Exco Technologies Ltd

TSX:XTC

Good day, and thank you for standing by. Welcome to the Exco Technologies Limited Second Quarter Results 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to Darren Kirk, Chief Executive Officer. Please go ahead.

Thank you, Lisa, and good morning to all participants. Welcome to Exco Technologies Fiscal 2025 Second Quarter Conference Call. I'll begin with an overview of operations, followed by our CFO, Matthew Posno, who will review the financial details for the quarter. Afterwards, I'll address our outlook before we open the call for questions.

Before we begin, I'd like to remind everyone of the cautionary notes included in yesterday's news release and on Page 2 of the presentation we posted to our website. These notes are applicable to today's discussion. Firstly, I'm very pleased with our performance this quarter, which featured record consolidated revenues, record revenues for our Casting and Extrusion segment and consolidated EBITDA, excluding restructuring charges, among the highest in Exco's history. We achieved these results despite challenging market conditions, including sharply reduced automotive production volumes in both North America and Europe as well as ongoing tariff uncertainties. Throughout the quarter, we continued investing in our future by enhancing operational efficiency, driving innovation and leveraging recent strategic investments to capitalize on favorable market opportunities.

In our Automotive Solutions segment, the modest sales decline significantly outperformed broader reduction in vehicle production volumes. This resilience was helped by exceptionally strong U.S. SAAR figures as consumers accelerated purchases ahead of impending U.S. tariffs. New program launches, favorable exchange rate movements and the restocking of accessory inventories that had reduced in prior quarter also helped our results. These factors, coupled with a favorable product mix helped maintain segment EBITDA margins around 12% despite increased pressure in Europe and restructuring charges, which largely reflect proactive headcount reductions as we further streamline operations and emphasize automation.

In our Casting and Extrusion segment, we saw strong sales for new high-pressure die cast moulds, rebuilds and additively printed inserts, although order intake for these products was softer. Demand for consumable die cast components and extrusion related products rebounded from the previous quarter to levels broadly consistent with the prior year. Capital equipment sales also remained relatively stable as our customers continue to focus on productivity and efficiency improvements at core strength of our cash fuel operations.

Margins in the Casting and Extrusion segment were lower year-over-year despite significant improvements at recent greenfield facilities, primarily due to restructuring charges. These charges negatively impacted results this quarter but have positioned us for immediate cost structure improvements moving forward. Additionally, we experienced higher cost and operational disruptions related to the outsourcing during the installation of new heat treatment equipment at our largest extrusion die facility located in Michigan.

We remain committed to achieving greater scale and efficiency from our recent capital investments and saw encouraging progress this quarter. Notably, Castool's facility in Mexico continued to ramp up effectively. Our heat treatment operations performed exceptionally well, and our Halex operations in Europe delivered profitability improvements that outpaced local market conditions.

Matthew will now provide an overview of the financials.

Thank you, Darren. Good morning, ladies and gentlemen. Consolidated sales for the second quarter ended March 31, 2025, were $166.1 million compared to $163.8 million in the same quarter last year, an increase of $2.3 million or 1%. The impact of foreign exchange rate changes increased consolidated sales $8.8 million in the quarter. Consolidated net income in the second quarter was $6.4 million or basic and diluted earnings of $0.17 per share compared to $8.1 million or $0.21 per share in the same quarter last year, a decrease of net income of $1.7 million or 21%.

Net income this quarter included $2 million or 5% on an EPS basis of after-tax restructuring charges compared to less than around 1% EPS in the prior year. The consolidated effective income tax rate was 33.7% in the quarter compared to 22.8% in the prior year quarter. The change in income tax rate in the quarter was impacted by geographic distribution, foreign tax rate differentials and losses that cannot be affected for tax accounting purposes.

The Automotive Solutions segment reported sales of $82.9 million in the second quarter, a decrease of $2.9 million or 3% from the prior year quarter. Foreign exchange rate changes increased segment sales in the quarter of $4.8 million. Second quarter sales were modestly below the prior year level but increased 15% sequentially. Results in the quarter were favorably impacted by strong seasonally adjusted annual rates in North America, reaching 17.7 million units in March as well as inventory restocking of accessory products driven by the strong SAAR performance. However, despite the favorable performance, the global automotive risks, market continues to be negatively affected by global tariff uncertainty, recessionary risks, environmental regulatory changes that may affect future production and reduced consumer confidence. Nonetheless, supportive factors include the potential for lower interest rates, continued resilience in vehicle sales, and aging vehicle fleet and higher OEM incentives.

The Automotive Solutions segment reported a pretax profit of $7.8 million in the second quarter, a decrease of $0.5 million in the prior year quarter. Second quarter segment pretax profit increased sequentially 65% over the first quarter. Variances in the period profitability were due to lower sales volume, product mix shifts and rising labor costs in all jurisdictions. Labor costs in Mexico have been particularly challenging in recent years and are seeing added pressure in fiscal 2025 given the significant rise in wage levels. In reaction to these challenges, the company incurred incremental restructuring costs of $0.5 million in the quarter. These restructuring actions will help the segment deal with current production levels more efficiently and provide a strong base for future profitability when the market improves.

