Q2 2022 Exco Technologies Ltd Earnings Call
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Yeah.
Good day and thank you for standing by welcome to the Exco Technologies Limited 2022 second quarter results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star and then the number.
One on your telephone keypad. These be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to Darin trick Chief Executive Officer of Exco Technologies Limited Sir. Please go ahead.
Thanks, Rachel Good morning, all participants welcome to Exco technologies fiscal 2022 second quarter Conference call I am Darren Kirk CEO of Exco I will lead off with an operations overview Matthew pause no. Our CFO will then review the financial results before we open the call for questions before.
As I 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, while I won't repeat that contents I want to emphasize that they apply to the discussion today.
So our revenues held up fairly well in the quarter and in fact showed modest growth year over year. Despite lower overall vehicle production volumes in our core markets of North America and Europe . However, it was a challenging quarter with extreme macroeconomic factors negatively impacting our operations in <unk>.
Results. Nonetheless, we reported consolidated revenues of $119 million and earned <unk> 13 per share given all the headwinds we faced I think our results were actually pretty decent.
This speaks directly to the strength of our businesses and of course, our very talented and dedicated team members.
Lower vehicle production volumes due to supply chain disruptions.
It was certainly a contributing factor to our reduced profitability this quarter.
In particular this hurt our European parts business, but also our north American tooling operations through continued inventory destocking in the die cast channel.
As well U S vehicle sales were also about 16% lower year over year, which negatively impacted some of our accessory products in the automotive solutions segment.
Of course widespread inflationary pressures labor disruption to prevent a greater spread of the omicron variant and logistical constraints all contributed to margin compression.
But while the quarter was again challenging it is worth noting that our results improved significantly from the first quarter and as I indicated in our last call nothing has changed fundamentally for exco or our medium term outlook. Despite current macro conditions. We continue to expect much stronger results in the quarters ahead.
Head.
By this point I think the constrained supply microchips impacting the Oems ability to manufacture vehicles is well understood.
There has been an improvement in this constraint in recent months and most industry players expect supply will continue to improve as we go through 2022.
For example is anticipating an 8% increase in combined North American and European production volumes in 2022, and a further 11% in 2023.
I've mentioned several times before that the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for exco tooling business.
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. In addition, there is a heightened focus on efficiency by all manufacturers for sustainability sustainability initiatives, including a trend towards re shoring all of which will be very positive for the into.
<unk> of our tooling business.
In anticipation that these trends will continue to take hold we are making sizable investments to better position our various businesses to capture the expected growth to summarize these investments include.
Our new tooling plant for cast tool in Morocco, which opened in November 2021 to better serve European extrusion and die cast markets.
Another new facility for cast tool in Mexico, which recently broke ground to add incremental capacity within Mexico, and the southern U S.
Significant investments in heat treatment equipment across the entire tooling group to enhance capacity reduce emissions and enabled us to in source most of our needs.
Investments to upgrade the capabilities of our large mol group to head the mould of extreme science, which we expect will be increasingly demanded by all Oems.
Additional equipment for our three D printing tooling business, which continues to see strong growth.
And additions to two of our production facilities in the automotive solutions group to provide much needed capacity for awarded programs.
As a reminder, our total capex budget this year exceed $50 million and covers these and several other growth initiatives. We again made great headway on advancing these projects during the quarter.
Now just a few comments on our exposure globally, given the significant macroeconomic developments in the last few months.
First as it relates to the Russian invasion of Ukraine, we have no material direct exposure to either country on the supply or customer side.
There obviously is indirect exposure across the industry is supply chain constraints and the Ukraine, Ukraine is negatively impacting European vehicle production volumes given its proximity to the conflict.
As well developments from this situation are causing further challenges and increases in global inflationary conditions.
Next looking at the recent Covid Lockdowns in China, We again see limited direct impact to our operations, we source very little raw material and other components out of China, particularly in our auto solutions group.
