Good morning. My name is Stephanie and I will be your conference operator today. Welcome to Luxfer’s 2019 Second Quarter Earnings Conference Call. [Operator Instructions] Now, I will turn the call over to Doug Fox, Luxfer’s Director of Investor Relations. Doug, please go ahead.

Thank you, Stephanie and welcome. With me today are Alok Maskara, our CEO and Heather Harding, Luxfer’s CFO. First, Alok will provide a brief overview of the second quarter. Alok’s remarks will be followed by Heather’s review of the second quarter’s financial performance. Alok will then return for some closing remarks. Today’s webcast is accompanied by a slide presentation, which can be found on 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 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 reserved time for questions and answers. Now let me turn the call over to Alok. 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 performance for the second quarter of 2019. Luxfer second quarter results demonstrate the impact of successfully lowering our cost structure and increasing the operating leverage of our business. For the quarter, while sales were down 9%, EBITDA margin increased 60 basis points, and earnings per share was unchanged at $0.44. We achieved $3.1 million in cost savings during the quarter as we accelerated our transformation plan actions to mitigate the impact of sales decline. The sales decline was largely the result of lower shipments of our SoluMag magnesium alloy product as oil and gas customers continue the destocking in the face of lower fracking activity. FX headwinds and reduced sales of Superform products also contributed to sales decline. As expected, we were a net user of cash for the quarter, mostly for restructuring payments related to the closure of our French cylinder manufacturing site. So, we maintained a strong balance sheet with a net debt-to-EBITDA ratio at a modest 1.1x and delivered better than 500 basis point year-over-year improvement in return on invested capital to 19.5%. We made excellent progress on our cost transformation plan to deliver net $24 million in cost savings by 2021. During the quarter, we completed the closure of our facility in France and successfully transferred production to our location in the UK and U.S. In addition, we divested our Czech magnesium recycling operations. Achieving these major milestones will further our journey towards simplified lean operations and enable future commercial excellence. Overall, we are pleased that we were able to maintain flat adjusted earnings per share despite significant challenges in our oil and gas end market. Now please turn to Slide 4 for some color…

Thanks, Alok, and good morning, everyone. Second quarter sales declined 9.1% to $116.5 million, substantially on a reduction in volume, as well as a $2.7 million headwind from FX. Favorable pricing partially offset the decline by approximately $1 million. Consolidated adjusted EBITDA for the quarter of $20.2 million was $1.2 million or 5.6% down from the prior year. For the quarter, we improved gross profit margin increasing to 26.6% from 26.2%, partly on the success of our transformation plan. Price and net cost reductions partially offset unfavorable FX, inflation and volume mix. With the $3.1 million in cost reduction in the second quarter, the cumulative amount for the first half of the year is approximately $1.2 million. Now please turn to Slide 7, where you will see a summary of our Elektron segment performance. Second quarter sales for our Elektron segment, $58.4 million declined 13.9%, primarily on the reduction in SoluMag sales and disaster relief products and partially offset by higher shipments of zirconium chemicals. Segment EBITDA declined $3.3 million to $13.1 million or 20.1%. For the quarter, price and favorable net cost reductions partially offset the decline in volume as well as inflation and FX headwinds. Completion of the sale of our magnesium recycling operation occurred at the end of the quarter. Now if you turn to Slide 8, you will see a summary of our Gas Cylinders segment performance. Net sales for the Gas Cylinders segment were up 3.8% to $58.1 million as unfavorable FX and volume offset an improvement in price. Strong growth in alternative fuel cylinder sales offset the decline in Superform revenue. Overall, business activity remains firm for cylinders. Despite the sales decline, second quarter adjusted EBITDA increased 42% to $7.1 million as favorable movements in price, mix and cost reductions more than offset FX and inflationary headwinds. Now let’s take a look at the key balance sheet and cash flow metrics on Slide 9. Net debt totaled $88.8 million at the end of the second quarter, down from $94.6 million a year ago, but up from $78.4 million at the end of the first quarter. As expected, funding needs included approximately $6 million related to the terminated Neo transaction, funds for the French closure and investments in our infrastructure, supporting future growth. As a result, we had a net cash outflow before financing activities of $5.9 million, net of $5.8 million in proceeds from the sale of the Czech recycling operation and the Findlay facility. We expect to return to positive cash generation in the second half of 2019 and remain committed to delivering on our goal of 100% cash conversion for the company. Working capital at the end of the second quarter was up around $1 million from the same period in 2018. In addition, ROIC from adjusted earnings on a trailing 12-month basis was up significantly from 14.4% to 19.5%. Now, let me turn the call back over to Alok.

