© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to the Exco Technologies Limited Third Quarter Results 2018 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Darren Kirk, Chief Operating Officer. Please go ahead, sir.
Thank you, Amanda. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited's Fiscal 2018 Third Quarter Conference Call. I am Darren Kirk, Chief Operating Officer of Exco. I will lead off with an operations overview. Drew Knight, our CFO, will then review the financial results. Brian Robbins, our President and CEO, will participate in the Q&A session. Brian and I are calling in from our Neocon facility in Nova Scotia, and Drew is at our corporate office. So please bear with us if we don't coordinate as well as usual.There are a number of analysts, shareholders and brokers on the line with us today. In addition, call-in details have been widely disseminated to the public through the news release process. This call is also being simultaneously webcast at our website where we have posted a short presentation that we will reference this morning. We welcome all participants. The format of this conference call will be the same as in the past. After the presentation, we will take questions. The call will end at about 10:40 [Operator Instructions]. You should have all received our news release by now. If not, it is available on our website at www.excocorp.com or www.sedar.com.Before we begin, I would like to make some comments about forward-looking information. In yesterday's news release and on Page 2 of the presentation, you'll find cautionary notes in that regard. While I won't repeat the contents of the cautionary notes, we do claim their protection for any forward-looking information that we might disclose on this conference call today. For further information, you can also refer to the risk factors and assumptions contained in our latest annual report and our annual information form, both of which are available on the SEDAR website or from the company. We disclaim any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.Well, this certainly was a busy quarter, with a number of developments in many of our businesses. Overall, we are very satisfied with our results, which we marked by the third consecutive quarter of earnings improvement and a return to year-over-year earnings per share growth. Just as important, we believe we are very well positioned to sustain this momentum through the final quarter of our fiscal year.For more detail on the quarter, I'll start on Slide 3 with the North American businesses within our Automotive Solutions segment. Here, of course, we are talking about the combined results of Polytech, Neocon and AFX. Overall industry's light vehicle production in North America was off by 5% during the quarter. This reflected a 16% decline in the production of passenger cars and a 1% growth in the production of trucks and utility vehicles. As we have indicated in the past, our overall sales exposure to cars in North America is greater than that of industry production volumes, now at about 45% compared to about 30% for the industry. This effectively gives our North American parts business an exposure to a 7% decline in weighted auto production for the quarter. On that basis, changes in vehicle production explain about half of the 15% decline in revenue for these businesses year-over-year. Additional factors that drove the results include adverse foreign exchange rate movements, program launch timing, a focus on higher-margin business, isolated pricing pressures and modestly lower demand for certain of our accessory products. The aggregate of these factors, together with unfavorable product mix variants and continuing raw material cost inflation, pressured margins, produced a 170 basis point decline in EBITDA margins versus the prior year period. I would note, however, that the margin continued to improve sequentially while we landed a number of new awards that will have positive implications for future quarters, as well new product initiatives and quoting activity for both new and existing products remains very encouraging. I'm highly confident that our Q4 fiscal '18 trends for these businesses will be significantly better than recent quarters when comparing year-over-year results. Lastly, while there is continuing uncertainty with respect to NAFTA and lots of noise about possible vehicle import tariffs in the U.S., it is well premature to speculate if, when and how any changes may impact our North American parts businesses at this time.Moving over to Europe. There were very significant developments at ALC this quarter, where local market conditions drove operating losses to intolerable levels. For a review of our current situation and prospects, it became apparent that our large fixed-price seat cover program, labor-intensive operations and diversification efforts were at odds with local market fundamentals, which have changed significantly in recent years. More specifically, unemployment rates in Bulgaria have dropped by more than 50%, while wages have roughly doubled since ALC commenced work on its anchor program about 5 years ago. ALC employee wages have increased albeit at levels well below local market trends. This is mainly because our fixed-price program economics necessarily capped the wages we can affordably pay. Consequently, labor turnover has become elevated and absenteeism has risen sharply, driving increased cost for overtime and expedited freight, leading to large operating losses. With that grim backdrop unlikely to change anytime soon, we determined the