Good morning. My name is Laurie, and I will be your conference operator today. Welcome to Luxfer's 2020 Second 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 to begin. Mary, please go ahead..

Thank you, Laurie. Welcome to Luxfer's second quarter 2020 earnings call. We're happy to have you all with us today. I'm 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 second 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 slide two of today's presentation for further details. Now, let me turn the call over to Alok..

Defense, first response, and healthcare; transportation; and industrial. Before we review the performance of each end user segment, let me give you a sense of the shifting demand partners during the quarter.

Sales in April and May were substantially lower as many of our customers' factories were shutdown due to government orders or working at reduced capacity due to supply chain constraints. The sales decline experienced in April and May was better than worst case scenarios, and we saw some recovery in June as government restrictions eased.

As such, we continue to operate the company with the expectations that the recovery will be long and challenging.

Sales in defense, first response and healthcare declined 5.9% for the quarter as higher sales of our disaster relief products were more than offset by reductions in magnesium alloys for countermeasure players, as military training exercises were redefined due to COVID.

SCBA sales were marginally lower, primarily due to timing and COVID-related supply chain disruptions. Sales in transportation declined 29.1% in the quarter. Demand from luxury passenger auto manufacturers worsened during the quarter, and we also experienced decline in aerospace application.

Alternative fuel sales declined year-over-year due to supply chain disruptions, but demand levels remain strong, and we expect these products to return to growth in the back-half of the year.

Even with alternative fuel product sales improving, we expect to see continued declines in transportation for the remainder of the year, as demand for auto and aerospace is likely to remain weak. In Industrial segment, sales declined 27.1% in the quarter, as COVID further impacted industrial production in April and May as seen by lower ISM PMI index.

Sales decline was broad based and impacted most of our industrial products. As expected, there are virtually no SoluMag sales during the quarter, but we remain optimistic about the long-term potential for this product as the industry recovers. Now, please turn to slide six for an update on some growth investments.

Two of our successes recently highlighted include the growth in our alternative food product line and the growth in our decontamination and testing kits supplied to the U.S. military.

In the alternative fuel space, while growth in systems and cylinders or compressed natural gas continues, we are experiencing accelerated and meaningful growth in our hydrogen product line. This growth is driven by Luxfer's 20 years of industry-leading experience in hydrogen storage design, prototyping, and manufacturing.

We are investing in expanded capacity for this product line, and expect growth to continue as cities across the world continue to replace their legacy bus fleets with environmentally-friendly CNG or hydrogen-based vehicles.

Supporting the growth, large fleet companies like UPS, Waste Management, and Amazon continue to invest in environmentally-friendly alternative fuel delivery trucks. For chemical response kits, we are enhancing our capabilities at our newly expanded Cincinnati facility, which also manufactures flameless ration heaters and HeaterMeals.

While COVID created some limitations in ramping up production in the second quarter, we have overcome most of these challenges, and remain confident about delivering incremental sales in 2020 as we fulfill the recent award from the U.S. military.

We have a strong value proposition for these products, and we remain optimistic about the growth of this product line for the remainder of 2020 and beyond. More broadly, we are driving differentiated growth by increasing innovation and pursuing commercial excellence.

On innovation, our goal is to increase percentage of revenue from new products to greater than 20% by 2024. On commercial excellence, we are targeting to improve customer's satisfaction as measured by net promoter score to greater than 60% by 2024.

Now, please turn to slide seven for a review of our multi-year transformation plan, which has benefited us during this environment. Launched in 2018, Luxfer's transformation plan is delivering greater value for our shareholders through simplification, productivity, growth, and portfolio optimization.

We have completed the simplification phase of the transformation plan, which resulted in our shares being included in Russell's small cap index funds. Through our productivity efforts, we have delivered significant net cost savings and remain confident in delivering our goal of $24 million.

The next phase of our transformation plan will create additional shareholder value through growth, lean continuous improvement, and portfolio optimization.

While some of the portfolio optimization initiatives have been delayed by the COVID pandemic, we remain confident that we will create significant shareholder value as we execute the next phases of a transformation plan.

In summary, we are facing unprecedented conditions, but remain confident that we will continue to strengthen the company for the long-term and emerge stronger through this environment.

Now, let me turn the call over to Heather Harding, Luxfer's Chief Financial Officer for details on the transformation plan results, and a detailed summary of our second quarter financials..

