Exco Technologies Ltd
TSX:XTC
Earnings Call Analysis
Summary
Q1-2024
The company recorded a robust quarter with a 13% year-over-year increase in consolidated sales to $156.7 million, and a 24% increase in net income standing at $5.6 million. The Automotive Solutions segment saw an impressive 18% increase in sales due to new program launches and higher vehicle production, despite a $2 million headwind from the UAW strike. The Casting and Extrusion segment enjoyed $74 million in sales with pretax earnings surging 88% to $3.6 million. Margins faced pressure from the UAW strike and rising labor costs, particularly in Mexico, but management remains optimistic about margin improvement in future periods. The continued robust demand, particularly for new molds across vehicle types, and a promising outlook for vehicle production volumes suggest a stable to modest growth trajectory for 2024. With strategic initiatives bolstered by a solid balance sheet, the company is poised for ongoing growth and margin enhancement.
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Good day, and thank you for standing by. Welcome to the Exco Technologies Limited First Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Darren Kirk, President and CEO. Please go ahead.
Thank you, Shannon, and good morning, all participants. Welcome to Exco Technologies Fiscal 2024 First 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.
Before I begin, I'd like to point out the cautionary notes in yesterday's news release and on Page 2 of the presentation that we have posted to our website. They are applicable to this discussion today. Overall, we had a fairly decent quarter with solid year-over-year growth in revenues, EBITDA and EPS. I would emphasize that we did have some incremental challenges this quarter which we expect will dissipate through the remainder of the year, contributing to our expectations for ongoing growth.
Namely, these challenges included a very modest dampening of sales due to the UAW strike, but also more pronounced seasonal weakness in December than we have seen in a while as well as tightened FX headwinds. Jumping right into market conditions and looking at our Automotive Solutions segment, vehicle production volumes in North America and Europe were up roughly 6% on a combined basis. This occurred despite UAW strike-related production stoppage in October.
Vehicle sales also remained relatively robust ending the calendar year with a U.S. SAAR of almost 16 million units. 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 and OEM consensus are clearly picking up.
In relation to the 6% rise in production this quarter, our segment revenues, again strongly outperformed overall market conditions, rising 18% and signaling ongoing growth in content per vehicle, pulled higher by our focus on accessory products. We estimate the UAW strike related impact on our revenues was just over $2 million for the quarter.
Looking forward, despite macro headwinds, vehicle production volumes are expected to remain stable or grow modestly in 2024 as dealer inventory continues to be replenished and pent-up consumer demand is satisfied. As we've long demonstrated, we would expect our revenues to exceed industry rate of growth, helped by our new programs that are ramping up.
Quoting activity also remains very decent, which we expect will support our growth longer term. On the cost side, margins were squeezed during the quarter by lost contributions from the UAW strike action as well as rising labor costs, particularly in Mexico. Labor costs in Mexico have increased significantly over 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. Turning to our Casting and Extrusion segment. We saw mixed results between die cast and extrusion related products. Starting with die cast, demand in that end market remains very firm, particularly for new molds for both new EVs and internal combustion engine vehicles. This is true for powertrain and structural programs giga-sized dies and of course, our additive manufacturing operations.
While there is clearly a slowing pace of EV adoption, it is important to note that our business is relatively agnostic to powertrain architecture. Should the EV revolution slow further or even shift toward hybrid vehicles, we remain confident in the trend towards aluminum and that demand for our products will continue to grow strongly in the years ahead.
Of note, our Large Mould group continues to see record and growing backlog levels. Demand for consumable extrusion tooling softened during the quarter as extruders have responded to weaker global macro conditions. While certain end markets such as automotive and green energy applications are still showing growth, the building and construction market deteriorated through the quarter.
Typical seasonal softness may have been exacerbated this year as extruders consolidated plant shutdowns over the holidays to deal with weaker conditions. To that point, we have seen a rebound in demand for extrusion products materialize through January. Capital equipment sales, both in the extrusion end market, nonetheless remain decent as extruders continue to focus on enhancing their productivity and efficiency through the cycle of sweet spot for our Castool operations.
Margins in our Casting and Extrusion segment improved over the prior year but weakened sequentially due to the weakness in the extrusion market, start-up losses at Castool Mexico and balance sheet FX losses. We remain confident in the path higher for segment margins through our outlook period of 2026 as our greenfield investment season -- our recent capacity additions are utilized and various efficiency initiatives continue to take hold.
