Exco Technologies Ltd
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Earnings Call Analysis
Q4-2023 Analysis
Exco Technologies Ltd
In fiscal 2023, Exco has managed to pull off a remarkable performance with a 26% jump in sales to $619 million, alongside a significant 41% growth in EBITDA reaching nearly $75 million and a 39% boost in earnings per share to $0.68, all despite the challenging market conditions that have rippled across industries.
The financial uplift is matched by a deliberate push towards operational excellence. Encouraged by the swift growth of its 3D printing operations and the embrace of efficient systems at Castool, Exco continued to innovate across its sectors. This innovation extends from product development to recycling initiatives, underscoring Exco’s commitment to sustainability and reaffirming its leading position in repurposing plastics globally.
Looking forward to 2024, Exco foresees an increase in vehicle production volumes due to replenishing dealer inventories and a release of pent-up consumer demand. The company’s market share is on the rise, with record backlog levels in long lead time products like large moulds. This upward trajectory is expected to power through start-up losses and operational disruptions, driving earnings even higher in the upcoming year.
With the automotive industry being Exco’s primary market, the company has positioned itself to benefit from the shift towards electric vehicles and the global effort to reduce emissions. An increase in the use of lighter, more eco-friendly aluminum is playing into Exco’s strengths, as car manufacturers increasingly prefer it over steel to meet stringent fuel efficiency standards.
Exco has laid out ambitious goals for fiscal 2026, with targets of $750 million in revenue and $120 million of EBITDA, updating its EPS aim to approximately $1.50 due to anticipations of higher capital spending and the possibility of enduring elevated interest rates.
The automotive sector showed a general uptrend, which has, in turn, enhanced Exco’s operational efficiency, particularly in the Automotive Solutions segment, leading to a notable sales increase and margin improvement. Despite a modest impact from union strikes, consumer demand remains resilient in the face of inflation and rising interest rates.
Quoting activities across Exco’s segments remain robust, pointing to sustained long-term growth, even as input costs begin to show signs of easing. The company is observing strong demand for new die-cast moulds, contributing to growth in the Casting and Extrusion segment. Meanwhile, labor rates and foreign exchange fluctuations remain challenging, with demand for consumable extrusion tooling softening in response to global economic pressures.
Sales of Castool’s capital equipment within the extrusion markets continue vigorously, thanks to the increasing demand for its consumable die-cast tooling and systems. This is resulting in market share gains across the globe and contributing to margin enhancements spurred by cost optimization efforts and strategic price increments.
The fourth quarter rounded up with a solid 14% increase in sales, an EPS surge of 71%, and a 33% sales increase in the Automotive Solutions segment. Investments in growth capital were significant, and Exco concluded the quarter with $94.2 million in net debt. Looking ahead, Exco is planning for about $49 million in capital expenditures to further propel strategic growth, while sustaining a strong fiscal foundation for agile pursuit of long-term growth investments.
For the fiscal year 2024, Exco is allocating $49 million to capital expenditures, with expectations that these outlays may extend beyond the year due to long lead times. The increased depreciation from these capital investments is a contributory factor to the revised fiscal 2026 EPS estimates. Investments made in recent years are expected to lift margins, and efforts are ongoing to reach the 20% margin target for the Casting and Extrusion segment.
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Good day, and welcome to the Exco Technologies Limited fourth quarter 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Darren Kirk, President and Chief Executive Officer. Please go ahead.
Thank you, Abigail. Good morning, all participants. Welcome to Exco Technologies Fiscal 2023 Fourth Quarter and Year-end 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 the cautionary notes in yesterday's news release and on Page 2 of the presentation that we have posted to our website. They are applicable to this discussion today.
In fiscal 2023, Exco clearly demonstrated our aggressive growth strategy is on the right track. Despite difficult market conditions, we recorded a 26% increase in sales to a record $619 million, grew our EBITDA by 41% to almost $75 million and delivered $0.68 of earnings per share, a 39% improvement over last year. As well, our momentum remains strong. We established positive trends throughout the year with our quarterly revenues and EBITDA showing sequential improvement ending the year on a high note.
We not only achieved substantial financial growth but also pushed operational excellence throughout our business. From our fast-growing 3D printing operations to Castool's energy-efficient systems that help die cast and extrusion customers reduce emissions globally to Neocon's leadership in the industrial reuse of plastics and post-process recycling, it is truly inspiring to see the numerous examples of innovation in both products and processes happening across Exco. Similarly, the opportunities we see to further our reach through both recent acquisitions and greenfield investments is thoroughly exciting.
