Q2 2021 Exco Technologies Ltd Earnings Call
Good day, and thank you for standing by welcome to the Exco technologies limit the second quarter results 2021 conference call.
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If you require any further assistance. Please press star zero and I would now like behind the conference radio Speaker of today, Mr. Darren <unk>, President and CEO of Exco. Please go ahead.
Thank you Vic and good morning, ladies and gentlemen, welcome to Exco Technology Limited fiscal 2021 second quarter Conference call I am Darrin Kirk CEO of Exco, and I will lead off with and operations overview, Matthew Posner. Our CFO will then review the financial results the <unk>.
Format of this call will be the same as in the past after a brief presentation, we will take questions for.
First I would like to make some comments about forward looking information and yesterday's news release and on page two of the presentation that we have posted to our website, you'll find cautionary notes and that regard while I won't repeat the content of the cautionary notes, we do claim their protection for any forward looking information we might disclose today.
We had a very good second quarter, producing 30 <unk> of earnings per share. This brings us the 58 of earnings per share year to date and puts us firmly on track for a record year.
I'm, particularly pleased with our results given the ongoing challenges of COVID-19, the extreme weather conditions, we faced during the quarter as well as rising input cost supply chain bottlenecks and a stronger Canadian dollar.
I want to thank all of my Exco teammates for their fantastic efforts and of course commitment to working safely through such extreme circumstances.
Looking first at our automotive solutions segment overall automotive production was modestly lower in the quarter as Oems were crimped by the shortage of microchips.
Consumer demand for vehicles, However remained near an all time high with sales incentive declining and dealer inventory levels now at very low levels.
We expect this backdrop will be met with the pickup in production as we go through the year one supply chain issues.
Our foreign exchange adjusted segment revenues performed better than the overall market again, which represents continuing content per vehicle growth.
New program launches helped achieve these results and we have high content on several refreshed vehicle models that are performing well and additionally, some inventory channels continued to be buffer stock, although at much reduced levels compared to prior quarters.
Quoting activity remains decent and we are seeing a number of important wins and sizable new opportunities, particularly with electric vehicles from both new and traditional Oems.
On the cost side, our margins benefited from favorable product mix shift and a continued focus on efficiency.
We did however continue to experience major fluctuations and forecast versus actual order releases again this quarter.
This occurred as our customers juggle their own production schedules and response to the chip shortage.
These challenges were pushed down to the supply base and place strain on our production planning process as.
And as well we lost several days of production associated with the Texas Winter Storm, we faced various supply chain challenges of our own and and counted rising input cost inflation.
These elements required us to be nimble and absorb a lot of extra costs related to overtime materials and to expedite product shipments as.
As well and Q2, we fully geared up for the launch of one new program, which are customer delayed into our third fiscal quarter.
Nonetheless, we still produced an EBITDA margin of 16% in the segment I must say this is pretty good margin, even and favorable conditions.
Looking forward combined North American and European vehicle production levels are expected to be up size of fleet for the year as industry production normalizes from the OEM plant shutdowns that occurred a year ago.
Our results will benefit accordingly, and will be further bolstered by the launch of new programs as well as an expected increase in penetration levels for some of our key accessory products for.
We remain deeply engaged and quoting new programs that we expect will contribute outsized growth.
And our casting and extrusion segment, we had a terrific results demand was very strong and all three of our segment business groups as I've mentioned several times before the automotive industry's transformation towards electric vehicles and focus on emission reduction is extremely positive for exco and it is hard to <unk>.
The state this.
We certainly saw that benefit and our results 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 Tesla with its Giga press is a good example of this as they are now producing the entire sub frame assemblies with die cast components that are much larger than <unk>.
<unk> previously produced.
Cash tool is already directly benefiting from these developments, but it is a very positive trend for all three of our tooling businesses.
The extrusion market remained exceptionally strong this quarter with high demand across the vast majority of end markets. As you know our extrusion tooling ultimately supports a diverse range of applications, including residential and industrial building and construction and conserve consumer durables and transportation.
