Darren Kirk - Chief Operating Officer Drew Knight - Chief Financial Officer Brian Robbins - President and Chief Executive Officer

Michael Doumet - Scotia Bank Nav Malik - Industrial Alliance Ben Jekic - GMP Securities Peter Sklar - BMO Capital Markets Michael Glen - Macquarie

Good day, ladies and gentlemen and welcome to the Exco Technologies Limited Fourth Quarter Results 2018 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Mr. Darren Kirk, Chief Operating Officer of Exco. Sir, you may begin.

Thank you, Jimmy. Good morning, ladies and gentlemen. Welcome to Exco Technologies Limited fiscal 2018 fourth quarter conference call. I am Darren Kirk, Chief Operating Officer of Exco. I will lead off with an operations overview. Drew Knight, our CFO will then review the financial results. Brian Robbins, our President and CEO is also present and will participate in the Q&A session. There are number of analysts, shareholders and brokers on the line with us today. In addition, the calling 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 posted a short presentation that we will reference this morning. We welcome all participants. The format of this conference call will be the same as in the past. After the presentation, we will take questions. The call will end at about 10.40 and I ask that any caller limit themselves to two questions. When you speak please identify yourself, so we know who is talking. You should have all received a news release by now. If not, it is available on our website at www.excocorp.com or www.sedar.com. Before I 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 will find cautionary notes in that regard. While I won’t repeat the contents of the cautionary notes we do claim that protection for any forward-looking information that we might disclose on this conference call today. Turning to the quarter, I would summarize our overall results as very decent measured by earnings per share of $0.27, which was 50% higher than the prior year quarter. This marks our fourth consecutive quarter of sequential earnings growth and record results for any fourth quarter in Exco’s history. Just as important we demonstrated meaningful operational progress on many fronts which will benefit our future results. This progress has instilled us with more confidence than ever that Exco will achieve record earnings in the year ahead. For more detail on the quarter, I will start with the European operations within our Automotive Solutions segment on Slide 4. This of course represents the combined results of Polydesign in Morocco and ALC in Bulgaria. These operations contributed strongly to our improved results this quarter despite incurring substantial front-end operating cost associated with our many repositioning and growth activities. This is obviously quite the reversal from prior year periods when our European parts businesses have generally recorded operating losses. At ALC, we continued to execute on our turnaround initiative. Specifically, we have now moved the vast majority of non-seat cover programs as well as about 20% of the BMW mini-seat cover business out of Bulgaria and over to Polydesign in Morocco. By the end of next month, ALC’s operations will consist almost entirely of the BMW mini seat cover programs. The only exception to this will be one small program, which is housed in its own facility for which our participation will end by June 2019. We expect the more streamlined operations at ALC will enable the development of a workforce of higher overall quality and contribute towards our unwavering goal of restoring ALC to sustained profitability. Attainment of this goal however will still require ongoing price support from our primary customer which continued this quarter. Discussions with this customer to make recent price increases permanent remain on focus. However, we have not yet come to a resolution. In the interim, we take some comfort in the pricing support we have received as an indication of value in the supply chain to which it contributes. Moving on to Polydesign in Morocco, our operations there continued to perform very well with solid organic revenue growth driven by programs transferred from ALC and new program launches including takeover business from other Eastern European based suppliers as well coding activity for additional business remains extremely active at poly design. Our available capacity however is somewhat limited and we are being very selective in whatever we pursue. Nonetheless, we do own the last piece of vacant land in our industrial park which is adjacent to our existing facility. With these details in mind, we are currently evaluating plans to expand our footprint as much as possible. This could translate into roughly 50% increase in poly design’s building square footage to a total of about 