Luxfer Holdings PLC (LXFR) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Crystal, and I will be your conference operator today. Welcome to Luxfer's First Quarter 2018 Earnings Conference Call. [Operator Instructions] Now I will turn the conference over to Doug Fox, Luxfer's Director of Investor Relations. Doug, please go ahead.

Thanks, Crystal. And welcome to Luxfer's 2018 First Quarter Conference Call. With me today are Alok Maskara, our CEO; and Heather Harding, Luxfer's CFO. First, Alok will provide a brief overview, followed by Heather's review of the financial performance. Alok will then return to provide an update on Luxfer's strategy. Today's webcast is accompanied by a slide presentation, which can be found in the investors section of Luxfer's website. We'll 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, let me remind you that any forward-looking statements made about the company's expected 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 have reserve time for questions and answers. Now let me turn the call over to Alok Maskara. Alok, please go ahead.

Thanks, Doug. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 for the summary of our first quarter performance. Luxfer is pleased to report a strong start to 2018. For the first quarter, revenues increased 16% to $119.7 million, on strength in both our Elektron and Gas Cylinders segments. For the first quarter, revenues increased and the growth was broad based with most business units contributing to the strength. Adjusted fully diluted earnings per share for the quarter were $0.38, up 41% over the earnings of $0.27 last year. Adjusted EBITDA, advanced 26% to $19 million. This strong performance is early evidence of our success in focusing on growth, productivity and simplification. These efforts led to the generation of a net cash inflow before financing of $7.8 million an increase of 26% from the prior year. While still in its early days, our Luxfer transformation strategy to deliver more sustainable growth, improving profitability and delivering higher returns on invested capital is definitely gaining momentum. Given the first quarter results and the improved outlook for the remainder of the year, our new earnings guidance range is $1.20 to $1.30 per adjusted fully diluted share for 2018. Now let me turn the call over to Heather for a closer look at Luxfer's financial performance, beginning on Slide 4.

Thanks, Alok. As you can see on Slide 4, consolidated revenue for the first quarter was $119.7 million, which is 16% higher than the $103.4 million for the first quarter of 2017. Higher volumes accounted for better than 60% of the change, contributing $9.7 million to the growth principally from our Elektron segment. FX accounted for $5.5 million of the increase. Pricing, primarily to recover from raw material inflation, accounted for $1.1 million of the revenue growth. Adjusted EBITDA for the first quarter was $19.3 million with 26% higher than a year ago. The improved volume, along with favorable FX, better pricing and higher productivity, more than offset higher cost, principally, for raw materials such as aluminum and zirconium. Now please turn to Slide 5 for an overview of our Elektron segment performance. Elektron revenue advanced to strong $11.4 million for the first quarter for 23% year-over-year growth. Excluding FX, segment revenue increased 16%. Shipments of disaster-relief and military products contributed to the growth as well as increased sales of magnesium alloys and zirconium products. We were very pleased for continued growing demand for our innovative magnesium-based SoluMag products for the oil and gas industry. Higher volume largely drove adjusted EBITDA for Elektron, up 33% for the quarter. Productivity enhancements also contributed to the operating leverage experienced in the segment to more than offset material cost inflation, primarily for zirconium. We have actions underway to recover material inflation with price increases in the coming quarters. Now please turn to Slide 6, for an overview of performance in our Gas Cylinders segment. Quarterly revenue for cylinders increased 9%, with growth in sales of cylinders and Superform, partially offset by lower shipments of alternative fuel products. FX had the biggest impact on the $4.9 million increase, followed by volume and price. First quarter adjusted EBITDA for Gas Cylinders up 13%, reflects the positive impact of the higher volume and pricing as well as productivity, which was a direct result of manufacturing improvement. Cost inflation primarily for aluminum partially offset the improvement. In the quarter, Superform had strong revenue growth, but profitability remained challenged due to ongoing manufacturing inefficiencies and pricing issues. More recently, we had experienced lower manufacturing scrap rates and are working aggressively with customers to recover pricing. We remain optimistic about delivering a turnaround at Superform by the end of the year. Looking ahead for this segment, we are implementing pricing surcharges to offset the increased cost of aluminum, which is up nearly 20% since the beginning of the year. The increases, which range from 4% to 10%, took effect as of May 1st. If you turn to Slide 7, we provide a summary of our key income statement metrics. In addition to the points already discussed, let me point out the 5 percentage point improvement in gross profit margin. The increase was primarily driven by higher volumes and productivity improvements partially offset by the higher raw material costs. On Slide 8, we highlight the year-over-year improvements on the balance sheet, cash flow generation and returns on capital. Since last year, we have worked to strengthen the balance sheet and improve cash generation. From a year ago, our net debt has declined $8.2 million to $97.7 million. Working capital increased $4 million to support the higher sales activity. Still our net cash flow before financing, increased 26% to $7.8 million for the quarter. Our improved performance led to significantly higher returns on invested capital from 10.7% to 12.5%. Let me now turn the call back over to Alok, who will provide a brief wrap up and then some deeper insights into our transformation strategy.

