Q3 2021 Exco Technologies Ltd Earnings Call
Segment sales were supported by a number of key program launches for both new and existing products and favorable vehicle mix.
Third quarter pre tax earnings of the automotive solutions segment totaled $5.1 million compared to the loss of $3.8 million the same quarter last year, an increase of $8.9 million.
The segment's profitability growth for.
Flex 3 months sales compared to less than a full quarter due to the plant shutdowns in the prior year from COVID-19 restrictions overall profit margins were lower than expected due to decreased fixed cost absorption from sales reductions of RASM for the microchip shortage raw material price increases due to inflationary pressures high freight transportation costs and ramp.
Of course for future programs management remains focused on improving the efficiency of its operations and reducing its overall cost structure the.
The casting and extrusion segment reported sales of $53.9 million for the third quarter, an increase of $11.1 million of 26% from the same period last year all of the although the impact of the microchip shortage was.
Not of significance in the catching extrusion segment as it was in the automotive segment sales and cash tool on the large mall groups were still negatively impacted third.
Third quarter segment sales reflects the third consecutive quarterly increase 10% over the second quarter of fiscal 2021, even with the negative impact of foreign exchange on the microchip issues the extremes.
And a group of experienced higher sales at all locations, reflecting demand for extrusion tools across the industry segments, coupled with the operational improvement that have continued to reduce lead times contributing the market share gains.
Demand for capital of <unk> consumable tooling and extrusion products was solid with a slightly stronger demand for the dicast consumable tooling.
Extrusion machines.
For the leading for the quarter.
The large mol group sales were up 31% from Q2 fiscal 2021 with diversity of its customer base and solid additive sales representing key drivers of the results new business from current and new customers was awarded in the quarter as a result of inventories and backlog.
Fueling some of the grow.
The casting and extrusion segment reported $7.8 million of pre tax profit in the third quarter, an increase of $2.8 million of 57% from the same quarter last year similar to the automotive segment of the catching a true segment profitability growth over the prior year as a result of higher sales due to the impact of COVID-19 last year.
The Covid impact was somewhat muted last year by the nature of much of this segment's tooling products as they feed into many of the central industries.
With the higher third quarter sales segment profitability continued to improve through fixed cost absorption and we benefit from greater labor efficiencies, reflecting our continuing investments in new equipment and processes. The.
These improved.
Continuing were partially offset by higher freight and raw material input costs.
Exco generated cash from operating activities of $19 million during the quarter and $15.3 million of free cash flow after $3.6 million in maintenance capital expenditures. This cash flow funded 13 point for.
The $13.1 million of growth capital expenditure.
<unk> and $3.9 million of dividend consistent with recent quarters. There was no activity on the company's normal course issuer bid capital expenditures were above our historical levels will continue higher this year and heading into fiscal 2022 to support our growth initiatives ex.
<unk> ended the quarter with $26.3 million of net cash continuing its practice.
Proven on maintaining a strong balance sheet and liquidity position.
<unk> financial position remains strong as such the company's balance sheet and availability under the existing credit facility allows considerable flexibility to support strategic initiatives. This combined with our free cash flow creates the foundation for management to pursue high value growth capital expenditures dividend.
This and other opportunities opportunities that may arise.
This concludes my third quarter financial review before we open up the call to questions. Darren has some additional comments regarding exco outlook Darrin.
Thanks, Matthew turning to the outlook section of the presentation materials beginning on page 16, we highlight some of the key factors supporting.
Porting our expectation for top line growth in the back half of calendar 2021 a.
A rebound in vehicle production volumes, driven by an easement of microchip supply constraints as chief among these factors, but we are launching several new programs and we are seeing increased demand in both of our business segments generally from the.
Dividend, but transition to electric vehicles and broader global sustained the trends.
With respect to ex goes Esg's strategic priorities, we have highlighted on page 16 of the presentation. The key categories. We are focused on to ensure our operations are sustainable and we are being a good global citizen.
With respect to our.
Our goals are ESG marketplace opportunities are substantial and with respect to the environment. We are investing significant capital to improve the efficiency of our operations and lower our carbon footprint, but.
