Q3 2024 Exco Technologies Ltd Earnings Call

August 1, 2024

Good day and thank you for standing by. Welcome to the Exco Technologies Limited 3rd Quarter Results 2024 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'll need to press star 1-1 on your telephone. You will then hear an automated message device and your hand is raised.

To withdraw your question, please press star 1 1 again. Please be advised, 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.

Operator: Thank you, Kevin, and good morning all participants. Welcome to Exco Technology's fiscal 2024 third quarter conference call. I will lead off with an operations overview. Matthew Posno, our CFO, will then review the financial aspects of the quarter before we open the call for questions.

Darren Kirk: Thank you, Kevin, and good morning all participants. Welcome to Exco Technology's fiscal 2024 third quarter conference call. I will lead off with an operations overview. Matthew Posno, our CFO , will then review the financial aspects of the quarter before we open the call for questions.

Speaker Change: Before I begin, I'd like to point out that the cautionary note in yesterday's news release and on page 2 of the presentation that we have posted to our website are applicable to this discussion today.

Overall, we had another solid quarter, chalking up our seventh consecutive quarter of year-over-year growth in EBITDA and EPS.

Speaker Change: As well, I'm very happy to point out that we saw a notable uptick in our casting and extrusion segment EDA-DOM margin, which rose to almost 18%.

Darren Kirk: This segment margin has much more upside from our current investment initiatives and as we focus our efforts on filling new capacities, improving our efficiencies, and achieving our fiscal 2026 target. Vehicle sales also remain decent, ending the quarter with a U.S. seasonally adjusted rate of about 15.5 million units. Volumes would likely have been a bit better than this if not for the large cyber incidents that impacted thousands of dealerships in the month of June.

Free cash flow was also much stronger this quarter as our earnings continued to improve when capex came in a little later. We continue to tightly assess our capital spending and now expect annual spending will come in around 36 million dollars this year.

Darren Kirk: Beyond our financial results, we made great progress at pushing the pace of innovation across the company again this quarter. It is truly exciting to see all the innovation happening across Exco and the tremendous potential that will clearly be unleashed through the use of AI and machine learning.

Darren Kirk: We are already literally taking hundreds of hours out of jobs with these technologies across design, programming, and machining functions.

Darren Kirk: We also continue to make meaningful progress at scaling up our greenfield plants, further integrating HALACs into Exco's extrusion die operations, and maximizing the benefits of our enhanced heat treatment equipment.

Speaker Change: Jumping into market conditions and first looking at our automotive solutions segment, vehicle production volumes in North America and Europe were roughly flat on a combined basis, with North America a little higher and Europe a little lower.

Speaker Change: Vehicle sales also remained decent, ending the quarter with a U.S. seasonally annual adjusted rate of about 15.5 million units.

Darren Kirk: While elevated interest rates and continuing high average transaction prices are certainly headwinds, there remains pent-up demand at the consumer level, while dealer inventories continue to be replenished. Compared to flattish OEM production this quarter, our segment revenues modestly underperformed overall market conditions, dropping 4%.

Speaker Change: OEM incentives are clearly picking up and interest rates are starting to head lower.

Speaker Change: This was due to customer-driven program launch delays, unfavorable vehicle mix, and our general program launch cadence, with some programs ending before new programs launch later this year.

Darren Kirk: Looking forward, vehicle production volumes are widely expected to be flaxed slightly down in the second half of calendar 2024, which includes expectations of more pronounced summer shutdowns this year. In this regard, our launch pipeline, coding activity, and new product development remain very robust. Turning to our casting and extrusion segments, and starting with die cast, demand in that end market remained very firm for new bolts, rebuilds, shot end tooling, and, of course, our leading 3D metal printing business.

Speaker Change: As we've long demonstrated, we would expect our revenues to comfortably exceed the industry rate of growth over time, representing content-per-vehicle growth of between 5 to 10 percent.

Speaker Change: In this regard, our Launch Pipeline coin activity and new product development remains very robust.

Speaker Change: On the cost side, margins were squeezed during the quarter by modestly weaker volumes, unfavorable vehicle mix, and higher labor costs, particularly in Mexico.

