Q4 2020 Exco Technologies Ltd Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Exco Technologies Limited fourth quarter 2020 results conference call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you on the other press star one on your.
Telephone please be advised that todays conference is being recorded if you acquire any other systems. Please press star zero I.
I would now like turn the conference just speaker today, they're in current Chief Executive Officer of Exco. Please go ahead Sir.
Thank you to all good morning, ladies and gentlemen, welcome to Exco Technology limited fiscal 2024th quarter Conference call I'm, Darrin Kirk CEO with Exco I will lead off with an operations overview Matthew partner for 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 and no later than 10 40, but.
Before we begin I would like to make some comments about forward looking information in yesterday's news release and on page two of the presentation that we have posted to our website, you'll find cautionary notes in that regard.
Well I won't repeat the contents of the cautionary notes, we do clean 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 cope in 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.
For Us we're 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 and the results for both the quarter and the year, especially in context of the extremely difficult market conditions, we faced in the last two quarters.
I know all of our stakeholders I. Appreciate these results for only possible with a lot of extra effort by and disruption to each of our employees.
Very thankful for the extra effort for the entire exco team, especially for working together to keep each other sales through these difficult times.
For the year, we delivered 69 cents of earnings per share and generated free cash flow of $42 million or one dollar and four cents per share.
We paid out about a third of this cash and 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 castings Extrusions segment, our new extrusion die plants in Mexico performed extremely well for the first full year results exceeding our expectations.
We also advanced our industry, leading position in the Threed printing of powdered metal for tooling purposes.
Created an added equipment across our businesses gained several new customers and saw significant productivity gains.
As well, we progressed key strategic investments, including Caf two new Greenfield plant in Morocco, and we are moving ahead with heat treatment facilities for several of our locations.
In our out of automotive solutions segment, we continue to develop new innovative products, one sizable new programs advance several others and are ready for the launch of some new key new programs this quarter.
In both of our business segments for the rise of the electric vehicle and the entrance of several new non traditional automakers are creating incremental opportunities, which we are actively season.
Well in our tooling group, our product for 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 material materially relative to Q3 as.
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.
Seven 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 and as well as the de stocking 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 in place strain on our production planning process. Nonetheless, despite the disruption and increased cost to keep our labor sales, we rose to the challenge to satisfy our customer needs.
Offsetting these challenges we implemented several operational measures measures that will result in lasting productivity gains once things inevitably normalized in our volumes go higher as we expect of.
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.
We expect our growth to exceed these trends beginning in our first fiscal quarter disc.
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 for the year above the levels that we would normally see.
Further we are deeply engaged in quoting new programs that could contribute outsized growth.
In the casting extrusion segment market conditions vary 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 condition.
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 multi plant footprint and harmonize manufacturing processes.
This flexibility enabled us to meet customer demands while containing costs.
On the die cast side, there were also bearing trends, but overall market demand is pretty good cash.
Cash flow saw significant demand for its cons to consumable tooling products is automotive production volumes ramped up sharply.
Cash too is also seeing decent share gains as the benefit from their leading market position, an increasing demand for larger and more complex die cast components.
For large mulgrew saw lower activity during the quarter from the delayed impact of OEM production stoppages in our third quarter.
New day development continue through this period, but day rebuild work typically lags 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 costs, it's hard to overstate how competitive for 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 risks in the broader market, we're very well positioned for fiscal 2021 in 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 Derek good morning, ladies and gentlemen, consolidated sales for the fourth quarter ended September 30 for $100.7 million, a decrease of $21 million for 17% from the prior year.
The decline in sales reflects the global impact of COVID-19 on the company's two segments.
Fourth quarter sales at our automotive solutions segment decreased $8.2 million or 12% and the casting extrusion group sales were down $13 million or 25% over.
Over the quarter exchange rate movements increased sales by $1.3 million.
Annual sales total $412 million compared to 507 million last year, the decrease $95 million or 19% over last year.
Decline reflects the global impact of COVID-19 together the deconsolidation of AOCI in January 2019.
