Good morning. My name is Lorie, and I will be your conference operator today. Welcome to Luxfer’s 2020 Fourth Quarter and Full Year 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 Heather from Luxfer. Heather, please go ahead.

Thank you, Lorie. Welcome to Luxfer’s fourth quarter and full year 2020 earnings call. We are happy to have you with us today. I am Heather Harding Luxfer’s Chief Financial Officer; and with me today is Alok Maskara, Luxfer’s Chief Executive Officer. On today’s call, we will provide details on our fourth quarter and full year 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. Now 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, Heather, and welcome, everyone. Thank you all for joining us today. To start with, I want to thank our employees for their continued focus on serving their customers while managing the inherent challenges of the pandemic. I am grateful to all of them for delivering strong cash and margin performance throughout the year, while maintaining steadfast adherence to safety protocols as we continue to navigate the COVID pandemic. I want to highlight that as part of our transformation plan, we intend to divest the majority of our aluminium operations, including Superform. We are in active dialogue with potential acquirers for these valuable assets and plan to complete the transaction over the next 12 months. The divestment of these businesses would lead to about 200 of our employees, which into a new employer. And I want to personally thank each and every one of them for the years of service to Luxfer. I appreciate the patience and dedication of these employees as we work through this process, while continuing to focus on our customers first. Given our intention to divest these operations, all the numbers in our press release and presentation exclude the results of these operations as per the accounting guidelines for discontinued operations. Before I review you our results, I want to highlight three key messages. First, we delivered solid Q4 earnings. While some of our end markets remain challenge, we experienced sequential improvement in sales, despite typical Q4 seasonality and we realize growth in several new products. Second, we generated strong cash flow further bolstering our already robust balance sheet. This gives us greater opportunity as we invest in organic growth enablers and pursue potential inorganic opportunities. Third, we executed our transformation plan with cost savings exceeding expectations, while making meaningful progress on initiatives to drive growth…

Thanks, Alok, and good morning, everyone. Again, thanks everybody for joining us. First, I’d like to review our sales performance by end market on Slide 9. As a reminder, our sales can be classified into three key end-user market, Defense, First Response, and Healthcare, Transportation, which is a combination of Alternative Fuel, Aerospace and Automotive, and General Industrial. In the Defense, First Response, and Healthcare end market, quarterly sales declined by 3%. We saw increased demand for our disaster relief products, but that was also by a decline in our products for first responders, which is firefighters and medical personnel. Sales in transportation grew 20% in the fourth quarter, driven by strong demand for hydrogen and compressed natural gas products. We also experienced growth in our auto catalyst products driven by industry recovery in the lighter adaption of gas particulate filtration. Weakness in aerospace was all set by growth in other product lines. Sales in the General Industrial end market declined 11%, which is a meaningful sequential improvement from the 21% decline in Q3. The sales decline was broad-based and impacted most of our industrial products. However, we were encouraged by the sequential improvement in sales in order rates. Now please turn to Slide 10 for a summary of our fourth quarter P&L results. As a reminder, all the information presented today excludes the results of discontinued operations. We have provided detail of the through statement activity in the appendix of this presentation, and in our 8-K filings. Fourth quarter sales of $82.1 million were fairly flat to prior year, which favorable FX and price offsetting volume decline. Growth in transportation fueled by alternative fuel sales was offset by the COVID impact in industrial products. Consolidated adjusted EBITDA for the quarter of $13.8 million improves 21.1% versus the prior year.…

Thank you, Heather. Before I wrap up, I wanted to update you on our ESG efforts as we published our first ESG report after our last earnings call in November, 2020. This report highlighted key stakeholder interest, including our environmental goals, social statistics and governance structure. We realize that non-financial reporting is important to our stakeholders, and we are committed to providing transparency around our sustainability activities. As a result of our recent efforts, our ESG scores from ISS have improved significantly over the past few months. Our environmental score has improved from nine to four, our social score has improved from six to one, while our governance score remained at a strong two. Please turn to Slide 19 for a wrap up. Let me wrap up by recapping that we serve attractive niche market 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 customers first. Thank you for listening. We will now take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Chris Moore of CJS Securities.

