Q4 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 fourth 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.

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You will then hear an automated message advisers your hands raised.

Please be advised today's conference call is being recorded I would now like to turn the conference over to Darin <unk> President and CEO . Please go ahead Sir.

Thank you Lisa good morning, ladies and gentlemen, welcome to excellent technologies fiscal 2022 fourth quarter conference call I am Darren Kirk CEO of Exco, I will lead off with an overview of our strategic growth agenda.

Partner, our CFO will then review the quarter before we open the call for questions.

First I'd like to make some comments about forward looking information.

In yesterday's news release and on page two of the presentation that we've posted to our website, you'll find cautionary notes in that regard.

While I won't repeat the context I want to emphasize that the cost cautionary.

Cautionary note supply for this discussion today.

Well fiscal 2022 was certainly a difficult year, we grappled with extreme macro factors or most of which was the constraint and erratic volumes of OEM vehicle production caused by global Microchip shortages, but we also faced significant deflationary pressures widespread labor shortages logistical hurdles.

Energy costs and many other supply chain challenges in the aftermath of COVID-19, and Russia's invasion of Ukraine.

Although we recorded a 6% increase in sales and delivered 49 of earnings per share compared with 98% last year.

Yes fiscal 2022 our 70 <unk> year of operation.

It is also a resounding success, we've bolstered the foundation that will sustainably drive our future growth through the acquisition of helix obtained key program wins realized significant productivity gains and continue to make sizable capital investments as we execute on our ambitious growth agenda.

As well, we demonstrated positive trends throughout the year with consecutive quarterly increases in both revenue and EBITDA.

Looking forward vehicle production volumes are expected to grow in 2023 and beyond is supply chain pressures continue to ease dealer inventories are replenished and pent up consumer demand is satisfied.

As well startup losses associated with current investment activity should reduce and the benefits from recent price increases and various efficiency initiatives will continue to take all.

While there will no doubt be new challenges, we remain very optimistic that our earnings will be substantially stronger in the years ahead.

Our business is directly support the electric vehicle Revolution and worldwide movement towards reducing emissions. Consequently, as the world focuses on becoming more sustainable future for our products has never been brighter and increase in the use of aluminum across many industries is the primary driver of this tailwind, particularly.

In the automotive industry.

At the automotive industry adapt to ever tightening fuel efficiency standards lightweight metals are increasingly displacing structural steel components to make a turtle combustion engine vehicles more environmentally friendly.

More so electric vehicles make extensive use of aluminum components to reduce weight and therefore maximize battery range.

Our casting extrusion segment is especially well positioned to benefit from this transition as we are the leading producer of tool that cheap lightweight metals, and we do not manufacture cooling or steel components.

Over the next several years sizable growth as expected and the application of both extruded die cast components.

More recently aluminum components and associated truly have been increasing significantly in both size and complexity.

Oems are increasingly using dicast machines that are much larger than those used previously.

<unk> enables the casting of entire vehicles upgrades, rather than a timber assembling numerous stamped metal components, creating meaningful manufacturing efficiency gains.

Julie required to facilitate this process is also much larger and more complex, which plays directly into our strength and technical expertise.

We expect more and more Oems will ultimately adopt the use of these larger die cast machines, and we are making significant additional investments in our people equipment and processes. It remains the leading supplier in this market.

Our automotive solutions group, which manufacturers products for both interior and storage area at the passenger vehicles.

<unk> stands to benefit from sustainability trends, our automotive solutions segment typically makes products that are lighter in weight and competing products and electric vehicles generally have more cabin and storage space for which our products are well suited.

This growth Oems are increasingly looking to the sale of higher margin <unk>.

<unk> III products as a means to enhance their own profitability.

An extra with a leader in the product.

And the industry for many of these products.

We remain focused on our capital asset investment and growth strategies, and we again made great progress executing this agenda in fiscal 2022 and in our fourth quarter.

In May of 2022, we closed the acquisition of extrusion.

Di business of Helix Holdings, Alex is the second largest manufacturer of aluminum extrusion dies in Europe , and the confidence leading supplier of complex extrusion that this acquisition provides us with well established and high quality operations and more extensive opportunities to better support our global customers.

While the energy crisis and weak economic conditions in Europe have presented unexpected early challenges we remain excited by the potential over the longer term.

We are already seeing good synergies through the sharing of best practices and leveraging greater global scale.

We are also pursuing an aggressive capital agenda within our casting extrusion segment to capture the sizable growth opportunities related to the market trends are just described.

This is especially evident in our cash pool division.

Its products.

Significantly increase the productivity safety and energy efficiency of both die casters and extruded globally.

In November 2021 capsule opened a third production facility in Morocco to better serve its customers from Europe , the Middle East and Africa in fiscal 2023 Castro will open export facility in Mexico to further increase capacity and better serve the local market in Latin America, and the Southern U S.

