Luxfer Holdings PLC
Q1 2021 Earnings Call Transcript

Published: 27 Apr 2021

[Operator:]

Good morning. My name is Laurie, and I will be your conference operator today. Welcome to Luxfer's 2021 First 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 Heather from Luxfer. Heather, please go ahead.

[Heather Harding:]

Thank you, Laurie. Welcome to Luxfer's first quarter 2020 earnings call. We are happy to have you all with us today. I am Heather Harding, Luxfer's Chief Financial Officer, and with me today is Alok Maskara, Luxfer's Chief Executive Officer. On today's call, we will provide details on our first quarter 2021 performance as outlined in the press release issued yesterday. Today's webcast is accompanied by a presentation that can be accessed at luxfer.com.

[Alok Maskara:]

Thanks, Heather, and welcome everyone. I want to start with my appreciation of our employees for their continued focus on serving customers while maintaining steadfast adherence to safety protocols as we navigate the Covid-19 pandemic. Thanks to the hard work of our leaders and employees, we delivered record margins and strong cash flow in the first quarter of 2021. Let me begin by highlighting three key developments during the quarter. First, we delivered solid Q1 earnings, and EBITDA margin of more than 20% despite the pandemic's negative sales impact, conversion of these strong earnings into cash resulted in a net debt to EBITDA ratio of 0.7, the lowest level in the past eight years. Second, we meaningfully upgraded our portfolio by acquiring structural composite industries to increase our presence in aerospace and alternative fuel applications such as CNG and hydrogen storage. With the addition of SCI alternative fuel now makes up 20% of Luxfer's total revenues. Third, we achieved our long-term transformation cost reduction goal ahead of schedule by delivering a total of $31 million in cash savings, including $25 million in P&L savings, and $6 million in capital spend reductions. We also continued to simplify our portfolio by completing the divestiture of a Graham aluminum plant, which was part of the previously announced discontinued operations. I will provide more details on these themes before our CFO, Heather Harding reviews our financial performance in greater depth. Now, please turn to slide 3, for a summary of our first quarter financial results. During the first quarter, total sales of $85.2 million decreased 3.6% year-over-year, as the pandemic continued to negatively impact our industrial product sales. First quarter adjusted EBITDA of $17.7 million increased 12%, primarily driven by productivity improvements. Our adjusted diluted EPS was $0.39 for the quarter, an increase of 15% from the prior year. Our Q1 cash flow was driven by lean working capital improvements, as we generated $13.8 million of free cash or reversal from the 2020 outflow of $7 million. This strong cash flow enabled us to reduce our net debt to $41 million compared to net debt of $92 million at the end of Q1 last year.

[Heather Harding:]

Thanks Alok and good morning to everyone again. Before I review the first quarter financial results, I will start with a summary of our cost reduction efforts on slide 8. We are very pleased to announce the completion of the cost reduction component of our transformation plan. We executed our planned actions and realized more than $4 million of net cost savings in the first quarter, bringing our total P&L savings to $25 million. This focus over the past three years has positioned the company well for the future, with a lower fixed cost structure, fewer manufacturing locations, and relentless focus on working capital.

[Alok Maskara:]

