Ladies and gentlemen, thank you for standing by, and welcome to Exco Technologies Limited First Quarter Results 2022. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to turn the conference over to your speaker for today, Darren Kirk, President and Chief Executive Officer. You may begin.
Thank you, Tawanda. Good morning, ladies and gentlemen. Welcome to Exco Technologies fiscal 2022 first quarter conference call. I am Darren Kirk, Chief Executive Officer of Exco. I will lead off with an operations overview. Matthew Posno, our Chief Financial Officer , will then review the financial results before we open the call for questions. Before I begin, I would like to make some comments about forward-looking information. In yesterday's news release and on page two of the presentation that we have posted to our website, you'll find cautionary notes in that regard. While I won't repeat the contents, I want to emphasize that they apply to this discussion today. It was a challenging quarter with several factors catching up to us. Lower vehicle production volumes due to ongoing chip shortage was the biggest contributor.
However, labor disruption due to the greater spread of the Omicron variant, widespread inflationary pressures, inventory destocking, broader supply chain issues, and logistical constraints also contributed. I want to emphasize that while the quarter was challenging and while our results were well below our recent performance, nothing has changed fundamentally for Exco or our medium-term outlook. We expect much stronger results in the quarters ahead. In fact, with that in mind, I am very pleased to announce that yesterday our board of directors approved a 5% increase in our dividend to an annualized rate of CAD 0.42 per share. This is the fourteenth time Exco has increased its dividend in the last 13 consecutive years. I'm not sure how many other companies have done this, but I do know it's a pretty exclusive club.
Despite current headwinds, we remain encouraged by the underlying trends across our various businesses that will contribute to our future growth. I've mentioned several times before, the automotive industry's transformation towards electric vehicles and focus on reducing emissions is extremely positive for Exco's tooling businesses. As OEMs make the change to greener vehicles and strive for greater manufacturing efficiency, there is an increased use of light metals and the demand for our associated tooling. There is also increasing demand for technical expertise at the supplier level as products become larger and more complex. More broadly, we also expect to benefit from the trend towards larger and more complex castings across the industry as all OEMs seem likely to pursue this playbook. In addition, there is a heightened focus on efficiency by all manufacturers for sustainability initiatives that will be very positive for the entirety of our tooling business.
In anticipation of these trends, we continue to make sizable investments in order to better position our various businesses to capture these opportunities. We are investing record sums of CapEx this year across several initiatives, and we made great headway on advancing these projects during the quarter. By this point, I think the constrained supply of microchips impacting the OEM's ability to manufacture vehicles is well understood. Most industry players and analysts do, however, expect an improvement in supply as we go through 2022. IHS, for example, is anticipating a 17% increase in vehicle volumes in 2022 and a further 11% in 2023. It is important to understand that underlying demand for vehicles remains strong. This is evidenced by record high prices for used vehicles, significantly depleted dealer inventories, and an aging of the on-road vehicle fleet to historic levels.
Turning to the quarter and first looking at our Automotive Solutions segment, overall vehicle production volumes in North America and Europe were down about 20% year-over-year. This drove our segment revenues lower, but we were additionally impacted by unfavorable vehicle and product mix shift, inventory destocking of Exco's products in the supply chain, as well as our own operational and logistical constraints. New program launches contributed to our results this quarter, including one key new program where we are supplying sizable content on a fleet of commercial EV vans. This program will begin to ramp up more significantly in our third fiscal quarter and continue for several years. Moreover, we will continue to ramp up several other new key programs through 2023 that will provide outsized growth relative to our historical performance. Meanwhile, quoting activity and new program awards remains very decent.
We are seeing a number of sizable new opportunities, particularly with electric vehicles from both new and established OEMs. On the cost side, our margins suffered from greatly reduced overhead absorption due to the lower volumes. Employee severance costs were also a factor, although we also carried extra costs as we have retained surplus labor in anticipation that demand levels will rebound in the coming quarters. Fluctuations in the forecast versus actual order releases were again problematic this quarter. This occurred as our customers juggled their own production schedules in response to the chip shortage issue. These challenges were pushed down to the supply base and placed strain on our own production planning process. Moreover, raw material cost increases picked up, and we faced various supply chain challenges of our own.
