Exco Technologies Ltd
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Good day and thank you for standing by. Welcome to the Exco Technologies Limited Fourth Quarter Results 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to hand the conference over to your speaker today, Darren Kirk, CEO of Exco. Please go ahead.
Thank you, Gigi. Good morning, ladies and gentlemen. Welcome to Exco Technologies fiscal 2021 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 before we turn the call -- before we open the call for questions.Before I 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 contents, I want to emphasize that the cautionary notes apply to this discussion today.So it was a challenging quarter, but we performed well, producing $0.18 of earnings per share. I must say our performance stands out against much weaker results shown by many other automotive suppliers in the current environment. It is a testament to what differentiates Exco, which I think is vastly underappreciated by the market.Our quarter capped off a year in which our results were also very decent despite severe macroeconomic headwinds that saw microchip shortages and broader supply chain challenges forcefully restrain global automotive vehicle production. As well, we managed through rising input costs and a stronger Canadian dollar, which further crimped our results. Despite this, our full year sales were up 12% compared to fiscal 2020, and we delivered $0.98 of earnings per share, a 42% improvement compared to $0.69 last fiscal year. I want to thank all of my Exco teammates for their fantastic efforts and, of course, commitment to working safely through such extreme circumstances.Beyond our financial results, in fiscal 2021, we bolstered the foundation that will drive our future growth once current constraints inevitably ease and as the electric vehicle revolution continues to take hold. We promoted our core Exco values, we enhanced our employee code of conduct and published our first sustainability report. But we also secured sizable program wins, realized significant productivity gains and mapped out investment plans and a growth agenda that we expect will enable our revenue, EBITDA and EPS to more than double in the next 5-year period.Our businesses directly support the electric vehicle revolution and worldwide movement toward reducing emissions. Consequently, as the world continues to push towards social and environmental sustainability, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the primary driver of this tailwind, particularly in the automotive industry, our primary end market. One key trend that will continue to benefit Exco is the increasing size and complexity of die-cast aluminum components. Tesla has really pushed the envelope on this front using massive Giga presses, which are much larger die-cast machines than those used previously. This enabled Tesla to cast entire subframes of the vehicle in one shot with Giga castings rather than assemble numerous stamped metal components in the body shop, creating significant space and manufacturing efficiency gains. The tooling required to facilitate this process is very large and extremely complex, limiting the number of players able to compete effectively. Our Castool division is already the primary supplier of all shot end tooling for Tesla's Giga presses globally. This provides a clear indication of the depth we have in the design and know-how required to meet the challenges of the industry.We expect traditional OEMs will follow Tesla's lead in using these larger die-cast machines as they transition to an EV future. Consequently, we are making significant additional investments in our people, equipment and processes to remain a leading supplier.Our aggressive capital agenda within our Casting and Extrusion segment is aimed at capturing growth from this development, but from higher expected demand for extrusion tooling across many industries. These investments are especially evident in our Castool division. In November 2021, Castool celebrated the opening of its latest production facility in Kenitra, Morocco. This new facility will enable Castool to better serve its customers in Europe, the Middle East and Africa, while providing increased capacity to meet market demands. Other projects within Castool include a new energy-efficient heat treatment plant located in our existing new market facility, which is expected to begin operations in the spring of 2022. This new equipment will be the largest in North America, providing us with unique capabilities for our internal needs. As well, Castool is moving forward with the construction of a new greenfield facility in Mexico, which will further increase manufacturing capacity and allow us to better serve the local market in Latin America, Mexico and Southern U.S.During the year, our Large Mould group made several investments in new equipment to harmonize its manufacturing processes within the group, further improve its efficiency and better position us to capture growth in the very large die-cast segment. Installation of this equipment has commenced and will continue throughout fiscal 2022. In addition, our Board approved 3 new projects in fiscal 2021 to enhance