This quarter, we demonstrated we could keep up with sizable demand growth by leveraging the harp harmonized manufacturing process of our numerous group facilities.
This initiative has allowed us to centralize certain processes, such as programming and design and utilize our capacity on a network basis when required.
All of this keeps our cost low capacity high and with the ability to manufacture of quality standardized product.
During the quarter, we received board approval to make additional capital investments to further expand and upgrade our in house heat treatment and capable.
All of operations.
These investments are quite strategic as they will shrink lead times and drive down our operating costs and give us enhanced control over a critical part of the manufacturing process, all while reducing our environmental footprint.
Our large mol group continued to be negatively affected by COVID-19 related program delays.
And these constraints did ease sequentially, however, and we expect will further improved and the second half of our fiscal year. We are very bullish on the long term outlook of this business given the growing dicast demand increasing complexity of components localizing of supply chains, and our leading market position.
During the quarter, we completed a detailed analysis of our operations and committed further capital to ensure we remain best in class is the full service operation.
Segment margins benefited significantly in the quarter from higher sales, but more so by efficiency gains and the usage of both material and labor. This progress reflects our past and ongoing sizable investments and new equipment, but it is really driven by our people who continuously rethink the way.
As of doing things and who pushed the envelope on innovation and product performance.
The need for suppliers to be both low cost and bring solutions to the customer has never been greater tolerances are becoming tighter lead time requirements are shrinking and demand for lower prices are intensifying yet there is a lot of profitable growth ahead provided we meet these requirements and I think our search.
The results this quarter with 11% revenue growth and of 22% EBITDA margin clearly demonstrate we can.
On the capital deployment side, we expect our spending to pick up and our second half. We anticipate this remaining spend could total towards $25 million as cast tool nears completion of its expansion plans and Morocco, and we make deposits on new machinery for further investments and our large mol group and heat treatment facilities.
So in summary, we had an excellent second quarter and first half two of our fiscal year. Despite the significant challenges. We all face today, we are very well positioned to continue this momentum and the quarters ahead. Once again, we thoroughly expect our fiscal 2021 to be a record year for exco.
That concludes my operations overview I will pass the call over to Matthew to discuss the financial highlights of the quarter Matthew Thank you Darren.
Ladies and gentlemen, consolidated sales for the second quarter ended March 31, 2021 were $118 4 million compared $120 2 million and the same quarter last year, a decrease of $1 $8 million or 1% second quarter sales of our automotive solutions segment were down $4 1 million or 6% and the casting and extrusion group sale.
<unk> increased $2 3 million or 5% over the quarter exchange rate movements decreased sales of $6 4 million, excluding the impact of foreign exchange.
Consolidated sales for the quarter were up 4% automotive sales were flat and the casting and extrusion sales were up 11%.
Consolidated net income for the second quarter was $11 7 million or basic and diluted earnings of <unk> 30 per share compared to $9 5 million or <unk> 24 per share and the same quarter last year and increase and net income of 23%. The company did not receive support from the Canadian wage subsidy program this quarter the.
The consolidated effective income tax rate of 22% and the current quarter was the same as the prior year period.
The automotive solutions segment reported sales of $69 $3 million and the second quarter decreased of $4 1 million or 6% from the prior year quarter. The segment sales were favorable when considering the negative impact from foreign exchange rate fluctuations the global micro chip shortage continued COVID-19 challenges, the Texas Snow storm and shipping delays from congested for.
<unk>, which reduced the vehicle production in the quarter.
Segment sales were supported by a number of program launches for both new and existing products and a favorable vehicle mix.
Second quarter pretax earnings and the automotive solutions segment totaled $9 4 million, which is consistent with the same quarter last year. The segment maintained traditional profitability. Despite the slight sales decline through continued cost discipline, and addition of new product launches and a favorable sales mix were offset by ramp up costs for future program supply chain challenges raw material.
Cost inflation and fluctuations with customer relations releases caused by uncertainty due to the microchip shortage.