These elements required us to be nimble and also absorb a lot of extra costs related to overtime, material substitution, and expedited freight. Pricing remains tough in this business, and there is limited ability to use this tool as a lever. We did, however, take pricing action where possible to recover higher input costs. We will see the impact of these actions in our second quarter. In our Casting and Extrusion segment, our top line held up fairly well. In fact, we recorded modest growth over the prior year. The extrusion market remained strong this quarter, with high demand across a number of end markets. Our extrusion tooling ultimately supports a diverse range of applications, including residential and industrial building and construction, solar panels, consumer durable products, and various modes of transportation.
This quarter, we again demonstrated we could keep up with the sizable demand growth by utilizing equipment and labor more efficiently while leveraging the harmonized manufacturing process of our numerous group facilities. With regards to the latter, this initiative has allowed us to centralize certain processes such as programming and design and utilize our capacity on a network basis. All of this keeps our cost low, capacity high, and provides us with the ability to manufacture a quality product in a standardized manner. We are making significant strategic investments to further shrink lead times, drive down our operating costs, and insource more of our own heat treat requirements, all while reducing our environmental footprint. The die-cast market, which is driven by automotive production, however, softened materially in the quarter as lower vehicle production was magnified by inventory destocking.
This negatively impacted demand for Castool's consumable die-cast tooling while the Large Mould Group suffered from reduced rebuild work. Nonetheless, we achieved a number of program wins that will benefit future quarters. In fact, we achieved record levels of order intake in our Large Mould Group, ending the quarter with the highest backlog in our history. We are very bullish on the long-term outlook of this business, given the growing demand for large and complex die-cast components, coupled with our leading market position, full service capabilities, and view that supply chains will become more localized over time. As well, our additive tooling business continues to perform very strongly, contributing record levels of sales and order intake during the quarter. Additive tooling is a critical differentiator providing us with an unmatched competitive edge. We are extremely optimistic on where this business will go.
Looking at the Casting and Extrusion segment margins, we experienced weakness this quarter from levels that we have otherwise come to expect. Segment margins were impacted by unfavorable product mix, rising input costs, higher freight charges, and labor disruption due to COVID, all of which outpaced ongoing efficiency gains. Front-end losses at Castool's new plant in Morocco added to the margin pressure this quarter as revenue was only started to be generated towards the end of the quarter. We did take pricing action where possible through the quarter to protect our margins and expect the impact will be evident in our next quarter. We reached an agreement to acquire Halex, Europe's second-largest manufacturer of extrusion dies. There's not really much more of an update at this time.
We continue to work towards closing the acquisition this spring and welcoming Halex employees to Exco at that time. That concludes my operations overview. I will now pass the call to Matthew to discuss the financial highlights of the quarter. Matthew?
Thank you, Darren. Good morning. Consolidated sales for the first quarter ended December 31st were CAD 101 million, a decrease of CAD 20.4 million. Over the quarter, the consolidated impact of exchange rate movements reduced sales by CAD 3.5 million. Adjusting for the impact of foreign exchange, first quarter sales at our Automotive Solutions segment decreased CAD 18.6 million or 24%, and the Casting and Extrusion group sales were up CAD 1.6 million or 4%. Consolidated net income for the first quarter was CAD 2.7 million or earnings of CAD 0.07 per share, compared to CAD 10.9 million or CAD 0.28 per share in the same quarter last year, a 75% decrease in net income. The effective income tax rate for the current quarter was 26%, compared to 22% in the prior year period.
The income tax rate in the current year quarter was impacted by geographic distribution and foreign rate differentials. The Automotive Solutions segment experienced a 27% decrease in sales in the first quarter or a decrease of CAD 20.9 million to CAD 55.2 million. The decrease in sales is attributed to lower OEM production volumes due to COVID-19 constraints, related supply chain disruptions, shortage, including a shortage of semiconductor chips, unfavorable vehicle production mix, logistics challenges, and the negative impact of foreign exchange. First quarter pre-tax earnings in the Automotive Solutions segment totaled CAD 3.4 million, which is a decrease of CAD 8.2 million or 71% over the same quarter last year. The segment's lower pre-tax profit is due to the 24% reduction in sales, causing lower overhead absorption and higher material, logistics, and labor costs.
The Casting and Extrusion segment recorded sales of CAD 45.8 million in the first quarter compared to CAD 45.3 million last year.
