Q4 2024 Exco Technologies Ltd Earnings Call
Okay.
Speaker Change: Good day and thank you for standing by welcome to the Exco Technologies limited fourth quarter results 'twenty 'twenty four conference call at this time all participants are endless.
Speaker Change: Only mode. After the speaker's presentation, there will be the question and answer session.
Speaker Change: A question during the session you will need to press star one bond on the telephone keypad, you would I can't I'm not thematic message advising you had this race to a draw a question. Please press star one again.
Speaker Change: Be advised that today's conference is being recorded.
Dan Katz: I would now like to hand, the conference over to a speaker today that on Katz, President and Chief Executive Officer. Please go ahead.
Thank you.
Dan Katz: Good morning, all participants welcome to ESCO technologies fiscal 2044 fourth quarter and year end conference call I will begin with an operations overview after which our CFO Matthew Cosmo will review the financial aspects of the quarter before we open up the call for questions.
Before we proceed I'd like to highlight the cautionary notes included in yesterday's news release and on page two of the presentation available on our website.
Dan Katz: Notes apply to today's discussion.
Dan Katz: Overall I would describe the quarter is decent though we faced anticipated headwinds from lower automotive production volumes.
Dan Katz: I was pleased to see the sustained improvement in EBITDA margins in our casting and extrusion segment holding steady at around 18%.
Dan Katz: The segment margin continues to have more upside potential from our recent investment initiatives as we continue to focus on building new capacity enhancing efficiencies and advancing towards our fiscal 2026 targets.
Dan Katz: Our free cash flow focus was also evident this quarter, which remained strong bringing our total free cash flow for the year to $54 million, representing a robust 66% conversion of EBITDA.
Dan Katz: Innovation remains a key driver for us and this quarter was no exception, our three D. Printing operations are performing exceptionally well, we recently added a sixth Frankfurt and placed an order we're at seven underscoring our confidence in this expanding market.
Dan Katz: We made meaningful strides in scaling up our greenfield plants, including integrating <unk> into our extrusion die operations and maximizing the benefits of our enhanced heat treat up equipment.
Dan Katz: But there is certainly more work to be done.
Dan Katz: Turning to market conditions, the automotive solutions segment faced headwinds.
Dan Katz: As we expected combined vehicle production volumes in North America, and Europe were down approximately 5% as Oems adjusted to rising inventory levels driven by softening Matt.
Dan Katz: Macroeconomic conditions high transaction prices and lower vehicle affordability, our segment revenues declined by about 10%. Additionally impacted by customer.
Dan Katz: Customer driven program launch delays and reduced accessories sales due to inventory destocking.
Dan Katz: Favorable vehicle mix also impacted us as there were lower sales of certain premium trim vehicles, where we have higher concentration of accessory products further contributing to this decline.
Dan Katz: Looking ahead vehicle production volumes are expected to again be slightly down in the last calendar quarter of 2024 with a more pronounced pullback in Europe.
Moving into 2025 volumes are projected to stabilize through the year as lower interest rates and higher OEM incentives stimulate demand.
Dan Katz: Over time, we expect our revenues to exceed the industry rate of growth driven by ongoing content per vehicle in this regard our quoting activity new product development and launch pipeline remained robust, especially for new program launches in the second half of fiscal 2045.
Dan Katz: On the cost side margins were pressured this quarter by weaker volumes unfavorable product mix.
Dan Katz: Somewhat erratic order releases and higher labor costs.
Dan Katz: Labor cost in Mexico have increased significantly in recent years and the severance expenses in Mexico and elsewhere associated with head count optimization further compressed markets.
Dan Katz: To mitigate these pressures we are implementing automation exiting less profitable programs different cost downs and targeted price increases as older tighter margin programs roll off and newer favorable ones ramp up we expect segment margins will recover.
In our cafes, and extrusion segment demand or new malls rebuilds and adequate we printed inserts remained firm while demand for consumable die cast tooling softens slightly alongside produce OEM production volumes.
While <unk> adoption has slowed our business remains relatively agnostic to powertrain architectures positioning us well for continued growth over time as aluminum adoption increases.
Dan Katz: Demand for consumable extrusion truly with steady across most regions.
Dan Katz: So some softening was evident late in the quarter extrusion related capital equipment sales. However remained solid as extruders are prioritizing productivity and efficiency enhancements a key area of focus for our cask fuel operations.
Dan Katz: Margins at our casting and extrusion segment improved over the prior year and held relatively steady sequentially supported by higher demand for new malls extrusion dies and a relatively favorable pricing environment looking forward, we anticipate further margin improvement as greenfield investments mature new.
