Luxfer Holdings PLC (LXFR) 2017 Q4 法說會逐字稿

Good morning. My name is Lori, and I'll be your conference operator today. Welcome to the Luxfer Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions)

Now I will turn the conference over to Cassandra Stanford from Luxfer. Cassandra, please go ahead.

Thanks, Lori, and welcome, everyone, to Luxfer's Fourth Quarter 2017 Conference Call. With me today is Alok Maskara, our Chief Executive Officer; and Heather Harding, our Chief Financial Officer.

First, Alok will provide an overview, followed by Heather's review of the financial performance. Alok will then return to provide an update on Luxfer's transformation plan and offer an outlook for 2018.

Today's webcast is accompanied by a slide presentation, which can be found in the Investors section of Luxfer's website. We'll 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 the any forward-looking statements made about the company's anticipated 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.

We'll now turn the call over to Alok Maskara. Alok, please go ahead.

Thanks, Cassandra, and welcome, everyone. Please turn to Slide 3 for the executive summary.

For the fourth quarter ending on December 31, our revenue was 21% higher compared to the same quarter in 2016 and our adjusted fully diluted EPS of $0.23 is $0.09 ahead of last year. Full year fully diluted adjusted EPS for 2017 is $1.02, an increase of $0.10 compared to 2016. Full year adjusted EBITDA of $61.8 million was 12% higher compared to 2016. We had strong cash conversion in 2017, which enabled us to reduce our net debt by $7 million to $100.4 million.

On other fronts, as part of our transformation plan, we successfully terminated our ADR facility in December and seamlessly exchanged all ADSs for ordinary shares, which continued to trade on New York Stock Exchange. Recently, we also bolstered the Luxfer leadership team by onboarding Peter Dyke as the Chief Human Resources Officer; and Heather Harding as the Chief Financial Officer. They are both great additions to our team. And you will hear from Heather later in today's presentation.

Now please turn to Slide 4 for an overview of Luxfer's Q4 revenue and EBITDA performance. Total revenue for the fourth quarter was $116.1 million, which is 21% higher compared to $96.1 million in the fourth quarter of the previous year.

The FX impact on group's revenue in the fourth quarter was a positive $6.2 million and the pricing impact was negative $700,000. Volume growth of $14 million was driven by our Elektron Division.

Adjusted EBITDA for the fourth quarter was $14.6 million, 43% higher compared to $10.2 million in the fourth quarter of the previous year, largely driven by an increase in volume.

Now please turn to Slide 5 for an overview of Gas Cylinders' performance. Cylinders revenue for the fourth quarter of 2017 was $54.8 million, which is $3.1 million higher than last year, driven by a positive FX impact of $3.5 million that was slightly offset by a volume decline of $400,000. Volume decline was primarily caused by lower sales of alternative fuel cylinders resulting from the loss of a large customer in 2016 and was partially offset from growth in other product line, such as aluminum cylinders and medical oxygen cylinders.

Quarter 4 adjusted EBITDA for Gas Cylinders was $2.6 million, which is a 41% decline compared to 2016. Profits in the Gas Cylinders Division were adversely affected by the continued productivity challenges at Superform and also compounded by a large onetime bad debt impairment in relation to one of our customers. We are deploying more leadership and lean expertise to overcome the productivity challenges at Superform. And we are tightening our overall credit controls to minimize bad debt impairment in the future.

Please turn to Slide 6 for an overview of the Elektron Division's performance. Elektron's reported fourth quarter revenue of $61.3 million was significantly higher than the previous year as we saw large growth in volume and also benefited from FX. Defense and disaster relief sales were higher in Q4 as we continued to fulfill replenishment orders for our Flameless Ration Heaters after the hurricanes earlier in 2017.

We are also experiencing a general uptick in military orders. Magnesium and zirconium alloy sales were strong and SoluMag sales continue to exceed our expectations. Elektron's adjusted EBITDA in the fourth quarter was $12 million, which was 107% higher compared to the prior year, largely driven by volume growth.

Please turn to Slide 7 for full year 2017 revenue and EBITDA summary for Luxfer. For the full year 2017, our revenue of $441 million was 6% higher in 2016; and our adjusted EBITDA of $61.8 million was 12% higher than prior year. Strong performance in the second half of the year enabled us to meet our full year 2017 expectations of at least 10% improvement in adjusted EBITDA. The summary of full year results for both the divisions is in the appendix Pages 22 and 23.

I will now turn the call over to Heather Harding, Luxfer's new Chief Financial Officer. Heather, please go ahead.

Thank you, Alok, and hello, everyone. Welcome to the call. As you can see from my bio, I've spent my career in large industrials, including Emerson Electric, Cooper Industries and most recently, Eaton Corporation.

