Q1 2025 Exco Technologies Ltd Earnings Call
Okay.
Speaker Change: Good day and thank you for standing by welcome to the ESCO Technologies Limited first quarter results 2025 conference call.
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Speaker Change: The speaker's presentation, there will be a question and answer session.
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Speaker Change: Today's conference being recorded.
Speaker Change: To hand, the conference over to your first speaker today, Derek Kirk President and CEO. Please go ahead.
Derek Kirk: Thank you Martin and good morning.
Derek Kirk: All participants welcome to the <unk> technologies fiscal 2025 first quarter conference call I will start with an operations overview, followed by Matthew boss Snow, Our CFO, who will review the financial aspects of the quarter after which we will open the call for questions.
Derek Kirk: Before we begin I would like to remind everyone of the cautionary notes in yesterday's news release and on page two of the presentation, we posted to our website.
Derek Kirk: No those are applicable to our discussion today.
Derek Kirk: Our first quarter of fiscal 2025, clearly presented challenges primarily due to several headwinds, particularly lower automotive production levels.
Derek Kirk: The U S. Overall production declined by approximately 3%.
Derek Kirk: With some key customers experiencing substantial drops leading to very performance across Oems.
Derek Kirk: In Europe production volumes decreased by over 10%.
Derek Kirk: Additionally, we faced continued delays in the launch of new programs and certain customers focused on right sizing inventory levels of some of our accessory products and consumable tooling components.
Derek Kirk: Despite these headwinds we remain confident in our long term strategy.
Derek Kirk: Evidenced by strong quoting activity and New program awards, the demand for our products remains strong and we benefit from secular trends such as increasing use of aluminum across many industries and the growth of OEM vehicle accessories.
Derek Kirk: We continue to focus on operational efficiency, driving innovation and leveraging our recent strategic investments to capitalize on these trends and achieve growth in revenue and profitability in line with our previously stated targets.
Derek Kirk: It is important to highlight that despite relatively high transaction prices consumer vehicle sales in the U S remains fairly robust with an annualized sales rate of around 16 million units.
Derek Kirk: Oems are increasing incentives.
Derek Kirk: As needed to stimulate demand and after the production declines in the last quarter dealer inventory levels are down much healthier.
Derek Kirk: This of course bodes well for a more stable production levels in future quarters.
Derek Kirk: And our automotive solutions segment, our sales decline outpaced the reduction in vehicle production volumes due to ongoing customer driven delays in certain program launches.
Derek Kirk: An unfavorable vehicle mix and a pullback in accessories sales as customer inventory levels are reduced.
Derek Kirk: Looking ahead at vehicle production volumes are expected to be flat to slightly down in calendar 2025.
Derek Kirk: While consumer demand is on definitely stress and vehicle affordability remains a hurdle.
Derek Kirk: Lower inventory.
Derek Kirk: Yeah.
Derek Kirk: Lower interest rates and increased OEM incentives are expected to stimulate demand.
Derek Kirk: Historically, we have outpaced industry production growth achieving content per vehicle growth of 5% to 10% over time.
Derek Kirk: In this regard our launch pipeline quoting activity and new product development remains particularly robust.
Derek Kirk: The second half of this fiscal year.
Derek Kirk: On the cost side margins were compressed this quarter due to lower overhead absorption from weaker volumes and unfavorable product mix higher labor costs and severance expenses related to workforce reductions.
Derek Kirk: The unbalance logos on our plants driven by high variability of volumes across our various programs added to the margin pressure.
Derek Kirk: To mitigate these challenges we are implementing various measures, including automation head count reductions were peaceful exiting less profitable programs deferred cost downs and targeted price increases.
Derek Kirk: Our segment margins will also benefit as some of our older lower margin programs phase out and newer more profitable programs ramp up I'm.
Derek Kirk: Im also pleased to report that during the quarter, we successfully completed our annual negotiations with our Mexican labor unions at levels consistent with our budgeted expectations.
Derek Kirk: Turning to our casting and extrusion segment demand for new high pressure die cast malls rebuilds and adequately printed inserts remain decent throughout the quarter.
Derek Kirk: There was some large tickets deliveries were deferred by customers into early Q2.
Derek Kirk: Demand for consumables die cast components softened with the decline in production volumes as well as a modest level of Destocking, which is a typical temporary response with OEM production to clients.
Derek Kirk: EV adoption continues to progress at a slow pace, while hybrid vehicle adoption is growing steadily and it is evident that the internal combustion engine will remain a key part of the market for the foreseeable future.
Derek Kirk: As a result, the growth of additional giga pressures, which we expect will be used extensively in EV manufacturing has been delayed.