330,000 square feet. Back to North America on Slide 5, the combined results of our Polytech, Neocon and AFX operations continued to experience softness this quarter with a combined revenue reduction of 5% compared to Q4 last year. Our overall North American light vehicle production volumes were relatively flat compared to the prior year although the trend away from passenger cars and towards trucks and utility vehicles remained clear. Our overall results continued to be hurt by these trends, although with decreasing magnitude. The main factors that contributed to lower sales this quarter were consistent with those experienced through most of the year. Those factors include isolated pricing pressures, modestly lower demand for certain of our accessory products, program launch timing and our focus on higher margin business. The good news however is that, the negative impacts from these pressure points has mostly been felt. Looking forward we expect the launch of several new programs and reduced pricing pressure which should enable our North American parts businesses to return to a trend of revenue growth through 2019. Our underlying operating margin for our North American parts businesses also suffered this quarter. Price pressures and higher import costs contributed, however operational disruption associated with flawed execution by a key supply chain partner was also a significant factor. We believe we have mostly resolved this issue. However, there will be some ongoing impacts in our first quarter albeit to a much lesser degree. Prospectively, with these issues result material price increases now mostly absorbed and the anniversary of various cost increases reached, we believe the segment’s margins in North America will begin to recover. Looking at our Casting and Extrusion segment, I will start with a general comment on the U.S. steel tariffs. As you know aluminum tariffs don’t directly impact us as those costs were incurred by our customers for products they make with our tools. But as it relates to steel tariffs they do impact about 30% of our tooling business which is the percent of revenues derived from our operations located in the U.S. within the segment. In most cases we are passing on 100% of the tariff to our customers although there is still a modest drag on overall profitability and certainly margins. On to Slide 6, our extrusion group once again demonstrated very strong results during the quarter. Market fundamentals remained firm and our five plants collectively experienced solid demand growth. Our harmonization initiative is now essentially complete. However, we will continue to realize the benefits of improved efficiency for several quarters to come. We are now very focused on improving the performance of our extrusion operations in Brazil and completing the construction of our new plants in Mexico. We expect those new plants will be operational by early calendar 2019 enabling us to better service the local markets there and providing meaningful opportunity for growth. Turning to Castool, sales were noticeably higher in the quarter as demand for the group’s capital equipment continued to rebound. Profitability was also up sharply as the group benefited from select price increases implemented earlier in the fiscal year meant to counter rising input costs as well Castool’s operations in Thailand continued to season reflected by higher sales and profits over the prior year quarters there. Looking forward, we believe Castool’s product portfolio is very well positioned for continued success with many leading products in both the die cast and extrusion end markets. Lastly, turning to our large mould group on Slide 7, revenue growth was strong as we continued to execute on our healthy order backlog. Profitability within the group however continued to suffer as we incurred higher costs and expected to meet our delivery requirements. These higher costs were driven by ongoing inefficiencies with our new manufacturing process, but also a few difficult programs with incurred increases losses towards program completion. We expect – with respect to our new manufacturing, so progress continues albeit at a pace slower than we would like. Nonetheless, we continue to move in the right direction with tangible results. Approximately, 60% of our insert volumes are now going through the cell and we expect this will increase to 75% by the end of next month. This will enable us to finally begin reducing our cost structure which remains burdened by our dual manufacturing process. As well, we expect recent problem contracts will mostly conclude by the end of our first quarter setting the stage for earnings improvement through the remainder of the year. That concludes my remarks. I will now ask Drew to discuss the financial highlights from the quarter. Drew?