The company sales were impacted by code 19 differently, depending on the business segment for the automotive solutions segment three of our for plants for idled for two and a half months in the third quarter. The catching extrusion segment experienced sales declines ranging from 10% to 50% as volume fluctuated fluctuated with disrupted timing for customer orders customer demand.
For this segment vary depending on the product.
Demand rebounded for the EPS 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 cash in extrusion segment sales were down 23 million or 11% compared to fiscal 2019 the.
Capex rate movements added about three and a half million to sales during the year.
Consolidated net income in the fourth quarter increased to 10.7 million or earnings per share of 27 cents.
Compared to 6.7 million or earnings of 17 cents per share in the same quarter last year and EPS increase of 59%.
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 for resolve tax exposures and $300000 of R&D tax credit 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 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 volume the delay in certain new customer programs ramping up due to COVID-19.
And timing of accessory sales, which is 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 pre tax profits increased benefiting from management's efforts to control costs improve deficiencies and the shift in demand to higher margin programs.
In addition, current period results benefited from the Canadian wage subsidy program for the prior year results were adversely impacted by higher labor costs at polytech in FX significant inefficiencies associated with program launches higher severance costs and the inefficiencies related to the general Motors strike.
Cashing extrusion segment recorded sales of 39.5 million in the fourth quarter compared to 52 point for 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 for delivery timing as well as lower steel costs generally.
Pre tax earnings in the casting extrusion segment improved by $200000 or 5% over the same quarter last year to $4.2 million.
The earnings improvement was driven by increased increased contributions from the extrusion the cash to groups and benefits for the Canadian which subsidy program.
Exco generated cash flow from operation 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 and 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 and net cash and $76.6 million of available liquidity, including $33.1 million and balance sheet cash continuing the company.
His practice of maintaining a very strong balance sheet and liquidity position.
Excos financial position remains very strong as such the company's balance sheet availability under 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 transitioned the Q and a portion of the call Joelle.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
John Good question press, the pound key to standby when we compare the Q1 day roster.
Our first question comes from Michael demand with Scotiabank. Your line is now open.
Hey, good morning, guys.
Good morning, Michael.
Nice quarter I was just wondering if you can call out the the wage subsidy received in the quarter.
And then for the automotive solutions, if you ex out the way subsidy Im just wondering if you can sustain that level of margin going forward.
So in terms of wage subsidy the quarter disclosers around $4 million approximately 25% was the automotive solutions group the remainder was capping extrusion.
And then I guess with respect to the.
EBITDA margin for the segment, we were around 15% for the quarter certainly.
Certainly benefited to some extent from the weighted subsidy, but.
We do see the prospect for that margin going higher over.
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.
This year, so I would say that.
We do see upward pressure on net margin.
Interesting Okay. That's good news and then.
Turning to the accounts Unix you're going I mean, you called out.
A couple of factors, there's a lag effect in the large mold there were lower steel prices and then queues in fiscal Q4, I mean, presumably those are all moving in the opposite direction for for fiscal Q1, I think you did talk about margins ticking down any way you can provide.
Maybe some goalpost for guidance, Rob what type of normalization, we should see you next quarter.
Yeah, I'd say, it's tough to give you guidance for a quarter.
But for.
For the year, we do.
Certainly expect that we'll have both topline and EBITDA growth, even if the margin comes under pressure a little bit of pressure from from Q4.
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 will see that in our Capex budget for 2021 is north of $30 million that $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 facility 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 consistent consist.
Consistently increasing the dividend.
But to the extent that the balance sheet continues to.
Remained strong in that we have surplus cash we.
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 that we're not happy with.
Then we also periodically buyback stock, but I think you should expect that the balance sheet will will remain strong.
Got it thanks for the thanks for the color guys nice quarter.
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Thank you for our next question comes every day that Ocampo with Cormark Securities. Your line is now open.
Hi, good morning, guys.
For the.
When we think about the new programs that you won in automotive solutions and sort of what youre quoting on today and coupling that with what appears to be a shift to more higher end vehicles, how should we think about the CPT growth over the next few years.
So I think we've had a pretty.
Good track record of generally having revenue growth that five to 10 percentage 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 outsize.
Relative to prior years.
I would expect that we could.
