Wescast Industries Inc.
TSX : WCS.A

Wescast Industries Inc.

April 30, 2007 16:45 ET

Wescast Reports First Quarter Sales and Earnings

BRANTFORD, ONTARIO--(CCNMatthews - April 30, 2007) - Wescast Industries Inc. (TSX:WCS.A) today reported 2007 first quarter sales of $104.0 million and net earnings of $3.1 million.

"We continue to undertake the actions necessary to address the significant competitive and economic challenges in the automotive industry, particularly in North America. As evidenced this quarter, we continue to experience year-over-year improvement in Europe resulting from the sales growth being achieved there. Our European operation is now profitable and we anticipate significant future upside opportunity for this business unit as operating performance metrics improve," said Ed Frackowiak, Chairman and C.E.O. "We continue to make progress on our expansion into Asia; operations are now underway in a leased facility in China, with the construction of a permanent foundry and machining facility proceeding as planned."

Highlights

- Consolidated sales were $104.0 million, an increase of 5.2% from the $98.9 million reported in the first quarter of 2006, reflecting the significant increase in the level of sales generated by the Company's European operations.

- The Company's European operations reported improved financial results compared to the same quarter last year. Net earnings of $1.2 million were generated in the quarter compared to net earnings of $0.2 million reported in the first quarter of 2006.

- The Company's planned expansion into Asia is well underway. Construction of an integrated foundry and machining operation in China continued during the quarter. The Asian operation machined and shipped its first prototype castings from a leased facility during the quarter. The foundry operations are expected to begin in the first quarter of 2008 after construction of the integrated facility has been completed. During the quarter, the pre-launch expenditures represented a net loss of $0.6 million and the operation incurred $6.0 million of capital expenditures and equipment deposits.

- The Company reported net earnings of $3.1 million for the quarter compared with net earnings of $3.7 million reported in the same quarter last year.

- The first quarter net earnings per share on a diluted basis were $0.23, compared with net earnings per share of $0.28 reported in the first quarter of 2006.

- The North American automotive industry experienced a 7.7% decline in light vehicle production levels in the first quarter of 2007 compared to the first quarter of 2006. However, the Company's primary North American customer base, the domestic Big 3, experienced a more significant decline of 12.1% in light vehicle production levels over the same period.

Operations

Consolidated sales

Consolidated sales for the quarter were $104.0 million, a 5.2% increase compared to the previous year's level of $98.9 million. The consolidated sales are net of inter-segment sales of $2.2 million between the Company's European and North American business units. The sales analysis which follows is discussed on the basis of gross sales.

Consolidated prototype and tooling sales in the first quarter were $4.9 million, consistent with the $4.7 million recorded in the first quarter of 2006.

North American sales

North American sales, excluding prototype and tooling sales, declined by 6.8% to $73.8 million compared to $79.2 million reported in the same quarter last year. The Company experienced a quarter-over-quarter decline of 5.6% in unit casting sales volume in North America. Machining volumes were up 4.7% compared to the first quarter of 2006.

The casting unit volume and sales decline resulted from:

- The impact of the 12.1% reduction in vehicle production volumes of the domestic Big 3 automakers compared to the first quarter of 2006;

- The impact of market-driven price reductions and changes in product mix compared to the same quarter last year; and,

- A reduction in light truck volume requirements of the domestic Big 3 automakers, due in part to sustained high fuel prices and strong competition from the new domestic automakers.

The factors above were partially offset by increased sales with DaimlerChrysler, reflecting additional content that the Company was awarded mid-way through 2006 for the minivan program. This is a cast only program, as a result the additional volume generates lower sales dollars per part than a program that is both cast and machined.

European sales

Sales generated by the Company's operation in Europe, excluding prototype and tooling sales, were $27.5 million for the quarter compared to $16.7 million during the same quarter last year. The operation experienced a quarter-over-quarter increase in casting unit sales volume of 26.8%. Total units machined were 65.3% higher than the first quarter of 2006. The significant increase in unit volume resulted from the impact of several new programs that were launched during 2006 and the ramp-up of programs that existed in early 2006. Also contributing to the increased sales level was the impact of a stronger Hungarian forint against the Canadian dollar compared to the first quarter of 2006 and an increase in sales from machined only programs. The cost to acquire the raw castings for certain of these machined only programs is quite high, with the casting cost a direct pass through to the end customer.

Consolidated earnings

The Company reported earnings from continuing operations of $3.1 million for the quarter, compared with earnings of $3.8 million reported in the same quarter last year.

North American earnings

The Company's North American operations reported net earnings of $2.4 million, compared to net earnings of $3.7 million reported in the first quarter of 2006.

The decline in net earnings from 2006 to 2007 resulted from the impact of:

- Lower casting unit sales volumes that reduced gross profit by $1.5 million compared with the first quarter of 2006;

- Market-driven sales price reductions and changes in product mix that in total reduced gross profit by $3.6 million;

- Lower operating performance of the manufacturing facilities due to significant production downtime as a result of severe winter weather conditions and equipment downtime;

- Lower prototype and tooling margins; and,

- Increased consulting costs related to implementing manufacturing process improvements and lean initiatives.

The impact from these factors was substantially offset by the positive benefits from:

- The reduction in costs resulting from the implementation of the Company's foundry capacity optimization plan; specifically the closure of the Brantford foundry operations; and,

- Lower depreciation expense, specifically of the machining operations, which increased gross profit by $1.0 million compared with the first quarter of 2006.