Good morning, ladies and gentlemen. My comments will cover Slides 9 to 14 of the presentation. Consolidated sales for the fourth quarter ended September 30 were $139.5 million, an increase of 6% or $8.1 million compared to last year. Full year consolidated sales were $575.6 million, a decrease of $8.6 million or 1.5% from last year. The significant fluctuations in the U.S. dollar have impacted Exco’s results during Q4. It has increased the Canadian dollar value of U.S. dollar denominated sales in the quarter and overall FX increased sales approximately $4.3 million. Otherwise, $4.7 million of the increase is attributable to the tooling group. As Darren noted, the extrusion group harmonization effort has improved performance and as such the Michigan and Texas operations have increased revenue substantially versus 2017. Castool has also increased revenue as many of their innovative products have gained market share while the Large Mould Group revenue was also higher. In the Automotive Solutions Group, FX adjusted revenue in Q4 declined $0.8 million versus 2017. As Darren noted, revenue increased in Europe. However, this was mostly offset by declines in North America and this story is consistent on a full year basis also. Consolidated net income for the fourth quarter was $11.6 million or basic EPS of $0.27 compared to consolidated net income of $7.5 million or basic earnings of $0.18 per share last year, an EPS increase of 50%. This is a record Q4 result for Exco. While there were business improvements during Q4, the net income also improved by FX and a reduction of the effective tax rate from 27.4% last year to 18.7% this year. Though the tax rate was helped by the U.S. rate reductions, it was also helped by the reduction of losses that are not tax affected and the proportion of earnings in low tax jurisdictions. EBITDA was up 27% or $4.3 million to $20.1 million from $15.8 million in 2017. As noted on Slide 11, the automotive segment EBITDA improved $3.7 million, the tooling group increased $0.3 million and FX increased EBITDA to $1.2 million and the corporate segment decreased $0.8 million. As Darren noted, the improved automotive results occurred in Europe with Polydesign’s continued strong execution and ALC’s temporary price increases. Full year consolidated net income was $42.3 million compared to $42.5 million last year and for both years the basic earnings was $1 per share. Turning to the Automotive segment on Slide 12, EBITDA increased 40% in the fourth quarter versus last year. The EBITDA margin increased 450 basis points as ALC improved pricing and operating efficiencies to record a profit compared to losses in the prior year. Also profits in North America increased due to a gain on sale of a building, while the three businesses in North America collectively experienced reduced earnings compared to 2017. On Slide 13 in the Casting and Extrusion segment, revenue was $50.5 million for the fourth quarter, an increase of $6.2 million or 14% versus Q4 2017. Year-to-date sales were $199.9 million, an increase of $16.7 million or 9.1% over last year. The extrusion business and Castool businesses experienced increases while the Large Mould Group declined. Casting and Extrusion segment reported higher EBITDA in the fourth quarter $6.9 million, which is an increase of $0.9 million or 14% from last year. For the full year, the segment reported EBITDA of $30.4 million, a slight increase from $31.2 million in 2017. However, the 2018 results were burdened by an $800,000 loss on asset disposals incurred during the extrusion harmonization strategy. Extrusion and Castool had solid earnings growth in both Q4 and full year. However, this was mostly offset by further declines in the Large Mould Group caused by inefficiencies in the ramp up of the new manufacturing cell and losses experienced on contracts being concluded early in fiscal 2019. Cash flow was strong for the full year. Cash flow from operating activities improved $0.6 million to $65.3 million for 2018. Though this is somewhat offset by $4.3 million in CapEx or $4.3 million increase in CapEx and the temporary $18.1 million increased cash usage for changes in working capital. The net result is free cash flow of $27.4 million for the year and $3.5 million for the quarter though we expect the pace of CapEx to continue into Q2 2019 to launch Extrusion Mexico we expect to see some turnaround in the working capital investment. As noted on Slide 14, Exco’s financial position remains very strong. As such, the company balance sheet and availability under the existing credit facility allow considerable flexibility to support any strategic capital spending and acquisition activity as well as dividends and share buybacks should opportunities arise. That concludes my comments. We can now transition to the Q&A portion of the call.

