Luxfer Holdings PLC

Good morning. My name is Stephanie, and I will be your conference operator today. Welcome to Luxfer's 2020 Third 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 Read from Luxfer. Mary, please go ahead.

Thank you, Stephanie. Welcome to Luxfer's Third Quarter 2020 Earnings Call. We're happy to have you all with us today. I'm Mary Read 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 third quarter 2020 performance, as outlined in the press release issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at luxford.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 the Safe Harbor Statement on slide 2 of today's presentation for further details. Let me turn the call over to Alok.

Thanks, Mary, and welcome, everyone. I hope you and your families remain healthy during these turbulent and uncertain times. Before I discuss our third quarter performance and provide an update on our transformation strategy progress, I want to thank our 1,500 employees around the world for working hard to ensure the health and safety of all our colleagues and their families while always putting our customers first. I am proud of our team's discipline and steadfast adherence to operating procedures as we navigate the COVID pandemic. While several of our end markets remain challenged, we have been executing with agility as we recalibrate our cost structure to current demand levels while also positioning Luxfer to fully capitalize on recovery. With that, let me provide some highlights that sum up our quarterly performance and strategic focus. First, we delivered solid Q3 financial results despite challenging end market conditions, and we are seeing sequential improvement across our businesses. Second, we generated very strong cash flow, further bolstering our already robust balance sheet. This gives us greater optionality as we invest in organic growth enablers and pursue potential inorganic opportunities. Third, we executed our transformation plan and made meaningful progress on initiatives to drive growth through new product development and commercial excellence. I will provide more details on these themes and our CFO, Heather Harding, will then 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 third quarter financial results. We delivered solid third quarter results as we addressed the impact of COVID-related macro conditions on our end markets with a focus on controlling costs and driving free cash flow. Total sales of $90.4 million declined 15.6% on a year-over-year basis, but we saw sequential improvements compared to the 21.1% decline in the second quarter. Third quarter adjusted EBITDA of $14.2 million declined 15%, helped by cost actions to mitigate the gross margin impact of lower volumes. Our adjusted diluted EPS for the third quarter was 25 cents, down 31% as compared to the prior year. During the quarter, our focus on working capital resulted in $25.6 million of cash generation, including $1.4 million in cash restructuring expenses. This enabled us to reduce our net debt to $59.3 million compared to net debt of $82.4 million at the end of the second quarter. Our net debt to EBITDA ratio improved to 1.1 times at the end of September, which is significantly below our covenants. Our balance sheet remains strong with additional liquidity from $150 million of an undrawn revolving credit facility, providing us a lot of financial and strategic flexibility. We are currently operating most of our facilities at reduced capacity to serve the evolving needs of our customers and are encouraged by the sequential improvements in demand. All our locations are operating with additional COVID safeguards, and as the number of positive cases continues to rise, the health of our employees, our customers, and our communities remains our number one priority. Now, please turn to slide four for an overview of how Luxfor has adapted to the new normal. Over the eight months since the COVID pandemic began, we have effectively adapted and innovated better ways to serve our customers. We have retooled our manufacturing operational procedures, rearranged shift patterns, and enabled remote work where possible to minimize the number of people in our facilities at any given time. We continue to limit the number of visitors to our facilities while making face masks and social distancing mandatory for all personnel. Some of our procedures are likely to result in more permanent change as we continue to adapt to an ever-evolving external landscape. If there is a silver lining, The pandemic allowed us to accelerate many of our lean initiatives, and I believe Luxfor will be better positioned to capture growth in the future. Given the current environment, our customers are shifting preference towards a localized supply chain. Luxfor is a beneficiary of this shift as most of our manufacturing is in region for the region. For example, U.S.-based manufacturing generates greater than 90% of its sales in the U.S., and a similar situation is true in Europe. Lastly, greater remote connectivity allows for increased access to a broader talent pool as physical locations become less relevant for certain roles and positions. We will continue to leverage the skills and talent of our dispersed workforce even after the pandemics. Let's now review our revenue performance by end markets on slide five. As a reminder, our current sales can be classified into three approximately equal end user markets. Defense, first response, and healthcare. Transportation, which is a combination of alternative fuel, aerospace, and automotive. And general industrial. Before we review the performance of each, let me give you a sense of the shifting demand patterns we saw during the quarter. There was a gradual sequential improvement in sales after the very low levels experienced in April and May. Order rates continued to improve modestly in July and August, but plateaued in September, especially in the US. Two factors that may be impacting order patterns or uncertainty surrounding US elections, which would be typical for defense orders, and the recent uptick in COVID cases across the country. We are closely monitoring our order rates and will execute additional countermeasures if business conditions deteriorate. In the defense first response and healthcare markets, sales declined roughly 8% for the third quarter. We saw increased demand for our disaster relief products and chemical response kits, but that was offset by a decline in cylinder sales for fire extinguishers and SCBA. Sales in transportation declined 19% in the third quarter. Demand for luxury passenger auto improved modestly, and our auto catalyst products grew year over year. However, Demand for aerospace applications weakened during the quarter as manufacturers implemented additional production cuts in response to a protracted slump in air travel. Alternative fuel returned to growth during the quarter, and we remain optimistic that this trend will continue going forward. Sales in the general industrial end market declined 19%, which is a meaningful sequential