European earnings

The Company's European operations generated net earnings of $1.2 million during the quarter compared to net earnings of $0.2 million reported in the same period in 2006.

The significant improvement in the profitability of the European operation was due to:

- Increased casting and machining volumes which provided better absorption of fixed costs;

- Significant prototype casting margins realized during the first quarter; and,

- Increased foreign exchange gains reported compared to the first quarter of 2006.

The positive impact from the above factors was partially offset by:

- Increased consulting costs related to implementing manufacturing process improvements and lean initiatives;

- Increased depreciation expense compared to the first quarter of 2006 due to capital investments made in 2006 and 2007;

- Higher payroll and employee recruiting costs;

- Increased electricity costs due to rate increases; and,

- Higher manufacturing scrap costs.

A more detailed discussion of the consolidated results for the quarter ended April 1, 2007 is contained in the attached Management's Discussion and Analysis which follows the interim consolidated financial statements and the notes thereto.

About Wescast

Wescast Industries Inc. is the world's largest supplier of exhaust manifolds for passenger cars and light trucks. The Company designs, casts, machines and assembles iron exhaust system components for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America, Europe and Asia. The Company employs approximately 1,900 people in 7 production facilities and 3 sales and design centres in Canada, the United States and Germany. The Company also has sales and technical design representation in the United Kingdom, France, Japan and China. The Company is recognized worldwide for its quality products, innovative design solutions and highly committed workforce.

Learn more at www.wescast.com.

Forward Looking Statements

The contents of this news release contain statements which, to the extent that they are not recitations of historical fact, may constitute forward-looking statements based on certain assumptions and reflect Wescast's current expectations. Such forward-looking statements may include financial and other projections as well as statements regarding Wescast's future plans, objectives or performance for the current period and subsequent periods. The words "may", "would", "could", "will", "likely", "expect", "anticipate", "estimate", "intend", "plan", "forecast", "project" and "believe" or other similar words and phrases are intended to identify forward-looking statements. Persons reading this news release are cautioned that such statements are only predictions, and that Wescast's actual future results or performance may be materially different.

This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements, including our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties principally relate to the risks associated with the automotive industry and include, but are not limited to: our operating and/or financial performance, including the effect of new accounting standards on our reported financial results, fluctuations in interest rates, changes in consumer and business confidence levels, consumers' personal debt levels, vehicle prices, the extent and nature of purchasing or leasing incentive campaigns offered by automotive manufacturers, environmental emission regulations, fuel prices and availability, the continuation and extent of outsourcing by automotive manufacturers, changes in raw material and other input costs, our ability to continue to meet customer specifications relating to product performance, cost, quality, delivery and service, industry cyclicality or seasonality, trade and/or labour issues or disruptions, customer pricing pressures, pricing concessions and cost absorptions, actual levels of program production volumes by our customers compared to original expectations, including program cancellations or delays, price reduction pressures, dependence on certain engine programs and the market success and consumer acceptance of the vehicles into which such powertrain products are installed, our relationship with and dependence on certain customers, currency exposure, failures in implementing Wescast's strategy, technological developments by Wescast's competitors, government and regulatory policies and changes in the competitive environment in which Wescast operates.

Wescast does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this news release or to reflect the occurrence of unanticipated events, except as required by law.

A conference call has been arranged for:

May 1, 2007

3:00 p.m. EST

To participate, please dial: North America 1-800-525-6384; International 1-780-409-1668. Conference ID# 4848961 (required). Investors can also listen to the live conference call by webcast by visiting www.wescast.com and accessing the link on our homepage.

Call back is available from May 1, 2007 to May 8, 2007, to access please dial 1-888-214-7746 (International: 1-402-220-1547) and enter pass code 4848961.



For further information, please contact:

Mr. David Dean
Vice President, Finance
(519) 750-0000


Wescast Industries Inc.
Consolidated Statements of Earnings and Retained Earnings
(in thousands of Canadian dollars, except per share amounts) (Unaudited)

Three months ended
----------------------------
April 1, 2007 April 2, 2006

----------------------------

Sales $104,048 $98,874
Cost of sales 90,584 84,958
----------------------------

Gross profit 13,464 13,916
Selling, general and administration 7,582 6,541
Research, development and design 1,605 1,547
----------------------------

4,277 5,828
----------------------------

Other (income) expense
Interest expense 200 577
Investment income (108) (45)
Other (642) (394)
----------------------------

(550) 138
----------------------------

Earnings from continuing operations
before income taxes 4,827 5,690
Income taxes 1,730 1,932
----------------------------

Earnings from continuing operations 3,097 3,758
Net loss from discontinued operations (42) (62)
----------------------------

Net earnings $3,055 $3,696
----------------------------
----------------------------

Earnings from continuing operations
per share (Note 5)
- Basic and diluted $0.24 $0.29
----------------------------
----------------------------

Net earnings per share (Note 5)
- Basic and diluted $0.23 $0.28
----------------------------
----------------------------

Retained earnings, beginning of period $258,068 $257,206

Net earnings 3,055 3,696

Dividends paid (788) (787)
----------------------------
Retained earnings, end of period $260,335 $260,115
----------------------------
----------------------------



Wescast Industries Inc.
Consolidated Statements of Comprehensive Income
(in thousands of Canadian dollars) (Unaudited)

Three months ended
----------------------------
April 1, 2007 April 2, 2006

----------------------------

Net earnings $3,055 $3,696

Other comprehensive income, net of income tax:
Change in unrealized gains (losses) on
translating financial statements of self-
sustaining foreign operations 3,078 (2,522)
----------------------------

