Exco Technologies Limited

Thank you, Marvin, and good morning, all participants. Welcome to Exco Technologies fiscal 2025 first quarter conference call.

I will start with an operations overview, followed by Matthew Posno, our CFO, who will review the financial aspects of the quarter, after which we will open the call for questions. Before we begin, I would like to remind everyone of the cautionary notes in yesterday's news release and on Page 2 of the presentation we posted to our website.

These notes are applicable to our discussion today. Our first quarter of fiscal 2025 clearly presented challenges, primarily due to several headwinds, particularly lower automotive production levels.

In the U.S., overall production declined by approximately 3%, with some key customers experiencing substantial drops, leading to varied performance across OEMs. In Europe, production volumes decreased by over 10%.

Additionally, we faced continued delays in the launch of new programs, and certain customers focused on right-sizing inventory levels of some of our accessory products and consumable tooling components. Despite these headwinds, we remained confident in our long-term strategy.

Evidenced by strong quoting activity and new program awards, the demand for our products remained strong, and we benefited from secular trends, such as increasing use of aluminum across many industries and the growth of OEM vehicle accessories. We continued to focus on operational efficiency, driving innovation, and leveraging our recent strategic investments to capitalize on these trends and achieve growth in revenue and profitability in line with our previously stated targets.

It is important to highlight that despite relatively high transaction prices, consumer vehicle sales in the U.S. remain fairly robust, with an annualized sales rate of around 16 million units.

OEMs are increasing incentives as needed to stimulate demand, and after the production decline in the last quarter, dealer inventory levels are now much healthier. This of course, bodes well for more stable production levels in future quarters.

In our automotive solutions segment, our sales decline outpaced the reduction in vehicle production volumes due to ongoing customer-driven delays in certain program launches, an unfavorable vehicle mix, and a pullback in accessory sales as customer inventory levels were reduced. Looking ahead, vehicle production volumes are expected to be flat to slightly down in calendar 2025, while consumer demand is undoubtedly stretched, and vehicle affordability remains a hurdle.

Lower inventory, lower interest rates, and increased OEM incentives are expected to stimulate demand. Historically, we have outpaced industry production growth, achieving content for vehicle growth of 5% to 10% over time.

In this regard, our launch pipeline, core activity, and new product development remain particularly robust for the second half of this fiscal year. On the cost side, margins were compressed this quarter due to lower overhead absorption from weaker volumes, an unfavorable product mix, higher labor costs, and severance expenses related to workforce reductions.

The unbalanced loads on our plants, driven by high variability of volumes across our various programs added to the margin pressure. To mitigate these challenges, we are implementing various measures, including automation, headcount reductions where feasible, exiting less profitable programs, deferring costs, downs, and targeting price increases.

Our segment margins will also benefit as some of our older, lower-margin programs phase out and newer, more profitable programs ramp up. I'm also pleased to report that during the quarter, we successfully completed our annual negotiations with our Mexican labor unions at levels consistent with our budgeted expectations.

Turning to our casting and extrusion segment, demand for new high-pressure die-cast molds, rebuilds, and adequately printed inserts remained decent throughout the quarter, though some large ticket deliveries were deferred by customers into early Q2. Demand for consumable die-cast components softened with a decline in production volumes, as well as a modest level of destocking, which is a typical temporary response when OEM production declines.

EV adoption continues to progress at a slow pace, while hybrid vehicle adoption is growing steadily, and it is evident that the internal combustion engine will remain a key part of the market for the foreseeable future. As a result, the growth in additional giga presses, which we expect will be used extensively in EV manufacturing, has been delayed, though it is clearly evident more and more giga presses will be used in the North American market over time.

However, I want to emphasize that Exco remains largely agnostic to powertrain types. As the broader industry shifts toward increased aluminum usage, it will support sustained demand for our products in the years ahead.

Demand for consumable extrusion tooling weakened across most regions and end markets through the quarter, with much lower demand in the month of December, as extruders extended plant shutdowns over holiday periods to consolidate employee vacation days. Capital equipment sales within the extrusion sector, however, remained relatively stable as extruders continued to focus on productivity and efficiency improvements, an area where our task tool operations excel.

Margins in our casting and extrusion segment improved slightly year-over-year, but declined sequentially from recent quarters, as overhead absorption suffered with weaker sales in December, and we incurred higher costs and disruption from outsourcing activity associated with new heat treat equipment installation at our largest extrusion dive facility. We remain focused on achieving greater scale and efficiency benefits from our recent capital investments, and despite challenging market conditions, we did see progress on a number of fronts this quarter.

In particular, Castool's facility in Mexico continues to accelerate its ramp. Our various heat treat operations are performing extremely well, and our Halex operations in Europe outperformed market conditions there, contributing year-over-year improvements to profitability.

