Q1 2023 Exco Technologies Ltd Earnings Call
Okay.
Good day and thank you for standing by welcome to the Exo Technologies Limited first quarter 2023 earnings 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 one.
One on your telephone you well.
And then here an automated message message advising you. Your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Darren Cook, President and Chief Executive Officer. Please go ahead.
Thank you Michelle.
Ladies and gentlemen, welcome to ESCO technologies fiscal 2023 first quarter conference call I will lead off with an operations overview Matthew boss note. Our CFO will then review the financial aspects of the quarter before we open the call for questions.
I'd like to make some comments about forward looking information.
Yesterday's news release and on page two of the presentation that we have posted to our website you will find the cautionary notes in that regard.
I won't repeat the content I want to emphasize that the cautionary note supply to this discussion today.
So we again made great progress advancing our various growth initiatives during the quarter, which is evident in our very strong top line results. We continued to see solid demand for our large and complex cooling and related solutions as well as our assorted interior trim and accessory products.
Importantly, key drivers here are the accelerating adoption of electric vehicles, and the broader environmental sustainability movement, both of which are in early innings.
We are more confident than ever that exco is entering into a multi year period of heightened demand growth for which we are exceptionally well positioned.
With regards to our specific investment plans I'm pleased to report the cast tool has essentially completed construction of its new facility in Mexico and delivery of machinery and equipment has commenced.
We expect this plant to be operational in our third fiscal quarter, providing much needed capacity and better positioning us competitively within Latin America, and the southern U S.
Installation of.
Of new equipment.
That will upgrade and enhance our heat treatment capabilities across the segment continues and we expect these pieces will be fully operational by the end of our second quarter.
Equipment will give us unmatched competitive advantages, while significantly reducing our own carbon footprint.
Elsewhere cast tools plant in Morocco remains in a ramp up phase and is making terrific progress while the large mol group has completed the installation of all equipment and crane capacity to handle more of extreme size.
Lastly, our plant expansions within our automotive solutions groups are complete and all equipment to support new programs are operational at this time, we have no change to our prior capex guidance for the year of $47 million.
Overall market conditions continued to improve during the quarter with automotive industry volumes, increasing modestly and production flows stabilizing in both North America and Europe .
This positively impacted our own efficiency, particularly in our automotive solutions segment, which demonstrated continued recovery in both sales and margins.
Consumer demand for new vehicles is holding up well, despite the financial squeeze from inflationary pressures and rising interest rates.
We have seen early signs that Oems are responding to the changing environment by increasing incentives and in some cases, reducing vehicle prices. This bodes well for automotive suppliers. As these actions will help support sales volumes should economic conditions deteriorate further.
Micro chip supply is improving though the industry is likely still months away from being fully recovered independent industry experts forecast a 5% increase in overall volumes for both North America and Europe through calendar 2023.
We would expect our auto solutions segment to generate higher sales growth in this as we continue to launch previously awarded programs.
Looking at further quoting activity is robust across the segment, which will support our growth over the longer term.
With respect to our own input costs, we continue to see signs of slowing inflation or disinflation in fact in some aspects of our business. We have begun to see pockets of outright deflation, which is the case for certain transportation cost steel and some other commodities.
Labor rates, however, remain a challenge, particularly in Mexico, which pushed pushed through a 20% increase in minimum wage in December with these factors in mind, we continue to take specific pricing action, where possible in order to restore and protect our margins we of course remain extremely.
<unk> on further improving our own efficiency, which is ultimately the clearest path to margin enhancement.
Within our casting and extrusion segment, we saw strong demand for new die cast malls, well rebuild work is continuing to pick up.
This is true for both powertrain and structural programs and of course, our additive operations continued to gain meaningful traction.
In fact in January 2023.
Our large multi group recorded its highest ever level of monthly order intake and our backlog to sales ratio is currently sitting at record levels.
Demand for consumer.
Super Bowl extrusion truly did begin to weaken during the quarter as Extruders responded to softening global macro conditions. However, extrusion demand in a number of end markets such as automotive remains firm.
As well cast fuels capital equipment sales within the extrusion end markets remained very strong as does demand for consumable die cast tooling and systems, where we are clearly gaining significant market share.
