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Edited Transcript of XTC.TO earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Exco Technologies Ltd Earnings Call

Markam May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Exco Technologies Ltd earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Andrew Robbins

Exco Technologies Limited - CEO, President and Executive Director

* Darren Michael Kirk

Exco Technologies Limited - EVP

* Paul E. Riganelli

Exco Technologies Limited - COO and SVP

* R. Drew Knight

Exco Technologies Limited - CFO, VP of Finance and Secretary

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Conference Call Participants

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* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* David Tyerman

Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Michael W. Glen

Macquarie Research - Analyst

* Neil Linsdell

Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations

* Peter Sklar

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Exco Technologies Limited second quarter results conference call. (Operator Instructions) Mr. Darren Kirk, Executive Vice President, you may begin your conference.

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Darren Michael Kirk, Exco Technologies Limited - EVP [2]

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Thank you, Chris. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited Fiscal 2017 Second Quarter Conference Call.

I am Darren Kirk, Executive Vice President of Exco. I will lead off with an operations overview. Drew Knight, our CFO, will then be reviewing the financial results. Brian Robbins, our President and CEO; and Paul Riganelli, our Chief Operating Officer, are also present and will participate in the Q&A part of the call.

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 also posted a short presentation that we will loosely reference. We welcome all participants this morning.

The format of this conference call will be the same as in the past. After the presentations, 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 at 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 content 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 last 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.

Turning to the presentation material. I refer you to the text on Slides 3 to 5 that will cover my remarks. As we pointed out in our news release, this is the best quarter ever in terms of consolidated sales and EBITDA. Earnings per share was also strong at $0.30, favorably comparing to $0.21 last year. I would also highlight that results were stronger at each of our 2 reporting segments relative to both the year-ago and previous quarter with our Casting and Extrusion segment returning to growth for the first time in several quarters. As well, for most of our businesses, momentum increased throughout the quarter, providing increased confidence in our prospect for continued robust performance through the back half of the year.

Looking first at our Automotive Solutions segment. All of our businesses continued to experience strong quoting activity amidst firm industry fundamentals and a pipeline of robust product offers. Contribution from AFX, which we've now owned for a year, represented the largest component of revenue growth during the quarter. However, we also achieved very strong organic growth in most of the company segment's businesses despite flattish vehicle production levels. To that end, the combined foreign exchange adjusted revenues of Polytech, Polydesign and Neocon were up 22% in the quarter, driven by both new product launches and new program awards.

New program ramp-up at Polydesign, in particular, continued unabated during the quarter with headcount there increasing by 78% over the last 12 months to support very robust growth. As well, our previously noted building expansion at Polydesign is now well underway and should be ready for occupancy by July of this year. Of course, the front-end inefficiencies of scaling up these growth initiatives are being fully absorbed in our operating results, which only stand to improve further as these new programs season.

Equally impressive to the strong growth at Polydesign has been the increased business activity at Neocon. With its growing portfolio of attractive and proprietary product offerings, centered on both interior and exterior vehicle protection, Neocon's growth has been extremely robust. More importantly, we believe the positive impact of several of Neocon's new product initiatives have yet to be felt.

Over at ALC, its results have benefited from the prior shutdown of loss-making operations in South Africa and Lesotho. Nonetheless, ALC still felt a pinch in the current quarter from operating disruptions associated with the repositioning of its business. Developments there include the wind-down of the BMW 5 Series seat cover program in mid-February and the ongoing ramp-up of the Audi seat cover program and large steering wheel wrapping programs, among others. To accommodate these changes, we have taken up occupancy at a third plant in Bulgaria. With this additional square footage, ALC has the ability to eliminate outside warehousing space, use more localized labor and pursue its growth agenda as it seeks to further improve its customer and product diversity.

