Exco Technologies Limited Q2 2023 Earnings Call
Speaker 2: 2023 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 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker 2: To withdraw your question, please press star 11 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 Kirk, President and Chief Executive Officer. Please go ahead. Okay.
Speaker 3: Thank you, Michelle. Good morning, all participants. Welcome to Xcode Technologies fiscal 2023 second quarter conference call. I will lead off with an operations overview. Matthew Posner, our CFO , will then review the financial aspects of the quarter before we open the call for questions.
Speaker 3: Before we begin, please ensure you review the cautionary notes in yesterday's news release and on page two of the presentation that we have posted to our website.
Speaker 3: These notes are applicable to this discussion today.
Speaker 3: I would like to start off with a big thank you to the entire XCO team who worked together with purpose through the quarter to drive our business forward while producing much stronger financial results.
Speaker 3: This quarter, we demonstrated clear evidence that our strategic growth initiatives are on the right track. We saw solid demand across our various businesses, particularly for our large and complex tooling, but also our assorted interior trim and accessory products.
Speaker 3: We are more confident than ever that XCO is exceptionally well positioned to enjoy a multi-year period of heightened demand growth.
Speaker 3: Looking first at the advancement of our strategic growth initiatives, we again made great progress this quarter.
Speaker 3: Importantly, I will remind you that our initiatives are primarily driven by the increasing demand for electric vehicles, the light weighting and economizing of all vehicles.
Speaker 3: the broader environmental sustainability movement, and adoption of increasingly sophisticated extrusion in diecast tooling.
Speaker 3: With regards to our specific investments, I am pleased to report that Castoul has essentially completed construction of its new facility in Mexico and delivery of machinery and equipment has continued this quarter. We expect this plant to be operational in our third fiscal quarter.
Speaker 3: providing much needed capacity to better and better positioning us competitively within the geographies of Latin America and the Southern US.
Speaker 3: Installation of new equipment that has upgraded and enhanced our heat treatment capabilities across the segment has continued with the last of these pieces now fully operational.
Speaker 3: This equipment provides us with unmatched capabilities and competitive advantages, lowers our costs and also significantly reduces our carbon footprint.
Speaker 3: Beginning this current quarter, we are now able to handle essentially all of our North American heat treatment requirements in-house across the casting extrusion segment.
Speaker 3: Elsewhere, Castuels plant in Morocco remains in a ramp-up phase and is making slow but steady progress, while the large mold group has completed the installation of all equipment in crane capacity to handle molds of extreme size and is continuing to optimize the use of this new equipment. For more information, visit www.aclu.org
Speaker 3: The integration of Halux into the extrusion group and realization of synergies from the sharing of best practices remains ongoing, but here again, we made great progress this quarter.
Speaker 3: Despite unexpected challenges during the first year of owning Halix due to the elevated energy costs and heightened inflationary pressures in Europe , we remain very happy with this acquisition and know Halix has great potential.
Speaker 3: Lastly, our plant expansions within our Automotive Solutions segment are complete and all equipment to support new programs are operational, contributing to our very strong growth this quarter.
Speaker 3: It is important to note that these investments not only require a significant amount of capital, but there are sizable front-end cash costs that we are absorbing within our results. Not to mention the allocation of our most precious resources, the time and attention of our people.
Speaker 3: Nonetheless, we believe we are at an inflection point as we are starting to see the aggregate of these investments now contributing to not just sales but also margin growth. We expect this trend will continue in the quarters ahead.
Speaker 3: Turning to market conditions, there was overall improvement during the quarter with automotive industry volumes increasing sharply and production flows stabilizing in both North America and Europe . This positively impacted our own efficiency, particularly in our automotive solutions segment, which demonstrated argumentative efficiency in both mobile and industrial environment, and extensive target and target transmission around food Ben
Speaker 3: continued good growth in both sales and margins.
Speaker 3: Consumer demand for new vehicles is holding up well despite the financial squeeze from inflationary pressures and rising interest rates.
Speaker 3: We have seen early signs that OEMs are responding to the changing environment by increasing incentives and in some cases reducing vehicle prices.
Speaker 3: This bodes well for automotive suppliers as these actions will help support sales volumes should economic conditions deteriorate further.
Speaker 3: Microchip supply is improving, though the industry is likely still months away from being fully recovered. Independent industry experts forecast a 5% increase in overall automotive production volumes for both North America and Europe through calendar 2023.
Speaker 3: We would expect our automotive solution segments to generate higher sales growth than this as we continue to benefit from the launch of previously awarded programs. Looking at it further, quoting activity is very robust across the segment, which will support our growth over the longer term.