Comprehensive income $6,133 $1,174
----------------------------
----------------------------



Wescast Industries Inc.
Consolidated Balance Sheets
(in thousands of Canadian dollars) (Unaudited)

As at
April 1, 2007 December 31, 2006
-------------------------------

Assets
Current
Cash and cash equivalents $8,173 $16,071
Accounts receivable 74,283 54,880
Inventories 31,991 33,200
Prepaid expenses 2,587 2,067
Future income taxes 1,430 1,430
Current assets - discontinued operations 55 63
-------------------------------

118,519 107,711

Property, plant and equipment 289,308 287,297

Future income taxes 42,383 43,530

Assets held for sale 4,194 4,969

Long-term assets - discontinued operations 358 408

Other assets 1,815 1,066
-------------------------------

$456,577 $444,981
-------------------------------
-------------------------------

Liabilities and Shareholders' Equity
Current
Accounts payable and accrued liabilities $41,517 $37,288
Income taxes payable 954 167
Current portion of long-term debt 2,181 1,672
Restructuring charge 33 52
Future income taxes 123 123
Current liabilities - discontinued
operations 141 147
-------------------------------

44,949 39,449

Long-term debt 4,794 4,822

Deferred government assistance 3,065 3,081

Future income taxes 10,035 9,925

Employee benefits 19,967 19,307
-------------------------------

82,810 76,584
----------------------------

Shareholders' Equity

Capital stock (Note 3) 110,841 110,816
Retained earnings 260,335 258,068
Share purchase loans (149) (149)
Accumulated other comprehensive
income (loss) (Note 4) 2,740 (338)
-------------------------------

373,767 368,397
-------------------------------

$456,577 $444,981
-------------------------------
-------------------------------



Wescast Industries Inc.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars) (Unaudited)

Three months ended
-------------------------------
April 1, 2007 April 2, 2006

-------------------------------
Cash derived from (applied to)
Operating
Earnings from continuing operations $3,097 $3,758
Add (deduct) items not affecting cash:
Depreciation and amortization 9,049 9,588
Future income taxes 879 1,257
(Gain) loss on disposal of equipment (109) 62
Deferred government assistance (16) (111)
Stock-based compensation, net of payments - (16)
Employee benefits, net of payments 660 756
-------------------------------
13,560 15,294

Change in non-cash operating working
capital (Note 6) (12,848) (8,120)
-------------------------------
712 7,174
Discontinued operations (40) (7)
-------------------------------
672 7,167
-------------------------------

Investing
Purchase of property, plant and
equipment and other assets (9,284) (6,863)
Proceeds on disposal of equipment 895 38
Discontinued operations 47 161
-------------------------------
(8,342) (6,664)
-------------------------------

Financing
Issue of long-term debt 1,141 1,063
Repayment of long-term debt (601) (1,109)
Payments under capital lease obligations (5) (49)
Issuance of common shares 25 37
Employee share purchase loan repayments - 13
Dividends paid (788) (787)
-------------------------------

(228) (832)
-------------------------------

Net decrease in cash and cash equivalents (7,898) (329)

Cash and cash equivalents
Beginning of period 16,071 1,944
-------------------------------

End of period $8,173 $1,615
-------------------------------
-------------------------------


Wescast Industries Inc.

Notes to the Consolidated Financial Statements

(in thousands of Canadian dollars, except per share amounts) (Unaudited)

Note 1. Basis of presentation

The unaudited interim consolidated financial statements ("interim financial statements") have been prepared following the same accounting policies as set out in the annual consolidated financial statements for the year ended December 31, 2006 included in the Company's 2006 Annual Report to Shareholders.

These are interim financial statements and as such the disclosures do not conform in all respects to the requirements of generally accepted accounting principles applicable to annual consolidated financial statements. These interim financial statements should be read in conjunction with the most recent annual consolidated financial statements for the year ended December 31, 2006.

The interim financial statements and the notes thereto have not been reviewed by the Company's external auditors pursuant to a review engagement applying review standards set out in the CICA handbook.

Note 2. Changes in accounting policies

Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement, Section 3865, Hedges, Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards requires changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments. The Company had no such transition adjustments. The comparative consolidated financial statements have not been restated, except for the presentation of translation losses on self-sustaining foreign operations.

a) Financial assets and financial liabilities

Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the associated financial instrument.

All financial instruments are classified into one of the following five categories: held for trading, held to maturity investments, loans and receivables, available for sale financial assets or other financial liabilities. All financial instruments, including derivatives, are included on the balance sheet and are measured at fair value with the exception of loans and receivables, held to maturity investments and other financial liabilities, which are measured at amortized cost. Held for trading financial instruments are measured at fair value and all gains and losses are included in net earnings in the period in which they arise. Available for sale financial instruments are measured at fair value with revaluation gains and losses included in other comprehensive income until the asset is removed from the balance sheet. As a result of the adoption of these standards, the Company has classified its cash and cash equivalents and derivatives as held for trading. Accounts receivable and other receivables are classified as loans and receivables. Accounts payable and accrued liabilities and long-term debt have been classified as other financial liabilities, all of which are measured at amortized cost.