Thanks, Alok, and good morning everyone. Thanks for joining us. Following Alok's review of the strategic elements of our multi-year transformation, I wanted to summarize the financial impacts of the plan on slide eight.

Our focus on cost reductions and waste elimination, so that is $16 million of net cost savings to our profitability through the second quarter, the continuous improvement mindset and our workforce positions as well to maintain our costs initiatives during the back-half of the year and realign operations as conditions evolve.

In summary, we remain on track to deliver our committed $24 million of net cost reduction by the end of next year. Now let's walk through the second quarter financial results summary on slide nine.

Second quarter reported sales of $89.5 million, declined 23.2% primarily due to COVID related impacts in our transportation and industrial segments, excluding the impact of the Czech recycling divestiture in June 2019, core sales declined 21.1% including a 1.3% impact of foreign exchange.

As a reminder, this will be the last quarterly comparison impacted by the Czech divestiture. Consolidated adjusted EBITDA for the quarter of $10.4 million was down 49% versus the prior year.

Despite the volume decline, the company executed on the transformation plan and delivered approximately $700,000 of net cost reductions, while the organization executed cost actions worth $1.6 million.

These reductions were partially offset by $500,000 of fire remediation at our Madison, Illinois graphic arts location, and approximately $400,000 incremental COVID related expenses to ensure a safe operating environment for all our employees. For a deeper dive into the two products segment results, let's turn to slide 10.

Elektron sales of $39.1 million declined 29.3% from the prior year. The sales decline is primarily due to weakness in catalysis, magnesium, aerospace, and transportation products, partially offset by strength in HeaterMeals and chemical response kits. Lower sales performance was the primary contributor to a 60% decline in EBITDA to $5.3 million.

Gas cylinders segment sales declined 13.3% to $50.4 million as COVID impacted transportation and industrial end markets, resulting EBITDA $5.1 million declined 28%. Now let's review our key balance sheet and cash flow metrics on slide 11. We ended the second quarter with a strong balance sheet.

Our net debt improved by $9.1 million to $82.4 million by the end of the quarter, leading to a net debt-to-EBITDA ratio of 1.5 times. Second quarter operating working capital remains flat prior year. This reflects the initial results of our working capital initiative primarily focused on aligning inventory to current demand level.

We expect these working capital initiatives to drive additional cash flow in the second-half of the year. We generated $12.1 million in free cash flow for the quarter using approximately $1.6 million in cash for restructuring activities. This compares favorably to our prior year second quarter performance, but consuming $11.7 million in cash.

On a trailing 12-month basis, we delivered 12.7% ROIC from adjusted earnings. Our balance sheet remains solid. We have returned to generating positive free cash flow, and we remain well positioned for strong cash conversion in 2020. In the interest of providing transparency, as we will not be reinstating formal 2020 guidance.

Let me provide our views on some of the key assumptions for the remainder of the year on slide 12. The challenging current market environment continues to have a significant impact on our business. For the full-year, we expect our first response and healthcare product sales to be flat to slightly down.

This implies a modest improvement from our Q2 run rate. Continued growth in MRE and chemical response kits will be partially offset by weakness and fire extinguisher, countermeasure flares and SCBA sales, darkness and transportation and industrial is expected to continue.

For the full-year, we expect transportation and industrial to be down 20% to 25%, which is similar to first-half performance. We accept the affirmative dual product to return to growth in the second-half. However, passenger, auto, aerospace and general industrial softness will likely continue.

We remain focused on cash preservation and cash generation for the year. We continue to ensure working capital and capital expenditure plans are aligned to current conditions without sacrificing investment and future growth and productivity opportunities.

The resulting free cash flow excluding cash needed for restructuring would convert at approximately 100% for the year. Now I'll turn the call back over to Alok for a wrap up..

Thank you, Heather. I want to wrap up with a brief review of our downturn playbook on slide 13. We have been driving success by implementing our downturn playbook that we shared during the Q1 earnings call. Recent actions have resulted in approximately 10% lower headcount as compared to last year, and a 30% reduction in executive compensation.

By maintaining a strict freeze on discretionary expenses, we remain on track to deliver incremental savings to offset COVID related operating costs. An important part of our playbook is how we deploy capital during this downturn. As our cash flow generation remains strong, we have chosen to maintain our regular dividends.

We are maintaining the decision made last quarter to temporarily suspend share repurchases to provide flexibility should the environment take control dramatic turn for the worse. We are funding our transformation cost savings initiatives, while investing in important growth opportunities that will strengthen the company for future success.

