Luxfer Holdings PLC (LXFR) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Christine and I will be your conference operator today. Welcome to the Luxfer Second Quarter 2017 Conference Call. [Operator Instructions] I would now like to turn the conference over to Dan Stracner from Luxfer Investor Relations. Dan, please go ahead.

Thanks Christine. And welcome everyone to Luxfer's Second Quarter Conference Call. With me today are Alok Maskara, our Chief Executive Officer; and Andy Beaden, our Group Financial Director. First, Alok will provide an overview of the quarter, followed by Andy's review of financial performance. Alok will then return to sum up and offer an outlook. Today's webcast is accompanied by a slide presentation which can be found in the Investor Section of Luxfer's website. We will refer to these slides throughout our prepared remarks. Any references to non-GAAP financials are reconciled in the appendix of the presentation. Before we begin, please let me remind you that any forward-looking statements made about the company's anticipated financial results, are subject to future risks and uncertainties. Please refer to Slide 2 of today's presentation for further details. After our prepared remarks, we reserve time for questions and answers. We will now turn the call over to Alok Maskara. Alok, please go ahead.

Thank you Dan. Good morning, ladies and gentlemen, and welcome to Luxfer conference call for the second quarter of 2017. Given that this is my first earnings call after becoming the CEO on July 1st, I will start on Slide 3 with a brief introduction. I joined Luxfer at the end of May and officially took over as the CEO from Brian Purves on July 1st. Brian is retiring from the company next month after 15 years as CEO. Please join me in wishing Brian all the best in his retirement. As for myself, prior to joining Luxfer I was at Pentair for over eight years. While at Pentair, I led multiple business units of progressively larger scope and size. I had joined Pentair when a GE business unit that was I leading was contributed into a joint venture with Pentair. Earlier at General Electric I was part of a corporate team that drove lean implementation across the company. Prior to GE, I've spent four years at McKinsey & Company in the Chicago and Amsterdam offices. I am a chemical engineer. I obtained by bachelor's in engineering from IIT Mumbai, master's in chemical engineering from the University of New Mexico and an MBA from the Kellogg School of Business at Northwestern University. Now, let's turn to Slide 4 for a summary of Luxfer's second quarter results. For the second quarter ending on June 30th, our adjusted fully diluted EPS of $0.25 is $0.04 below our last year. However, we are optimistic that improvements in order rates and an increased focus on cost reduction will drive recovery in the second half of this year. Our reported EPS of $0.09 was significantly impacted by a non-cash write-down of an alternative fuel investment driven by the depressed state of that market. Going into the second half of 2017, our order backlog is higher compared to last year and we are taking additional cost actions across the group. This underpins our guidance for the full year with 2017 full year adjusted EBITDA and adjusted EPS expected to be 10% higher than prior year. Now, please turn to Slide 5 for an overview of group's financial performance. Total revenue for the second quarter of 2017 was $106.6 million, which is 3% lower compared to $110 million in the second quarter of 2016, but 3% higher compared to $103.4 million in the first quarter this year. The FX impact on group's revenue in the second quarter was negligible. Our total order backlog at the end of June was 5% higher, driven by a 14% rise in the order backlog for Elektron and a 4% decline in the order backlog for cylinders. Trading profit for the second quarter of 2017 was $10.1 million compared to $11 million in the second quarter of 2016. We did benefit from exchange rates over last year as unfavorable currency hedges continued to wind down. However, issues with productivity and volume decline caused trading profit to be lower in the quarter. Productivity challenges were limited to a couple of our sites and we are aggressively tackling the root causes of these challenges using well-established lean manufacturing principles. We have also initiated an aggressive cost reduction program. Now, please turn to Slide 6 for an overview of Gas Cylinders' performance. Cylinders revenue for the second quarter of 2017 was $4.5 million lower than last year. The decline was driven by a negative FX impact of $0.8 million and a volume decline of $3.7 million. Shipments of SCBA cylinders in North America were lower than last year as customers are experiencing a lower level of demand. Alternative fuel sales were also weaker in this quarter as that market is not showing any signs of improvement. However, there was a pickup in the European medical sector where the sales of our advanced L7X range of cylinder is now higher than in the second quarter of 2016. Superform revenues and margins were lower while we tool up for new production for Ferrari and other high-end automotive OEMs. Startup challenges and customer-driven project delays impacted our first half performance at Superform. However, our order pipeline at Superform remains robust and we are driving additional actions to recover productivity. Trading profit at Gas Cylinders was only marginally lower versus last year as FX and productivity actions offset the impact of volume decline. Now, please turn to Slide 7 for an overview of the Elektron segment's performance. Elektron's reported revenue for the second quarter of $50.6 million was flat compared to the prior year as a small positive impact of FX was offset by volume decline. SoluMag sales continued to grow and encouragingly the recovery in sales of flameless ration heaters also continued. Aerospace and defense orders were lower in the quarter, but new orders for chemical detection kits and for aircraft decoy flares were received in the quarter. Catalysis sales were lower in the quarter, influenced by continued decline in shipment for automotive application. However, the order backlog is higher with more shipments scheduled for the second half of 2017.Now; please turn to Slide 8 for an update on our growth opportunities. For Energy & Industrial applications, sales of our SoluMag products into the oil and gas market continue to grow and exceed expectations. In addition, we are making solid progress towards increasing the penetration of our Graphic Arts and Gas Cylinder products into fast growth regions such as the Middle East and India. For medical and healthcare applications, sales of our new L7X alloy medical cylinders showed significant year-over-year growth. Also, we continue to make progress in surgical usage of cardiovascular stents made from our patented SynerMag alloy. For aviation and automotive applications, the new Superform Technology Center in the U.K. has initiated production and we expect productivity and volume to improve in the second half. Also, while our revenue from automotive catalysis was lower, we are making good progress in our patent infringement legal case against a competitor and we expect orders to grow in the second half of the year. Thank you. Andy Beaden will now take you through more details on the Q2 financial results. Andy, go ahead.

