Good morning. My name is Stephanie, and I will be your conference operator today. Welcome to Luxfer's 2020 Third Quarter Earnings Conference Call. All lines have been placed on mute. After the speakers' remarks, there will be a question-and-answer session. Now, I will turn the call over to Mary Reed from Luxfer. Mary, please go ahead.

Thank you, Stephanie. Welcome to Luxfer's third quarter 2020 earnings call. We are happy to have you all with us today. I am Mary Reed from Luxfer, and with me today is Alok Maskara, Chief Executive Officer; and Heather Harding, our Chief Financial Officer. On today's call, we will provide details on our third quarter 2020 performance as outlined in the press release issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at luxfer.com. Please note, any references to non-GAAP financials are reconciled in the Appendix of this presentation. Before we begin, a friendly reminder that any forward-looking statements made about the company's expected financial results are subject to future risks and uncertainties. Please refer to the Safe Harbor statement on Slide 2 of today's presentation for further details. Now, let me turn the call over to Alok.

Thanks, Mary, and welcome everyone. I hope you and your families remain healthy during these turbulent and uncertain times. Before I discuss our third quarter performance, and provide an update on our transformation strategy progress, I want to thank our 1500 employees around the world for working hard to ensure the health and safety of all our colleagues and their families, while always putting our customers first. I am proud of our teams’ discipline and steadfast adherence to operating procedures as we navigate the COVID pandemic. While several of our end-markets remain challenged, we have been executing with agility as we recalibrate our cost structure to current demand levels, while also positioning Luxfer to fully capitalize on recovery. With that, let me provide some highlights that some of our quarterly performance and strategic focus. First, we delivered solid Q3 financial results despite challenging end-market conditions and we are seeing sequential improvement across our businesses. Second, we generated very strong cash flow, further bolstering our already robust balance sheet. This gives us greater optionality as we invest in organic growth enablers and pursue potential inorganic opportunities. Third, we executed our transformation plan and made meaningful progress on initiatives to drive growth through new product development and commercial excellence. I will provide more details on these themes and our CFO, Heather Harding will then review our financial performance in greater depth and share guidepost for the remainder of 2020. Now please turn to Slide 3 for a summary of our third quarter financial results. We delivered solid third quarter results as we address the impact of COVID-related macro conditions on our end-markets with a focus on controlling costs and driving free cash flow. Total sales of $90.4 million declined 15.6% on a year-over-year basis, but we saw sequential improvements compared to the…

Thanks, Alok, and good morning everyone. Thanks for joining us today. Following Alok's review of the strategic elements of our multi-year transformation, I wanted to summarize the financial impacts of this plan on Slide 11. Our focus on cost reductions and waste elimination, has resulted in $18 million of net cost savings through the third quarter. In addition to cost reduction, the smaller footprint in our manufacturing has reduced our annual operating capital requirement by approximately $5 million to $6 million from our historical levels, further improving our cash generation. Our overall lower cost structure will deliver incremental profitability as our end-markets recover. We remain on track to deliver our committed $24 million of net cost reduction by the end of next year. However, based on the strength of our Q3 performance, we now expect to deliver an additional $1 million in savings this year for a total of $6 million to $7 million in savings in 2020. Now let’s walk through the third quarter financial results summary on Slide 12. Third quarter reported sales of $90.4 million, declined 15.6% year-over-year, primarily due to the COVID-related impacts in our Transportation and Industrial end-markets. Consolidated adjusted EBITDA for the quarter of $14.2 million was down 15% versus the prior year. Despite the volume decline, the company executed on the transformation plan and delivered approximately $2.8 million of net cost reductions in the quarter. There were several one-time events in the quarter that impacted our results. The quarterly adjusted EBITDA was positively impacted by approximately $600,000 of net favorable non-recurring items including a net benefit from a customer contract in the Gas Cylinder segment, and partially offset charges in the Elektron segment for obsolete processes and agency contracts. The quarterly adjusted effective tax rate was negatively impacted by $900,000 for the change…

Thank you, Heather. Please turn to Slide 17. Let me wrap up by recapping that we serve attractive niche markets with proprietary products and technology. Our transformation plan has delivered results and will continue to make a positive impact for the next few years. After the transformation plan is complete, we have plenty of runway to create even more shareholder value by deploying the Luxfer business excellence standard toolkit to drive operational improvement and to accelerate growth. Once again, I want to thank all our employees around the world for safely operating our facilities, while maintaining our commitment to always putting our customer first. Thank you for listening. We will now take questions.