best course of action for ALC at this time is to shrink rather than grow its operations. To that end, we have worked with our customers to conclude certain programs, while others will be mostly moved either partly or completely to Polydesign in Morocco. With regards to timing, much of these program moves are already well underway and will be concluded by the end of the calendar year in any event. The remaining operations in Bulgaria will be much smaller and focused, which should enable the development of a workforce that is more reliable and dependable. Perhaps most importantly, ALC has engaged its key customer to improve program economics and received a temporary price increase, which was sufficient to bring us profitability to break even for the quarter. ALC is continuing these customer discussions with an objective of receiving a permanent price increase in order to restore its operations to sustained profitability. And while achieving that objective is certainly what we expect, in the event we are unable to do so, we will have no choice but to exit from our remaining operations in Bulgaria. We will simply not continue to support money-losing operations where there is no prospect of generating an acceptable level of profitability.Moving on to Polydesign and Morocco. Our operations there continue to perform very well with solid organic revenue growth and modest margin expansion over Q3 fiscal '17 despite front-end inefficiencies from the revenue ramp. Quoting activity remains extremely active at Polydesign for both new programs and takeover business from other players that are facing similar labor pressures in Eastern Europe that we are experiencing. In fact, new business awards at Polydesign this year now total a record EUR 13.4 million, excluding the business that is being transferred from ALC. Lastly, while labor conditions are certainly tightening in Morocco as they are globally, labor supplies and wages there remain attractive.Looking at the Casting and Extrusion segment, I'll start with a general comment on U.S. steel tariffs. As you know, aluminum tariffs don't directly impact us as those costs are incurred by our customers for products they make with our tools. But as it relates to steel tariffs, they do impact about 30% of our tooling business, which is the percent of revenues derived from our operations located in the U.S. within the segment. In most cases, we are passing on 100% of the tariff to our customers, although there is still a modest drag on overall profitability and certainly margins. Nonetheless, the majority of our tooling operations are located in Canada, while most of our customers and competitors are located in the U.S. Therefore, the tariffs currently provide us with a relatively competitive advantage because our Canadian operations don't incur steel tariffs, while the finished goods are shipped tariff-free under NAFTA.Diving into the large mould group on Slide 5, revenue growth was strong despite FX headwinds as we continue to execute on recent contract awards. Our new manufacturing cell continues to move ahead albeit still more slowly than we would like. We do however have a comprehensive plan that we expect will dramatically improve performance by the end of the calendar year. In the meantime, as I mentioned last quarter, we have recently installed similar equipment at the group's 2 other locations, which are providing additional capacity and flexibility, and those pieces of equipment are ramping up reasonably well. Profitability within the group didn't follow revenues higher again during this quarter due to the rising cost inflation, foreign exchange headwinds, program mix variance and embedded conservatism with percentage completion accounting. We are nonetheless engaged in discussions with customers to recapture some pricing lost to rising input costs. As well, new order activity remains robust, while pricing conditions are generally improving. And as with all of our new -- as with all of our businesses, we are increasingly selective about the quality of jobs we are taking on, focusing on those with higher expected margins.On to Slide 7. Our Extrusion group continue to demonstrate very solid results during the quarter. Market fundamentals remain very favorable, and we experienced balanced demand growth across all of our 5 plants. We continue to invest significant financial and management resources into harmonization of our design and manufacturing processes across our various extrusion facilities. This initiative has bear much fruit since we began it a couple of years ago, and yet we believe there is still much potential for continued improvement into the medium term. Adding to this opportunity is the new plant we are currently constructing in Mexico to better service the domestic extrusion market there. We expect this facility will be operational by early calendar 2019.Lastly, turning to Castool, sales were noticeably higher in the quarter as demand for the group's capital equipment continued to rebound. Profitability was also up sharply as the group benefited from select price increases implemented toward the end of our previous quarter meant to counter rising input costs. As well, Castool's operations in Thailand continue to season, reflected by higher sales and profits over the prior year quarter there. Looking forward, we believe Castool's product portfolio is very well positioned for continued success with many leading products in both the die-cast and extrusion end markets. That concludes my remarks. Drew will now walk you through the financial aspects of the quarter.