The fair value of a financial instrument on initial recognition is the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, fair value is determined using valuation techniques which refer to observable market data.

b) Embedded derivatives

Derivatives may be embedded in other financial instruments (the "host instruments"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standard, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument. The terms of the embedded derivatives are measured at fair value with subsequent changes generally recognized in net earnings. The Company has elected to apply this accounting treatment for all embedded derivatives in host contracts entered into on or after January 1, 2003. The impact of the change in accounting policy related to embedded derivatives was not material.

c) Comprehensive income

Comprehensive income is composed of the Company's net earnings and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale financial assets, foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income are disclosed in the consolidated statements of comprehensive income.

d) Hedge accounting

There was no impact on the Company as a result of adopting Section 3865, Hedges.



Note 3. Capital stock

Authorized
Unlimited Preference shares, no par value
Unlimited Class A subordinate, voting shares, no par
value ("Class A shares")
9,000,000 Class B common shares, no par value ("Class B shares")


April 1, December 31,
2007 2006
----------------------

Issued and outstanding
5,753,887 Class A shares (2006 - 5,751,648) $98,414 $98,389

7,376,607 Class B shares (2006 - 7,376,607) 12,427 12,427
----------------------
$110,841 $110,816
----------------------
----------------------

Note 4. Accumulated other comprehensive income
Unrealized gain
(loss)on translating
financial statements
of self sustaining
foreign operations
----------------------

Balance, as at January 1, 2007 ($338)

Changes during the quarter 3,078
----------------------
Balance, as at April 1, 2007 $2,740
----------------------
----------------------


Note 5. Earnings per share

Basic earnings per share from continuing operations and basic net earnings per share for the three months ended April 1, 2007 and April 2, 2006 are based on the weighted average common shares outstanding (2007 - 13,115,618 shares; 2006 - 13,102,157 shares). Diluted earnings per share from continuing operations and diluted net earnings per share for the three months ended April 1, 2007 and April 2, 2006 are based on the diluted weighted average common shares outstanding (2007 - 13,130,494 shares; 2006 - 13,119,390 shares).

Note 6. Consolidated statements of cash flows

The following is additional information to the statements of cash flows.



Change in non-cash operating working
capital Three months ended
-----------------------------
April 1, 2007 April 2, 2006
-----------------------------

Accounts receivable ($19,403) ($10,470)
Inventories 1,209 3,639
Prepaid expenses (520) (872)
Accounts payables and accrued liabilities 5,098 (390)
Restructuring charge (19) (91)
Income taxes payable 787 64
-----------------------------
($12,848) ($8,120)
-----------------------------

Note 7. Employee benefits

The Company's net benefit plan expense, which is recorded in cost of sales
and selling, general and administration expenses, is as follows:

Three months ended
-----------------------------
April 1, 2007 April 2, 2006
-----------------------------
Pension benefit plans $654 $616
Other benefit plans 333 298

-----------------------------
$987 $914
-----------------------------


Note 8. Financial instruments

Foreign exchange contracts

The Company uses foreign currency forward contracts to manage well defined foreign exchange risks. In particular, the Company uses foreign exchange forward contracts to hedge certain future committed U.S. dollar and euro outflows and inflows. A decision support system is employed and hedges are put in place when technical signals indicate it is appropriate to do so. As such, there may be times when the Company has left a foreign currency exposure unhedged. At April 1, 2007 no such forward contracts to hedge firm commitments were in place.

In addition, the Company uses forward contracts to manage foreign exchange risk arising from the translation of foreign currency denominated monetary assets. As at April 1, 2007, the Company has committed to sell a total of US$51,600 at an average exchange rate of 1.1550, with maturity dates in the second quarter of 2007. The Company has not elected to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts receivable at their fair value, with changes in fair value recognized in earnings. At April 1, 2007 the marked-to-market gain on these outstanding forward contracts totalled $150, which has been recorded in earnings.

The Company has also entered into a series of foreign exchange forward contracts to purchase Chinese renminbi and euros in connection with the construction of a manufacturing facility in China. At April 1, 2007 the amount of outstanding forward contracts totalled 108 million Chinese renminbi at an average CAD/RMB exchange rate of 6.4531 with maturity dates from April 16, 2007 through March 14, 2008 and 4.5 million euros at an average EUR/CAD exchange rate of 1.5448 with maturity dates from April 16, 2007 through January 15, 2008. The Company has not elected to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts payable and accrued liabilities at their fair value, with changes in fair value recognized in earnings. At April 1, 2007 the marked-to-market loss on these outstanding forward contracts totalled ($226), which has been recorded in earnings.

The Company's subsidiary in Hungary, Wescast Hungary Zrt., entered into a series of foreign exchange forward contracts to sell euros in exchange for Hungarian forints. Wescast Hungary Zrt. expects a net long euro position in 2007 due to the excess of sales denominated in euros less expenses denominated in euros. At April 1, 2007 the amount of outstanding forward contracts totalled 9 million euros at an average exchange rate to the Hungarian forint of 259.59 with maturity dates from April 27, 2007 through December 28, 2007. The Company has elected not to apply hedge accounting treatment for these forward contracts. Consequently, they are recognized on the balance sheet as part of accounts receivable at their fair value, with changes in fair value recognized in earnings. At April 1, 2007 the marked-to-market gain on these outstanding forward contracts totalled $466, which has been recorded in earnings.

The Company does not purchase or hold derivative financial instruments for speculative purposes. The Company estimates fair value based on observable market data.