Margins in our casting and extrusion segment remained well below potential as we absorbed startup losses at new operations incur elevated levels of depreciation from recent capex activity navigate through operational disruptions as we install new equipment and continue to catch up from inflationary pressures.
Difficult conditions in Europe also weighed on segment margins. However, more recent data points are encouraging including a significant reduction in energy costs and realization of initial synergies within the extrusion tooling group.
We are very optimistic our segment margins will see recovery from here through the remainder of the year.
With regards to the cyber incident that affected our large mold groups three plants during the quarter I will provide a few comments.
I will say this was a very sophisticated attack on our network I want to emphasize that exco is committed to data security and is taking this matter very seriously.
Upon learning of the incident, we took immediate action to secure our systems and mitigate the impact to our data and operations I am pleased to report that our operations have now been fully restored and shipments to our customers have not and will not be materially interrupted.
We are still fully assessing the financial impact of the situation, but at this time and expect production downtime and other costs associated with the incident will reduce our earnings per share in Q2 of this fiscal year by between one to three.
Net of expected insurance proceeds.
We do not expect material additional implications for future quarters beyond Q2 I.
I would like to thank our customers and partners for their patience as we remediated the situation and of course, our employees, who work tirelessly to restore our network and operations expeditiously.
Lastly, I'm sure you noticed with last Night's earnings release, our board of directors elected to maintain our quarterly dividend at <unk> <unk> per share the board supported continuing our dividend at this level rather than increasing further which exco has done 14 times in the past 13 consecutive years.
I want to point out that continuance of the current dividend level in no way reflects a lack of confidence in excess operate expectations of future profit growth.
Either I would emphasize that we see significant growth opportunities in our core business and are motivated to preserve our capital to fund such growth.
In that regard, we will prioritize the use of surplus near term cash flow to reduce our current indebtedness I will now pass the call over to Matthew to discuss the financial highlights of the quarter Matthew Thank.
Thank you Darren and good morning, ladies and gentlemen.
<unk> sales for the first quarter ended December 31 were $139 1 million, an increase of $38 million or 38% over the quarter. The consolidated impact of exchange rate movements increased sales by $6 million <unk>.
Adjusting for the impact of foreign exchange first quarter sales at our automotive solutions segment increased $11 6 million or 21% and the casting extrusion group sales were up $20 4 million or 45%.
Consolidated net income for the first quarter was $4 5 million or earnings of <unk> 12 per share compared to $2 7 million or <unk> <unk> per share in the same quarter last year to 67% increase in net income the effective income tax rate for the quarter was 21% compared to 26% the prior year period the change in income tax.
Right in the current year quarter was impacted by geographic distribution and foreign rate differentials.
The automotive solutions segment experienced a 27% increase in sales in the first quarter or an increase of $15 million to $70 3 million from $55 million.
The increase the sales increase was driven by higher vehicle production volumes and pure program launch delays at supply chain disruptions eased in the quarter North American industry vehicle production was up 8% compared to a year ago and European industry vehicle production was up 4%.
<unk> increased at all four of the segments operations, and we continued to ramp up and our new programs.
First quarter pre tax earnings and the automotive solutions segment totaled $7 $2 million, which is an increase of $3 8 million or 112% over the same quarter last year.
The segment's higher pretax profit is due to the 27% increase in sales and improved overhead absorption, partially offset by continued pressure on wages materials and transportation costs compared to the prior year period.
The casting and extrusion segment recorded sales of $68 $8 million in the first quarter compared to $45 8 million last year, an increase of $23 million, Hey, look sales were $11 6 million <unk>.
These results were impacted by December holidays, the Russian conflict in Ukraine, and weakening economic conditions in Europe .
And for our extrusion tooling and associated capital equipment outside of Europe remained relatively strong due to both industry growth and ongoing market share gains however, signs of slowing market activity exist through the quarter and the die cast market demand continues to improve as vehicle industry as industry vehicle production recovers, new electric vehicles and more efficient internally.
Combustion engines last transmission platforms are launched and customer inventory levels increased exco is additive three D. Printed tooling continues to strong contribution as customers focus on greater efficiency with the size and complexity of the die cast tooling continuing to increase.