Speaker Change: Labor costs in Mexico have increased significantly in the past several years and we are working to offset these pressures through various measures. These measures include implementing automation and trimming headcount where possible, exiting less profitable programs, pushing off cost downs, and of course targeting price increases.

Speaker Change: As some of our older, tighter-priced margin programs roll off and newer programs with more favorable economics ramp up, we expect our segment margins will begin to recover.

Speaker Change: Turning to our casting and extrusion segment and starting with die cast, demand in that end market remained very firm for new molds, rebuilds, shot end tooling, and of course our leading 3D metal printing business.

Speaker Change: While EV adoption has clearly slowed, it is important to note that our business is relatively agnostic to powertrain architecture.

Darren Kirk: Should the EV revolution slow further or shift toward hybrid vehicles, as appears to be the case, we remain confident in the trend toward aluminum and that demand for our products will continue to grow strongly in the years ahead. Demand for consumable extrusion tooling remains strong across most regions and markets.

Speaker Change: Demand for consumable extrusion tooling remains strong across most regions and end markets.

Darren Kirk: During the quarter, while extruders continued to be somewhat sluggish overall due to weak demand in the building and construction end markets, this end market improved this quarter, and certain other markets, such as automotive and green energy applications, continued to show good growth. That concludes my prepared remarks. I want to thank all of my Exco teammates for their tremendous efforts, their drive to push innovation through our organization, and their focus on working safely always.

Darren Kirk: I will now pass the call to Matthew to discuss the financial highlights. Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the third quarter ended June 30th were $161.8 million, a decrease of 2.8 million, or 2%. The Atomos Solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter.

Matthew Posno: For an exchange rate change, increased segment sales of $1.1 million. The casting and extrusion segment reported sales of $78.9 million for the third quarter, an increase of half a million dollars from the same period last year. Demand for extrusion tooling remains strong in both North America and Europe. High interest rates and negative interest rates negatively influenced the building, construction, and recreational vehicle extrusion end markets in prior quarters, but the construction end market improved more recently while demand within the automotive market gained momentum. The sustainable energy end markets were strong.

Speaker Change: foreign exchange rate changes increased sales approximately 1.9 million in the quarter

Speaker Change: The effective income tax rate was 27% in the current quarter, compared to 26% in the prior year quarter. The income tax rate in the quarter was impacted by non-deductible losses, geographical distribution, and foreign rate differentials.

Speaker Change: The Automotive Solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter. Foreign exchange rate changes increased segment sales $1.1 million in the quarter.

Speaker Change: Vehicle production volumes however remain relatively stable which has led to improvements in labor scheduling and reduced expedited shipping costs to partially offset these other costs.

Speaker Change: As well, pricing action and efficiency initiatives continue to temper inflationary pressures.

Matthew Posno: Management continued to develop its Castile Greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America. Exco's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility provide continued support for our strategic initiative. 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. Kevin?

Speaker Change: Offsetting these cost improvements were ongoing startup costs at Cassfield's Greenfield operations and a $700,000 increase in segments appreciation for the quarter associated with recent capital expenditures.

Speaker Change: This free cash flow, together with the company's cash balances, was used to fund six Assets for Growth Initiatives of $3.2 million, paid $4.1 million in dividends, and a million dollars to repurchase shares under a normal floor issuer bid.

Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press star 1-1 again.

Operator: We will pause for a moment while we compile our Q&A robot. Our first question comes from David Ocampo with Cormark Securities. Your line is open. Thanks. Good morning, everyone.

Darren Kirk: Word, David. There are all kinds of hurdles when you're starting a new plant in Morocco and shipping into Europe. We've overcome a lot of those in the past quarter, and we do expect that the performance is going to continue to improve very soon. But you're absolutely correct that it is behind schedule. But there's no, you know, we certainly see a path to achieving our objectives for that plant.

Speaker Change: Sure, yeah I think it's a fair comment that that facility is behind our expectations in terms of ramp-up.

Speaker Change: You know, we continue to make progress there. It's generally kind of hanging around in EBITDA, break-even.