An additional major project within cash flow includes new energy efficient.

Treatment plant in new market, which became operational in mid fiscal 2022. This new investment represents vertical integration for a critical process with a cast tool it will reduce customer delivery times and improve quality quality control and provide unmatched capabilities for large size tooling all while enhancing.

Our cash flows and minimizing emissions through the supply chain.

Moreover, we invested an additional <unk> metal printing machines to meet growing customer demand in that business. While we are making significant investments in state of the art treatment equipment across our extrusion group that will enhance capacity reduced emissions and enable us to further enforce most of our needs.

We also completed substantial investments in our large mall business to handle most of extreme side with all equipment now often right. Meanwhile, our automotive solutions segment, we added 40000 square feet of manufacturing space across two of our production facilities to provide capacity for several newly awarded programs.

With the benefit of these investments the launch of new programs General market growth and also market share gains consistent with our history, we expect to achieve substantial growth by fiscal 2026, we are targeting to generate annual revenue of $750 million and generate EPS of roughly $1.

90 from organic means.

With all of that I know these goals can be obtained without the dedication of our people.

I would again like to thank the entire team at Exco for their focus hard work and flexibility. During this past quarter of the year I will now pass the call over to Matthew to discuss more highlights of the quarter.

Thank you Darren.

Good morning, ladies and gentlemen that consolidated sales for the fourth quarter ended September 30 were $140 4 million, an increase of $34 million or 32% from the prior year fourth quarter sales in our automotive solutions segment increased $9 2 million or 16% and the casting and extrusion group sales were up $24 8 million or 50%.

Foreign exchange rate movements were negligible, reducing sales by 600000 in the quarter.

Annual sales totaled $489 9 million compared to $461 2 million and increased 28, 7%, sorry, $28 7 million or.

6% the net impact of changes in foreign exchange rates was negative $6 2 million.

Full year sales in the automotive solutions segment were $253 9 million, a decrease of $9 3 million or 4% and sales in the casting extrusion group were $236 million, an increase of $38 million or 19%. The casting extrusion segment increase reflects five months sales from helix and continued strength.

And our cost tool and extrusion divisions.

The autonomous solutions segment full year sales were lower due the impact of supply chain disruptions on vehicle production in the first three quarters of the fiscal year fourth quarter sales increases reflect the impact of <unk> and a general reduction in the negative impact of semiconductor chip charges in the fourth quarter.

Consolidated net income in the fourth quarter was $5 6 million or earnings per share of <unk>.

Compared to $7 1 million or earnings of <unk> 18 per share in the same quarter last year <unk> decreased 22%. The effective income tax rate was 26% in the quarter compared to 27% in the same quarter last year.

The automotive solutions segment experienced a 16% increase in sales or an increase of $9 2 million.

To $66 million from 56, eight in the fourth quarter of last year.

Yeah.

The sales increase was driven by higher vehicle production volumes and pure program launch delays or supply chain disruptions eased through the quarter North American vehicle production was up 24% compared to a year ago and European vehicle production was up 20% sales increase at all four of the segments operations as we benefited from higher production volumes and the continued ramp.

New programs. This outweighed negative mix for some programs and lost shipping days at Neocon, which is impacted by hurricane piano at year end.

Fourth quarter pre tax earnings and the automotive solutions segment totaled $6 5 million, an increase of $2 million or 44% over the same quarter last year fourth quarter automotive sales are traditionally lower due to summer shutdowns and in the current year, our quarterly sales increase due to the reduced impact of the semiconductor shortage of new product launches.

Nonetheless, some of our plants continued to experienced disruptions by the semiconductor shortage, which continue to be unpredictable, making it challenging to manage operations efficiently.

These production and shipping challenges also created inefficiencies that increased overhead and direct labor cost during the quarter and as I mentioned neocon was shut down due to the impact of hurricane <unk>, which negatively impacted the segment's pre tax profit.

The casting and extrusion segment recorded sales of $74 4 million in the fourth quarter compared to $49 6 million last year, an increase of $24 8 million or 50%, excluding the impact of foreign exchange movements. The segment sales were up 47% for the quarter.

Included in the quarter was the first full quarter of <unk> sales of $12 3 million sales increase from Q3, but remained below potential due to European summer holidays, the Russian conflict in the Ukraine and weakening economic conditions in Europe .

And for our extrusion tooling dummy blocks dies stemmed et cetera, and associated capital equipments Diamond and containers outside of Europe remained strong due to both industry growth and ongoing market share gains.

The die cast market demand and order flow for new malls associated consumable tooling like shocks leaves rods ring tips and rebuild work has recently picked up and as the industry vehicle production recovers and new electric vehicles and more efficient internal combustion engines and transmissions platforms are launched sales are also aided by pricing.