Other derivative instruments

To manage natural gas cost volatility, the Company enters into fixed-price forward contracts to purchase natural gas. The current contracts expire August 31, 2007 and October 31, 2007. There are approximately 111,520 gigajoules (GJ) at a weighted average price of $6.79 per GJ remaining. The estimated fair market value of these contracts as at April 1, 2007 was $88. The Company has documented these contracts as normal purchase contracts in order to receive the expected usage exemption from treatment as derivatives. As such, these contracts have been accounted for as executory contracts; any gain or loss resulting from the contracts will be recognized in the statements of earnings upon contract settlement.

The Company does not enter into natural gas contracts for speculative purposes. The Company estimates fair value based on observable market data.

Note 9. Segment information

The Company operates in the automotive industry in three geographic segments, North America, Europe and Asia. The Company's manufacturing facilities, where appropriate, are geographically situated to align with the physical location of its customer base. The Company evaluates segment performance based on earnings or loss before income taxes.

The Company accounts for inter-segment sales at current market prices. All Corporate costs not directly allocated to the European or Asian operation have been allocated to the North American segment.



Three months ended April 1, 2007
--------------------------------
Inter-segment
-------------
North America Europe Asia Eliminations Total
------------- ------ ---- ------------ -----

Sales to external
customers $76,016 $30,168 $17 ($2,153) $104,048

Earnings (loss) from
continuing operations 2,412 1,204 (551) 32 3,097

Investment income 108 - - - 108

Interest expense 200 - - - 200

Depreciation and
amortization 6,483 2,535 31 - 9,049

Income taxes 1,713 17 - - 1,730

Purchase of property,
plant and equipment
and other assets $1,242 $1,999 $6,043 $- $9,284


Three months ended April 2, 2006
--------------------------------

Inter-segment
-------------
North America Europe Asia Eliminations Total
------------- ------ ---- ------------ -----

Sales to external
customers $83,353 $17,181 $- ($1,660) $98,874

Earnings (loss) from
continuing operations 3,651 184 - (77) 3,758

Investment income 45 - - - 45

Interest expense 577 - - - 577

Depreciation and
amortization 7,743 1,845 - - 9,588

Income taxes 1,918 14 - - 1,932

Purchase of property,
plant and equipment
and other assets $3,791 $3,072 $- $- $6,863



April 1, 2007
-------------

Discontinued
------------
North America Europe Asia Operations Total
-------------- ------- -------- ----------- -------
Total Assets $298,985 $139,031 $18,148 $413 $456,577

Property, plant
and equipment $175,103 $100,739 $13,466 $- $289,308
---------------------------------------------------------------------------

December 31, 2006
-----------------

Discontinued
------------
North America Europe Asia Operations Total
-------------- ------- -------- ----------- -------
Total Assets $303,554 $129,336 $11,620 $471 $444,981
Property, plant
and equipment $180,426 $98,587 $8,284 $- $287,297
---------------------------------------------------------------------------


Note 10. Comparative Figures

Certain of the comparative figures have been reclassified to conform with the presentation adopted at April 1, 2007.



Management's Discussion and Analysis
Of Results of Operations and Financial Position
For the Three Months Ended April 1, 2007


All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in Canadian dollars unless otherwise noted. This MD&A should be read in conjunction with: the interim consolidated financial statements and notes thereto for the three-month period ended April 1, 2007; the "Management's Discussion and Analysis" included in the Annual Report of Wescast for the year ended December 31, 2006; and with the consolidated financial statements and notes thereto for the year ended December 31, 2006. The accompanying interim consolidated financial statements and the notes thereto have not been reviewed by the Company's external auditors pursuant to a review engagement applying review standards set out in the CICA Handbook.

This MD&A is current to April 30, 2007. Additional information relating to the Company is available online at SEDAR, www.sedar.com.

Overview

Wescast Industries Inc. ("Wescast" or the "Company") designs, casts, machines and assembles iron exhaust system components for automotive original equipment manufacturers ("OEMs") and Tier 1 customers for the car and light truck markets in North America, Europe and Asia. The Company employs approximately 1,900 people in 7 production facilities and 3 sales and design centres in Canada, the United States and Germany. The Company also has sales and technical design representation in the United Kingdom, France, Japan and China.

The Company's resources are strategically located in geographic business units to meet unique, customer-specific requirements. The Company currently has North American and European full-service business units and is in the process of establishing an Asian business unit. The Company believes that the combination of its design capability and high-quality manufacturing creates unique value for the customers in the markets that it serves. The Company believes this is the reason that it is the world's largest supplier of exhaust manifolds for passenger cars and light truck applications.

The Company is focused on the design and manufacture of exhaust system components for sale primarily to OEM and Tier 1 customers for application in the passenger car and light truck markets in North America, Europe and Asia. The Company's powertrain operations in North America are well established and consist of five production facilities. The European powertrain operations are conducted from a production facility in Hungary, through the Company's subsidiary Wescast Hungary Zrt. As part of Wescast's global strategy, the Company is developing a manufacturing presence in Asia and is in the process of constructing an integrated foundry and machining facility in China. The Company is currently operating in a leased facility in China.

Current Market Conditions

North American light vehicle production volumes for the quarter totalled approximately 3.8 million units, a 7.7% decrease from the 4.1 million units produced during the same period in 2006. The Company's primary North American customer base, the domestic Big 3 automakers, experienced a more significant production decline of 12.1% over the same period in 2006.

Results from Operations

Consolidated sales

Consolidated sales for the quarter were $104.0 million, a 5.2% increase compared to the previous year's level of $98.9 million. The consolidated sales are net of inter-segment sales of $2.2 million between the Company's European and North American business units. The following sales analysis for the business units is presented based on gross sales.