Lastly, with regard to our various capital asset investments and growth strategies, we continue to move the ball ahead in Q1. With the commercial operations of Castool Mexico now commenced, our capital plans mainly consist of several smaller projects to selectively boost our capacity, enhance our capabilities and improve our overall efficiency. For example, this quarter, we kicked off a new vacuum heat treat project for our Michigan extrusion die facility and completed a major equipment upgrade to 1 of our Halex plants. We are confident these investments will see great returns over the coming years.
That concludes my prepared remarks. I want to thank all my Exco teammates for their tremendous efforts and focus on working safely through the quarter. I will now pass the call over to Matthew to discuss the financial highlights.
Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the first quarter ended December 31 were $156.7 million, an increase of $17.6 million or 13%. Foreign exchange rate impact was negligible in the quarter.
Consolidated net income for the first quarter was $5.6 million or earnings of $0.15 per share compared to $4.5 million or $0.12 per share in the same quarter last year, a 24% increase in net income. The effective income tax rate for the quarter was 23.6% compared to 22.7% in the prior year period. The change in income tax rate in the current year quarter was impacted by geographic distribution and form rate differentials. Segment discussions. The Automotive Solutions segment experienced an 18% increase in sales in the first quarter or an increase of $13 million to $83 million. The sales increase was driven by new program launches and higher vehicle production volumes.
Combined North American and European vehicle production was up approximately 6% compared to a year ago, which demonstrates the strength of Exco's product mix. The revenue impact of the UAW strike action, which was resolved in late October was approximately $2.5 million. Adjusting for the strike impact, sales were up at all 4 of the segments locations compared to the prior year quarter.
First quarter pretax earnings in the Automotive Solutions segment totaled $8.1 million, which is an increase of $900,000 or 12% over the same quarter last year. The increase in pretax profit is largely attributable to higher sales and better absorption of overheads. Higher volumes from new program launches and increased sales allowed the segment to benefit from improved efficiencies and better absorption of fixed costs.
Offsetting these factors were higher labor costs in all jurisdictions. Labor costs in Mexico have been particularly challenging in recent years, we would see added pressure in fiscal 2024 given the significant rise in minimum wage levels. Volumes in the quarter were impacted by the UAW strike action and December holiday shutdowns at certain OEMs. These shutdowns reduced profitability as labor levels were maintained and production inefficiencies were incurred for specific parts and programs. Apart from these specific impacts, management is cautiously optimistic that its overall cost structure will improve such that margins should strengthen in coming periods.
The Casting and Extrusion segment recorded sales of $74 million in the first quarter compared to $69 million last year, an increase of $5 million or 7%. Demand for extrusion tooling was lower in the quarter, as outlined by Darren as the continued impact of higher interest rates and recessionary conditions in certain end markets such as building and construction and recreational vehicles caused an overall reduction in tooling demand from extruders.
Demand for certain capital equipment sold by Castool within the extrusion market remains firm as extruders focused on various efficiency and sustainability initiatives. We remain focused on developing the benefits of the company's new greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America to better proximity to customers.
In the die-cast market, demand for molds associated consumable tooling like shot sleeves, rods, rings, tips and such, and rebuild work increased. In addition, demand for Exco's additive 3D printed tooling continues its strong contribution as customers focus on greater efficiency. Sales in the quarter were also aided by price increases, which were implemented to protect margins from higher input costs.
Quoting activity remains robust and our backlog for die-cast moulds at record levels. Pretax earnings in the Casting and Extrusion segment of $3.6 million increased 88% or $1.7 million compared to the prior year quarter. The pretax profit improvement is due to higher sales volumes, program pricing improvements, favorable product mix and efficiency initiatives within the Large Mould group.
Improved efficiency in the extrusion die business, including improvements at Halex and the elimination of prior year onetime costs associated with outsourcing due to the extrusion heat treat implementation. As well, there was improved absorption and efficiency at Castool's heat treat operation, stabilizing raw material and labor costs and lower Castool Morocco start-up costs. Offsetting these cost improvements were start-up losses at Castool's new operations in Mexico and an $800,000 increase in segment depreciation costs associated with recent capital expenditures.
Exco generated cash from operating activities of $12.9 million during the quarter and $2.9 million of free cash flow after $7.7 million of maintenance fixed asset expenditures. This free cash flow, together with the company's cash balances was used to fund fixed assets for growth initiatives of $4.2 million, $4.1 million of dividends and $400,000 to repurchase shares under our normal course issuer bid.
Exco ended the quarter with $16 million in cash, $116 million in bank and long-term debt and $37 million available in its credit facility. Exco's financial position remains strong. As such, the company's balance sheet and availability under the existing credit facility provides continued support for our strategic initiatives. Our strong financial position, combined with our free cash flow, provides the 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. Thank you, Shannon.
