Luxfer Holdings PLC

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

Thank you, Lori. Welcome to LuxFIR's Second Quarter 2020 Earnings Call. We're happy to have you all with us today. I'm Mary Reid 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 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.

Thanks, Mary. I welcome everyone. I hope you and your families are staying safe and enjoying the summer months as much as possible. We are operating in unprecedented times, and I want to start by expressing my gratitude to our customers, employees, and supplier partners who continue to support Luxforce operations. The safety of our employees, our customers, and the communities in which we work and live remains our number one priority. With appropriate safeguards, we continue to operate all our facilities to serve the current and evolving needs of our customers. I am proud of our team's relentless adherence to operating procedures and commitment to being a part of building a high performance culture during this time of unprecedented change and uncertainty. This is enabling us to safely operate our facilities while also aligning our cost structure to demand levels as we contend with the impact of COVID-19 on various end markets. I wanna thank our 1,500 employees around the world for their dedication and hard work as we navigate the current landscape. In today's call, I want to highlight three key messages that sum up our quarterly performance and strategic focus. One, while the COVID pandemic created significant challenges during the second quarter, we were able to deliver strong cash flows and further strengthen our balance sheet. Two, we have taken several proactive and aggressive actions to mitigate the impacts of COVID-19 including rigorous expense management at every level. And three, while we remain vigilant on maintaining an appropriate cost structure for the current environment, we are making targeted strategic investment in our business to ensure that Luxfer is well positioned to capture growth in certain markets today and in the future as other hardware hit markets recover. I will address these themes in more detail, and then our CFO, Heather Harding, will review our financial performance in greater depth and share guideposts for the remainder of 2020. Now, please turn to slide three for a summary of our second quarter financial results. Luxfer's second quarter 2020 financial results were impacted by the challenging macro caused by the COVID pandemic. Total sales, excluding the impact of non-core check recycling divestiture, declined 21.1%. Our second quarter EBITDA declined 49% to $10.4 million, as we were able to partially offset the gross margin impact of lower sales with cost reductions. Our adjusted diluted EPS for the second quarter was 17 cents, During the quarter, we sequentially reduced our net debt by $9.1 million to $82.4 million by generating strong operating cash while maintaining our regular quarterly dividend. Our net debt-to-EBITDA ratio was 1.5 times at the end of the quarter, which is significantly lower than the level where our covenants become relevant. Our balance sheet remains strong, providing a lot of financial flexibility. Now, please turn to slide four for an overview of how Luxfer is adapting to the new normal. Amid the changing market environment brought on by the health risk associated with COVID-19, and more recently, racial unrest across our globe, we have made many changes to rapidly react to the market circumstances and maintain business continuity. Like many others, we have increased the level of transparency and frequency of communication with our customers, employees, and shareholders. In addition, we have also retooled our manufacturing operations to ensure social distancing and are investing in our facilities to enhance hygiene especially in high traffic common areas. The company's leadership has come together during these difficult times to lead by example and have voluntarily taken furloughs and temporary pay cuts in solidarity with all our employees and to improve our financial results. We recognize that the current downturn and volatility is likely to impact demand levels and operations Thank you for joining us. and certain travel across the organization becomes obsolete. Also, there will be increased access to talent as location becomes less relevant and technology will continue to enable connectivity. So while there remain overhangs, which we will continue to navigate, we are also embracing the new way of working, which I'm confident will benefit Luxfer. Let's now review the related revenue impact by end market on slide five. As a reminder, our current sales can be classified into three approximately equal end user segments. 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. Sales in April and May were substantially lower as many of our customers' factories were shut down due to government orders or working at reduced capacity due to supply chain constraints. The sales decline experience in April and May was better than our 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 or countermeasure flares 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 Solimax 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 fuel product line and the growth in our decontamination and testing kits supplied to the US military. In the alternative fuel space, while growth in systems and cylinders for compressed natural gas continues, we are experiencing accelerated and meaningful growth in our hydrogen product line. This growth is driven by Luxfor'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 heater meals. 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 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, Luxforce 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 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 our 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, Luxor's Chief Financial Officer, for details on the transformation plan results and a detailed summary of our second quarter financials.