Exco Technologies Limited (XTC) Earnings Call Transcript & Summary

Thank you. Thank you for standing by. Welcome to Exco Technology's third quarter results 2026 problem. at the time of the session on a listen-only mode. After this presentation, there will be a question and ask session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hands raise. Please note today's conference is being recorded. I would like to end the conference. Over to you, speaker.

Darren Kirk, President and CEO. Please go ahead, sir. Thank you, Olivia, and good morning, everyone. Welcome to Exco Technology's third quarter conference call for fiscal 2026. I'm joined this morning, as usual, by Matthew Posno, our Chief Financial Officer. Before we begin, I'll remind everyone that today's call may contain forward-looking statements and references to non RS measures. Please refer to the cautionary language and reconciliations in yesterday's news release and our MD&A available on CEDAR Plus and our website. I'll begin today with an overview of our operations and strategic progress during the quarter, including an update on the official launch of Exco Energy, which I believe represents one of the most exciting developments at our company in many years. Matthew will then walk through the financial details and following that, we will open the questions. EXCO delivered solid progress in the third quarter. Consolidated sales increased 7% year-over-year to $165 million, a third quarter record for the company, while EBITDA increased 26% to $18.5 million. Our consolidated EBITDA margin expanded by roughly 170 basis points to 11.2% driven by a meaningful improvement in our casting and extrusion segment. That income was $5.8 million or $0.15 per share, which included $0.02 of restructuring charges. Excluding those charges, the underlying earnings power of the business continued to build in the quarter. More important than any single quarter's results is the direction of travel. Over the past several years, we have invested significantly in our business, new greenfield facilities, expanded machining and heat treatment capacity, automation, and industry-leading additive manufacturing capabilities. Those investments are now essentially complete, and our capital spending has moderated accordingly. Our priority, and the lens through which we are managing the company, is translating that expanded asset base into higher utilization, improved margins, stronger cash generation, and better returns on capital. demonstrated clear progress against these objectives and we believe there is much more to come. Let me turn to the development that I am most excited about. During the quarter, we officially launched Exco Energy, a new initiative to pursue opportunities in the Canadian nuclear energy sector and, over time, in other advanced and technologically demanding end markets. The logic behind Exco Energy is straightforward. Through our large mold group, Exco has spent decades machining some of the largest, most complex and most demanding precision components in North America. We operate among the most advanced large-scale machining, engineering and quality systems on the continent, supported by rigorous process controls in a workforce whose craftsmanship is very difficult to replicate. Those are precisely the capabilities the nuclear industry requires, capabilities that are in short supply as Canada embarks on what we believe will be a multi-decade expansion of its nuclear energy infrastructure. The demand backdrop is compelling. Electricity consumption is rising structurally, driven by electrification, reshoring of industrial activity, and the enormous power requirements of AI in data center infrastructure. Nuclear energy is increasingly recognized as essential to meeting that demand with reliable, secure, emissions-free baseload power. In Canada, that translates into major refurbishment and life extension programs at existing reactor fleets, new large-scale builds, and an emerging pipeline of small modular reactors. all of which require a deep domestic supply chain of qualified precision manufacturing partners. We intend for EXCO to be an important part of that supply chain. We were honoured that the Government of Canada chose to host its Nuclear Energy Strategy Announcement at our Newmarket facility on June 22nd. We view that event as a strong validation of the relevance of our capabilities to Canada's nuclear ambitions, and it has meaningfully raised our profile with utilities, government stakeholders, and industry partners. engagement across the sector has deepened considerably and quoting activity has already been very encouraging. I want to be clear about how we are approaching this opportunity. Exco Energy will leverage our existing precision machining assets, engineering talent and quality systems, which means incremental revenue in this area, carry attractive economics and