During my career with these manufacturing organizations, I've spent time driving for operational results, including lean manufacturing, working capital and profit expansion initiatives, as well as participating in M&A from both sides of the transaction.

As I looked at my past experiences, coupled with career aspirations, I saw Luxfer as an excellent fit. Luxfer is poised for operational improvements and strategic M&A growth opportunities. I know I can be a meaningful part of this journey and partner with Alok to drive growth and profit expansion.

Please turn to Slide 9 to review key income statement metrics. For Q4 2017, our revenues and profits have both grown compared to Q4 of the previous year. Fourth quarter adjusted EBITDA of $14.6 million was 43% higher as compared to Q4 2016. There were a number of restructuring costs across both divisions in the quarter, which are summarized on Slide 12. However, as a result of these charges, we recorded an operating loss for the period of $7.5 million compared with a profit of $5.3 million in Q4 2016.

Net income for the quarter was a net loss of $2.3 million compared to a net profit of $3.2 million for Q4 the previous year. Adjusted for exceptional items and excluding the IAS 19 pension finance cost, this quarter had an underlying net profit of $6.3 million compared to $3.7 million for Q4 of last year. Fourth quarter adjusted diluted EPS was $0.23 compared to $0.14 for Q4 of the prior year.

For the full year, our revenue and profits have both increased compared to prior year. Adjusted EBITDA of $61.8 million grew 12% from 2016 EBITDA of $55.3 million. Net income for the year was $11.5 million compared to $21.9 million in 2016. Again, adjusted for exceptional items and excluding the IAS 19 pension finance cost, full year underlying net profit of $27.6 million increased over 11% from $24.7 million in the prior year. Adjusted diluted EPS was $1.02 for the year compared to $0.92 for 2016, an increase of 11%.

Please turn to Slide 10 for key balance sheet and cash flow metrics. Net debt was $100.4 million, a $7 million reduction over the Q4 2016 position of $107.4 million, despite the cash outflow of $5 million for the acquisition of ESM.

Thanks in part to tight control on capital expenditures, we had a strong quarter on cash with operating cash flow a positive $16.3 million versus $9.4 million for Q4 of the previous year. Net cash flow before financing was a positive $6.6 million, significantly higher than the $3.8 million in Q4 of the prior year. Our working capital has increased to $93.5 million, primarily due to higher receivables associated with strong Q4 sales.

Looking at full year cash performance. Operating cash flow of $45.2 million for the year posted strong improvement from prior year of $29.2 million, driven by controls over capital expenditures and favorable working capital performance. Net cash before financing was a positive $27.1 million, again higher than the prior year of $14.1 million. Detailed slides on the balance sheet and cash flow can be found in the appendices.

Now please turn to Slide 11 for a summary of the recent tax and tariff impacts. Following the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017, Luxfer recorded a $6 million exceptional credit in our 2017 full year results. We expect the tax rate decline will benefit 2018 and our expected tax rate will fall to approximately 21%.

After the recent March 8 U.S. White House announcement on steel and aluminum tariffs, we have reviewed the proposed changes and determined there is no direct and immediate impact to our business as long as aluminum exports from Canada to the United States are excluded. While the long-term impact of this is unclear, we are concerned about any secondary metal inflationary impacts in the U.S.

Please turn to Slide 12 for a summary of restructuring activities. We have incurred a number of large restructuring and other costs during the fourth quarter. The largest of these is the rationalization of our operations, which resulted in a charge of $7.9 million. Across both divisions, we've made tough decisions to close a number of our sites to achieve productivity improvements and to simplify our operation. Furthermore, we discontinued our Advanced Oxygen Systems product line as the returns from the product were not acceptable. Within both divisions and at corporate, we have also made a number of redundancies to flatten our organization structure.

After the year-end, we reached a settlement agreement with a competitor regarding a patent infringement case, which we had been pursuing, resulting in a charge of $2.7 million.

A further $1.8 million has been incurred in the quarter in relation to the ADS conversion project. This brings the total cost of the conversion to $2.3 million.

And lastly, we recognized a noncash charge for fixed asset impairments across the Elektron Division with the primary impact related to our Czech magnesium recycling business.

Thank you. And I will now hand the call back over to Alok.

Thank you, Heather. Please turn to Slide 13 for an overview of Luxfer's transformation plan. Over the past few months, we have developed a plan to transform Luxfer into a higher-performance growth company over the next 3 years. The 5 key pillars of this plan are: talent and culture enhancement, productivity acceleration, growth recovery, simplification, and portfolio optimization.

We are making solid progress on this plan and have completed a few of the actions, such as upgrading the leadership team and converting our ADS into regular shares traded on New York Stock Exchange. We are excited about this transformational journey, which is expected to deliver significant benefit to our shareholders, customers and employees.