Actions to protect margins from higher input costs.

Fourth quarter pre tax earnings in the die casting and extrusion segment totaled $2 6 million.

A decrease of $3 4 million or 57% over the same quarter last year. The pre tax profit decline was driven by $2 $2 million and higher depreciation startup costs at capital Morocco capsules heat treat operations in new market temporarily outsourced heat treat costs in Markham, and Texas as new equipment is being installed and higher raw.

Serial freight and labor costs due to inflation.

The higher depreciation relates to <unk> and the company's investment in new capital that will improve operations and provide access to new geographies to increase our market share management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expects such activities together with its sales efforts should lead to improved segment profitability over time.

Jim.

Operating cash flow before changes in working cap was $17 5 million in the quarter compared to $15 3 million in the same prior year quarter, sorry in the prior quarter lower fourth quarter net income was offset by increased depreciation amortization and interest costs in the current quarter the negative changes in the working capital in the current quarter.

Higher accounts receivable and inventory balances due to the strong business activity in the quarter as well as additional as edition of Payless and cast to Morocco.

Investment in fixed assets of $16 3 million includes.

That includes $10 $5 million in growth capital expenditures related to the company's strategy to increase capacity at innovative equipment for new processes and address customer demand in existing and new locations Exco ended the quarter with $90 3 million and net debt the company had $20 million in available liquidity under its banking facilities at year end.

On November 7th the company increased its credit facility is $25 million to $152 million with no changes in terms.

With respect to fiscal 2023, we are planning for four or <unk> $47 million of capital expenditures with $28 million in growth Capex and $19 million in maintenance Capex.

Included in the $47 million total are approximately $18 million in carryforward projects are longer term projects that were accrued in prior years.

<unk> financial position remains strong as such the company's balance sheet availability under existing credit facilities allow us flexibility to support strategic initiatives. This combined with cash from operations 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 Lisa.

Thank you as a reminder.

Have a question. Please press star one on your telephone.

One moment, while we compile the Q&A roster.

Okay.

The first question that I have is coming from David Ocampo.

Core Mark Securities. Your line is open.

Thanks, Good morning, gentlemen.

Alright, if it werent there.

Matt I think you guys called out.

Some of the costs that you guys saw in the quarter or onetime in nature. So just the outsource heat treatment costs and the start up costs are you guys able to quantify that for us a better sense on what the EBITDA profile would look like on a go forward basis.

The total impact of those will be for the quarter approximately <unk> <unk>.

And <unk>.

Approximately eight or nine for.

For the full year.

And are you able to provide that on the EBITDA line.

Yes, I mean.

Not off the top my head, where we kind of anticipated. The question. We just went straight to an EPS calculation. So.

That's okay, we could take it offline.

Then.

Darrin I'm just curious if you guys had an update on your the extra large mold initiatives, particularly if theres been any business wins that you guys have been seeing in your backlog.

And generally what competition looks like in this space.

Yes.

We have gone through a period of time here of making <unk>.

Significant investments, particularly in our new market plant.

We do have full capabilities of handling.

I would call more of the big screen size at this point.

We.

We do have some of that business in our backlog and.

It's difficult to get a read on competition competition in these businesses is always extreme.

But.

Certainly to say that.

There is no.

The competition is not making the investments that we are and as we look to the <unk>.

Expected growth in that part of the industry, we think it will be quite significant our multi year horizon.

Got it.

Helpful.

And then when you guys acquired talent.

You guys mentioned previously that the margin profile of <unk> was slightly below.

Based on legacy business with all the disruptions that we're seeing today, how much lower is the margin profile out of Hey, Alex versus.

Versus your legacy lines there.

Well im not going to quantify it because we don't report performance by.

By business unit.

Early but.

It has been more pronounced than what we expected just given the.

The rising energy costs and the weaker demand in Europe at this point.

Our hands and they're in.

Yes.

Obviously be taking measures to.

To mitigate those impacts as best we can.

And I guess is it still your expectation that helix gets up to 20% and if so what's the timeline on that.

Well I think we've never really indicated that.

Target for helix as 20%, but we've indicated that.

By 2026 at least the segment would be producing 20% EBITDA margin and Thats certainly still our expectation.

Okay. That's it for me Thanks, a lot guys.

Thanks, Dave.

Thank you.

I would like to ask a question. Please press star one on your telephone.

One moment please.

At this time there are no more questions in the queue I would like to turn the call back over to management for closing remarks.

Thanks to everyone for joining the call today, we look forward to speaking with you in January at our AGM and then for our first quarter conference call early next year.

Everyone. Thank you.

Thank you for attending today's conference call may disconnect everyone have a great rest of your day.

The conference will begin shortly to raise Johan during Q&A, you can dial star one one.

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