Speaker Change: It is clear the evident more and more giga presses, what we used in the north American market overtime.
Speaker Change: However, I want to emphasize that exco remains largely agnostic to powertrain types at the broader industry shifts toward increased aluminum usage.
Speaker Change: It will support a sustained demand for our products in the years ahead.
Speaker Change: Demand for consumable extrusion truly weekend across most regions and end markets through the quarter with much lower demand in the month of December as Extruders extended plant shutdowns over holiday periods to consolidate employee vacation days.
Speaker Change: Capital equipment sales within the extrusion sector. However remained relatively stable as extreme as continued focus on productivity and efficiency improvements in area, where our cask fuel operations.
Speaker Change: Margins in our casting and extrusion segment improved slightly year over year, but declined sequentially from recent quarters as overhead absorption suffered with weaker sales in December and we incurred higher costs and disruption from outsourcing activity associated with new heat treat equipment.
Speaker Change: Installation at our largest extrusion die facility.
Speaker Change: We remain focused on achieving greater scale and efficiency benefits from our recent capital investments and despite challenging market conditions, we see progress on a number of cross this quarter.
Speaker Change: In particular casket <unk> facility in Mexico continues to accelerate its ramp.
Speaker Change: Our various heat treat operations are performing extremely well and our helix operations in Europe outperformed market conditions, they're contributing to year over year improvements to profitability.
Speaker Change: We remain confident in our outlook for higher segment margins through 2026, as our Greenfield investments mature our recent capacity expansions are utilized and ongoing efficiency initiatives take hold.
Speaker Change: Lastly, the global trade landscape continues to evolve with discussions around potential increases in the U S. U S tariffs.
Speaker Change: Once again, making headlines.
Speaker Change: Generally we believe exco is well positioned to navigate these potential changes and could even benefit if tariffs on Chinese imports increase given that we source very little from this region and China is a significant competitor.
Speaker Change: Any impact.
Speaker Change: The impact of any broad based tariff measures on goods imported into the U S from Mexico, or Canada would be far more challenging to the auto supply industry, including exco.
Speaker Change: That said, we view implementation of broad based and sustained Harris as relatively low given the highly integrated nature of the North American auto supply chain and the significant cost implication for U S consumers should such tariffs being implemented.
Speaker Change: That concludes my prepared remarks, I would like to thank all of my expert teammates for their tremendous efforts their commitment to innovation and their focus on maintaining a safe work environment at all times I will now pass the call over to Matthew to discuss the financial highlights.
Speaker Change: Thank you Darren and.
Matthew: Good morning, ladies and gentlemen, consolidated sales for the first quarter ended December 31, 2024 were $143 6 million compared to $156 7 million in the same quarter last year, a decrease of $13 million or 8%.
Matthew: And exchange rate movements increased sales $4 million for the quarter, primarily due to the strengthening U S dollar compared to the Canadian dollar.
Matthew: Consolidated net income for the first quarter was $4 $2 million or basic and diluted earnings per share of <unk> 11.
Matthew: Compared to $5 6 million or <unk> 15 per share in the same quarter last year consolidated effective tax income tax rate for the current quarter was 35, 8% compared to 23, 6% for the prior year period. The change in income tax rates in the quarter was impacted by geographic distribution foreign tax rate differs.
Matthew: And lots of it cannot be effective for accounting purposes at this time.
Speaker Change: Yes, <unk> solution segment recorded sales of $72 1 million in the first quarter, a decrease of $10 9 million or 13% from the same quarter last year.
Exchange rate changes increased sales by $2 4 million.
Speaker Change: Sales decrease was driven by lower production volumes in North America, and Europe customer driven delays in certain program launches unfavorable vehicle mix extended OEM customer plant shutdowns during the month of December the destocking of certain accessory products in the inventory channel.
Speaker Change: Overall industry vehicle production.
Speaker Change: Actually it was down an estimated 3% in North America, and 13% in Europe versus the prior year quarter.
Speaker Change: Production volumes decreased in response to rising dealer inventory levels in North America European production volumes declined in response to lower consumer sales as well as to reduce inventory levels as Oems clearer cars that don't comply with new mandates external sales volumes will benefit from recent and future program launches that are expected to provide ongoing.
Speaker Change: And our content per vehicle coating 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 online solutions segment totaled $4 $8 million per quarter, a decrease of $3 4 million or 41% over the same quarter last year. The negative variance in the first quarter was due to lower sales of our diverse product and vehicle mix shifts and rising labor costs non jurisdictions labor cost in Mexico have been particularly challenging in <unk>.
Years, and we're seeing added pressure given the significant rise in wages.
