Q3 2022 Exco Technologies Ltd Earnings Call
Okay.
Good day and thank you for standing by welcome to the Exco Technologies Limited third quarter results 2022 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.
Our one one on your telephone please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Darrin Kirk President and CEO of Exco Technologies Limited. Please go ahead.
Thanks, Gigi good morning, all participants welcome to <unk> technologies fiscal 2022 third quarter conference call I will lead off with an operations overview Matthew Parker. Our CFO will then review the financial results before we open the call for questions.
Before we begin I would like to make some comments about forward looking information in yesterday's news release and on page two of the presentation that we have posted to our website, you'll find the cautionary notes in that regard.
While I won't repeat the contents I want to emphasize they apply to this discussion today.
I would like to start by thanking our employees for their hard work and dedication through another challenging quarter.
I'd also like to welcome all employees of Helix, which exco acquired on May 2nd Accordingly, our consolidated results. This quarter benefited from two months of contributions from helix, but I'll have more to say on helix later.
We are joining the call today from our New York, Neocon Division and beautiful, Nova Scotia, where we held our board meeting yesterday and toward the facilities.
I must say, how impressed I am with neocon operation and the team here.
Innovation has always been critical to exco success in Neocon operations are a great example, where innovation is evident across the entirety of business.
With their growing portfolio vehicle protection and organization products created by an in house design studio using proprietary materials to the efficiency innovation teams that are dedicated to streamlining production processes neocon continuously gets a better product to its customers faster.
Neocon has grown significantly over the years and is nearing completion of a large addition to our building to handle its next chapter of growth I have great optimism in the teens future here and congratulate them on their achievements to date.
So market conditions in the quarter were again top and influenced by several of the same factors as our second quarter results.
Nickel production volumes remained constrained below market demand due to ongoing chip shortages and other supply chain limitations, which were exacerbated by the effects of China Covid Lockdown It this quarter.
Lower volumes hurt our part business, but also our tooling operations through reduced demand and the Dicast channel.
And of course widespread inflationary pressures labor disruption to prevent greater spread of Covid and logistical constraints, where all additional factors weighing on our performance.
Despite these challenges our revenues held up fairly well in the quarter showing modest organic growth year over year.
We recorded consolidated revenues of $129 million generated almost $15 million of EBITDA and earned 14th.
For sure.
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.
But at this point I think the constrained supply of microchips impacting the Oems the ability to manufacture vehicles as 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.
Rising interest rates and generally slowing economic conditions will create new challenges demand for new vehicles is expected to hold up relatively well given pent up demand following a prolonged period of constrained supply.
IHS Markit for example is anticipating a 20% increase in combined North American and European production volumes in the second half of calendar 2022, and a further 10% growth in calendar 2023 as supply conditions improve.
But while the quarter was again challenging I would note our results improved for the second consecutive quarter sequentially and as I indicated in our last call nothing has changed fundamentally for exco or our medium term outlook. Despite current macro conditions, we are making strategic investments to ensure we remain well positioned in our core market.
And continue to expect much stronger results in the quarters ahead.
As mentioned several times before that the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for exco is tooling businesses as Oems make the change to greener vehicles and strive for greater manufacturing efficiency areas, an increased use of light metals and the demand for our associated.
To it.
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 <unk>.
Trend toward re shoring all of which will be very positive for the entirety 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 new tooling plans for cast tool in Morocco in Mexico to better serve the European extrusion and die cast markets and add incremental capacity within.
Mexico, and the southern U S <unk>.
Significant investments in state of the art heat treat equipment across our entire tooling group to enhance capacity reduce emissions and enable us to in source most of our needs.
Investment investments to upgrade the capabilities of our large mol group to handle modes of extreme size, which we have which we expect will be increasingly demanded by all Oems additional equipment for our <unk> printed tooling business, which continues to see strong growth and building expansions at neocon and polytech to support.
Previously awarded contracts.
As a reminder, our total capex budget this year exceeds $55 million and covers these and several other growth initiatives. We again made great headway on advancing these projects during the quarter.