[Operator Instructions] Our first question comes from Michael Doumet with Scotia Bank. Your line is now open.

Yes, hi. Good morning guys.

Good morning Michael.

Yes. So on ALC, it feels like there is still number of unknowns there. First, can you discuss maybe the nature of the bad debt expense in the quarter there? I mean if there should be concerns going forward? And second, thinking about the temporary price increase and the reduced footprint, how should we think about ALC into 2019?

Well, with respect to the bad debt expense that was a one-time item at the conclusion of the Audi program. So that is a non-recurring event and we don’t expect any risk over and above normal business risk. And Darren, do you want to handle the other?

Yes. I guess further thought on the bad debt expense, I mean, that bad debt expense was something that we took the charge on in the quarter, but it’s really a customer dispute and we think at the end of the day it’s customer throwing its weight around at the end of a program and we are taking every measure possible to recover that amount. So with regards to ALC more broadly what we have tried to do is really narrow the scope of the activities of that entity and we have moved all the complexity but virtue of the diversified programs to Morocco. And really what’s going to be left at ALC is an operation that will be probably half the size of what it was before that will enable us to get access to the labor force that we need in order to have efficient operations, but even with that those measures that we are going to take there that we are taking we do need a price increase to reach sustained profitability and those discussions continued to achieve that goal on a permanent basis but we are not just there yet, but in the interim, we are gaining sufficient price to enable ALC to remain solvent and remain liquid.

Yes, that’s helpful. Thanks. And maybe just to follow-up there just if it’s possible at all to size up the Bulgarian operation just so we can better get a sense for in 2019?

Well that operation what’s left would probably have revenue of about CAD$60 million in 2019.

Thanks, Darren. And maybe just the second question, so Extrusion and Castool appear to be lining up well going into 2019, you could also comment that Large Mould should be at an inflection point going into the year, I think Q1 could be a little soft. Anyway you can help us just in terms of the margin expectation for the segment as a whole and any color around the cadence for the margin improvement there whether it’s more in the first half or in the second half?

Well, certainly the Large Mould’s contribution will occur in the second half. The drag at the front end is the completion of some of these challenging programs that we have, but we expect those will be substantially complete by the end of our first quarter, so large mould will contribute increasingly in the second quarter and through the remaining half of the year. With respect to extrusion and in Castool I think their improvement will be more progressive through the year. So hopefully that helps you a bit.

Hey, it does. Thanks a lot.

Thank you. And our next question comes from Nav Malik with Industrial Alliance. Your line is now open.

Yes. Hi. Thanks. Good morning. I just wanted to ask first on CapEx I guess for the year, first of all it was about $20 million for the year and I think earlier the guidance that you had provided was – that was coming around sort $29 million is there any – maybe just comment on where your CapEx came in and if it was light why it was light?

I guess to $20 million is perhaps net of the building sale. But also some of the Mexico extrusion facility plant CapEx has bled into fiscal ‘19 out of ‘18. And I think if you go back over time you will see that we have a history of falling short on our CapEx plans.

Okay. And then I guess following on that what – do you have a number that you can provide us for 2019?

I will give you a number that probably won’t reach, but it’s we are planning for about $35 million in fiscal ‘19 and that really reflects three primary principles of projects. And one of those is the conclusion or completion of the Mexican extrusion plant. The second is the large capital program at our Castool facility to potentially install a heat treat facility which will provide Castool with reduced operating costs and quality benefits as well as additional capacity. And then the third element is unlike the building expansion that we are going to pursue in Morocco so that poly design can keep up with the expected growth there.

Okay, that’s great. That’s very helpful. And I just also want to talk maybe in terms of what’s happening industry-wide is of course we saw the announcement with GM, first I guess I am wondering if there is any sort of direct implication for your business?

There is no direct implication from the GM announcement on our business. I think GM is taking its actions that you would expect at this point in the cycle. We still see things overall is being relatively healthy industry volumes are I will call it flattish. Passenger cars are now down to about 30% of overall volumes and our mix has improved on that front as well where we used to have a wider gap between our passenger cars and we were more exposed to passenger cars in the market that gap has come down. So we think that the overall industry fundamentals are quite sound.

Okay. And then I mean I understand on the cars versus the trucks and SUVs that you guys are reducing the shift or I guess matching your – trying to match your focus with the industry trends, I am wondering in terms of one of the other things obviously GM and other companies in the industry are focused on is on electric vehicles and on autonomous vehicles, can you give us a sense maybe of where or how you might be able to sort of realign or shift some of your focus to capture those particular trends?