But we view each of our 5 strategic priorities is important and we expect to update the market on the status and progress of these initiatives over.
Rapid quarters.
Beyond the near term, we are pleased to announce our targets for revenue EBITDA and net income by fiscal 2026 over this 5 year horizon, we anticipate growing our top line by an average of 10% per annum, while targeting EBITDA net income and EPS growth at.
At slightly higher levels.
Altogether, we are targeting of more than 50% increase in our various financial metrics and the time horizon.
This would increase our annual revenue to roughly $750 million EBITDA to $120 million and earnings per share to $1.90 by.
For the come 2026.
Digging into the elements of the revenue growth on slide 19, we see several factors contributing with respect to the casting and extrusion segment, we are targeting incremental revenue of $30 million per annum by fiscal 2026 from the launch of 2 new greenfield facilities being.
Being constructed by cash fuel in Morocco in Mexico.
These facilities will provide access to new geographies, where we are somewhat inhibited from competing effectively.
Due to proximity constraints.
Market share gains will contribute the bulk of the growth that these local markets are also expected to grow strongly in both the ex.
<unk> and Dicast end markets.
Next with respect to our casting and extrusion segment generally the intensifying global focus on environmental sustainability is creating significant growth drivers that are expected to persist through at least the next decade.
Automotive Oems are looking to lightweight metals such as aluminum.
Luminous to reduce vehicle weight and reduce carbon dioxide emissions.
This trend is evident regardless of powertrain design, whether it's internal combustion engine electric vehicle or hybrid.
As well our renewed focus on the efficiency of Oems and their own manufacturing process is creating higher demand for advanced tooling that.
Contribute towards the profitability and sustainability goals we.
We expect traditional Oems will ultimately follow the trend of increased casting sizes, and we're positioning our operations to capitalize on accordingly.
Altogether, we expect these operations along with G D P plus type growth in.
In the broader extrusion market will provide us with $90 million of <unk>.
The annual revenue incremental opportunities.
Moving on.
To the automotive solutions segment, we have already begun to launch $65 million of recently awarded programs roughly half of these programs.
That can turn around electric vehicles, and the launches will occur steadily over the next couple of years ramping up fully by early fiscal 2020 for <unk>.
Lastly, with respect to our broader automotive solutions segment opportunities, we are targeting to maintain our track record of increasing content per vehicle in the vicinity of 7% per annum.
Graham This is within range of our historical track record and could be enhanced by higher vehicle production volumes, which of which we have not factored in.
Drivers behind the content per vehicle of growth are mainly twofold first Oems are increasingly looking to the sale of higher margin accessory products as a means to enhance their old levels.
The profitability.
<unk> automotive solutions segment derives the significant amount of activity from such products and as the leader in the prototyping development and marketing of the same.
Secondly, the rapid movement towards an electrified fleet isn't any types of new market entrants into the automotive market.
I think traditional OEM incumbents to further differentiate their product offerings. All of this is of driving above average opportunities for exco.
On the cost side inflationary pressures have intensified in recent quarters, while prompt availability of various input materials and components has become.
More challenging we.
We are offsetting these dynamics through various efficiency initiatives and taking pricing action where possible.
While there is typically several quarters of lag before the countermeasures are evident we do expect to generally hold our segment EBITDA margins near current levels over time in particular, we're targeting.
<unk> of 20% and the casting the extrusion segment, and 15% and automotive solutions producing of consolidated EBITDA margin of 16% on an annual basis.
With respect to the ample amounts of free cash flow that we expect to generate where price <unk>. The use of these proceeds.
The margin growth capital and dividend increases even so we expect to have significant surplus cash flow over our 5 year horizon, which will add to our exceptional balance sheet strength.
Acquisitions remain an area of focus we expect we may pursue opportunities that add around $250 million to.
2 our top line, while sustaining a very strong balance sheet.
Any acquisitions, however will be pursued very cautiously and with the strategic view.
In any event. They are not included in our EPS target of $1.90 by fiscal 2026.