We continue reviewing our portfolio for divesture opportunities as well as maintaining a pipeline of potential acquisition targets, although there is greater uncertainty around the timing of any activity given the market environment.

Overall, I'm pleased with our execution during these difficult times, and feel confident that Luxfer will be a stronger company when the macro conditions improve. Please turn to slide 14 for a wrap up. Let me backup 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 next few years.

After the transformation plan is complete, we have plenty of run way to create even more shareholder value by deploying the Luxfer Business Excellence standard toolkit to drive operational excellence and improvement in growth and productivity.

Once again, I want to thank all our employees around the world for safely operating our facilities while maintaining our steadfast commitment to serving our customers first. Thank you for listening. We will now take questions..

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

Hi, good morning guys..

Hi, Chris..

Good morning. So, it sounds like June showed some sequential improvement.

From what you've seen so far, is that trend continuing in July?.

Yes, I mean July is turning out similar to where June was, maybe a shade better, but [I cannot know] [ph] massive reshape strong recovery, but yes, we see the June trend kind of continuing into July..

Got it.

So, it sounds like right now kind of the 10% workforce reduction, can you maybe just split that between layoffs, and furloughs, and then talk about which plants are having the biggest issues, and are those more demand-driven or more production-related?.

Sure. For the 10% number that I mentioned, that's kind of permanent layoffs. In addition, we have kind of bidding on the [week] [ph] 15% to 25% of our workforce on furlough. So, that's in addition to the 10%.

So the 10% is more permanent reduction, and that's consistent with just how we manage, we would rather take the actions to bring the cost down sooner, and then add it back when the demand comes.

From a facility perspective, Chris, you know, majority of the facilities when they're working in reduced capacity is demand-driven, and, as you know, we do have significant capacity and quite a bit of leeway to serve our customers in a manner [technical difficulty].

There are pockets like in Cincinnati, where we are having challenges attracting the right kind of labor force as we try and ramp up production. There will be a few cases, where reduced capacity is driven by operational challenges or labor challenges, but majority of the factories are at reduced capacity because of demand..

Got it, very helpful.

And last one for me, just on the specialty chemical kits side, I know you don't give specifics, but I'm trying to get a sense from a revenue standpoint as more than half of what you expected in fiscal '20 have already been booked, or just in terms of kind of the cadence there?.

Sure. So, when we started the year on that, Chris, I sort of mentioned that this would be more back-half loaded, but we were expecting Q2 to be at a similar level as Q3 and Q4 with Q1 being just start-up.

In reality, Q2 turned out to be weaker, and that's where some of the production or demand labor challenges that I had mentioned came in, but no, I would say less than half is kind of in the sales side. Orders are on the books already. They're just a matter of fulfilling those orders. That will be more back-half loaded..

Terrific. Thanks, guys..

Thanks, Chris..

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

Hi. Good morning, and thanks for taking my questions. So, look, in your prepared remarks, you talked about Waste Management and Amazon, and what they're doing in alternative fuels, but one of the very big opportunities is also in hydrogen for you, I believe.

Jo Bamford, the CEO of Wrightbus is out there, talking about doing 3,000 fuel cell buses before 2025. If I'm remembering correctly, it's 20,000 to 60,000 per bus for you. So, that's a huge opportunity. It's been as big as $180 million on the high-end.

What should we be looking forward to see the rate at which this revenue opportunity is likely to materialize, and how well do you see Luxfer is positioned to continue to serve this business opportunity?.

Great question, Craig, and thank you. So, first of all, I mean I'll start from your last question. We are very well-positioned to serve this opportunity.

Our technology perspective both on Type 3 and Type 4 cylinders, we are providing customers with manufacturing, prototype, design, all sorts of collaboration, and frankly, I mean we work with Jo Bamford and Wrightbus very, very closely.

The first hydrogen buses in the City of London to Wrightbus, they have all been supplied with our products, and that's one reason we have made the comments in my prepared remarks. So, very excited about the opportunities, we are clearly very focused only on buses and trucks.

So, unlike some of our competition, we're not going after passenger auto or smaller vehicles, we're very much focused on the larger vehicles, and demand there is right now very good and the projections are even better, as you pointed out.

When you say what you should look for, I think we are looking forward to continued success from companies like Wrightbus, companies like Nikola. Hydrogen fuel cells are a game-changer for the industry, and we are definitely part of the ecosystem, in fact, a major part of that ecosystem..

Excellent. Thank you for that.