Speaker 3: With respect to our own input costs, we continue to see a leveling off of inflationary pressures.
Speaker 3: Labor rates, however, remain a challenge, particularly in Mexico, which pushed through a 20% increase in minimum wage in December .
Speaker 3: With this in mind, we continue to take specific pricing actions where possible in order to restore and protect our margins.
Speaker 3: We also, of course, remain extremely focused on further improving our own efficiency, which is ultimately the clearest path to margin enhancement.
Speaker 3: Within our casting and extrusion segment, we saw very strong demand for new diecast molds while rebuild work is continuing to pick up.
Speaker 3: This is true for both powertrain and structural programs, and of course our additive operations continue to grow strongly.
Speaker 3: In Q2, our large mole group recorded its highest ever level of quarterly order intake and our backlog to sales ratio remains at record levels.
Speaker 3: Within this backlog, I would point out that orders are well balanced between molds for powertrain and structural applications.
Speaker 3: Demand for consumable extrusion tooling did soften during the quarter as the extruders responded to slower global macro conditions.
Speaker 3: However, extrusion demand in a number of end markets such as automotive and green categories remain solid. Cast tools, capital, equipment sales within the extrusion end markets remain very strong as does demand for its consumable die-cast cooling and systems.
Speaker 3: Capstools products are leading the market forward as they greatly enhance the productivity and efficiency of their customers.
Speaker 3: As a result, Castool is clearly gaining significant market share globally.
Speaker 3: Margins in our casting and extrusion segment improved this quarter, but remain below potential as we absorb 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 with pricing actions.
Speaker 3: Nonetheless, as I mentioned, I believe we are at an inflection point with our investments and expect to see continued gains in the segment margins in the quarters ahead.
Speaker 3: With that, I again want to thank all my Expo teammates for a great quarter, and I will now pass the call over to Matthew to discuss the financial highlights. Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the second quarter ended March 31, 2023, for $155 million, compared to $119 million in the same quarter last year.
Speaker 4: Consolidated sales for the quarter were up 24%, automotive sales were up 15%, and casting extrusion sales were up 35%. Consolidated net income for the second quarter was $6.3 million or 16 cents per share compared to $5.1 million or 13 cents per share in the same quarter last year. An increase in net income of 1.2 million or 24%.
Speaker 4: Earnings per share were reduced three cents in the quarter due to the one-time impact of the January 2023 Cyber Incident.
Speaker 4: The consolidated effective income tax rate of 21% in the current quarter decreased from 23% from the prior year quarter due to non-deductible losses from our recently launched Castle Morocco facility offset by geographic distribution and foreign rate differentials.
Speaker 4: The hour-long solution segment reported sales of $83.1 million in the second quarter, an increase of $14.9 million or 22% from the prior year quarter. The sales increase was driven by the ramp-up of newer programs, higher vehicle production volumes, select pricing options, actions, and sales.
Speaker 4: to compensate for inflationary pressures as well as a favorable vehicle mix. North American European production volumes were up about 13 percent in the quarter indicating continued gains in content per vehicle. Looking forward, OEM vehicle production volumes are expected to increase as the semiconductor chip shortages and other supply chain constraints continue to improve. While industry growth may be tempered by rising interest rates and
Speaker 4: of a global recession. There remain significant pent-up customer demand for new vehicle and dealer inventory levels are expected to be replenished.
Speaker 4: As well, Exco will benefit from recent and future program launches that are expected to provide ongoing growth in our continent's vehicles.
Speaker 4: So, tax pre-earnings in the automotive solutions segment totaled $8.7 million, which represents an increase of $2.5 million from the prior year quarter. The higher pre-tax profit is largely attributed to increased sales, improved overhead absorption, and benefits from select pricing actions.
Speaker 4: These improvements were partially offset by inefficiencies caused by launch costs in the period.
Speaker 4: Industry vehicle volumes remain below pre-pandemic levels and production flows remain somewhat erratic due to ongoing supply chain challenges but these challenges lessened in the quarter while cost increases related to raw materials, wages and transportation also
Speaker 4: Pricing discipline remains a focus and action is being taken where possible, though there is typically a lag of a few quarters before the impact is realized. As well, new vehicle awards are priced to reflect management's expectations for higher future costs.
Speaker 4: The casting and extrusion segment reported sales of $72.4 million for the second quarter, an increase of $21.3 million, or 42%, from the same period last year.
Speaker 4: in our third quarter of fiscal 2022. Excluding Halux to sales, segment sales increased by 12% in the quarter. Demand for extrusion tooling, dies, dummy blocks, stems, etc., and associated capital equipment, die ovens and containers remain relatively strong due to industry growth and ongoing market share gains.