An increase of CAD half a million dollars. The Extrusion Group experienced strong sales at locations reflecting steady demand for extrusion tools and market share gains. The Castool and Large Mould Group's sales were down during the quarter due to the same supply chain disruptions caused by the semiconductor shortage negatively impacting automotive vehicle production, lowering demand for consumable tooling for die casting and rebuild work for molds. The Large Mould Group quoted and was awarded a number of programs from current and new customers in the quarter. As a result, inventories and backlog are increasing. Pre-tax earnings in the Casting and Extrusion segment declined by CAD 2.6 million or 7% over the same quarter last year to CAD 4.6 million. The impact of inflationary pressure on raw materials and transportation, combined with lower overhead absorption at Castool and Large Mould reduced pre-tax profit.
Exco generated cash from operating activities of CAD 8 million during the quarter, and CAD 5.2 million of free cash flow after CAD 2.8 million in maintenance fixed asset expenditures. This cash flow, together with cash on hand, was more than sufficient to fund fixed assets for growth initiatives of CAD 8.2 million and CAD 3.9 million of dividends. Exco ended the quarter with CAD 11.6 million in net cash and CAD 35.3 million in available liquidity, including CAD 26.3 million of balance sheet cash. Exco's financial position remains very strong. As such, the company's balance sheet and availability under the existing credit facility allows considerable flexibility to support strategic initiatives like our Halex Extrusion purchase announced in December 2021.
Our strong financial position, combined with our free cash flow, creates a foundation for management to pursue high value growth capital expenditures, dividends, and other opportunities that may arise. That concludes my comments. We can now transition to the Q&A portion of the call.
Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Ocampo with Cormark Securities. Your line is open.
Good morning, everyone.
Morning.
Morning, David.
Darren Kirk, I'm just curious, what percentage of the contracts that you guys have in place were you able to reprice? Just thinking about a more higher level, when you combine that with sort of that operational efficiencies that you guys are looking for, are you guys able to offset that inflationary pressure and hit your 15% target, or are we thinking more longer term where we need to see some of these contracts roll off?
I presume you're talking about the Automotive Solutions segment.
Yeah, that's right.
Yeah, you know, a lot of that business is kind of fixed price work that continues for a number of years. You know, you kind of are exposed to rising raw material costs. You know, our path back to kind of a 15% segment EBITDA margin certainly remains very achievable in our minds. That path includes kind of first getting back to normalized sales levels and then having the benefit of the new program launches for overabsorption of overhead that we plan through the next at least couple of years.
You know, there are pockets of products within the segment where we do have some pricing power, and we have pursued that. You know, it's probably the minority of products, and the rest you have to offset with efficiency gains, which we continue to do. There are other aspects such as LTAs or long-term pricing adjustments, where you know have an obligation to reduce prices through the program. You know, with pushback, we expect that you know we'll be successful in not taking those reductions. You know, that's kind of at a high level how we think about the impact of rising costs in that segment.
Okay. Understood. A lot of the discussion over the last few quarters has been on your Large Mould division and the impact on sales from the shift to EV. One area that we haven't really touched on is the margin profile. Are the molds for EV in your view, you know, similar to transmissions and engine blocks, or could they even be higher than where your legacy business is today?
Yeah, I wouldn't say that there is, you know, a reason to expect a dissimilar margin for EV molds as opposed to powertrain. I mean, just generally, as molds get larger and more complex, it reduces the number of players that can effectively compete in the space and requires much more sophisticated engineering and technical depth. You know, you would expect that that would be accompanied with higher value add over time. We're certainly not modeling that in. I think that the logic holds together.
Okay. Last one for me. What kind of ramp can we expect at the new Castool facility? Is it something similar to what we've seen with the other greenfield facilities where, you know, it takes a couple quarters to get up to profitability?
Yeah, that's right. I mean, there's certainly a few quarters of drag in the profitability. By the end of the fiscal year, we would certainly expect that facility to be at least EBITDA breakeven, if not better. Our five-year target that we have disclosed of realizing at least CAD 30 million of revenue between Castool's plant in Morocco and then their new plant in Mexico by the end of that timeframe certainly holds true.
Okay. That's it for me. I'll hop back in the queue. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Peter Sklar with BMO Capital Markets. Your line is open.
