Exco Technologies Limited (OTCQX:EXCOF) Q4 2022 Earnings Conference Call November 30, 2022 10:00 AM ET
Company Participants
Darren Kirk – President and Chief Executive Officer
Matthew Posno – Chief Financial Officer
Conference Call Participants
David Ocampo – Cormark Securities
Operator
Good day, and thank you for standing by. Welcome to the Exco Technologies Limited Fourth Quarter Results 2022 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference call is being recorded.
I would now like to turn the conference over to Darren, President and CEO. Please go ahead, sir.
Darren Kirk
Thank you, Lisa. Good morning, ladies and gentlemen. Welcome to Exco Technologies’ fiscal 2022 fourth quarter conference call. I am Darren Kirk, CEO of Exco. I will lead off with an overview of our strategic growth agenda. Matthew Posno, our CFO, will then review the quarter before we open the call for questions.
First, I’d like to make some comments about forward-looking information. In yesterday’s news release and on page two of the presentation that we have posted to our website, you’ll find cautionary notes in that regard. While I won’t repeat the content, I want to emphasize that the cautionary notes apply to this discussion today.
While fiscal 2022 was certainly a difficult year, we grappled with extreme macro factors, foremost of which was the constrained and erratic volumes of OEM vehicle production caused by global microchip shortages. But we also faced significant inflationary pressures, widespread labor shortages, logistical hurdles, rising energy costs and many other supply chain challenges in the aftermath of COVID-19 and Russia’s invasion of Ukraine.
All told, we recorded a 6% increase in sales and delivered $0.49 of earnings per share, compared with $0.98 last year. Yet, fiscal 2022, our 70th year of operation, was also a resounding success. We bolstered the foundation that will sustainably drive our future growth through the acquisition of Halex, obtained key program wins, realized significant productivity gains, and continue to make sizable capital investments as we execute on our ambitious growth agenda. As well, we demonstrated positive trends throughout the year with consecutive quarterly increases in both revenue and EBITDA.
Looking forward, vehicle production volumes are expected to grow in 2023 and beyond as supply chain pressures continue to ease, dealer inventories are replenished and pent-up consumer demand is satisfied, as well, start-up losses associated with current investment activity should reduce and the benefits from recent price increases and various efficiency initiatives will continue to take hold. While there will no doubt be new challenges, we remain very optimistic that our earnings will be substantially stronger in the years ahead.
Our businesses directly support the electric vehicle revolution and worldwide movement towards reducing emissions. Consequently, as the world focuses on becoming more sustainable, the future for our products has never been brighter. An increase in the use of aluminum across many industries is the primary driver of this tailwind, particularly in the automotive industry. As the automotive industry adapts to ever-tightening fuel efficiency standards, lightweight metals are increasingly displacing structural steel components to make internal combustion engine vehicles more environmentally friendly.
More so, electric vehicles make extensive use of aluminum components to reduce weight and therefore, maximize battery range. Our Casting & Extrusion segment is especially well positioned to benefit from this transition, as we are the leading producer of tools that shape lightweight metals, and we do not manufacture tooling for steel components. Over the next several years, sizable growth is expected in the application of both extruded and die-cast components.
More recently, aluminum components and associated tooling have been increasing significantly in both size and complexity. OEMs are increasingly using die casting machines that are much larger than those used previously. This enables the capping off entire vehicle subframes rather than assembling numerous stamped metal components, creating meaningful manufacturing efficiency gains. The tooling required to facilitate this process is also much larger and more complex, which plays directly into our strength and technical expertise. We expect more and more OEMs will ultimately adopt the use of these larger die-cast machines, and we are making significant additional investments in our people, equipment and processes to remain the leading supplier in this market.
Our Automotive Solutions group, which manufactures products for both interior and storage area of the passenger vehicles, also stands to benefit from sustainability trends. Our Automotive Solutions segment typically makes products that are lighter in weight and competing products, and electric vehicles generally have more cabin and storage space for which our products are well suited. Helping this growth, OEMs are increasingly looking to the sale of higher-margin accessory products as a means to enhance their own profitability and Exco is a leader in the product — in the industry for many of these products.
We remain focused on our capital asset investment and growth strategies, and we again made great progress executing this agenda in fiscal 2022 and in our fourth quarter. In May of 2022, we closed the acquisition of extrusion die business of Halex Holdings. Halex is the second largest manufacturer of aluminum extrusion dies in Europe and the continent leading supplier of complex extrusion dies. This acquisition provides us with well-established and high-quality operations and more extensive opportunities to better support our global customers.
While the energy crisis and weak economic conditions in Europe have presented unexpected early challenges, we remain excited by the potential over the longer term. We are already seeing good synergies through the sharing of best practices and leveraging greater global scale.
We are also pursuing an aggressive capital agenda within our Casting & Extrusion segment to capture the sizable growth opportunities related to the market trends I’ve just described. This is especially evident in our Castool division as its products significantly increased the productivity, safety and energy efficiency of both die casters and extruders globally.