With all the with all of that we know these goals can't.
Be obtained without the dedication of our people I'd like to again, thank the entire team at exco for their focus hard work and immense flexibility during the past quarter and year.
No. We are all looking forward to a very bright future.
That completes the prepared comments, we can now proceed to questions.
<unk>.
Right.
Peter.
As a reminder to ask a question for star 1 on your telephone keypad to remove yourself from the question queue price per pound.
Your first question is from David Ocampo.
Hey, good morning, everyone. Good morning, David.
Yes, Darrin on your guidance.
When you provide that 2026 EPS target how should we think about how that scales to that number or is it.
That's more backend weighted or should we think about it is more evenly distributed by year.
I think.
Think when you look at the buildup of that David and the.
I guess I'd point, the page 19 of the at the.
The conference call deck, Theres really for components and.
That's the new plant in Morocco.
The above average market share growth from share gains from casting extrusion and the various programs awarded.
And automotive solutions and then automotive.
The organic growth being the for components.
The the various programs awarded and 21% to $65 million that'll ramp up steadily I guess between now and early fiscal 2024.
The the other component plywood.
Guide Youtube toward.
Kind of layering it in on a.
On a steady basis through the time horizon.
Okay and then.
But when I think about that 7.
The 7% CAGR that you have on the CPB growth.
How much visibility do you guys have on that.
Just based on your discussions with.
<unk> and <unk>.
Something that is.
It's reasonably attainable.
Well near term I'd say, it's pretty decent.
But.
Yeah.
Looking deeper into the horizon.
That's the expectation is based on our our long term historical track record.
For your cost of growing it at 5% to 10%.
The percentage points better than of changes in vehicle production volume and I guess I guess, it again point back to the unique nature of the accessory products that we have being a key driver of.
Of that growth and as Oems look to.
Of these accessory components to bolster their own profitability.
Great.
And I appreciate the commentary on the inflationary pressures that you guys are seeing and you guys noted that you do have some initiatives to mitigate it.
But it's not enough to completely off side of it or.
Or is that something thats only possible with the new contracts that you guys put in place over time.
Well, it's difficult to say what the intensity of the.
The cost inflation measures may may be over the near term and as a result, it's difficult to.
The guide you to what the margins can be on a short term basis, but we do feel that with time and focus debt.
At the segment margins of 20 per cent for casting extrusion and 15% for automotive solutions will be sustainable.
Okay. The last 1 for me before I hop back in the.
To the just for Matt.
I think about the Capex does that elevated for call. It the next year or so and then and then falls back to your kind of normal run rate.
Yeah, I mean, we think we'll hit around 40.40 plus of this year and that's obviously considerably higher than last couple of years.
The Q fiscal 'twenty 'twenty 2 of them I guess it'll be very similar.
We're just in the midst of our budget, but I see that continuing.
And on 2023 and beyond I think it will taper off a bit but as we get bigger there'll be more maintenance capex and other things, but I do see things tapering a bit after 2023.
It's just a question.
The timing and how it flows through.
Okay that was very helpful I'll hop back in queue.
Thanks, David.
And your next question is from Peter Sklar.
Yeah.
Darrin of Matthew.
True.
Yeah.
First just on the margin that you had in the auto.
Sure.
The segment, so like I understand what the chip shortage, there's obviously the issue of overhead absorption.
So that will put a lot of pressure on your margin, but when I look historically.
When that segment like it has previously been at this kind of revenue level and did post much higher.
So the surgeons.
So what what was weighing on the business.
You know the height besides of the overhead absorption issue was it just largely this.
This like was it the disruption related to the chip shortage or.
Are there plastic prices were really pressing.
Can you make can you talk about you know do you have protection on plastics is the already pass through or what's going on there.
Yeah, So there's a number of elements there Peter.
While we've had.
Higher margins with similar type revenue in the past our operations were.
Quite frankly geared up to have.
Even higher revenue this quarter that didn't materialize due to the chip shortage issue issue. So we're carrying costs.
Arent reflected.
The reflective of the sales that we did generate and so that's the biggest component of the margin pressure.