Speaker Change: on a quarterly basis now, but the sales are and the orders are starting to come up and so while it's you know

Speaker Change: There's all kinds of hurdles when you're starting a new plant in Morocco and shipping into Europe . We've overcome a lot of those in the past.

Speaker Change: And we do expect that the performance is going to continue to improve.

Darren Kirk: It's just been a little more protracted. Okay, that makes sense. So then, I was just hoping you could speak a little bit about your ongoing discussions with customers as it relates to giga presses, especially in the context of slowing EV demand. And just out of curiosity, is this something that could also be used by traditional ICE customers, or are all discussions right now related to that? And so, to the extent that EVs have been pushed out, the demand for gigatooling is also being pushed out.

Speaker Change: especially in the context of slowing EV demand.

Speaker Change: Yeah, it's a good question. You know, so far, I have not seen application of gigapresses for anything but EVs.

Speaker Change: And so the extent that EVs have been pushed out, the demand for gigatooling is pushed out. I still believe that it's pushed out and not cancelled.

Darren Kirk: I still believe that it's being pushed out and not cancelled. It's, you know, the cheapest path for an OE when they're kind of tweaking an existing platform is to stick with their existing process, but to the extent that new platforms are developed, you may see giga castings and tooling being used for those applications. But at this point, we don't think so.

Speaker Change: We're probably looking at a 12 to 18 month delay here, maybe 24 months. But we still have very active discussions with customers about interest in moving forward with EVs and gigatooling.

Speaker Change: OEs from using that technology for

Speaker Change: for hybrid or even gas powertrain architecture.

Darren Kirk: Casting is kind of like 15 to 17% of our overall revenues. It is a higher growth part of the market. And while we are seeing a delay in EVs and giga, there's a lot more activity going on for, a risk at this point in our 2026 target. Okay, that's it for me.

Speaker Change: casting demands for for both gas and hybrids.

Speaker Change: I just lost one here for Matt. If I look at CapEx for the first three quarters...

Speaker Change: So we've been doing a couple things we started talking about the end of last quarter Where we took our guidance from almost 48 to 40. I we think our capex will land somewhere close to 36

Operator: Thanks a lot, guys. Okay, thanks, David. One moment for our next question, and as those programs roll off, thanks, that's all my questions. I'll pass the mic.

Speaker Change: Our next question comes from Nick Corcoran with Accune Capital. Your line is open.

Speaker Change: Sorry, I kind of missed the part in terms of margins moving up. Yeah, I'm a true man. Yeah I think you got to take it segment by segment You know, we are kind of running the north of 12% or so in our automotive solution segments of the target target of 15%

Speaker Change: suffering through the inflationary effects of

Speaker Change: labor and raw materials relative to older price programs. And as those programs roll off.

Speaker Change: in 2025. In terms of the casting and extrusion segment, you know, this quarter, as I mentioned, has had a

Speaker Change: Pretty good uptick in that segment margin Closing in on 18% versus a 20% target And I think you know as we continue to season our green fields

Speaker Change: I'm just wondering if you've seen any indication that supply chains, any of the OEMs, whether in North America or Europe , are starting to slow down production.

Speaker Change: You know, we listened to the OE calls last week like most people in the sector and you know, it was I'd say a little more visible than it has been for some period of time there is

Speaker Change: I don't have greater visibility at this point than kind of the industry-level comments that I've just relayed, but, you know, there is likely to be some pullback in OE volumes, but, you know, our offset is always that

Speaker Change: We certainly expect that to be the case going forward. It won't necessarily be true every quarter, as was the case this quarter, but by and large, through the cycle, that's what we expect to achieve.

Speaker Change: Thanks, that's all my questions, I'll pass the mic.

Operator: Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone. Okay, well, thanks everyone for joining us on the call. We look forward to speaking to you all once we publish our fiscal 2024 year-end results. So, take care. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day. And I'm Darren Kirk.

Speaker Change: And I'm not showing any further questions at this time. I'd like to turn the call back over to Darren for any closing remarks.

Speaker Change: Music Music Music Music Music Music Music Music Music Music

Operator: I'll see you next time. ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Good day and thank you for standing by.

