Luxfer Holdings PLC (LXFR) Q4 2018 Earnings Conference Call Transcript

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Luxfer Holdings PLC (NYSE: LXFR)
Q4 2018 Earnings Conference Call
March 12, 2019 , 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Laurie and I’ll be your conference operator today. Welcome to Luxfer’s 2018 Fourth 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’ll turn the conference over to Doug Fox, Luxfer’s Director of Investor Relations. Doug, please go ahead.

Douglas A. FoxDirector of Investor Relations

Thank you, Laurie, 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 fourth quarter and full year. Alok’s remarks will be followed by Heather’s review of the fourth quarter’s financial performance, Alok will then return for some closing comments. 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.

Alok MaskaraChief Executive Officer

Thanks, Doug. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 for the summary of our performance for the fourth quarter of 2018. For the fourth quarter of 2018, Luxfer reported adjusted diluted earnings per share of $0.40, a 67% increase year-over-year and adjusted EBITDA of $16 million, up 16% year-over-year.

We achieved this strong profit growth despite a 4% decline in quarterly sales. For the year, net cash flows before financing increased to $22.6 million, up from $7.1 million in the prior year. We finished the year with a net debt of $63.3 million, which is a $38 million year-over-year reduction in net debt and a modest 0.8 times net debt-to-EBITDA leverage ratio.

On an annualized basis, we delivered 18.4% in return on invested capital, based on adjusted earnings. In addition to the strong financial performance, we made significant progress toward our transformation plan. For 2018, we achieved $9.2 million in cost reductions that includes benefits from manufacturing productivity, footprint consolidation and streamlining our back office operations.

With this strong start, we are increasing our 2021 cost reduction target to $24 million, up from our prior $20 million commitment. And with the filing of our first 10-K as an SEC domestic issuer, we have completed the simplification phase of our transformation plan.

Now, please turn to Slide 4 for details around the financials. For the fourth quarter, sales of $110.9 million were down 4% from a year ago. This decline was primarily the result of an anticipated reduction in hurricane-related disaster-relief sales. Even with the quarterly decline in sales, revenue for the 2018 fiscal year were up 11% to $488 million, which is well above our long-term projected growth rate of GDP plus.

We had a solid year all around, with both business segments contributing to the growth. We benefited from strong customer acceptance of our innovative new products and our focus on commercial excellence. Our exceptional growth in 2018 sets a new foundation for future growth to be sustained through our innovation and commercial excellence initiatives.

Our focus on driving higher productivity through lean operations and streamlining back office activities has delivered a 16% increase in adjusted EBITDA for the fourth quarter. For the full year, EBITDA increased $34 million to $80 million. Adjusted earnings per share under GAAP accounting was $0.40 for the quarter and $1.69 for the year. Supplemental financial information on the IFRS to GAAP conversion is available on our website.

Now, please turn to Slide 5. With the filing of our Form 10-K yesterday, we have now completed the simplification phase of our transformation plan. We began this initiative in December 2017, when we converted our listing of ADR’s to ordinary shares on the New York Stock Exchange. Now, as an SEC domestic issuer, we are following US GAAP accounting standards and will be issuing 10-Qs, proxies and other documents such as SEC forms 3, 4 and 5. We believe that shareholders will welcome the increased transparency and governance standards associated with being an SEC domestic issuer.

We are also on track with the second and third phases of our transformation plan. Our cultural transformation is gaining momentum with leadership training on Luxfer values of accountability and customer first. Recently, we strengthened our leadership rank with the addition of Jeff Moorefield as our Global Vice President of Operations.

In his new rule, Jeff will be responsible for driving Luxfer’s Business Excellence Standard Toolkit or Luxfer B.E.S.T. We will work with our business units to drive lean manufacturing, strengthen the supply chain, and accelerate productivity. We are very excited to welcome Jeff to our leadership team and believe that his years of operational leadership experience will be a great asset to Luxfer; welcome, Jeff.