Speaker 4: Although we did see signs of market activity for consumable extrusion tooling slowing through the quarter in North America.
Speaker 4: In the die-cast market, which primarily serves the automotive industry, demand for new molds, consumable tooling like shop sleeves, rods, rings and tips, rebuild tools and additively printed tooling has continued to improve as industry vehicle production recovers and new electric vehicles a more efficient internal combustion engine transmission platform.
Speaker 4: costs. Quoting activity within the die cast end market remains extremely robust while our backlog levels are at record highs which is expected to bode well for sales into fiscal 2024.
Speaker 4: The casting and extrusion segment reported $3.9 million of pre-tax profit in the second quarter, an increase of $1.2 million from the same quarter last year, and $2 million from the first quarter of fiscal 2023.
Speaker 4: The second quarter pre-tax improvement was driven by contributions from Halex, increased overhead absorption and production efficiencies due to stronger sales in the diecast market, including new molds, rebuilds and consumable tooling.
Speaker 4: These positive contributions were partially offset by higher depreciation in the quarter, startup costs at Castrol's New Moroccan and Mexican operations, and its heat treat operations in Newmarket, higher energy, raw material, energy, freight and labour costs. As well, costs were impacted by roughly $600,000 of expenses.
Speaker 4: recorded in the segment due to lost production time in the large mold group arising from the cyber incident. Management remains focused on ramping up newer operations, reducing its overall cost structure, and improving manufacturing efficiencies.
Speaker 4: We expect such activities, together with our sales efforts, should lead to further improvement in segment profitability over time.
Speaker 4: Exco generated cash from operating activities of $6 million during the quarter and $1.1 million of free cash flow after $10 million of increased non-cash working capital, $2.9 million in maintenance fixed asset additions and interest of $2 million.
Speaker 4: Cash flows combined with cash on hand in existing credit facilities funded $4.1 million of dividends, $7.7 million in growth capital expenditures,
Speaker 4: Management expects fiscal 2023 capital expenditures to be approximately $46 million as we complete our strategic capital asset projects.
Speaker 4: Exco ended the quarter with $13.1 million in cash, $116 million in bank and long-term debt, and $36.3 million available in its credit facility. Exco's financial position remains strong. As such, the company's balance sheet and availability under existing credit facilities provide continued support for our strategic initiatives.
Speaker 4: 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.
Speaker 2: That concludes my comments, so we can now transition to the Q&A portion of the call, Michelle. Okay. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker 2: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker 2: The first question comes from David Ocampo with Corn Mix Securities. Your line is now open.
Speaker 5: Thanks. Good morning, Darren and Matt.
Speaker 5: Morning, David. Morning. So the EPA put out a proposal for a change in the CAFI requirements up to 2032. Are you guys doing that as a risk or opportunity and does that change how you guys are investing your capital or more or less confirm what you guys are putting out there today? You know, with regards to that specific proposal it doesn't...
Speaker 3: Those two trends within the diecast.
Speaker 3: segment of our casting extrusion segment, we'll continue to see increased demand. I guess the only question remains what pace and how high the demand goes, but we're certainly seeing it already that there is significant demand. Again, we expect that will persist for.
Speaker 3: now that you have all the equipment in place. Just curious how that business scales over time. Yeah, well, as we mentioned, this was a record quarter for order intake and the backlog continues to grow.
Speaker 3: I guess with regards to specific programs, the only thing I would say is that we've installed a tremendous amount of new equipment. And that gives us the capabilities to work on moulds of extreme size and we're using all the equipment as...
Speaker 5: as we expected. And I guess, is there any kind of hurdles that you guys see have the equipment in place? Is there a technical know-how that you guys need to develop in-house before we could see this materially uptick in future quarters? No. At this point, I'd say that the biggest risks are certainly behind us. Is that, again, why we need to make sure that the PCs MARKS because the web server that everyone's using that can get connected to their projects and all this. The third caution that I may face, is that something that's definitely been done. Don't bother me for it to pass through my steps or my
Speaker 3: heat treatment operations had to go through a qualification procedure with some OEMs and they passed it with flying colors.
Speaker 3: go through a qualification procedure with some OEMs and they passed it with flying colors.
Speaker 2: Okay, that's it for me. Thanks. Thanks. Yeah. Yeah. As a reminder to ask a question, please press star one one on your telephone.
Speaker 2: I show no further questions at this time. I would now like to turn the conference back to Darren for closing remarks.
Speaker 3: Well, thanks everyone for participating today. We look forward to speaking with you again in another 90 days or so. Take care.
Speaker 2: This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker 2: This concludes today's conference call. Thank you for participating. You may now disconnect.