So, just on the same line of question, so [Ballard] [ph] talks about having supplied stacks and modules for 760 fuel cell buses, and just this week, I heard one of the industry consultants talked about 5,000 buses out there, obviously including China, which would be more than half, or well over half of that 4,000, but can you maybe talk about the experience at Luxfer in these fuel cell bus and fuel cell truck opportunity at this? Do you feel that you've supplied more than a 25% share, or more than a 20% share of the industry?.

I wouldn't want to give numbers, but I would say we have supplied our fair share of more than our fair share.

Now, some of the markets like China, which don't have the stringent DoT type regulations, we don't supply as much right now, but I think as regulations improve in those markets, and they adopt more of the universal DoT standards, then I think our value proposition there increases, but even in China, we are ramping up capacity right now for composite cylinders.

Beyond that, if you look at from where we have supplied whether that's Wrightbus buses or even trains in U.K., or making hydrogen fuel cell base trucks here in U.S. that are still mostly on the experimental side, we have our fair share of -- definitely more than our fair share in those markets, but as you know the market is evolving pretty rapidly.

It's going to be a question of success in terms of adoption. We remain very confident in our technology and our value proposition there..

Thank you. So, my next question is about the preservation of earnings power.

So obviously, this was again another great quarter where you did preserve that earnings power to give us EPS ahead on the bottom line, but as we look into 2021, 2022, which is where most investors are focused these days, if we assume that that automotive photolysis demand is back up to where it has been and our sales are similar to what they were not too long ago.

What are the other key items that you think investors should be most focused on to understand where the rebounding earnings leverage is going to come from in 2021 and beyond?.

I think it's going to be all around market recovery that you mentioned. I mean AutoCAD is a small portion of our business, but yes that's going to be critical for us to look at.

The biggest factor for us is going to be on the industrial recovery, which as you know is one-third of our sales and by profitable sales when it compare to transportation or AutoCAD business.

So I think the closely monitoring the ISM PMI index just general industrial recovery, both in Europe and in U.S., that's going to be the key driver of our earnings recovery, and you are right, because of our exposure to defense and first response, and the aggressive cost measures we have taken in the past and continue to take, we do feel confident that earnings power that minimum would be at the Q2 levels, unless things really take a turn for dramatic worse.

From that perspective, we feel confident on a going forward basis, and industrial recovery would essentially change the current status and get us back to being a more normal operating environment..

Okay, and then last question, if I may, so the durable goods orders yesterday were encouraging With a nice rebound to then have you increasingly optimistic about potential for strengthening, it looks for in the second-half.

And do you feel that the high frequency data sets like this are good metric for external observers to have a feel for where things are heading for Luxfer?.

From our perspective, we're definitely prepared for recovery, but at the same time, data is pretty confusing whether it's durable good orders, or even the BMI index, I mean they are showing signs of bullishness.

So I'm hoping the worst is behind us, but at the same time, we also have to be prepared that things could remain stagnant, especially with the number of COVID cases going up, but yes, I mean those are encouraging signs, but some of it is also as you look at sequentially, there is a pent-up demand level because of the April, May shut down.

So, look for those numbers to hold for to be reporting cycle before we get too bullish on those, I do feel that with the June, July summer just going to be pent-up demand because of factory shut down or supply chain disruptions and then we got to watch out what happens after that..

Excellent. Well, thank you so much for taking my questions and congratulations for the strong execution in this difficult environment..

Thanks, Craig. Appreciate it..

[Operator Instructions] Your next question comes from the line of Sarkis Sherbetchyan of B.Riley..

How are you guys?.

Good, Sarkis. Good morning..

Hey, just wanted to kick-off the question with the free cash, so look like for the quarter receivables collections was fairly strong, and not surprising kind of given the environment, the kudos on that.

And then just kind of looking at the working capital items, right? Do you expect inventory to be a more significant source of kind of cash for the second-half of the year?.

Yes, good morning, Sarkis. I'll take that one. So when you look at our inventory profiling, and we did talk a little bit about working capital, obviously at our last Q1 call, we do expect to have additional improvement in working capital primarily inventory in the back-half.

As we looked at -- we said here I guess roughly 90 days ago, when we're closing Q1 and communicating that, we certainly there was a lot of uncertainty, right. We were making sure we had the right raw materials to keep key products going et cetera.

So, in addition to the safety of our employees, business continuity was something that we were very focused on. So, when we look at inventory, we spent the last 90 days realigning some of our working Capital initiatives around inventory to make sure that we can meet our customer needs.