Speaker Change: [inaudible]

Operator: Welcome to the Expo Technologies Limited 3rd Quarter Results 2024 conference. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message device in your hand saying, To withdraw your question, please press star 1 1 again. Please be advised, 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.

Darren Kirk: As well, I'm very happy to point out that we saw a notable uptick in our casting and extrusion segments. We also continue to make meaningful progress in scaling up our greenfield plants, further integrating HALAC into Exco's extrusion die operations, and maximizing the benefits of our enhanced heat treatment equipment. Volumes would likely have been a bit better than this if not for the large cyber incidents that impacted thousands of dealerships in the month of June. While elevated interest rates and continuing high average transaction prices are certainly headwinds, there remains pent-up demand at the consumer level, while dealer inventories continue to be replenished.

Darren Kirk: Overall, we had another solid quarter, chalking up our seventh consecutive quarter of year-over-year growth in EBITDA and EPS.

Speaker Change: As well, I'm very happy to point out that we saw a notable uptick in our casting and extrusion segment EDADA margin, which rose to almost 18%.

Speaker Change: This segment margin has much more upside from our current investment initiatives and as we focus our efforts on filling new capacities, improving our efficiencies, and achieving our fiscal 2026 targets.

Speaker Change: Free cash flow was also much stronger this quarter, as our earnings continued to improve and CapEx came in a little lighter. We continue to tightly assess our capital spending and now expect annual spending will come in around $36 million this year.

Speaker Change: Beyond our financial results, we made great progress at pushing the pace of innovation across the company again this quarter. It is truly exciting to see all the innovation happening across Exco and the tremendous potential that will clearly be unleashed through the use of AI and machine learning.

Speaker Change: We are already literally taking hundreds of hours out of jobs with these technologies across design, programming, and machining functions.

Speaker Change: We also continue to make meaningful progress at scaling up our greenfield plants, further integrating HALACs into X-coat extrusion die operations, and maximizing the benefits of our enhanced heat treatment equipment.

Speaker Change: Vehicle sales also remained decent ending the quarter with a U.S. seasonally annual adjusted rate of about 15.5 million units.

Speaker Change: Volumes would likely have been a bit better than this if not for the large cyber incidents that impacted thousands of dealerships in the month of June.

Speaker Change: While elevated interest rates and continuing high average transaction prices are certainly headwinds, there remains pent-up demand at the consumer level while dealer inventories continue to be replenished.

Darren Kirk: OEM incentives are clearly picking up, and interest rates are starting to head lower. As we've long demonstrated, we would expect our revenues to comfortably exceed the industry rate of growth over time, representing content for vehicle growth of between 5 to 10 percent. In this regard, our launch pipeline, coding activity, and new product development remain very robust. While EV adoption has clearly slowed, it is important to note that our business is relatively agnostic to powertrain architecture. That concludes my prepared remarks.

Speaker Change: OEM's incentives are clearly picking up, and interest rates are starting to head lower.

Speaker Change: Compared to the flattish OEM production this quarter, our segment revenues modestly underperformed overall market conditions, dropping 4%.

Speaker Change: Looking forward, vehicle production volumes are widely expected to be flat to slightly down in the second half of calendar 2024, which includes expectations of more pronounced summer shutdowns this year.

Speaker Change: Looking out a little further, vehicle production volumes are expected to remain relatively stable in 2025 as pent-up consumer demand is satisfied.

Speaker Change: In this regard, our Launch Pipeline coin activity and new product development remains very robust.

Speaker Change: On the cost side, margins were squeezed during the quarter by modestly weaker volumes, unfavorable vehicle mix, and higher labor costs, particularly in Mexico.

Speaker Change: Labor costs in Mexico have increased significantly in the past several years and we are working to offset these pressures.

Speaker Change: through various measures. These measures include implementing automation and trimming headcount where possible, exiting less profitable programs, pushing off cost downs, and of course targeting price increases.

Speaker Change: As some of our older, tighter-priced margin programs roll off and newer programs with more favorable economics ramp up, we expect our segment margins will begin to recover.

Speaker Change: Turning to our casting and extrusion segment and starting with die cast, demand in that end market remained very firm for new bolts, rebuilds, shot end tooling, and of course our leading 3D metal printing business.