The Casting and Extrusion segment reported sales of $83.2 million in the second quarter, an increase of $5.2 million or 7% from the same period last year. Foreign exchange rate movements increased segment sales by $4 million in the quarter. Demand for our Casting and Extrusion products recovered in the second quarter as sales increased 17% from weak conditions in the first quarter, primarily -- due primarily to December holiday shutdowns at our customers. Extrusion tooling sales were stable in the second quarter, reflecting the diverse end markets this group ultimately supports which include building and construction activity, automotive, sustainable energy, transportation, recreational vehicles and electrical components.

In the die cast market, which primarily serves the automotive industry, order flow for new moulds and associated consumable tooling has declined as automotive manufacturers continue to put new product development and production on hold in part due to the political -- current political risks. That being said, sales of large moulds were very strong in the quarter as the high number of dies were shipped. While overall quoting activity remains decent, sales of die cast products in the short term will be impacted as the automotive industry reacts to global tariffs, economic uncertainty and lengthening vehicle refresh cycles.

Demand for Exco's additive 3D printed tooling continues its steady contribution as customers focus on greater efficiency with the size and complexity of die-cast tooling continuing to increase with the rising adoption of giga-presses. Management is developing the benefits of its Castool greenfield locations in Morocco and Mexico, which provide the opportunity to gain market share in Europe and Latin America through better proximity to local customers.

The Casting and Extrusion segment reported $4.5 million of pretax profit in the second quarter, a decrease of $1 million from the same quarter last year and an increase of $800,000 from the first quarter fiscal '25. Pretax profit reduction is primarily due to incremental restructuring costs of $1.6 million incurred during the second quarter, mainly related to headcount reduction activity. Excluding the impact of the restructuring charges, segment pretax profits improved marginally. The underlying pretax profit improvement was due to program pricing improvements, favorable product mix and efficiency initiatives across the segment, including the ongoing use of lean manufacturing and automation to improve productivity through standardization and waste elimination.

In addition, volumes of Castool's heat treat operation continue to increase, providing savings and improve production quality while efficiency initiatives at Halex are progressing. Offsetting these cost improvements were ongoing losses at Castool's greenfield operations, albeit with good improvement demonstrated. We remain focused on standardizing manufacturing processes, enhancing engineering depth and centralizing critical support functions across our various plants. These initiatives have reduced lead times, enhanced product quality, expanded product breadth and increased capacity, which will contribute to profit improvements.

Exco generated cash from operating activities of $8.7 million during the quarter and $3.1 million of free cash flow after $4.4 million in 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 $4.1 million, $4 million of dividends and $900,000 to repurchase shares on our normal course issuer bid. Exco ended the quarter with $18 million in cash, $100 million in bank and long-term debt and $51 million availability in its credit facility.

Exco's financial position remains strong. As such, the company's balance sheet and availability on the existing credit facility provides continued support for 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. That concludes my comments.

We can now transition back to Darren to discuss the company's outlook.

Thanks, Matthew. So turning to our outlook. From a macro perspective, industry analysts forecast vehicle production declines of roughly 9% in North America and approximately 5% in Europe in calendar 2025, driven by the tariff impacts. Additionally, U.S. SAAR is expected to decline to around 15 million units in 2025.

Given the growing uncertainty surrounding global trade policy, particularly around tariffs, we withdrew our fiscal 2026 financial targets this quarter. Although we made significant progress towards achieving these goals since their initial announcement in fiscal 2021, the unpredictability of tariff implementation and scope, particularly regarding the United States, makes it impractical to reaffirm our previous financial objectives at this time. Nonetheless, we believe the strategic initiatives underpinning these targets remain solid and achievable over the longer term.

Our greenfield investments, new program launches, organic market growth and consistent track record of market share gains should all contribute to meaningful growth and margin expansion as market conditions stabilize. Importantly, we anticipate that products complying with United States, Mexico, Canada Agreement, USMCA, rules of origin will remain tariff-exempt over the long term. Nearly all of Exco's North American sold products meet USMCA compliance standards, positioning us favorably amidst ongoing trade policy shifts.

Furthermore, our substantial manufacturing presence in the U.S. for extrusion dies and large mould ensure that we remain well positioned should tariff application broaden beyond our current expectations. And should tariff -- elevated tariffs persist, particularly against noncompliant jurisdictions like China, Exco stands to benefit competitively relative to global peers. We are also encouraged by broader North American macro trends, particularly industrial reshoring initiatives. These trends should bolster demand for both extrusion and high-pressure die-cast tooling, core competency of Exco.

The alignment of policy-driven reshoring efforts, structural automotive industry shifts and Exco's strong market positioning give us confidence in our long-term outlook despite near-term challenges. That concludes my prepared remarks. I'd like to sincerely thank all my Exco colleagues for their hard work, innovation and unwavering commitment to maintaining a safe work environment.

I'll now turn the call back to Lisa for Q&A.

[Operator Instructions] And our first question will come from the line of Dave Ocampo of Cormark Securities.