Pressure that we faced in the automotive solutions segment of this quarter, but as I as I mentioned and as you pointed out.
The cost.
Relation.
<unk> freight as well as new program launches.
And the FX, where we're on.
The material components and it's hard to give you an exact.
The magnitude for each but they all influenced the margin and with respect to.
The pass through cost.
<unk>.
There are some of <unk>.
The in large.
Cost inflation on the short term basis is something that we have to.
Absorbed.
And we look the fix that overtime through various means but.
That's obviously a factor as well.
Peter for some of our releases we were showing you know.
Volume is coming of months down the road and then the they changed it I mean, you you see the numbers on the news.
The 1 minute they say, they're going to ship and then.
They shut down for 2 weeks and that's hard to manager your production flow and so you're talking about sales of historic how do you of how do you manage that flow of up and down.
Yeah Okay.
Understood.
And then.
Like with with.
With these releases and the volatility.
<unk> leases.
Because of the chip shortage like how much like how much.
Like how much are you seeing as you go into the you know production weeks of week or 2 ahead of you can they can they literally like from the production schedules literally change at the last moment is is that what you're saying.
In the room.
Not not like 1 week out, but 2 or 3 weeks things are looking good and then week later, the kind of slowed down a bit so.
You're just looking at automotive news yesterday about some of our Oes in 1 minute, they're saying it's on and then they are off for 3 more weeks. So.
Yeah, we would typically have 8 weeks.
Matthew visibility and then all of a sudden.
If things get yanked out of the the the order system within 2 weeks of of shipment and things were just very erratic during the quarter as the Oes.
Shifted.
The production around is the microchip issue remains quite fluid I think the good news is.
<unk> of it that we think that our Q3.
Calendar Q2 was the peak of this impact and it will.
Is expected to improve from here I think the impact will be with us for some time, but at a reduced level of intensity.
Okay.
Just moving on to the Tesla relationship.
As these larger aluminum castings that they're doing.
What are the what are the castings are the structural parts, yes, theres structural parts, they're casting the entire back end of the the Y and the casting the entire front end of the why.
Really.
1 shot and so these giga presses in the.
Big of castings.
Our basically replacing 70 different stamps and welded.
Ferrous metal components.
Debt.
Assembled.
By robots and the body shop in the.
This trend toward.
The producing parts of the frame much larger parts of the frame of the casting it seem to be much more efficient way of manufacturing and it makes the vehicle lightweight and improve the manufacturing efficiency.
We have a pipeline into the.
The OE providers of these large die cast machines and.
It does seem that there is strong interest in the established oes of going down this route as well and we're gearing up our operations too.
The take advantage of the fact that we do.
Do expect debt.
Larger castings will become much more prevalent across the industry.
So the big cash things then.
They're not specifically targeted towards battery electric vehicles, they're also being employed in contemporary vehicles is that what you're saying, yes, I mean today.
So it's really.
Really the only 1 that's doing it and obviously theyre battery, but I think there's nothing that stops the.
The non battery type vehicles from employing the same approach and.
I think youll see it used across the widespread swath of vehicles right.
Alright, Okay, and then just my last question Darrin.
The 5 year guidance that you provided I don't think you've provided 5 year guidance before so I was just wondering like what was the motivation to provide that now.
Sure there's really a number of reasons, we do have the sizable contracts in the automotive solutions segment, the $65 million quite frankly at the sites.
Even higher than that already.
And we think that that's kind of of material element of growth.
All of these changes that are occurring in the industry with respect to larger castings.
Our another impact we're spending.
A much higher levels of capital than we have.
It is true and we think getting.
Putting all of that in context of where we're going.
Quite frankly I'm not so.
Sure that the.
The story and understanding of of our growth prospects are well understood by the broad market. So we're trying.
On the path to highlight that as well.
Okay. Thank you for your comments thank you Peter.
And we have no further questions at this time.
Okay, well thanks, everyone. Appreciate your time on the call today, and we look forward to talking to the next quarter.
Thank you again for joining US today. This does conclude today's presentation you may now disconnect.
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