the extrusion group's heat treatment capabilities. All of these investments will further minimize our environmental footprint, enhance quality and enable a reduction in lead times once completed in fiscal 2022.In our Automotive Solutions segment, we are adding 40,000 square feet of manufacturing space to accommodate the launch of several new key programs. These programs will together contribute annual revenue in excess of $65 million once fully ramped up by the end of fiscal 2022. Over and above this growth, we expect to maintain our longer-term track record of content per vehicle growth in the 5% to 10% range. Of particular note, much of the segment's growth is being driven by content on electric vehicles, which are exceptionally well suited for our products.In total, we expect our capital spending will approximate $55 million in fiscal 2022, of which $43 million is for growth initiatives. With the benefit of these investments, we expect to achieve substantial growth in the years ahead. As detailed in our last quarter, over the next 5 years, Exco is targeting a compounded average annual growth rate of approximately 10% for revenues and slightly higher levels for EBITDA and net income. If achieved, as we expect, Exco's annual revenue would grow to $750 million and generate EPS of roughly $1.90 in fiscal 2026.Turning to the quarter and looking first at our Automotive Solutions segment, overall vehicle production volumes in North America and Europe were materially lower year-over-year. Nonetheless, our foreign exchange adjusted segment revenues were only down a tick and again exceeded industry growth by a significant margin. This reflects continuing gains in our content per vehicle at levels well above our historical track record. On both a year-over-year and sequential basis, our segment revenues were down slightly, but well below levels we would have otherwise expected this quarter. This shortfall is mainly due to reduced vehicle production volumes as OEMs continue to be crimped by the shortage of microchips. As a result, North American and European vehicle production in the quarter was 25% to 30% lower than a year ago. Consumer sales were similarly constrained by the lack of supply, while sales incentives are declining and the dealer inventory levels are now at record lows. This bodes well for a sustained period of higher vehicle production volumes once microchip supply issues ease, which we expect will begin to occur in the next couple of quarters.New program launches contributed to our results this quarter, and we also have high amounts of content on several vehicle models that are outperforming market trends. We did launch one additional key program this quarter, which will continue to contribute strongly to our results in the quarters and years ahead. Quoting activity has slowed somewhat but remains decent. We are seeing a number of important wins in sizable new opportunities, particularly with electric vehicles for both new and established OEMs.On the cost side, our margins were relatively stable compared to Q3 but did slip from Q4 last year due mainly to reduced overhead absorption arising from lower vehicle production volumes. As well, we faced foreign exchange headwinds and heightened fluctuations in forecast versus actual order releases again this quarter. This occurred as our customers juggled their own production schedules in response to the chip shortage issue. These challenges were pushed down to the supply base and place strain on our production planning process. Moreover, raw material cost increases picked up further, and we faced various supply chain challenges of our own. These elements required us to be nimble and absorb a lot of extra costs related to overtime, material substitution and expedited freight.In our Casting and Extrusion segment, we again had terrific results. Demand was strong in all 3 of our segments business groups. As I've mentioned several times before, the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for Exco's tooling business. We certainly saw the benefit in our results again this quarter. As OEMs make the change to greener vehicles and strive for greater manufacturing efficiency, there is an increased use of light metals and the demand for our associated tooling. There is also increasing demand for technical expertise at the supplier level as products become larger and more complex. This plays right into our strength. Again, as mentioned, Tesla with its Giga press is a good example of this as they are now producing die-cast components that are much larger than anything produced previously. Castool is the primary supplier for much of Tesla's shot end tooling for its Giga presses and expect to expand this relationship as Tesla ramps up its new facilities in Texas and Berlin any week now. More broadly, we also expect to benefit from the trend towards larger and more complex castings across the industry as traditional OEMs inevitably pursue a similar process. In addition, there is a heightened focus on efficiency by all manufacturers for sustainability initiatives that will be very positive for the entirety of our tooling business.The extrusion market remained strong this quarter with high demand