Turning now to the Casting and Extrusion segment. Its revenues were modestly higher on both the year-over-year and sequential basis, with segment EBITDA and pretax profitability following suit. Within these results, the top and bottom lines of the large mold business remained generally soft during the quarter, as pricing remains under pressure and the mix of businesses -- business continues to be skewed towards a number of relatively new programs. However, our order book continues to be at very high levels and quoting activity remains robust. As well, we continue to make excellent progress on our large capital upgrade project in Newmarket. At this point, all equipment is operational and component production time is improving significantly. Combined with our additive manufacturing capability, we are highly confident that we have best-in-class operations within the industry. As our customers increasingly value the ability to supply highly engineered molds with shorter and shorter lead times, we only stand to benefit. Consequently, we believe we're well positioned to capitalize on the very favorable industry growth trends that we expect will unfold over the coming years.

Our extrusion die group demonstrated strong results during the quarter, with group sales and profitability reaching record levels. These results were driven higher by 4 of our 5 plants, with the notable exception of Brazil, where the good news is that its results remained relatively stable. We continue to invest significant financial and management resources in the harmonization and standardization of our design and manufacturing processes across our various facilities. Our results this quarter clearly indicate our efforts are paying off. While there may be some choppiness to our progress going forward, we believe these operations still maintain potential for sizable improvement over the medium term.

Turning to Castool. It had a decent quarter with higher sales, although modestly lower pretax profit. Product development and innovation, however, remain high and market share gains continue, especially in Asia. Profitability at our Thailand facility, which is crucial to our growth plans, were solidly positive this quarter and we have every reason to believe this positive momentum will continue. More so, we have confidence that Castool is poised for strong results during the second half of the year, given a robust pipeline of opportunities.

Finally, with respect to our greenfield operations in Colombia, Texas, Thailand and Brazil, sales growth remained strong at each of these locations during the quarter. As well, we are pleased to report that the collective profitability of these 4 operations turned positive for the first time during the current quarter with the -- with only the operations in Brazil remaining in a loss position.

Now looking towards the back half of our fiscal year, we believe industry fundamentals will remain firm with somewhat elevated vehicle production levels likely to persist. This will, of course, continue to benefit Exco, as will the ongoing trends away from cars and towards SUVs, where we have a relatively greater amount of content and content opportunity. Potential changes to U.S. tax policies, trade deals and environmental regulations remain at the forefront of our thoughts. And while we're following any development closely, implications are only speculative at this time. In the interim, we will continue to focus on improving our operations and maximizing our growth opportunities of our various businesses. Now I'll turn the call to our CFO, Drew Knight, to cover off the financial review. Drew?

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [3]

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Thanks, Darren. Good morning, ladies and gentlemen. My comments will cover Slides 6 to 10 of the presentation. Consolidated sales for the second quarter ended March 31, 2017, were $153.8 million, an increase of $20.4 million or 15% compared to the same quarter last year. Year-to-date consolidated sales were $306.9 million, an increase of $42.6 million or 16% from last year. Over the quarter, the average U.S.-CAD exchange rate was 2% lower, reducing revenue by $1.5 million, while the year-to-date average U.S.-CAD rate was 1% lower, also reducing revenue by $1.5 million. The average euro-CAD exchange rate was 5% lower in the quarter and 3% lower year-to-date, reducing sales by $2.3 million and $2.8 million, respectively. As such, the total impact of unfavorable foreign exchange movements compared to prior year reduced revenue $3.8 million in the quarter and $4.3 million year-to-date.

Consolidated net income for the second quarter was $12.6 million or basic and diluted earnings of $0.30 per share compared to $9 million and $0.21 per share in the same quarter last year. The EPS change reflects an increase of 43%. Year-to-date consolidated net income was $24.1 million or $0.57 per share compared to the consolidated net income of $20.8 million or $0.49 per share in the same period last year. Free cash flow was $8 million in the quarter and $26 million year-to-date. The consolidated effective income tax rate decreased to 29.2% in the current quarter from 29.7% in the same quarter last year. The year-to-date effective income tax rate also decreased to 30.0% from 30.5%. The effective tax rate was improved by the proportion of earnings from lower-tax jurisdictions and also the reduction of nondeductible losses globally.