Consolidated prototype and tooling sales in the first quarter were $4.9 million, consistent with the $4.7 million recorded in the first quarter of 2006.

North American sales

North American sales, excluding prototype and tooling sales, declined by 6.8% to $73.8 million compared to $79.2 million reported in the same quarter last year. The Company experienced a quarter-over-quarter decline of 5.6% in unit casting sales volume in North America. Machining volumes were up 4.7% compared to the first quarter of 2006.

The casting unit volume and sales decline resulted from:

- The impact of the 12.1% reduction in vehicle production volumes of the domestic Big 3 automakers compared to the first quarter of 2006;

- The impact of market-driven price reductions and changes in product mix compared to the same quarter last year;

- A reduction in the volume and demand requirements on programs with non-Big 3 automakers, specifically Nissan. This has resulted from reduced demand on certain vehicle platforms and the customer's use of a non-cast manifold design on an engine platform; and,

- A reduction in light truck volume requirements of the domestic Big 3 automakers, due in part to sustained high fuel prices and strong competition from the new domestic automakers.

The factors above were partially offset by increased sales with DaimlerChrysler, reflecting additional content that the Company was awarded mid-way through 2006 for the minivan program. This additional volume was for a cast only program which generates lower sales dollars per part than cast and machined parts.

European sales

Sales generated by the Company's operation in Europe, excluding prototype and tooling sales, were $27.5 million for the quarter compared to $16.7 million during the same quarter last year. The operation experienced a quarter-over-quarter increase in casting unit sales volume of 26.8%. Total units machined were 65.3% higher than the first quarter of 2006. The significant increase in unit volume resulted from the impact of several new programs that were launched during 2006 and the ramp-up of programs that existed in early 2006. Also contributing to the increased sales level was the impact of a stronger Hungarian forint against the Canadian dollar compared to the first quarter of 2006 and an increase in sales from machined only programs. On certain of these machined only programs, the cost to acquire the raw castings is quite high, and this cost is a direct pass through to the end customer.

Gross Profit

Consolidated gross profit for the quarter was $13.5 million, comparable with the $13.9 million reported in the first quarter of 2006.

The Company's North American operations generated gross profit of $12.5 million for the quarter, compared to $13.5 million generated in the same quarter last year.



- The North American operations generated lower gross profit due to the
effects of:

- Lower casting unit sales volumes that reduced gross profit by
$1.5 million compared with the first quarter of 2006;

- Market-driven sales price reductions and changes in product mix
that in total reduced gross profit by $3.6 million;

- Lower operating performance of the manufacturing facilities due to
significant production downtime as a result of severe winter
weather conditions and equipment downtime; and,

- Lower prototype and tooling margins.

These factors were partially offset by the positive benefits of the
following:

- A reduction in fixed costs compared to the first quarter of 2006
resulting from the implementation of the Company's foundry capacity
optimization plan; specifically the closure of the Brantford
foundry operations; and,

- Lower depreciation expense, specifically of the machining
operations, which increased gross profit by $1.0 million compared
with the first quarter of 2006.

The Company's European operations generated gross profit of $1.3 million in
the first quarter of 2007, compared with $0.5 million generated in 2006.

- The main factors for the significant improvement were:

- Increased casting and machining volumes which provided better
absorption of fixed costs; and,

- Significant prototype castings margins realized during the
first quarter.

These positive factors were partially offset by:

- Increased consulting costs related to implementing manufacturing
process improvements and other lean initiatives;

- Increased depreciation expense compared to the first quarter of 2006
due to capital investments made in 2006 and 2007;

- Higher payroll and employee recruiting costs;

- Increased electricity costs due to rate increases; and,

- Higher manufacturing scrap costs.


Selling, General and Administration

The Company's selling, general and administration expenses for the quarter were $7.6 million, compared to $6.5 million incurred in the same period in 2006. Included in this amount was depreciation of $0.6 million for the quarter compared to $0.9 million in 2006. Excluding depreciation, the selling, general and administration expenses were $7.0 million, up $1.4 million from 2006. The majority of this increase was due to increased consulting costs related to process improvements and lean initiatives, costs associated with the establishment of the Company's integrated foundry and machining facility in China and higher legal expenses compared to 2006.

Research, Development and Design

The Company's research, development and design expenses for the quarter were $1.6 million, comparable to the $1.5 million incurred in the first quarter of 2006.

Interest Expense

Interest expense for the quarter of $0.2 million was down from the $0.6 million incurred over the same period in 2006. The decline was due to lower debt balances carried throughout the first quarter of 2007 compared to 2006.

Income Taxes

The effective income tax expense rate on earnings from continuing operations for the quarter was 35.8%, compared to 34.0% in 2006. The change in the effective rate was due to the following factors:

- In the first quarter of 2007, the Company reported a higher foreign exchange loss on the translation of foreign denominated assets, principally related to a future income tax asset associated with a foreign subsidiary. This foreign exchange loss was not tax deductible; consequently, no tax impact was recorded related to this loss in the first quarter of 2007; and,

- No tax benefit has been recognized with respect to the losses realized by the operation in China or the earnings realized by the operation in Hungary as these operations are subject to tax holidays which extend through 2011 or beyond.

Quarterly Results

The table below sets forth selected financial information of the Company for the eight most recent quarters.