Good morning, ladies and gentlemen. My comments will cover Slides 8 to 17 of the presentation. Starting on Slide 9. Consolidated sales for the third quarter ended June 30 were $152.8 million, an increase of 5% or $6.8 million compared to last year. The significant fluctuations in the U.S. dollar have impacted Exco's results during Q3, reducing revenue $2.6 million. This was offset by the euro increasing revenue $1.2 million, so overall FX decreased sales approximately $1.4 million. Further reconciliation on Slide 11, excluding FX, the Casting and Extrusion group increased sales $7.4 million, and the Automotive Solutions group increased by $0.8 million and FX subtracted $1.4 million. As Darren noted, the Automotive Solutions revenue declined in North America, while Europe had a significant improvement.As reconciled on Slide 12, consolidated EBITDA for the third quarter totaled $20.1 million, a decrease of $0.5 million or 3%. The decline from prior year is primarily driven by FX movements reducing EBITDA by $0.8 million and the reduction in Automotive Solutions of $0.8 million, offset by improvements in Casting and Extrusion and corporate cost of $0.9 million and $0.2 million, respectively. Sequentially, the Q3 EBITDA was increased over both Q2 and Q1 for both Automotive Solutions and Casting and Extrusion.On Slide 10, the consolidated results for Q3 2018 yielded EPS of $0.27 per share versus $0.26 per share in the prior year quarter. The tax rate was reduced to 23% from 28% in 2017 as a result of lower U.S. tax rates and profit shifting towards low tax rate jurisdictions. Free cash flow was $18.6 million in Q3, and this very strong result was due to improvements in earnings and working capital movements but also lower CapEx as the year was front-loaded in Q1 and Q2, though Q4 could be somewhat heavier with construction underway at the new extrusion plant in Mexico. The healthy cash flow has improved the balance sheet to a net cash position as of June 30.Turning to the Automotive Solutions segment on Slide 13. Sales in Q3 were $99.9 million, an increase of $0.5 million or flat versus last year. FX movements decreased segment sales by $0.4 million. As noted earlier, the North American divisions, Polytech, Neocon and AFX, had $7.4 million less revenue than last year due to slightly lower overall vehicle volumes, specific weakness in passenger cars and the timing of replacement program launches. These negatives were more than offset by the European sales increasing by $8.3 million at Polydesign and ALC due to the many new program launches at Polydesign and the aforementioned temporary pricing adjustment at ALC.As noted on Slide 14, our Automotive Solutions segment reported lower EBITDA of $13.2 million in Q3, a decrease of $1.3 million or 9% from last year. The decrease in the quarter was driven by FX movements of $0.4 million, the impact of lower sales of $1.5 million and margin deterioration, excluding ALC, of $0.6 million. This was partially offset by $1.2 million from ALC eliminating the prior year loss and essentially breaking even for the quarter.Turning to Slide 15 and the Casting and Extrusion segment. Revenue was $52.8 million for Q3, an increase of $6.4 million or 14% versus Q3 2017. All 3 business groups experienced revenue increases in the quarter, so this was partially offset by FX rates reducing revenue by $1 million. The Casting and Extrusion segment reported increased EBITDA in Q3, as noted on Slide 16, an increase of $0.5 million or 7% from last year. Of this, the impact of FX reduced EBITDA by $0.4 million. Excluding FX, EBITDA improved by $0.9 million, though EBITDA margin declined by 120 -- 110 bps for reasons noted earlier by Darren.On Slide 17, cash flow from operating activities was $23.2 million in Q3, and free cash flow was $18.6 million, improving the balance sheet to a net cash position of $1.5 million. Compared to Q1 and Q2, cash flow increased through improved net income, decreased investment in working capital and reduced intensity of CapEx investments. Exco's financial position and liquidity remain very strong. As such, the company balance sheet and availability under the existing credit facility allow considerable flexibility. That concludes my comments. We can now transition to the Q&A portion of the call. Amanda?
[Operator Instructions] Our first question comes from the line of Michael Doumet from Scotiabank.
Yes, first question, so obviously, we've seen steel prices, resin, freight, labor cost increase in the last few quarters. Obviously, a lot of moving parts there and impacting your businesses differently. But can you just give us a sense of the price-cost gap expectation in subsequent quarters and whether you think that, generally speaking, price increases should outpace higher input cost going forward?