Please turn to Slide 14 for an overview of our talented Luxfer's board and executive team. Luxfer has an impressive independent Board of Directors, which continues to be refreshed. Board members have a broad range of experience, and majority of the board members have been on the board for 5 years or less.

We have an independent Non-Executive Chairman, Joe Bonn, who was an important driver of the Luxfer transformation plan. Having established momentum on the transformation plan, Joe has informed us of his intention to step down as Chairman in early 2019 and not stand for reelection during the 2019 Annual General Meeting. We have started the process of recruiting 2 new board members and appointing a new Chairman.

Luxfer's new executive leadership team is also very talented. We have business leaders with deep industry experience who are eager to grow their businesses and functional leaders who are driven to establish functional excellence across Luxfer. I am grateful for the board's support and the leadership team's dedication towards transforming Luxfer.

Please turn to Slide 15 for highlights from our productivity transformation efforts. To improve our gross margins and to achieve greater scale efficiencies, we have opportunities to consolidate our factories and to drive lean transformation across the enterprise. We recently announced 2 significant factory consolidations and both projects are on track to successfully complete before year-end.

We are also reducing our G&A cost by delayering our management structure and by implementing shared services. An example of our ongoing productivity effort is this week's move of our stand-alone corporate office to an existing building within our Manchester manufacturing facility. We expect to deliver $20 million in gross annual savings by 2021 due to our productivity initiatives.

Please turn to Slide 16 for highlights of our growth transformation. We are building growth momentum by focusing on the areas of sales and innovation. To establish sales excellence, we recently had an independent advisory firm conduct an assessment of our team's current state. The results of this review, as seen in the top of this slide, will reveal that we have significant improvement potential to drive organic growth within our currently served end markets through investment in our sales team.

Our innovation transformation revolves around going back to the basics, basics of developing and launching new products that fulfill the needs of our customers. As you can see from the Gas Cylinder example highlighted on this page, we are refocusing on our core and exiting loss-making products and projects. Over the long term, we strive to generate 15% to 20% of our revenues from new products introduced within the past 5 years.

Please turn to Slide 17 for an update on our corporate simplification. In December 2017, we successfully converted our ADS into ordinary shares, which continued to seamlessly trade on New York Stock Exchange. The conversion to ordinary share eliminates the depository fees that had been deducted from the dividends paid to our shareholders and also makes our shares eligible to join certain indices, such as Russell 2000.

As part of our ongoing simplification process, we intend to convert from a foreign private issuer status to a domestic issuer status, which will require us to comply with the U.S. domestic reporting rules from January 1, 2019. Based on our initial assessment, we believe the transition to U.S. GAAP will not have a material impact on our earnings. We believe that these corporate simplification activities will expand the potential investor base for Luxfer shares.

Now please turn to Slide 18 for an update on our recent acquisition and divestures. In December 2017, we completed the acquisition of speciality metal powders product line from the ESM Group. This small bolt-on acquisition to our existing magnesium powders product line is on track for integration. And we expect to generate synergies from growth and operational improvements.

Over the past few months, we have also divested 2 small product lines in a continued effort to simplify our product portfolio. The divested product lines were the Hotpack product line in the U.K. and in our Elektron Division. The second product line was the HyPerComp Engineering product line in our Gas Cylinders portfolio. In summary, our transformation plan is off to a good start. We will provide further updates during the first quarter earning release on our transformation plan.

Please turn to Slide 19 for our full year 2018 outlook. 2017 was an encouraging year for Luxfer, where our results improved and we initiated the transformation plan to ensure that Luxfer delivers double-digit EPS increase for the next 2 to 3 years.

We expect that full year 2018 adjusted earnings per share will increase by 10% to 15% from 2017 due to operational improvements and the favorable impact of the U.S. tax reform.

Thank you. We will now take questions.

(Operator Instructions) Your first question comes from the line of Sarkis Sherbetchyan of B. Riley FBR.

As I look at the opportunities for working capital management and free cash conversion, as you mentioned, can you maybe share some more information on how you plan to kind of achieve some of that improvement?

Sure. So if I break it into 2 separate buckets. The first one is about just capital spend. We have opportunities to make sure that each and every capital spend is justified, made on a reasonable payback, and is put in the right areas within the business so that we can use it to generate productivity or to generate growth. Today, we spend about $18 million to $19 million in capital. And over the next few years, we plan to continue scrutinizing that and then deploy a lot more of that to generate the $20 million in savings that we mentioned earlier. On working capital, we have inventories that are spread out and we probably could do much better job in putting inventory controls in place, putting a lot more of management incentive plans also on reduction through the working capital pieces. So we are taking quite a few steps. And in the end, we also think just footprint consolidation itself will help in inventory management and working capital reduction. So in 2018, for the entire management team, cash is a significant portion of our incentive plans.