---------------------------------------------------------------------------
(unaudited; in thousands of Canadian dollars, except per share amounts)
---------------------------------------------------------------------------
First Quarter Fourth Quarter
---------------------------------------------------------------------------
2007 2006 2006 2005
---------------------------------------------------------------------------
Sales $104,048 $98,874 $84,686 $87,825
---------------------------------------------------------------------------
Earnings (loss) from
continuing operations $3,097 $3,758 ($3,055) ($20,330)
---------------------------------------------------------------------------
Net earnings (loss) $3,055 $3,696 ($3,563) ($20,543)
---------------------------------------------------------------------------
Earnings (loss) from
continuing operations
per share
---------------------------------------------------------------------------
Basic and diluted $0.24 $0.29 ($0.23) ($1.55)
---------------------------------------------------------------------------

Net earnings (loss) per share
Basic and diluted $0.23 $0.28 ($0.27) ($1.57)
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Third Quarter Second Quarter
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Sales $84,825 $87,634 $102,613 $103,293
Earnings (loss) from
continuing operations ($1,378) ($2,990) $5,562 $5,333
---------------------------------------------------------------------------
Net earnings (loss) ($1,399) ($3,188) $5,276 $4,797
---------------------------------------------------------------------------
Earnings (loss) from
continuing operations
per share
---------------------------------------------------------------------------
Basic and diluted ($0.11) ($0.23) $0.42 $0.41
---------------------------------------------------------------------------
Net earnings (loss) per share
Basic and diluted ($0.11) ($0.24) $0.40 $0.37
---------------------------------------------------------------------------


Notes:

1. The Company's sales and production volumes are generally lower in the third quarter, in comparison to the other quarters, as North American vehicle production is lowest during the third quarter due to model changeovers by the domestic Big 3 automakers. Also, the Company's facilities traditionally shut down for a period during the third quarter to allow for summer vacations.

2. Severance costs of $1.5 million related to structural changes to better align the capacity of the North American operations with customer volume requirements were recorded in the fourth quarter of 2006.

3. An asset impairment charge of $18.5 million after-tax, reflecting the impairment of the Brantford foundry assets, was recorded in the net loss of the fourth quarter of 2005.

Financial Condition, Liquidity and Financial Resources

At April 1, 2007, the Company had cash balances of $8.2 million and total debt of $7.0 million compared with cash balances of $16.1 million and total debt of $6.5 million at the end of 2006.

Operating Activities

The Company generated $0.7 million in cash from continuing operations during the first quarter, compared to $7.2 million generated during the first quarter of 2006. The significant decline was due primarily to lower earnings and increased investment in non-cash working capital during the first quarter versus the year earlier period. Accounts receivable increased year-over-year as sales in the first quarter were higher than sales in the first quarter of 2006. Also, a higher proportion of the Company's sales were generated in Europe in the first quarter of 2007 compared to last year. Customer payment terms in Europe tend to be longer than in North America. Accounts payable increased during the first quarter due to higher machining tooling charges in North America.

Investing Activities

Capital expenditures for the first quarter were $9.3 million, compared to $6.9 million for the same quarter last year. Expenditures related to the establishment of the China facility totalled $6.0 million for the quarter.

Financing Activities

During the first quarter of 2007, net advances of $0.5 of long-term debt were drawn by the Company's jointly controlled entity, United Machining Inc. Dividends paid during the quarter were $0.8 million ($0.06 per common share), consistent with the first quarter of 2006.

Financing Resources

The Company is well positioned to fund strategic initiatives with cash generated from operations and the utilization of available credit, if required.

Wescast has a committed borrowing facility. Based on the current drawings under the facility and certain financial covenants that the Company must satisfy, approximately $72.7 million of unused credit was available to the Company at April 1, 2007.

Shareholders' Equity

Shareholders' equity at the end of the quarter was $373.8 million, an increase of $5.4 million from the $368.4 million at December 31, 2006. Net earnings generated during the first quarter increased shareholders' equity by $3.1 million. Dividends of $0.8 million ($0.06 per share) have been paid on the Class A and Class B shares. Accumulated other comprehensive income increased by $3.1 million during the first quarter. Other comprehensive income is a component of shareholders' equity that is now presented in accordance with a new accounting standard that the Company adopted at January 1, 2007. For Wescast, accumulated other comprehensive income consists of the unrealized change in the value of the Company's investments in its self-sustaining subsidiaries reporting in foreign currencies and translated to Canadian dollars at current rates of exchange. The change during the quarter resulted from exchange fluctuations associated with the Company's investment in Hungary due to the weakening of the Canadian dollar against the Hungarian forint.

Change in Accounting Policies

Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement, Section 3865, Hedges, Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards requires changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments. The Company had no such transition adjustments. The comparative consolidated financial statements have not been restated, except for the presentation of translation losses on self-sustaining foreign operations. For further details related to this change in accounting policy, see Note 2 to the interim consolidated financial statements for the three-month period ended April 1, 2007.

Internal Control Over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting during the three-month period ended April 1, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Outstanding Share Data

As at April 30, 2007, the Company had 5,754,715 Class A Subordinate Voting Shares and 7,376,607 Class B Common Shares outstanding. The Company also had outstanding stock options to acquire 507,222 Class A Subordinate Voting Shares.