Turning to the quarter and first looking at our automotive solutions segment overall industry vehicle production volumes in North America were up about 12% while volumes in Europe were down 5% year over year, excluding foreign exchange rate movements and our our segment revenues were up by 4%.
Revenues were helped by certain pricing actions taken to protect margins, but did suffer from unfavorable vehicle mix, particularly in Europe .
New program launches contributed to our results this quarter, including one key new program.
<unk>.
Supplier sizable content on a fleet of commercial Evs.
Vince This program is off to a slower than expected start but will ramp up more significantly going forward 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.
Yeah.
Meanwhile, quoting activity and New program awards remains very decent we're seeing a number of sizable new opportunities, particularly with electric vehicles from both new and established Oems.
On the cost side, our margins were impacted by higher input costs as well as unfavorable product mix during the quarter extra costs associated with carrying surplus labor in anticipation of higher demand levels also impacted our results compounding. These issues were fluctuations in forecast versus order actual order releases.
Occurred as our customers juggled their own production schedules in response to the chip shortage 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.
These elements required us to be nimble and also absorbed a lot of extra costs related to overtime material substitution and expedited freight.
Pricing remains tough in this business and there is limited ability to use this lever. We continue however to take pricing action, where possible to recover higher input costs and are embedding higher inflationary costs in our current quotes.
And our casting and extrusion segment. It was again, a mixed bag demand for extrusion related tooling and equipment remained 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.
This quarter, we again demonstrated we could keep up with the sizable demand by using equipment and labor more efficiently, while leveraging the harmonized manufacturing process of our numerous groups facilities.
With regards to the latter this initiative.
US to centralize certain processes, such as programming and design and utilize 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 down lead times drive down our operating costs and.
And in source more of our own heat treat requirements, all while reducing our environmental footprint.
With respect to <unk> extrusion die business volumes are holding up quite well integration of these plants into our existing operations is proceeding and we are excited by the potential we see.
As we discussed on our call when we announced the acquisition of <unk> operations are high quality and we do not plan to undertake meaningful changes near term, yes longer term, we expect through the sharing of best practices and leveraging of greater global scale, we will certainly see significant synergies.
The die cast market, which is driven by automotive production remained soft in the quarter as lower lower vehicle production was magnified by inventory Destocking.
This negatively impacted demand for cast tools consumable die cast tooling, while the large mol group suffered from greatly reduced rebuild work.
Nonetheless, we saw sequential improvement in activity again, and we achieved a number of important wins that will benefit future quarters.
Our large mol group again ended the quarter with the highest backlog in our history and both <unk> and the large mould had several key wins in the quarter for very large and complex die casting molds and associated tooling for structural applications.
We are very bullish on the long term outlook for this business given the growing demand for large and complex die casting components, coupled with our leading market position full service capabilities and view that supply chain will become more localized overtime as well our additive tooling business continues to perform very strongly contributing record levels of sales.
<unk> and order intake during the quarter additive tooling is a critical differentiator, providing us with an unmatched competitive edge. We are extremely optimistic on where this business will go.
Looking at the casting and extrusion segment margins, we experienced weakness again this quarter from levels that we would have otherwise come to expect.
Segment margins were impacted by unfavorable product mix, including very limited rebuild work and our large multi segment.
As well rising input costs higher freight charges and labor disruption due to COVID-19, where all the drag on our performance and outpaced ongoing efficiency gains.
<unk> losses at cast tools, new plant in Morocco, and heat treat operations added to the margin pressure. This quarter. Although we have started to generate revenue and expected cash losses for quickly reduce.
Lastly, I would point out that the segment margins improved sequentially for the second consecutive quarter and we expect ongoing improvement in the quarters ahead.
That concludes my operations overview, I will pass the call to Matthew to discuss the financial highlights of the quarter Matthew Thank.
Thank you Darren.
Consolidated sales for the third quarter ended June 32022 were $129 3 million compared to a $115.0 million in the same quarter last year, an increase of $14 3 million or 12% third quarter sales in our automotive solutions segment were up $3 6 million or 6% and the casting extrusion group sales increased.