Dan Katz: Last week is utilized and efficiency initiatives take hold.
Dan Katz: Finally, a brief comment on the evolving global trade landscape Exco remains well positioned to navigate rising input tariffs into the U S from regions outside of NAFTA.
Dan Katz: It could even be a benefit for our operations. However, the prospect of increased tariffs on goods from Mexico, or Canada into the U S. What presents significant challenges for the highly integrated North American auto supply chain.
Dan Katz: That said, we view this risk is low given the deep regional interdependence and remain skeptical that these tariffs will actually be implemented.
Speaker Change: That concludes my prepared remarks, I'd like to thank my exco teammates for their tremendous efforts their drive for innovation and their unwavering commitment to safety I will now hand, the call over to Matthew to discuss the financial highlights.
Matthew Cosmo: Thank you Darren and good morning, ladies and gentlemen, consolidated sales totaled $637 8 million compared to $619 million last year, an increase of $19 million or 3%.
Full year sales in the automotive solutions segment were $331 million, an increase of $4 million or 1% and sales in the casting extrusion segment were $307 million in.
Matthew Cosmo: An increase of $15 million or 5%.
The company experienced higher demand within our casting and extrusion segment and sales and Yamana automotive solutions segment increased slightly as the impact of the UAW strike action and program launch delays, partially offset the company's higher content per vehicle, while overall automotive production volumes in North America, and Europe were mostly stable consol.
Matthew Cosmo: Consolidated sales for the fourth quarter ended September 30 were $155 million.
Matthew Cosmo: A decrease of $4 7 million or 3% fourth quarter sales at our caching extrusion segment increased $4 million or 5% in the automotive solutions segment were down $8 million or 10%.
Matthew Cosmo: Fourth quarter net income was $7 $7 million or earnings of <unk> 20.
Matthew Cosmo: Per share compared to $9 million of our earnings up 24 per share in the same quarter last year. The effective income tax rate was 26%.
Matthew Cosmo: In the quarter compared to 25% the same quarter last year.
Matthew Cosmo: The automotive solutions segment fourth quarter sales of $79 million were down 10% from the prior year quarter. The sales decrease was driven by lower automotive production volumes in North America, and Europe customer driven program launch delays and unfavorable vehicle mix looking forward industry growth may be tempered near term by increasing OEM inventory.
Matthew Cosmo: Elevated interest rates relatively high vehicle average transaction prices and softening global economic conditions countering. These headwinds central banks are have begun lowering rates vehicle sales have remained resilient dealer inventory levels remain below pre COVID-19 levels vehicle fleets continue to age and OEM incentives.
Matthew Cosmo: <unk> are rising.
Speaker Change: As well Exco sales volumes are expected to benefit from a Warner program launches that should provide ongoing growth in our content per vehicle.
Speaker Change: Activity remains encouraging and we believe there is ample opportunity to achieve our targeted growth objectives.
Speaker Change: First quarter pre tax earnings in the automotive solutions segment totaled $8 million, a decrease of $2 million or 22% over the same quarter last year.
Speaker Change: <unk> and <unk> period profitability were due to lower sales product mix shifts rising labor and severance costs and foreign exchange movements, although production volumes have largely stabilized from a macroeconomic and global perspective from recent years volumes in the segments first first quarter are expected to follow typical seasonality trends due to OEM.
December holidays.
Speaker Change: Apart from these specific impacts management is cautiously optimistic that its overall cost structure should improve margins in coming quarters.
Speaker Change: Pricing discipline remains a focus and actions are being taken on current programs where possible. So there's typically a lag of a few quarters before the impact is realized as well New program awards are priced to reflect management's expectations for higher future costs.
Speaker Change: The casting extrusion segment recorded sales of $76 million in the fourth quarter compared to $73 million last year an increase of.
Speaker Change: $3 7 million or 5% demand of our extrusion tooling remained relatively resilient in both North America, and Europe, though activity slowed through the quarter with key end markets, such as building and construction as well as automotive extrusion showing signs of softer conditions.
Speaker Change: Other end markets, such as sustained sustainable energy remained firm.
We remain focused on initiatives to reduce lead times enhanced product quality expand product breadth and increased capacity contributing to share gains in our core markets management continues to develop its Castro, Morocco in Mexico locations, which provide the opportunity to gain market share in Europe, and Latin America through better proximity to local customers.
Speaker Change: Mers.
Speaker Change: And then die cast tooling market demand and order flow for new malls and rebuild work remained firm during the quarter, though demand for consumable tooling slowed.
Speaker Change: Demand for <unk> tooling has similarly pulled back with the.