Thank you, Heather. Please turn to Slide 9 for a summary of the first quarter results. Luxfer is delivering better performance from improved execution. The increased organizational focus on customers is driving growth as each Luxfer sales person is expected to reach out to at least two new customers every week. Similarly, our innovation projects are benefiting from early customer input. At the same time, we are maintaining better discipline over cost and have begun the process of facilities consolidation to improve manufacturing capacity utilization. We remain on track with these plans, which will deliver net $20 million in annual cost savings by 2021. For 2018, our initiatives to drive business improvement, is supporting our higher earnings range of $1.20 to $1.30 per share on an adjusted fully diluted basis. Now please turn to Slide 10 for an update on Luxfer's strategy. At Luxfer, we strongly believe that our best days are still ahead of us. We are focusing on building a company around our core strength, as a global leader in the development and production of highly engineered advanced materials. We serve customers in end markets with attractive growth rate and our expertise in advanced material delivers high profitability and attractive returns on invested capital. We are committed to customer driven innovation and continuous improvement to increase long-term shareholder value. Currently, we are in the early stages of a comprehensive company transformation to increase growth and profitability. At the same time, we are committed to improving cash generation and pursuing a disciplined approach to capital allocation. Overall, we see significant opportunities to enhance shareholder value. Now please turn to Slide 12 for an overview of Luxfer's transformation plan. The key elements of our transformation plan are simplifying our company, building a high-performance culture and talent, accelerating productivity, growth recovery, and finally, unlocking the value of our portfolio. We are nearing completion of Phase 1 of our transformation, are well underway on Phase 2 and are in the early stages of Phase 3. On Slide 13, we present our actions that are simplifying our company. Beginning last year, we have worked to make it easier for investors to become Luxfer shareholders by reducing obstacles to invest in Luxfer. In December 2017, we converted from ADS's to direct listing of ordinary shares on the New York Stock Exchange. This action eliminated the deduction of ADS fees from cash dividends as well as barrier for inclusion in stock indices. Our transition continues, as we plan to convert from a foreign private issuer to U.S. domestic issuer. Beginning in 2019, we will be reporting our financial results on a U.S. GAAP basis, and file the relevant reports with the SEC such as 10-Q, 10-K and 8-K, as compared to filing 20-F and 6-K. The move to become a domestic issuer will also improve transparency, as we file an annual proxy statement, and fully implement the SEC process for insider-trading disclosures. Simplification is extending also to our internal business processes. For example, under Heather's leadership, we will be simplifying our internal financial operations by moving to a shared services model. Please turn to Slide 14 for an overview of the ongoing cultural transformation at Luxfer. We are transforming Luxfer's culture by increasing our emphasis on Luxfer's values, which include a greater focus on customers and accountability.Our employees are responding positively to this change, which offers greater opportunity for professional growth, including enhanced pay-for-performance. Our efforts also include emphasis on training, coaching and mentoring, so that we can acquire, retain and develop talent. Refreshing the culture is also extending to the Board of Directors and executive management team. The majority of Luxfer executives now are either new to Luxfer or in new roles within Luxfer. In addition, four of our five board members have a tenure of less than five years. Please turn to Slide 15 for an overview of our productivity efforts. To drive productivity and to rationalize our cost structure, we are focused on increasing our gross margins and reducing G&A cost, by implementing lean manufacturing and rightsizing our manufacturing footprint, we expect to reduce cost by approximately $12 million. Two subsidy consolidations are already underway, and we have divested two small nonstrategic facilities and product lines. We project an additional $8 million in savings from our simplification initiatives to consolidate back-office and generate greater efficiency in G&A expenses. To date, we have created a flatter and more responsive management structure, and are executing