Q1 2021 Exco Technologies Ltd Earnings Call
Ladies and gentlemen, and thank you for standing by and welcome for the Exco and technologies Limited first quarter was fall of 'twenty 'twenty one.
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And I like to hand, the conference I'll, let you speak of today for Darren <unk>, President and Chief Executive Officer. Please go ahead Sir.
Thank you Olivia and good morning, ladies and gentlemen, welcome to Exco technology Limited's fiscal 2021 first quarter conference call I'm Darrin Kirk CEO of Exco, I will lead off with and operations overview, Matthew Pas and <unk>. Our CFO will then review the financial results. The format of this call will be.
At the same as in the past after a brief presentation, we will take questions. The call will and no later than 10, and 41st 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 what I won't repeat the <unk>.
Intent of the cautionary notes, we do claim their protection for any forward looking information we might disclose today.
In summary, we had a very good quarter.
Our earnings per share of <unk> 28 is the highest such figure in any of our first quarters and our history.
I'm, particularly pleased with these results given the ongoing challenges we are all facing with respect to COVID-19 and <unk>.
Want to thank all of my Exco teammates for their fantastic efforts and of course commitment to working safely through such extreme circumstances.
Before I start my quarterly operations overview, I would like to address the accelerating movement towards electric vehicles and the rise of several new non traditional entrants into the EV market as it relates to exco.
Want to be clear that these changes are creating substantial opportunities for us in fact, we are already seeing decent sales and strong order growth and each of our business segments from these trends.
As it relates to our automotive solutions group of electric vehicles have much more cabinet space with the which is essentially additional real estate for us to sell our innovative and cost effective product into we have won programs for key content on several electric vehicle platforms, including with newer industry entrance more and.
Encouragingly customer discussions and quoting activity and New program awards are all gaining steam.
And our tooling group, both Dicast and extruded aluminum components are increasingly being used and a number of structural automotive applications.
This is especially true for electric vehicles, but for internal combustion engine vehicles as well sure. The tooling, we provide for engines and transmissions will inevitably decline, but this will occur only very slowly over a number of years growth and non powertrain die cast and extrusion applications. However will greatly.
Exceed this decline.
And any event, our direct internal combustion engine powertrain tooling exposure currently makes up a very small proportion of our total operations, perhaps about 10% to 15% of consolidated sales.
In addition, our products are getting larger and far more complex is the scale of application and engineering limits are pushed increasingly higher this plays to our competitive advantage, given our leading industry position and the engineering design and production of the various products we produce.
Simply put our customers are looking to us to help solve problems and we are responding.
As it relates to the operations and.
And our automotive solutions segment for the first quarter market fundamentals for decent.
On a combined basis industry production volumes in North America, and Europe were essentially flat compared with the prior year period.
Segment revenues and the quarter were nonetheless, higher by 11% year over year, which represents significant content per vehicle growth new.
New program launches helped the cheap these results and we have high content on several refresh the vehicle models as well contrary to our experienced last quarter, we saw some inventory channel being restocked and perhaps to some degree overstocked as to mitigate against possible future supply chain disruptions.
On the cost side, our margins benefited this quarter from higher margin sort of higher volume levels and increased overhead absorption favorable product mix shifts and general efficiency improvements as well and our first quarter last year, we faced significant program launch inefficiencies and GM related straight cost we can.
<unk> two experienced major fluctuations and forecast versus actual order releases again this quarter. This occurred as our customers struggled to anticipate demand and understand their own plant production limitations.
The challenges were pushed down the supply base and place strain on our production planning process. The intensity of this dynamic however, it did reduce through the quarter.
Nonetheless, despite the disruption and increased costs to keep our labor safe, we rose to the challenge to satisfy our customer needs of note. Our segment EBITDA margin improved to 17, 5%, which is amongst the highest such bigger we've ever achieved.
Looking forward combined North America, and European vehicle production levels are expected to be up size of the fleet for the year as industry production normalizes I expect our growth will comfortably exceed this trend for the year helped by the launch of new programs and the following quarters that are above the size, we would normally see further.
We remain deeply engaged and quoting new programs that we increasingly expect will contribute as sales growth.
And the casting and extrusion segment overall market conditions continued to improve this was true and both the extrusion and die cast production markets, where order intake exceeded sales by a decent amount of across the segment.
Sales of larger capital equipment within the extrusion channel remained relatively weak through much of the quarter. However.
Nonetheless order flow for these products picked up in December which will bolster our sales and the quarters ahead.
Our large mol group continued to see a delayed impact from the OEM production shutdowns and our third quarter of fiscal 2020.
This impact is exacerbated by accounting rules, whereby we don't recognize revenue until the product is complete.
I believe we've largely worked through this temporary suppression now and expect our large mol group sales will move higher in the quarters ahead as we complete work on our substantial order backlog.
I would point out that while our segment sales were down year over year, they were up 15% sequentially.
Despite the lower sales and the segment profitability edged higher driven by favorable product mix various efficiency improvements more balanced production loans across our plants and lower steel tariffs and surcharges, which are of significant of which a significant component is pass through to the customer.