Turning to the Automotive Solutions segment. Sales in the second quarter were $106.3 million, an increase of $20.0 million or 23% from the same quarter last year. Year-to-date sales were $214.4 million, an increase of $50.5 million or 31% compared to the same period last year. FX movements reduced the segment revenue by $3 million in the quarter and $3.5 million year-to-date. AFX contributed much of the increased sales with $27.3 million in the quarter and $55.8 million year-to-date. Polytech, Polydesign and Neocon also reflected higher revenue on a combined basis over 2016, with growth rates of 18% in the quarter and 17% year-to-date. ALC revenues were down 37% in the quarter and 25% year-to-date, driven by permanent closure of the African operations and the timing of program turnover in Bulgaria, as Darren mentioned.

As noted on Slides 7 and 8, our Automotive Solutions segment reported higher profitability with pretax profit of $15.0 million in the second quarter, an increase of $3.9 million or 35% from last year. Year-to-date, segment reported a pretax profit of $29.6 million, an increase of $9.5 million or 47% from last year. Much of the earnings growth resulted from the inclusion of AFX in 2017; however, the other divisions also contributed well. In North America and Morocco, stronger sales without materially higher fixed or overhead costs have provided increased earnings. ALC earnings improved due to the African closure, but this was tempered by the reduced earnings in Bulgaria related to the program transition from the BMW 5 series to the gradual launches of Audi and the new steering wheel business.

Turning to Slide 9 and 10. In the Casting and Extrusion segment, revenue was $47.5 million for the second quarter, an increase of 1% from the quarter last year. FX movements reduced revenue by $0.9 million for the quarter. Year-to-date sales were $92.4 million, a decrease of $7.9 million or 8% from the same period last year. The vast majority of the decrease relates to the large mold business, and Darren has already touched on the factors impacting [this softening]. The Casting and Extrusion segment reported lower pretax profit of $5.4 million in the second quarter, an increase of $0.2 million or 4% from the same quarter last year. Year-to-date, the segment reported pretax profit of $10.4 million, a decrease of $31 million from the same period last year. The vast majority of this reduction occurred in the large mold business, which had lower absorption rates, unfavorable margin mix variance and launch inefficiencies in the second quarter. The segment results were also impacted in the quarter and year-to-date periods by modestly lower profit in the Castool group and stronger results in the extrusion die business.

The greenfield businesses in Brazil, Colombia, Thailand and Texas have turned the corner, as the collective profitability of these 4 divisions was positive for the first time. During the first 6 months of 2017, operating cash flow before changes in noncash working capital from operating activities improved to $37.4 million compared to $29.3 million in the prior year. The strong cash generation was favorably influenced by continued healthy EBITDA generation.

Looking at Slide 11. The company's net debt totaled $27.3 million at March 31, 2017, down from $44.6 million at September 30 and approximately $71.0 million when AFX was first acquired in April of last year. Given the EBITDA of $92 million in the trailing 12 months, Exco's net leverage ratio is 0.3x. As such, the company balance sheet allows considerable flexibility for growth and any strategic capital spending and acquisitions via generated free cash flow, $27.6 million of cash on the balance sheet and $65 million of unused availability on the existing $100 million committed credit facility.

That concludes my comments. Chris, perhaps we can transition to the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So you saw a strong growth in Polytech, Polydesign, Neocon. I think you flagged that. It's well above production growth in North America and Europe. I mean, could you give us any insight or particularities on what's driving the momentum there? I mean, is it share gains? Are there particular products that are seeing significant growth? And how should we think about the growth of those businesses going forward?

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Darren Michael Kirk, Exco Technologies Limited - EVP [3]

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So you're right. I mean, the growth has been very strong collectively at those 3 entities. And with volumes being flat, it's really a function of the mix of the vehicles that we're on. And we do have, particularly at Polytech and Neocon, a greater concentration of products on SUVs as opposed to cars. So we -- even if production volumes are flat, we benefit from a mix -- a favorable mix shift. And then we are continuously developing new products at these entities. And we're seeing those products met with success, getting on to existing platforms, and also in many cases, penetrating new customers. So this is a product initiative story, and it's also a new customer penetration story.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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And on the Audi and steering wheel program, I mean, could you update us on where we are in terms of the ramp-up and uptake and then some color on when the ramp-up-related margin headwinds could taper?