across the vast majority of end markets. Our extrusion tooling ultimately supports a diverse range of applications, including residential and industrial building and construction, solar panels, consumer durable products in various modes of transportation. This quarter, we again demonstrated we could keep up with sizable demand growth by utilizing equipment and labor more efficiently while leveraging the harmonized manufacturing process of our numerous group facilities. With regards to the latter, this initiative has allowed us to centralize certain processes such as programming and design and utilize our capacity on a network basis. All of this keeps our cost low, capacity high and provides us with the ability to manufacture a quality product in a standardized manner. We are making significant strategic investments to further shrink lead times and drive down our operating costs by in-sourcing more of our own heat treat requirements, all while reducing our environmental footprint.Our Large Mould group performed well on the top line this quarter, although still suffered from reduced rebuild work due to lower automotive production. We did, however, have a number of program wins that will benefit future quarters. We are very bullish on the outlook of this business given the growing demand for large and complex die-cast components, coupled with our leading market position, full-service capabilities and view that supply chains will become more localized over time. As well, our additive business continues to perform strongly and is a critical differentiator, providing us with an unmatched competitive edge. This business is now contributing strongly to our results, and we are very optimistic on where this business will go.Despite rising input costs, segment margins benefited in the quarter from absorption gains driven by higher sales, but more so by efficiency gains in the usage of both material and labor. This progress, in part reflects our path in ongoing sizable investments in new equipment. But again, it is really driven by our people who continuously rethink the way of doing things and who push the envelope on innovation and product performance.So in summary, we had a decent fourth quarter and year. Despite the significant challenges we all face today, we are very well positioned to build on our results in the years ahead. With all of that, we know these goals can't be obtained without the dedication of our people. I'd again like to thank the entire team at Exco for their focus, hard work and immense flexibility during the past quarter and year.That concludes my operations overview. I will now pass the call over to Matthew to discuss the financial highlights of the quarter and year. Matthew?
Thanks, Darren. Good morning, ladies and gentlemen. Consolidated sales for the fourth quarter ended September 30 were $106.4 million, an increase of $5.7 million or 6% from the prior year. Fourth quarter sales at our Automotive Solutions segment decreased $4.4 million or 7% and the Casting and Extrusion group sales were up $10.1 million or 26%. Over the quarter, exchange rate movements decreased sales by $5 million.Annual sales totaled $461.2 million compared to $412 million last year, an increase of $49 million or 12% over last year. Excluding the negative impact of exchange rate movements, full year sales increased 17%. Sales in the Automotive Solutions segment were $263 million, an increase of $32 million or 14%, and the sales in the Casting and Extrusion group were $198 million, an increase of $17 million or 9%. The quarterly and full year sales improvements reflect the general economic recovery from the global impact of COVID-19, strong demand for extrusion and diecast consumable tooling and increasing customer base and significant product launches. These are partially offset by constraints to automotive production volumes due to supply chain disruptions, particularly in the third and fourth quarters of the fiscal year.Consolidated net income in the fourth quarter was $7.7 million or earnings per share of $0.18 compared to $10.7 million or earnings of $0.27 per share the same quarter last year, an EPS decrease of 33%. The effective income tax rate was 27% in the current quarter compared to negative 3% in the same quarter of last year. The effective tax rate in the current period reflects the impact of nontaxable expenses in foreign jurisdictions and the payment of franchise and state taxes. The tax rate in the prior year quarter reflects reversal of $2.6 million of deferred tax liabilities from resolved tax exposures and R&D tax credits. These 2 items increased earnings $0.07 last year.The Automotive Solutions segment experienced a 7% decrease in sales or a reduction of $4.4 million to $56.8 million. Excluding the impact of foreign exchange, the segment sales decreased $1.4 million or only 2%. The sales decline was driven by materially lower vehicle production volumes in both North America and Europe due to supply chain disruptions, including semiconductor chip shortages and logistical constraints.As Darren noted earlier, North American and European vehicle production decreased 25% and 30%, respectively, during the quarter compared to a year ago. The segment's 