The slower adoption of Evs, Although management. It continues to expect this market segment will see significant growth in coming years.
Speaker Change: Our leading market three D printing group continued strong sales activity supported by the six additive printers, Darren referenced earlier as customers focus on greater efficiency and all large mold size segments for.
Speaker Change: For both <unk> and non gigabit sized dicast machines sales in the quarter were also aided by price increases which were implemented to protect margins from higher input costs.
Fourth quarter pre tax earnings and the casting extrusion segment totaled $6 3 million, an increase of $1 million or 18% over the same quarter last year.
Speaker Change: Pre tax profit improvement is due to higher sales volume within the diagnostic extrusion end markets program pricing improvements favorable product mix and efficiency initiatives across the segment, including the ongoing use of lean manufacturing and automation to improve productivity through standardization and waste elimination.
Speaker Change: In addition volumes at capitals heat treatment operation continued increase providing savings and improved production quality well efficiency initiatives at helix are progressing.
Speaker Change: Setting these cost improvements were ongoing challenges at capsules Greenfield operations and an increase in segment depreciation of $5 million for the quarter associated with recent capital expenditures.
Speaker Change: Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expect such activities together with its sales efforts should lead to improved segment profitability over time.
Speaker Change: Operating cash flow before net changes in working capital was $16 $7 million in the quarter compared to $23 5 million in the prior year quarter. The primary drivers on operating cash flow includes a $5 million quarterly change in deferred income taxes, lower net income and interest expense.
Speaker Change: Fourth quarter net change in noncash working capital contributed $12 $2 million of cash compared to a $5 9 million use of cash in fiscal 'twenty two 'twenty three.
Speaker Change: Proven from working capital driven primarily by lower accounts receivable due to management's focus on collections throughout the year slightly lower fourth quarter sales and due to customer payment delays at the end of 2023 due to the UAW strike.
Speaker Change: Investment in fixed assets of $8 7 million compared to $9 6 million in the prior year quarter included in the current quarter was $3 $3 million in growth capital the reduction in capital spending related to timing of equipment purchases and completion of major projects from the prior year Exco ended the quarter with $73 4 million in net debt compared to.
Speaker Change: $94 2 million in the prior year, the company has $46 million and available liquidity under its banking facilities at year end.
Speaker Change: With respect this fiscal 2025, we plan to invest approximately $40 million and capital expenditures of which roughly $21 million is for growth expenditures.
Speaker Change: <unk> financial position remains strong as such the company's balance sheet and availability under existing credit facility allows flexibility to support strategic growth initiatives.
Speaker Change: This combined with cash from operations create the foundation for men and pursue high value growth capital expenditures dividends and other opportunities that may arise.
Speaker Change: That concludes my comments, we can now transition to the Q&A portion of the call.
Speaker Change: Thanks, Nat yet.
Speaker Change: Thank you Dear participants as a reminder, each wish to ask a question. Please press star one on your telephone keypad and wait for an end to be announced should we draw. A question. Please press. Please press star one again, please <unk> <unk> and that <unk> will take a few moments.
Speaker Change: And now we'll go and take our first question.
Speaker Change: And it comes from the line of Nick Coppola from Acumen capital. Your line is open. Please ask your question.
Hey, guys and congrats on the strong.
Speaker Change: A strong year.
Speaker Change: Thanks, Nick can you speak up just a little I don't know if youre far from your mic.
Yes.
Speaker Change: Sticking with that so that's why I say as dawn tariffs tariffs in general.
Speaker Change: Yes, I understand your policy.
Speaker Change: The tariffs in North America might be unlikely given the the supply chain are there any other geographies like China, where we.
Speaker Change: Where tariffs might have an impact either positively or negatively on me.
Darren: Sure Good morning Darren.
Darren: Yes.
Darren: Outside of NAFTA.
Darren: We face a lot of competition from China in our die cast tooling for both large mall and for some of the consumable tooling elements and.
Darren: Quite frankly, some of those products that come from China can be significantly lower price than that our product given the government subsidies over there to the players and so tariffs would.
Darren: Go a long way to leveling the playing field.
Darren: Between the two.
Darren: Competition of us and in China, So that's probably.
Darren: The biggest likely impact that we see and that would be positive now I guess, we do import some.
Darren: Leather and some other products from Europe, although that is that is pretty small and.
Darren: Im going to say it wouldn't have a huge impact on us for our North American operations, we do tend to source.
Darren: <unk> amount locally and so therefore as long as the NAFTA region.
<unk> blow up with.
Inter country tariffs.
Darren: Then we should be pretty good.