Our focus on growth recovery is also generating positive, sustainable results. We are embracing commercial excellence, which is supported by a growth scorecard that is driving favorable customer oriented behaviors. In addition, we are seeing early positive results from a disciplined stage-gate process implemented late last year to manage our innovation process.

Now, please turn to Slide 6. In addition to strengthening the management team, yesterday we announced changes to Luxfer’s Board as part of our ongoing succession planning process. These Board changes will enhance corporate governance and increase our focus on talent management. Effective May 15th, David Landless will become the new Chair of Luxfer’s Board in conjunction with the previously announced retirement of Joe Bonn.

David has been a member of Luxfer’s Board since 2013 and is currently the Chair of the Audit Committee. He also serves on the nominations and governance committee. David’s history with Luxfer combines with his extensive financial experience in manufacturing companies makes him well suited to lead Luxfer’s Board.

We are also pleased to announce the addition of Allisha Elliott. Allisha is the Chief Human Resources Officer of Sensata, a publicly traded company that is the leading supplier of sensing solutions. She brings great experience in the development of human capital from her tenure at some of the world’s largest companies, including Honeywell, Amazon and Pepsi. We welcome her insights on developing a high performance, customer focused culture at Luxfer.

Allisha follows the addition of Dick Hipple, who joined the Luxfer Board in November 2018. Dick is the former Chair and CEO of Materion, a global advanced materials company like Luxfer. He’s also a Director of the Barnes Group and KeyCorp Bank. As an experienced global leader of a performance materials company, Dick adds substantial knowledge and experience to our Board.

Joe Bonn has been a member of Luxfer’s Board since 2007 and the Board chair since 2016. He has been instrumental in driving the current transformation at Luxor, including refreshing the Board and the management team. Personally, I will miss Joe’s mentoring and guidance and I want to thank him for orchestrating an orderly and seamless transition. Thank you Joe, for your years of service on the Luxfer Board and wish you well for your well-deserved retirement.

Now, please turn to Slide 7. We continue to make significant progress in our transformation plan. We are now positioned to achieve greater cost savings by 2021 and have increased our target to $24 million. Based on a strong 2018 performance, we expect to deliver an additional $15 million in cost savings over the next three years.

As part of our transformation plan, in 2018, we made great strides in consolidating our facility footprint. In Q4, we completed two manufacturing consolidations, Riverhead, New York into Cincinnati, Ohio and Findlay, Ohio, into Madison, Illinois. In addition, during the fourth quarter, we announced our decision to divest our magnesium recycling operations in the Czech Republic.

In December, we also announced a project to consolidate our French cylinder operations into our UK and California locations. We are currently in discussions with the representatives of the local works council on this project.

Now, please turn to Slide 8, and let me turn the call over to Heather for a review of our financial performance. Heather, go ahead.

Heather HardingChief Financial Officer

Thanks Alok, and good morning, everyone. Fourth quarter sales were down 4% to $110.9 million, primarily the result of lower volumes, much of it related to reduced hurricane-related sales of disaster-relief products, which accounted for approximately $3 million of the year-over-year decline.

The remainder related to a $2.3 million impact from FX, as well as lower shipments of Graphic Arts products due to timing. Higher sales in our cylinder segment and favorable pricing partially offset these volume declines. Despite the sales decline, adjusted EBITDA increased 16% to $16 million for the quarter, our concerted efforts around price and cost reductions more than offset inflation and lower volume.

Now please turn to Slide 9 for a summary of our full year results. For 2018, the 11% growth in sales was largely due to higher volumes, which contributed $35 million or 76% of the total increase. The remaining growth came from favorable pricing and movements in foreign exchange.

For the full year, sales grew in both segments. Gas Cylinders increased 8% on notable growths in alternative fuel cylinders and Superform products. Elektron advanced 13% on the strength of magnesium alloys, driven in large part by SoluMag and growth in zirconium chemicals. The growth in sales contributed to the 34% increase in adjusted EBITDA of $80 million.

Volume, cost reductions, price and FX were all favorable and more than offset inflation for the year. Volume added approximately $11 million to the total $17.7 million growth in profits with cost reductions accounting for $9.2 million of the increase.