Our segment EBITDA margin was again fairly strong and the quarter coming in at 18%. While it is difficult to forecast. This margin on a quarterly basis. We continue to expect the segment will realize overall revenue and EBITDA growth this year.
On the capital deployment side, we continued to advance our various strategic priorities, including cash tools, new Greenfield plant and Morocco heat treatment facilities for several of our tooling group locations and opportunistic purchases of capital equipment, where we found deals.
We didnt buyback any shares during the quarter, although we may and the quarters ahead, we remain interested and acquisitions, but have a lot on our plate with the organic growth initiatives. We are currently pursuing.
We intend to director of growing cash flows towards these initiatives, but to the likely extent our cash flow still exceed this usage, we will gladly pad our balance sheet further waiting for the right opportunities to the route develop.
Lastly, I am extremely pleased to announce that yesterday, our board of directors approved a <unk> <unk> per share increase and our annual dividend to an annualized rate of <unk> 40 per share. This amount represents just 36% of exco and trailing 12 month free cash flow and marks the 13th time Exco has.
<unk> increased its dividend and 12 consecutive years.
As you are likely aware, that's and exclusive club.
So in summary, again, we had a very good good first quarter with our youre getting off to a record start despite the significant challenges, we all face today and meaningful near term risks and the broader market. We are very well positioned to continue this momentum and the quarters ahead.
That concludes my operations overview I will now pass the call over to Matthew to discuss the financial highlights of the quarter.
Thank you Darren.
And ladies and gentlemen, consolidated sales for the quarter ended December 31 of $121 million and increase of $1 million first quarter sales and of automotive solutions segment increased $7 $8 million of 11% and the casting and extrusion segment sales were down $6 8 million or 13% over the quarter exchange rate movements had and.
Negligible impact on sales.
<unk> net income for the first quarter was $10 $9 million or earnings of <unk> 28 per share compared to $8 1 million or <unk> 20 per share and the same quarter last year and increase and net income of 35%.
The effective income tax rate for the quarter was 22% compared to 18% and the prior period prior year period, the income tax rate and the prior year quarter was favorably impacted by the recognition of deferred tax assets and increase in earnings in jurisdictions with lower tax rates, excluding the recognition of the deferred tax assets the effective income tax rate for the prior year.
<unk> was 20%.
The automotive solutions segment expense of 11% increase in sales and the first quarter or an increase of $7 8 million for $76 1 million from $68 3 million and the first quarter last year. The increase compares favorably to and overall industry vehicle production volumes, and North America, and Europe, which are relatively flat and the quarter segment sales are soft.
Sort of by program launches higher order volumes favorable product mix and higher tooling sales.
First quarter pre tax earnings and the automotive solutions segment totaled $11 6 million, which is an increase of $3 6 million or 45% over the same quarter last year key factors in the segment's improved margins include the improved cost absorption with higher sales and cost reductions improved operational efficiencies and favorable product mix and addition of the prior year.
Quarter segment pre tax profit for negatively impacted by adverse exchange rate movement and the impact of the general motor strike and certain program launch cost inefficient.
The cash and extrusion segment recorded sales of $45 3 million and the first quarter compared to $52 million last year, a decrease of $6 $8 million of 13%. The sales decline is mainly driven by the deterioration of general economic conditions due to the impact of Covid, 19 changes and product mix and delivery timing as well as lower steel.
Cost of the generally.
And those sales were down compared to the first quarter 2020 sequentially sales were up $5 8 million of 15% compared to the fourth quarter of 2020.
This 15% quarter over quarter increase reflects demand across large mall extrusion and the caf two groups pre tax earnings and the casting extrusion segment improved by.
And by $300000 or 7% over the same quarter last year. This represents a 25% increase and pre tax profit margin and the segment. The earnings improvement was driven by improved fixed cost absorption with more balanced sales across extrusion divisions and favorable product mix shifts of cast tool.
Exco generated cash from operating activities of $9 $6 million during the quarter and for $6 million of free cash flow after $5 million and net capital expenditures. This cash flow was more than sufficient to fund the $3 7 million of dividends and exco ended the quarter with $26 5 million and net cash and $75 million and available liquidity.
Including $35 $2 million of balance sheet cash continuing its practice of maintaining a very strong balance sheet and liquidity position.
Exco 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 capital spending dividends share buybacks and other opportunities that may arise that concludes my comments, we can now transition to the question and answer portion of the call.
Yeah.
Ladies and gentlemen, as a reminder to ask a question for you when you're two questions pardon. The one key on your Touchtone telephone.
To withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Okay.
I'm showing we have a question coming from the line of David Ocampo from <unk> Securities. Your line is open.
And good morning, everyone.
Good morning, David.
Darrin I think your guidance last quarter was to outpace the automotive industry by around 5% to 10%. So if I had to break that out between market share gains and just vehicles getting larger how should we square that up.
Yes.
Thanks for the question David It is difficult to give you a complete breakdown on that I mean, theres a number of moving factors that are going on there.
As I mentioned last quarter, we do kind of expect to get to the upper level of that range and of it.
There is the.
And at the vehicle production was flat and then we did have a number of new program launches.
And those program launches.