That's helpful. And then you touched on this briefly in the prepared remarks, but can you maybe go into a little bit more detail on how that.
Speaker Change: The ramp in Mexico, Morocco is going.
Sure. So I'm going to say Morocco is continues to be slow.
Slower than expected.
Speaker Change: The challenges there.
Speaker Change: The European market is.
Is relatively soft and this is a long game for US we are trying to take market share from incumbent players in Europe.
Speaker Change: With our.
Speaker Change: Superior products that are priced competitively, but.
Speaker Change: Our customers have their preferred tool shops, and we need to dislodge them and that will take time that being said I mean that operation is.
Speaker Change: Hovers around EBITDA breakeven or so and so it's not a material cash drag. It's just we want to we want to get the topline moving and we're working on that with respect to Mexico I'm going to say the progress there is much better than <unk>.
Speaker Change: Mexican operation is different than Morocco in that Morocco was going to capture new customers, whereas we already have significant customers in Mexico that we had shipped product to from Canada, and so therefore, we're moving.
Speaker Change: Production from Canada to Mexico, and selling direct to customers that are preexisting.
Speaker Change: That operation as is ramping up quite nicely and we expect that progress will continue pretty strongly through fiscal 2025.
Speaker Change: Great and then maybe a related question in Mexico, you touched on.
Speaker Change: It's trying to automate more.
Speaker Change: Production there.
Speaker Change: What stage of that are you at.
Speaker Change: I'm going to say that as a.
Speaker Change: Continuous improvement projects that will likely.
Speaker Change: Go for years, and we're kind of identify any area that is manually intensive that we can.
Speaker Change: Supplement with or replaced with automation, including semi automated fixtures to help expedite the.
Speaker Change: Sewing and assembly of various interior trim products and so.
Speaker Change: It's just an ongoing process and we're not just doing it in Mexico.
Speaker Change: And all of our facilities our facility in Nova Scotia, Our Neocon International operations for example.
Speaker Change: Brilliant team of engineers, there that designed around automation.
Speaker Change: Machines that.
Speaker Change: Greatly enhance their productivity and we need that because there is more program launches coming and the cost of labor is going up and in some regions regions that somewhat scarce.
Speaker Change: That's helpful and maybe one last question for me just on the FX with the weakening Canadian dollar how should we think about the impact on your final statements.
Speaker Change: If you go once our annual report, we actually have the breakdown by dollars and cents a bit more but a weakening Canadian dollar is as good for Exco. We are majority exporter to the U S from our Canadian operations.
Speaker Change: Yes.
Speaker Change: I'm actually not despite it.
Speaker Change: As the tariffs kick in we expect weaker Canadian dollar might be a little bit of a hedge if the tariffs again, there might be weak Canadian dollar, which would be a bit of a hedge against some of that as well so.
Speaker Change: I don't want to say go U S dollar go but.
Speaker Change: It doesn't hurt us to have a weaker Canadian dollar.
Speaker Change: Thanks, That's all for me I'll pass along thanks.
Thanks, Nick.
Speaker Change: Thank you.
Speaker Change: Yeah participants as a reminder, if you wish to ask a question. Please press star one one on the telephone keypad.
Speaker Change: Okay.
Speaker Change: And now we're going to take over next question Jess.
And the next question comes from the line of Adam Schneider from Cormack Securities. Your line is open. Please ask your question.
Adam Schneider: Hey, guys similar to one of the previous questions, but how do you plan to ramp to 120, <unk> EBITDA and could you break this out by segment. Please.
Speaker Change: Sure Good morning Darren.
Speaker Change: Think broadly speaking we expect that.
Our casting extrusion segment will grow its top line from just over 300 million this year towards $3 50 in the next couple of years.
Speaker Change: And.
Speaker Change: Automotive solutions would go from about $3 30 to 400.
And so that topline growth is accompanied by a target margin EBITDA margin expectations of 20% in the casting and extrusion segment versus around 18% in the last couple of quarters and then.
Speaker Change: Our target for automotive solutions EBITDA margin is about 15% and that compares to about 12% or so where we've been.
And so.
Speaker Change: The blended consolidated EBITDA margin after corporate expenses is targeted to be about 16% and thats the buildup.
Okay. Okay perfect. Thank you I'll pass it on.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: There are no further questions I would now like to hand, the conference over to USB Darin <unk> for any closing remarks.
Speaker Change: Okay, well, thanks, everyone for joining us today and happy Thanksgiving to all of our U S. Participants that are listening and we look forward to talking to you next quarter.
Speaker Change: This concludes today's conference call. Thank you for participating you may all disconnect have a nice day.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.