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Darren Michael Kirk, Exco Technologies Limited - EVP [5]

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So we're still somewhat early in the process of the ramp-up for both programs. I think that I wouldn't expect them to reach full speed until later this year. So there is a drag on earnings at ALC because of the ramp-up of both of those programs together with the wind-down of the BMW 5 series program. So I mean, I can't give you a magnitude in terms of what's doing on the bottom line, but it is certainly a drag, and that drag will diminish as we go through the year.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And just in terms of timing as well, plant expansions in Mexico and Morocco. I mean, are you thinking that that's a drag until the end of the year as well?

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Darren Michael Kirk, Exco Technologies Limited - EVP [7]

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So the plant expansion in Morocco is well underway. It will be largely complete, if not entirely complete by July. It's being absorbed in the results at Polydesign, which the growth in the revenue and the profitability of Polydesign has been pretty strong. So it seems to be able to be managed within the context of all of that. And at Polytech, we haven't moved forward yet with the vehicle -- sorry, the building expansion. It's possible that may be pushed off into next year at this point. But we're managing within the facility that we have.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay, great. And maybe just sneaking in one last one. There's certainly a lot of political noise out there around the industry. And could you talk about your acquisition pipeline and what type of assets you'd be looking at and maybe which ones you'd be shying away from?

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Darren Michael Kirk, Exco Technologies Limited - EVP [9]

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I'm not leaving questions for anyone else, but I guess, it's okay. So the M&A pipeline, I mean, certainly from a balance sheet perspective, we have the capacity. AFX has been largely absorbed into the broader organization. We are on the lookout for acquisitions. But at the same time, the evolving patterns for trade and tax policies and the like make us want to proceed cautiously with anything in North America. I mean, I certainly wouldn't be expecting any material acquisitions to be happening in the next couple of quarters. But we continue to be on the lookout. Can we let someone else ask a question then, Michael (sic) [Chris]?

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Operator [10]

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Your next question comes from David Tyerman of Cormark Securities.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [11]

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First question is just -- if I look at the revenue, it's been running around $153 million in the last couple of quarters and EBITDA has been in the $22 million, $23 million the last 4 quarters. The discussion seems to be quite positive, yet we don't seem to be making much progress on the actual numbers. I was wondering if you could provide some insight into when you think the numbers will actually start moving up.

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Darren Michael Kirk, Exco Technologies Limited - EVP [12]

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So I guess, there's still a number of moving items here within the numbers where we've got the results of -- sorry, the revenues from South Africa and Lesotho disappearing and the Bulgarian revenues kind of coming down from the BMW 5 series contract. We still have had some pressure on the other side of the business from the casting, sort of the large mold part of the Casting and Extrusion segment. And we think that, that has largely bottomed out in terms of its impact on revenue and profits. I think that you would start to see revenue over the next couple of quarters probably tick higher. But again, there's a number of moving parts there. I mean, we've got strong organic growth in the Polytech, Polydesign, Neocon trio happening. We've got -- AFX continues to move ahead. And then the other parts of the business are going to have some modest growth. But I think it's going to be a slow improvement, but it's not going to be a rapid sense in terms of revenue and earnings, David.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [13]

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Okay. So what's the drag like? I mean, there's lots of positives you described. The thing I mentioned on the revenue side reflected just the last 2 quarters. So South Africa is already out. So I'm just wondering what's dragging the revenues down if you're not growing very much over the next couple of quarters.

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Darren Michael Kirk, Exco Technologies Limited - EVP [14]

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Well, the revenues come down as we kind of lap prior years that had Lesotho and South Africa and the 5 series in it, and it's not being fully compensated from the ramp-up of the Audi and the steering wheel programs yet. So that kind of explains why the revenues aren't improving massively. I mean, I think that on the Casting and Extrusion side of the business, you're going to see some modest uptick in the revenue growth there from the trio of Extrusion, Casting and Castool businesses. But they're heading higher, but it's just -- it's not hugely robust growth.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [15]

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Okay. The other question I had, so your balance sheet is very good, as it often is. I was just wondering, so what do you do with all the free cash going forward? I know you've been doing some selected expansions. But I would think you're going to have quite a bit of free cash flow or maybe you can tell me you're not. Do you use it for M&A, keep it aside for M&A, or does buybacks come into the equation at some point here?