On the tooling side of the business, I think that metal or steel input costs have risen and they've largely leveled off except for the tariffs. And so again, we face these tariffs primarily in our U.S. tooling businesses because we import a lot of the steel that we use from Europe, and we're passing on, within our Extrusion group, 100% of that tariff. And in the other businesses, Castool, we don't face tariffs in that as operations are located in Canada. But then in our large mould group, we do have some exposure there, and the mechanism to recapture that tariff is not as quick as it is with the Extrusion business. So we expect to get there and kind of recapture all of the raw material cost increase, whether it's tariff or otherwise, but there may be some lag. With respect to the Automotive Solutions business, we have seen rising input costs for some of the resins that Neocon uses, but that also has leveled off. We've had the quarter over -- or the year-over-year impact now for, I think, about 3 quarters, and so we're largely through the point of absorbing that. And we're trying to offset those higher resin costs as best we can, but it's not easy to do so with pricing on that side of the business.
Very helpful there. So maybe just turning to ALC. So the strategy there is you're looking to shrink the business. How much of the business there would you characterize as having, call it, inadequate profitability? And what's your expectation of how much could roll off and your comfort level in terms of recapturing that portion in Morocco?
Well, I'll make a few more comments on it, and then -- and I'll leave it there. But that business now -- the Audi contract that we've spoken about in the last several quarters has been completely concluded, and so that is out of the equation going forward. We have primarily 95-plus percent of that ALC business is the BMW Mini seat cover program. We were adding some other diversified products, head covers and armrest and such, wrapping those products. We have retreated from that strategy and moved those products -- and are moving those products to Morocco. So really, what ALC will consist of is a large chunk of the BMW Mini seat cover business. Even some of that seat cover business is moving to Morocco. And so the ALC losses would continue under the current pricing structure because of the challenges in the labor market largely that I referenced in my earlier remarks. And so we've lost a good chunk of money there. And we've drawn a line in the sand that under the current program economics, we are not putting any more money into ALC. We need to see program economics improve. And we are in discussions with our customer to do just that, and they have responded in this quarter with a temporary price increase, and we'll continue those discussions with an objective of making it permanent.
And maybe just a follow-up there. I mean, when you expect to finalize those discussions?
I can't comment on timing, but the discussions certainly continue.
Our next question is from the line of Peter Sklar with BMO Capital Markets.
This is Chang Ding on behalf of Peter Sklar. First question is that for large mould business, you seem to have good backlog, have ramped up the business and the CapEx program is complete. So what is preventing you from achieving profitability levels of the past?
There's a number of moving parts in that large mould business. We've talked about our new manufacturing cell and the challenges we've had ramping that up to where we ultimately expect it to get to. We've continued to see further progress on that front during the quarter albeit, again, slower than what we'd like. But I think that the bigger issue there is just the mix of business that's going through this year. We do have a large backlog. We do continue to write sizable new orders. And it's just that the mix of products that are going through at this time are a majority of the lower margin business. I think that, to the extent that we do have a large backlog, we are being much more selective of programs that we are taking on a go-forward basis, and we continue to ramp up the new manufacturing cell. As we benefit from both of those factors, we expect the results will improve. We're also being hit by rising steel costs. And as I mentioned, in response to Michael's question earlier, we are intending to pass on some of those costs, but those are customer discussions and the mechanism to do so has got a greater lag than it does in other parts of our tooling business.
Second question is that you noted that operations in Bulgaria are being scaled back because of wage pressure and fixed prices. But aren't these issues generally common for all auto parts operations? So what in particular about Bulgaria that's the issue?
Well Bulgaria, if you look at the statistics in the last 5 years or so, the average manufacturing wages have risen by 50%, 5 0 percent, and unemployment rate has gone from 13% to about 3% in some of the regions where our plants are. So the materiality of those factors, I think, is more significant in Bulgaria, and they're exacerbated by a depopulation that is occurring in Bulgaria, which is I think the country globally that is depopulating at the fastest rate. And so these factors are evident in Eastern Europe with a number of players, but they seem to be more pronounced in Bulgaria.
Okay. And final question, you mentioned in Europe, temporary pricing improvements helped ALC. Why aren't these temporary improvements permanent?