Thank you, Heather. Let me conclude by reviewing the global growth trends shaping our portfolio on slide 15. The three mega trends shaping Luxfer's future growth are lightweighting, safe and healthy lifestyle and a clean environment including clean emissions. Luxfer's historic growth has been driven by a demand for lightweighting. We believe that this trend will continue for many more years. Our magnesium alloys play a critical role in reducing the weight of key high temperature high performance, aerospace and industrial components. We are also the world leaders in lightweight, high pressure composite cylinders for SCBA and other applications. The lighter nature of our products enables firefighters and first responders to be ergonomically safe while carrying sufficient oxygen for the difficult task. A desire for a safe and healthy lifestyle also shapes our growth profile as demand grows for healthier meals ready to eat using our flameless ration heated technology in defense and emergency response application. Additionally, sales of our Zirconium products used in pharmaceutical and water treatment applications. And our portable medical oxygen cylinders also benefit from the global trend towards safe and healthy lifestyles. The mega trend towards a clean environment and lower emissions as fuel growth of our alternative fuel products, and is also accelerating the growth of our auto catalyst product line. For example, our newly introduced gas particulate filtration product is being adopted in multiple platforms to meet increasingly stringent environmental regulations. As a result, we believe that our auto catalyst content per vehicle will continue increasing for the foreseeable future. Next, I wanted to update you on our ESG efforts on slide 16. We published our first ESG report in November 2020. Since then, we have been busy making further improvements across the company to meet or exceed our ESG commitments, including 22% reduction in carbon dioxide equivalent emissions, 10% reductions in fresh water usage and 20% reduction in waste to landfill. Recent investments to improve our environmental footprint includes initiative to reduce energy demand, increase use of recycling to reduce waste, and upgrades to our manufacturing processes to make them more carbon dioxide friendly. As we continue our ESG journey, we are finding new opportunities to reduce and recycle waste that is also generating cost savings. For example, our St. Louis facility installed a new capability to separate waste oil from ground magnesium, allowing us to both recycle materials and generate additional cost savings. We are proud of our significant progress on our ESG initiatives, which have resulted in improvements in our third party ESG ratings from agencies such as ISS. Now, please turn to slide 17 for a recap for how we are building the foundation for our company's long-term success. Four thoughts to remember, Luxfer serves attractive niche markets with proprietary products and technology. Our transformation plan has delivered results by simplifying our businesses, reducing our cost structure and reshaping our portfolio towards higher growth. The final phase of the transformation plan that will take place over the next few years will focus on accelerating growth and delivering margin expansion. We have plenty of runways to create additional shareholder value by deploying the Luxfer Business Excellence standard toolkit to drive operational improvement and accelerate our growth. Once again, I want to thank all our employees around the world for safely operating our facilities during the pandemic, while always putting our customers first. Thank you for listening. We will now take questions.

[Operator:]

Our first question comes from the line of Chris Moore of CJS Securities.

[ChrisMoore:]

Hey, good morning, guys. Thanks for taking a few questions. You guys have made significant progress on multiple fronts. Just hoping to focus maybe a little bit more on the growth strategy specifically is there kind of a reasonable expectation in terms of organic growth over the next three to five years from a number or range standpoint that you guys, talk about internally?

[AlokMaskara:]

Chris, that's a great question, because the next phase of our transformation plan is focused on accelerating growth. Historically, we have talked about our company being GDP plus type growth profile. I think with the current momentum around clean emissions and alternative fuel, we expect our transportation end user segment to grow much faster than that. And a lot of this depends on the macro or the industrial and defense should also get positive tailwind. That wouldn't give out a number at this stage, Chris, but we do expect our growth profile to be better than we had previously expected. Simply because of the momentum from the three end user market and our new products, and the SCI acquisition which further increases our position in alternative fuel with hydrogen and CNG. Both of which continue to grow rapidly.

[ChrisMoore:]

Got it, it's helpful. In one similar vein, do you need to ramp R&D significantly in order to really keep pushing new product revenue.

[AlokMaskara:]

I think from our effort perspective, we are looking to increase our investments in R&D. And that's been consistent for the past few years, in the last year with COVID; a lot of those activities did not make much progress. So yes, we are increasing; I wouldn't use the word significantly. We use less than 1% of our revenue in R&D, would we look to double that over the next few years? Yes. But it's not going to be much more than that. I think it's still would be 2% or less of our total spend over a long range planning period, Chris.

[ChrisMoore:]

Got it. That's helpful. And last one, for me just on a little bit more on SCI. In terms of the mix of the business, it looks like it's roughly half alternative fuel and half on aerospace? You, I think you talked about 10% EBITDA margins a couple years out so it, can you do better than that, I would think that CNG and hydrogen are, will be above that, is the aerospace the piece that's lower or how do you look at that?

[AlokMaskara:]

Yes, no, we really aspire to be more than that, Chris. I think at this stage, if you look at our total synergies of $5 million to $7 million, this year losses which are probably going to be around $4 million, we easily would get to about 10% over the next couple of years. That assumes no recovery in growth in aerospace and other niche applications. Currently, I think the revenue breakdown is roughly about half alternative fuel, quarter of aerospace and quarter of various niche applications. So I think as we put aerospace recovery in perspective, and continued growth in alternate fuel, we think it'll come up to our overall composite cylinder margin profile, which as you know is higher than 10%.

