Luxfer Holdings PLC

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

Thank you, Brandi. Welcome to Luxfer's First 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 Mascara, Chief Executive Officer, and Heather Harding, our Chief Financial Officer. On today's call, we will provide details on our first 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.

Thanks, Mary. Welcome, everyone. During this call, I will provide an overview of our first quarter performance and a summary of Luxfor's response to the COVID pandemic. After that, our CFO, Heather Harding, will provide details of our recent financial performance and provide estimated guideposts for the rest of the year 2020. Before I summarize our Q1 results, I would like to thank all our employees for continuing to serve our customers and shareholders during these unprecedented times. The safety of our employees, our customers, and the communities in which we work and live remains our number one priority. During this pandemic, we have taken significant additional measures to enhance safety protocols as we continue to operate most of our facilities to deliver essential products to our customers. I am proud of the company's performance culture, which ensures that we continue to safely operate our essential factories while we also achieve significant cost reduction to mitigate the impact of COVID. Now, please turn to slide three for a summary of the first quarter's financial results. Luxfer's first quarter 2020 financial results were impacted by the challenging industrial macro conditions worsened by the COVID pandemic. Our total sales, excluding the impact of the non-core check recycling divestiture, declined 10.5%. Our first quarter EBITDA declined 18.4% to $15.1 million as we were unable to fully offset The gross margin impact of lower sales with cost reductions. Our adjusted diluted EPS for the first quarter was 30 cents, down 25%. Our balance sheet remains in good shape. Our net debt to EBITDA ratio was 1.4 times at the end of the quarter, which is significantly lower than the level at which any of our financial covenants become relevant. During the quarter, we used $7 million in cash, which is a reduction compared to our cash usage of $11 million in the first quarter of 2019. As a reminder, we usually have negative cash generation in the first quarter due to business seasonality and timing. Our return on invested capital finished above 15%. For the full year 2020, Our ability to provide reliable forecast and guidance is impacted by the unprecedented volatility in our end markets and customer demand due to COVID. When we issued our full year guidance in early March, we had considered the immediate impact of COVID outbreak in China, but we had not anticipated the impact of the global COVID pandemic. Given the current global uncertainties, We are withdrawing our full year financial guidance. Now please turn to slide four for an overview of the employee and customer actions being implemented at Luxfor to address the significant impact of the COVID pandemic. As a company, our performance culture and strong focus on safety is allowing us to responsibly deal with the COVID pandemic. We have activated our crisis response plan and are executing the necessary steps to maintain business continuity. We are working even more closely with our customers to understand their changing demands and expectations so that we can appropriately prioritize our own efforts. Based on customer demand, we are increasing our production capacity in some locations while we have suspended operations at other sites. In all locations, We have implemented enhanced sanitization and cleaning protocols while increasing employee training and awareness for hand washing and infection control as per the CDC and NHS guidelines. We have re-evaluated and re-tooled our operations to enable safe social distancing by changing shift schedules and production floor layouts. We have been able to maintain enough stock of safety and disinfecting supplies, sometimes with the help of our large customers and our facility in China. When possible, our employees are working remotely from home, enabled by our previously implemented cloud-based IT and telecommunication infrastructure. Overall, we are confident that we have provided greater protection for our employees, customers and communities in which we serve while adequately fulfilling the essential needs of our customers. Given the diverse end markets we serve, let's review the related revenue impact on slide five. As a reminder, our current sales can be classified into three approximately equal end markets. 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 patterns during the quarter. At the beginning of the quarter, we anticipated and experienced lower year on year industrial sales due to ongoing industrial downturn and also lower defense sales given the expected timing of a few large orders. Towards the end of the first quarter, We started experiencing significant contraction in our transportation and markets as many of our customers in US and Europe suspended their production in response to COVID. In addition, we saw further weakness in our industrial demand as oil price declined and some of the industrial customers further reduced production. We did see an increase in defense demand towards the end of the quarter and we expect the defense end user sales to remain strong in the near term. Despite the strength in March, the defense first response in healthcare end market saw a decline of 7.1% for the full quarter due to the anticipated slower start to the year. Sales in our transportation end market declined 15.2% in the quarter. Demand for passenger auto worsened during the quarter and we also saw declines in some aerospace applications. Alternative fuel sales continued to grow year over year, but we expect those sales to slow down in the second quarter as many of our customers have suspended operations during the COVID outbreak. We expect to see continued declines in transportation for the remainder of the year as demand for auto isn't expected to recover in the near term and aerospace demand is likely to remain soft. Our industrial and market sales declined 9.4% in the quarter. The lower ISM PMI index coupled with the COVID crisis is having a significant negative impact. While Solimax oil and gas sales were flat year over year in the quarter, We are not forecasting any significant near-term sales of this product until the WTI oil price experiences a meaningful recovery. Now, please turn to slide six for a deeper review of specific Luxfer products used to fight the COVID crisis. Luxfer is proud to play a small role towards enabling the US military, first responders, and medical professionals to fight the COVID pandemic. Our heater meals and our flameless ration heaters are providing nutrition to US military and disaster relief agencies in the field and often also in their home bases as many of the canteens have suspended operations to stop the spread of COVID. Our aluminum oxygen cylinders are a critical part of the medical infrastructure for patient care in field hospitals, Thank you for joining us today. Over the past few weeks, we have experienced an increased order rate for all three of these products. We are actively ramping up production to meet the higher demand levels so that we can continue to supply these essential products to healthcare professionals and first responders. Now, please turn to slide seven, which highlights how our transformation plan has positioned us for success. LuxFor initiated the transformation plan in early 2018 with a goal of delivering greater value for our shareholders through simplification, growth, productivity, and continuous improvement. In addition to delivering on those objectives, the transformation plan is also enabling LuxFor to weather the current COVID crisis. Our focus on cost reduction and waste elimination has added $15 million of net cost savings to our profitability through the first quarter, thus reducing the impact of current volume decline. The continuous improvement mindset in our workforce positions us very well to deliver further cost actions throughout the coming year. Our pay for performance culture has built a more nimble organization that is quick to react to current conditions and focus on business continuity for our customers while generating automatic cost savings when performance deteriorates. Our low-cost, scalable IT infrastructure enabled fast adoption of remote working practices, which is critical given the global nature of our operations and team members. In summary, we are facing unprecedented conditions and are confident that despite potentially adverse short-term financial results, we will continue strengthening the company for the long-term and emerge stronger through this crisis to recover growth and profitability. Now, let me turn the call over to Heather Harding, Luxor's Chief Financial Officer, for details on our financial results.