on multiple initiatives to reduce cost such as IT and indirect spend. Please turn to Slide 16 for overview of the growth recovery plan. We are currently in early stages of establishing robust processes in sales, marketing and product development to drive more sustainable growth. These steps include giving our sales organization the tools and incentives to drive more profitable growth. For example, we are updating the incentive compensation plan for our sales team and are rolling out salesforce.com across the enterprise. For innovative product development, we are cleaning out the funnel to rationalize projects that have a lower likelihood of commercial success, and are redirecting resources into more promising customer driven innovation. Another attractive area for growth is to increase our global market share, including developing a greater business presence in China, India, Middle East and Eastern Europe. Please turn to Slide 17 for insights into our business segments. Luxfer currently operates in two business segments. Elektron and Gas Cylinders. Both segments offer attractive opportunities for enhancing profits through manufacturing excellence and extending industry leadership with new products and solutions. Overtime, we will also be looking strategically to unlock the value of this portfolio by supplementing profitable organic growth with acquisitions and divestures. Please turn to Slide 18 for an overview of our growth potential. Luxfer operates in large markets with attractive growth and profitability. This $10 billion addressable market offers us ample opportunity for growth, both organically and through share growth and through acquisitions. The market for high-performance alloys, ceramics and composites is growing well above GDP to support the growing demand for high-performance, lighter-weight advanced materials. In high-performance cylinders, we hold a leading market position, supported by our technology and manufacturing excellence in both aluminum and composite cylinders. There are clear opportunities to maximize the value of this unique position over time as the industry continues to consolidate. Please turn to Slide 19 for a view on our capital allocation principles. Right now, our priority is on investing in our current operations, as we outlined today. We expect to receive a rapid two year payback on achieving the net $20 million in cost savings from productivity. New product innovation is another area of significant opportunity. Currently, we spend less than 1% of revenue on product innovation. Overtime, we expect to increase the level of funding to 2%, in addition to establishing processes to increase the cadence of successful new product launches. We are already seeing benefits of greater focus and discipline in this area. In April, we announced the introduction of Luxfer ECLIPSE, the world's lightest high-performance SCBA cylinder available today. Designed for use by firefighters, the new cylinder uses advanced engineering and manufacturing techniques to deliver weight savings, without sacrificing strength, durability or safety. It is 20% lighter than comparable aluminum line cylinders, and up to 3% lighter than plastic line cylinders. We are expecting ECLIPSE to generate meaningful sales, starting in 2019. Our third pillar in capital allocation principles is to pursue strategically important acquisitions and divestures. We continually evaluate our internal business portfolio and external options to identify opportunities for additional shareholder value creation. While the vast majority of our time and focus will remain committed to creating shareholder value through internal execution, we remain open to strategic acquisitions and divestiture options. Please turn to Slide 20 for the final summary. Let me finish by stating that we believe that Luxfer's best days are still ahead of us. As we outlined this morning, we have a strategy in place that guides our daily action to build shareholder value. Luxfer is well positioned to serve attractive end markets as a global provider of highly engineered advanced materials. Several attractive organic growth initiatives are underway to improve sales execution and reinvigorate the product development process to drive long-term profitable growth. At the same time, we are well underway with several cost initiatives to optimize operations and are seeing positive early results in building a high performance culture that is focused on serving our customers and increasing accountability. Our balance sheet is in good shape. We are generating strong cash flow, while cautiously investing in those areas of our business that deliver the highest risk-adjusted returns. Thank you for listening. We will now take questions.