Thanks, Heather. Let’s turn to Slide 10. In addition to announcing second quarter earnings, we are pleased to announce the addition of Lisa Trimberger to the Luxfer Board of Directors. We are pleased to add Lisa’s talent and experience to Luxfer’s Board. Lisa is a retired partner of Deloitte & Touche, after having worked there for over 30 years. She’s now a managing member and owner of Mack Capital Investments, an early-stage investment fund. Her broad professional career spans multiple industries, including significant manufacturing experience. With a strong background in audit and advisory roles, Lisa will further strengthen Luxfer’s already strong Board. Her experience with M&A will also be very valuable to Luxfer. Upon joining the Board, Lisa will become a member of the Board’s Audit Committee and Compensation Committee. With the addition of Lisa, the Luxfer Board transformation is now complete. 3 of the 5 independent directors were added in the past 12 months, and all 3 have significant U.S. public company experience. Now please turn to Slide 11 for an update on our earnings outlook. For 2019, we are now projecting adjusted earnings per share within a range of plus or minus 2% relative to 2018, $1.69 versus prior expectation of 8% EPS growth. We are concerned about the outlook for industrial, including oil and gas, and that is around one-third of our total sales. We expect the destocking of SoluMag to continue through the second half of 2019. More broadly, we are noticing weaker industrial sentiments, as many of our large customers are themselves expecting softness and are expected to become more cautious with orders and inventory levels. At the same time, we continue to expect resilience in the rest of our business in defense and transportation. Core defense sales continued to remain robust and are not…

[Operator Instructions] Your first question is from the line of Chris Moore with CJS Securities.

Hey. Good morning guys.

Hi. Chris

Maybe just start on the cost savings side. So prior to this, the timing had been $3 million in ‘19 and $6 million in ‘20, $6 million in ‘21. It’s now $5 million in ‘19. Is that just kind of accelerate what’s going to happen in ‘21 or any thoughts in terms of the relative balance between ‘20 and ‘21?

Hey good morning Chris. Yes, when – as we looked at our performance in the second quarter, and as we can see where some of the market indicators and market sentiments were going, we certainly look to see whatever we could accelerate in action within the quarter. So I think if you go back to Q1 and relative to what we had said for the balance of the year, we have increased our full year guidance a little bit, and that really is kind of the timing between ‘19 and ‘20, I would say. We’re still committed to the $24 million by 2021.

I think one way to think about it, Chris, is that we would still expect another $5 million next year and then the remaining in 2021.

Okay. That’s helpful. And just in terms of the commitment – can you walk through the cash spend that you’re talking about for the balance of 2019 and then to 2020, just to make sure I have a good picture that.

And I assume you’re referring with respect to the restructuring program, Chris?

Yes, exactly.

So we had always said that 2019 would be a heavy year from a cash spend perspective. And we did spend a pretty significant portion in Q2 on restructuring. And because of the French timing, some of those payments are actually were extended in July. So, there’s certainly some more to come out in the – specifically, Q3 in the back half. But from a cash spend perspective, we could think about a substantial portion here in ‘19. I’d say, we are halfway done. So we’ve spent, from a cash perspective, about half of the restructuring dollars that we expected in ‘19 that have been extended through the reported June results. And so, the second half will be of a similar amount.

Just last question, just with respect to SoluMag, it sounds like the inventory levels are coming down a little bit. Is there – from what you’re seeing in that market, are there any new competitors that you’re going up against in that space? Or is it just a kind of purely a matter of oil prices and kind of the overall demand on that side?

We have not seen any new competition or any change in the overall dynamics. We think it’s simply the impact of 2 things. It’s lower upstream activity, especially in the difficult horizontal fracking in brackish water where our products are applied for, and customers who have built-in excess inventory last year. So as they expect a bit of slowdown, we see the double whammy of slowing demand and the excess inventory that needs to work through the customer stocking levels.

Got it right. Let me jump back in line. Appreciate it guys.

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

Hey, it’s Phil Gibbs. How are you?

Good, Phil. How are you? Good morning.

Pretty good. Good morning. Spreads were pretty neutral in the first half of the year? Are you expecting that to be the case in the second half as well?

Yes, I think we expect second half to be very similar when we look at spreads.