Well, in the Automotive Solutions segment we are really agnostic to power trains, if you are going to have an interior turn component it’s not going to matter whether it’s electric vehicle or internal combustion engine vehicle. Where the difference may hit is on the Casting and Extrusion segment, but even there I think the trend towards electric vehicle provides one of opportunity and that aluminum is finding its way into more cars regardless of power train. It’s particularly true with respect to the electric vehicle because of the way that the batteries and the need to maximize the range of the vehicle. So whether power train is ICE or electric, we see significant growth in the amount of aluminum going into these vehicles and therefore the demand for the tooling that we provide.

Okay, fair enough. Thanks very much.

Thank you. Our next question comes from Ben Jekic with GMP Securities. Your line is now open.

Good morning. Two questions for me. One is on the tax rate this quarter it came much lower than I had expected, is this a sustainable trend that more and more profits, especially now with Thailand being in good shape and that more and more profits are coming from these low tax jurisdictions rate and what would be the tax rate that we can kind of comfortably use?

Yes, I think, going forward Q4 was maybe unusually low and part of that was driven by activities in Bulgaria, but going forward, it’s probably closer to 20%, 20% to 21% and you are right, many of our former greenfields are now black ink and doing well and have low tax rates such as Thailand.

Okay. Well, that’s encouraging. And then my second question is on potential acquisitions, I am getting the sense that this is not something that’s extremely pressing, but how is – what is the mindset that you guys have in terms of like what you are going to go after and especially like given that some of the recent acquisitions are kind of taking either have not worked as well as you had hoped or are taking some time to ramp up like is there anything in the methodology on how you evaluate the targets is anything changing or is it just sort of delayed until later?

So I guess I got a few thoughts on that, Ben. The first is that acquisitions do remain a focus for us we look periodically, but having said that, we are very selective. I think that one of the things that drives that selectivity is the amount of opportunity that we have for internal growth over the next year as I mentioned in my comments about CapEx, we have three significant projects that will consume some capital in operational resources, but then provide meaningful growth opportunities on the back end of that. And so we have had tremendous success with greenfield investments over the years and we feel very comfortable with respect to making those investments and to the extent that we have those opportunities on the horizon here, I mean that’s been our best use of capital. And so I expect us to focus on that. Also another part of the thought process is we want to pick the ALC before we go off and make any other meaningfully sized acquisitions and we are getting our hands around the neck of the problem there and we should hopefully have some conclusion in the next couple of quarters or so, but that’s some backdrop that drives our thinking around acquisitions at this point.

Ben, could I just add, I mean ALC was not a good acquisition and we acknowledged that and we screwed up, but we have done some very good acquisitions. And I mean Polytech was an acquisition, Neocon was an acquisition, AFX and I am surprised it’s somewhat stigmatized these days, yes, they were more exposed to cars rather than SUVs and trucks, but they are adapting rapidly and if I had to do it again by ALC and I would pay the same amount of money we paid for excuse me AFX. So yes, we screwed up, but I don’t know anybody who does the acquisitions who hasn’t screwed up, but we have done some very good ones as well.

No, no, I meant more once in the last 3 or 4 years. And then just the last question to just to make sure I heard correctly, which you said to Michael, the ALC the current run-rate revenue run-rate is about $60 million?

CAD$60 million a year.

Okay, thank you.

Thank you. Our next question comes from Peter Sklar with BMO Capital Markets. Your line is now open.

Drew, can you go through the adjustments please?

Sorry, which adjustments you are referring to Peter.

Like the footnote 1 says that there are adjustments for one-time items, can we just review them? I am looking at the press release on the front page.

Yes. Well, that’s in the comparative period related to South Africa as we are winding down South Africa.

So are there any adjustments this period?

No.

What about the building sale?