$10 7 million or 20%.
Casting and extrusion segment sales included $9 million from helix over the quarter exchange rate movements increased sales $1 $5 million, excluding the excluding the impact of foreign exchange.
<unk> sales for the quarter were up 10% automotive sales increased 4% and casting extrusion sales were up 17%.
Consolidated net income for the third quarter was $5 6 million or basic and diluted earnings of <unk> 14 per share.
<unk> to $8 7 million or 22 per share in the same quarter last year, a decrease in net income of $3 1 million.
The consolidated effective tax income tax rate of 24% in the current quarter increased from 12% last year. The increased income tax rate in the quarter was due to fiscal 2021 <unk> tax credits booked in the third quarter last year non deductible losses from a cost to Morocco facility in fiscal 2022 geographic distribution.
Foreign tax rate differentials.
Third quarter EBITDA of $14 6 million was fairly stable compared to prior year of $15 2 million the difference in the lower the difference in a lower net income being.
Being driven by 26% increase in depreciation and effective tax rate difference explained earlier and higher interest costs associated with the increase in our credit facility related to the helix acquisition.
The automotive solutions segment reported sales of $64 6 million in the third quarter increase of $3 6 million or 6% from the prior year quarter.
Segment sales in the quarter were primarily influenced by vehicle production volumes in North America, and Europe IHS market estimates volumes increased 12% in North America and declined 5% in Europe compared to the prior year quarter segment sales were also negatively influenced by unfavorable vehicle mix, partially offset by ongoing key program launches for new and existing.
<unk> products as well as certain pricing actions taken to protect margins.
Third quarter pre tax earnings and the automotive solutions segment totaled $4 8 million, which represents a $300000 reduction from the prior year quarter.
The segment's lower pre tax profit was due to an unfavorable market driven product mix.
Changes higher raw material logistics and labor costs.
The reversal of certain bad debt accruals last year, partially offset by pricing actions.
Proving the efficiency of operations and reducing the overall cost structure is a key management focus on current programs where possible, though there's typically a lag of a few quarters before the impact is realized.
The casting and extrusion segment reported sales of $64 7 million for the third quarter, an increase of $10 $7 million or 20% from the same period last year foreign exchange rate changes increased sales $1 5 million in the quarter <unk> contributed $9 million of sales in the quarter, reflecting two months of activities.
Demand for our extrusion tools dyes dummy blocks stemmed et cetera, and associated capital equipment Diovan containers remains strong due to both industry growth and ongoing market share gains.
The die cast market, which primarily serves the automotive industry demand has remained suppressed due to lower vehicle production volumes, which in turn is due mainly to a broader supply chain constraints.
These constraints have been amplified by customer inventory destocking activity in recent quarters, particularly in the large mould segment, which has faced significantly lower rebuild work than typical sales in the quarter were also aided by price increases which were implemented to protect margins from higher input costs with respect to quoting activity longer lead times.
Longer lead time items continue to see elevated demand for future activity, particularly large mall inventories in backlog growth, which will be benefit sales through the remainder of fiscal 2022 and into fiscal 2023.
The casting of extrusion segment reported $4 8 million of pretax profit in the third quarter, a decrease of $3 million from the same quarter last year. The lower pre tax profit was primarily driven by reduced activity for rebuild work in the large mol group, coupled with shipments of new malls.
Profitability was negatively impacted by raw material and labor cost inflation unfavorable market driven products mix shifts reduced labor availability and higher overtime costs across the three business units.
Up losses at Castro's, Morocco plant in Morocco, and new heat treat operations in new market also negatively impacted profitability, mainly due to noncash depreciation of plant and equipment segment.
Segment pre tax profitability. However benefited from contributions from the acquisition of <unk> and was higher sequentially for the second second consecutive quarter.
Exco generated cash from operating activities of $14 $1 million during the quarter and $9 9 million of free cash flow after $3 5 million.
Maintenance fixed asset additions the company utilized $60 million of its credit facility to fund its investment in helix.