improve utilization and returns on capital across our existing footprint. At the same time, the nuclear industry rightly demands rigorous qualification processes and revenues will build over a period of years rather than quarters. We are investing the time now to establish the certifications, relationships, and track record that will position EXCO as a partner of choice as this market develops. We believe the long-term prize is substantial, a large, growing, non-automotive end market with high barriers to entry that play directly to our strengths. EXCO Energy is also broader than nuclear alone. A core element of the strategy is applying our additive manufacturing expertise across a wider range of end markets. EXCO has quietly built one of the leading additive manufacturing operations for tooling applications in North America. The addition of our seventh industrial 3D printer in late fiscal 2025 further strengthened this capability and demand for our 3D printed tooling solutions remains strong as customers pursue greater efficiency and increasingly large and complex tooling, including tool for press applications. Additive manufacturing is transforming what is possible in our industry, enabling conformal cooling, faster cycle times, longer tool life, and design geometries that simply cannot be produced conventionally. The same attributes that make our additive solutions valuable in die-cast tooling are relevant to a broad set of technically demanding industrial applications. We are actively pursuing opportunities to apply this expertise together with our engineering capabilities and installed asset base across other end markets, reducing our reliance on any single industry and improving the quality and durability of our earnings. earnings over time. Diversification of our end market exposure initially on a capital light basis and from a position of technological strength is a central pillar of our long-term strategy. Turning to our segments, the casting and extrusion segment reported third quarter sales of $77 million, up 4% from the prior year, while segment EBITDA margin improved to 16.2% from 12.7%, a testament to the pricing discipline, operational efficiency initiatives, and cost-effectiveness. and cost actions we have pursued across the segment. Extrusion tooling sales remain solid, supported by diversified demand across building and construction, transportation, renewable energy, electrical applications, and AI infrastructure related projects. The structural demand drivers here are powerful. Construction remains the largest end market for extruders, extrusions and continues to grow. Aluminum content per vehicle keeps rising as automakers pursue light weighting, particularly in electrified platforms. And the build out of data centers and electrical infrastructure is emerging as a significant new source of demand. Industry forecasts suggest data center infrastructure alone could add more than a million tons tons of aluminum demand through 2030 spanning heat sinks, cooling systems, and structural framing, all of which are extrusion-intensive applications, with the Americas expected to be the fastest-growing region. Layer-on tariff dynamics in reshoring, which are pushing production toward domestic and near-shore supply, and the backdrop for North American extrusion tooling is as constructive as we have seen it in some time. Importantly, we are also seeing increasing activity for our capital equipment products, containers, dye ovens, and related tooling systems, particularly in North America, as extruders invest in new press capacity and upgrade existing lines to meet this growing demand. These products deepen our position. across the customer's press carry attractive, consumable, and replacement dynamics over time, and are a natural compliment to our dive business. To further capture this opportunity, we have been reinforcing our sales efforts, strengthening our commercial teams, increasing the intensity and discipline of our customer coverage, sharpening our quoting processes. The work is showing up in higher quoting activity and improving order flow. Your European conditions overall were more mixed, though we continue to pursue market share gains in the region and to further integrate and strengthen our operations there. Turning to die-cast tooling, revenues were relatively stable in the quarter as shipments increased against the segment's elevated backlog. I would be candid, however, that our die-cast results and indeed our overall results were held back this quarter relative to our expectations and the underlying potential of the business. Three factors were at play. First, certain customer-driven timing delays continued to defer shipments and the associated revenue recognition. Second, we incurred additional incremental costs to complete the closure of our large mold facility in Mexico. And third, margins on a couple of large