Exco Technologies Limited (XTC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Exco Technologies Limited Acquisition Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Darren Kirk, President and CEO. Please go ahead.

Thank you, Victor. Good morning, ladies and gentlemen. Welcome to Exco Technologies conference call. The purpose of today's call is to discuss Exco's acquisition of Halex Extrusion Dies in Europe. Joining me on the call this morning is Matthew Posno, our CFO; as well as Nick Gnatyuk, Vice President and General Manager of our Extrusion group. I'll provide some brief opening remarks then we will open the call for any questions. Before I begin, I would like to make some comments about forward-looking information. In today's news release, you'll find cautionary notes in that regard. While I won't repeat the contents, I want to emphasize that they applied to this discussion today. First, I must say I'm extremely pleased that we have reached this agreement to acquire the Extrusion Die business from Halex Holdings GmbH. We have been looking to expand our existing extrusion die business into Europe for some time, and we see Halex as the perfect fit to do so. Halex Extrusion Dies was founded in 1990 and operates 4 key manufacturing locations. The plants are roughly equal size and extremely well positioned in the heart of Europe's manufacturing industries. Two of the plants are in Germany, one in the north part of the country and 1 towards the south. The other 2 plants are located in the northern industrial region of Italy right around Brescia. All of these regions are vital extrusion markets. And as I've indicated in the past, the extrusion die business is characterized by very short lead times, around 7 to 10 days from order to delivery. So proximity to customers is certainly key. Halex has a very strong and established brand names with excellent quality products and a competent management team. The company recorded steady growth over the years. It is now the second largest extrusion die manufacturer in Europe. But importantly, Halex is also the leading provider of extrusion dies for complex shapes. Together with Exco's 6 extrusion die facilities in the Americas and Castool's global presence in extrusion tooling solutions, Exco will become 1 of the largest extrusion tooling providers around the world. Strategically, we see this acquisition as opportunistic to capitalize on the growing market for extrusions in Europe. The European market is similar in size to North America and is expected to see decent growth over the next few years. This growth is being driven by the automotive sector, in particular as internal combustion engines strive to become lighter in weight but more so by the electric vehicle revolution. EVs need to be light in weight in order to maximize the range of the battery and aluminum extrusions are used throughout the structure of the vehicle, including in battery enclosures and various crash zones. But demand for aluminum extrusions is growing strongly across many industries as the world seeks to reduce emissions and become more sustainable. These extrusions are increasingly working their way into the solar industry, automation, high-speed rail and energy efficient buildings as well aluminum has infinite recyclability. So combined with its lightweight, high strength-to-weight ratio, corrosion resistance and formidability, it is important element in many sustainable solutions. Beyond these considerations, our customer base is becoming more global, and this acquisition will enable us to better serve these customers with consistent high-quality products. The acquisition will also provide positive benefits to Castool in Europe, which you know only very recently opened their new facility in Morocco. The European market is very similar in North America, but it does have some nuances that differentiate it, including more complex extrusion shapes generally owing to the mix of industries. These include much more activity in automation, robotics and rail. Halex' design and manufacturing capabilities are very well suited to these industries. Looking at the competitive landscape, there are relatively few players of size in this space and acquiring Halex is perhaps the last opportunity for Exco to enter the European market in very desirable locations at scale. We had considered entering Europe through greenfield investments in a low-cost country. However, it would take a long time to achieve critical mass and penetrating Western Europe would be very difficult. Extrusion operations have their preferred die shops they deal with and incumbents are difficult to dislodge. We believe integration risks are low. We do not plan to undertake meaningful changes to Halex near term and key existing management will remain with Halex. Yet longer term, we expect through the sharing of best practices and leveraging of greater global scale, we will certainly see synergies. We do not expect material integration charges, although some front-end capital to modernize certain equipment and better position the business for expected growth is likely. We expect to close the acquisition in the spring of 2022. Our targeted date to close the transaction is in April, although it could slip by a month or 2 depending on how long it takes to complete certain transaction-dependent actions. Halex's annual revenue total almost EUR 40 million currently, representing about CAD 55 million of incremental revenue. The Halex operations will fall under the leadership of Nick, he's Head of our Extrusion group and we will report the results of Halex within our Casting and Extrusion segment. Once included, we expect our segment pro forma EBITDA margins will see slight downward pressure but we remain firmly confident in achieving our 5-year target for a 20% segment margin. The acquisition, however, will be immediately accretive to earnings per share. With regards to valuation, the acquisition is valued at EUR 40 million on an enterprise value basis. This will consist of approximately EUR 36 million in equity and EUR 4 million for the assumption of debt and debt-like liabilities. Exco will fund the equity portion with available bank lines. Our pro forma leverage will remain very low with net debt to EBITDA of less than half a turn. With that, it concludes my remarks. I look forward to welcoming all Halex' employees to Exco once the transaction closes in the spring. I will now turn the call back to the operator to facilitate any questions.

[Operator Instructions] Our first question will come from the line of David Ocampo from Cormark Securities.

Darren or Nick, I was wondering if you could provide the breakdown for the end markets specifically for Halex. I was just more curious, is there a significant runway to sort of ramp up automotive and particularly EV? Or is that kind of at a level that where you're seeing your current operations happen today?