Looking forward, despite macro headwinds, vehicle production volumes are expected to grow in 2024 as dealer inventories continue to be replenished and pent-up consumer demand is satisfied. Also, we are clearly gaining market share, and we enter the new fiscal year with a record backlog levels in our large -- in our long lead time products such as large moulds. Moreover, start-up losses and operational disruption associated with our current capital investment activity should reduce, while the benefits of our ongoing efficiency initiatives will continue to take hold. While there will no doubt be new challenges, we remain very optimistic that our earnings will again be substantially stronger in the year ahead.
As I've noted many times in the past, a key focus for Exco is to directly support the electric vehicle revolution and the worldwide movement towards reducing emissions. Consequently, as the world continues to push forward with sustainability initiatives, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the principal driver of this tailwind, particularly in the automotive industry, our primary end market. As the automotive industry adapts to ever tightening fuel efficiency standards, lightweight metals are increasingly displacing structural steel vehicle components to make internal combustion engine vehicles more environmentally friendly.
Moreover, electric vehicles make extensive use of aluminum components to reduce weight and therefore, maximize battery range. Our Casting and Extrusion segment is especially well positioned to benefit from this transition, as we are the leading provider of tools that shape lightweight metals, and we do not manufacture tooling for stamped steel components. Over the next several years, significant growth is expected in the application of both extruded and die cast aluminum components.
More recently, die cast aluminum components and associated tooling have been increasing in both size and complexity. OEMs and their tier suppliers are increasingly using so-called Giga Press die casting machines that are much larger than those used previously. This enables the casting of entire vehicle subframes from aluminum rather than assembling numerous stamp-melt components, creating significant manufacturing efficiencies. The tooling required to facilitate this process is also much larger and more complex, which plays directly into our strengths. We anticipated this trend several years ago and have made considerable investments in our people, equipment and processes to be the leading supplier in this market segment.
Our Automotive Solutions group, which manufactures products for both the interior and storage areas of passenger vehicles, also stands to benefit from sustainability trends. Exco's Automotive Solutions segment typically makes products that are lighter in weight than competing products and electric vehicles generally have more cabin and storage space for which our products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher-margin accessory products as a means to enhance their own profitability and Exco is an industry leader for many of these products.
To these points, we grew our content per vehicle by 14% in fiscal 2023, which was well above our historical range of 5% to 10% per annum. It is important to note that while both our business segments are very well positioned for the automotive industry's eventual transition to electric vehicles, Exco is relatively agnostic to powertrain architecture. Should the EV revolution proceed more slowly or even shift toward hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead.
With regard to our various capital asset investment and growth strategies, we again made great progress in fiscal '23. I want to emphasize the sizable negative impact these investments have had on our recent financial results. We have incurred significant front-end cash costs from the start-up of new plants, navigated through operational disruption as we installed new equipment, and are incurring much higher levels of depreciation associated with our conservative accounting methods.
Nonetheless, in fiscal 2023, we saw clear signs that the aggregate of these investments has not only begun to add to our EBITDA, but is accretive to our margins as well. I will direct you to the slides we posted to our website or to our quarterly material for more information about the specifics of these investments. I would point out, however, that Castool's new facility in Mexico is now operational with commercial operations beginning on October 1. This plant will provide much needed capacity for Castool and better position us competitively within the geographies of Latin America and the Southern U.S.
In fiscal 2024, we will continue to generate efficiencies from the substantial capital that we have recently deployed, as well we plan to spend approximately $49 million in capital in the year ahead to further improve our efficiency, provide additional capacity and reduce our environmental footprint. With the benefit of these investments, the launch of new programs, general market growth and also market share gains consistent with our history, we expect to achieve substantial growth.
This quarter, we confirmed our fiscal 2026 targets of $750 million in revenue and $120 million of EBITDA. We did, however, revise our fiscal 2026 EPS target to roughly $1.50 as a result of higher-than-expected capital spending for future growth initiatives as well as the potential that interest rates remain higher for longer.
Turning to market conditions. There was an overall improvement again this quarter with automotive industry volumes increasing and production flow stabilizing. This positively impacted our own efficiency, particularly in our Automotive Solutions segment, which demonstrated impressive sales growth and margin improvement. UAW strike action, which commenced in mid-September, had only a very modest impact on our results in Q4. While this impact continued through October before the strikes were resolved, I would describe the impact on our Q1 results as muted.
Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates. We have seen early signs that OEMs are responding to the changing environment by increasing incentives and, in some cases, reducing vehicle prices. This bodes well for automotive suppliers as these actions will help support sales volumes should economic conditions deteriorate further. Independent industry experts forecast a low single-digit increase in overall automotive production volumes for North America and Europe through 2024. As was the case again this quarter and year, we would expect our Automotive Solutions segment to generate higher sales growth than this as we continue to benefit from the launch of previously awarded programs.