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

Hey. Good morning guys. Thanks for taking the questions. I just want to make sure I am looking at the cost savings correctly. You talked about some COVID cost reductions to be permanent. And then, kind of trying to understand is that, incremental to the transformation plan that’s happening now or is that incorporated in there? Or kind of any detail you could give us on the COVID cost reductions that could be permanent would be helpful.

Sure. So, Chris, I think from COVID perspective, we have quite a bit of cost reduction that we had to do just to offset the gross margin impacts. But putting that aside, both cost decreases and higher costs, each our factories is spending more for sanitization, cleaning, inefficiencies, and we have savings, whether it’s things like travel, supply chain, transportation. The total commitment on $24 million does not change. So that remains on net cost savings. What we are more optimistic is, once growth recovers next year and some of the one-time COVID-related costs are behind us, we will generate additional header drop through when the growth recovers. But a simple way to look at it, let’s keep the cost out number at 24 and any upside in future comes from better gross margin on sales that come back.

Gotcha. Alright. Thank you. On the revenue side, how much visibility do you have into fiscal 2021 with respect to the decontamination kits and the heater meals?

We have more visibility by the end of the year. So at this point, we do expect the sales to continue going into next year at the same level as what we had in 2020. But by end of the year, we’ll have more confirmation in terms of confirmed orders. But right now, we expect that to continue.

Got it. And I would see new product development important, does R&D spending needs to increase much over the coming quarters in order to take advantage of the opportunities that you are seeing at this point?

Not really. I think we – like you know, as we spend right about 1% and I think the number is going to remain in that range. We’ve been very efficient and we’ve been very focused on fewer bigger projects and that seems to be paying off without the need to significantly increase our R&D spend. And I think we should think about that 1% for the near future.

Got it. And last one from me, any Brexit thoughts at this point in time? Is there any potential near-term impact that might be had on Luxfer?

Hey, Chris. I’ll take that one. Good morning.

Good morning.

Overall, certainly, we feel like we plan for this a couple of times depending on the…

Right.

The nature of the projects over the last, I think four years or so. Certainly, from our perspective, we feel like we’ve done the proper planning. And we don’t think will be disadvantaged any more than any other business depending on what logistical or new administrative requirements are enacted. We had, as I mentioned – we are looking at some key inventory positions and making sure there are some key items that we will likely build a little bit up in the fourth quarter. And frankly we think some of our key customers may be looking at that as well. So, overall, we don’t view it as a significant material impact to us as we get to the end of the year.

Got it. I appreciate. I’ll jump back in line. Thanks guys.

Thanks, Chris.

Thank you. Your next question comes from Craig Irwin with ROTH Capital Partners.

Hi. Good morning, and thanks for taking my questions.

Hey, Craig.

So, one of the things I really like about Luxfer is, you have an array of interesting growth opportunities in front of you, right? Everything from alternative fuels to new particulates technology and automotive catalysis to even things in medical markets, right. Can you maybe list your top opportunities for expanding 2021 contribution to the top-line? Can you maybe sort of expand on the proportionate impacts or maybe rank the impacts from a dollar perspective? And what you are looking for to get confidence there to be more bullish, so that it seems like you are generally conservative which I know is just the way you operate. But if you could maybe describe what you are waiting for from your customers to get more confidence that these will all be a larger contribution?