The cash and extrusion segment reported sales of $49 1 million for the second quarter and increase of $2 3 million or 5% from the same period last year, excluding the negative impact of foreign exchange rate movements. The segment sales were up 11% and continue to rebound and exceed pre COVID-19 levels ex.
Surgeon group sales were supported by a strong buy strong results and all six locations, reflecting high demand for extruded and tools across north and South America across all industry segments.
Demand for die cast consumable tooling has been and the primary driver of cash tools sales performance and addition orders for larger capital goods and extrusion and markets and the increased.
The increased throughout the second quarter.
The large mold sales groups were down sales of large modern group sales were down as customers delayed shipping dates on existing programs. However, inventories increased and new business from current and new customers continued to outpace shipments for this group.
Pre tax earnings and the casting extrusion segment improved by $2 9 million of 65% over the same quarter of last year to $7 4 million.
The segment's profitability improvement was driven by strong efficiency gains and both material and labor usage, coupled with greater overhead absorption.
Exco generated cash from operating activities of $11 9 million during the quarter and $6 8 million of free cash flow after $5 million and net capital expenditures. This cash flow was more than sufficient to fund the $3 $9 million of dividends capital expenditures will be back end loaded this year as commitments for new equipment have increased.
And we'll continue in the coming months Exco ended the quarter with $28 4 million of net cash continuing its practice of maintaining a strong balance sheet and liquidity position.
Exco financial position remains very strong as such the company's balance sheet and availability under existing credit facilities allow the considerable flexibility to support strategic capital spending dividends and other opportunities that may arise that concludes my comments, we can now transfer to the Q&A portion of the call. Thanks Vic.
And the reminder to ask the question you will need the breadth is Taiwan and the telephone and Keybanc.
All of your question Ross the bounty.
The first question comes from the line of David Campbell Your line is open.
Good morning, everyone.
Good morning, Greg.
Erin.
You're casting and extrusion margin. This is probably the highest level of but it's been and almost five years. So I'm. Just wondering can you continue at this level or perhaps even directionally at the same level, especially with all of the demand that youre seeing towards the back half of the year with your large mol provision.
Well I certainly would expect so.
I think.
One attribute is that the large mall business is continuing to have a lagging impact from COVID-19. So it really.
Can we expect will contribute more to the profitability and the margin of the segment so to the extent debt.
Volumes remain healthy.
Healthy.
I could certainly see continuation of that margin and even some further upward potential.
And there and maybe perhaps you can comment on some of the competition that youre seeing and the marketplace and how that was.
The issue and the path for those competitors largely out of the market or youre, not seeing and London.
And the competitive threat anymore.
I would say Theres no material change from the competition and these markets is incredibly intense.
Now as as I mentioned components are getting much larger and more complex and we're seeing that from a number of customers and we are really the go to player when it comes to providing tooling for that part of the market. So.
I think competition remains intense.
And we are making investments to the more competitive and youre seeing that show up and the margin and the performance of the segment.
That's helpful.
You touched a little bit on the on the chip shortage and Thats pretty well documented.
Thank for put out pretty weak guidance.
Last week or so.
So do you have any visibility on what the impact could be for the back half of the year, especially in the context of having a discussion with your customers.
I, probably don't have much greater insight than whats available and the public press.
The numbers do seem to be growing in terms of the impact of production declines I see for it was was out this morning with some some news on that front.
But I think we're really positioning our business to <unk>.
To deliver the products for whatever the production levels are and we would aim to to exceed to exceed that growth as we've done in the past.
And then last one for me on your use of the capital do you have and update on the Capex spend this year and what are you planning for it.
The cash or are you just kind of harvest harvest of as you've done and the pass here. So.
Yes.
And I mentioned that our capex.
Spend will be weighted to the to the back half we spent $10 million, so far and we could likely spend another $25 million through the next two quarters and that is <unk>.
Merrily to finish.
Finish off the.