Speaker Change: Apart from these specific impacts management's cautiously optimistic that overall cost structure should improve margins as production volumes are expected to rebound to match vehicles sales figures in the future.
Speaker Change: <unk> discipline remains a focus and actions being taken where possible, especially on new programs that are price reflect management's expectations for future higher future costs.
Speaker Change: The casting and extrusion segment recorded sales of $71 4 million in the quarter decreased $2 2 million or 3% from the same period last year foreign exchange rate changes increased sales by $2 million.
Speaker Change: Demand for extrusion tooling declined marginally in the quarter as continued impact of higher interest rates and recessionary conditions in certain end markets, such as building and construction and recreational vehicles as an overall reduction in demand from extruders demand for certain of capital equipments sold by cash flow when the extrusion market such as containers of Diovan.
Speaker Change: <unk> was relatively stable as extruders focus on various efficiency and sustainability initiatives.
Speaker Change: Management remains focused on standardizing manufacturing processes, enhancing engineering depth depth centralizing critical support functions and on developing.
Speaker Change: The benefits of its new locations in Morocco in Mexico, which provide the opportunity to expand market share in Europe and Latin America.
Speaker Change: Even better our proximity to local customers. These initiatives have reduced lead times and enhanced product quality expanded product breadth and increased capacity contributed to market share gains the.
Speaker Change: The die cast market demand was softer for new malls associated consumable tooling and rebuild where demand for exco, adding a three D. Printed tooling continues its strong contribution as customers focus on greater efficiency with the size and complexity of die cast tooling continuing to increase.
Speaker Change: Hello by the rising adoption of Giga presses.
Speaker Change: Sales in the quarter, partially supported by price increases, which were implemented to protect margins from higher input cost quoting activity remains very encouraging in our backlog for dicast malls remains healthy, though it is off recent highs.
Speaker Change: First quarter pre tax earnings in the casting extrusion segment was $3 7 million, an increase of $200000 or 4% from the same quarter last year. The pre tax profit improvement is due largely to program pricing improvements favorable product mix and efficiency initiatives across segments, including the ongoing use of lean manufacturing and <unk>.
Speaker Change: Automation to improve productivity through standardization and waste elimination as well as foreign exchange rate gains from the balance sheet impact.
Speaker Change: In addition volume at Castle peak treatment operation continue to increase providing savings and improved productivity production quality, while efficiency initiatives at helix are progressing.
Speaker Change: Offsetting these cost improvements are lots of the capitals Greenfield operations and a slight increase in segment depreciation.
Speaker Change: In addition volumes were uneven through the quarter with levels of activity in December being lower than normal as customers extended plant shutdowns for the holiday period in response to weaker market conditions management remains focused on reducing its overall cost structure and improving manufacturing efficiencies that expect such activity together with the sales efforts generally lead.
Speaker Change: To improve segment profitability over time.
<unk> generated cash from operating activities of $10 4 million during the quarter and $3 $8 million of free cash flow after $5 2 million in maintenance fixed asset expenditures. This free cash flow together with the Companys cash balances was used to fund fixed assets for growth initiatives of $2 5 million.
Speaker Change: $4 1 million of dividends and 157000 to repurchase shares under our normal course issuer bid.
Speaker Change: It's worth noting that we also reduced our long term debt levels by $10 million with surplus cash generated in the last quarter.
Speaker Change: <unk> ended the quarter with $119 million in cash $96 million in bank in long term debt.
Speaker Change: $6 million availability on its credit facility.
Speaker Change: <unk> financial position remains strong as such the company's balance sheet and availability under the existing credit facility provides continued support of our strategic initiatives, 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 Change: That concludes my comments Marvin we can now transition to the Q&A portion of the call.
Speaker Change: Thank you at this time, we will conduct a question and answer session.
Speaker Change: A reminder to ask a question you will need to press star one on your telephone and wafer name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
And our first question comes from the line of Nick Gorgon of Acumen capital. Your line is now open.
Nick Gorgon: Good morning, Thanks for taking my questions. Just the first one for me you maintained your treasury six fiscal targets I'm. Just wondering has your view on on how you get there were timing changed at all.
Darren: Good morning, Matt It's Darren here.
Darren: We obviously had a softer quarter here, but we do remain.
Darren: Firm in our outlook for 2026.
Darren: This quarter, obviously was impacted by some.
Darren: Production dislocations at the Oems.
Darren: With the extended plant shutdowns in December and it's not.
Darren: Typical quarter in many regardless.
Darren: So we obviously it becomes a more aggressive target into 2026 timely line to hit at this point.
Darren: Our path to getting there remains the same.
Darren: We are focused on.
Darren: Chile is the capacity that we built with these new greenfield plants and.
Darren: Improving the margin.