Thank you Alok. And welcome everyone to the call. Turn to the summary of the key income statement metrics on Slide 9. As previously noted revenue and trading profit have fallen based on Q2 2016. However, they still represent a continued recovery on Q3 and Q4 of last year. Adjusted EBITDA $15.2 million that reduced on Q2 2016 is at the run-rate that we need to hit our full year guidance. In the quarter there were a number of exceptional items. As Alok noted earlier, we had further impaired investments in the alternative fuel business. Furthermore we have incurred restructuring cost within both divisions and continue to incur expenditure on the ongoing patent infringement litigation against competitor. All these charges in total amounted to $3.3 million. So 2/3 of this was non-cash related. Statutory IFRS net income for Q2 2017 was a net profit of $2.5 million compared to $6.7 million for Q2 2016. Adjusted for the exceptional items and excluding the IAS 19 pension finance cost, Q2 2017 was an underlying net profit of $6.6 million compared to $7.9 million the Q2 2016. Adjusted diluted EPS was therefore $0.25 for Q2 2017 compared to $0.29 for Q2 2016 providing dividend cover of 2x the quarter. Slide 10, to key balance sheet and cash flow metrics; detailed slides for the balance sheet and cash flow can be found in the appendices. Key points to Slide 10 are as follows; net debt, which is debt minus cash was $103.4 million, a 4 million reduction over the yearend 2016 position of $107.4 million, though slightly higher than a year ago. Our trade working capital balance has increased to $99.7 million, higher than both Q2 and the other positions in 2016, but we remain focused on reducing working capital both in the back-half of 2017 and also longer term. Our adjusted return on invested capital was back into double-figures at 11% after the weakness in Q4 2016. We had a strong second quarter on cash as operating cash flow of positive $9.7 million that is $9.6 million in Q2 2016. Net cash flow before financing was $7.5 million, well above from the $5 million for Q2 2016 which was helped by tight control of the capital expenditure and also cash inflows received from our JVs. With the LTM EBITDA of $2.7 million our net debt to EBITDA ratio was just a 2x, but we believe with strong controls over cash and maintaining the level of EBITDA into the second half of 2017, the ratio will start to fall back below 2x.Slide 11 shows the renewal of our banking facilities. On July the 31st we successfully completed an extension to our unsecured senior facilities agreement, which provides a $150 million in committed debt facilities in the form of a multicurrency revolving credit facility, an additional $50 million of uncommitted facilities through an accordion clause. Our senior facilities agreement was due to mature in April 2019 and has now been extended until the end of July 2022. Interest rates have been reduced, but non-utilization fees and drawings over adjusted EBITDA to net debt at 2x with savings expected to be $0.3 to $0.4 million per annum. The terms are similar with the current arrangement with a slightly lower fees and interest margins. The deal provides a strong financial foundation for the next few years and introduces Luxfer to two new large international banks being Citigroup and HSBC who are keen to support our long-term growth plans along with RBS, Lloyds, and Clydesdale Yorkshire Bank. Thank you. I'll now hand you back to Alok to sum up.