And I was reading the 10-Q filing last night, and sales to Germany were down pretty substantially in the first half, I think, $14 million from $21 million. What was that specifically tied to?

Very specifically tied to our French factory shutdown as we move through, like in other shutdown phase, as you know, there was significant disruption in early part of Q1 and a little bit in Q2, so we expect to recover out of that in the second half.

And in terms of the cash operating piece of restructuring, I think you’ve mentioned some of that. I just wanted to reiterate what you said about the year-to-date spending there, Heather? And then what you expect in the second half?

Right. So on a year-to-date basis if you look at both quarters, we spent just under $15 million on total cash for restructuring. And to be clear, there is some of that that’s in capital expenditures, but it’s a fairly small amount. So for the year, we would expect that to be a similar amount in the second half. And again, it’s more heavily weighted towards cash for restructuring as opposed to capital expenditures.

Okay. So thinking like something – thinking about something close to $12 million or so for cash restructuring in the first half and a couple of million for CapEx and then second half, something similar? Is that fair?

Yes. It’s less capital than – it’s less than that. So the $15 million is total, think about maybe $1 million-ish for capital.

Also for like $14 million and $1 million, and then you expect $14 million and $1 million in the second half or something like that.

Something like – yes, but it is more heavily weighted for restructuring cash, not capital.

Okay. And given the weaker macro outlook? It just feels like there’s a little bit more pull forward of some of these restructuring – some of those restructuring spend. Are you still anticipating the net debt to be at the same level it was at the end of 2018? Or is that number going to be a bit higher?

Again with our 100% cash conversion goal, it would be our intention that we will hold net debt flat to prior year.

Thank you.

Your next question is from the line of Sarkis Sherbetchyan with B. Riley FBR.

Hey good morning Alok, Heather, Doug.

Yes Sarkis.

Hey, thanks for taking my question. So it sounds like you’re kind of concerned here on some of the industrial end markets. I think you specifically are calling out oil and gas. Just remind me, did you say it’s 1/3 of the sales metric?

Yes. Total effect of sales are in total industrial. Total industrial includes oil and gas, the way we report it. Oil and gas is only 5% of our total sales, but industrial is 1/3 total.

Got it. Okay. And then you kind of called out resilience in defense and transportation. I guess, can you maybe talk about what you’re seeing in defense and aerospace, maybe some of the growth in some of the alternative fuel category. Just – is the growth in some of the other components enough to offset some of the other weakness that you’ve called out on a like-for-like business, given the divestitures?

Yes, when excluding the divestitures, which were clearly shown separately, I think 2019, that will be a challenge especially on the margin side as the oil and the gas business we have is much higher margin than some of the alternate fuel and other growth areas that we are experiencing. So that’s the reason we had to take our outlook down. But overall, from a defense trend perspective and in the current environment, we see that business being very steady and has always been very reliable even in economic downturn. So I think that’s something we feel confident about. And alternate fuel continues to grow, driven by thinking of public bus spending in Europe, mostly. That’s both doing well. And aerospace remains steady as the new builds and everything else are pretty uniform. I think some of the uncertainty is just around what’s going to happen to the broader industrial. While we haven’t seen change in any order rate, we do get concerned that ISM falls from close to 60 to close to 50, and large customers like 3M and others start talking about softness in their end markets.

Understood. And that’s helpful. And I guess just to kind of wrap up my line of questioning. I think 10% of last year’s sales were from new products. Can you speak about your traction with new products year-to-date? And where does your management team expect 2019 mix to shake out?

I think we would probably end the year back at same number, and that’s because SoluMag was part of our new products, and that’s taken a backward tone this year because of destocking. So we probably – earlier, we would have expected that number to grow. But at this stage, I would say that number is likely to remain flat at the end of the year. But in the long term, we still have confidence in getting that number up to 20% of sales.

Good. Thank you for that.

[Operator Instructions] There are no additional questions at this time. I would like to turn the conference back over to Doug Fox for closing remarks.

Thank you very much for joining us this morning. Heather, Alok and I will be around for additional questions that you might have. We would look forward to talking with you again after our third quarter report, which will be at the very beginning of November. Have a good day.

Thanks, everybody. Bye.

Thank you. An encore recording of this conference call will be available in about 2 hours. Telephone numbers to access the recording will be available on the Luxfer website at www.luxfer.com. Thank you for joining us today. The regularly scheduled call will be in November when the company discusses its 2019 third quarter financial results. This ends the Luxfer conference call. Thank you.