[Operator Instructions] Our first question comes from the line of David Ocampo with Cormark Securities.
I guess, Darren and Matt, you guys have put a lot of capital work over the last few years. And I guess, that's the expectation for this year. It seems like a lot of equipment has gone to support the giga-sized mould and some greenfield facilities.
I'm just curious how you expect the revenue and EBITDA to be backfilled in the coming years and what your confidence level is on that just based on your ongoing discussions with customers?
Sure. Yes. I mean, we have had a number of capital initiatives to build capacity in certain regions globally and also strengthen our capabilities. And the revenue is pretty firm. We've got a target of $750 million by 2026, and it really only requires kind of a mid-single-digit CAGR to get there.
But where our focus is starting to turn is on improving the margins. We're still suffering through ramp-up costs in the early days of the Castool facilities. Mexico was just turned on in the last quarter or so. And then our Halex operations are still receiving some additional investment to improve those operations.
But we do see a clear path to margin enhancement through the time frame of our 2026 targets. I'm not going to articulate on how the ramp-up of that margin progression is, but there's numerous pathways to improvements that are turning to our focus now to achieve such that much of the capital has been deployed on these new plants and bigger projects.
Got it. That's helpful. And just a follow-up on that. I mean, Matt, if I take a look at the margin profile for Casting and Extrusion it did take a step back quarter-over-quarter. Is that largely responsible to the start-up costs that you guys are seeing at the new facilities? And if so, I was hoping you could potentially quantify that?
The Mexico cash start-up costs were somewhere in the neighborhood of $0.5 million or so. It wasn't the biggest factor, quite frankly, I think the fact that the extrusion business deteriorated through December -- in this business, you've got to run the plant in a high degree of utilization to get and keep the margin up at the expected level.
And as I mentioned in my remarks, we did see more seasonal weakness this year than we've seen in a while. And it seems likely, and it was certainly the case with our operations that we consolidated the downtime through December to offset that weakness -- good vacation days and the like. And we've seen that our customers on the extrusion side of things were likely doing the same thing, as I also mentioned, the sales have come back in January. So that was certainly a factor. And then the last thing I would call out is the Canadian dollar versus the U.S. dollar moved around quite significantly during the quarter, and that backed up on the segment to probably $0.5 million or so of FX balance sheet losses.
Got it. And just sticking with the theme of margins. I mean labor in Mexico has been an issue for you guys in the past. So certainly not something new, but maybe the order of magnitude, I think, 20% is. So when we think about your contracts with your customers, are there any price provisions built in for these onetime shocks? Or how are you guys managing the potential negative impact on your margins?
There's no provisions in the contract that link pricing to labor costs or anything like that. So it is a constant negotiation that has to occur. We've been successful in at least pushing off cost downs in recognition of the increased inflationary labor environment. And we are having some success at getting selective pockets of price increase. But really, the bigger opportunity for price increase comes when the contract rolls over, and you've got a rebid the new programs at the higher cost structure.
And we're certainly doing that.
And it's -- we're continuing to be successful with awards at that higher cost base. But -- so there is kind of an attractive period where you're absorbing the higher cost with the lower pricing, and then it corrects over time.
Perfect. And last 1 for me. If I take a look at the last few quarters or maybe even the last few years, you guys continue to outperform the automotive industry. I was hoping you could comment on whether if that's being on more platforms or just increasing the content per vehicle on the platforms that you're already on?
It's both. Where it's easiest to point to that outperformance is in our Automotive Solutions group, which has a strong correlation of sales to production volumes and -- we've been increasing the number of products, selling those products to -- more products to existing programs and increasing the number of OEMs that we're penetrating and on new platforms. So it's coming from all sides on that, which is what you need to do.
I mean, again, this quarter, we had 18% growth versus 5% to 6% growth in production volumes. And we think that pace is going to remain pretty strong. The pull on accessory sales is a big contributor. OEMs are increasingly looking to accessory sales to have their own profitability, and we have a tremendous pipeline of products to help them achieve that goal.
And I guess just a follow-up to that, that 18% growth, if you had to split that between volumes and pricing, is the bulk of it volumes versus price? .
The bulk of that would be volumes.
[Operator Instructions] And I'm currently showing no further questions at this time. I'd like to hand the call back over to Darren Kirk for closing remarks.
Great. Thanks, Shannon, and thank you all for joining us on the call today. We look forward to speaking with you at the end of the next quarter. Take care, everyone.
This concludes today's conference call. Thank you for your participation. You may now disconnect.