Yeah. Good morning, Darren and Matthew. My first question is, like you've done a really good job explaining, you know, how the earnings deteriorated year-over-year. I would just like to have a little bit of discussion versus quarter-over-quarter versus the fourth quarter. Like, if you look at vehicle production volumes, like they were, you know, stronger global vehicle production volumes. North American vehicle production volumes were stronger in Q1 than they were in Q4. Like, the earnings of the company in both segments really deteriorated rapidly, you know, or significantly versus the fourth quarter. I'm just trying to figure out what has changed since the fourth quarter, because arguably, you know, the backdrop was pretty bad and was even worse in the fourth quarter, at least in terms of vehicle production volumes.
Yeah, it's a good question, Peter. I would explain that we were more so impacted by inventory destocking in our first quarter than the fourth quarter. You know, that concept has really come to a head during our latest quarter. You know, just to kind of explain that, you know, if you're running call it six die-cast machines, you might have 12 molds, six in production and, you know, six backup. As volumes go down, you know, you first deplete your backup dies rather than adding new dies for rebuild. We really saw the impact of that this quarter.
In fact, we only shipped one rebuilt die in the quarter, which is highly unusual for us. I guess the converse of that is on the way up, not only, you know, do you get the benefit of higher vehicle production, but then you get the inventory replenishment that needs to occur. With our strong order flow that we saw in the quarter, rising to record backlog in the Large Mould Group, we certainly think and expect that we're at the front end of that rebound.
Okay.
Similar dynamics would apply to Castool's die-cast consumable tooling components, which did see a more sizable dip this quarter than what we saw in prior sequential quarters.
Right. Okay. Can you talk a little bit about plant labor? Have you had trouble getting labor in the plant, and has that disrupted your operations?
Yeah, for sure. I think that phenomenon is pretty widespread across all entities. It has been exacerbated by the Omicron variant in the last quarter, where you know there were some weeks where 20% of the labor or more was out due to that factor. It's a continuing challenge to just find people. That is compounded by just the disruption that's occurred due to COVID. You know, we continue to work against that. It forces you to think about how you produce things, and ultimately you need to become more efficient.
I think that one of the benefits that we've had over the years is we've added a lot more equipment, and we really haven't increased our headcount. We have become more efficient, and we'll continue to do so.
Darren, just back on this quarter-over-quarter theme, like I understand you gave a good explanation why the, you know, the tooling businesses did worse, but also Automotive Solutions did worse versus the fourth quarter. You know, vehicle production volumes were higher in the first quarter than the fourth quarter. What happened there?
That you know is similar. Inventory destocking, I think, was a big factor in that, and then labor disruption as well. There has been some elevated raw material and input cost inflation that we have taken some measures to reverse. As we've indicated in our comments and in the news release that we expect to see the benefit of that in our second quarter.
Yeah. Peter, another component that we look at is mix between different locations, and we don't get into that level of detail in these calls, but we've had different mix of, you know, production might have been up in certain areas, but depending on how it fit our mix and our production and our locations, that also caused some challenges there too.
Okay. Just my last question is, in the write-up, you talked about the additive manufacturing business. I don't think I've heard that wording before. What is that?
That's our 3D printed tooling components. We'd love to have you up to our Newmarket plant, but that's been a very strong growth business and differentiator for us. What we're talking about there is making parts of the mold components by printing them with steel. We basically print a steel component, and that enables us to have water lines and cooling lines that follow the contour of the mold. We can target hotspots in the mold much better using 3D printed components than making those components traditionally.
That has an overall very positive impact on the cycle time and other measures such as scrap rates of the casting process. We are leaders in this business. A couple of years ago, we won the Automotive News PACE Award in recognition of our leadership of this business. We're seeing greater and greater traction from many customers. We use these additively produced components in our own molds and we also sell some of them as kind of replacement components for mold rebuild. It's a very exciting part of the Large Mold Group, and we expect it will have you know very strong growth over the coming years.
I understand. Is it like a prototype tooling, or is it a prototype part?
No, it's a production tooling.
Oh, I see.
They're used in the molds, and in more and more of our molds. In fact, most of them now have 3D printed mold components in them that serves to improve the efficiency of the overall mold.
Interesting. Okay, thanks. That's all I have.
Thanks, Peter.
Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. I'm showing no further questions in the queue. I would now like to turn the call back over to Darren for closing remarks.
Well, thanks everyone for your time this morning. We look forward to speaking to you again next quarter. Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.