[Operator:]

Our next question comes from a line of Craig Irwin of ROTH Capital Partners.

[CraigIrwin:]

Good morning and congratulations on the strong result. Hi, Alok and Heather. Your EBITDA margins at Elektron were particularly strong this quarter. To go back to a number that was higher, we have to go back something like three years to find stronger performance. Can you talk about, what's driving this specifically in the quarter? Was there anything they'd be one time in nature? Or is this the result of the repositioning and restructuring we've done over the last couple years? And more sort of business mix and momentum with the products you're selling now?

[AlokMaskara:]

Heather, do you want to start on that?

[HeatherHarding:]

Yes. Good morning, Craig, it's good to speak with you. I would say as I think through the margins, and some of the items that you highlighted, primarily, it is really a result of some of the repositioning and a lot of the work we've done on cost reductions. There weren't any real significant one timer in the results. And we certainly, as we talked about, we saw nice growth in aerospace. As we said, that return to growth, some of that would have been in that segment, of course, and then some of our other businesses within the Elektron segment, continue to really realize the benefits of that cost reduction, momentum and all the efforts we've been doing over the past three years.

[CraigIrwin:]

Excellent. And just to continue on the theme of the cost reductions, $4 million in achieved savings this quarter. That's an impressive result. I think the last time you had savings like that was just the front end of the program. When I guess you're picking the low hanging fruit, can you maybe give us a little bit of detail about where that came from? And is it possible that we see additional savings later on this year where you could exceed the total forecast savings from the total -- from the overall program?

[HeatherHarding:]

Well, certainly with the $4 million this year, as we highlighted in the presentation, we've already exceeded the $24 million, right. So we're currently kind of life-to-date sitting at $25 million. So from that perspective, we're very pleased. As we continue to look forward in time, will there continue to be some cost savings? Yes. I certainly don't expect that this particular level will continue every quarter, there will be as Alok mentioned investments that are required. And certainly we're very pleased with the performance we had this quarter. In terms of where it came from, when you look, we do highlight the two segments in the back of the presentation, but it was pretty equal, right in terms of the split between gas cylinders, and Elektron, they were -- gas cylinders was slightly more, but they were each around to $2 million. So that's also I think important to know that our cost reduction plans, which really encompass a full acceptance by the entire enterprise. And I think you see that when you look at the cost reduction mix between the two segments, which was, as I said, fairly equal. So that would be my response, Craig.

[CraigIrwin:]

Understood, thank you. So then, Alok, one of the key things over the next couple of years is where you're able to get to on your margin expansion. I understand the reticence to respond to a growth rate question. You don't control the markets and things are improving, but I guess visibility is better, but not as good as everyone wants. But margins, you've really demonstrated excellence as far as being able to operate and improve and manage the mix, et cetera. How would you look at a potential margin target over the next couple years? I mean, can you see several 100 basis points in margin expansion, as you sort of move the mix into higher growth, higher margin products and does Luxfer has potential to be a 30% plus gross margin company?

[AlokMaskara:]

Craig, that's a very futuristic question. And I think three years earlier, we were talking about would Luxfer ever get to teens margin. And then we talked about getting to 20s margin. And listen, we are today at 20s margin. And our first aim is to hold that as we look at it, one quarter doesn't make a trend. So we are going to work really hard to make sure we hold and exceed this level. And given the shift in portfolio, given the strong cost reduction effort, fewer factories, and frankly, a huge focus on sort of lean working capital, and using the 80

[CraigIrwin:]

Understood And then maybe you can correct me, but I believe that one of the gaps in your portfolio, at least on the tank side is the opportunity for hydrogen hauler products. Some of the high pressure hydrogen tank trucks, right? Can you comment about sort of what it might take for you to add those two to the portfolio? And given that there are now five green hydrogen plants in development by plug with the first one supposed to commissioned fairly soon. It looks like there's going to be third parties purchasing the green hydrogen from these plants, an obvious need for some of these hydrogen haulers just to sort of avoid the incremental cost of liquefaction. What do you think about that as a product opportunity? Do you already serve it? And do you see long-term growth there?