In November 2021, Castool opened its third production facility in Morocco to better serve its customers in Europe, the Middle East and Africa. In fiscal 2023, Castool will open its fourth facility in Mexico to further increase capacity and better serve the local market in Latin America and the Southern U.S.
An additional major project within Castool includes a new energy-efficient treatment plant in Newmarket, which became operational in mid-fiscal 2022. This new investment represents vertical integration for a critical process within Castool. It will reduce customer delivery times, improve product quality control and provide unmatched capabilities for large-sized tooling, all while enhancing our cash flows and minimizing emissions through the supply chain.
Moreover, we invested in additional 3D metal printing machines to meet growing customer demand in that business, while we are making significant investments in state-of-the-art heat treatment equipment across our extrusion group that will enhance capacity, reduce emissions and enable us to further in-source most of our needs.
We also completed substantial investments in our Large Mould business to handle moulds of extreme size with all equipment now up and running. Meanwhile, our Automotive Solutions segment, we added 40,000 square feet of manufacturing space across two of our production facilities to provide capacity for several newly awarded key programs.
With the benefit of these investments, the launch of new programs, general market growth and also market share gains consistent with our history, we expect to achieve substantial growth. By fiscal 2026, we are targeting to generate annual revenue of $750 million and generate EPS of roughly $1.90 from organic means.
With all of that, I know these goals can’t be attained without the dedication of our people. I’d again like to thank the entire team at Exco for their focus, hard work and immense flexibility during the past quarter and the year.
I will now pass the call over to Matthew to discuss more highlights of the quarter.
Matthew Posno
Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the fourth quarter ended September 30 were $140.4 million, an increase of $34 million or 32% from the prior year. Fourth quarter sales at our Automotive Solutions segment increased $9.2 million or 16%, and the Casting and Extrusion group sales were up $24.8 million or 50%. Foreign exchange rate movements were negligible on reducing sales by $600,000 in the quarter.
Annual sales totaled $489.9 million, compared to $461.2 million, an increase of 28.7% — sorry, $28.7 million or 6%. The net impact of changes in foreign exchange rate was negative $6.2 million. Full-year sales in the Automotive Solutions segment were $253.9 million, a decrease of $9.3 million or 4%, and sales in the Casting & Extrusion Group were $236 million, an increase of $38 million or 19%. The Casting & Extrusion segment increase reflects five month sales from Halex and continued strength in our Castool and Extrusion divisions.
The Automotive Solutions segment full-year sales were lower due to the impact of supply chain disruptions on vehicle production in the first three quarters of the fiscal year. Fourth quarter sales increases reflect the impact of Halex and a general reduction in the negative impact of semiconductor chip shortages in the fourth quarter.
Consolidated net income in the fourth quarter was at $5.6 million or earnings per share of $0.14, compared to $7.1 million or earnings of $0.18 per share in the same quarter last year, an EPS decrease of 22%. The effective income tax rate was 26% in the quarter, compared to 27% in the same quarter last year.
The Automotive Solutions segment experienced a 16% increase in sales or an increase of $9.2 million to $66 million from $56.8 million in the fourth quarter of last year. The sales increase was driven by higher vehicle production volumes and fewer program launch delays as supply chain disruptions eased through the quarter.
North American vehicle production was up 24%, compared to a year ago, and European vehicle production was up 20%. Sales increased at all four of the segment’s operations as we benefited from higher production volumes and the continued ramp-up of new programs. This outweighed negative mix for some programs and lost shipping days at Neocon, which was impacted by Hurricane Fiona at year-end.
Fourth quarter pre-tax earnings in the Automotive Solutions segment totaled $6.5 million, an increase of $2 million or 44% over the same quarter last year. Fourth quarter automotive sales were traditionally lower due to summer shutdowns. And in the current year, our quarterly sales increased due to the reduced impact of the semiconductor shortage and new product launches.
Nonetheless, some of our plants continue to experience disruptions by the semiconductor shortage, which continue to be unpredictable, making it challenging to manage operations efficiently. These production and shipping challenges also created inefficiencies that increased overhead and direct labor costs during the quarter. And as I mentioned, Neocon was shut down due to the impact of Hurricane Fiona, which negatively impacted the segment’s pretax profit.
The Casting & Extrusion segment recorded sales of $74.4 million in the fourth quarter, compared to $49.6 million last year, an increase of $24.8 million or 50%. Excluding the impact of foreign exchange movements, the segment sales were up 47% for the quarter. Included in the quarter was the first full quarter of Halex sales of $12.3 million.
Halex sales increased from Q3, but remained below potential due to European summer holidays, the Russian conflict in the Ukraine and weakening economic conditions in Europe. Demand for our extrusion tooling, i.e., dummy blocks, dies, stems, et cetera, and associated capital equipment, die ovens and containers outside of Europe remained strong due to both industry growth and ongoing market share gains.