Just first question here. Just I completely understand the pulling of the '26 guidance just given the uncertainty. But I am curious, when you do speak to your customers and hear about their order schedules, how much visibility do you guys have into the next quarter? Is it status quo right now until we get a change either for the good or the worse relating to tariffs?

Yes. David, I'm going to say at this point, there's not a lot that has changed from a visibility perspective. Things continue to be relatively normal for now. We do expect, though, that the longer that the tariffs stay in place, that the more likely things are to shift. It's just that we haven't seen it to a material degree yet. Now I will say that on the large mould side of the business, we have seen a slowdown on order intake that will impact the next couple of quarters. But that I'm going to say is not entirely driven by tariffs. There's some cyclicality there that is going to bite. Longer term, we still remain extremely bullish on high-pressure die cast, and we are seeing a lot of growing activity on the quoting side of things. So this is one of these things that it will play out through the next quarter, but things could change rapidly depending on what happens to tariffs on an overall perspective.

Yes, that makes sense. And you called out China and how they're certainly being targeted by the U.S., but a lot of your competitors for the large mould division are from China. Are you starting to see more of your customers starting to have more conversations with you as they look to kind of shift their supply chains to more Western mould suppliers like yourself?

That's exactly right, David. We are seeing a lot more conversations and -- about what we can do in North America to reduce the dependence on China for the whole industry. And we really feel that this is kind of going to demonstrate the value of the investments that we've made in particularly our high-pressure die cast operations, but across our whole tooling group, where we built the capabilities up to handle kind of giga type moulds and increased volume. And so to the extent that we end up in a situation where China has tariffs, not even at the 145% level, but even something lower that our competitive position should improve dramatically.

Okay. And then just 2 quick ones just for Matt, a couple of million dollars of restructuring this quarter. Is there any more that gets leaked into future quarters? And how should we be thinking about the payback on those actions that you've made so far?

I think our payback is going to be less than 12 months, I think, from a lot of what we've seen. And I'm going to say we'll -- we're considering other things. It really depends on where the market is and operationally, how things are reacting.

Okay. And then just last one here. It may have come up in your prepared remarks, but just thoughts on CapEx given the uncertainty. I know there was a bit of growth CapEx in the quarter, but do you guys plan on pulling back some of your capital plans, just given all the uncertainty.

Yes. We have certain capital that is committed. I think last quarter, we kind of said we think the CapEx should be around $40 million. I don't anticipate us hitting that level. It could be $35 million to $40 million, could be less than $35 million. I do know that we're already in the midst of discussions for future CapEx. And as we've talked about even last year and heading into this year, we do see our CapEx being much lower. I mean some of the stuff we have right now, it's committed. So we have to kind of complete it, but we are looking at anything discretionary. And next year, for sure, because we spent so much, it's -- I don't want to say we're in maintenance mode, but we're getting close.

Sorry, what is the maintenance CapEx for your operations on an annual basis?

It could be [ $20 million ], plus or minus 10%.

And our next question will be coming from the line of Nick Corcoran of Acumen Capital Partners.

This is [ Reece McCauley ] on the line for Nick Corcoran from Acumen Capital. A few questions from me. Have you seen OEMs change your production schedules in response to tariffs?

Not materially at this point. I mean there's certainly been some shifts for sure. But in terms of those shifts and the impact on our products and demand, it has not been material at this point. But kind of going back to my previous answer, I would expect that to change if there's no further adjustments to the tariffs through the quarter.

Great. And then this kind of touches on the other question, too. Just to confirm with the U.S. government imposing higher tariffs on China, has this made your extrusion products more competitive? Or do you believe they will?

So with regard to extrusion, we don't actually get or have a lot of competition from China. The nature of the extrusion business is such that lead times are so short, kind of 7-9 days typically that China is not able to compete effectively in that market anyway. But with respect to high-pressure die cast moulds in particular, lead times are much longer kind of in the 6-month time frame, typically. And so China has been a significant competitor there for a number of years. And the broader perspective on trade policy, which I think the U.S. is really addressing this and that's the subsidized nature of all of these Chinese products that are making their way to the U.S. is really being demonstrated here. And to the extent that, that plays out anywhere near where the tariffs are positioned today, that will be very helpful to our high-pressure die cast operations for a long period of time.

Great. Then just last one for me. Just touching on M&A pipeline. Has it changed at all since your Q1 release?

Our M&A pipeline, I think we've said before, Exco is not an M&A company, but we're always looking for the right strategic fit that meets our vertical integration or our current skill sets. So I'm going to say no. I don't think we've changed our philosophy. We're just very selective and we want to continue to be so. I mean now might be a good time to find some gems, but we're not changing our philosophy being more bullish or less.

This concludes today's Q&A session. I would like to turn the call back over to Darren for closing remarks. Please go ahead.

Well, thanks, everyone, for joining us on the call today. We look forward to speaking to you again next quarter when, hopefully, we'll have a lot more clarity and certainty over the tariff policies and directions. So we'll talk to you then.

Thank you all for participating. You may now disconnect.