Looking further, quoting activity is very robust across the segment, which will support our growth over the longer term. With respect to our own input costs, we continue to see signs of slowing inflation. Labor rates, however, remain a challenge, particularly in Mexico, while foreign exchange rate movements have been an added headwind.
Within our Casting and Extrusion segment, we saw very strong demand for new die-cast moulds, while rebuild work is also continuing to pick up. This is true for powertrain and structural programs, giga-sized dies and of course, our additive manufacturing operations. Demand for consumable extrusion tooling did remain soft during the quarter as extruders have responded to weaker global macro conditions. However, extrusion demand in a number of end markets, such as automotive remains strong.
Castool's capital equipment sales within the extrusion end markets remain robust, as does demand for its consumable die-cast tooling and systems. Castool's products greatly enhance the productivity and efficiency of their customers, and they are clearly gaining significant market share globally. Margins in our Casting and Extrusion segment improved this quarter as we have been expecting to see. Margin improvement came from numerous areas, but primarily reflect our cost optimization efforts, strategic price increases and the net benefit of the substantial investments we have been making over the past couple of years.
We remain confident that there is much more upside to our margins as our recent greenfield investment season and our recent capacity additions are utilized.
With that, I want to thank all of my Exco teammates for a great quarter and year. I will now pass the call over to Matthew to discuss the financial highlights.
Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the fourth quarter ended September 30 were $160.2 million, an increase of almost $20 million or 14% from the prior year. Fourth quarter sales at our Automotive Solutions segment increased $22 million or 33%, and the Casting and Extrusion group decreased $1.8 million or 2%. Foreign exchange rate movements increased sales by $4.8 million in the quarter. Annual sales totaled $619 million compared to $490 million last year, an increase of $129 million or 26%. The net effect of foreign exchange rate changes increased sales $28 million for the year.
Full year sales at Automotive Solutions segment were $327 million, an increase of $73 million or 29%, and sales in the Casting and Extrusion group were $292 million, an increase of $56 million or 24%. The increase reflects 12-month sales from Halex, strong demand from our die-cast products, Large Mould and Castool and higher sales in the Automotive Solutions segment as automotive production volumes continued to increase and program launches generated higher content per vehicle for the company.
Consolidated net income in the fourth quarter was $9 million -- $9.2 million or earnings per share of $0.24 compared to $5.6 million or earnings per share of $0.14 in the same quarter last year, an EPS increase of 71%. The effective income tax rate was 25% in the current quarter compared to 26% in the same quarter last year. The Automotive Solutions segment experienced a 33% increase in sales or an increase of $21.6 million to $87.6 million from $66 million in the fourth quarter of 2022. Excluding the impact of foreign exchange rate, segment sales increased $19.2 million or 30%. Sales increased in all 4 of the segment's operations. The sales increase was primarily driven by new program launches and to a lesser extent, higher vehicle production volumes.
North American vehicle production was up 9% compared to a year ago, and European vehicle production was up 6%. There's virtually no impact of the UAW strike, which started in mid-September and was resolved in late October. Fourth quarter pretax earnings in the Automotive Solutions segment totaled $10 million, which is an increase of $3.5 million or 54% over the same quarter last year. Although production volumes continue to experience some challenges with semiconductor and supply chain constraints, the impact of those factors has reduced considerably. This has allowed all 4 businesses to benefit from improved efficiencies and absorption of fixed costs to offset the higher raw material and labor costs experienced in recent years.
In addition, the stabilized production volumes means improvements to scheduling and managing labor downtime, fewer expedited shipping and overtime costs experienced by the segment.
The Casting and Extrusion segment recorded sales of $72.6 million in the fourth quarter compared to $74.4 million last year, a decrease of $1.8 million or 2%. Demand for extrusion tooling was lower in the fourth quarter as the impact of higher interest rates and potential for global recession reduced orders, mainly in the building and construction markets. Demand for extrusion tooling in automotive and sustainable energy markets remained strong and growing, but the building and construction market is the largest driver of extrusion tooling.
In the die cast market, which primarily serves the automotive industry, demand in order for new moulds, associated consumable tooling like shot sleeves, rods, rings and tips and rebuild work continued to pick up as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engine transmission platforms are launched. In addition, demand for Exco's industry-leading additive 3D printed tooling has continued to gain significant traction as customers focus on greater efficiency with the size and complexity of die-cast tooling continuing to increase.
Sales in the quarter were also aided by price increases, which were implemented to protect margins from the higher input costs, also impacting revenue during the quarter was considerable period-over-period variance for the recognition of revenue from some of the large new moulds -- new build moulds, which have high price points relative to other products in the segment.