Speaker Change: While EV adoption has clearly slowed, it is important to note that our business is relatively agnostic to powertrain architecture.

Speaker Change: To the EV revolution slow further or shift toward hybrid vehicles as appears to be the case, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead.

Speaker Change: Demand for consumable extrusion tooling remains strong across most regions and end markets.

Speaker Change: During the quarter, while extruders continued to be somewhat sluggish overall due to weak demand in building and construction end markets, this end market improved this quarter and certain other markets such as automotive and green energy applications continued to show good growth.

Speaker Change: Capital equipment sales within the extrusion end market also remain decent as extruders continue to focus on enhancing their productivity and efficiency through the cycle, a sweet spot for our cask fuel operations.

Speaker Change: Margins in our casting and extrusion segment improved over the prior year and sequentially as we benefited from higher demand for extrusion dies, a more favorable pricing environment in the die cast market, but also much improved productivity across the segment.

Speaker Change: We are clearly seeing the benefit of our various capital investment initiatives.

Speaker Change: We remain confident in our expectations for higher segment margins through our outlook period of 2026 as our greenfield investment continues to season, our recent capacity additions are utilized, and various efficiency initiatives continue to take hold.

Matthew Posno: I want to thank all of my Exco teammates for their tremendous efforts, their drive to push innovation through our organization, and their focus on working safely always. I will now pass the call to Matthew to discuss the financial highlights. Foreign exchange rate changes increased sales approximately 1.9 million in the quarter. The automotive solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter.

Matthew: That concludes my prepared remarks. I want to thank all of my actual teammates for their tremendous efforts, their drive to push innovation through our organization, and their focus on working safely, always. I will now pass the call to Matthew to discuss the financial highlights.

Matthew: Thank you, Darren. Good morning ladies and gentlemen. Consolidated sales for the third quarter into June 30th were $161.8 million, a decrease of $2.8 million or 2%.

Matthew: foreign exchange rate changes increased sales approximately 1.9 million in the quarter

Matthew: Consolidated net income for the third quarter was $8.2 million or earnings of 21 cents per share compared to $6.3 million or 16 cents per share in the same quarter last year. This is an increase of $1.9 million or 30%.

Matthew: The effective income tax rate was 27% in the current quarter, compared to 26% in the prior year quarter. The income tax rate in the quarter was impacted by non-deductible losses, geographical distribution, and foreign rate differentials.

Matthew: The Automotive Solutions segment reported sales of $82.9 million in the third quarter, a decrease of $3 million from the prior year quarter. Foreign exchange rate changes increased segment sales $1.1 million in the quarter.

Matthew Posno: Foreign exchange rate changes increased segment sales by $1.1 million. The casting and extrusion segment reported sales of $78.9 million for the third quarter, an increase of half a million dollars from the same period last year. Demand for extrusion tooling remains strong in both North America and Europe. High interest rates, negative, highest interest rates negatively influenced the building construction and recreational vehicle extrusion end markets in prior quarters, but the construction end market improved more recently while demand within the automotive market gained momentum. The sustainable energy end markets were strong.

Matthew: The sales decrease was driven by customer delays in certain program launches, unfavorable vehicle mix, and slightly lower blended vehicle production volumes in North America and Europe compared to the prior year quarter.

Speaker Change: Third quarter pre-tax income in the automotive solutions segment was $8.1 million, which is a decrease of $800,000 from the prior year quarter. Variances in period profitability were due to lower sales, product mix shifts,

Speaker Change: Higher raw material pricing, rising labor costs, and foreign exchange movements. Labor costs in Mexico have been particularly challenging in recent years, and we're seeing added pressure in fiscal 2024, given the rise in wages.

Matthew: Vehicle production volumes however remain relatively stable which has led to improvements in labor scheduling and reduced expedited shipping costs to partially offset these other costs.

Matthew Posno: As well, pricing action and efficiency initiatives continue to temper inflationary pressures.

The casting and extrusion segment reported sales of $78.9 million for the third quarter, an increase of half a million dollars.

Speaker Change: for the same period last year.