And where we do have exposure, we are adding some buffer stock to mitigate against adverse developments with respect to our tooling group. There is some exposure to certain die cast components procured from China, and we have some alternatives outside China for many of these purchases.
It is worth noting that our competitors generally have much greater reliance on China than we do.
Turning to the quarter and first looking at our automotive solutions segment or.
Overall industry vehicle production volumes in North America were down very slightly while volumes in Europe were down 18% year over year. Nonetheless, our segment revenues were essentially flat year over year with our sales outperforming industry production in both regions.
New program launches contributed to our results this quarter, including one key new program, where we are supplying sizable content on a fleet of commercial EV Vance.
This program will begin to ramp up more significantly in our third fiscal quarter and continue for several years.
Moreover, we will continue to ramp up several other key programs through 2023 that will provide outsized growth relative to our historical performance.
Revenues were also helped by certain pricing actions taken to protect margins as well as favorable vehicle mix with these trends generally improving through the quarter.
Meanwhile, quoting activity and New program awards remains very decent it actually picked up a bit through the quarter.
We are seeing a number of sizable new opportunities, particularly with electric vehicles from both new and established Oems.
On the cost side, our margin suffered from higher input costs as well as unfavorable product mix during the quarter.
Extra cost associated with carrying surplus labor in anticipation of higher demand levels also impacted our results.
Compounding these issues were fluctuations in forecast versus actual order releases. This occurred as our customers juggled their own production schedules in response to the chip shortage issue and other constraints, particularly in Europe .
These challenges were pushed down to the supply base in place strain on our own production planning process.
Moreover, raw material cost increases remains a factor and we faced various supply chain and labor availability challenges of our own.
These elements required us to be nimble and also absorbed a lot of extra costs related to overtime material substitution.
<unk> expedited freight.
Pricing remains tough in this business and there is limited ability to use price as a lever. We did however, take pricing action where possible to recover higher input costs and we began to see the impact of these prior actions this quarter.
We expect this trend will continue to be evident in the quarters ahead.
And our casting and extrusion segment. It was a mixed bag demand for extrusion related tooling and equipment remained quite strong while dicast has been weak due to lower industry vehicle production volumes combined with inventory destocking in the supply chain.
Our extrusion tooling ultimately supports a diverse range of applications, including residential and industrial building and construction solar panels consumer durable products in various modes of transportation.
This quarter, we again demonstrated we could keep up with sizable demand growth by utilizing equipment and labor more efficiently, while leveraging the harmonized manufacturing process of our numerous facilities.
With regard to the latter this initiative has allowed us to centralize certain processes, such as programming and design and utilized our capacity on a network basis. All of this keeps our cost low capacity high and provides us with the ability to manufacture a quality product in a standardized manner.
We are making significant strategic investments to further shrink lead times drive down our operating costs and in source more of our own heat treat requirements, all while reducing our environmental footprint.
The die cast market, which is driven by automotive production. However remained soft in the quarter as lower vehicle production was magnified by inventory Destocking.
This negatively impacted demand for cast tools consumable dicast tooling, while the large mol group suffered from greatly reduced rebuild work.
Nonetheless, we achieved a number of program wins that will benefit future quarters. In fact, we achieved record levels of order intake in our large mol group ended the quarter with pretty much the highest backlog in our history.
We are very bullish on the long term outlook of this business given the growing demand for large and complex dicast components, coupled with our leading market position full service capabilities and view that supply chains will become more localized overtime.
As well our additive tooling business continues to perform very strongly contributing record levels of sales and order intake during the quarter additive tooling is a critical differentiator, providing us with an unmatched competitive edge.
Looking at the casting and extrusion segment margins, we experienced weakness this quarter from levels that we have otherwise come to expect.
Segment margins were impacted by unfavorable product mix, including essentially no revenue from rebuild work and our large mould segment.
As well rising input cost higher freight charges and labor disruption due to Covid, we're all a drag on our performance and outpaced ongoing efficiency gains.