Fourth quarter pretax earnings in the Casting and Extrusion segment totaled $5.3 million, an increase of $2.8 million or 108% over the same quarter last year. The pretax profit improvement is due to improved efficiency in the extrusion die business, including improvements in Halex and the elimination of fiscal 2022 onetime costs associated with the outsourcing due to the extrusion heat treatment implementation. As well, there was improved absorption and efficiency that Castool's heat treat operation ramps up, stabilizing raw material and labor costs and lower Castool Morocco start-up costs. Program pricing and mix has also improved in the Large Mould group as demand has picked up in recent quarters, while efficiency initiatives continue to take hold. Offsetting these reduced costs was $0.5 million increase in depreciation costs associated with increased capital expenditures and start-up loss of Castool's new operation in Mexico.
Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with its sales efforts should lead to improved segment profitability over time.
Operating cash flow before changes in working capital was $23.5 million in the quarter compared to $17.5 million in the prior year quarter. Higher fourth quarter net income, depreciation, deferred taxes and interest expense contributed to the increased operating cash flow in the quarter. Cash used for working capital was $5.9 million in fiscal 2023 compared to $21.5 million cash used last year. Current quarter cash used for working capital was driven by higher accounts receivable associated with higher fourth quarter sales and increased inventory, reflecting the strength of our backlog and ramping up of new facilities.
Investment in fixed assets of $9.6 million compared to $16.4 million in the prior year quarter included in the current year quarter was $5.2 million in growth capital. The difference relates to timing -- the difference from prior year relates to timing of equipment purchases and the completion of major projects.
Exco ended the quarter with $94.2 million in net debt. The company has $43 million in available liquidity under its banking facilities at year-end. With respect to fiscal 2024 investments in fixed assets, we are planning for approximately $49 million in capital expenditures with $25 million in growth CapEx and $24 million in maintenance CapEx. Included in the total spending are approximately $7 million in carryforward projects from longer-term projects that were approved in prior years.
Exco's financial position remains strong. As such, the company's balance sheet availability and the existing credit facility allows flexibility to support strategic growth initiatives. This combined with cash from operations 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, Abigail, to the Q&A portion of the call.
[Operator Instructions] I'm showing no questions at this time. I would like to turn the call back to Darren Kirk for closing remarks.
Thanks, Abigail. Actually, we did receive a few questions that were just submitted online. So I'll read them off and address them.
Question one, with respect to the revision of EPS in 2026, you are indicating that depreciation will be higher than previously expected. What do you foresee for CapEx over the next few years?
Okay. Well, I'll take care of that one. So as we -- I just mentioned in my notes, we're expecting CapEx in fiscal 2024 to be approximately $49 million. That includes $7 million of carryover from last year or prior years. The lead time on some of this capital is quite long, and it's actually getting a little longer. So the timing of that $49 million, some of it may carry over into next year. However, we are looking at a lot of new opportunities, and we do not shy away from building and adding capital that's going to support us. So I expect our CapEx to remain elevated over the next couple of years, again, $49 million this year. I don't have an estimate exactly for next year, but I'd say in excess of $40 million and probably pretty steady at that level for the next year or 2.
Okay. Next question I have is, EBITDA margin in the Casting and Extrusion segment saw a nice improvement this quarter. What were the key drivers of this improvement? And how do you reach your 20% margin target?
Yes. Thanks for the question. I guess the biggest driver of the margin improvement was a lot of these investments that we've been making over the last couple of years, as we've indicated, throughout the investment period, there's a lot of operational disruption to install the new equipment. We've got start-up losses for new plants. We had to outsource some of our heat treat operations while we installed new energy-efficient heat treat operations within our own facilities. And I guess we've turned the corner with respect to the aggregate impact of these investments such that we're now starting to see the margin lift from them.
And on top of that, we've had a continued drive for efficiency throughout the segments. And all 3, Castool, Large Mould and Extrusion, did see improvement in their margins this quarter. So I'd say the last thing with respect to the recent improvement we've seen is we've worked through a lot of the older, much lower-priced programs in our Large Mould segment. And the market conditions in that business are improving rapidly, such that demand is increasing, particularly for the capabilities that we now have with these giga type dies. And so that is starting to have an impact as well.
And continuation of all of these things, plus the seasoning of our greenfield plants that are still incurring cash drag on our results will enable us to reach our 20% margin by 2026.
So the last question I have is, I was a little surprised that you were guiding the UAW strike won't have a material impact on your results. What explains this?
I would say that the biggest impact you would expect is in the Auto Solutions group. And it's not to say that the impact is zero, but our operations are very diverse with significant nondomestic OEM exposure. And it's really that diversity that -- plus the impact of the programs that we were on that has given us kind of a muted impact. Again, not to say 0, but it shouldn't be material within the context of the overall results.
So that's all the questions I have. And I want to thank everyone for participating, and we look forward to talking to you again next quarter.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.