Hey, good morning guys.

Good morning, Chris.

Good morning. Yes, maybe just start with alternative fuel, obviously, a very exciting area. Just trying to get a feel for, how competitive this market is. Worthington, it sounds like just announced the product that they’re going to do in hydrogen space. Are there a couple of people that you see regularly or just kind of your thoughts on that competitiveness?

Sure. So I think from our perspective, we are very focused on heavy vehicles and there are a lot of competition in the lighter vehicles and the smaller cylinder space. But in the heavy vehicle, I think, it’s – our position is pretty strong. I don’t really want to talk about like in our competition, but I would say Hexagon and Worthington are great companies, who offer similar products in certain markets of ours. Our differentiating value proposition is, we have been in this industry a very long time have made both Type 3 and Type 4 products, our reliability and our long-term reputation is a huge asset companies choose, where to buy their products from. Also our focus – narrow focused on heavy trucks and buses is very, very helpful to us versus our competition. So we do see competition, there probably be more, but it’s a very exciting industry and we really like our position here.

Got it, helpful. And commodity prices have been very volatile recently, your key inputs have, I guess, aluminum and magnesium and zircon sand and some rare earth minerals. Any concerns there and how does your supply chain overall look like?

We likely the lower commodity prices versus higher. So from that perspective, yes, there’s some watching that we do constantly, but overall, our standard operating mechanism is that we are able to pass on higher commodity pricing within sort of 60, 90-day delay timeframe. And while the aluminum price has taken recover from the pandemic, we think they’re still in the manageable range. Zirconium, we have a fairly – we can a long supply chain and very well established sourcing methods. And on magnesium, we typically do back-to-back locking based on our contracts with governments and others. So yes, I mean, we watch it constantly. We would maintain our view that over three to six months timeframe, our inflation versus pricing would continue to offset each other. So we’ll keep watching, but no immediate concerns here.

Got it. Last one for me. Is there any SoluMag in your fiscal 2021 guidance?

We put a small amount, which is kind of similar to what we had in 2020. We’re not making any growth in for SoluMag in 2021.

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

Thanks, Chris.

Your next question comes from the line of Craig Irwin of ROTH Capital Partners.

Good morning, and thanks for taking my questions. Hey, Alok and Heather. I wanted to start with transportation right, the 19.5% growth in the fourth quarter of 2020 is a strong number. You do say that oil fuel was double-digit growth. But maybe can you help us understand a little bit about what drove that that strength there. Was there may be a channel fill from the particulates product for automotive catalysis that you’re launching this year? Was there something else maybe that outperformed in there that gave you such a strong result?

We think it’s a sustainable and not any specific factor, so there was no inventory fill or anything else that we can go back. But do keep in mind that Q4 2019, we did have some disruption related to one of our customers in alternative fuel, but [indiscernible] largest driver of growth alternative fuel.

Okay, excellent. So over the course of 2021, I think you guided for mid single digit growth in the segment. Can you maybe help us understand the contribution that you’re expecting from the new particulates product? Is this likely to be a material contribution? Will we see sort of more than a $10 million or $20 million uplift to catalysis revenue. How much proportionately is the content per vehicle increasing? Are we seeing a potential double, 15%, 25% at any color you can offer?

Sure. So the largest driver of growth for 2021, Craig, will remain alternative fuel. And that’s the one that gives us the confidence of guiding it kind of low double digit range for transportation in 2021. The content per vehicle for gas particulate filtration and auto catalyst is increasing in the range of 20% to 25%, no, it’s not double. But we do expect that to add to good numbers in 2021, especially given that 2020 was a really bad year for automotive. But if I take a step back, I mean, both of these products, including the auto catalyst gas particulate filtration, our new Type 4 hydrogen cylinders, and obviously continued traction on our G-Stor products for CNG and hydrogen. All three will contribute meaningfully, but alternative fuel and hydrogen will be the number one driver.