[Operator Instructions] Our first question comes from the line of Phil Gibbs with KeyBanc Capital Markets.

The question is on the timing of these net savings that you're outlining cumulatively around 20 million. How are we supposed to envision that flowing through in '18 beyond '19 and '20? And how much cash spending is going to be associated with achieving these net savings?

Yes, Phil, I would say the vast majority of these savings are likely to be in '19 and '20 and with '21 achieving the full run rate of $20 million in net savings. I think this year, I would probably expect maybe only 20% of the or less than 20% of the $20 million. So let's say $3 million to $4 million in net savings. From a cost, it's kind of a similar story where majority of the 40 million cost, so if we expect a two year payback is likely to fall in 2019, maybe some in '20, because that's where the bulk of the spend is going to be.

And what's the pure spend that you are going to make to achieve this? Is it what you call...

We will look at a total cash spend. It is going to be $40 million, so it gives us roughly a two year payback to get to the $20 million in net savings. It will be little bit this year but a large majority of it's going to be in '19.

And what's the split between OpEx and CapEx there?

The savings, which we talked about was $12 million in gross margin and $8 million in G&A. From OpEx, CapEx perspective, it is hard to kind of break it out fully right now, but I would expect probably we're going to look at $8 million to $9 million in CapEx and the remaining in OpEx. But that's a very rough number at this stage.

I appreciate that and on the zirconium business, just been seeing some follow-through from one of your competitors in Europe in terms of what it looks like some product patent success wins against the Chinese, curious if that's something that you are seeing? And something that you maybe benefiting from in the future? And just looking for some thoughts around that.

Yes, there was a press please from Solvay where Solvay has won the patent and we have cross licensing agreement with Solvay against the Chinese manufacturers. We do expect that to be a positive for us in the long-term, Phil. In the short term, there is -- I guess some of these changes take time. But zirconium business we are getting more optimistic and for the first time, we are starting to see growth there as well. But with the latest battle that Solvay won against the Chinese competition, we do feel much better our own intellectual property position and accessibility to market with existing products. And as you know we also have new products, which are likely going to help us kickstart growth later in 2019 and '20. So both the short-term and long-term are turning more positive there.

And my last question and I'll jump back in the queue here. It is on the new product pipeline, I think you talked about pretty strong growth year-on-year in Q1 for SoluMag, can you give us any ideas in terms of what that contribution may have been or what the growth rate is this year?

SoluMag from a growth rate perspective is quite good, but it's still very small. Last year, we ended the year where SoluMag was still less than $10 million. This year, we're expecting it to double again and we do expect it to become double-digit millions this year. But we really don't break individual products out from -- just to keep -- not give too much information to competition.

Yes, I mean, is there anything else from the new product standpoint that is exciting here for you in the pipeline?

There is, I mean, I think, our medical series of products quite of which are delayed, especially, as we look at our joint product with BIOTRONIK [indiscernible] magnesium dissolvable stent portions, I mean that's pretty exciting. ECLIPSE that I highlighted, is also quite exciting for us, which is the lightweight SCBA cylinders and finally, we continue to work even in other areas to look at new applications for the soluble magnesium technology beyond SoluMag. So just new application of the same technology. So pretty excited about some of those. At the same time, we are very early in the process, Phil. We have just eliminated some of the older new product that we were working on. So I do believe a large majority of the benefit would come out closer to 2020 and beyond, because these are 18 to 24 months cycle before new products can be launched and got revenues out of.

At this time, there are no further questions in queue.

Okay. You can close the call, operator.

An on-call 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 ends the Luxfer conference call.