Construction of cash tools, new facility, and Morocco, which could be up and running this fiscal year and to also making some investments or some deposits on new equipment for our heat various heat treat programs and some additional capital for the large mall business.
And then beyond that are you just planning on harvest and the cash from here because the free cash flow profile is quite strong.
And for the last few years, we do continue to look out for additional Greenfield investments as I mentioned last quarter, we're kind of narrowing down our sites on and additional.
Plant likely for cast tool.
And in Mexico.
And.
We are really accelerating our spend for new equipment, we're bringing it forward.
From potentially future years to really solidify our competitive positioning for a market that we see is very strong both ex dicast and extrusion and.
And it's being driven by all of the comments that Ive made the electric vehicle the light weighting.
Building and construction activity and.
And so we'll continue to have kind of an elevated level of capex for the next couple of years, but.
And would still expect us to generate free cash flow.
And the final yet.
David the a lot of the backend of capital Youre seeing some of that is deposits because it's for larger equipment as well. So a lot of that is carrying forward as darin said into the next year. So there is.
There's a lot going on.
Okay great.
Helpful. Thanks, a lot guys.
Okay.
Your next question comes from the line of Michael Donovan sort of language.
The open.
Hey, good morning, guys.
Good morning, Michael Good morning.
For.
First of all of nice quarter.
I wanted to start maybe on the automotive solutions segment now and the margins there and looked solid I guess, given the long list of challenges faced in the quarter I Wonder.
And do the headwinds, namely the higher raw mats chip shortage and the ramp up costs do they become more meaningful into next quarter for smoothing out just to get a sense for the the sequential impact.
There is going to be pluses and minuses.
The raw material costs are going up and we're trying as best we can to offset that with efficiency measures.
And.
We were also impacted this quarter by the Texas ice storm, which and.
Guessing is not going to happen again and the next few quarters.
But.
We do have some are one program in particular debt is going to ramp up in Q3 and.
And we were fully geared up for that program to start glass and our Q2 and it didnt. So so that will be of positive influence on margin from overhead absorption.
As we go through the next couple of quarters. So.
And there is still quite the potential here that that margin.
And as some upside at this point, despite the headwinds that that will continue.
Got you Okay. That's good to hear and then all of the the.
And the market share gains and extrusion and cast tool.
And im.
Can you maybe get into that a little bit and just.
What's really driving the share expansion, there, obviously got new facilities and.
Across different areas, but is it just new capabilities of the better pricing.
Just to give us a sense for what's driving that and how sustainable it is.
Well it is.
<unk> Bye bye business extrusion, we have made significant investments over a multiyear timeframe to make the manufacturing of our dies the same.
Ian and.
The of the six plants that that group has.
And that has.
And really given us increased fluidity of manufacturing.
Across the network of those plants and such that we can we can balance loads better we have opened up capacity and.
And at the end of the day, we produce.
A very high quality die and we do that in.
A short period of time and when you do that consistently to your customer you get the next order and we've been growing from those elements and.
And on cash tool.
These guys of really innovative with their products and product suites that they have.
<unk>.
They really play to this.
Need for larger and complex components.
They are there is there are a dominant player in the shot sleep market is part of the die casting business.
Can see what Tesla is doing with that business in terms of these giga presses and Giga castings and cash tool is participating directly in that so.
It's a number of things, but it really does speak to the investment that we've made and equipment, but really our people and the.
And the way that they innovate our products to our customers demands.
Okay. Thanks for that Darren.
And then just I guess going off some of the last questions.
Sounds like the growth focus will come from internal investments rather than M&A.
Maybe just talk about what you guys are.
Targeting as investment hurdles for some of the Greenfield and some of the investments that youre, making any incremental.
The EBITDA growth that we should expect over the next several years as capex ramps up.
We've always had a good.
And return on investment.
Of targeting that and the 20% plus range is is ideal.
And we're going to continue to.
To expand our margin from making our products more efficiently and from.
Taking market share and both existing markets and the new markets as were doing with the cast tool was cast tool is doing with its investment in Morocco.