As well front end losses at Caf tools, new plant in Morocco added to the margin pressure this quarter, although we have started to generate revenue there.
Lastly, with respect to our acquisition of <unk> Europes second largest manufacturer of extrusion dies, we continue to work towards closing the acquisition in the very near term.
That concludes my operations overview I will now pass the call to Matthew to discuss the financial highlights of the quarter Matthew.
Thank you Darren.
Good morning, ladies and gentlemen, consolidated sales for the second quarter ended March 31, 2022 were $119 3 million compared to $118 4 million in the same quarter last year. This is an increase of $900000 or 1%.
Second quarter sales at our automotive solutions segment were down $1 1 million or 2% and the casting extrusion group sales increased $2 million or 4%.
Over the quarter exchange rate movements decreased sales of $1 5 million, excluding the impact of foreign exchange rates.
Impact to consolidated sales for the quarter were up 2% automotive sales were flat and catching extrusion sales were up 4%.
<unk> net income for the quarter was $5 1 million or basic and diluted earnings of <unk> 13 per share compared to $11 7 million or <unk> 30 per share in the same quarter last year. The decrease in net income of $6 6 million.
Consolidated effective income tax rate of 23% in the current quarter increased from 22% from the prior year quarter due to non deductible losses from our recently launched Casto Moroccan facility.
The automotive solutions segment reported sales of $68 2 million in the second quarter, a decrease of $1 1 million or 2% from the prior year quarter. This segment second quarter sales were consistent with last year, when considering the negative impact from foreign exchange rate fluctuations compared to IHS, North American and European production volumes, the automotive solutions segment out.
Performed the industry segment sales were supported by a number of key program launches for both new and existing products and a favorable vehicle mix.
Second quarter pretax earnings in the automotive solutions segment totaled $6 2 million, which represents a $3 2 million reduction from the prior year quarter. The segment's lower pretax profit was due to unfavorable market driven product mix higher material logistics and labor costs, partially offset by pricing actions, which were taken in.
Quarter inflationary pressure continues to be a challenge in this segment, particularly in petroleum based products resins, plastics and rubber energy freight and labor.
Management remains focused on improving the efficiency of its operations and reducing its overall cost structure pricing discipline remains a focus and actions are being taken on current programs where possible. Though there is typically a lag of a few quarters before and impact will be realized.
Yeah.
The casting extrusion segment reported sales of $51 1 million for the second quarter, an increase of $2 million or 4% from the same period last year foreign exchange rate changes were negligible in the quarter approximately $200000.
Within this segment demand for our extrusion tooling dies.
Dummy block stemmed et cetera, and associated capital equipment, Diovan and containers remain both strong strong due to both industry growth and ongoing market share gains and the die cast market, which primarily serves the automotive industry demand has remained suppressed due to lower vehicle production volumes, which in turn due to due mainly.
Two broader supply chain constraints demand for exco has industry, leading additive three D. Printed tooling has continued to gain traction as customers focus on greater efficiency as the size and complexity of Dicast tooling continues to increase.
Were also aided by price increases, which were implemented mainly towards the end of the quarter in order to protect margins from higher input costs.
The casting and extrusion segment reported $2 $7 million of pre tax profit in the quarter, a decrease of $4 7 million for the same quarter last year. The lower pre tax profit was driven by reduced activity for rebuild work in the large mould group coupled with the shipment of a number of new lower margin mould profit profitability was negatively impacted by raw.
<unk> and labor cost inflation before price increases were implemented unfavorable market driven product mix shifts within the cast tool group startup losses of cast tools plant in Morocco, which opened in November 2021, reduced labor availability and higher overtime costs across three business units to reduce the spread of COVID-19.
Segment pretax profitability was higher sequentially and new business awards across the quarter are very strong, particularly infrastructural die cast components in an EV platforms.
Exco generated cash from operating activities of $5 $3 million during the quarter and $3 6 million of free cash flow after $1 6 million and maintenance fixed asset additions.