7% sales decline in context of the global vehicle production eruption reflects the benefits of sizable new program launches and favorable product mix, particularly at our Polytech and Neocon operations.Fourth quarter pretax earnings in the Automotive Solutions segment totaled $4.5 million, which is a decrease of $2.8 million or 38% over the same quarter last year. Included in the prior year quarter was COVID-19 wage subsidies of $1.3 million. Current period profitability was negatively impacted by lower sales volumes and higher costs associated with the semiconductor shortage.The Casting and Extrusion segment recorded sales of $49.6 million in the fourth quarter compared to $39.5 million last year, an increase of $10.1 million or 26%. Excluding the negative impact of foreign exchange movements, the segment sales were up 31% for the quarter. The sales increase was mainly driven by the recovery of general economic conditions due to the impact of COVID-19. The Extrusion, Large Mould and Castool group experienced higher sales from new and existing customers in the quarter.Pretax earnings in the Casting and Extrusion segment improved by $1.7 million or 40% over the same quarter last year to $5.9 million. Excluding $2.7 million in COVID-19 subsidies received last year, segment profitability improved by $4.4 million. The earnings improvement was mainly driven by increased contributions from the Extrusion group. This group benefited from higher volumes and prices, improved labor efficiencies and fixed overhead absorption, which offset higher costs. While higher sales at Castool and Large Mould groups also positively impacted segment profitability, this benefit was countered by rising raw material prices, cost overruns with certain programs nearing completion and initial expenses for Castool's new plant in Morocco.Exco generated cash from operating activities of $7.3 million during the quarter and $3.2 million of free cash flow after $4 million of maintenance fixed asset additions and $8 million in working capital investment. This cash flow, together with cash on hand, was more than sufficient to fund fixed assets for growth initiatives of 7.7 and $3.8 million in dividends. For the year, Exco generated free cash flow of $37.3 million and returned $15.5 million to shareholders through dividend payments. Exco ended the year with $18.6 million in net cash and $68.6 million in available liquidity, including $24.1 million of balance sheet cash. Exco's financial position remains very strong. As such, the company's balance sheet and availability under the existing credit facility allows considerable flexibility to support strategic initiatives. This, combined with our 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. Gigi?
[Operator Instructions] Our first question comes from the line of David Ocampo from Cormark.
For your 2026 guidance, you also laid out the path for it to get to $1 billion through M&A. And given all the supply chain disruptions that we're seeing today, are you starting to see more distressed assets come available for sale?
Yes. We are seeing some distressed assets come for sale, David. But we tend to pass on those opportunities pretty quickly. We don't intend to acquire companies that require kind of turnaround efforts. And so while the deal flow availability is picking up, our appetite in that regard is very low.
So would you say that your near-term priorities are kind of your organic initiatives as opposed to going out in the marketplace and acquiring other assets?
Yes. That's certainly our focus. Never say never on the acquisition front. But certainly, front and center on our focus is our organic growth initiatives, of which we have several underway.
Yes. And then I guess the big concern for most people, including the auto parts guys and your peers, is the labor issues. Are you starting to see labor increases that are approaching 10%? And are you able to pass off those costs to your customers? Or is that something that you have to eat while you're under those longer-term contracts?
I can't really give you a clear magnitude of the impact. But certainly, all input costs are going up, labor, materials and other inputs. And in this business, it's extremely difficult to get a price increase out of your customer. We have had some success in our Extrusion group at recapturing some of the raw material price increases as well as in other pockets of the business. But by and large, we need to continue to push ahead with efficiency efforts in order to offset those pressures.
And I guess asked more directly, like is it possible for you guys to get into the 15% EBITDA margin range again given all the inflationary pressures that you're seeing?
With time, I certainly expect so. Our -- in the Automotive Solutions segment, that's kind of our target and overall on a consolidated basis, a little bit higher than that. But where the margin goes in the near term is very difficult to say, but we're confident that we're making the right investments and decisions to recapture and maintain that margin at those levels on a longer-term basis.
Okay. That's it for me. I'll hand the line over.
Our next question comes from the line of Pete Sklar from BMO Capital.