On a number of vehicles that were refreshed and then had a bit of of sales boost from that effort.
There was also some inventory restocking going on.
And which had gone and the other direction and our fourth quarter of 2020 and to some degree we believe that the supply chain is bolstering up their inventory levels too.
I guess prepare for any disruption from for.
The COVID-19 given the emergence of.
The other variance and things like that.
No.
I struggled to quantify each of those for you but.
And some of each.
Okay, that's fair.
Sure.
And probably the zero in on the margins and automotive solutions and it was quite strong.
Is this sort of that new norm that you guys can expect going forward or can it actually go much higher and.
Lower margin contracts begin to roll off.
Like what's the delta between the new the new margin contracts and the old ones.
And I'd like to think it's the new norm I don't want to get the aggressive with any guidance.
We do have some other programs that are launching this year.
That may have some front and compression associated.
With them, but.
To the extent that overhead absorption has improved significantly and this quarter to the extent that the mix and the volume levels remain where they are there is certainly no reason why we can't continue to enjoy such good margins like this.
Okay.
And Matt what was the split on the government assistance that you guys had in the quarter I know it was pretty small but by segment would be great. Just over 450000 of the quarter. It was and our last note and the financial statements.
And what's the split between cost of extrusion and automotive.
Sure.
I would say, yes about two third one third two thirds cash.
Cash and extrusion.
Okay, that's great I'll hand, the call over.
Okay.
And as a reminder, ladies and gentlemen ask the question. Please press star one.
Our next question coming from the line of Peter Sklar with BMO capital markets. Your line is open.
Yes, good morning, Darren and Matthew Darin and your call.
Commentary, where you were discussing electric vehicles and kind of the.
And the dynamics that underlie that.
The statistic of 10% to 15% could you I didn't quite catch that could you explain that and what that represents is that youre of powertrain exposure, yes, that's roughly of the powertrain exposure and.
You can assume that.
A good piece of the large mol group and some of cast tool.
Okay, So thats largely making dies for.
And Jim blocks and transmission covers and plus some consumables out of cash tool is that how we should think about it yes, yes. That's how you should think about it I mean, it's a relatively small portion of the business now.
But as I also mentioned.
And the powertrain work that we have is ongoing.
In fact in the quarter, while the large mol group has continued to have some revenue suppression as a delayed impact of COVID-19.
The order flow is substantial.
<unk> been running with.
Book to bill or order flow cuts compared to sales of about 50% higher and we expect to at the start shipping on that and the quarter ahead. So.
You will see some revenue pickup and.
And that order flow as it is across the board and.
Certainly some powertrain and stuff, but the non powertrain components as well and several new customers I will add.
Okay.
On this.
Like this new kind of cash tool expansion plant and Morocco.
Given that you've had the experience and Thailand, I assume building and equivalent kind of operation can you talk about like so you know like and Thailand, just how did the ramp go to.
Like how long.
How long does it take to.
How long does it take to build up.
Yes.
How long before it breakeven.
Can you put it in the context.
Thailand to help you put that in the context as to what the maturity curve looks like.
Well.
And it's going to be for it's going to be tough to give you guidance on that Peter.
The cash tool Moroccan plant expansion is all about.
Taking additional market share in the European market and.
To the extent that we're successful.
As we expect to be that ramp of DFAST and if not it will be a little slower but the generally these plants.
If I look at our Mexican extrusion plant.
Were EBITDA positive in the first year and.
It's pretty much.
Positive profitability at this point so.
There is.
I think we're pretty optimistic that that ramp is going to go pretty well, but the wait and see.
But do you supply like.
Like do you supply European Digesters from cash stool here and Oxbridge.
Good day.
Can you spell in the Europe for both die cast and extrusion from from Oxbridge and.
For the larger.
Extrusion capital components, we really can't be competitive and.
And when you don't get that relationship on the capital side, it's hard to follow through on the consumable side.
And even on the die cast side, we're at a competitive disadvantage to the distance and.
So we do sell in the Europe, it's not.
Not a huge part of our of our revenue.
For for cash tool and this will open up the avenue to to improve that.
Okay, and then lastly, Darren like and your commentary you said that you're happy to buildup of cash.
For the right opportunities and when you referenced opportunities are you talking about acquisitions or are you talking about.
Building, new plants and similar to the this new Moroccan facility or all of the Bob When you think of all of the above.
We've had a long track record of Greenfield growth and the.
Moroccan plant is is the latest one but.
It's too early for me to announce what we're thinking of here, but we are.
We're certainly thinking of new Greenfield investment opportunities.
From the demand that we see and we.
We continue to look out for acquisitions.
Okay, and just sort of.
Sorry, one other question on this new plant and Morocco, like who at Exco is taking the leadership and launching this as it Paul Robyn similar to what we did and sort of line haul and his team at our cash flow.
Yeah, Okay, great. Thanks, very much thanks for.
Peter.
Again, ladies and gentlemen, and good luck to ask the question. Please press star one.
And Im showing no further questions at this time.
Okay with that I guess, we can move to conclude the call I. Appreciate everyone's time. This morning, and look forward to talking to you again next quarter take care.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may all disconnect.
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