Matthew: Demand for extrusion tooling remains strong in both...

Matthew Posno: North America and Europe.

Matthew: High interest rates negatively influenced the building construction and recreational vehicle extrusion end markets in prior quarters, but the construction end market improved more recently, while demand within the automotive market gained momentum, the sustainable energy end markets were strong.

Darren Kirk: Management continued to develop its Castile Greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs. The Casting and Extrusion segment reported $7.1 million of pre-tax profit in the third quarter, an increase of $3.1 million, or 77% from the same quarter last year. The pre-tax profit margin and pre-tax improvement is due to higher sales volumes within the extrusion end markets, program pricing improvements, favorable product mix, and efficiency initiatives across the segment.

Darren Kirk: Management continued to develop its Castile Greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America.

Darren Kirk: In the die-cast tooling market, demand and order flow for new molds associated with tooling and rebuild work remained firm during the quarter, and demand for Exco's additive 3D-printed tooling grew strongly as customers focused on greater efficiency in all large mold size segments.

Matthew: Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs.

Speaker Change: The Casting Inc. Student Segment reported $7.1 million of pre-tax profit in the third quarter, an increase of $3.1 million, or 77% from the same quarter last year.

Darren Kirk: The pre-tax profit margin, pre-tax improvement is due to higher sales volumes within the extrusion end markets, program pricing improvements, favorable product mix, and efficiency initiatives across the segment.

Darren Kirk: As well, volumes at Castile's heat treatment operation continue to increase, providing savings and improved production quality, while efficiency initiatives at Halex are being realized.

Matthew: Offsetting these cost improvements were ongoing startup costs at Cassfield's Greenfield operations and a $700,000 increase in segments appreciation for the quarter associated with recent capital expenditures.

Darren Kirk: 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.

Speaker Change: Exco generated cash from operating activities of $22.7 million during the quarter and $15.9 million of free cash flow after $4.7 million in maintenance fixed asset additions.

Darren Kirk: This free cash flow, together with the company's cash balances, was used to fund six Assets for Growth Initiatives of $3.2 million, paid $4.1 million in dividends, and $1 million to repurchase shares under a normal portion issuer bid.

Darren Kirk: Exco ended the quarter with $20 million in cash, $107 million in bank and long-term debt, and $44 million available in its credit facility.

Darren Kirk: Exco's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility provide continued support for our strategic initiatives.

Darren Kirk: 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.

Kevin: That concludes my comments. We can now transition to the Q&A portion of the call. Kevin? Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1 1 on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press star 1 1 again. We'll pause for a moment while we compile our Q&A roster.

Darren Kirk: As well, volumes at Castil's heat treatment operation continue to increase, providing savings and improved production quality, while efficiency initiatives at Halex are being realized. However, offsetting these cost improvements were ongoing startup costs at Cassfield's Greenfield operations and a $700,000 increase in segment depreciation for the quarter associated with recent capital expenditures. Our first question comes from David Ocampo with Cormark Securities. Your line is open. Thanks. Good morning, everyone. Hey David. Morning, David.

Speaker Change: Our first question comes from David Ocampo with Cormark Securities. Your line is open.

David Ocampo: Thanks. Good morning, everyone.

Darren Kirk: My first question is probably for Darren. I mean, if you think about the Castile Morocco facility, it's been open since, I think, November 2021, so obviously, a few years there, but it does sound like performance is still not at levels that you would like. So I was just curious if that timeline is consistent with your expectations, and probably most importantly, what else needs to happen at the facility for you guys to get your desired returns on Castile.

Darren Kirk: My first question is probably for Darren. I mean, if you think about the Castile Moroccan facility, it's been open since I think November 2021.

Darren Kirk: So, obviously a few years there, but it does sound like performance is still not at levels that you would like. So, I was just curious if that timeline is consistent with your expectations and probably most importantly, what else needs to happen at the facility for you guys to get your desired returns on capital?

Darren Kirk: Yeah, I think it's a fair comment that that facility is behind our expectations in terms of ramp-up, but we continue to make progress there. It's generally kind of hanging around in EBITDA break even on a quarterly basis now, but the sales are, and the orders are starting to come up. And so while it's, you know. Okay, that makes sense.