jobs delivered in the corner came in lower than anticipated. These tools were admittedly priced during last year's order drought at pricing that reflected the competitive conditions of that period. None of these factors change our view on the underlying trajectory. The Mexico wind down is now complete, consolidating production across pure locations. The delayed shipments remain in our backlog rather than lost and pricing on our more recent order intake is meaningfully healthier. With a strong shipping schedule in place, we expect the fourth quarter to be materially better for our die-cast tooling. Stepping back, the demand picture for die-cast tooling in North America is increasingly encouraging. Our die-cast backlog remains above historical levels and demand continues to diversify beyond passenger vehicles into energy, heavy trucks and other industrial applications. There is also continued momentum in gigapress applications. where Expo has significant and differentiated capabilities. What began with a handful of EV pioneers is broadened across the industry. Multiple OEMs and Tier 1 suppliers... are now installing and evaluating very large casting machines in North America. Industry forecasts call for double-digit annual growth in gigacastings through the end of the decade, and some analysts expect a substantial majority of large structural automotive castings to migrate to gigacasting formats by 2030. Critically for EXCO, these molds are among the largest and most complex complex tools in the industry and our combination of large envelope precision machining, high tonnage crane capacity and additive manufacturing puts us in a strong position to serve this market as it scales. The automotive solutions segment reported third quarter sales of $88 million, an increase of 9% over the prior year, or roughly 8% excluding foreign exchange, which meaningfully outpaced underlying industry vehicle production. Performance benefited from resilient North American automotive demand, recent and ongoing program launches, a favorable vehicle mix, and continued growth in accessory products. with both new and existing customers. US SAR averaged approximately 16.2 million units during the quarter, including 16 and a half million units in June. Segment profitability was affected primarily by product mix, higher labor costs, and increased energy and supply chain cost pressures. And we are responding on multiple fronts, advancing lean manufacturing and automation initiatives, taking pricing action where possible, and maintaining pricing discipline on new products. program awards. In Europe, conditions remain challenging amid OEM restructuring and competitive pressures, though supplier consolidation and our manufacturing capabilities in Morocco are creating additional opportunities for us. Quoting activity across the segment increased during the quarter, supporting the potential for future programs. awards and we remain confident that recent and upcoming launches and continued supplier consolidation will support growth and exclude content for vehicle over time Looking ahead, our fourth quarter will reflect normal seasonality associated with OEM summer shutdowns and European vacation schedules. The broader environment remains characterized by uncertainty surrounding global trade policy tariffs and geopolitical developments, which may create volatility in customer demand and does limit near-term visibility somewhat. That said, we believe EXCO is well positioned to navigate these dynamics. Nearly all of our products sold in North America comply with USMCA requirements, and we maintain a substantial US manufacturing footprint for extrusion dyes and large products, providing additional flexibility should tariff policies evolve. Indeed, if elevated tariffs on imports from non-compliant jurisdictions persist, we may well benefit from improved competitive positioning relative to certain global peers. More broadly, we are encouraged by increased increasing initiatives to reshore industrial manufacturing in North America, which support demand for both extrusion and high-pressure die-cast tooling, areas where we maintain considerable strength. So, with our die-cast backlog above historical levels, favorable North American extrusion market dynamics, increased quoting activity across the business, moderating capital expenditures and the launch of Exco Energy, we believe the foundation is in place for higher utilization, stronger earnings, improved cash generation and better returns on capital in the periods ahead. Before I hand the call over to Matthew, I would like to sincerely thank our roughly 4,500 employees around the world for their dedication and continued focus on safety, quality and customer service. Their efforts are what makes EXCO's progress possible. With that, I'll now pass the call to Matthew to review the financial in more detail. Thank you, Darren.

