remainder was Casting and Extrusion.
And then, I guess, with respect to the EBITDA margin for the segment, we were around 15% for the quarter. It was certainly a benefit to some extent from the wage subsidy. But we do see the prospect of that margin going higher over the next year. It's going to be helped by some additional overhead absorption as our volumes improve. Also, the product mix is expected to improve this year. So I would say that we do see upward pressure on that margin.
Interesting. Okay. That's good news. And then turning to the Casting and Extrusion. I mean you called out a couple of factors. There's a lag effect in the Large Mould. There were lower steel prices and then Qs in fiscal Q4. I mean presumably, those are all moving in the opposite direction for fiscal Q1. I think you did talk about margins ticking down. Any way you can provide maybe some goalpost or guidance around what type of normalization we should see next quarter?
Yes. I'd say it's tough to give you guidance for a quarter. But for the year, we do certainly expect that we'll have both top line and EBITDA growth, even if the margin comes under a little bit of pressure from Q4.
Awesome. Okay. And if I can sneak one in. I mean presumably, earnings will recover next year. Your free cash flow comfortably covers your dividend. You've got a net cash balance. And even with the buyback, I mean it looks like you're going to build your cash balance going forward. I'm just wondering what the big picture strategy is to accelerate capital deployment.
Well, we are certainly focused on spending capital. And you'll see that our CapEx budget for 2021 is north of $30 million, about $33 million. And we're focused on greenfield additions and also making some capital investments that will improve the operations of our tooling group, namely with the heat treat facilities that I mentioned. I think it's still -- we're still going to generate free cash flow even after all those sizable investments. And we'll look at the dividend next quarter.We've had a long track record of consistently increasing the dividend. But to the extent that the balance sheet continues to remain strong and that we have surplus cash, we don't mind holding it for some period of time. We're on the lookout for acquisition opportunities. And we continue to be focused on that, but we're not going to jump the gun and take something that we're not happy with. Then we also periodically buyback stock, but I think you should expect that the balance sheet will remain strong.
Our next question comes from David Ocampo with Cormark Securities.
When we think about the new programs that you've won in Automotive Solutions and sort of what you're quoting on today and coupling that with what appears to be a shift to more higher-end vehicles, how should we think about the CPV growth over the next few years?
So I think we've had a pretty good track record of generally having revenue growth that's 5% to 10% points higher than changes in vehicle production volumes. And looking at the programs that we're launching this year, which does include some that are outsized relative to prior years, I would expect that we could certainly get close to the upper end of that range or 10% premium growth and that represents content per vehicle growth.With all the change to vehicles that are happening in the rise of the electric vehicle, there is a significant opportunity for us to introduce more content into vehicles as they get larger and have more cabin space as electric vehicles do. And so we are actively quoting on and, frankly, winning a lot of these programs. And so I think, just naturally, as we see kind of the landscape evolve for vehicles, it plays to our advantage and that's contributing to the growth.
That's great. And then last one here for me. With steel prices moving up so dramatically in the last few months, is there any lag with respect to passing off this cost to your customers? And can you give us a sense on what percentage of raw material cost is steel?
Yes. So for the steel, we buy specialty grade tooling steel. And we have not seen that price increase for the steel that we buy occur. In fact, if anything, it's continued to have downward pressure in recent quarters and months. So a lot of the movement in the price of steel is passed on to customers, but there's a lag. And where the price of steel goes in the future, I can't say, but our recent track record has been that it's been coming down. I guess in terms of intensity of revenues, it's probably in the neighborhood of 20% or so for the tooling group.
[Operator Instructions] Our next question comes from Peter Sklar with BMO Capital Markets.
Darren, I first wanted to ask you, like strategically, you're seeing this accelerated movement globally to battery electric vehicles. So like what is your plan for the Large Mould business? Because obviously, a battery electric vehicle doesn't need a transmission case cover or an engine block. And I'm just wondering what you're thinking is there and what you can do with that business.
Sure. I think broadly, the move to the electric vehicle is a very positive thing for our entire tooling group, both extrusion and die-cast. The electric vehicle may not have the requirements for engine blocks and transmissions, of course. But a lot of the structure of the vehicle is being made with die-cast components. You only need to look at what Tesla is doing with the massive die-cast machines that they're installing to see that die-cast is taking share. And the Mould complexity is increasing with the size of these components that are required.We are actively quoting, winning awards for structural components and building them today. And whether it's internal combustion engine or electric vehicle, more of a structure will be made of die-cast. These components will become more complex and that plays to our strength. And so we're seeing that today, and we expect it's going to be a tailwind for us, not a headwind.
Okay. And then the other thing I wanted to ask you about is, can you elaborate a little bit about the -- this tooling you're developing, not through traditional machining methods, but through 3D printing? Is that in -- like where are you doing that? Is that extrusion tooling or Castool tooling? Can you just talk a little bit about that?
So the machines that we have, of which we have 3 up in new markets, we use them primarily to support our mold design for the Large Mould group. And by using an additive printed component in the mold, it enables the entire mold to perform at much higher levels of efficiency.We also design and develop and manufacture replacement tooling components that we do sell to our customers. But that 3D printing business is going very well for us. We are a clear market leader, and we are seeing significant growth in that market. It both supports our existing business and provides us with new growth channels.
Right. Okay. And then just my last question is just kind of what is your gut feeling in terms of the outlook for demand in the extrusion tooling business? Obviously, as it relates to nonresidential construction, you're not -- there's obviously going to be a slowdown in office towers, but there's going to be -- there's obviously a big pickup in building of warehouses and distribution centers and things of that nature. So I'm just wondering kind of on balance, how you think the demand is going to unfold in that business?
Yes. It's a tough thing to forecast, Peter. But the beauty about that business is that it's very diverse by end market. Building and construction is perhaps the largest end market, but it's only 30% or 1/3 of the overall use. And as you point out, where one segment falls, others may rise. We're certainly seeing an increase in demand for extruded aluminum for the automotive industry, and we're very active in that part of the market. And I think, generally, the extrusion market has kind of had a GDP-plus type growth profile. And I don't know where things shake out over a quarter or 2, but longer term, I would expect that to hold.
Right. And this Mexican plant you have, like, it sounds like it's performing well. How do you find the labor force there?
In terms of recruiting them? Or how do we find...
Well, I know in Mexico, like you've talked about, in your Automotive Solutions businesses in Mexico, one of the issues there is very high turnover of your staff.
Yes, I'd say our labor situation in Mexico generally has been favorable in the last several quarters. Absenteeism and turnover are way down. With respect to our extrusion operations there, one of the benefits that we have is that we have this multiplant footprint and we can centralize things like the design of the die and the programming for the equipment. And those are perhaps some of the more technical skills that are required in order to perform that business. And so that has helped kind of centralizing those parts of the operations, has really kind of helped us start up these greenfield plants where we can take some of the more complex jobs out of the day-to-day requirements there and do it elsewhere.
The other thing, Peter, is those plants in -- like the extrusion plant, aren't as large. So attracting good talent and keeping them, it's a little bit different than 1,000 here and there. So it hasn't been an issue from what I've heard.
I'm not showing any further questions at this time. I would now like to turn the call back over to Darren Kirk for closing remarks.
Great. Well, we appreciate everyone's time this morning, and we look forward to speaking with you again next quarter. Stay safe, everyone. Bye-bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.