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [16]

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Well, as you noted from our press release earlier in the quarter, we've initiated a normal course issuer bid. But we haven't activated -- or progressed on it yet. But really we're on the hunt for acquisitions as we move forward, David. So we don't have any slam-dunk opportunities in our hand at the moment, but there is a lot of activity out there right now, and we continue to watch and try to find things that fit well and are tuck-unders in our existing product portfolio.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [17]

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Okay, very good. Sounds like keep the powder dry for M&A then is really the focus.

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [18]

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That's a fair comment, yes.

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [19]

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David, can I add, I've never had a problem with having excess cash. It's a wonderful thing, and it puts us in a position to do things as opportunities arise. But I think the best value for our shareholders is not so much the revenue number, but it's the bottom line. And I think our mix of business is changing. I know our mix of business is changing. And the seat cover program kind of inflated the top line, but we have some very good opportunities, particularly in Europe, for organic growth. And it doesn't require -- little to no cash, but it will have significant impact on the bottom line.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [20]

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So are you saying, Brian, that although the top line may not grow super fast, the bottom line could grow a decent amount more?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [21]

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I think substantially from the top. The margin should improve.

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David Tyerman, Cormark Securities Inc., Research Division - Analyst, Institutional Equity Research [22]

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This year?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [23]

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Oh, yes. But you don't -- you take on a new program, David, and all due respect, certainly, the first quarter of a new program, you're not going to make any money. Hopefully, you don't lose any. But we're seeing very significant growth opportunities in Europe and it seems to be consistent with what we hear in the news.

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Operator [24]

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Your next question comes from Neil Linsdell of Industrial Alliance.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations [25]

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So Darren, you mentioned that the -- all the equipment in Newmarket is operational. Are you talking about the first 3 CNC machines and the tool wall, or is there anything planned for the, say, second phase?

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Darren Michael Kirk, Exco Technologies Limited - EVP [26]

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That's correct. That's what I'm referring to, the 3 machines and the tool wall. That's all operational at this point. There is no phase 2 on the drawing board at this point. I think we'll continue to make sure that we're happy with how phase 1 has gone. And by all means, everything we've seen so far, we're very happy. But there's capacity that's created through that, and that capacity still needs to be absorbed before we move forward with phase 2. At some point, that could happen, but it wouldn't be in the next couple of quarters, I wouldn't think.

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [27]

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And as Darren mentioned in his earlier comments, as much as that equipment is functional, it's not operating at full efficiency yet. So there's still a lot of opportunity there.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations [28]

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Yes, I think, at the AGM, we kind of had a little bit of color as far as how much faster the machines were working, how much greater your capacity is. Is there any more detail you can give us on that?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [29]

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Neil, I can tell you that we've a long way to go yet. But we took on a program about 2 or 3 weeks ago for a new-generation V6 engine block and with a new customer, which is big news. We bid at, I think, a 26-week delivery. Had we bid that a year ago, we would have bid 52-week delivery and probably taken over 60. So we won the program at a comfortable price, primarily because of our delivery capability. So I think that really put some meat on the plate.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations [30]

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No, that's good color. And speaking of those new programs, the ones that you're talking about, I guess there's uncertainty what might happen with CAFE standards and the direction in the automotive industry. Are you seeing any increased, I guess, quoting activity or interest on the, say, structural component side that we've been talking about?

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Darren Michael Kirk, Exco Technologies Limited - EVP [31]

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Well, the structural component business continues to move ahead despite, I guess, this newfound uncertainty with the EPA regs. We're still early days on structural. I think that from what we would expect to see over the next year or so, there's not going to be a meaningful shift in the demand for structural. Structural is still going to be happen. These OEMs know that they need to improve the fuel economy. The question is, is how steep is that slope. So they're moving ahead. Structural is moving ahead. We're seeing a number of new die cast machines go in and quotes from various customers around structural. But we're still early days. And so we -- despite the noise around the EPA regs, we do still have confidence that the structural business is going to grow and grow quite significantly.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations [32]

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Okay. So you haven't seen any kind of drop-off in conversations about it or lack of enthusiasm for it? At this point, it's still just basically the same we saw before?