Good morning, ladies and gentlemen. Consolidated sales for the third quarter into June 30th, 2026 were 165.4 million compared to 154.9 million in the same quarter last year, an increase of 10.6 million or 7%. On-exchange movements increased sales by approximately 1.9 million in the quarter. Excluding this impact, sales increased approximately 6%. Consolidated net income for the quarter was 5.8 million or 15 cents a share compared with 5.4 million or 14 cents per share in the prior year quarter. Results in the current period included $600,000 or two cents of average tax restructuring charges. The effective income tax rate in the quarter was 30% compared to 13% recovery last year. The prior year quarter benefited from $1.6 million of research and development tax credits Quarterly consolidated EBITDA was $18.5 million, representing 11.2% of sales compared to $14.7 million or $9.5 in the prior year period, an increase of 26%. Third quarter sales for the automotive solutions segment were $88.3 million, up $7.5 million or 9% from the prior year quarter. The segment benefited from resilient North American automotive demand, recent and ongoing program launches, a favorable vehicle mix, and continued growth in accessory products. European conditions remain challenging, although supplier consolidation and EXCO's capabilities in Morocco are creating additional opportunities. Pre-tax profit for the segment was $6.5 million, a decrease of $800,000 for the prior year quarter. The decline primarily reflects product mix, higher labor costs, and increased energy and supply chain cost pressures. Management continues to focus on lean manufacturing, automation, and pricing discipline, particularly on new program awards. Quoting activity increased during the quarter, and recent and upcoming launches were expected to support growth in content per vehicle, although fourth quarter results will reflect normal seasonality from OEM summer shutdowns. Third quarter sales for the casting and extrusion segment were $77.1 million, up $3.1 million, or approximately 4% from the prior year quarter. Extrusion tooling sales remained solid, supported by diversified demand across construction, transportation, renewable energy, electrical applications, and AI infrastructure related projects. North American conditions remained favorable, while European demand was more mixed. Die-cast tooling revenues were relatively stable as shipments increased against the segment's elevated backlog, partly offset by customer timing delays and the closure of the large MOLT Mexico facility. During the quarter, EXCO launched EXCO Energy to leverage the large mold group's precision-meaning engineering, quality and additive manufacturing capabilities in the Canadian nuclear energy market and other technically demanding end markets. The segment reported pre-tax profit of $5.1 million, an increase of $2.5 million, or 97% from last year. The results included $900,000 of incremental restructuring charges. The improvement reflected higher extrusion tooling sales and foreign exchange gains, partially offset by lower die-cast results, product mix, higher overhead costs, fixed costs under absorption, and increased depreciation. Management remains focused on converting the elevated die-cast backlog in the shipments, increasing utilization at newer operations, and improving return on capital through pricing, lean manufacturing, automation, process standardization, and the centralization of key support functions. Corporate expenses for the quarter were $2.4 million compared to $4 million in the prior year quarter. The decrease primarily reflects foreign exchange swings compared to the prior year quarter. Cash provided by operating activities was $13.4 million compared to $25.2 million in the prior year quarter. The decrease primarily reflects a greater use of non-cash working capital in the current quarter. Free cash flow for the quarter was $9.7 million compared to $20.1 million last year. Cash use and financing activities included $3.9 million in dividend payments, $900,000 to repurchase shares under the company's normal course issuer bid, and a reduction in bank indebtedness. Cash use and investment activities total $2.7 million with virtually all fixed asset additions related to maintenance. Following several years of elevated growth related investment, management now expects the fiscal 2026 capital expenditures of approximately $20 million, focused primarily on maintenance, productivity improvements and select growth initiatives. Exco ended the quarter with $26.1 million in cash, net debt of $63.9 million, and approximately $61.6 million of availability under its committed credit facility. the company remains in compliance with its financial covenants. Our balance sheet remains strong and provides flexibility to support dividends, share buybacks, debt reduction, and strategic investments, while management continues to prioritize improved asset utilization and returns on capital. That concludes my comments. I will now turn the call back to Darren for his closing remarks.

Thanks, Matthew. To summarize, our third quarter showed clear progress on the priorities we have laid out. Sales growth, meaningful margin expansion, disciplined capital spending, and stronger returns on capital. While the launch of Exco Energy marks an important step in diversifying our business into large, growing, and technically demanding industries, and markets that play directly to our strengths. We are excited about the road ahead. Operator, we would now be pleased to take questions.

Ladies and gentlemen, as reminded, to ask a question at this time, you will need to press star 1-1 on your telephone and wait for your name to be announced. Okay, I'll star 1-1 to answer questions. And we have a question coming from the line.

Nick Corcoran with Acumen Capital. Your line is now open. Hi, it's Bruce McCauley on the line for Nick Corcoran. Thanks for taking my questions. So quick two questions here. So in terms of the launch of Exco Energy, uh, How is this initiative progressing and how big is that total market looking?.