Excellent. I wanted to ask a question about some of the content on your Slide number 7, right, future capabilities, you’re pointing to new opportunities in Asia. You’ve done a tremendous job getting down to 10 facilities from 20 over the last couple of years, restoring the growth profile and the profitability of the company. Can you maybe talked about where you are in the decision process on potentially building something in Asia. And is this going to be strictly CNG and hydrogen as you suggest in the slide. Or are there may be other opportunities and any CapEx related to this in your guidance for this year.

Yes. Great question, Craig, appreciate it. So we’ve been in China for a while, but recently started composite cylinder manufacturing in China. And that’s what we highlighted on Slide 7. I mean, right now our focus remain all our composite cylinder end market, including SCBA, including aviation, including alternative fuel. We are just starting on that journey, maintaining our focus on heavy vehicles as we have done in the past. There is a CapEx requirement, I mean, a large portion of the CapEx guidance we give land up going to alternative fuel just like it did in 2020. But it’s all baked in our current numbers, nothing incremental beyond that. And that’s because we have capacity globally that we can move around and capability that we can deploy globally as needed.

Understood. Congratulations on the strong result. I’ll hop back in the queue.

Thanks, Craig.

Your next question comes from the line of Sarkis Sherbetchyan of B. Riley Securities.

Hi, good morning, Alok and Heather. Thanks for taking my question here.

Good morning, Sarkis.

Yes. So just want to quickly touch on the divestment of the aluminum product lines and including Superform. I think if I look at the discontinued sale offline, a little over $50 million for this year and very small kind of EBITDA contribution. I guess, as we strip out this line – business line from the financials and we look at the business going forward. Can you maybe help us understand what the incremental contribution margin will be pro forma as if you were have – to have divested that business and as we think about sales growth and operating leverage on your infrastructure.

Hey, good morning. Sarkis, it’s Heather. I’ll take that one. So when you look at our mix, certainly as Alok mentioned, the new Gas Cylinders segment, I think represented about 44% of our sales for the total company. Going forward, obviously, the Elektron margins will drop through around that 30% or so level. And we would expect Gas Cylinders sale to drop through approximately around 25% going forward. Obviously, with discontinued ops, there would have been some profitability that would have been included in 2021 when we built our original budget some time ago. So we’d expect that’s probably in that $2 million range that will not occur in our continuing operations.

Great. Thanks for that, Heather. I guess points about also is how does the free cash flow profile change kind of excluding the discontinued ops and looking at the business kind of going forward. Does that improve? Does that stay similar? Just kind of help us understand that.

Yes. When I think about the free cash flow, certainly you can see on our statement. There was a minimal impact from the discontinued ops in terms of free cash flow. So moving forward, our guidance remains the same. We still expect to convert a 100$ of net income excluding restructuring. It really doesn’t change that that profile much going forward.

Got it. And I think look, you mentioned building the business organically and through some value creating acquisitions, maybe if you can help us understand the areas you’re looking at, are there certain end markets that you believe you need to go out and buy versus build on your own? And if you can maybe comment on potential geographies that you think you might need to fill holes and just any color there would be extremely helpful.

Sure. And there’s a broad range of opportunities we are targeting when it looks at acquisition. I think the strategic filters as laid out by Heather are all of the right ones. And to answer your question more directly Sarkis, I mean obviously we are looking to improve our growth profile. So we would look for acquisitions on areas such as alternative fuel, where if we believe we can get additional capabilities and capacities at the appropriate valuation that would be something we look at. Clearly Asia and emerging markets remains geographical expansion opportunity for us given how little of our sales currently go in that region. So we look at that as a greenfield versus brownfield or an acquisition. So I think that remains another priority for us. And then finally, things like aerospace and defense, I know it’s in a tough spot right now, but we are in the business for long-term and we remain confident that like if there is something it’d be appropriate valuation, given the market sentiments and the appropriate synergies that come to us, we wouldn’t shy away from that either. We’ve been trying to focus on things where we can create operating synergies, things that improve our growth profile, including like growth driven by mega trends, growth driven by geographical expansion, there’s is a broad basket. And we’re kind of pleased with how quickly the M&A market has rebounded compared to what it was last year.