And yes, as you alluded to, we do expect inventory to continue to really have improving in the back -- improvements in the back-half that will drive additional working capital and free cash flow..

Thanks for that.

So with that line of thought, I mean, would you expect kind of to have some of those key raw materials on hand despite maybe kind of working down the inventory in the back-half, I mean how are you planned for that?.

Yes, as we looked at some of the key raw materials, especially those that have longer lead times or from a supply chain perspective, we certainly wanted to ensure that we had those on hand, and by and large, the organization has done a great job of identifying those and coming up with solutions.

So, as Alok has talked about from a production perspective, some locations, the issue has been more around that retaining of talent, skilled labor, that we'll continue to run our production, inventory availability has not been a major concern for us so far..

Great, that's helpful.

And if we kind of step back, I know it's maybe too soon to talk about recovery, but given just kind of the significant cost actions especially as it relates to headcount, should recovery materialize a bit quicker than maybe what most folks are planning for? How would you respond to maybe bringing back the workforce or the talent? Can you maybe give us some insight on your plans around that?.

I'll take that, Sarkis.

So as I mentioned, we do have about 20% of our workforce on furlough, and they've been very understanding and very supportive, and those are obviously folks we like to bring back first, Joe will be very successful in bringing back quickly, so I'm not too worried about that, and that should take care of any recovery projections.

In addition, we obviously want to drive productivity through this process. So, the 10% reduction that we have done, I don't see us bringing those back as full-time. We obviously may need to bring some more temporary workers as we ramp up production, it depends on the [facility trends] [ph].

So, from my perspective, no, that's not a concern at this moment, especially the given the level of high unemployment that's going on both in [technical difficulty]..

Yes, understood. Thanks for that. And just finally, I noticed on slide four, under recent actions, you kind of highlight how you are enhancing customer communication to support kind of the supply chain requirements and gain some insight on demand trends.

Can you maybe dive a little bit deeper into that? What does that mean for the organization today? And then potentially on a go-forward basis, how does that improve your process or workflow?.

Sure. So, multiple pieces, right. So as sales people are more working from home versus being on the road, Salesforce.com is being used a lot more.

We had implemented it last year, and I think during the period, we are seeing huge usage [technical difficulty] become the only tool that we use to communicate internally regarding sales matter, opportunity pipeline, but take it a step forward as like we have fully adopted Microsoft team and so have many of our new customers.

Like I mentioned, many of our existing customers have gone to new virtual -- the worst in the previous time, our sales person may be getting there once every month, once every two weeks.

Now, they have Microsoft team session every week for sure, and sometimes, twice a week just because we want to understand their demand patterns and customers want to ensure their supplier base and get their understanding on the supplier base hub. Those have become way more efficient than somebody driving six hours for a one-hour meeting.

We have put more cadence, more like large customer weekly updates on demand supply planning, and we think that's going to continue and that's going to lead us to much closer collaboration and make it harder for customers to switch if there was a reason [technical difficulty]..

Good, that's helpful. And then just one final one if I may, as far as the end market color and comments, right, that's super helpful.

I guess any areas where you see kind of stability or kind of consistent opportunity or kind more weakness to follow aside from what you have mentioned on the earnings commentary?.

Yes, I think from a stability perspective, the military sales remain stable. I mentioned some lower training exercises impacting in the short-term, but beyond that, I see that remaining stable.

So, that's kind of one-third of our business, and we are forecasting that to be flat-to-down for the year, which means that it will be slightly up for the second-half. So, we don't expect many changes there. Hard to imagine a situation where demand will get worse in any of the areas.

I mean some places like automotive, customers factories were shut for six to 10 weeks during Q2. So, I would be surprised if something gets much worse, but hey, never say never. If it does, we will be prepared for it, but I think we saw worse of the demand patterns in Q2.

We don't have that much exposure to commercial aerospace, but that's one space where I do feel that if things could get worse, that might be the one where people are still flushing through long-term orders and demand patterns, and maybe there will be more weakness there as we are further down in the supply chain and we don't experience changes there as quickly as some of the other product lines.

That will be the only call out I would leave with, but other places I do think lot of what we experienced in Q2 was the low point..

Great. Thanks for that, and wish you guys continued success..

Thanks, Sarkis..

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 October of 2020 when the company discusses its 2020 third quarter financial results.

This ends the Luxfer conference call..