Sales in the quarter were also aided by price increases which were implemented in order to protect margins from higher input costs.
Pre tax earnings of the casting extrusion segment at $1 9 million declined modestly compared to the prior year quarter. The decline was driven by a $1 9 million higher depreciation startup cost of capitals heat treat operations in new market continued outsourcing heat treat cost in our extrusion tooling group, while new equipment is being installed and higher raw material.
Energy freight and labor costs due to inflation, particularly in Europe .
Exco generated cash from operations operating activities of $10 $8 million during the quarter and $5 6 million of free cash flow after $3 $4 million in maintenance fixed asset expenditures. This free cash flow together with the company's cash balances was used to fund fixed assets for growth initiatives, a $4 million and $4 $1 million of.
Dividends Exco ended the quarter with $18 million in cash $110 7 million and bank in long term debt and $41 $9 million available and its credit facility.
<unk> financial position remains strong as such the company's balance sheet and availability under the existing credit facility provides continued support for our strategic initiatives, our strong financial position combined with our free cash flow provides a foundation for management to pursue high value growth capital expenditures dividends and other opportunities that may arise.
That concludes my comments, Michelle we can now transition to the Q&A portion of the call.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for your first question.
And our first question comes from the line of David.
Campeau with core Mark Your line is open. Please go ahead.
Hi, Thanks, good morning, everyone.
Alright, David.
Darren you talked a bit about casting extrusion margins improving throughout the year, especially as some of these onetime costs are eliminated and inflationary pressures ease, but when you take a look at your backlog, maybe maybe excluding helix is the margin profile in the backlog getting closer to your long term target of 20% or.
How should we be thinking about getting that the bridge back to 20% here.
Yes sure. Thanks for the question David.
So the backlog that I'm addressing the areas.
Really in the large mol group and.
I will say that there.
As a.
Good recovery underway in pricing the pricing environment for that business, it's been a very difficult time.
For the past several years.
Right.
The backlog that we have to date is at.
Much firmer pricing and we expect it's going to go a long way to restoring our margins towards our target of 20% for the segment.
Yes.
And do you expect the pace of improvements to be pretty even or is it can it be more front end loaded back end loaded.
So that it's probably going to be more backend loaded, but thats just one feature thats going to help restore the margins I mean, there is there has been a drag on the margins from the very difficult conditions.
In Europe , we are seeing signs of easing there I don't think you should expect the margins to pop back up in that isolated regard but.
It should certainly demonstrate some some good improvement in our Q2.
We do still have.
Front end.
Up losses in our new plant and we've had a tremendous amount of.
Inefficiency from.
Replacing all of this heat treatment equipment within the group and having to outsource that has implications for for lead times and sales. So you can't.
Downplay the impact that all of these things have.
Contributed together and so it's.
Given the number of moving parts Im not going to give you a roadmap through the end of the year, but.
Rather I just refer to what I said during my script and that we expect that the margin is going to have improvement from here through the year.
Standardized.
That's helpful and then large multi touched on it briefly there about the backlog.
With the good talent from EV.
But when you when you look at the backlog or is there anything in there that that's related to the extremely large malls that you've alluded to in the past, especially as here installing new machinery and crane work there.
Yes.
<unk> that.
New equipment and the upgraded train capacity is in.
Significant part of our strategy there.
There is certainly is a lot of activity in that backlog that is going to take use of that capability. So yes.
We are seeing.
Demand.
Already and we expect that demand will grow strongly over the next several years.
And then maybe competition in that area I mean, it does seem like an area where that is.
That has above average growth relative to the sector are you seeing more of your competitors invest in this equipment or is this something that you guys are doing kind of on an installed basis.
I would say that the very few competitors have this capability.
Not aware of.
What other competitors are specifically doing to upgrade their capabilities to match. The standards that we have I think it's going to be very difficult for them to do theres a lot of capital Thats required in order to.
Impede at this level.
Your customers demand.
Supplier like us that has extremely high quality so.
As things get larger and more complex.
It all plays to our strengths and so we expect that.
We will increasingly be evident over the next several years.
Okay. That's perfect. That's it for me thanks, guys. Thanks.
Thanks, David Thanks, Ed.
Thank you and one moment for our next question.