[AlokMaskara:]

It's a very exciting opportunity for us. We do see long- term growth there, Craig. I mean, you're right. I mean green hydrogen is the wave of the future. We totally believe in that and work with our customers whether that we have customers name by you and others. There is a small gap in our portfolio and I referenced earlier in my transcript, we are working on a Type 4, 350 bar product that would essentially fill that gap and then it's just a matter of coming up with a custom sizes required for that market. So we already have the core technology, it's a matter of getting the right dot certifications and approvals to enter that market. So we remain committed to it. And we are like on our way to get there.

[CraigIrwin:]

Excellent. And last question, if I may, before I hop back in the queue, so your automotive catalysis opportunity is exciting for the growth that you're seeing incremental content per vehicle. What is the potential increase there? If you could maybe frame out for us? Are we seeing a 50% increase in content per vehicle, potentially a doubling? How does this fit together as sort of the available opportunity per vehicle over the next couple years?

[AlokMaskara:]

Sure. So in dollar terms, if you think about, well, I guess I've said in the percentage term. So yes, we look at is the 40% to 50% increase in our content per vehicle. For Autocad business from where it is, remember, last year was a slow year, because of COVID. And hardly any production going on in Q2, Q3 timeframe. We do look at that business growing to 30$ to 50% in the near future and that content increase is very good. What we're also excited about is higher standards for emission than US, because today, almost all the market for that product is outside US, given some of the US emission requirements are still lagging. But with the California regulations having a higher chance of becoming more in the federal level. So we are excited about just higher emission standards in US and then expanding the market to beyond just the Europe and other markets today.

[Operator:]

Your next question comes from a line of Sarkis Sherbetchyan of B. Riley Securities.

[SarkisSherbetchyan:]

Hi. Good morning Alok and Heather. Thanks for taking my question here. Hey, just wanted to touch firstly, on the SCI acquisition, I think you mentioned about a $4 million loss for this first year here. And with your synergies, probably getting to let's call it a $1 million to $3 million of accretion next year on $20 million to $25 million in sales. Is it right to think about the margin profile of that business eventually looking like the margins we're seeing in your gas cylinders business today? Or do you think with the combined SCI portfolio and your portfolio, you can eventually get to better fixed cost absorption and therefore better margins that what we're seeing in gas cylinders today?

[HeatherHarding:]

Yes, good morning, Sarkis. I'll start on that one. Certainly, we're very excited about the addition of this acquisition. And as we talked about we'll be on this journey here to deliver the $5 million to $7 million synergies and expect that to turn accretive to us in 2022. As we look ahead part of the reason that we thought through the compelling benefits and renews our strategic filters, when we looked at this. I think you're thinking about it correctly there, there are potential opportunities, right, as we think about additional growth, additional opportunities of leveraging fixed costs. And so we're going to work through that. But our main focus right now over these next 18-24 months, is to work on this initial synergy plan, and deliver those $5 million to $7 million.

[SarkisSherbetchyan:]

Great, thanks for that Heather. And as I kind of think about the divestiture of the aluminum product lines, and I think, divesting super form is still pending. Would it be correct to think that the entire portfolio in gas cylinders is now wholly composite? Or are there certain aluminum lines that are lingering?

[AlokMaskara:]

I'll take that one, Sarkis. There are a small amount of aluminum products that are made in factories that are shared factories. Those are typically high quality aluminum alloys like L7X, used in applications such as medical oxygen. But majority of or the vast majority of our sales are now in the composite, which include both type two type three? And now the new type four cylinders. There is a small amount of type one pure aluminum mostly focused on medical oxygen.

[SarkisSherbetchyan:]

And as far as kind of the growth rates of that small piece of business that's left is that comparable to kind of what you're seeing in composite and therefore you're holding on to it or is there a different kind of game plan after you've digested SCI?

[AlokMaskara:]

We obviously want to make sure we focus on digesting the SCI business. We like the medical oxygen business, it's a specialty alloy where we have differentiated value proposition compared to our competition in that space. And because these are shared location, while the growth profile is probably not as good as alternative fuel and other areas, it's still a very good business, good ROIC, and not worth for us to kind of look at separating that just piece out. So for now, I think our transition is complete.

[SarkisSherbetchyan:]

No, thanks for that. And just want to touch on the timeline for diversity in super formed. Any thoughts on kind of the timeline here? And maybe how much cash this could potentially bring to the balance sheet?