Operating cash flow combined with cash on hand, and existing credit facilities funded $4 $1 million of dividends $9 $1 million in growth capital expenditures and repurchased $1 6 million of shares under the normal course issuer bid.
As in previous quarters management expect total capital expenditures to be in excess of $55 million as we complete our new market heat treatment facility. The extrusion plant heat treatment projects launched cast tool Mexico complete the expansion of our Nova Scotia facility and upgrade certain large mould assets to allow us to win additional projects for larger EV and structural <unk>.
Ponant.
The company's balance sheet availability under expanded credit facility allow flexibility to support strategic initiatives like our helix extrusion 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 and we can now transition to the Q&A portion of the call.
T J.
As a reminder to ask a question you wanted to press Star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of David Ocampo from core Mark Securities.
Morning, gentlemen.
David David.
My first question is just on the pricing environment I understand it takes a few quarters for things to flow through here.
But when you take a look at kind of your order book is there still a lot more to do to get the margin profile back to normal I'm, just trying to get a sensitive at this takes a year or even longer for things to sort of normalize here.
Sure I guess, it really does depend on the business unit.
Broadly speaking.
Casting in extrusion.
There is.
A greater ability to to use price.
To recapture margins.
And we're certainly.
Doing that it does.
Happen.
Instantly theres several programs that.
Particularly in the large mol group.
That will work out over time, but.
Certainly.
We're seeing that trend.
Pricing to recapture.
Input costs occurring.
Closer to real time, and casting extrusion automotive solutions there is pockets of.
Products that we have in there that we do have the ability to go back to the Oems with the tears to to get price increases.
It's much less limited.
So we are.
We are unable to really ramp up the <unk>.
Rising there, but certainly with respect to.
New quotes we're embedding current levels of pricing and in our expectations for.
Inflation going forward.
That one plays out.
Slowly over over a few years.
And then can you remind me how much of your order book at least in automotive solutions rollover any year's at 20% to 30%.
Yes, it would be in the neighborhood of 20% or so.
But.
But really that.
Pricing and automotive solutions.
As part of the equation, but.
Really what drives the margin there is levels of vehicle production volume.
While they remained at.
At lower levels than that.
We expect whether it will go I mean that has the biggest impact on the dampening margins.
Okay.
Okay.
Sorry, David in every quarter, sometimes one program gets delayed over another one and that can impact a lot depending on our mix at the time too so.
Okay. That's fair and then just sticking with automotive solutions here, what im thinking about the overall markets say for not some that's how much of that market now as third party not not what you guys are selling but the overall market.
Has that market share shifted over the last few years as Oems look to scale back their mineral rights.
Third third party, meaning.
What aftermarket business or suppliers aftermarket business.
I think the.
Okay.
Broadly speaking.
I don't know the number but there is tremendous opportunity to increase penetration of both of those products.
As the Oems try to recapture.
Accessory products themselves.
I can't I can't give you a figure other than that it's very high number.
Okay.
Prepared comments and then I don't know on the capabilities for moving.
To larger.
Larger mould your large mol division is there much competition, there and how long does the Capex program for.
For you guys to be able to supply these giga presses.
We.
We have the capabilities now by and large it is a couple of other.
Addition center capital additions that are being completed but.
We can we can start work on.
Very large molds now.
And while we will be done or.
Our current Capex plans, probably in the next couple of months or so related to that.
With respect to competition there.
There is very limited.
Competition in North America that has these capabilities the industry.
Has by and large look to outsource a lot of these.
These requirements too.
China and.
We see that with increasing demand.
And kind of a focus on re shoring that it should be very beneficial to us.
And with the margin profile amongst those bigger bigger multi very similar to what you guys are doing now in the division or is it a step function up.
I guess, all I would say on that is.
Great.
We got a target out there of 20% EBITDA margin for the segment.
We certainly expect that to be very attainable.
Okay. That's it for me thanks, so much guys.
Thanks, Dave.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
I would now like to turn the conference back to Darin Kirk for closing remarks.
Okay, well thanks, everyone for your time today I Hope you have a great long weekend and we look forward to speaking with you again.
Sure.
Third quarter results.
Take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.