So a hurdle and that range is kind of what we target and I think we've got a very good shot of getting there.
Got you and that.
Hurdle of that pre tax or post tax.
Thanks for that I know post that.
Gotcha, alright, thanks, guys.
Thanks, Michael Thanks, Michael.
And again, everyone to ask the question just for instance, Taiwan dollar for.
The <unk> bed your net.
Next question comes from the line of Mr.
<unk> nine.
Your line is open.
Yes, good morning.
Darin just have a question first on you seem to be making these investments and heat treating both the.
The large mold.
Smith, and as well the extrusion business and what is the significance of.
Of the heat treating.
Is that that you treat the metal prior to machining and that improves the machine speeds and results could you explain kind of and.
The late <unk>.
Yes.
And we hit the tool steel that we use for both extrusion and dicast needs to be heat treated two and enhance the hardness properties of the steel through the manufacturing process and.
So all of our steel goes through heat treat at some part of the process and for.
For our extrusion business.
We have in house heat treat capabilities and we've long had debt and we have needed debt in order to.
And.
Keep the lead times short the.
Lead time and that part of the business of seven to nine days and if you outsource it and you lose control over that aspect you won't meet the objective of.
The lead time of turnaround.
And capital part of the business they have grown significantly over the years and they have relied on third party. He.
Heat treat providers.
Providers and.
As the complexity and the of.
These products increases and the scale of their business increases.
We have determined that.
It is advantageous to bring that heat treat in house and so we are doing that and we're making significant investments to do so.
And so.
I guess.
Expect two extrusion again.
We are adding new heat treat and equipment that is much more energy efficient and.
And that will have positive impact for our operating costs as well so theres a few heat treat programs going on.
But.
And theyre all to upgrade our internal capabilities and reduce our costs.
And then the large molds.
Do you outsource the heat treating.
We do currently and the heat treat operation that cash tool is putting and will actually go and the back of the plant of the large mall.
And it's up and new market. So large multiple have access to in house heat treatment as well.
Okay.
And then the last thing I wanted to.
Talk about was.
On the opportunity.
Given the net.
Necessity for light weighting of vehicles.
So where is that opportunity largely as it is it and the large mold business or is it and cast tool and.
Like what does that mean for the large mold business because they make.
Because now you make the tooling for engine blocks and transmission case covers and then you need to transition to.
Tooling for structural parts. So if you can just talk a little bit about that.
So the opportunity is in all three.
Of our tooling businesses.
And at a high level, it's both on the die cast and extrusion side.
The large mall has.
Traditionally had the bulk of its business and engine blocks and.
Transmission housings, and making molds for those components.
But increasingly over the past several years, they have made molds for structural applications and.
And those structural applications are increasing.
The increasing significantly in volume as these Oems lightweight their internal combustion engine vehicles, and then also with respect to electric.
Of vehicles, the battery weighs so much debt they've got to make more of the structure of the vehicle out of aluminum so.
So of large bolt is today, making several molds for structural components for both electric vehicle and for light weighting of internal combustion engine vehicles.
Cash dual similarly feeds.
Its its products into.
Trends.
Whatever the powertrain is for.
Whatever the dicast processes to make structural components cash.
This tool is the <unk>.
Significant player and that market today and is structural components are larger and more complex. It really requires tooling debt Ken.
And to handle that complexity and so capsule.
Benefiting significantly from that and then even and extrusion.
Sure they will.
Oems we'll make.
Some extruded components.
For the vehicle structure.
They need the extrusion dies for that so we're seeing a benefit there, but given the diversity of debt extrusion business. It's it's not a sizable.
But it is still very positive.
Okay. Thanks, very much thanks.
Thanks Peter.
<unk>.
Presenters today and no further question at this time please continue.
Okay, well thanks, everyone for your time and interest on the call. This morning, we look forward to speaking with you again next quarter take care.
This concludes today's conference call and thank you for your participating you may now disconnect.
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