Understood, that's helpful. And if I were to think about -- I think you mentioned $20 million in gross annual savings by 2021, right, from the transformation plan. What's the -- I suppose, the rate that we should expect for that to be realized?

For the first year or 2, although the gross savings will be coming in, we'll be spending quite a bit to get to those savings on things such as the move costs and such as [picking up], we have some lack of productivity when we make the moves. So while it would not be a hockey stick, I would expect the second half to be richer in achieved savings, although the actual amount of effort would be spread out over the entire 3 years. So I know I'm not giving you guidance on the exact numbers per year, but if we look at it from building of the project, where we are now, there'll be just higher costs to achieve those and maybe start to see much greater realization in '19, '20 and '21.

Understood, that's helpful. And I think you mentioned the organization's striving for about 15% to 20% of new product introduced within the past 5 years to represent that piece of your sales. Can you remind us where new product, as a percent of sales, sit today?

We are below 5% right now. So we have significant room to improve. And that's one reason I didn't put a date on that because we are still working through the detailed analysis so that we can come back to the investor community with more specifics around it. But right now, we are less than 5% there, Sarkis.

(Operator Instructions) Your next question comes from the line of Phil Gibbs of KeyBanc Capital Markets.

Welcome, Heather.

Thank you, Phil.

I had a question, first, on cylinders. So the profits -- private profits there obviously got whacked pretty good. And how do we have visibility to this getting better as we move into next year, I guess, is my first question. And then subsection of that is, how much was the bad debt expense in the fourth quarter?

The bad debt expense in the fourth quarter was a little over $1 million on Gas Cylinders. And that's obviously something that we need to have better credit controls. And we believe this is something we will be able to manage much better going on in the future. On the other side, our biggest productivity challenge is in Superform. And it's related to one specific alloy that we have introduced. And we are monitoring that constantly on a weekly basis. It's all around lower scrap rate. So we have seen some progress in first quarter. And that's something that we are confident we can fix. It just took us longer than we expected it to take. So hence, Q4 was a little more negative than we expected it to be. But we have done this before. We have got some new lean talent in the business. We're getting some new engineering talent in there. And we are confident we can make this better.

And you mentioned the tariffs as well. And can you talk about maybe what you're seeing there? Are you seeing impacts from higher substrate costs in the cylinders business? And are you expecting that in '18?

We are seeing some higher inflation in aluminum. But that's just based on the LME. We haven't seen any direct impact of tariffs yet, Phil, but we are monitoring it closely. As you know, the situation was quite a bit confusing. If Canada had not been exempt from the duties, then we would have expected a significant impact in 2018. But at this stage, we are not expecting any direct impact in 2018. But Heather mentioned that there may be secondary impact, therefore there is indeed tariff and prices in U.S. go up, then that will be a concern for us. Now we do have riders on our contract and we'll be able to recover a large portion of any material price increases. But there's usually a lag between the actual inflation versus when we can get it back.

And then your rationalization goal by 2021 of $20 million, very impressive in terms of the magnitude of that number. How much of that is cost of goods sales versus SG&A? And maybe just in terms of the big buckets? And then how are you thinking about it in terms of the segments?

I would say 60% of that's probably going to come from cost of goods sold and 40% is going to come from G&A. I know you said SG&A, but we would probably have G&A reduction and deploy some [back-end] sales. So I do think we have created that. But net impact on that's probably 12 from fixed cost and 8 from the G&A side.

And then the breakout between the segments, is that largely heavily going to be in the Elektron Division?

No, I think it's going to be spread pretty evenly across the 2 segments. [And I think both] have pretty good opportunities there, so.

Okay. And then one last one from me. The FX in the fourth quarter, what was the impact to trading profit year-over-year? I think we were coming up with $2.1 million positive. I wanted to make sure that was the case. And how is that split between the segments? And what do you expect for FX in '18?

For '18, as you know, I mean, the pound has kind of recovered a bit. So we do expect '18 to be more of [a wash] or much lower than where we were looking at earlier when we had spoken at the Q3 earnings release time frame scale. The $2.5 million number does seem about right, I mean, internally we have looked at right about a $3 million number. I don't have the split of divisions in front of me but we can follow that up. I know it's in one of our tables in the back. But we can follow that up a bit later, Phil.

(Operator Instructions) At this time, there are no further questions. I'll now return the call to management for any additional or closing remarks.

Thank you, Lori, appreciate it. And thank you, everybody, for your investment, and thank you for your support of our transformation plan. We'll look forward to providing you greater details on our transformation plan in our Q1 earnings call. Operator, you can close the conference now.

Thank you. That does conclude the Luxfer Fourth Quarter 2017 Earnings Conference Call. You may now disconnect.