That's what we keep asking. It's a discussion with our customer. I mean, ALC has only got a finite amount of resources, in that this program, in our eyes, is deeply uneconomic and we are not willing to inject more capital into ALC. And in order to keep ALC operating, it needs to receive price increases on an ongoing basis. So far, we've been receiving those price increases, but it lacks the ability to call it permanent at this time. But that is certainly our objective.
Our next question comes from Nav Malik from Industrial Alliance.
I just wanted to pick up on a couple of comments you made in your remarks there. With respect to the tariffs providing a relative competitive advantage in, I guess, certain parts of your large mould business with your facility in Canada, are you actually then pricing your products lower than competitors? Like is there an advantage that you're passing through?
No, we wouldn't be pricing it lower. This is -- in the large mould business, it's kind of an evolving thing and that the sales cycle and the product delivery cycle is longer. But it really -- the tariffs, I think, will benefit pricing for the industry over time, in that pricing has come down significantly over the last few years as we've mentioned in many calls. I think the level of distress for a lot of our competitors, many of which are based in the U.S., and to the extent they have further price increase -- or input cost pressures, it certainly helps bring up the pricing equation for the whole industry. And we would certainly expect to keep some of that benefit for ourselves.
Yes, okay. Okay. And I just want to move over to the North American auto segment. So you mentioned in your remarks that you're looking at Q4 trends being significantly better. I mean, I guess you've seen this year quarter-over-quarter your margins have declined anywhere from 300 basis points, I guess, earlier in the year, not as much of a decline this past quarter. But are you looking at stemming that going forward? Or would you actually look at an improvement in your, call it, EBITDA margin into Q4?
I would be hopeful for a year-over-year improvement, but we'll see. We'll certainly have much better trends year-over-year, and that Q4 last year was really the first quarter where things held off as OEMs curtailed their production significantly. And so to the extent that we're now lapping that and together with the efficiency measures and other factors that we've taken to improve operations through the year, I'd be hopeful for improvement, but we'll see.
Okay. And then just lastly, I wanted to ask on your balance sheet. I mean, it gives you some flexibility, basically no net debt now. I mean, what are you looking to do there? Or are you looking at any sort of growth initiatives, acquisitions? Or would you look at more along the lines of returning cash to shareholders through accelerating the buyback or a special dividend? Or what -- give us some thoughts on what you guys are thinking there.
Well, we are always on the lookout for acquisitions in order to grow and diversify the business over time. But having said that, there's nothing on the front burner at this time. We're very much focused on improving all of our operations in ALC, in particular. And there's obviously lots of moving parts going on with tariffs and NAFTA and protectionist threats on those regards. So I think for the near term, you should expect that we'll continue to do what we've been doing, and that is generating strong levels of cash flow and paying the dividend, focused on increasing that dividend over time and using a portion of the free cash flow to buy back shares.
Okay. At an accelerated pace than what you've been doing or along the same line?
It'll certainly be at a minimum along the same lines, but we believe that the stock is very attractively valued. So we are buying it back, and there's the potential that we can buy back more than we have.
Our next question comes from David Tyerman from Cormark Securities.
First question is just on the North American Q4 margin discussion. So sequentially, it sounds like it should improve a fair bit. What is driving it sequentially?
Well, we're taking cost efficiency measures to combat the persisting level of input cost inflation that -- it's stabilized now, but it's got to be absorbed year-over-year. So I think we were down 320 basis points a couple of quarters ago. And in this quarter, we're down 180 basis points. There is new products and all kinds of factors that we take, as we generally do, in order to improve the profitability of the business, including being selective in some of the business that we take. I mean, business has got -- that's got a very low margin, we are pushing that away. So that is a factor as well.
Okay, okay. In the short term though, presumably the biggest drivers would be costs, whatever you can do on that side, and if you're rolling in any higher margin business. Is that the way to think of it?
Yes, I'd say that that's the [indiscernible].
And do you have material amounts of new higher margin business coming on?
We've got a decent amount. We've got a number of new awards through the last several quarters, and it takes time to roll that into the broader base. But it's a decent amount. It won't change things overnight. But over several quarters, I think, we're very hopeful that, that will help push the margin up.
Okay, that's helpful. And then next question is just on the large mould. So if I heard you correctly, you're expecting a dramatic improvement in profitability through year-end. So what drives this sudden change? Is it that your mix is getting a lot better all of a sudden? It sounds like the manufacturing sales side is kind of smaller changes kind of situation or maybe that's suddenly changing too.