Okay. Darren, I'm just trying to understand -- make sure I understand how you see the opportunity for vehicle electrification. So if [ I am right, it's ] at a very high level. The Auto Solutions business will carry on because all the things they do are required on battery electric vehicles. And then on the tooling side, like as you say, the structural parts are going to become big and complex, so like new market and your large die-cast mold capabilities will play a role. And at the same time, there'll be all the associated consumables, which will be satisfied by Castool. Is that kind of how you're thinking about it?
Yes. No, that's exactly right, Peter. As I've mentioned here, Tesla has really taken the lead and really changed the way that vehicles are manufactured. And they've had tremendous success with that. We can see it in our order flow. And as they ramp up these new plants, that order flow will be expected to increase further. But we do see a clear evidence that many of the traditional OEMs are looking in a deep dialogue with these large OEM, die-cast machine builders to implement their own Giga presses. And I expect that as they transition to an electric vehicle future that they will pursue similar means of producing the vehicle -- the vehicle structure with these large Giga cast machines.
Okay. So on Tesla specifically, like you talked about how this is an opportunity that you're satisfying with Castool, but like who is doing their large molds and -- for these big presses? And did you get a piece of that and did you bid on it? And kind of what's the backdrop there? Like why is new market not the supplier for Tesla of these large molds?
Well, I mean, I'm not going to speak to who's providing those molds today. But I will say that all of our divisions are involved with Tesla at some level. And they are an important and growing customer across the board and we see significant opportunity to expand on that.
Okay. And then like just on this transition to vehicle electrification. So I think the way it's going to play out is that your traditional large mold business, which is making molds for transmission case covers and engine blocks is going to wind down and then making molds for these big complex structural parts is going to wind up. So how do you know that 5 years from now that it's all going to balance out? Do you know what I mean? Like how do you know you're not going to have a big dip until all these electrification molds fill in the gap as traditional ICE engines wind down?
Yes. Well, we can see it based on kind of the order flow of high-pressure die-cast machines and what's going on at that supplier level, either from the OEMs direct or through the tiers. We can see that there is significant demand for additions to die-cast machines. I think at a high level that you're probably going to have -- the internal combustion engine is not going away overnight. It's going to be around for a long period of time. And the OEMs are continuing to reconfigure transmissions and engines into more efficient formats. And so molds are going to be required both for initial molds and rebuild work on the powertrain side and internal combustion engine for at least 5 years and likely for a decade. But even as that happens, the structural mold demand is going higher. And that's not just for electric vehicles, but also for internal combustion engines as well. And we are working on a number of molds and mold components for structural components for internal combustion engines. So there is a big tailwind here for the next several years that I think is going to support overall growth in that business, at least through the next 5 years and likely beyond.
Okay. Another area too, why is that Castool so strong? Because Castool is selling consumables. And as you point out, global vehicle production volumes are down 20%, 25%. So I would have thought Castool would have taken a dip, but by your comments, like Castool seems to be doing really well.
Yes. I agree. They're doing fantastic. I think that if vehicle production was normalized, that they would be doing even stronger. They are taking market share. They have an incredible team, they have incredible products, and they're really capturing a lot of market growth, not just on the diecast side, but also on the extrusion side as well. Extrusion presses are also becoming much bigger, much more complex and there's a focus on efficiency like never before across all of these industries and Castool's products and services facilitate that improvement right down the chain.
And then just lastly, you've mentioned also that the extrusion tooling business has been very strong. I'm just curious like what sectors of the economy are you seeing that strength coming from?
It's coming across the board. Automotive is a real big driver. So more and more extrusions are going into automotive as vehicles need to be made lighter. And as that happens, automotive has the need for the tightest tolerance of any industry. And so having a quality product that facilitates a good quality and efficient extrusion is paramount. And so we're picking up market share over and above-market growth due to that. And so -- but again, it's really coming across the board that the extrusion demand is highly diversified. I mean they're going into solar panels and high-speed rail and everything.
[Operator Instructions] At this time, showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.