No, that’s not normalized out of that.

Okay. What was the gain on that?

$1.8 million pre-tax.

And which segment was that recorded in?

Automotive.

In auto, okay. And then this price support that you are getting at ALC, what is the justification for that, is it that the programs were mispriced or you are threatening not to supply or just trying to understand what the backdrop is and what the prospect is for the permanent price increase?

The backdrop is that it’s a fixed price program that was entered into 4 years ago when the labor market in Bulgaria and pretty much across Eastern Europe was completely different than the situation that exists today. Over that period of time, the unemployment rate has plummeted from 13% to 3% in some of the manufacturing regions that we are in and wages on average manufacturing basis in Bulgaria have increased by 50%. And when you have that change in the labor market, the old economics of the program just don’t work and ALC had been bleeding money for some period of time grinding down its equity base to effectively nothing and we just weren’t going to support a program and an entity that had those kind of economics. And so getting the price support in order to sustain ALC have a decent level of liquidity and remaining solvent has been the interim goal pending ongoing discussions to make those price increases permanent in reflection of the current market activity.

Okay. And then lastly on the Large Mould business like I understand how you have the cost associated ramping up the new cell and the duplicative efforts, but could you explain kind of in layman’s language like what happened with these mould programs that you described them as near complete programs and there were issues there?

Well, there is a whole host of issues, but one of them as it relates to the manufacturing cell is that we entered into fiscal ‘18 with record levels of backlog and continued to underwrite new business at the front end of the year at a high level with the expectation that our capacity would increase in new market as we had ramped up that new manufacturing cell. And to the extent that we fell behind pace on our agenda for increasing the capacity and the utilization of those pieces of equipment, we have to juggle things operationally, which meant pursuing outsourcing of some requirements and the like and all of those things compound upon you and ends up costing money and that drove some of the unfavorable results related to those programs, but additionally to that in an effort to diversify our customer base about 2 years ago we took on some new programs which had very aggressive pricing on them and unfortunately it turned out to be too aggressive. We have come to an end to those programs at the end of this quarter and the end of the first quarter, they will all be complete and the remaining business we have which is ample this is much better pricing.

Okay. And whatever happens like you used to talk a lot about the opportunity in new market for die-casting structural parts, where are you on that – in that opportunity, I haven’t heard much about it lately?

Well, we are winning more programs on it and we will win more programs, but really the meat and potatoes in that business is in that engine blocks and that’s where we are focusing mostly, Peter, because we have more experience in it. I mean over time I think we will gain more knowledge on the structural parts, but we have done several and quite frankly we have struggled with them.

Okay, thank you.

Thank you. And our next question comes from Michael Glen with Macquarie. Your line is now open.

Hey, good morning. Just wanted to circle back on the balance sheet, at what point, I mean it does feel like you could pursue some sort of accretive action with your balance sheet maybe something along the lines of the substantial issuer bid. At what point, does something like that make sense for you guys?

Good morning, Michael. We have been stepping up our share repurchases over the last quarter in recognition that the cash flow profile of this business is very strong and we do have an un-levered balance sheet whether or not we would go out and accelerate that further by borrowing money to payback shares is something completely different. I mean, this company hasn’t typically done that. We have built up balance sheet capacity and used it for acquisitions over time. But I think the strategy for the time being will need to continue with the share repurchases at the current pace, which is still inside of the free cash flow that we generate and have a bit of both improving the balance sheet and reducing the share count.

Okay. And when you look at the company right now on a standalone basis assuming no other M&A what would be sort of what do you think the right number for leverages on that business?

Well, we are comfortable with zero or even being in a net cash position, I don’t – we don’t have a problem being under-levered.

Okay, thanks for taking the questions.

Thank you. And I am showing no further questions in the queue at this time. I would like to turn the call back over to speakers for any closing remarks.

That concludes our remarks. Thanks everyone for participating.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program and you may all disconnect. Everyone have a great day.