David, I don't think we've exactly said -- it's Brian here. But I think what we can say is we'll see a dramatic improvement in 2019 over 2018 regards to the large mould business, and that's primarily a function of mix and maturity of the program.
Okay, okay. So not in Q4, but over the next year?
I don't think we're going to see a huge change in Q4. But in the coming fiscal year, I think we will see a dramatic improvements in that area. And we've already experienced quite a dramatic improvement in the Extrusion and Castool end, and that should continue as well. But to put things in a nutshell, I think we've gotten -- it may sound crazy, but we've gotten some price discipline. And our customers seem to be -- understand price increases, and that might have a lot to do with the tariffs, which really opened the door in price increases. But we've gone back on even existing programs to our customers and said, "You know, we just can't honor these commitments. You're going to have to do something for us." And I can tell you, in many cases, they are doing something for us. So the market has changed, and the attitude and perception in the market has changed.
Okay, that's helpful. And then just on ALC, so are you losing money? It sounds like you broke even in the quarter. So in Q4, would you lose money or continue to run at breakeven?
Well, with the existing pricing for the program, excluding any pricing adjustments, we would lose money as we have in the last several quarters and as we would have in this quarter without the pricing adjustment. However, we continue to have these discussions with our customer for pricing adjustments. We continue to receive them, but nothing is permanent at this time.
Okay. But I thought, Drew, you said that you broke even in ALC in Q3.
Yes, we broke even with the pricing adjustment.
Okay. And so as long as you're under that, you're breakeven. And if you're not under it, then you're completely out of it?
David, we refuse to go on losing money on that program. We've reported to our customer for 3 or 4 years. And if it means losing money, we'll shut the door tomorrow.
For sure, makes total sense. So from a...
David, just to be clear, we're also looking to get it to profitability if we keep it. I mean, staying breakeven is not the objective there.
No, I get that, and I'll just have to wait and see how you make it out there. I guess the other question would be how much is at stake here? Obviously, on the profitability side, it's 0 or less. I'm not sure what the total losses are so far this year. Maybe you can comment on that. At least that would be a swing. And also, how much revenue is at stake?
Well, it's about $90 million or so on an annual basis for revenue, and we probably lost about $0.10 there through the first -- probably $0.08 for the first couple of quarters, and then we were breakeven this quarter.
Our next question comes from line of Ben Jekic from GMP Securities.
I just -- and I apologize, I have to ask again a question about the pricing at the ALC. So if I'm understanding correctly, this is probably something on a short-term basis. And I'm asking, if nothing else, just for modeling. Like is it -- as long as this adjustment is valid, your kind of breakeven ability is improved. But at what point does the customer kind of withdraw that increase or boost it? Like I just want to gauge the consistency of your ability to breakeven at least.
Well, I guess the only thing I can really say on that, Ben, is that ALC has finite resources in that the equity that we put in there has been pretty much ground down to a very low level through the losses that have occurred, and that we are not putting in any more money unless these program economics are improved materially. And so without these continued price adjustments that the losses would ultimately push ALC into bankruptcy. And if it ends up there, so be it. We don't have any broader connection to the rest of Exco, but it requires these price increases at, at least a breakeven level in order to stay in business.
Okay. And did I hear correctly that you moved kind of the non-BMWs activities to Morocco?
Yes, they are being moved. It's well underway, and there's even a portion of the BMW Mini business that is being moved to Morocco. And this is all about reducing the scale of the business in order to reduce the amount of labor that we need and then getting the price increase that is required in order to sustain the business at a profitable level with a lower level of headcount.
And Ben, the issue in Bulgaria, we talk about the price increase and one immediately thinks that this program is grossly underpriced. It may well be grossly underpriced but to do business in Eastern Europe, and particularly Bulgaria, has become just untenable. We've got 17% absenteeism on a daily basis. We've got 1,500 employees. In other words, 250 people don't show up to work every day. So based on economics and our customer is going to support us to work our way through that, but that's why we're moving the business to Morocco, where people come to work.