We remain confident in our outlook for higher segment margins through 2026 as our greenfield investments mature, our recent capacity expansions are utilized, and ongoing efficiency initiatives take hold. Lastly, the global trade landscape continues to evolve, with discussions around potential increases in U.S.

tariffs once again making headlines. Generally, we believe Exco is well positioned to navigate these potential changes, and could even benefit if tariffs on Chinese imports increase, given that we source very little from this region, and China is a significant competitor.

However, the impact of any broad-based tariff measures on goods imported into the U.S. from Mexico or Canada would be far more challenging for the auto supply industry, including Exco.

That said, we view implementation of broad-based and sustained tariffs as relatively low, given the highly integrated nature of the North American auto supply chain and the significant cost implication for U.S. consumers should such tariffs be implemented.

That concludes my prepared remarks. I would like to thank all of my Exco teammates for their tremendous efforts, their commitment to innovation, and their focus on maintaining a safe work environment at all times.

I will now pass the call over to Matthew to discuss the financial highlights.

Thank you, Darren. Good morning, ladies and gentlemen.

Consolidated sales for the first quarter ended December 31, 2024, were $143.6 million, compared to $156.7 million in the same quarter last year, a decrease of $13 million, or 8%. Foreign exchange rate movements increased sales $4 million in the quarter, primarily due to the strengthening U.S.

dollar compared to the Canadian dollar. Consolidated net income for the first quarter was $4.2 million, or basic and diluted earnings per share of $0.11, compared to $5.6 million, or $0.15 per share in the same quarter last year.

Consolidated effective income tax rate for the current quarter was 35.8%, compared to 23.6% for the prior year period. 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 accounting purposes at this time.

The automotive solution segment reported sales of $72.1 million in the first quarter, a decrease of $10.9 million, or 13%, from the same quarter last year. Foreign exchange rate changes increased sales by $2.4 million.

The sales decrease was driven by lower automotive production volumes in North America and Europe, customer-driven delays in certain program launches, unfavorable vehicle mix, extended OEM-customer plant shutdowns during the month of December, and de-stocking of certain accessory products in the inventory channel. Overall, industry vehicle production was down an estimated 3% in North America and 13% in Europe versus the prior year quarter.

Production volumes decreased in response to rising dealer inventory levels in North America. European production volumes declined in response to lower consumer sales, as well as to reduced inventory levels, as OEMs clear out cars that don't comply with new mandates.

Exco sales volumes will benefit from recent and future program launches that are expected to provide ongoing growth in our content per vehicle. Quoting activity remains encouraging, and we believe there is ample opportunity to achieve our targeted growth objectives.

First quarter pre-tax earnings in the automotive solution segment totaled $4.8 million in the quarter, with a decrease of $3.4 million, or 41% over the same quarter last year. The negative variance in the first quarter was due to the lower sales of the first product and vehicle mix shifts, and rising labor costs in all jurisdictions.

Labor costs in Mexico have been particularly challenging in recent years, and we are seeing added pressure given the significant rise in wages. Apart from these specific impacts, management is cautiously optimistic that its overall cost structure should improve margins as production volumes are expected to rebound to match vehicle sales figures in the future.

Pricing discipline remains a focus, and action is being taken where possible, especially on new programs that are priced to reflect management’s expectations for higher future costs. The casting and extrusion segment reported sales of $71.4 million in the quarter, with a decrease of 2.2 million, or 3%, from the same period last year.

Foreign exchange rate changes increased sales by $2 million. Demand for extrusion tooling declined marginally in the quarter 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 demand from extruders.

Demand for certain capital equipment sold by Castool in the extrusion markets, such as containers and die ovens, was relatively stable as extruders focused on various efficiency and sustainability initiatives. Exco's management remains focused on standardizing manufacturing processes, enhancing engineering depth, centralizing critical support functions, and on developing the benefits of its new locations in Morocco and Mexico, which provide the opportunity to expand market share in Europe and Latin America through better proximity to local customers.

These initiatives have reduced lead times, enhanced product quality, expanded product breadth, and increased capacity, contributing to market share gains. The die-cast market demand was softer for new molds, associated consumable tooling, and rebuilt work.

Demand for Exco's additive 3D printed tooling continues its strong contribution as customers focus on greater efficiency, but the size and complexity of die-cast tooling continue to increase, helped by the rising adoption of giga presses. Sales in the quarter were partially supported by price increases, which were implemented to protect margins from higher input costs.

Quoting activity remains very encouraging, and our backlog for die-cast molds remains healthy, though it is off recent highs. First quarter pre-tax earnings in the casting extrusion segment was $3.7 million, an increase of $200,000, or 4% from the same quarter last year.