improvement from the 27% decline in Q2. The sales decline was broad-based and impacted most of our industrial products. However, we are encouraged by the sequential month-over-month improvement as the quarter progressed. As expected, there were virtually no Solumag sales during the quarter. Despite our strong position, we expect Solumag sales to remain challenged for the rest of the year. Now, please turn to slide six for an update on our transformation strategy. We are successfully executing our transformation strategy with discipline and are creating incremental value for our shareholders. Successful completion of the simplification phase has significantly improved our balance sheet. The lower fixed cost enables us to better navigate the COVID pandemic and benefit from future recovery. Phase two of the transformation plan covers improvement in our high performance culture and lean operations. Phase three is focused on growth through organic means and through portfolio optimization. We remain committed to completing the transformation plan and creating incremental value as market recovers. Over the next few minutes, I would like to share some examples that will drive success for phase two and three of the transformation plan, starting with a review of our environmental, social, and governance slide seven. Despite the challenging economic landscape, we have increased attention on developing sustainability initiatives that position us for a stronger recovery and long-term success. we are pleased to report that we will be publishing our first-ever Environmental, Social, and Governance report in the coming weeks. Our ESG report discusses key subjects of interest to our shareholders, such as the establishment of our 2025 Environmental Protection Goals, disclosures of social statistics, and an overview of our governance structure. Our upcoming ESG report highlights our long-term sustainability activities and explains how these activities are driving our performance. The purpose of this report is to initiate consistent reporting on ESG matters, improve our transparency and disclosure, and formulate the basis for an informed conversation between us and our stakeholders. We realize that non-financial reporting is important to our stakeholders. As such, we hope that by periodically publishing an ESG report, we are creating a different platform through which we can connect about the ways we are creating value for all our stakeholders, including employees, customers, communities, the environment, and shareholders. We also hope that increased transparency in this regard can be a tool to promote our resilience and will strengthen our ability to emerge stronger post-COVID. Now, please turn to slide eight for an example of one of our growth initiatives. As many of you know, our zirconium products are often used in the formulation of three-way catalysts for catalytic converters in gasoline-powered automobiles. Environmental consideration and changes in emissions regulations are increasing the content per vehicle of our products. In addition, shift from diesel to gasoline in Europe is offsetting the shift from internal combustion engine to electric vehicles for companies like us that are focused on gasoline-based products. To further capture growth from this end market, We have recently launched a new nanotechnology-based product for gas particulate filtration. This new product utilizes our strong IP position and unique technology to deliver exceptional catalytic and filtration properties to our customers while minimizing any exhaust back pressure to optimize performance. We are optimistic that this new product and our other existing products for gasoline particulate filtration will drive strong organic growth. We expect this product category to ultimately make up over one-third of our autocatalytic product sales. Now, please turn to slide nine for an example of our success in the area of hydrogen fuel cell vehicles. When it comes to hydrogen fuel cell vehicles for public buses and medium to heavy duty trucks, Luxfer is well positioned with 30 plus years of experience in hydrogen storage technology. Our competitive advantage in hydrogen is based on industry leading lightweight cylinder technology and our capability for advanced systems design, manufacturing and testing. We have a proven track record in partnering with customers to deliver hydrogen first, including the world's first hydrogen double-decker bus, the first commercially available hydrogen garbage truck, and the first hydrogen-based train in the UK. We manufacture these lightweight cylinders in our state-of-the-art alternative fuel facilities in California and Canada. which also make cylinders for compressed natural gas-based vehicles. Our systems are designed and assembled in our Nottingham, UK facility using just-in-time development and manufacturing techniques. While this is a nascent industry and sales of our hydrogen storage products make up only about 1% of our total sales, we are excited about the growth potential in this space and will continue to invest in building our hydrogen innovation and manufacturing capability. Now, please turn to slide 10 for an example of one of our lean manufacturing initiatives. Our LuxForum Magtech Cincinnati facility historically only manufactured flameless ration heaters and self-heating meals and beverages. But more recently, It has started the production of chemical response kits after the consolidation of our factory in Riverhead, New York. The expanded size and scope of the Cincinnati factory has generated scale economies. This has created the opportunity for us to deploy more lean talent and invest in manufacturing automation. The recent successful launch of new chemical response kits for decontamination and the COVID-related higher demand for emergency response has placed additional strain on this facility. To satisfy our significantly increased customers' need, our team had to recruit a large number of temporary employees. Attracting, training, and retaining temporary employees during COVID has been a challenge, so we have recently installed an automated packaging line for our self-heating meals to reduce the need for additional workforce. The new line will also increase the quality and consistency of our heater meal products while reducing the expected delivery time for our customers. The Cincinnati example is just one of the many lean automation transformations that is taking place in Luxor facilities post the recent footprint consolidations. Fewer larger factories are allowing us to deploy more lean resources and invest smartly to better serve our customers and increase productivity. Our internal manufacturing scorecard shows significant improvement in safety, quality, delivery, cost, and cash in our factories. These improvements will generate attractive returns and allow us to efficiently serve our customers. Let me turn the call over to Heather Harding, the first chief financial officer, for details on the transformation plan results and a summary of our third quarter financials.