And our next question comes from the line of Rob <unk> with BMO. Your line is open. Please go ahead.
Hi, Thanks for taking my question.
The opening remarks, you mentioned that you've.
<unk> seen come.
The market activity slowing down why did the same time Garland inquiry levels have been great.
So can you help us on that.
Rich part of the market is experiencing a slowdown.
And why is not impacting your strong demand outlook.
So just to clarify.
And you're right there were some comments, we've seen some market slowing down and some picking up so the large mall than die cast.
Production areas have certainly been heating up.
And.
Within the extrusion area, we are seeing a little bit of cooling down in the market.
In certain sectors.
That we supply.
I think that kind of covers what your question was there to do.
Yes, I would just add to that.
Building and construction as you would expect is.
Significantly influenced by.
<unk>.
Rising interest rates and we're starting to see some some slowdown there.
That business is highly highly diverse and so while building and construction which is.
A large end market has is perhaps down a bit.
Automotive.
Many other transportation and Green energy.
Segments are are showing strength.
So altogether, we've seen total demand kind of back off a little bit, but I will also say that things are pretty temperamental in that business.
It's difficult to get a good read of where we are seasonally December is typically a relatively soft month.
We are seeing things come back.
Actually.
Quite a bit stronger towards the end of January so, we'll see where it goes but.
That's some kind of color around what's happening in the extrusion part of the business I would also add that.
Pass dual kind of sales.
A number of consumable components.
Two extruders, but also a lot of capital equipment, which have a longer lead time and time focus and that capital equipment businesses.
It's continuing to remain very strong and further looking.
And the immediate timeframe and there are a number of new and large presses extrusion presses going in a globally.
That kind of gives you a good indication of.
Where things will go on a longer time basis.
Got it and then you just slightly touched upon a weaker.
The first quarter and the fourth quarter.
We do.
Right.
Can I understand during COVID-19, the disparate and welcome.
From them going forward.
You bet.
For us in the fourth quarter will be weaker going forward.
So.
It's hard to say, what our regular cyclicality of our quarters is.
As you know with between Covid and the semiconductor supply chain issues I mean, traditionally our fourth quarter.
There are summer shutdowns, especially in Europe and.
Less so in North America, but in North America.
And then our first quarter Christmas.
The December holidays I'll call. It has certainly impacted so I.
I'd say, that's normal, but I don't know what normal is nowadays.
That's kind of typically shipping days and so on.
Yes, but seasonally speaking got it and then quickly.
Lower than our Q3, yes.
Okay.
And just finally on.
How much of the margin pressure in the costume extrusion segment is attributable to the input cost inflation that you're seeing.
Okay.
Quantifying that is it.
It's difficult it's got a number of moving pieces.
To some extent, it's offset by prices.
It is a sizeable component to be sure and then you've got to work hard to further improve efficiency in order to recapture that lost margin.
And then price increases have to be part of the equation and then.
And then hopefully.
We see a continuation of the.
Certain deflation trends that.
Our.
Becoming evident the price of steel is starting to go down and.
Some of our energy sources is also going down and some other commodity input costs are seeing.
Certainly disinflation, but even some deflation so.
Can't give you Unfortunately a specific.
Margin percentage, but I can say, it's a material impact at the front end here.
Got it.
And Mr.
Just additional question on that one.
So you said you put forward some price increases.
It looks like in this quarter are we going to see some margin improvement because the price Goldman next quarter.
Sorry.
The line was a little garbled there could you ask.
Ask again.
Yes.
Mentioned that you pulled forward some price increases.
The question was.
Does that price increase is reflective of that price increase reflected in this quarter.
We can see margin.
Margin improvement because of the price increase in the next quarters.
Yes, you will see that some of that price increase it was evident in the current quarter, but youll see continued improvement from that regard.
Subsequent quarters as well.
Okay. That's it from me. Thank you so much great. Thank you very much.
Thank you and again, if you would like to ask a question. Please press star one on your telephone.
I would now like to hand, the conference back over to Darren <unk> for closing remarks, great.
Great. Thanks, Michelle and thanks, everyone for joining US today, we look forward to discussing our Q2 results in another 90 days or so after that.
This concludes today's conference. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.