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Darren Michael Kirk, Exco Technologies Limited - EVP [33]

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That's true. To the extent that the EPA CAFE requirements are backed off, I mean, there's mixed implications there. On one side, you could argue that it kind of pushes out the demand for more aluminum going into the vehicle. But I think the other side is that it really pushes off potentially the electric vehicle and keeps the internal combustion engine around longer. So there's -- this has mixed implications.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products and Special Situations [34]

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Great. But you're not -- you're agnostic to the platform, anyway, right? So even if you -- whether it's electric vehicles or gas-powered vehicles, you're still looking at the same opportunities?

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Darren Michael Kirk, Exco Technologies Limited - EVP [35]

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Well, the powertrain demand is higher for the internal commotion engine. Structural, I guess, we would be agnostic.

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Operator [36]

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Your next question comes from Michael Glen of Macquarie.

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Michael W. Glen, Macquarie Research - Analyst [37]

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So as we look at that margin profile in the Casting and Extrusion segment, you highlighted the bottoming last quarter, and we definitely saw some good evidence of that. So it did fall off pretty quickly there as that business came under pressure. So as we look to what that margin should look like going forward, should we -- can you give a sense as to how much uptick we should see or what kind of level we should expect to see out of this business, say, in 1.5 or 2 years?

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Darren Michael Kirk, Exco Technologies Limited - EVP [38]

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Well, that segment used to do -- have EBITDA margin profiles of like 24%, and we're just north of 18% now. I think if you look out a couple of years, it would be our expectation that we can get that EBITDA margin back towards the 24%, maybe not quite there, but certainly comfortably above 20%, approaching 22% kind of thing. And that would be a substantial growth for the EBITDA of that segment.

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Michael W. Glen, Macquarie Research - Analyst [39]

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Okay. And is that -- with getting back there, is that predicated off of a combined strong growth within -- or a combined rebound in the large mold business?

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Darren Michael Kirk, Exco Technologies Limited - EVP [40]

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Yes, the large mold business has, I think, only got upside from here. We've seen some pretty clear evidence that we bottomed out. And we think that, certainly, the only way that margin has to go is up. And so in addition to that, we still have high expectations that we've got some margin expansion opportunities in both the other 2 parts of the Casting and Extrusion segment. The extrusion die business has been benefiting, which is obvious in this quarter from some of the changes that we've made to our processes, and we expect that there's more room to run there. And in Castool as well, it's got a number of new products and initiatives underway that we think will have positive margin improvement. So it would come from all 3 legs of the stool there, Michael.

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Michael W. Glen, Macquarie Research - Analyst [41]

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So some of the -- when -- at the AGM, on the call, you had highlighted the very, very competitive dynamic within that large mold business. So have you seen real evidence that, that should or will alleviate in coming quarters?

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Darren Michael Kirk, Exco Technologies Limited - EVP [42]

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I wouldn't say that the pricing environment has changed dramatically since the last call. I guess, the way I would frame it is that the current pricing environment is stable at a very high competitive level. And so our results are demonstrating the brunt of that. And to the extent that the pricing environment improves and that we continue to get better at our operations, the margin would stand to benefit as a result.

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Operator [43]

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Your next question comes from Peter Sklar of BMO Capital Markets.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [44]

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A question on the large-mold die-cast business, I mean, which is at the trough now. So in retrospect, I'm just wondering if you have any further thoughts on why the large mold had this downturn. Was it these 9 and 10 speed transmission programs were delayed, or were there other issues? I'm just wondering what your thoughts were that caused the slowdown.