Cash flow combined with cash on hand, our renewed and increased credit facility funded $4 $1 million of dividends $9 1 million and growth capital expenditures and repurchased $1 8 million of shares under the normal course issuer bid.
As reported in previous quarters management expects total capital expenditures to be in excess of 50% to $55 million as we continue our strategic capital growth programs discussed by dairy and discussed by Darren previously.
<unk> financial position remains strong the company's balance sheet and availability on the expanded credit facility allows considerable flexibility to support strategic initiatives like our helix extrusion dies acquisition.
Our strong financial position combined with our free cash flow 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 to the Q&A portion of the call Rachel Please.
Thank you Matthew and as a reminder to ask a question you will need to press Star and then the number one on your telephone keypad again, just press star.
And then the number one on your telephone keypad and do we draw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Mcgill Dara from core Mark Sir. Please go ahead.
Hey, good morning.
Wanted to touch on the Helix acquisition you previously mentioned that you saw a pathway to achieving around 20% margins do you see this changing given the European exposure.
With this just push these expectations into the rate.
Assuming the business has been hit harder more than the legacy exco.
Sure. Thanks for the question.
I don't think we've commented specifically with respect to <unk> margin, but certainly within casting and extrusion segment.
Do have an expectation of achieving achieving a margin of.
20%.
The acquisition of <unk> as I mentioned, when we announced the acquisition would have a modest front end compression to the EBITDA at the time EBITDA margin at the time, but we see no reason why within our five year <unk>.
<unk> framed for our 2026 targets that we can't get the margin for the group or the segment back to 20%.
With respect to.
Developments in Europe .
Certainly.
There is an increase in an inflationary pressures there perhaps of a greater magnitude than what we're seeing in North America, but I will point out that what we've seen so far in terms of demand on the extrusion side.
Europe is that there is significant demand globally for those products.
And just to clarify is there any direct exposure.
From helix with regards to Ukraine, Russia conflict.
Not direct now.
Awesome. Thank you and then changing gears to legacy business could you remind me how much cash capacity is coming online with the introduction of Morocco and in Mexico could be down the road.
Sure.
What we've said when we built up our 2026 target is that we expect that those two plants together will provide annualized revenue of about.
$30 million or so so.
So.
In fact, there's probably more upside to that.
Then anything but.
I would use that as a benchmark.
And just a follow up there if we were to back out the onetime start up costs associated with Morocco is there a figure you can point to.
Typically when we start these plants.
There was a loss of 100000 Bucks a month or so but that quickly reduces as as the revenue builds up and as we indicated last quarter, we would expect to be kind of fun and EBITDA breakeven towards the end of this fiscal year for the Moroccan operation.
That's great and then last one for me you touched on the IHS forecast and your opening remarks, but specifically where do you see production volumes trending given your conversations with customers.
More or less in line with these forecasts or do you have more I guess optimistic slash pessimistic outlook, yes, no I'd say in line with IHS based on what we're seeing.
Certainly an improvement that should continue through the remainder of the year and beyond but nothing nothing too dissimilar from what IHS is saying.
That's all for me thanks for taking time.
Okay.
Thank you and our next question comes from the line of Peter Sklar with BMO capital. Your line is open.
Good morning Derik.
Derek.
Like in your auto parts business.
The revenue number the sales were exceptionally strong you kind of gave a laundry list.
And the write up but do you mind, just elaborating a little bit like why does your topline.
So above and beyond kind of.
Whereas the production volumes were in North America, and Western Europe .
Sure.
Well I think generally we have a track record of.
Exceeding changes in vehicle production volume by 5% to 10 percentage points overtime and.
As we've indicated.
We are launching a number of <unk>.
Outsized programs that are contributing to our automotive solutions revenues.
At this point and that has started and that will continue to pick up pace through the remainder of the year.
That growth in in revenue from from those elements.