Darren Kirk: Sure, yeah I think it's a fair comment that that facility is behind our expectations in terms of ramp-up.

Darren Kirk: You know, we continue to make progress there. It's generally kind of hanging around in EBITDA break-even.

Darren Kirk: on a quarterly basis now, but the sales are and the orders are starting to come up and so while it's you know

Darren Kirk: There's all kinds of hurdles when you're starting a new plant And in Morocco and shipping into Europe. We've overcome a lot of those in the past

Darren Kirk: quarter and we do expect that the performance is going to continue to improve.

Darren Kirk: [inaudible]

Darren Kirk: So then, I was just hoping you could speak a little bit about your ongoing discussions with customers as it relates to giga presses, especially in the context of slowing EV demand. And just out of curiosity, is this something that could also be used by traditional ICE customers, or are all discussions right now related? Yeah, it's a good question.

Darren Kirk: Okay, that makes sense. So then I was just hoping you could speak a little bit about your ongoing discussions with customers as it relates to Giga presses.

Speaker Change: especially in the context of slowing EV demand. And just out of curiosity, is this something that could also be used by traditional ICE customers or are all discussions right now related to EV?

Darren Kirk: You know, so far, I have not seen an application of giga presses for anything but TVs. And so, to the extent that EVs have been pushed out, the demand for gigatooling is pushed out as well. I still believe that it's being pushed out and not cancelled.

Darren Kirk: Yeah, it's a good question. You know, so far I have not seen application of gigapresses for anything but EVs.

Darren Kirk: And so, to the extent that EVs have been pushed out, the demand for gigatooling is pushed out. I still believe that it's pushed out and not cancelled.

Darren Kirk: We're probably looking at a 12 to 18 month delay here, maybe 24 months, but we still have very active discussions with customers about their interest in moving forward with EVs and gigatooling. While I have not seen any application for gigatooling outside of the EV market, there's nothing that would prohibit OEs from using that technology for hybrid or even gas powertrain architecture. It's, you know, the cheapest path for an OE when they're kind of tweaking an existing platform is to stick with their existing process, but to the extent that new platforms are developed, you may see giga castings and tooling being used for those applications, casting demands for both gas and hybrid. Because, you know, to the extent that they're not selling EVs, they're going to be selling a risk at this point in Good morning, guys.

Darren Kirk: We're probably looking at a 12-18 month delay here, maybe 24 months, but we still have very active discussions with customers about interest in moving forward with EVs and gigatooling.

Darren Kirk: And, you know, so while I have not seen any application for gigatooling outside of the EV market, there's nothing that would prohibit...

Darren Kirk: OEs from using that technology for hybrid or even gas powertrain architecture.

Darren Kirk: It's, you know, the cheapest path for an OE when they're kind of tweaking an existing platform is to stick with their existing process, but to the extent that new platforms are developed, you may see Giga castings and tooling being used for those applications.

Speaker Change: Okay, that makes sense. Is there any risk to your 26 targets just given that this has been pushed out to the right by, call it, 12 to 18 months?

Speaker Change: You know, at this point, we don't think so. Casting...

Speaker Change: is kind of like 15 to 17% of our overall revenues.

Darren Kirk: It is a higher growth part of the market, and while we are seeing a delay in EVs and giga, there's a lot more activity going on for

Darren Kirk: casting demands for for both gas and hybrids.

Darren Kirk: because, you know, to the extent that they're not selling EVs, they're going to be selling...

Darren Kirk: and other powertrain platforms, and so there is a pretty good offset there. And so I think, you know, given all of that, we don't see a risk at this point in our 2026 targets.

Matt: I've just lost one here for Matt. If I look at CapEx for the first three quarters, it's around $22-$23 million. It does imply there's going to be some big CapEx spending in Q4 against, I think, your previous guidance of $40 million. I'm curious if that still holds or if some of these capital projects have also been pushed to the right.

Speaker Change: That's a combination of a couple things. One is we are trying to evaluate our programs and making sure that we're getting the best return on investment on the equipment we're purchasing. And also, you know, some of these products, they take 12 to 18 months to actually get delivered to us, depending on the size and the complexity of it.