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [45]

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Peter, I think, the big influence is the devaluation of the euro. Our order book has not shrunk. In fact, if we look at some numbers of tools, our order book has grown a little bit. The price per tool has declined. But the big -- it's come from European tool builders and 20%, 25% devaluation of the euro.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [46]

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So it's not that they're winning, they're -- it's not that they're taking market share, but rather suppressing your -- I guess, your potential selling prices?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [47]

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Well, I would say that they've probably taken some market share, but the market has grown because of the 7-, 8-, 9-, 10-speed transmissions for an engine block. So they have gained market share. And in gaining market share, they've done at the expense of the pricing.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [48]

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So why are things going to get better, because the euro-Canadian-dollar relationship is kind of where it is?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [49]

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I know nothing about where the currency is going, but when it's all done is what's it cost us to build the product. And that's what we've been investing in. So we cut our cost by 20%, 30%. We are back to our historic norms. The only way to beat these guys is to be better. I think, as I said earlier, we took on an engine block program just in the last 2 or 3 weeks. We cut our delivery times by 50%. I mean, that is going to be reflected in how many hours it takes to build the product. So when we said it's going to be transformational, we were serious.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [50]

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Well, we'll see in 6 months.

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [51]

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Yes, we will.

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Peter Sklar, BMO Capital Markets Equity Research - Analyst [52]

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The other question I have was on the extrusion business. The various extrusion facilities seem to be gaining momentum. And I'm just wondering what's the underlying -- what's underlying that. Is it just general pickup in the U.S. economy, or are there other factors?

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [53]

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No, I think we're doing a better job. We've made significant management changes about 1.5 years ago, very significant, and some willingly and some not so. But we standardized some. We built the product. We've got centers of excellence for design, and it's paying off. I mean, we're building a better product in less time.

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Operator [54]

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(Operator Instructions) Your next question comes from Ben Jekic of GMP Securities.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [55]

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I have 2 questions. Number one is on the Audi contract in Europe. I was under the impression that you guys were a little bit on the disappointed side with regards to what volumes were panning out, yet I think on this call, you're sounding a bit more optimistic. So can you just give me kind of higher-level what's going on with that contract?

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Paul E. Riganelli, Exco Technologies Limited - COO and SVP [56]

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This is Paul, Ben. Yes, so we were disappointed. And the volumes were supposed to be much greater and much earlier. And basically, Audi delayed -- for whatever operational reasons of theirs, they delayed the volumes and the commencement. So I think a lot of that confusion has cleared up over the last quarter. And we have started deliveries. And so now the pipeline is still not what we originally expected, but it's become clearer.

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [57]

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I think, Ben, that the program that this relates to is the new A5 that's just come out, and there's a few different variants of that vehicle, and some of the variants have not come out yet. And there was supposed to be a full launch back in November, December timeframe. But it's been a more gradual launch of the sportback model and the convertible coupe.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [58]

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Right. Okay. Well, you definitely sound more encouraged. And then my second question is with regards to extrusion facilities. I know in the past, you guys were toying the idea that your tax rate in the future, especially as these kind of foreign locations start producing -- I mean, in the meantime you added AFX so that kind of solidified the tax rate kind of more in the -- more on the North American level of things. But are you expecting that with the ramp-up in Thailand and Europe that at some point we could see the reduction in your tax rate?

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R. Drew Knight, Exco Technologies Limited - CFO, VP of Finance and Secretary [59]

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Yes, I think that's a fair comment. The other thing that's hurt us historically was we were losing money in South Africa, and we weren't tax-effecting those losses. And so now that's gone. And so the balance of earnings has shifted as some of the different divisions have started to improve, and it's not all U.S.-centric as it has been for the past couple of years. But it's also the elimination of nondeductible losses that I mentioned earlier.

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [60]

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But also, Drew, our biggest growth we're going to see is going to be in Europe. And Bulgaria is a 10% flat tax. In Morocco, I think it's 8.5% tax. And in Thailand, we have an 8-year tax holiday. So I think that will, over the coming year, have a profound impact on our tax rates -- overall tax rates.

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Darren Michael Kirk, Exco Technologies Limited - EVP [61]

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As would of course, if Trump gets his way, and reduces the corporate tax.

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Brian Andrew Robbins, Exco Technologies Limited - CEO, President and Executive Director [62]

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Yes.

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Operator [63]

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There are no further questions at this time. I return the call to our presenters.

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Paul E. Riganelli, Exco Technologies Limited - COO and SVP [64]

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Perhaps, we can terminate it at this time, Chris.

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Operator [65]

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This concludes today's conference call. You may now disconnect.