Right, right. And then my next question is just on -- to Darren. Darren, you mentioned that -- so fourth quarter, there is some momentum going. You mentioned a number of new awards. My impression was that, that was in the Automotive Solutions. Can you give us just some idea of what the wins have been? And are the wins the ones you said happened over the last several quarters? Or is it something that happened in the last quarter?
Well, I mean, the wins continue at a reasonable rate consistent with recent quarters, and these wins won't have a significant impact on the next quarter but they will just continue to have positive impact on future quarters at a modest pace upwards. So we don't typically disclose the amount of new awards on a dollar basis on a per quarter or so, but our recent quarters have been certainly very comfortable on that front.
May I add, we've had an extraordinary amount of wins in Morocco, and most of it takeover business and all of it out of Eastern Europe. So all our peers and counterparts are having the same issues. And we've just recently won a very large Porsche program, and Porsche would never deal with Morocco. And we've got 6 weeks to take the program over and it was based out of Romania, I believe.
Okay. And the very last question is just on the new facility in Mexico. You've done an amazing job standardizing production across your extrusion plants. You're building now the facility in Mexico. How long will it take for that plan to kind of generate acceptable margins?
Well, we hope to open production in January or February of '19. And I would state for the remainder of '19, it may be -- it will be loss to breakeven by the end of the year. And the losses shouldn't be greater than somewhere, say, like $100,000 per month.
We have a follow-up question from the line of David Tyerman from Cormark Securities.
Just a few couple follow-ups. Polydesign, just taking over the ALC work and it's also operating it sounds like below potential on margins because of the ramp up. So I'm just wondering, does ALC have any negative impacts on margins in the short term as you move it over? And then longer term, how much upside is there from getting that plant up to whatever it is that target margins are?
Well, so Polydesign grew at, I think, about 17% top line year-over-year in the quarter, and there was a very -- there was a material negative impact on margins. The headcount at Polydesign, we've gone up 10% year-over-year in the quarter, and that is having a front-end drag on margins at Polydesign currently. And so that will continue probably for the next couple of quarters or so. But thereafter, we should start to be in a mode where we can start to benefit from some of the efficiency measures and go from there. However, it will depend on the pace of additional business that we take over, which really, Polydesign is being inundated with requests for takeover work from all areas of Eastern Europe.
In the big picture, David, the overall margin for the group will improve because producing those parts in Bulgaria was a negative margin because of the reasons we stated earlier with the employee situation. So I mean, we've moved a good deal of that business already to Morocco. And I mean, it is [ performing ] in Morocco, and it's already got a higher produce rate that it did when it left Bulgaria.
Sure. Sure, it all makes sense. It sounds like there's quite a lot of loss that's disappearing because of it. The other 2, Extrusion sounds like it took a bit of a pause on margins. And Brian, you mentioned the Mexican operation will be a bit of a drag as it's starting up, which makes sense. So do we kind of look at a flattish profitability out of Extrusion in the, I don't know, call it next year or so?
No, by no means. We -- I mean, we've been taking a monthly charge for that matter in the Extrusion group for obsolete machinery because we've had to change the methods of manufacture because they weren't harmonized as such. And I mean, that goes away at year-end. And their production and their sales level is growing. And likewise, that would apply to Castool.
Okay, that was the other one I was going to ask. So it sounds like Extrusion and Castool should be positive next year. Or is this a very big driver? Or are we talking, I don't know, $1 million or $2 million?
Oh, I think it should be two or threefold that.
We have another follow-up question from the line of Peter Sklar from BMO Capital Markets.
Last question. In terms of your Mexico operations, have you factored in potential wage increase in Mexico due to NAFTA renegotiations?
Specifically, I can't tell you what level we've modeled in. I think we do look at the wage structure in Mexico, and it is much more attractive than it is in parts of North America. And to the extent that wages are going up there, I mean, we have been living with wage inflation in Mexico in other parts of our business. And so we would be thinking along those lines. But it's not going to have a huge impact on the performance of the business, in that labor's kind of 20% of the equation. And so whether you put a 4%, 6% or 8% of labor inflation on that, it's not going to change the needle too much in the first year.
The wages currently go up in Mexico by 5% or 6% per year, and so wages are going up. And it's usually followed by a devaluation of the peso.
Thank you. And at this time, I'm showing no further questions.
Okay. Thanks, Amanda. I guess we can conclude the call.
Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great rest of your day.