Now please turn to Slide 10 for a breakout of our Elektron segment performance. Fourth quarter’s segment sales declined 11%, primarily on lower volume, lower shipments of hurricane-related disaster-relief products, as expected, and Graphic Arts products were partially offset by strong growth in magnesium alloys and zirconium chemicals.

Foreign exchange reduced sales by $1 million and we achieved favorable pricing of approximately $700,000 for the quarter. Quarterly adjusted EBITDA declined 12%, primarily due to the lower shipments. Favorable price and cost reduction efforts partially offset the volume decline.

Looking to the Gas Cylinders results on Slide 11; sales for Gas Cylinder segment increased 3% on strong growth in alternative fuel cylinders, primarily in Europe. In addition, the turnaround in Superform continues with growth in both sales and profitability. Quarterly adjusted EBITDA for the Gas Cylinder segment increased a robust 144%, including $3.1 million in cost savings; favorable price and volume benefits totaling $900,000 more than offset inflation.

Please turn to Slide 12 for balance sheet and cash flow metrics. We finished the year in a strong financial condition. Net debt totaled $63.3 million, down $38 million from the end of 2017, and our net debt-to-adjusted EBITDA leverage ratio was a modest 0.8 times. We reduced our operating working capital by $11 million even with the 11% full year sales increase and remained under 20% of the sales for the year.

For the quarter, net cash flow before financing increased to $23 million, up from $7 million in the fourth quarter of ’17. Looking at the full year, net cash flow before financing was $53 million, delivering 114% cash conversion on adjusted net income. On an annualized basis, our return on invested capital on adjusted earnings was greater than 18%. So in summary, we had an exceptionally strong financial year, including both earnings and cash performance.

Now I’ll turn the call back over to Alok for a wrap up.

Alok MaskaraChief Executive Officer

Thanks, Heather. Please turn to Slide 13. 2018 was a transformative year for Luxfer. We achieved strong growth in sales and profits, sharply improved cash conversion and materially strengthened the balance sheet. We made it easier for investors to buy Luxfer’s stock and created a more transparent Company with the conversion to SEC domestic issuer status. Equally important, we positioned the Company for sustain long-term GDP plus growth.

We are increasingly optimistic about the future of the Company, as momentum in productivity is continuing and we are gaining share in our core markets by delivering more customer-focused innovation.

Please turn to Slide 14 for the 2019 outlook. We are starting 2019 in a good position. Macro trends and business activity remain favorable. Our strategy of developing a high performance culture is delivering results. We are also optimistic that innovation will continue and contribute to our performance in 2019 and beyond. Last year, SoluMag, a new generation of zirconium chemicals, contributed meaningfully to our growth.

In addition to expected further growth of these innovative products, we are starting to ship our new ECLIPSE SCBA high pressure cylinder, which is 20% lighter than competing pressure vessels currently on the market.

Our transformation plan continues on track and we are now positioned to recognize $24 million in cost savings by 2021. We achieved more than $9 million in savings in 2018, and programs are under way to deliver the remaining $15 million in cost savings over the next three years. While we are optimistic about our ongoing growth, our near-term outlook is tempered by first half 2019 comparisons against an incremental $6 million in sales of disaster-relief products in the first half of 2018. In addition, we’ll be focusing more on profitability and return by exiting certain low and zero margin product lines.

Now please to — turn to slide 15 for a wrap up. I want to start here by expressing a deep sense of gratitude toward our 1,600 employees who made 2018 an extraordinary success. Because of their commitment and dedication, we are optimistic about creating value for all Luxfer shareholders in 2019 and beyond.

I also want to thank our employees and all our external advisors who collectively worked numerous dedicated hours on the project to acquire Neo Performance Materials. As announced on March 10th, that acquisition arrangements had been terminated by a mutual consent. The details of the termination are covered by confidentiality agreement, and given this, we won’t be able to provide any further details beyond what is already published in the press release and SEC filings.