Speaker Change: So there have been a couple of delays in timing. So, you know, the way we see it is we're kind of saying around $40 million this year and maybe a little less next year, you know. Over the next two years, it'll probably be pretty consistent in the total, the absolute amount. But we think this year will be close to about $36 million.

Darren Kirk: Okay, that's it for me. Thanks a lot, guys. Thanks, David. One moment for our next question.

Speaker Change: Our next question comes from Nick Corcoran with Accune Capital. Your line is open.

Darren Kirk: Just a couple questions for me. The first is in terms of margins; how much more room do you think they have to move up? Sorry, I kind of missed the part in terms of margins moving up. Yeah, how much room do we have? Yeah, I think you've got to take it segment by segment. You know, we are kind of running a little north of 12% or so in our automotive solutions segment with a target of 15%, suffering through the inflationary effects of labor and raw materials relative to older price programs as those programs roll off.

Speaker Change: Good morning guys. Just a couple questions for me. The first is in terms of margins, how much more room do you think they have to move up?

Darren Kirk: Sorry, I kind of missed the part in terms of margins moving up. Yeah, I'm a true man. Yeah, I think you've got to take it segment by segment. You know, we are kind of running the north of 12% or so in our...

Darren Kirk: Automotive Solutions segments with a target of 15%.

Darren Kirk: and we certainly expect to get to that 15% by 2026. It's been soft as we've kind of been...

Darren Kirk: labor and raw materials relative to older price programs.

Darren Kirk: and as those programs roll off.

Darren Kirk: and new programs with more favorable economics roll on.

Speaker Change: That will help the margin. I would certainly expect that to be the case beginning in 2016.

Speaker Change: At 25

Speaker Change: And, you know, that should be boosted further by the fact that most of, a good piece of the growth that we have is from our accessory products and they tend to have a bit of a higher margin associated with them.

Speaker Change: That's the path, and I would expect to see that start to gain traction.

Darren Kirk: in 2025. In terms of the casting and extrusion segment, you know, this quarter, as I mentioned, has had a

Speaker Change: pretty good uptick in that segment margin Closing in on 18% versus a 20% target And I think you know as we continue to season our greenfields

Darren Kirk: and we continue to get the benefits of some of those CapEx that we've been spending, that we feel very comfortable that that 2026 target of 20% is going to hold as well.

Darren Kirk: [inaudible] pretty good uptick in that segment margin, closing in on 18% versus a 20% target. And I think, you know, as we continue to season our greenfields. Great, that's helpful. And then, this is a bigger picture question for me: there's been a lot of negative sentiment from OEMs. I'm just wondering if you've seen any indication that supply chains for any of the OEMs, whether in North America or Europe, are starting to slow down production.

Darren Kirk: Great, that's helpful. And then maybe just a bigger picture question for me. There's been a lot of negative sentiment from OEMs. I'm just wondering if you've seen any indication in the supply chains that any of the OEMs, whether in North America or Europe, are starting to slow down production.

Speaker Change: You know we listened to the OE calls last week like most people in the sector and you know it was I'd say a little more visible than it has been for some period of time there is

Speaker Change: If I just start with the IHS numbers, they don't look too bad, kind of slightly down for the second half of 2024. I do expect that summer shutdowns this year will be a little more pronounced than they have been in recent years.

Speaker Change: I don't have greater visibility at this point than kind of the industry-level comments that I've just relayed, but there is likely to be some pullback in OE volumes, but our offset is always that

Speaker Change: We aim to grow our content per vehicle and have a long track record of growing our content per vehicle in kind of a range of 5 to 10 percent.

Speaker Change: Thanks, that's all my questions, I'll pass the line.

Speaker Change: Thank you.

Speaker Change: Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone.

Darren Kirk: And I'm not showing any further questions at this time, I'd like to turn the call back over to Darren for any closing remarks.

Speaker Change: Okay, well, thanks everyone for joining us on the call. We look forward to speaking to you all once we publish our fiscal 2024 year-end results. So, take care. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Q3 2024 Exco Technologies Ltd Earnings Call

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