Certainly get close to the upper end of that range or for 10% premium growth and that represents content per vehicle growth.
With.
All the change to the vehicles that are happening.
And the rise of the electric vehicle.
There is a significant opportunity for us to.
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 low.
Lot of these programs and so I think just naturally as we see kind of the landscape evolve for for vehicles. It plays it plays to our advantage and Thats contributing to the group.
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 tossing off this cost for your customers and can you give us a sense on.
What percentage of raw material cost of steel.
Yes, so for the steel that we buy specialty grade tooling steel and we have not seen that price increase for for the steel that we buy occur.
In fact, if anything it's continued to have downward pressure in recent quarters and loans.
So.
A lot of movement in the price of steel is passed on to customers, but there is there is a lag.
And where where the price of steel goes in the future.
I can't say, but our recent track.
Track record is has been that has been coming down I guess in terms of intensity of revenues.
Probably in the neighborhood of 20% or so.
For the tooling group.
Okay. That's it for me ill hop back in queue.
Thank you.
My day to ask a question you will need to press star one on your telephone.
Next question comes from Peter Sklar with BMO capital markets. Your line is now open.
Yeah, good morning, Darren and Matthew.
Darren I first wanted to ask you like strategically.
What you're seeing this accelerated movement globally to battery electric vehicles.
Like what is your plan for the large mold business because obviously.
Battery electric vehicle doesn't need a transmission case copper or an engine block and I'm just wondering what your thinking is there and what you can do with that business sure I think.
Broadly.
Moving to the electric vehicle is.
A very positive thing for our entire tooling group of 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 are installing.
To see that I know day die cast is taking share.
And the mobile the more complexity is increasing with the size of these components that are required we are actively.
Quoting winning awards for structural components, and and building them today and whether its internal combustion engine or electric vehicle more of the 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 relate labrie, it a little bit about the day.
Tooling you are developing not true traditional machining methods, but through three D. Printing is I did like where are you doing that is that extrusion tooling or cash tool tool and can you just talk a little bit about that so the machines that we have.
Which we have three up and new market.
Use them primarily to support our mold design.
For large mold group and by using an additive print.
Printed component.
In the mall 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 threed printing businesses.
Is going very well for us.
We are a clear market leader and we are seeing significant growth.
In in that market, both supports our existing business and provides us with with new growth channels.
Right Okay.
And then just my last question is just just to kind of what does your gut feeling in terms of the outlook for demand in extrusion tooling business. Obviously, you know as it relates to non residential construction you're not theirs.
There's obviously going to be a slowdown in office towers, but theres going to be it's obviously, a big pickup and building.
Warehouses and distribution centers and things of that nature. So just wondering kind of on balance how do you think that the demand is going to unfold in that business. It's a tough thing to forecast Peter but the beauty of it 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% for a third of the overall use and as you point to where one segment faults others may rise.
We're certainly seeing an increase in demand for extruded aluminum.
Aluminum for the automotive industry and we're very active.
Active in that part of the market and.
I think generally the extrusion market is kind of head up.
GDP plus type growth profile, and I don't know where things shake out or over a quarter or two but longer term I would expect that total.
Right and this Mexican plants you have like this.
It sounds like it's performing well how.
How do you find that 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.
You know I'll be your staff.
I would say our labor situation in Mexico generally has been.
Favorable.
In the last several quarters absenteeism and.
And turned over our way down with respect to our extrusion operations. There one of the benefits that we have is that we have this multi plant footprint and we can centralize things like the design of the die and the programming for the equipment and.
Those are for.
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 operation.
Hi, This is really kind of helped us.
Start up these greenfield plants, where we can take some of the more complex jobs at the day to day requirements, there and do it elsewhere.
Okay. The other Peter as those plants and like the extrusion plant aren't as large so attracting good talent and keeping them.
It's a little bit different than.
1000 here and there so it's it's.
Hasn't been an issue from what I for okay.
Okay good to hear thank.
Thank you both for your comments.
Thanks Peter.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Dan cash for closing remarks.
Great well, we appreciate everyone's time this morning, and we look forward to speaking with you again next quarter Stacy for everyone Bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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