And the margin has improved.
<unk>.
But there was a front end costs to launching some of these programs too so.
As these.
New programs continue to grow and season, we expect that we will continue to.
Outperformed the market and outperform our 5% to 10 percentage points.
Performance of the market.
For the foreseeable future and the margin should also improve.
Okay.
The other thing I wanted to ask you about.
But this European extrusion acquisition, you've done to helix.
Could you just talk a little bit like benchmark it against your North America.
Extrusion like like how was their equipment how is their technology their know how.
Are you going to be learning from them or are they going to be learning from you did.
Do they do heat treatment all of those things like how does that compare to the North American business sure Theres a lot of similarities and there's also quite a few differences.
We are the largest player in the Americas by far.
Helix is the second largest player in Europe .
Are they build a very quality dye.
They have significant technical expertise and I believe as Nick mentioned on the call when we announced the acquisition.
We do see synergies.
Going both directions here from their know, how and our knowhow and in leveraging that.
I would I would say with respect to their equipment.
Our equipment is much generally much newer and more advanced we can't forget that <unk> has been owned by private equity for the better part of 10 years and these owners are not strategic.
Players, but financially motivated and as they typically do they did not inject the sufficient capital in the business too.
Maintaining modern equipment and.
We see the ability to to improve things from from that angle.
Well, we're excited to close this acquisition, which we expect to do in our third quarter and.
And get in there and start.
Sharing the knowledge back and forth to our mutual benefit.
And one of the things I understand you've done at like the North American extrusion business over the years as U centralized all your engineering and CAD work, so rather than each plant.
Having that.
You know capability and cost structure, it's kind of centralized into one area. So if I'm describing that correctly.
Like how is helix does each of their plants.
Do their own work in engineering in cat or a de centralized it in the same way that you've tried to do here in North America.
Yes.
It's a bit of both depending on the country.
We are certainly more centralized with those functions today than than Alex's.
Yeah.
We're not intending to helix runs.
Very good operation its not our intent to go in there and change things drastically on on day, one it's a quality operation and we will look to to improve things so overtime.
And then just lastly, do they have more or less the auto exposure than your North American operations.
I'm going to say it's similar.
Auto auto exposure as a percent of extrusion demands are probably somewhere 15% to 20%, but growing strongly and they would not be too dissimilar.
Okay.
And sorry, and just on the sorry, I have one other thing sorry Gerry.
The large past the large the large mould die casting business.
As you know, we're going to larger and larger.
So.
You have to add equipment, what does that mean that you have to add milling machines that can.
Deal with larger mould.
Wasn't too sure what what that meant.
Larger boring machines in particular certainly.
Increased crane capacity, we're taking are creating capacity to 100 tons.
And that will be installed next month.
So.
Those are primary elements were also in the back of our new market plant installing.
Large heat treat equipment will have the largest heat treatment equipment in North America. After this install it'll give us capabilities that the market is going to require and don't currently exist.
Okay, and as I recall that new market in the back you have that one die cast machine. So does that have to be replaced for a higher tonnage machine no not at this time.
We're not we're not planning to install our own Giga press.
But.
Yes.
Yes.
But that's not currently in the cards.
But then how does it work when you like how do you run prototypes and.
Run off we don't have for example in process.
All of the malls that we deliver.
We have that function for any of the diet.
Right.
Currently, but it's not a requirement in order to build a molder complete a rebuild for a.
Our mould of an extreme size.
So how does that work like you outsource the sampling or the customer does the customer the customer would run it yeah.
Yeah, Okay I got it. Thanks, So my engineers that go to the customer and participate in the process to set things up and we do it at the customer end.
Okay I got it thanks for your comments okay. Thanks Peter.
Thank you once again, if you have a question just press star and then the number one on your telephone keypad.
There are no further questions at this time speakers. Please continue.
Okay well everyone. Thank you for your time. This morning, we look forward to speaking again next quarter take care.
Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect.
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