I want to close by reiterating the strong case for investment in Luxfer. We serve attractive end markets and have a track record of delivering on our transformation plan and on our commitments. Our solid balance sheet is supported by consistent cash conversion and disciplined capital allocation. In addition to our exceptional recent performance, we have plenty of opportunities for continued value creation. I believe that the best year of Luxfer are still ahead of us.

Thank you for listening, we will not take questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Chris Moore of CJS Securities.

Chris MooreCJS Securities — Analyst

Hey, good morning guys. Thanks for taking some questions. Maybe we can just start kind of in Elektron on the sort of — kind of four sub-segments. Obviously, Zirconium and SoluMag were big contributors in ’18. Maybe can you just kind of walk through Magnesium alloys, Zirconium, Magtech, and kind of starting within alloys, talk about opportunities there just to try and understand, kind of where you see near-term growth potential coming from?

Alok MaskaraChief Executive Officer

Sure. So let’s talk with Magtech. Magtech is the one which had benefits from the hurricane activity, so as we look at 2018 or the first half of ’18, they had $6 million or so of extra sales. And that’s the headwind we are trying to overcome as we get into ’19.

Chris MooreCJS Securities — Analyst

Right.

Alok MaskaraChief Executive Officer

So I think it’ll be fair to say that for ’19, they are facing some really tough comps, but the overall defense spending remains quite robust and we feel good about the base underlying business in Magtech going forward.

Graphic Arts is the one where we reference about some timing issues toward the end of Q4 and that’s the one which we — it’s not a high growth business to start with, but given some of the timing issues, we think because some of those shipments have shifted to ’19 and we expected they’re going to make up for some of the shortfall that happened toward the tail end ’18 in that business. But that remains slow growth flat business for us, pretty exciting and good for profitability and lots of room for productivity there.

Chris MooreCJS Securities — Analyst

And the catch up there is — I’m sorry, in the first half of ’19 — I know it’s slow growth, but in the first half of ’19 or some of the stuff that happened at the end of ’18 would be shifted toward the back half of ’19?

Alok MaskaraChief Executive Officer

No, it will be first half of ’19 itself.

Chris MooreCJS Securities — Analyst

Okay.

Alok MaskaraChief Executive Officer

And then on zirconium chemicals, as you know we saw the autocatalysis and industrial catalysis market. Both of them have been showing growth for us all year in ’18. It’s small growth, but it’s looking good from zirconium side and the magnesium alloys is where SoluMag is; so clearly that had a very good growth here in last year. So, it’s going to be facing some tough comps and also that’s an area where fracking growth continues, but slows down a bit. So we expect zirconium to continue on their growth profile and the SoluMag or fracking growth to slow down compared to the high, high growth rates we had in ’18.

Chris MooreCJS Securities — Analyst

Got you. Coming into Q4, you had talked about the SoluMag probably slowing a little bit in Q4, but also said that you would be ultimately looking to expand production capacity there. Is that still the case or what are your thoughts on that front?

Alok MaskaraChief Executive Officer

Yes, that is still the case and SoluMag still grew in Q4, much less than what it grew for the rest of the year. We are still moving ahead and we are kind of halfway done with the extra capacity that we need to install. It’s a great product. We are very optimistic about the future. We continue to gain share against alternatives. Just our growth in ’18 was phenomenal, starting with small numbers. So like you know those numbers are getting larger and fracking has slowed down a bit compared to what it was in ’18. Yes, we still expect it to be growth here.

Chris MooreCJS Securities — Analyst

Got it. On the cylinder side, can you just talk a little bit more about the high pressure cylinders and your expectations there?

Alok MaskaraChief Executive Officer

Sure. Actually, let me start with Superform and then come to the higher pressure cylinders.

Chris MooreCJS Securities — Analyst

Great.

Alok MaskaraChief Executive Officer

Superform had a good growth here last year, but as we look forward, we are focusing more on our core competency and smaller set of activities where we make money. So we expect Superform to continue on profitability improvement trend, but probably shrink their overall revenue base. So I think that — some of our caution on revenue is reflected from that.