Well, I guess in Europe, the end market diversity is a little more diverse than in North America. Building and construction is the largest end market. It's kind of about 30% to 35% of the total. But I guess the vehicle or transportation market in Europe is probably around 20%, 25%, and automotive is a big component of that, but it's growing strongly similar to the way it is in North America. So I mean I guess the beauty about this business is that the end markets are very diverse. There's diversity of customers. And it's got a tailwind of growth across all industries due to sustainability initiatives including automotive, and that's true in Europe and in North America.

That's perfect. And Darren, you touched a little bit about a bit of margin compression at least in the near term. But do you see this business getting up into that 20% range? Or is it going to take some sort of capital investment or some sort of synergies to get there?

Yes. There'll certainly be synergies and capital investments that are required to get there. I mean we don't like to talk about the individual businesses in terms of profitability just because this industry is so competitive. And I'm sure there's a number of competitors on the call today. But broadly speaking, within the segments, we've got a 5-year target of 20% EBITDA margin. And we remain very confident that we're going to get there.

And maybe just shifting over to just the general M&A landscape. I think in your 2026 target, you put out sort of a soft guidance to get to -- to add $250 million in revenue. How does the landscape look today for both Automotive and Casting and Extrusion. And probably most importantly, can we expect further acquisitions? Or is now the focus just on the integration of Halex?

Well, I guess it's 1 step at a time, David. This is a pretty decent-sized acquisition for us. It does achieve kind of our strategic objective of expanding the extrusion die business to further jurisdictions, and Europe is certainly an attractive one with lots of tangible benefits here for the broader Cast and Extrusion segment. I don't -- we're not currently on the lookout for any further acquisitions of size in either segment. With that said, we certainly look at everything that's available. And as I mentioned on the last call, I mean, there's a lot of assets that are becoming available. But they are, by and large, not in our focus there. They tend to be more distressed at this point of the cycle, and we're not interested in turnaround [ place ].

Perfect. And then just a housekeeping question. Does this change your CapEx spend for '22? Or how should we think about that?

I mean we're going to spend something somewhere around, call it, $4 million or $5 million over the next 12 months after it closes. So how much of it falls into this fiscal year versus kicks into our fiscal 2023, that's a bit of a timing issue of how long it takes to get machine or equipment ordered and so on. So I'm going to say, there won't be a big impact this year. But some might fall in this year and then the rest next.

[Operator Instructions] Our next question comes from the line of Peter Sklar from BMO Capital Markets.

Darren, you didn't give any indication of what valuation you paid for the business. Can give us some -- can you talk a little bit about what you paid in terms of multiple on EBITDA?

Well, I guess we've put a few data points out there, Peter, that I'll leave you to back into it. But we've said that it's about EUR 40 million of revenue, and it's going to have a slight compression at the front end on the segment's EBITDA margins. And that should be sufficient information for you to make some assumptions and figure out what we paid.

Okay. Great. And Nick, can you talk about -- I just have some questions I want to ask you. Can you talk about like who is the due diligence team that looked at this acquisition? And did COVID -- does that constrain your ability to be boots on the ground due diligence?

I'll take that, Peter, because we were all involved in it here. Certainly, Paul Riganelli headed up the legal aspects and Matthew Posno headed up the financial aspects and then Brian, myself and Nick were all deeply involved for the strategic and operational aspects of the due diligence, and that certainly included some time in Europe and getting to know the management team and the facilities. And so that pretty much covered off the due diligence, and we certainly facilitated all of those efforts with some external providers of various services where we needed to.

Okay. And how long did this due diligence -- discussions with the company and due diligence process, over what period did that transpire?

That was a good 3 months or so, Peter.

Okay. And then Nick, can you talk about -- like how does that compare to an Exco extrusion tooling shop in terms of the capital equipment you have in there, software, processes that kind of thing.

We have a lot of similarity, but we have a lot of differences. And I find that a lot of very strong point what they do in Europe. And I'm thinking if we will combine these 2 companies together, it will be very beneficial for us, for them and for market in general. But there are differences and we will try to use these differences in best practices for our own benefit.

Right. Okay. And Darren, like what has this business been growing at in terms of its top line? Look, it sounds like the business is quite strong. So has this had -- has this business had a good growth rate over the recent past?

It's been decent. I'd say that our growth rate has been stronger than Halex, although Halex has still been decent. One thing to point out here is that Halex has been owned by financial sponsors pretty much for the better part of the last 10 years. And quite frankly, we have a different objective in terms of where we want to position this business going forward. I think that with our focus on strategic investments in growth and best practices in terms of our operating knowledge that we think that we can improve the growth that Halex has enjoyed going forward.

Okay. So that kind of led into my last question, which was other than -- it sounds like you're buying a good business at a reasonable valuation, like how does Exco create value? It sounds like you're saying you believe you can bring things to the table and accelerate the growth rate.

With any acquisition, you need to improve the operating margin and the growth prospects in order to realize value. And we think that we are uniquely positioned to achieve those objectives by virtue of our long and leading experience in this business in the Americas and the fact that it really has been owned by a different type of investor for the last 10 years or so. And so when we look at the holistic package here, we do believe that we are uniquely positioned to realize value from this acquisition.

Right. Okay. That makes sense.

[Operator Instructions] I'm not showing any further questions in the queue at this moment.

Okay. Well, with that then, I guess we can move to conclude the call. I wish everyone a safe and enjoyable holiday. And we look forward to talking to you early next year with our next quarter results. So thanks, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect.