Luxfer Holdings PLC (LXFR) 2018 Q2 法說會逐字稿

Good morning. My name is Brandy, and I will be your conference operator today. Welcome to Luxfer's 2018 Second Quarter Earnings Conference Call.

(Operator Instructions)

Now I will turn the call over to Doug Fox, Luxfer's Director of Investor Relations. Doug, please go ahead.

Thank you, Brandy. And welcome to Luxfer's 2018 Second Quarter Conference Call.

With me today are Alok Maskara, our CEO; and Heather Harding, Luxfer's CFO. First, Alok will provide a brief overview, followed by Heather's review of the second quarter's financial performance. Alok will then return for some brief closing remarks.

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

Now let me turn it over -- turn the call over to Alok. Alok, please go ahead.

Thanks, Doug. Good morning, everyone. Thank you for joining us today.

Please turn to Slide 3 for the summary of our performance for the second quarter.

Luxfer is pleased to report strong growth and improved profitability for the second quarter of 2018. Consolidated revenue increased 20% to $128.2 million on broad strength across the company. Revenues for the Elektron Segment increased 34% to $67.8 million, while revenue for Gas Cylinder Segment increased 8% to $60.4 million.

The higher volume and positive impact of cost reduction resulted in gross margin expansion of 180 basis points to 26.5% from 24.7% in 2017. Quarterly adjusted EBITDA was $21 million compared to last year's $15 million, up 40%. Adjusted fully diluted earnings per share for the quarter increased 76% to $0.44 from $0.25 in 2017.

Net cash before financing increased 7%, as we deployed additional working capital to support our strong growth. The results for the second quarter demonstrate the effectiveness of our focus on growth, productivity and simplification while establishing a culture of always putting the customer first.

For the full year 2018, our revised earning guidance range is now $1.35 to $1.45 for adjusted fully diluted share. Our guidance incorporates usual seasonality in our business during the second half of the year, lower disaster relief product sales as well as planned higher expenses related to simplification and productivity projects.

Now please turn to Slide 4. Luxfer has now demonstrated 4 consecutive quarters of year-over-year double-digit revenue growth. While some of this was driven by higher disaster relief sales, a large part of this was also driven by a focus on new products and from our increased emphasis on commercial excellence. The volume growth, along with the early impact from our lean productivity initiatives, has delivered strong year-over-year growth in profits. As you can see, our solid execution on a well-defined strategy is yielding better-than-expected results. Overall, I am pleased with this progress. And we will maintain the momentum of our transformation plan going forward.

Now let me turn the call over to Heather. Heather, please go ahead.

Thanks, Alok. And good morning, everyone.

Now please turn to Slide 5 for a summary of our consolidated quarterly performance.

With sales growth across both segments and nearly all product lines, consolidated revenue for the second quarter was $128.2 million, an increase of 20% over the $106.6 million for the second quarter of 2017. Higher volumes primarily drove the growth, accounting for $17.2 million of the year-over-year improvement. FX accounted for $1.9 million of the increase. And pricing, primarily to recover material inflation, accounted for $2.5 million of the revenue growth.

Adjusted EBITDA of $21.3 million was up 40% from a year ago. The improved volume and mix, better pricing and the impact of cost reductions more than offset higher raw material costs and wages, including the impact of increased incentive pay related to our favorable performance.

Now please turn to Slide 6 for an overview of the Elektron Segment performance.

For the Elektron Segment, revenue increased a very strong 34% to $67.8 million. Growth for this segment was broad based. In addition to continued strong shipments of disaster relief and zirconium products, we had very solid growth in our innovative magnesium-based SoluMag product for the oil and gas industry. FX had less than $1 million positive impact on sales, and price contributed $1.6 million to our sales performance.

Quarterly adjusted EBITDA for Elektron increased 64% for the quarter on improved operating leverage on a higher volume, pricing and cost reductions. These were partially offset by higher material costs and wages.

Now please turn to Slide 7 for an overview of the Gas Cylinder Segment performance.

Quarterly revenue for cylinders segment increased 8%. Volume, price and FX were all positive in the period relative to prior year. We had favorable demand for products across much of the segment. During the quarter, we maintained strong shipments of aluminum cylinders. We also saw growing demand for alternative fuel cylinders to support bus and vehicle fleet conversions. These conversions to CNG and compressed hydrogen occurred primarily in Europe, as municipalities act to reduce urban pollution, supporting a cleaner environment.

Cylinder shipments during the second quarter also included aluminum scuba cylinders that supported the successful rescue of the Wild Boars soccer team that was trapped in a cave in Thailand. Through Luxfer's Thailand scuba distributor, we provided Luxfer scuba cylinders to the rescue teams. Everyone at Luxfer is proud that our high-performance products played an important role in saving the lives of these 12 boys and their coach.

Second quarter adjusted EBITDA for Gas Cylinders declined slightly from a year ago from $5.2 million to $4.9 million. For the quarter, price and volume had a positive $1.1 million impact, but they were offset by raw material inflation and higher wages. In addition, segment productivity was negatively impacted by Superform performance. As planned, we implemented pricing surcharges in Q2 to offset the increased costs of aluminum. The surcharges, ranging from 4% to 10%, took effect on May 1 and have largely been accepted by our customers.

Now please turn to Slide 8, where we highlight our year-over-year balance sheet performance.

From a year ago, net debt decreased approximately $10 million to $93.8 million. Our net debt-to-adjusted EBITDA leverage improved to 1.3x. Year-over-year working capital was up $2.4 million, representing a 2.4% increase used to support the 20% quarterly revenue growth. Our working capital as a percentage of annualized revenue improved to less than 20%.

In addition to these metrics, we are pleased that the pension deficit declined to $37.5 million at the end of the second quarter compared with $55.3 million at the end of 2017 and $58 million at the end of the first quarter. This reduction was due to an increase in the discount rate and improvement in long-term inflation expectations.

Let me finish by summarizing. Luxfer finished the second quarter with a strong balance sheet and solid cash generation.

Now let me turn the call back over to Alok.

Thank you, Heather.

Please turn to Slide 9 for an update on the 5 key elements of our ongoing transformation plan.

The next milestone on our simplification journey is to discard our current foreign private issuer status. We remain on track to make this conversion by January 1, 2019, which will include publishing our results in the 10-K and 10-Q format consistent with the U.S. GAAP standard. We will also be publishing a proxy statement and become compliant with SEC Section 16 requirements.

As part of establishing a shareholder-focused, high-performance culture, the top 50 Luxfer leaders met recently and adopted our common values and solidified the action plan required to deliver on our 2020 goals. I was pleased with the level of energy and enthusiasm displayed by the Luxfer senior management team during this meeting.

Growth transformation is a long-term journey, and we are pleased with the early impact of more focused new product development and share recovery through the newly launched commercial excellence initiatives.

Productivity efforts continue to be fueled by lean and facility consolidation. Our previously announced consolidation of Riverhead, New York facility was completed in Q2 without any customer disruption. The consolidation of our Findlay, Ohio facility into Madison, Illinois remains on track to be completed before the end of this year. In addition, our team has been finalizing global contracts with vendors to deliver savings in IT, travel, freight, insurance and other areas.

To simplify and streamline our business portfolio, the Luxfer board continues to evaluate divestitures and acquisitions options that are driven by a proactive list of opportunities created from a detailed strategic review.

Now please turn to Slide 10 for a summary and outlook.

In summary, the Q2 results were better than expected. We are benefiting from favorable end market conditions combined with the early impact of our transformation plan focused on growth, productivity and simplification. We remain solidly on track to deliver net $20 million in annual cost savings by 2021.

For full year 2018, based on current results and second half expectations, we are increasing our EPS guidance to $1.35 to $1.45 per share on a fully adjusted diluted basis. The second half guidance incorporates our expectations of lower sales for disaster relief products and planned expenses for simplification and productivity initiatives.

Now please turn to Slide 11 for a wrap-up.

I believe the future for Luxfer and its shareholders is bright. We hold sustainable positions in attractive end markets. Our activities in building a high-performance culture and driving lean manufacturing are expanding our opportunities for growth, profit and return on capital. Our balance sheet remains strong, and we continue to generate strong cash flow. This gives us the flexibility to invest when necessary to support growth and to drive productivity.

I would like to express my gratitude to all the Luxfer employees, who have worked hard to deliver our improved performance. Together, by delivering innovative solutions to our customers and by using lean principles to drive productivity and growth, we will continue to generate differentiated returns for our shareholders.

Thank you for listening. We will now take questions.

(Operator Instructions) Your first question comes from the line of Michael Leshock of KeyBanc Capital.

Growth in Elektron is obviously very strong. I was just wondering if you could maybe parse out how much of the upside was due to SoluMag and how much was zirconium catalysts.

Both of those grew very solidly. We don't really declare the individual product line growth, but needless to say SoluMag sort of doubled in the quarter. And the zirconium catalysts also had double-digit growth. And what we were most impressed was the growth came from across the entire portfolio. And every product line delivered growth, but SoluMag was clearly one of the exceptions with really, really strong growth.

Okay, great. And then so the -- also, the FDA recently approved the potassium-reduction drug Lokelma, which appears it would use your zirconium oxide. Is this true? And if so, is there any sense of the opportunity you have there?

Yes, it is true. The FDA approval of Lokelma would, as you know, require us to supply the products to AstraZeneca. So we are very excited about it. It's a very good success for us. The financial impact of that is likely to be more in next year than this year because there are still a few more processes and things that we need to cover and AstraZeneca needs to cover before it can be commercially sold, but we are very excited about it. We believe our product has unique properties. And that's the reason AstraZeneca has chosen us to be their partner, and we will be supplying zirconium to that.

Okay, great. And I guess, just lastly, can you provide an update for us on the rationalization? Specifically, you discussed some of the headwinds in the back half from nonqualified restructuring. Can you provide us a magnitude of the transitionary cash costs that we should expect within your earnings guidance?

Overall, for the 3-year program to get to $20 million in savings, our cash cost is going to be about $40 million, which we have previously talked about. Given the strength of our current results, we are looking to pull a lot more of that in 2018. And that's one reason our second half, as you know, expenses, nonqualified restructuring expenses, are going to be higher than we had previously indicated. But we believe that allow us to get to savings sooner, so that's a good thing for the shareholders and us. I don't have an exact number to share with you, Michael, but needless to say it's still within the overall scope of $40 million that we have talked about.

Your next question comes from the line of Sarkis Sherbetchyan of B. Riley Capital.

So first question here. It looks like for both the Elektron and Gas Cylinders Divisions you were able to take some price to offset some of the material and wage inflation. Can you maybe help us understand how much of a lag is there? I think, Alok, you mentioned the customers are not necessarily pushing back. Just help us understand between the 2 divisions where you stand with regards to taking price.

Sure. So the customers, I mean, they are pushing back but no more than normal. And given the general inflationary environment, they're clearly more receptive and doing their own price increases as well.

Now to answer your question. On both segments, we have probably about a 90- to 120-day lag. You saw in Q1 our inflation was higher than pricing and they're essentially caught up with a small delta right now in Q2. And starting Q3 and going forward, we would expect us to be essentially on par. So we are able to offset any inflationary impact with that. Now wage inflation for us also includes impact for higher incentive plans given the required performance. But putting it all together, we do feel good about our pricing strategy and our pricing actions, which will overcome the inflation.

As you know, aluminum is one of the biggest drivers. And as you know, if the pricing comes down on that, as you know, some of our surcharges will be rolled back as well to be fair to our customers. So we'll continuously monitor it and, as you know, so far, feel very good about what the team has been able to deliver.

That's very helpful. And then I think in your prepared comments you also mentioned some of the favorable end market conditions. Can you maybe bifurcate what you're seeing in your end markets served? Is it really kind of strength in some, maybe some weakness in others? Or is it just kind of a broad-based strength? If you can help put some color there.

Sure. So if -- I think of our end markets in 4 broad buckets. We always talk about industrial being our largest. Then we have transportation. Then defense [enforcement standards], small in medical. I believe more medical since that's more of a share opportunity. Industrial, the [ISM] hovers around 58. It's really good. And that does impact a lot of our magnesium sales and, of course, zirconium industrial catalysts sales. All of that does well, so that's a favorable end market.

So we clearly get benefits of that.

On the transportation side, as you know, they're both from new aircraft and also from high-end automotive. Those are being favorable to us. And of defense sequestration spending and the new environment, where we are expecting to see and are already seeing higher defense orders and spend, all U.S., this is all U.S., is really good. So across our 3 main meaningful segments, we are experiencing good conditions. And we see no signs of that changing anytime soon, so quite pleased with that.

Great. One final one for me. It seems like you highlighted some productivity impacts from Superform inside the Gas Cylinders performance slide. Maybe can you help us understand if the scrap rates are improving there? I think you were kind of optimistic on turning that piece of business around. Can we get some updates on what actions are underway there?

Sure, yes. I mean we see early signs our scrap rate has improved. We have been able to use new technology to unyield the material and are working on productivity with our actual forming process. We have a lot more lean focus. I was in the factory just less than a month ago and actually 2 weeks ago and was pleased with all the progress we're making on lean initiatives there. So there is good progress.

Now from a year-over-year perspective, Q2 was still a bit upside down in productivity. That's pretty much what drove the negative productivity we had, the year-over-year decline in Gas Cylinder, but we are seeing solid signs of progress. We have also been able to work with customers, and these are large automotive customers, and being able to get better pricing, which this at least covers our costs fully. So from that perspective, we see good signs. There's a brand-new management team out there as well. So it took us probably a little bit longer than we had hoped for, but all the early indicators are positive, so I'm optimistic about Q3, it no longer being a headwind for us.

Your next question comes from the line of Christopher Hillary of Roubaix Capital.

I just wanted to ask. You had some strong growth this quarter. Are there some businesses or products that you're enthusiastic about with a medium-term view to help you continue that growth?

Yes, pretty much all the growth, except for some disaster relief sales that we called out, we are very excited about that going forward. And if I can call out one, I will call out SoluMag. That's the one where we have a very unique value proposition. We are helping our oil and gas partners deliver cost-improved productivity. So we feel very optimistic about that.

On the zirconium and the chemical side, we have been very optimistic both from an uptick in industrial and initiatives to get back share in the other catalysts business. And even in things like Superform. Superform had good revenue growth and one of the strongest growth Superform has had in a while. It's a matter of being able to convert that into profits, which we are increasingly optimistic about.

So we are pleased with the broad-based growth that we have seen. And the only thing we called out was the disaster relief products, which had a strong first half and strong second half last year. So that's where we will be a bit cautious about. That essentially depends on the number of landfall hurricanes that come into U.S., which you know you -- well, it's a pretty difficult year last year for the -- natural disasters, but it was good for people who supply disaster relief products.

At this time, there are no further questions. I will now turn the floor back over to management for any closing or additional comments.

Thank you, Brandy. Thank you, everybody, for listening today and participating on the call.

Just to remind you, our next regularly scheduled call for our third quarter is now on November 1.

So with that, Brandy, let's close the call. Thank you very much.

An encore recording of this conference call will be available in 2 hours. Telephone numbers to access the recording will be available on the Luxfer website at www.luxfer.com.

Thank you for joining us today. This ends Luxfer's conference call.