In the die cast market, demand and order flow for new moulds associated consumable tooling like shot sleeve, rods, rings, tips, and rebuild work has recently picked up as industry vehicle production recovers and new electric vehicles and more efficient internal combustion engines and transmissions platforms are launched. Sales are also aided by pricing action to protect margins from higher input costs.
Fourth quarter pretax earnings in the Casting & Extrusion segment totaled $2.6 million a decrease of $3.4 million or 57% over the same quarter last year. The pre-tax profit decline was driven by $2.2 million of higher depreciation, startup costs at Castool Morocco, Castool’s Heat Treat operations in Newmarket, temporarily outsourced heat treat costs in Markham and Texas as new equipment is being installed and higher raw material, freight and labor costs due to inflation.
The higher depreciation relates to Halex and the company’s investment in new capital that will improve operations and provide access to new geographies to increase our market share. Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies and expects such activities together with the sales efforts should lead to improved segment profitability over time.
Operating cash flow before changes in working capital was $17.5 million in the quarter, compared to $15.3 million in the same prior year quarter — sorry, in the prior year quarter. Lower fourth quarter net income was offset by increased depreciation, amortization and interest costs in the current quarter. The negative changes in the working capital in the current quarter reflect higher accounts receivable and inventory balances due to the strong business activity in the quarter, as well as additional — the addition of Halex and Castool Morocco.
Investment in fixed assets of $16.3 million includes $10.5 million in growth capital expenditures related to the company’s strategy to increase capacity, add innovative equipment for new processes and address customer demand in existing and new locations. Exco ended the quarter with $90.3 million in net debt. The company had $20 million in available liquidity under its banking facilities at year-end. And on November 7th, the company increased its credit facilities $25 million to $152 million, with no changes in terms.
With respect to fiscal 2023, we are planning for $47 million of capital expenditures with $28 million in growth CapEx and $19 million in maintenance CapEx. Included in the $47 million total are approximately $18 million in carryforward projects or longer-term projects that were approved in prior years.
Exco’s financial position remains strong. As such, the company’s balance sheet and availability on the existing credit facilities allows flexibility to support strategic initiatives. This, combined with cash from operations, 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, Lisa.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question that I have is coming from David Ocampo of Cormark Securities. Your line is open.
David Ocampo
Thanks. Good morning, gentlemen.
Darren Kirk
Good morning, David.
Matthew Posno
Good morning, David.
David Ocampo
Matt, I think you guys called out that some of the costs that you guys saw in the quarter were one-time in nature, so just the outsourced heat treatment costs and the start-up costs. Are you guys able to quantify that for us? So we can get a better sense on what the EBITDA profile would look like on a go-forward basis?
Matthew Posno
Yes. The total impact of those will be for the quarter, approximately $0.03 and approximately $0.08 or $0.09 for the full-year.
David Ocampo
And are you able to provide that on the EBITDA line?
Matthew Posno
Yes. I mean, not off the top of my head, we kind of anticipated the question we just went straight to an EPS calculation, so —
David Ocampo
That’s okay. We could take it offline if we had to. And then there and I’m just curious if you guys have an update on your — the extra Large Mould initiative, particularly if there’s been any business wins that you guys have been seeing in your backlog and generally what competition looks like in the space?
Darren Kirk
Yes. We have gone through a period of time here of making quite significant investments, particularly in the Newmarket plant, and we do have full capabilities of handling, I recall moulds the extreme size at this point. And we do have some of that business in our backlog. And it’s difficult to get a read on competition. Competition in these businesses is always extreme, but I’m certain to say that there’s no — the competition is not making the investments that we are. And as we look to the expected growth in that part of the industry, we think it will be quite significant over a multi-year horizon.
David Ocampo
Got it. That’s helpful. And then when you guys acquired Halex, I think you guys mentioned previously that the margin profile was slightly below your base and legacy business. With all the disruptions that we’re seeing today, how much lower is the margin profile out of Halex versus your legacy lines there?
Darren Kirk
Well, I’m not going to quantify it, because we don’t report performance by our business units generally, but it has been more pronounced than what we expected, just given the rising energy costs and the weaker demand in Europe at this point. We can our hands in there, and we’ll obviously be taking measures to mitigate those impacts as best we can.
David Ocampo
And I guess, is it still your expectation that Halex gets up to 20%, and if so, what’s the time line on that?
Darren Kirk
Well, I think we’ve never really indicated that the target for Halex is 20%, but we’ve indicated that by 2026, at least that the segment would be producing 20% EBITDA margin, and that’s certainly still our expectation.
David Ocampo
Okay. That’s it from me. Thanks a lot guys.
Darren Kirk
Thank you.
Matthew Posno
Okay. Thanks, David.
Operator
Thank you. [Operator Instructions] At this time, there are no more questions in the queue, I would like to turn the call back over to management for closing remarks.
Darren Kirk
Well, thanks, everyone, for joining the call today. We look forward to speaking with you in January at our AGM and then for our first quarter conference call early next year. Take care, everyone.
Matthew Posno
Thank you.
Operator
Thank you for attending today’s conference call. Everyone may disconnect. Everyone, have a great rest of your day.
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