Got it. That’s super helpful. And I think I’m just to piggyback on the point you made regarding aerospace and defense, it seems like that’s an area of opportunity given the specialty materials that that industry consumes. And would you say that there’s a particular maybe product set that could be attractive or add to your capabilities that you internally don’t have? I mean is that more of like a material, a particular type of materials specialty that you’d like to buy or further bolster?

Yes. So I mean we obviously have very strong position and something like magnesium, which is a niche material, small market size, but very strong position. If we looked at similar thing, whether it’s getting into composites, whether it’s getting into other speciality metal alloys that would be our focus. So while I wouldn’t go down the periodic table yet, we’d be looking at niche materials, alloys, composites that allow us to leverage our existing position in aerospace.

Fantastic. Thank you. I’ll hop back in the queue.

Thanks, Sarkis.

Your next question comes from the line of Michael Leshock of KeyBanc Capital Markets.

Hey, Alok and Heather, good morning.

Hey, good morning.

Good morning.

First, I wanted to get your expectations on defense going forward. In what changes you’ve seen from the new administration. I know it’s early on in generally a lumpy business as well, but wanted to get any color on what you’ve seen there thus far and maybe expectations going forward.

Yes, Michael. I’ll start on that one. Typically for us, ignore anyone’s personal politics, we’re certainly glad the election is behind us. It creates obviously more certainty. And frankly, in our experience, typically, post-election years tend to be a little better in terms of military, defense, sales. So that’s partly some of our thinking when we gave our guidance in terms of kind of mid-single digits, I think on defense and first responders sales. So that’s sort of our view of defense post to do administration. It’s hard to say depending on policies and all kinds of other legislative actions, but at this point we typically like the year after an election compared to election year disruption.

Got it. And then what were the primary drivers of the cylinders revenue decline year-over-year, despite the growth that, that you mentioned in alternative fuels there?

A lot of the – I’ll take that one. Lot of the cylinders still go into what I would call like discretionary medical or up, where we had elective procedures getting delayed last year. So I mean there was clearly an impact of that. There’s also a lot that still goes into industrial where it’s for a speciality industrial gases and that was slow as well. So those would have been the two primary driver. And even SCBA, which you would see from others was slightly lower given a lot of the firefighters and others. They put their budget towards other activities that help them immediately fight COVID versus upgrade their equipment. So nothing concerning, I would say, which is driven by the macro conditions last year.

Okay. And then one more question on SoluMag, if I could. I know that right before the oil collapsed last year, you were rolling out some new products targeted at freshwater applications in the Permian. I’m just wondering, did you see – did you begin to see sales there before we saw the oil price collapsed and all the CapEx budgets being slashed? Or is that not something that was very meaningful in 2020?

We did see good penetration for the new product and actually it was very successful all the field trials. And we remain very confident of our market value proposition in that sector. The recent sales that we have had although at a low level are more geared towards our new products and geared towards the Permian Basin versus the Bakken, which is where our historical presence has been. We have further invested in and maintain and increase investment in business development in that area. Now given how badly we were born that the oil price and the fracking collapsed from 2018 to 2019, and then 2019 to 2020, we don’t want to beacon any upside yet on that. No, at oil price 60, I’ve a lot more confident about the future of SoluMag than I was when it was negative then. We just want to make sure we do the right thing, stay with our customers and maintain our strong, strong value proposition here.

Got it. And then just lastly for me, can you breakout how much automotive business makes up your transportation silo?

Yes, I can take that one. So it used to be certainly, pre-divestment and everything like that, that it was a third, a third, a third almost pretty evenly split in our transportation segment between AF, aero and auto. Now I would say, automotive is certainly more like 20% or so it’s quite a bit lower given the divestment activity.

Got it. That’s helpful. 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 on the Luxfer website at www.luxfer.com. Thank you for joining us today. The next regularly scheduled call will be in April of 2021 when the company discusses its 2021 first quarter financial results. You may now disconnect your lines and have a wonderful day.