Thank you Andy. Please turn to Slide 12 for a summary. While our sales improved sequentially the first half of 2017 was still weaker than last year. In addition, being $0.02 lower in EPS than the consensus estimate this quarter is disappointing. However, our order backlog is stronger and we are taking additional steps to make the 2017 results more robust through a combination of aggressive cost actions and sales activity. Increasingly, the weaker pound sterling against the euro is improving the profitability of our exports into mainland Europe as unfavorable currency hedges continue to wind down. We expect second half of this year to be significantly stronger than second half of last year. Hence we are maintaining our prior guidance of 10% improvement in adjusted EBITDA and adjusted EPS for full-year 2017. Thank you and we will now take questions.

[Operator Instructions] Lastly we request that you initially ask only one question. After you've heard the answer we will give you the opportunity for a follow-up question. If you would like ask additional questions our operator will be glad to put you back in the line. Thank you for your cooperation. Our first question comes from Julian Mitchell with Credit Suisse.

Just really quickly on the cadence of FX tailwind that you're about to see in Elektron - mostly in Elektron, do you see a sequential step-up through the back-half of the year and if so could you kind of just try and quantify the amount that we should be seeing there?

Julian -

Go ahead Andy.

Yes, sorry. The - yes, so following our guidance for the full year, we're on track for that, and I would estimate between $1.5 million and $2 million for the second half of the year. We're obviously hitting $1 million a quarter, so when we get to the Q4, we are starting overlap ourselves from last year.

Our next question comes from Philip Gibbs with KeyBanc Capital Market.

I had a question on the backlog commentary. I think you said for Elektron it was up 14%. Is that year-on-year or is that relative to the end of March?

That's year-on-year, Philip, so it's going to - consistent with where we need to be to get 10% EBITDA improvement, but if compared to June last year.

How much of that backlog within Elektron is longer lead time item versus shorter lead time item in terms of how that goes? I'm just trying to gauge how much of Elektron's business you get on spot relative to coming out of that backlog?

Typically our backlog gives us good visibility into about one quarter, so I would say almost everything will ship within the second half, but this gives us visibility into half of the second half.

Okay. I appreciate that. And then on the cost actions I appreciated the color there in terms of wanting to improve productivity. The first half of this year really saw a sizable increase in operational expenses relative to last year I think they were up 6% on adjusted basis and our numbers where sales were down. Can you talk about where you saw the inflation in the business and then some of the steps you'll take to mitigate and reduce OpEx moving forward?

Yes, I do feel that that's something where we can control our own destiny and we will be taking quite a bit of action going forward to make sure our cost are lower in line with our revenue. Some of the actions have already started and some are going to progress as we go through the rest of the quarter. In the first half there were some one-time charges just associated with CEO transition, but even ignoring that it was higher than it should have been. So we do see that as an opportunity that gives us greater confidence in pulling levers if we see any weakness in the revenue.

And lastly from me -

At the end of -

Go ahead.

No, I was saying, at the end of Q3, so once I've had a little bit more time we probably can get you a bit more details and some numbers on that. Just too early for us to have any numbers.

And I appreciate that. And then lastly from me on the defense side, it sounds like the nonmilitary eater meal business is getting better based on some of the comments you made with the flares and the [indiscernible]. Any sense on how much incremental revenue or incremental call growth relative to last year second half we should anticipate in some of that? And then sub-question of that is are you seeing any change in the relationship with [indiscernible] in terms of their workout scenario?

So on the first part regarding defense orders, we are at this stage convinced that last year was more of an anomaly probably driven by just spending fees and defense as - due to elections and other activities in U.S. So we do expect the orders to get back to more of a normal level which would be a 2014-'15 run-rate, and that would be double-digits higher than where we were last year in 2016. We don't see any I think hiccups to that trend and besides what we have in the order backlog just - for quoting activity is quite strong and we see the sales pipeline to be pretty strong as well. The numbers - sorry, from your second question I'm not sure if I understood that fully, Phil, so could you repeat that one on the steel? Okay. So maybe we can take that offline when we can catch up later today. With that, Operator, are there any further questions?

[Operator Instructions] At this time there are no further questions. An encore recording of this conference call will be available in about two hours. Telephone numbers to access the recording will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today. This concludes the Luxfer conference call.