Thanks, Craig. So, from our perspective, it’s hard to talk about growth given the deep COVID-related impact. But putting macro aside, the area that we are most bullish is alternative fuel right now. And that’s especially true with hydrogen, but also true for compressed natural gas. That’s a product line that’s more than tripled over the past few years and we already have a strong backlog of orders going into next year. So, we feel quite confident and we will put some great partners to again supply these solution around the world. So, keep in mind, also we are very focused on lot of this and heavy to medium-duty trucks. So we don’t play in the passenger auto market, which means like you know, we are very specialized and capture fair or more than our fair share of growth in that space. Second, I would put our zirconium product line that’s where the gas particulate filtration belongs, that’s where we acquired a bit of a medical opportunity and going to pharmaceutical industry and that’s where also we have some industrial new product coating based on similar nanotechnology that we talked about. So I think that’s the other piece we see very confident about continuing to drive growth in that space. The third area that I would highlight would be something that Chris mentioned earlier is just decontamination – decontamination kits which are the ones made in our Cincinnati facility that we highlighted. Another growth area for us – another place where we have unique proprietary technology and very high market share. So those would be our one, two and three, alternative fuel, zirconium products, and finally the decontamination kits.

Thank you. So, if I could ask a follow-up on the alternative fuels side, so UPS is one of the most vocal customers in this market. Unfortunately, not a big customer for Luxfer, right. But they’ve gone out there and said multiple times on the record that, their Class 8 trucks, they operate them on alternative fuels, because, even though, they have higher maintenance cost, they still have well superior economics to conventional diesel trucks, right. The emissions regulations that are coming online and tightening and tightening for diesel are really pushing things in the direction of alternative fuels. So, the reason I reference UPS is, are you seeing strength predominantly in the big rig market and Class 8 trucks? Or are you seeing broad strength across people looking for last mile delivery solutions, people looking for small fleet, basically service organizations and everything in between or is there a changed sort of concentration up towards the larger vehicles that tend to go back to depots?

So, thanks for bringing that up. And I mean, UPS on itself may not be a big customer, but there are others which run similar route-based delivery networks. Companies such as Waste Management, or nowadays Amazon, in all of these route-based networks and public buses have a similar system. So those are clearly our target customers. And we do supply some to UPS although competition probably has greater share in that existing customer base. Our current sales are more around route-based, kind of, last mile delivery type opportunities. But we are seeing increasingly, like you know, more and more companies looking at large Class 8 vehicles, as well. But majority of our current sales are in medium, like you know, chassis frame and looking at these which are more last mile delivery going back to the service networks. We remain optimistic about the Class 8 heavy duty trailers as well. But that’s more of a nascent industry right now.

Understood. Understood. And then, just as a follow-up here, there have been a couple of very large contracts given in the last year. I think one of them was a $500 million contract on a systems level, right? And there has been chatter about others, right. Amazon, that’s a name that’s out there. Can you maybe describe for us the tempo of procurement activity in this market? Do you see many, many contracts that are out there in the – at the systems level, I guess in the many hundreds of millions or few hundred million that come back to Luxfer?

So, globally, I think, yes. We do see quite a few systems contracts. And keep in mind that we assemble our own systems in UK. So there we participate directly in the systems market and we see a very healthy pipeline. Now, some folks are optimistic about those opportunities converting into dollars. Some may be less optimistic. We are not quite optimistic on that level. It would come down to larger players like Amazon on the final decision that they make on their fleet. So far, CNG-based vehicles seem to meet all the environmental standards, they have excellent economics given the delta between CNG and diesel are still a bit of pretty viable despite the changes in oil price. And frankly, from an environmental perspective, given that a lot of electricity is generated through coal or natural gas anyway, this has very good environmental impact as well. So, yes, we remain very optimistic on, while we can’t commit to a number of 100 or 500, I mean, it’s in that range and some single opportunities on larger customers is that could just be in that range on its own, as well. So, that’s an opportunity. We have tripled the sales here and we are prepared for sales continue going up and we’ll keep investing in capacity and technologies.

That’s fantastic progress. That’s really, really good to hear. So, my next question is, everybody understands why you are deemphasizing fire extinguishers? It’s obviously the right move for the company. But the impact on the top-line and the duration of this impact is something where it’s been a little bit difficult to model. Can you maybe describe for us what you expect the revenue impact to be for you over the next handful of quarters? How long does this last? And when does it start to show through in margins as these products are shed?