Outlook

Current industry estimates project 2007 light vehicle production levels in North America will be approximately 15.2 million vehicles, relatively consistent with the level experienced in 2006. However, industry estimates predict a 4.0% decline in the market share of the domestic Big 3, the Company's primary North American customer base, during 2007. The Company anticipates that its production volumes in North America in 2007 will not reach the levels achieved in 2006, a result of the lower production levels projected for its primary customer base. The Company expects that its production volumes in Europe will be significantly higher than 2006 due to anticipated product launches in 2007 and the ramp-up of programs launched during 2006.

The Company has experienced significant market-driven downward price pressure from its customer base for some time. This pressure has intensified in recent years as some of these customers react to negative changes in their profitability and market share losses. This pressure has resulted in an increased frequency on the part of the domestic automakers to subject their supply requirements to ongoing market testing in relation to pricing; historically this form of price-driven market testing was done prior to a program entering production or following a major re-design. To date, the Company has had success in retaining major programs, or substantial portions of major programs, that have been subjected to these market tests. Through this process the Company has seen price reduction targets established by customers that exceed historic levels; the price targets reflect the impact on market pricing of new global price benchmarks being established by competitors located in low-cost countries.

The Company's results are sensitive to raw material prices for scrap steel and moly, the pricing of which is heavily impacted by global demand. The Company expects its average scrap steel and moly prices for 2007 to be higher than the averages experienced in 2006.

The Company's strategic direction is the pursuit of a global powertrain strategy capable of generating attractive growth and strong financial return prospects for its stakeholders:

- The focus of the Company's North American business unit is on maintaining the dominant market position it currently holds within its segment of the powertrain marketplace. To do so the Company must remain globally cost competitive in order to respond to the significant pressure on pricing being exerted by its customer base. To meet this challenge the Company will continue to pursue aggressive year-over-year cost reduction targets in these operations. To achieve these targets the Company will continue to promote a culture of continuous improvement and innovation by applying its HEART participative management process to identify and implement "lean" initiatives. The Company has engaged the use of outside consulting resources to help accelerate the implementation of these improvements.

- The Company has aligned its global capacity to meet the needs of its customers in the most efficient manner available. The foundry operations in Brantford, Ontario were closed during 2006. The Company has reduced its fixed costs as a result of the implementation of its foundry capacity optimization plan. With the Brantford foundry closure completed during 2006, additional incremental cost reductions are expected to be implemented and realized during 2007.

- The Company will continue to focus on expanding its powertrain business through the expansion of its customer base and geographic coverage. This includes completing the foundry and machining ramp-up of the operation in Hungary. The volume growth anticipated in Europe, combined with anticipated improvements in operating performance, is expected to provide improved financial results for the European operation in 2007.

- The Company is committed to being able to offer its customers the highest quality, technologically advanced products at globally competitive prices. As a result, the Company will maintain its commitment to fund research and development activities so that it may respond with innovative product technology solutions provided through the use of innovative manufacturing techniques. These activities include:



- The continued development and deployment of materials that offer
advantages such as the ability to withstand higher temperatures or
provide other performance and cost advantages; and,

- Deploying solutions to customers that address their hot-end system
requirements and to meet new, demanding emission regulations and
requirements.


- The Company's planned expansion into Asia is well underway. Construction of an integrated foundry and machining operation in Wuhan, Hubei Province, China began in the second half of 2006. Machining operations began during the first quarter of 2007, while the foundry is anticipated to be operational during the first quarter of 2008. Once established, the China operations will provide the Company with a global footprint of manufacturing, sales and engineering support in North America, Europe and Asia.

The Company believes that maintaining focus on these areas is the best means to ensure the long-term success of its business.

Forward-Looking Information

The contents of this MD&A contain statements which, to the extent that they are not recitations of historical fact, may constitute forward-looking statements based on certain assumptions and reflect Wescast's current expectations. Such forward-looking statements may include financial and other projections as well as statements regarding Wescast's future plans, objectives or performance for the current period and subsequent periods. The words "may", "would", "could", "will", "likely", "expect", "anticipate", "estimate", "intend", "plan", "forecast", "project" and "believe" or other similar words and phrases are intended to identify forward-looking statements. Persons reading this MD&A are cautioned that such statements are only predictions, and that Wescast's actual future results or performance may be materially different.

This information is based upon certain material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking statements, including our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties principally relate to the risks associated with the automotive industry and include, but are not limited to: our operating and/or financial performance, including the effect of new accounting standards on our reported financial results, fluctuations in interest rates, changes in consumer and business confidence levels, consumers' personal debt levels, vehicle prices, the extent and nature of purchasing or leasing incentive campaigns offered by automotive manufacturers, environmental emission regulations, fuel prices and availability, the continuation and extent of outsourcing by automotive manufacturers, changes in raw material and other input costs, our ability to continue to meet customer specifications relating to product performance, cost, quality, delivery and service, industry cyclicality or seasonality, trade and/or labour issues or disruptions, customer pricing pressures, pricing concessions and cost absorptions, actual levels of program production volumes by our customers compared to original expectations, including program cancellations or delays, price reduction pressures, dependence on certain engine programs and the market success and consumer acceptance of the vehicles into which such powertrain products are installed, our relationship with and dependence on certain customers, currency exposure, failures in implementing Wescast's strategy, technological developments by Wescast's competitors, government and regulatory policies and changes in the competitive environment in which Wescast operates.

Wescast does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this MD&A or to reflect the occurrence of unanticipated events, except as required by law.

Contact Information

  • Wescast Industries Inc.
    Mr. David Dean
    Vice President, Finance
    (519) 750-0000
    Website: www.wescast.com