The pre-tax profit improvement is due largely to program pricing improvements, favorable product mix, and efficiency initiatives across the segment, including the ongoing use of lean manufacturing and automation to improve productivity through standardization and waste elimination, as well as foreign exchange rate gains from the balance sheet impact. In addition, volume at Castool's heat treatment operation continued to increase, providing savings and improved productivity, production quality, while efficiency initiatives at Halex are progressing.

Outside of these cost improvements were losses at Castool's greenfield operations and a slight increase in segment appreciation. In addition, volumes were uneven through the quarter, with levels of activity in December being lower than normal as customers extended plant shutdowns through the holiday period in response to weaker market conditions.

Management remains focused on reducing its overall cost structure and improving manufacturing efficiencies, but expects such activities together with its sales efforts should lead to improved segment profitability over time. Exco generated cash from operating activities of $10.4 million during the quarter and $3.8 million of free cash flow after $5.2 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 $2.5 million, $4.1 million of dividends, and $157,000 to repurchase shares under a normal course of issuer bid. It's worth noting that we also reduced our long-term debt levels by $10 million, with surplus cash generated in the last quarter.

Exco ended the quarter with $119 million in cash, $96 million in bank and long-term debt, and $56 million in availability on 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, Marvin. We can now transition to the Q&A portion of the call.

Good morning. Thanks for taking my questions.

This is the first one for me. You maintained your 2026 fiscal targets.

I'm just wondering, what is your view on how you get there with the timing changes and all?

Good morning, Nick. It's Darren here.

We obviously have a soft quarter here, but we do remain firm in our outlook for 2026. This quarter obviously was impacted by some production dislocations at the OEMs together with extended plant shutdowns in December.

It's not a typical quarter in many regards. Obviously, it becomes a more aggressive target in the 2026 timeline to hit at this point, but our path to getting there remains the same.

We are focused on filling out the capacity that we've built with these new greenfield plants and improving the margin of our Halex operations on the cast and extrusion site. We continue to push on the accessory sales on the automotive solution side to get that margin close to 20%.

Our target for 2026 remains the same.

That's helpful. It might be a little early in the quarter, but any indication how the second quarter is being relative to the first?

It's a little early, but the signs that we've seen in January are much more normal. December was a pretty abnormal month across the board.

There are many more shipping days in our second quarter, which is also a good support. As I mentioned, some of the softness in the first quarter was due to the customer-driven delays on some big-ticket items in the large mold groups.

We'll get the benefit of that early in the second quarter here.

One last question for me. How do you see M&A being a part of hitting your fiscal targets?

Has the pipeline changed at all?

The pipeline has not really changed. We continue to be on the lookout for acquisitions of similar niche-type businesses.

It is not part of the formula for our 2026 target.

Great. Appreciate taking my question.

I’ll pass along.

Hey, good morning, guys. Thanks for taking my question.

My first question is, given that the minimum wage has gone up another 12% this year, what is your ability to offset the continued minimum wage increases in this geography and get ahead of it?

Sure, good morning, Adam. It’s Darren.

Minimum wage increase in Mexico, not just this year, but the cumulative effect since the last five years has been very significant. We had the added pressure of a stronger peso up until very recently.

The peso has pulled back some, which is helpful. We are very focused on improving our labor efficiency.

That has resulted in some fairly sizable headcount reductions. That has been helpful.

We are really looking to automation as an ability to sustain further reductions in the labor intensity, which is clearly required. On top of that, for any new program quoting activity, we certainly embed the view that wages will be sustained at a higher level.

Okay, great. Thank you so much.

Just moving on to your 2026 guidance, I just had a question about what production level are you building into that -- since recent IHS forecasts have it flat flushed out?

We are not anticipating production levels are going to increase for materially decrease from here. We set that target in place when the USR was around 15.5 million-16 million units.

That is essentially where it is today, implying a similar production level to where we are at.

Okay, great. Thanks.

Just one more question on the topic of issuer tariffs. How do you see tariffs impacting your ability to reach your 2026 guidance?

It is a good question and a difficult one given the uncertain nature of tariffs. We have gone through the scenario analysis internally, what we would do in response to these tariffs.

I think at the extreme, if there was a 25% fraud-based tariff applied to Mexico and Canada for any product going into the U.S., that would obviously be catastrophic for the industry and a very challenging situation. Although I think it would be pretty short-lived given the chaos that it would cause.

The 2026 target implies no tariffs. I think our view is that to the extent that there are tariffs, it is unlikely to be placed on the supplier components.

The compounding effect of tariffs for products going back and forth in order many times would significantly magnify the cost of building these cars and it would become unsellable. Obviously, anything is possible in the short term, but I expect that common sense will ultimately prevail.

Okay, great. That is really helpful.

Thank you. I will pass back the line.

Okay. Thanks, Adam.

Thanks, Marvin, and thanks to all participants today. We look forward to talking to you again after our second quarter results are released.