So, first of all, you are right. I mean, it is absolutely strategically the right thing for us to do. This was a low margin aluminum cylinder that hang on the wall where our light weighting value proposition wasn’t really valued by the customer. Right now, we look at this as about little over $1 million a quarter type impact perhaps. And we expect this to start lapping itself by kind of in early 2021. So, we have another couple of quarters of this $1 million a quarter type impact going forward.

Excellent. Thanks for taking my questions. I’ll take the rest of my questions offline. Congrats on the progress.

Thanks, Craig.

[Operator Instructions] Your next question comes from Sarkis Sherbetchyan with B. Riley Securities.

Good morning and thanks for taking my question here.

Hey, Sarkis. How are you?

Well. Thank you. So, just first wanted to get a better understanding on the gross margin level of the quarter. Heather, maybe, if you could talk about what the one-time inside Elektron, if that had an impact of course, there was just simply a mix impact? And then I have a few more.

Yes. Good morning, Sarkis. So, in terms of the one-timers, the bulk of the one-timers from a cost perspective did hit gross profit. So, over $1 million of that one-time cost – net cost did hit gross profit. So – and that obviously impacted Elektron. So, if you – on a restated basis, Elektron either dial would have been north of like, 17% excluding the items. So, that’s certainly a big hit. When you think about the gross margin, I know our reported gross margin is just over 20%. When you pull out the impact of the one-timers, we were closer to 21.7%, which certainly, we are still obviously impacted by the COVID sales decline. But if you look sequentially, relative to Q2, we posted some nice margin improvement on the gross margin line, just purely looking at an operating basis. So, hopefully that gives you some indication of kind of the impact of our cost reduction programs and how we are working through all the efficiency items in our plans.

Yes. So, thanks for that. And I think you mentioned in the prepared remarks, you’d expect sales to kind of remain flattish here sequentially. Maybe if you can talk about what you are seeing regarding order rates and maybe by either end markets? And then, if you can maybe comment on the margin structure you’d anticipate. Should that be kind of in line with what we saw this quarter? And/or improving given kind of your cost out? Just help us understand that.

Sure. So, I will start with the order rates. It’s still quite uncertain and our visibility remains less than ideal or less than before. But if I think of defense in a broad bucket, I mean, order rates are strong there and there is typically an election year pause, which we anticipated and are facing. But putting that aside, order rates remains strong and we are bullish about getting that to be slightly growing part of, like you know, Q4 and going forward as Heather mentioned. Transportation, Aerospace is weaker. Automotive is a little better. Alternative fuel is going to grow and as we talked about. So, net-net, I think that’s going to become a growth area for us going forward as well. Industrial is a one where it’s most challenging for two reasons. Q4 is sequentially lower for industrial. So we are going to face that. And that’s where I think we have seen more just bouncing along the bottom, not getting worse, but we haven’t seen things getting a lot better either. So, that’s the one which we are facing uncertainty and looking at how do we take this forward. From a margin structure perspective, while in general our margins are pretty comparable across the board, when industrial is very healthy margin, the auto that’s coming back is lower margin than aerospace. But that does have a negative mix impact to us. It’s kind of partially offset by defense being stronger. So net-net, if I put the picture together, I would expect margins to remain stable going forward, excluding the one-time impact that Heather already mentioned. Some of the clean up things that we did in Q3. Heather, anything to add to that? Or Sarkis, that answered your questions?

The only thing I might add, Alok, is that, the last part of – I think a question was around cost reductions. So certainly, our - talks about we’ve increased this year’s cost reductions from six to seven that we are pulling. We are pulling some forward. So, obviously, given the fact that we posted, I think it’s $4.5 million year-to-date. You could certainly model in continued cost reductions that we do expect to deliver in the fourth quarter.

That’s super helpful. And I guess, just to kind of build off of that thought process, Heather is, is the SG&A runrate of this quarter kind of the appropriate to look at going forward given kind of the cost out or were there anything unusual to consider for that number not to be kind of the typical number going forward?

Yes. I think from our perspective, I think the SG&A is pretty indicative. There is always a bit of quarterly things that happen. But overall, I would say, it’s pretty indicative for you to use going forward.

Okay. Thank you. I’ll take the rest offline.

Thanks, Sarkis.

Thank you. [Operator Instructions] Your next question is from Michael Leshock with KeyBanc.