Darren: Alex operations on the Capstone extrusion side, and we continue to push on the accessory sales.
Darren: Automotive solution side.
Darren: Get that margin close to 20% so.
Darren: Our target for 2026 remains remains the same.
Darren: That's helpful. I mean, it might be a little early in the quarter, but any indication of the second quarter has been relative to that first.
Darren: It's a little early but the signs that we've seen in January are much more normal December was a pretty abnormal month across the board.
Darren: Many more shipping days in our second quarter, which is also good.
Darren: Support.
Darren: And as I mentioned.
Darren: Some of the softness in the first quarter was due to the.
Darren: Customer driven delays on some big ticket items in the large mol group, So we'll get the benefit of that.
Darren: Early in the second quarter here.
Speaker Change: That's helpful and the last question for me, how do you see M&A being a part of your exiting year fiscal targets and has the pipeline changed at all.
Speaker Change: So the pipeline that has not really changed we continue to be on the lookout for acquisitions of similar niche type businesses.
Speaker Change: It is not part of the Formula for our 2026.
Speaker Change: Yeah.
Speaker Change: Great. Thanks for taking my questions I'll pass along thanks, Nick Thanks, Greg.
Speaker Change: Thank you our next question.
Speaker Change: Again as a reminder to ask a question you will need to press star one on your telephone.
Speaker Change: Our next question comes from the line of Adam Snyder Cormack Securities. Your line is now open.
Adam Snyder: Hey, good morning, guys. Thanks for taking my question.
Adam Snyder: My first question is given the minimum wage in Mexico, given that the minimum wage in Mexico has gone up another 12%. This year what is your ability to offset the continued minimum wage increases in this geography and get ahead of it.
Darren: Sure Good morning, Adam It's Darren here.
Adam Snyder: Yes.
Adam Snyder: Minimum wage increase in Mexico, not just this year, but the cumulative effect since really the last five years has been very significant.
Adam Snyder: We had had the added pressure of.
Adam Snyder: A stronger peso up until very recently recently and the peso has pull.
Adam Snyder: Pull back some which is which is helpful.
Adam Snyder: We are very focused on improving our labor efficiency and that has resulted in some fairly sizable headcount reductions.
Adam Snyder: And that's.
Adam Snyder: That's been helpful.
Adam Snyder: We are really looking to automation.
Adam Snyder: As a.
Adam Snyder: Ability to sustain.
Adam Snyder: Other reductions in the labor intensity, which is which is clearly.
Adam Snyder: Required and on top of that for any new program.
Adam Snyder: Putting activity, we certainly embedded.
Adam Snyder: The view that wages will be sustained at a higher level.
Adam Snyder: Okay, great. Thank you so much.
Adam Snyder: Just moving on to your 2026 guidance I just had a question about what.
Adam Snyder: Production level are you building into it into that since recent IHS forecasts have it flat flushed out.
Adam Snyder: Yes production level, we're not anticipating production levels are going to increase for materially decreased from from here, we set that target in place when the USR was kind of around $15 16 billion units and that's essentially where it is at today, implying a similar production level.
Adam Snyder: So that's where we're at.
Speaker Change: Okay, great. Thanks, and then just one more question on the topic Du jour tariffs.
Speaker Change: How do you see tariffs impacting your ability to reach your 2026 guidance.
Speaker Change: It's a good question.
Speaker Change: And in a difficult one.
Speaker Change: Given the uncertain nature of tariffs.
Speaker Change: We've kind of gone through that scenario analysis internally, what we would do in <unk>.
Speaker Change: Response to these tariffs I think at the extreme if there was at 25% broad based tariff.
Speaker Change: Slide <unk>.
Speaker Change: Mexico, and Canada for any product going into the U S.
Speaker Change: That would obviously be catastrophic for the industry and a very challenging situation, although I think it would be pretty short lift given the chaos that it would.
Speaker Change: Cause I mean that 2026 target implies no tariffs.
Speaker Change: I think our view is that to the extent that there are tariffs. It is unlikely to be placed on the supplier of components at a compounding impact of effective tariffs for products going back and forth or many times would significantly magnify the cost.
Speaker Change: Building these cars.
Speaker Change: Come and sell.
Speaker Change: Obviously anything is possible in the short term.
Speaker Change: We expect that.
Speaker Change: Common sense will ultimately prevail.
Speaker Change: Okay, Great. That's really helpful. Thank you I'll pass back to life.
Speaker Change: Yes.
Speaker Change: Thanks Anna.
Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn it back to Darin Kirk for closing remarks.
Speaker Change: Thanks, Marvin and thanks to all participants today, we look forward to talking to you again after our second quarter results are released.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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