[AlokMaskara:]

Sure. Heather, maybe -- go ahead Heather.

[HeatherHarding:]

Yes, Sarkis. I'll take that one. We're still committed to divesting the remaining operations by during this year, so by the end of 2021, and our current expectation is somewhere between $5 million and $10 million.

[SarkisSherbetchyan:]

Okay, no, that sounds good. And then just kind of coming back onto the Elektron division. That's been historically pretty high margin business, really kind of niche applications going on there right. And as you've remixed the entire portfolio, both on the gas cylinders front, and as we kind of see in the Elektron side, at what point do you think that the two portfolios look very different from one another? And are there any strategic actions that may come about? Or do you think it's finding well to run the two different businesses with the different growth trajectories and margins, and capital requirements kind of together under one roof?

[AlokMaskara:]

Our focus, Sarkis, is to create, making a value for our shareholders and maximize that value. And so from that perspective we remain open to broader strategic moves. Now, we're very pleased with how far the improvements on both segments have come over the past few years, both from a growth profile and margin profile. But from our perspective, we remain open to other broader strategic opportunities that could further enhance shareholder value. They're both great businesses, as you mentioned, they both work in advanced material, they both have good ROIC, one still has slightly better ROS than the others. But the growth profiles of hydrogen and CNG is also very exciting. So I will never say never. But we had to do this part, to make sure that we captured all the internal opportunities, which there's still significant runway for us to continue doing. But if there are broader external opportunities we will remain open to that as long as it creates more shareholder value.

[Operator:]

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

[PhilGibbs:]

Hey, Alok and Heather, good morning. Can you hear me? Good, okay. Your $1.10 to $1.30 in terms of earnings, can you give an implied EBITDA within that framework? And then also implied D&A for the year end? I know there's lots of moving pieces. So just trying to square in and what you're trying to communicate for that?

[HeatherHarding:]

Yes, so when I, I'll take that one. Phil so when I think about, first of all D&A is around $13.5 million. And you're right; there are some moving pieces with regards to that. But it's around $13.5 million is what we're anticipating. In terms of EBITDA $1.10 to $1.30 would imply EBITDA somewhere between call it, let's say 56 to 63, somewhere in that range, is kind of how we're thinking about it.

[PhilGibbs:]

Okay, that's helpful. And then your cash restructuring costs that you outlined in your deck of about $18 million at the midpoint, how much of that $18 million is from the SCI integration?

[HeatherHarding:]

Right. So if you think about the transformation plan, we had call it 11-ish, could be 12, 11 or 12, less from the former transformation plan. So the rest then would be that SCI integrations with the midpoint we're talking around call that seven-ish, something like that.

[PhilGibbs:]

Seven from SCI, you're saying?

[HeatherHarding:]

Yes.

[PhilGibbs:]

Okay. And the cadence of the losses, the $0.15, I talked to Alok last night I think he said about a $0.01 in the first quarter. But how does that split for the rest of the year?

[HeatherHarding:]

So if I think about how that splits for the rest of the year, it's, I would tell you it's pretty evenly split between Q2, Q3 and Q4 at this point, slightly heavier in two and three, but it's I don't know that it's meaningful. So I would say from a modeling perspective, you could almost divide by three just about.

[PhilGibbs:]

Okay, and then my -- appreciate that. And the last question, you said aerospace, comped up in terms of top line year-over-year, does this include defense, in that aerospace commentary or is that just purely commercial, anything there would be appreciated? Thank you.

[AlokMaskara:]

I think we do separate aerospace and defense, especially if it comes to the overall portfolio. But I think from aerospace, we are starting to see signs of recovery. And that's driven by our focus is more on helicopters, as you know a fixed wing focuses much lower and I think that's been showing signs of recoveries and we are encouraged. Military post-election and as the government have to replenish many of these stocks, both for flares and MRE. I think that's going to get back to more normal level quicker. But in defense, we expect the rebound to be faster than at an aerospace, but both showing good signs of recovery so.

[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 [e-mail]. Thank you for joining us today. The next regularly scheduled call will be in July of 2021 when the company discusses its 2021 second quarter financial results. This ends the Luxfer conference call.