Hey guys. Good morning.

Good morning, Michael.

So, first just on the SCBA timing, you called that out as it was impacting sales in the quarter. I thought a majority of that was behind us at least pre-COVID. If you could kind of talk about what happened there? And when do you expect to realize the sales?

Sure. So I think on SCBA, the pre-COVID disruptions were more around some certification and that’s clearly behind us. I think right now, what we are facing in SCBA is, we work very closely with our key customers, which you know who they are. And each of us are just having a bit of a supply chain challenge and retooling our factories for COVID, enjoying social distancing. So we have had some timing-related issues in that case. And just unfortunate case of everybody operating under the new normal with COVID. But these are factories that people are often standing shoulder-to-shoulder, doing assemblies and kits. And everybody had to just retool all the operations. So they are more just operational, supply chain related delays that we hope to be able to catch up in Q4 and Q1 going forward. So, over time, we can work at things like that. But this is not a demand issue at all.

Got it. That’s helpful. And then, moving on the M&A front, I just – out of curiosity, would be targeting multiple niche transactions? Or would you favor a larger deal?

I mean, I think we’ve talked about bolt-ons and what we are going to focused on from our perspective. We are not against the larger transaction, but given past experience and where we think we can add significant value, it’s going to be around niche end markets last where they have strong market position similar to what we have good attractive margins. But we are not looking at a big large type transaction. Our focus is going to remain on bolt-on things where we can get significant synergies. And with regard to T-Malls, like rich are in niches. So we’ll continue pursuing those. But at the same time, valuation, at least in transactions have not come down. And there is still a lot of money from private equity. So, I am not suggesting that anything is going to eminent to go.

Is there end-markets that you might target more than another?

Our strength on Defense, obviously is something that we like quite a bit. So the whole first category, I mean, we like Aerospace. There are niches within Industrial that we like. So, no, not specifically, but we try to not increase complexity of Luxfer. Alternative fuel is an area that we like quite a bit. So, that’s going to be areas which we feel we are strong in and areas where, like, one plus one is greater than two.

Got it. Appreciate all the detail. Thank you.

Thanks, Michael.

Thank you. Your next question comes from Phil Gibbs with KeyBanc Capital Markets.

Hey, thank you. Alok, when you talk about the gasoline particulate filtration opportunity, I think your pitch as 7.5 times sales increase in 2021 versus 2019. How much of that growth did you get in 2020? Because, presumably, you have been growing this year in that, as well. So, I am just engaged to that.

Yes. So we are growing. Now, keep in mind that 2.5 times is starting from a low base. So not all our sales are going into gas particulate filtration and that will be about 30% of our autocad sales going into gas particulate filtration. This year, I would say the – which is kind of consistent with our previous rule. You only talk about new products when we reach about $1 million sales. So, that’s where we would be this year.

You are going to be about $1 million in sales in this…

Yes.

Okay. Okay. And so, that – should we consider that that level you are at in 2019 as well. So this is going from about $1.2 million, $2.5 million.

2019 was close to zero. So this 2020 $1 million is all new sales, so.

Okay. Got it.

And auto – it’d be overall autocad which you know, I think you know is about one-third of our total zirconium sales.

And Heather you talked a little bit about the cost savings. Clearly, this quarter was very strong in that regard. Do you expect incremental cost savings relative to the 3Q baseline? Or is the number that you increased, mostly based on the year-to-year comparison. So, trying to understand if there is incremental relative to this past September quarter?

Right. So, certainly, as you know, when we measure the cost reductions, that is based on year-over-year. So, we would expect a continuation of this program into Q4. We’ve taken some significant cost actions here in the last two quarters. And so, we are always looking for additional opportunities. But I don’t expect material – significant sequential cost reductions from three to four – it’s continuation of our current cost plan – of our cost reduction plan.

Thank you.

Thanks, Phil.

Thank you. An encore recording of this conference call will be available in about two hours. Telephone numbers to access the recording will be available at Luxfer’s website at www.luxfer.com. Thank you for joining us today. The next regularly scheduled call will be February of 2021 when the company discusses its 2020 fourth quarter financial results. This ends the Luxfer conference call. You may now disconnect.