On the Gas Cylinder side, as we mentioned, we had had decent growth, we expect that to continue. SCBA which is the large piece of growth driver and you can see that from some of our customers’ earnings report, continues to remain in a growth mode and folks are bullish about it. Alternate fuel while is probably less growth in US right now, like you know Europe, that continues its growth trend, because less sensitive to diesel prices. So yeah, we continue to feel good about our growth trajectory in Gas Cylinders, high pressure cylinders and also and also Superform; but Superform, of course, revenue would be muted or going backwards.

Chris MooreCJS Securities — Analyst

Got it. And just in terms of, this specific exiting lower margin product lines, can you talk a little bit further about that?

Alok MaskaraChief Executive Officer

Sure. Two things I should highlight. One is the Superform which we’ve already touched. Second, as we did announce the divestiture or the intent to divest our magnesium recycling business. So that’s a like you know mid to high teens revenue business with limited profitability and honestly not a good fit with our overall focus on higher margin high-performance products. So that divestiture will probably not impact profits, but relatively take off like you know mid-teens or high-teens in revenue from our base, so that’s part of it.

And then the Superform where we are focusing on our core and not going to areas where we compete with larger volumes producers that we could not make attractive margins. Those will be two big things I’ll highlight on what could happen in terms of revenue.

Chris MooreCJS Securities — Analyst

Got it, that’s helpful. Let me jump back in line. I appreciate it.

Alok MaskaraChief Executive Officer

Thanks, Chris. Appreciate it.

Operator

Your next question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Phil GibbsKeyBanc Capital Markets — Analyst

Good morning.

Alok MaskaraChief Executive Officer

Good morning Phil.

Phil GibbsKeyBanc Capital Markets — Analyst

So much for two questions; my first question was just on the projected proceeds from the asset sales on the Czech Republic piece and you gave us the associated sales, but was there any EBITDA associated with those assets to ’18?

Alok MaskaraChief Executive Officer

Yeah, the EBITDA is near negligible, and the proceeds are probably not going to be consequential. It did lead to some asset impairment, which was part of the impairment charges we took in Q4. But we don’t think it’ll be much easier from either thinking of cash generated or from like you know EBITDA outlook.

Phil GibbsKeyBanc Capital Markets — Analyst

And then, when we think about the forward cash spending requirements associated with the rationalization plan, how much did we spend in 2018 and in ’17 related to that $40 million target? Is that $40 million target still intact and how much do we have left to go?

Heather HardingChief Financial Officer

Good morning, Phil. So, relative to the increase in our cost savings, we are taking that $40 million — we are increasing that a bit. And if I look back at ’18, when I think about restructuring as well as capital, we estimate that we spend between those two buckets, around $7 million, $7.5 million in 2018 on the cash cost to achieve. So there is obviously the remainder left to go. I think previously we had talked about ’19 would be a big cash year on restructuring and so we still expect that. I think we’d highlight it around $20 million in 2019, cash to achieve; the cost that we would take to get those savings.

Phil GibbsKeyBanc Capital Markets — Analyst

What was the 2019 piece, I’m sorry?

Heather HardingChief Financial Officer

Around $20 million.

Phil GibbsKeyBanc Capital Markets — Analyst

Okay, so pretty substantial. Thanks, I’ll leave it there.

Heather HardingChief Financial Officer

Thanks.

Operator

(Operator instructions) At this time, there are no further questions. I’ll now return the call to Doug Fox for any additional or closing remarks.

Douglas A. FoxDirector of Investor Relations

Thank you Laurie and just want to thank you for joining us today. Our next regularly scheduled earnings call will be in early May. And Alok, Heather and I will be around. If you have further questions, please give us a call. Thank you very much and have a good day.

Alok MaskaraChief Executive Officer

Thanks everybody, bye.

Operator

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 May, when the Company discusses its 2019 first quarter financial results. This ends the Luxfer conference call.

Duration: 30 minutes

Call participants:

Douglas A. FoxDirector of Investor Relations

Alok MaskaraChief Executive Officer

Heather HardingChief Financial Officer

Chris MooreCJS Securities — Analyst

Phil GibbsKeyBanc Capital Markets — Analyst

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Referenced Symbols: LXFR

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